Employee Entitlement Safety Net Scheme – Costs Escalating!

Historically in Australia there is a general societal acceptance that employees should be protected in the event of insolvency. This arises largely from the premise that employee’s are the lifeblood of the business. Indeed Corporations and Bankruptcy Acts provide that employees are entitled to receive their outstanding entitlements in priority to other unsecured creditors.

In certain circumstances, these priorities see employees rank ahead of secured creditors (ie Banks) regarding realisations made from certain assets. Practically, however this priority may not result in employees actually receiving some or all of their entitlements especially if the company does not have sufficient assets to pay such entitlements.

In 2001, the Federal Government introduced a taxpayer funded safety net scheme for employee entitlements in the event of an employer’s insolvency where there were insufficient company assets available to pay employee entitlements. Importantly employee entitlements were defined to exclude superannuation. Furthermore, it was put in place as an operative scheme and as such was not enshrined into legislation. There has been discussion from time to time about whether such scheme would ever be repealed, however as time passes it could be argued that this becomes less likely.

The need for such scheme was due to a number of high profile corporate collapses resulting in employees not receiving their employee entitlements. Initially, referred to as the Employee Entitlement Support Scheme this developed into the General Employee Entitlements and Redundancy Scheme (“GEERS”). GEERS fundamentally made the Federal Government the guarantor of certain employee entitlements such as unpaid / underpaid wages, unpaid annual and long service leave, redundancy and payment in lieu of notice. Upon payment of any employee claims, the Federal Government would subrogate an employee’s priority distribution status in the event of a distribution in a liquidation or bankruptcy pursuant to Section 560 of the Corporations Act and Section 109 of the Bankruptcy Act.

Over the years, the scheme has been refined to incorporate a greater level of entitlements. GEERS has more recently evolved with the introduction of the Fair Entitlements Guarantee Act 2012 (“FEG”). FEG provides a firm legislative footing and reassurance to employees regarding any unpaid entitlements owing by employers as a result of insolvency.

Over recent years we have seen a marked increase in total funds advanced under the GEERS / FEG. Below is a summary of the total funds advanced under the safety net scheme through its various names for the period 1 July 2002 to 30 June 2013.

Geers-FEG Funds Advanced

During the eleven (11) year period shown in the graph there has:

  • been a fivefold increase in the amount of funds advanced under GEERS / FEG from approximately $50 Million to over $250 Million;
  • the number of claimants has gone from approximately 8,700 per annum to approximately 16,000 per annum; and
  • the average entitlement per claimant has increased from approximately $7,000 to $16,000.

Whilst it is important that a safety net scheme does exist, the cost of such as scheme is significant and careful consideration needs to be continually taken to ensure that it achieves the initial intended aims.

We understand that some changes may soon be announced to limit redundancy claims under FEG.

Bankruptcy & Superannuation: Look Before You Leap

Individuals facing financial difficulties may think that making lump sum payments into their superannuation fund means that those funds will be “protected”’ in the event of the individual subsequently declaring bankruptcy. This misguided belief is because in the personal insolvency world, a bankrupt’s interest in a regulated superannuation fund is generally regarded as “non-divisible” property and is generally not available to creditors. However, payments to a superannuation fund will not always be protected.

Similarly, some individuals may access superannuation early in an effort to pay creditors or use as working capital in their business. This may not achieve anything particularly where the individual ends up in bankruptcy anyway and those funds (if left in the superannuation fund) would have been protected.

  • What happens when an individual facing financial difficulty makes large lumps sum contributions into their superannuation fund? For example they realise an investment in their name (ie shares) and then make a lump sum contribution into their superannuation fund.

There are provisions within the Bankruptcy Act (“the Act”) that deal with a bankrupt’s interest in a regulated superannuation fund. Section 116(2)(d) of the Act says that an interest in a regulated superannuation fund is not divisible property. However, Section 128B of the Act provides that a transfer (ie a payment) made by way of a contribution to a superannuation fund is void against a Bankruptcy Trustee if:

  • the transfer is made by way of a contribution to an eligible superannuation plan; and
  • the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and
  • the transferor’s main purpose in making the transfer was:
    • to prevent the transferred property from becoming divisible among the transferor’s creditors; or
    • to hinder or delay the process of making property available for division among the transferor’s creditors; and
  • the transfer occurs on or after 28 July 2006.

