Priority payments for employees in winding-up

The New South Wales Court of Appeal recently considered the application of the section of the Corporations Act (s556) relating to the priority of employee entitlement payments: Sturesteps v HIH Overseas Holdings Ltd (in liquidation) [2011] NSWCA 315

Under that section, an employee's retrenchment payment is prioritised over all other unsecured debts. However, the retrenchment payment is not to include any amount attributable to days where the employee had been a director in the last 12 months before the date of winding-up. The court held that the determination of entitlement to priority payment depended on the proportion of days that the person had been a director or non-director in the last 12 months, not on the position of the person at the time of winding-up.

The relevant employee in this case had been a director during the last 12 months prior to winding-up, then had resigned as director and become an employee. His entitlement to priority payment was therefore apportioned relative to the amount of time he had spent as a non-director in the last 12 months. The fact that the employee was an 'employee' and not a 'director' at the time of winding-up was not determinative.