SCHH Ltd v South West Pacific Investment Ltd [1994] VULawRp 5; [1980-1994] Van LR 729 (21 April 1994)

[1980-1994] Van LR 729

IN THE SUPREME COURT OF
THE REPUBLIC OF VANUATU

CIVIL JURISDICTION

Civil Case No. 30 of 1994

BETWEEN:

SCHH LIMITED
(RECEIVER & MANAGER APPOINTED)
Applicant

AND:

SOUTH WEST PACIFIC INVESTMENT LTD
Respondent

Coram: Downing J

Mr G Blake for Applicant
Mr J Ozols for Respondent

JUDGMENT

[RECEIVERS - EMPLOYMENT - CONTRACT - termination by receiver - severance pay entitlements - liability for payment of such entitlements - Companies Act priorities]

This matter comes before the Court by way of an Originating Summons in which the Applicant seeks the following declarations:-

1. A declaration that the period of employment by SCHH Limited of its employees up to and including the 14th July 1992 and the period of employment by SCHH Limited (Receiver and Manager Appointed) of its employees as and from the 15th July 1992 of those who had been employees prior to the 14th July 1992 do not together constitute continuous employment for the purposes of Section 54 of the Employment Act [CAP 160].

2. A declaration that on the true construction of Section 99 and Section 308 of the Companies Act [CAP 191] (as amended) the claim of any employee of SCHH Limited in respect of wages, salary and/or severance allowance in respect of the period prior to 14 July 1992 shall only have priority in the aggregate thereof up to the sum of VATU ONE HUNDRED THOUSAND (100,000 VT) over all other debts of SCHH Limited.

3. A declaration that on the true construction of clause 9.4 of the Agreement between SCHH Limited (Receiver and Manager Appointed) the allowance due to the Respondent pursuant to clause 9.4(c) of the Agreement in respect of severance allowance shall be limited in amount to the calculation of accrued severance allowance for the period from 15 July 1992 to 6 December 1993.

The Facts

SCHH Ltd (Receiver and Manager Appointed) (hereinafter referred to as the Company) formerly owned the Royal Palms Resort and Palms Casino. On the 8th October 1990 the Company gave a floating charge over its assets and undertaking to Westpac Banking Corporation. On the 14th of July 1992, following the making of a demand and a failure by the Company to pay, the charge was crystallised and Mr A. R Tuttle was appointed by the Westpac Banking Corporation as Receiver and Manager of the Company.

On or about the 14th July 1992 Mr Tuttle sent a letter to employees of the Company in the following terms:-

"SCHH Limited (Receiver and Manager Appointed)
Letter to Employees
I was appointed Receiver and Manager of the company by a secured creditor on 14 July 1992.
Your employment with the company is hereby terminated. However the company hereby offers to re-employ you as from today on the same terms and conditions on which you were employed immediately prior to my appointment. If you wish to accept this offer you should print your name, address and position on a copy of this letter and return it to Mr G Grady of my staff.
I am currently involved in an urgent appraisal of the company's activities to determine the best course of action to preserve the company's business. Employees who have accepted this offer are asked to continue with their normal duties pending further advice. A schedule of obligations of employees when a receiver has been appointed is attached for your general guidance. All instructions relating to the management of the company will now be issued by me, Mr Grady, or such of the management of the company who are authorised by me.
Your employment entitlements are divided into two categories for priority purposes:
1. After today, and if you elect to continue:
Wages and entitlements for continued employment after my appointment will be paid by the company on my authorisation.
2. Claims for amounts due for periods before my appointment:
Claims against the company for outstanding wages, accrued annual leave and other entitlement for the period prior to my appointment to the extent of (VT 100,000) receive priority over any return to the secured creditor.
However there are other higher ranking statutory priorities, such as any unremitted deductions to the National Provident Fund. At this stage I cannot give a firm indication of whether and when there will be sufficient assets to enable payment of employees' pre-appointment claims. I will, as a matter of good faith, pay pre-appointment wages due to employees later this week. As soon as the amount of the remaining pre-appointment claims has been calculated and the position of the company clarified you will be advised further.
I will be pleased to answer any questions you may have and look forward to your co-operation and assistance. Please contact Mr G Grady of my staff if you require any further information.
A.R. Tuttle
Receiver & Manager"

I would appear that most, if not all, of the employees of the Company who received this letter accepted the offer of re-employment.