In determining whether the person had the requisite purpose in making the contribution, the Bankruptcy Trustee will typically consider the individual’s pattern of contributions and whether the contribution in question is out of character”. It is not always the case that an out of character contribution will automatically be void, rather, an out of character contribution may indicate that the transferor was aware of their financial problems and as a result would be required to explain the purpose of the contribution to a Bankruptcy Trustee.

In addition to the above, Section 128C of the Act deals with contributions into a superannuation fund made by a third party for the benefit of an individual who subsequently becomes bankrupt. This section applies to situations in which a person agrees that monies that would normally be paid to the individual should instead be paid to the individual’s superannuation fund. For example, if a payment is made by an individual’s employer under a salary sacrifice arrangement. Section 128C(1) of the Act says that transfers that are void if:

  • a person (the transferor) transfers property to another person, (the transferee); and
  • the transfer is by way of a contribution to an eligible superannuation plan for the benefit of a person who later becomes a bankrupt (the beneficiary); and
  • the transferor did so under a scheme to which the beneficiary was a party; and
  • the property would probably have become part of the beneficiary’s estate or would probably have been available to creditors if the property had not been transferred; and
  • the beneficiary’s main purpose in entering into the scheme was:
    • to prevent the transferred property from becoming divisible among the beneficiary’s creditors; or
    • to hinder or delay the process of making property available for division among the beneficiary’s creditors; and
  • the transfer occurred on or after 28 July 2006;

Importantly, for Section 128C of the Act to apply, the bankrupt needs to be a party to the “scheme” which resulted in the transfer and the transferred property would have been available to creditors in a bankruptcy. A scheme means:

  • any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
  • any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

The beneficiary’s main purpose in entering into the scheme is taken to be the purpose described in paragraph (1)(e) above if it can reasonably be inferred from all the circumstances that, at the time when the beneficiary entered into the scheme, the beneficiary was, or was about to become, insolvent. In determining whether the individual’s main purpose in entering into the scheme, regard must be had to:

  • whether, during any period ending before the scheme was entered into, the transferor had established a pattern of making contributions to one or more eligible superannuation plans for the benefit of the bankrupt; and
  • if so, whether the transfer, when considered in the light of that pattern, is out of character.

If the payment is considered to be void under Section 128B or 128C of the Act, a Bankruptcy Trustee may be able to recover the payment by requesting the Official Receiver issue a superannuation account freezing notice pursuant to Section 128E of the Act. This effectively prevents the superannuation fund from cashing, rolling over, debiting or transferring any part of the fund. The Trustee can then:

  • request the Official Receiver issue a notice pursuant to Section 139ZQ of the Act which may require the superannuation fund to pay to the Bankruptcy Trustee the lessor of the withdrawal benefit or the value of the property received as a result of the void transaction; or
  • obtain a Court Order pursuant to Section 139ZU of the Act which deals with rolled over superannuation funds and may direct a superannuation fund to pay to the Bankruptcy Trustee a specified amount where a void contribution has been paid to another superannuation fund.

Accordingly, it is not simply a case of an individual making large lump sum payments into a superannuation fund on the assumption that such superannuation fund will be protected when that individual enters into bankruptcy.

  • So what happens when an individual withdraws superannuation early and ultimately ends up in bankruptcy?

Many individuals may consider it appropriate to access their superannuation early (assuming they meet the grounds for early release) to pay creditors or to fund working capital for a business interest in an effort to avoid bankruptcy. This may not ultimately achieve anything particularly where the individual ends up declaring bankruptcy anyway and those funds (if left in the superannuation fund) would have been protected.

Lump sum withdrawals from superannuation funds prior to bankruptcy lose their protection from bankruptcy and are fully exposed to creditors the same as any other property the individual may own. In other words, let’s assume an individual withdraws $25,000 to repay mortgage arrears on a family home that he has a joint interest in, and then sometime after that declares bankruptcy. Although the $25,000 contributed towards the mortgage was made using money from the superannuation fund, the payments have had the effect of increasing the equity in the family home (which is a divisible asset) and the Bankruptcy Trustee will be able to realise such asset for the benefit of creditors. In this instance, had the individual not obtained the withdrawal from the superannuation fund, then the amount would likely have been protected and not available to creditors.

