Wednesday, 15 July 2015

FEG Scheme to target banks on Section 433

WHILE it's good news that the Department of Employment will fund liquidators' recovery actions against directors and companies where an insolvency has left employee entitlements unpaid, more interesting still is the revelation that banks and receivers are also to be the subject of a renewed focus.

On July 1 the Federal Department of Employment, which administers FEG, or the Fair Entitlements Guarantee Scheme, resurrected the Active Creditor Pilot (ACP) program, phoenix like, after it was shut down without explanation in 2009. The new bird is called the Fair Entitlements Guarantee Recovery Program.

It's architect, Henry Carr is eager to again put money into the pockets of liquidators with strong cases for recovering FEG funds from directors who left companies with unpaid employee obligations. But he's not stopping there.

"One of the issues that is within the scope of the FEG Recovery programme is ensuring that receivers and controllers have fulfilled their statutory duty to pay employee entitlements out of floating charge assets, before paying proceeds of the secured property to their appointer," Carr told SiN.

"In circumstances of a breach of their statutory duties, the receiver/controller may be personally liable to pay damages; or the bank that had knowledge that certain preferential creditors remained unpaid, may be found to hold the proceeds of the charged assets on constructive trust for the Commonwealth," he said.

"Obviously a lot of the insolvency profession look the other way when I bring up this topic but I'm very interested in looking at whether all of the banks have lived up to their obligations in respect of their floating charge assets."

At its core, Carr said the issue is whether a bank can have a fixed charge over highly liquid assets like debtors and cash at bank.

"We pushed out a similar pilot in 2007 and 2008 and the first bank I had in my sights sent me a cheque," Carr said.

The introduction of the Personal Property Securities Act (PPSA) 2009 saw the concept of the fixed and floating charge replaced by a "security interest over a company's all present and after-acquired property" instrument.

Nevertheless, the PSSA and the Corporations Legislation still recognise the distinctions between a circulating security interest, which is the equivalent of the old floating charge, and the security interest attaching to personal property that is not a circulating asset - or in other words - the old fixed charge.

Carr said his inquiries into whether banks and receivers have complied with Section 433 of the Corporations Legislation will focus on the nature of the property and the degree of control the bank has over it. In other words, has the bank genuinely perfected its security interest?

"Where a circulating security interest held by the receiver or controller is over a current asset like a book debt, the receiver or controller will be obliged by Section 433 to pay the employee entitlement’s unless the bank has registered the charge, disclosed that they have control over the collateral, and they actually have that control," Carr said.

"In respect of a circulating security interest held by the receiver or controller over a tangible asset like say, stock-on-hand, the receiver or controller will be obliged by Section 433 to pay the employee entitlements unless the bank has perfected its security interest over the collateral by possession of the assets."

The restoration of the ACPP comes as the costs for both FEG and its predecessor, the General Employee Entitlements and Redundancy Scheme (GEERS) continue to rise, prompting questions about  their viability.

In the Insolvency Law Journal in 2013, Queensland University of Technology's Mark Wellard explained how the costs of GEERS and FEG were snowballing.

"The Commonwealth initially budgeted for $202.97 million in GEERS payments in the current financial year (2012/13). However, the 2012/13 Portfolio Additional Estimates Statements for the Department of Education, Employment and Workplace Relations (“DEEWR”) released in February 2013 now disclose the following anticipated expenses for this financial year:

  • GEERS: $248.39 million; 
  • FEG: $55.63 million (making a new appearance as a “special appropriation” because of the FEG’s operational commencement in December 2012). 

"Thus, the revised aggregate estimate of employee assistance payments through the combined administration of GEERS and FEG in 2012/13 is $304 million, a projected $109 million increase on total GEERS advances in 2011/12 ($195.53 million)."

Wellard noted at the time that it was not clear to what extent the increase might have been attributable to changes made to GEERS in January 2011, which saw the 16 week cap on eligible redundancy entitlements replaced with a maximum four weeks’ redundancy pay per year of service (for as many years of service as an employment contract might provide in the way of a redundancy entitlement). And he questioned whether the forward estimates for 2013 to 2015 weren't overly optimistic.

"The Commonwealth’s revised forward estimates - largely applicable to the FEG but with some minor GEERS run-off - are now $205 million for 2013/14 and $210 million for 2014/15.

"Some might say these are modest (or heroic) projections given the recent experience of significant increases in actual and estimated payments during the last four years)," Wellard said before concluding that effectively funded recovery action must be given serious consideration if GEERS and FEG are to be sustainable and quoted a 2008 review of the previous ACPP.

"... the Pilot has been effective in generating significant returns to the Commonwealth and to other creditors, such as employees, that would not have been otherwise available through normal GEERS recovery processes."

"... the success of the Pilot is manifest in the fact that it is anticipated the Pilot will return 562 percent of the funding provided by the Department for the ten completed matters.”

See: Bailing out the FEG : is the Fair Entitlements Guarantee (formerly GEERS) approaching its own fiscal cliff?

In tackling the banks in what he calls the "grey area" of security interests, Carr said his biggest obstacle is finding people suitably qualified to prosecute his inquiries who aren't conflicted by existing referral relationships with the banks. 

He confirmed discussions have been held with certain unencumbered legal practitioners who had expressed interest but with only $11.5 million in funding over two years and liquidators queuing, Carr is mindful that it will be worth his while to explore partnerships. 

"The Commonwealth is the only loser because there is nobody standing in our corner, looking over the shoulder of the banks and because there is a bit of a grey area there and we have been absent from the table, I think the banks have been exercising that grey area in their favour," Carr said. 

"I would love it if liquidators saw fit to raise this issue because there's a fee in it for them but I can tell you that I'm also taking steps to investigate the issue and I'll be asking questions of receivers and I'll be pursuing these matters directly with them."

IMF's Hugh McLernon can probably expect a call.

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