Superannuation and insolvency
The following information sets out how superannuation affects various insolvency administrations.
Changes to the Corporations Act 2001 mean that from 31 December 2007, employees of companies that go into liquidation, voluntary administration or receivership will stand a better chance of receiving their super entitlements.
Under the changes, the superannuation guarantee charge must be paid before payments to ordinary unsecured creditors. This means it will rank equally with employees' entitlements for wages and super contributions as long as there are assets available for distribution to priority creditors.
The changes also mean the superannuation guarantee charge will be included in the capped amount of $2,000 that certain excluded employees, such as directors and their relatives, can claim as a priority.
The superannuation guarantee charge is the total of the individual employee shortfalls plus the administration component plus the nominal interest component.
Liquidation starting before 31 December 2007
Where a company is wound up prior to 31 December 2007, any super guarantee charge payable is afforded priority by section 52 of the Superannuation Guarantee (Administration) Act 1992 (SGAA). Section 52 provides for a priority equal to that of a debt of the company of the kind referred to in paragraph 556(1)(e) of the Corporations Act 2001, which includes employee wages and super contributions.
Section 556(1A) of the Corporations Act 2001 caps the amount that can be paid to an excluded employee under paragraph 556(1)(e) at $2,000. Excluded employees are defined to be a director or their spouse during the 12 months prior to liquidation.
For liquidations commencing prior to 31 December 2007, individual employee shortfalls for directors and other excluded employees should be included in any super guarantee statement and the whole of the superannuation guarantee charge should be ranked equally with paragraph 556(1)(e) amounts. Furthermore, these shortfall amounts should not be included in any calculation of the $2,000 limit prescribed in subsection 556(1A) of the Corporations Act 2001, nor can the $2,000 limit in any way reduce an excluded employee's superannuation guarantee shortfall entitlement.
Liquidation commencing on or after 31 December 2007
With effect from 31 December 2007, section 52 of SGAA has been repealed and the Corporations Act 2001 has been amended to include the superannuation guarantee charge together with superannuation contributions in Section 556(1)(e).
Superannuation guarantee charge claims in respect of excluded employees, such as directors and their spouses, will be a priority to the extent of the first $2,000 claimed. Any amounts exceeding $2,000 will rank with unsecured creditors.
Deeds of company arrangement starting on or after 31 December 2007
A new section in the Corporations Act 2001, section 444DA, takes effect from 31 December 2007 and impacts on deed of company arrangement (DOCA).
From 31 December 2007, all DOCA are required to include a clause to the effect that 'eligible employee creditors' will enjoy a priority under the administration at least equal to what they would have received had there been a winding up. The definition of the term "eligible employee creditor" is defined to include a creditor with a liability that falls within the priority afforded by section 556(1)(e) of the Corporations Act2001. The Tax Office's claim for the superannuation guarantee charge falls within this definition.
Claims by an 'eligible employee creditor' are to be paid in priority to other unsecured creditors and ahead of any priority that otherwise might be enjoyed by a charge holder.
Affected employees may vote down the inclusion of such a provision at a meeting held prior to the second meeting of creditors, provided that, with their notice of that meeting they received a written opinion from the administrator, with reasons for the opinion and other relevant information, on whether the non-inclusion of that provision would be likely to result in the same or better outcome for them, as compared to what they would have received on an immediate winding up.
Although not specifically legislated for, the inclusion of the superannuation guarantee charge as a priority debt in section 556(1)(e) of the Corporations Act means that the superannuation guarantee charge will obtain a priority in a receivership through the operation of section 433(3)(c) of the Corporations Act. The superannuation guarantee charge will be treated in the same way as other wage related priority debts under section 556(1)(e).
The superannuation guarantee charge has been afforded priority in bankruptcy under section 109 (1C) of the Bankruptcy Act 1966 since 5 May 2003. The priority under section 109(1C) extends to general interest charge in respect to the non-payment of the superannuation guarantee charge. The superannuation guarantee charge is included in the category of employee entitlements including salary, wages or commission.
The maximum amount subject to the priority is adjusted annually:
- $3,850 for the year starting 1 July 2008
- $3,750 for the year starting 1 July 2007.
Part IX and X arrangements
There is no legislative requirement for the superannuation guarantee charge to be afforded a priority in arrangements made pursuant to Parts IX and Part X of the Bankruptcy Act 1966. However, trustees frequently address this anomaly by including a clause in the deed that gives the superannuation guarantee charge a similar priority to that which it would have received in bankruptcy. The Commissioner may vote against a deed that does not provide priority for superannuation guarantee charge if bankruptcy would yield a greater return.
Prior to 31 December 2007, where there were unpaid superannuation payments and the superannuation guarantee charge was imposed and the ATO and superannuation fund each proved for their liabilities, the liquidator was obliged to admit both proofs. The reasoning is that the two classes of debt were legally distinct.
From 31 December 2007 external DOCA administrators are required to reject a proof of debt where such a situation arises and to reject a proof of debt for a superannuation contribution that results in a superannuation guarantee charge (section 444DB). The superannuation guarantee charge will be preferred since it includes an interest component, providing employees a greater benefit. All DOCAs must now contain a provision to that effect.
Liquidators will also have the power under section 553(1A) of the Corporations Act 2001 to reject the whole or part of a proof of debt for superannuation where the amount has already been paid by way of the superannuation guarantee charge or there is an admissible proof for the superannuation guarantee charge.
How dividend payments are applied
Section 64B of the SGAA sets out a formula for the allocation of payments received on a pro rata basis, and prior to 31 December 2007 did not allow the Tax Office to allocate shares to employees to take account of special circumstances, for example, in the case of excluded employees under Section 556(1)(a) of the Corporations Act 2001 or section 109(1)(e) of the Bankruptcy Act 1966 in the case of an employee. Under the amendments commencing 31 December 2007 to section 64B the Commissioner is now granted.
Information about how super affects various insolvency administrations.