Balances in superannuation funds are generally the result of many years of work. It is therefore important that individuals facing financial difficulties get the right professional advice prior to considering the above types of transactions. This is particularly important because if the right advice is obtained then it is likely that the individual’s superannuation will be protected and will be an available financial resource for when they ultimately retire.

In our next edition, we consider the effects of bankruptcy on Self Managed Super Funds!

Employees and Unpaid Superannuation – Millions Lost

We know from ASIC’s statistics released that of companies placed into liquidation:

  • Approximately 85% have assets less than $100,000; and
  • In about 97% of liquidations (for the year 2012/2013) a dividend of less than 11 cents in the dollar was paid.


The fact that many company liquidations have very few assets and the dividend rate is so low is not overly surprising. It should also be remembered that approximately 80% of liquidations involve less than 20 employees. In this sense the dominate source of corporate insolvency relates to small incorporated businesses.

It is significant to note that small businesses employ almost half of the total industry workers. Therefore, when these small businesses are placed into liquidation, quite often there are significant employee entitlements outstanding. Whilst there is a Government safety net scheme currently known as the Fair Entitlements Guarantee (“FEG”), this scheme only covers employee entitlements for items such as unpaid wages, leave entitlements, payment in lieu of notice and redundancy. Importantly the FEG scheme does not provide for payment of unpaid superannuation of employees due by insolvent employers. We frequently find that when small businesses are placed into liquidation there is a significant amount due in respect of unpaid superannuation or superannuation guarantee charge (“SGC”).

Recent figures released indicated for the 2012-13 year there was approximately $190 million in unpaid superannuation owed to employees as a result of their employer’s insolvency. In the first half of the 2013-14 year that figure is currently sitting at approximately $81 million.

Whilst there were some amendments to the Director Penalty Notice Regime(“DPN”) which commenced from 1 July 2012 that now enables the ATO to issue DPN’s to directors to recover unpaid SGC amounts, in practical terms we have not yet seen any cases reported where the ATO has successfully used this regime to recover unpaid SGC on behalf of employees.

As the SGC rate continues to increase (from the initial amount when it was first introduced at only 3%) it is vital that employees regularly review whether or not their employer is making contributions on time (given the ability to access this information online). We have been involved in many company liquidations where employees have not had their SGC amounts paid for in excess of three (3) years and we believe there is some responsibility on the part of the employee to ensure that such payments are being made.

As the Governments of the present and the future place more reliance on the Superannuation System to provide for an employee’s future (even if in part) employees should bear some sort of responsibility for making sure their entitlements are paid. Obviously if it is not being paid, then the employee may need to consider their options. Equally we encourage employers that are becoming concerned about not being in a position to cover such payments to seek professional advice as it may be an indication of a level of financial difficulty and emerging exposure personally for the directors.

It is frequently discussed with us as to whether or not the Federal Government will ever introduce or extend the FEG Scheme to include unpaid superannuation. Whilst this may sound attractive and be an easy answer to deal with the problem, we are not aware of any present reforms or discussion papers that suggest this will occur. We also suggest that the costs that would be paid if this were to occur may be a significant detractor from it occurring.

Beneath the Insolvency Statistics

Whilst the headline statistics released by ASIC [for corporate insolvencies] and AFSA [for personal insolvencies] always make interesting reading and helps us understand correlations between the national / state economies and insolvency levels, looking beneath these statistics also reveals critical details about the most frequently used type of corporate insolvency administration, as well as the most commonly used personal insolvency option.

