The role of voluntary administrations
When a company encounters financial difficulty, it can be placed into voluntary administration, to provide the required breathing space to assess its future financial viability. In this situation, the interests of the company and employees will sometimes, inevitably conflict.
A voluntary administration can go one of two ways:
- Deed of Company Arrangement (DOCA)
A Deed of Company Arrangement (DOCA) is a proposal to recapitalise and restructure the company. All proposals are evaluated by the administrator, who will assess the commercial viability of the company and make a recommendation to creditors regarding the future of the company.
For the DOCA proposal to pass, 50% of creditors both in value and number must vote in favour. A DOCA must ensure that employee entitlements are paid in priority to other creditors, and that employees are no worse off than an immediate liquidation.
- Liquidation
If creditors will not support the DOCA proposal, the company will be wound up. This involves paying creditors in accordance with the priority regime outlined in the Corporations Act (2001) Cth. Employees may be entitled to a payout through Fair Entitlements Guarantee (FEG), a government scheme that provides certain guarantees for workers facing unemployment as the result of their employer filing for bankruptcy or liquidation. FEG will guarantee redundancy pay where appropriate.
The controversy surrounding FEG redundancy pay
During a voluntary administration DOCA proposal, employee creditors often have significant voting power. Liquidation can be a scary prospect, with many facing unemployment or a significant delay in repayment. However, this is not always the case.
For industries with tight labour markets and strong employment opportunities, a liquidation scenario will sometimes align more closely with employees’ personal interests. They may have strong employment prospects with the additional benefit of redundancy pay through FEG. This can incentivise employees to vote against a DOCA proposal.
The Takeaway
Employee entitlements need to be protected, but conflicting interests emerging from redundancy entitlements are sometimes unavoidable. This can compromise the avenues for turnaround.
