Bruck Textile Technologies - Case Update

The Supreme Court of Victoria Court of Appeal has ruled that directors who leave their company insolvent and unable to pay employee entitlements cannot be criminally liable under section 596AB(1) of the Corporations Act 2001 (Cth) if they believed the employees would receive payments through the government’s Fair Entitlements Guarantee (FEG) scheme—specifically rejecting arguments made by the Director of Public Prosecutions that this interpretation would render Part 5.8A of the Corporations Act 2001 (Cth) and the FEG scheme ‘empty’ and ineffective.

The decision was made in the criminal prosecutions of Philip Bart and Ronald Johnson, the sole directors and former chair and chief financial officer of Victorian textile manufacturer Bruck Textile Technologies (BTT). Barry Taylor of HLB Mann Judd and Andrew Needham, then of HLB Mann Judd and now at anequity, were appointed liquidators of the company in July 2014. At the time, BTT had been operating for more than 60 years and employed approximately 180 staff.

The Director of Public Prosecutions charged Mr Bart and Mr Johnson with entering into an agreement with intentions of preventing the recovery of employee entitlements. The Director alleged that Mr Bart and Mr Johnson deliberately entered into a questionable business arrangement whereby they agreed to sell BTT’s business to Australian Textile Mills Pty Ltd (ATM), another company controlled by them, for $1, offering employment to only 120 or so of BTT’s employees, and leaving the obligation to pay entitlements to the remaining 58 employees with BTT, which they then placed into voluntary liquidation. The Director further alleged that those employees’ entitlements totalled nearly $4 million, that BTT was insolvent when the agreement was entered into, and that Mr Bart and Mr Johnson knew that BTT did not have sufficient assets to pay the entitlements, but also knew that BTT or its liquidators may be able to make a claim under the Fair Entitlements Guarantee Act 2012 (Cth) (FEG Act). The Commonwealth, through the FEG scheme, eventually paid most of the entitlements.

In late May, the Court of Appeal heard arguments on a question of law—namely whether a person can be criminally liable under section 596AB(1) of the Corporations Act if they believed entitlements would be paid under the FEG scheme. The Director argued that if an intention to prevent recovery of employee entitlements could be negated by the belief or expectation that those entitlements would be satisfied through payments under the FEG Act, then s 596AB(1) of the Corporations Act would be deprived of practical effect. This was because persons could escape liability under s 596AB(1) merely by relying on the availability of the FEG scheme, thereby undermining the statutory objective of protecting employee entitlements from agreements intended to defeat their recovery.

The Court rejected this submission, holding that the availability of the FEG scheme did not render Part 5.8A empty. The Court observed that the FEG Act does not cover all types of employee entitlements (for example, superannuation contributions and injury compensation are excluded) and does not apply in all circumstances (such as where employment does not end due to insolvency, or where the employee is not an Australian citizen or permanent resident). Accordingly, s 596AB(1) still has significant work to do in protecting entitlements in situations where the FEG Act does not apply. The Court further emphasised that Part 5.8A of the Corporations Act was enacted before the FEG scheme existed and should not be construed by reference to later legislation. The fact that the FEG Act provides an alternative pathway for employees to receive their entitlements does not diminish the continuing relevance or operation of s 596AB(1).

The Court held that a person cannot be said to intend to prevent the recovery of employee entitlements if they expect or believe that those entitlements will be paid under the FEG scheme. The Court emphasised that "recovery" in section 596AB(1) is not limited to payments made directly by the employer; recovery can include payment through statutory mechanisms like FEG. Since the employees in this case were ultimately paid via the FEG advances passed through the liquidators, the employees' entitlements were considered "recovered" for the purpose of the legislation. The Court rejected the Director’s argument that recovery had to come specifically from the employer company.

As a result, the Court answered the legal question—whether a person can intend to prevent recovery if they believe employees will be paid via the FEG scheme—in the negative.

Read the decision HERE.

Professionals involved:

• Dr Oren Bigos KC of List A Barristers with Daniel Krochmalik of 3 St James’ (instructed by William James) for Mr Bart

• Christopher Carr SC of Parnell’s with Christopher Beshara of Eleven Wentworth (instructed by O’Loughlin Westhoff) for Mr Johnson

• Nicholas Robinson KC with Peter Botros (instructed by Mark de Crespigny, Solicitor for Public Prosecutions) for the Director of Public Prosecutions (Cth)