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Directors held liable for employee benefits on insolvency

In a recent decision of the Federal Circuit Court, the directors of a series of liquidated companies were held liable to compensate a former employee of those companies for unpaid statutory entitlements and underpayments.

The applicant, a scaffolder, had originally been employed by a company called A1 Scaffolding Pty Ltd in June 2005. Late in that year, the company was placed in administration and its assets and employees (including the applicant) were subsequently transferred to a second company, A1 Scaffolding (NSW) Pty Ltd.

In 2007, that company was in turn placed in administration and a third company, A1 Scaffold Pty Ltd, received the transfer of its assets and employees, again including the applicant.

In late 2012, the assets and employees of A1 Scaffold Pty Ltd were transferred to a fourth company, A1 Scaffold Group Pty Ltd, at which time employees (including the applicant) were notified that they would lose their accrued statutory entitlements such as annual leave.

The applicant was subsequently dismissed when he refused to sign a letter of offer and he sought the involvement of his union.

The applicant brought an adverse action application in the Federal Circuit Court against A1 Scaffold Group Pty Ltd, its officers and the officers of the various entities. In his application, the applicant argued that the matter was “a classic case of a phoenixing arrangement” where an entity is collapsed in a manner to deny unsecured creditors equal access to its assets, and parties related to the entity’s controllers commence another business within 12 months using some or all of the entity’s assets.

The applicant noted that section 550 of the Fair Work Act allowed for liabilities to be sheeted home to “accessories” of contraventions in some circumstances. It was submitted that the appropriate legal test for sheeting liability to an accessory was that, for the relevant person:

  1. He or she must have knowledge of the essential facts constituting the contravention;

  2. He or she must be knowingly concerned in the contravention;

  3. He or she must be an intentional participant in the contravention based on actual, not constructive, knowledge of the essential facts constituting the contravention, although constructive knowledge may be sufficient in cases of wilful blindness; and

  4. He or she need not know that the matters in question constituted a contravention.

The Court was prepared to find that the applicant had established “a prima facie case that [A1 Scaffold Group Pty Ltd] had acted through the ‘personal’ respondents [being the directors of the various entities] at various times” and to declare that several of those personal respondents were required to compensate the applicant for his unpaid entitlements and underpayments.

The decision was made following the default of various of the personal respondents to comply with orders, whilst an additional respondent did not appear in the proceedings at all. As such, there was nothing before the Court to rebut the assertion that the personal respondents were “knowingly concerned” in the contraventions by the various entities, a hurdle that can otherwise be difficult to surmount in practice.

That said, the decision is a useful reminder that collapsing or “phoenixing” a company may not be the end of the story when it comes to outstanding employee entitlements and underpayments, if a court can be convinced that the officers were “knowingly concerned” in breaches by the company.


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