The Allocation of Resources to Insolvent Company Employees: An Examination of the Consistency between Australian Law and Rawlsian Distributive Justice

This thesis seeks to answer the research question: is the allocation of resources to insolvent company employees in Australia consistent with Rawlsian distributive justice? The analysis of the research question comprises two components: first, the allocation of resources to insolvent company employees that is required by Rawlsian distributive justice and second, whether Australian law is consistent with that allocation. This thesis focuses on four particular areas of Australian law: the priority regime that is applicable when an insolvent company’s assets are distributed to creditors, director and related company liability for employee entitlements, the General Employee Entitlements and Redundancy Scheme (GEERS) and the procedure for corporate and business rescue contained in Part 5.3A of the Corporations Act 2001 (Cth). Employees are among the least advantaged persons in the event of corporate insolvency. According to Rawlsian distributive justice, resources must therefore be reallocated to ensure greater equality between employees and other persons ‘affected’ by corporate insolvency, including secured creditors, quasi-secured creditors, consumers, shareholders, insolvency practitioners, directors and taxpayers. However, Rawls’s ‘difference principle’ permits inequalities between employees and other persons affected by corporate insolvency if those inequalities contribute to achieving the greatest benefit of employees, for example as a result of job maintenance or the payment of employee entitlements. The priority regime is broadly consistent with the Rawlsian objective of ensuring the greatest benefit of the least advantaged employees. Although employee entitlements receive only partial priority over the claims of secured creditors and are subordinated to the claims of quasi-secured creditors and insolvency practitioners, the better prospects of secured creditors, quasi-secured creditors and insolvency practitioners satisfy Rawls’s difference principle because they are likely to preserve employment and the payment of employee entitlements in the ordinary course of business, thus contributing to the greatest benefit of employees. Director and related company liability for employee entitlements is likely to be beneficial for employees only in circumstances where directors and related companies engage in improper behaviour in relation to the payment of entitlements. Liability outside those circumstances is likely to jeopardise employment and the payment of employee entitlements. However, existing Australian law does not adequately provide for director and related company liability in circumstances of improper behaviour. Amendments to director and related company liability for employee entitlements in Part 5.8A of the Corporations Act 2001 (Cth), including the replacement of the test of subjective intention with an objective test, are likely to contribute to the greatest benefit of employees, thus ensuring greater consistency with the Rawlsian framework. In certain respects, GEERS is consistent with Rawlsian distributive justice. For example, GEERS reduces inequalities between employees and taxpayers; operates in conjunction with the employee priority regime and director and related company for employee entitlements, thus facilitating the equal sharing of resources among claimants; and effectively differentiates between the relative levels of disadvantage faced by individual employees in the event of corporate insolvency. However, the limitation of GEERS to liquidation and the restriction on claimable wages pursuant to GEERS compromise the Rawlsian objective of ensuring the greatest benefit of employees. The corporate and business rescue procedure contained in Part 5.3A of the Corporations Act 2001 (Cth) facilitates sustained employment and the preservation of employee entitlements, thus contributing to the greatest benefit of employees. Additionally, Part 5.3A does not encourage ‘hopeless’ rescue attempts and does not override the interests of secured and quasi-secured creditors, thus avoiding outcomes that may otherwise compromise the greatest benefit of employees. However, the ability of substantial charge holders to remain outside a Part 5.3A corporate or business rescue attempt is likely to adversely affect the interests of employees, thus implementing greater protection for secured creditors than is required to satisfy Rawls’s difference principle