Corporate Insolvencies


So why have CVL’s been the tool of choice since late 2007:

  • VA’s were first introduced in June 1993. At this time the Australian Taxation Office (“ATO”) introduced the Director Penalty Notice (“DPN”) regime.
  • At the time the DPN regime was introduced one of the only ways directors could effectively avoid personal liability using the external administration process was to use the VA regime. This was due to the CVL laws not enabling the company’s liquidation to generally be commenced in sufficient time whereby such liability could otherwise be avoided.
  • As a result one could argue that many SME’s were not necessarily making the best use of the VA regime. However, in late 2007 the Corporations Act was amended to give immediate effect to the special resolution made by shareholders such that the company commenced from that point. (Section 493)
  • Accordingly, since that time the CVL regime has been increasingly used particularly when the ATO is using the DPN regime. It should be borne in mind that the VA regime is also a costly process and has not since its introduction overcome other challenges (i.e. Ipso Facto clauses and guarantee related issues). As such it quite often is not viable for SME’s particularly when the directors leave it late in the day to get professional advice.

Other points of relevance

  • In 1999/2000 CVL’s accounted for approximately 15% of total corporate insolvencies whereas VA’s accounted for approximately 36%.
  • However, in 2012/2013 CVL’s represented approximately 47% of total corporate insolvencies, whereas VA’s represented approximately 14%.
  • ASIC statistics from 2009/10 to 2013/14 reveal that almost 80% of company external administrations involve businesses with less than 20 full time employees and 85% have assets of $100,000 or less.
  • For smaller SME’s affordability in dealing with their financial position is a real issue. It will be interesting to monitor this dichotomy and whether any legislative reform might provide a better framework to deal with SME insolvency.

Jones Partners has 4 Registered Liquidators all of whom have a depth of experience in advising directors and shareholders of SME’s when they are in financial difficulty.

Personal Insolvencies


Bankruptcy -some key observations:

  • For the March quarters 2012 to 2014 individuals that voluntarily entered into bankruptcy accounted for approximately 91% of all bankruptcies. This suggests that unsecured creditors are and remain cautious about taking individuals (debtors) via the Court process to otherwise have them declared Bankrupt.
  • Based on recent AFSA statistics released, Personal Insolvency Agreements (“PIA”) or Part X’s recorded the lowest number in the March quarter 2014 since March 2007. Also, Bankruptcies increased 3.31% in the March quarter 2014 compared to the March quarter 2013.
  • During 2012/13 Registered Bankruptcy Trustees and Registered Debt Agreement Administrators held on trust a total of $497.46 million. Of this $192.7 million or 39% was paid in dividends. Compared to 5 years ago at June 2008 funds held on trust amounted to $249.12 million and $91.6 million or 37% was paid in dividends. The doubling of monies held in trust has occurred at the time where numbers of Registered Bankruptcy Trustees has remained steady.

At Jones Partners we have 2 experienced Registered Bankruptcy Trustees who regularly act where individuals are considering voluntary bankruptcy. We are also hopeful of having another 2 Registered Bankruptcy Trustees before the end of 2014 to enhance our capability to provide personal insolvency services to individuals throughout NSW and Australia.

Take a step back and listen

I was sitting with my wife and 15 month old son where the lake meets Coolum Beach this easter playing charades with my wife feverishly acting sniffing a subject to finish a movie named “bed of ____”. I must have guessed a million different types of sleeping herbs or sleep related subjects before my son started piping up with flowers. Not listening to him I continued in my mumble of ignorance guessing totally wrong, until my wife breached protocol and told me to listen to my son.
When my son was so correct and the answer was staring directly at me, I managed to go down the wrong path despite my best intentions. Why is it that we block relevant, perfect and correct information and stumble into poor outcomes despite our noble intentions.

Information is being processed, published and blasted to us at a million miles an hour. Naturally we form a guard only allowing the information that is relevant to us to compute and assist in our decision making.

However, sometimes our guard can block information that is being articulated to us time and time again that we need to help ourselves improve and get a desired outcome. The best indicator that we are not taking on the correct information and making the right decisions is finding yourself in a position you do not want to be in.

For example, if you aren’t in the right place financially take a step back and listen to your advisors (whether that be your solicitors, accountants or other trusted sages) that are providing you advice on your options and the best direction to take and reap the rewards.

If you are having difficulty repaying your debts (business or personal) do not hesitate to give me a ring and have some free advice regarding the solutions available to you.