On the 4th of October 1993 a agreement for the sale of the business of the Company was executed between the Company and the Respondent. The clauses which are relevant to this matter are:-

"1.5 The Purchaser acknowledges and agrees that it is not contracting with the Receiver and Manager of SCHH Limited personally but rather is contracting with SCHH Limited so that the Receiver and Manager of SCHH Limited shall not incur any personal liability to the Purchaser on any account whatsoever".
"9.1 The vendor shall terminate the employment of Employees on and from the Completion Date, as required, in order to give effect to this Clause 9.
9.2 The Purchaser shall at least 14 days before the completion date offer to any Employee it choose employment in the Business with the Purchaser from and conditional upon completion of this Agreement.
9.3 The Vendor is solely responsible for the Terminating Employees and on the Completion Date shall pay to each Terminating Employee the amount (if any) due to that Terminating Employee whether arising under any agreement, any legislation, any award or otherwise in respect of:-

• (a) accrued salary and wages, annual leave;
• (b) accrued entitlements to long service leave; and
• (c) any other remuneration or entitlement arising out of the employment or its terminating, including severance allowance.

9.4 In relation to the Transferring Employees:

• (a) the Purchaser shall notify the Vendor at least five (5) business days before the Completion Date as to which employees have accepted the Purchaser's employment offer;
• (b) the Vendor shall deliver to the Purchaser on completion, documents setting out full details in respect to each Transferring Employee of all accrued entitlements as at the date for completion, including, without limitation, details of the amount of annual holidays pay and long service leave and severance allowance which would be payable if the Employee's employment were terminated at completion;
• (c) the Vendor shall pay or allow to the Purchaser at completion the amount equal to the value of the accrued entitlements referred to in subclause 9.4(b);
• (d) the Purchaser is responsible for the Transferring Employees; and
• (e) the Purchaser will from completion treat the Transferring employees and deal with all their entitlements as if each entitlement had been accrued by the relevant Transferring Employee while in employment of the Purchaser, and the Purchaser indemnifies and will keep indemnified the Vendor against each claim, action, proceeding, damage, loss, expense or liability however arising and whether present, unascertained, immediate, future or contingent against the Vendor in respect of the Transferring Employees relating to the period after completion.

9.5 The Purchaser shall pay to the Vendor the amount equal to the total amount of wages and salaries paid by the Vendor to the Transferring Employees in respect of any period after completion and the Vendor will pay to the Purchaser at completion an amount equal to the total amount of wages and salaries payable but unpaid by the Vendor to the Transferring Employees in respect of any period up to and including the date for completion of this Agreement."

1. The First Declaration Sought

The question posed by the first declaration which is sought is whether the letter of termination of employees given on or about the 14th of July 1992 in fact terminated the employment of the employees in such a way that their re-employment pursuant to the offer contained in the letter of termination did not constituted continuous employment for the purposes of Section 54 of the Employment Act [CAP 160]?

Mr Blake for the Company urged upon the Court that there are two distinct periods of employment for the employees. The first is prior to the 14th July 1992, the second is after that period and up until the completion date of the contact of sale of the business. He submitted that the letter of the 14th of July 1992 from the Receiver & Manager of the Company to the employees of the Company amounted to a termination of the employment by the Company of the employees and at that point the obligation to make payments in respect of the former employees for all wages, severance pay and holiday pay crystallised and were to be paid in priority to other claims to the extent of VT100,000. Any claim by an employee beyond the sum of VT100,000 would be of the same ranking as an unsecured creditor.

The Applicants reason for sending the letter of the 14th of July 1992 was, the Court was informed, to ensure that the employees knew that they would have continued employment after the appointment of Mr Tuttle. This, it was submitted was because Section 342 of the Companies Act does not provide expressly for an adoption of contracts by a Receiver and Manager. Whatever the reason, the letter makes it quite clear that immediately after the termination re-employment was offered:-

"However the company hereby offers to re-employ you as from today on the same terms and conditions on which you were employed immediately prior to my appointment".

Sections 54 and 55 of the Employment Act provide:-

"54. Severance Allowance
1. Subject to section 55 where an employee has been in continuous employment for a period of not less than 12 months with an employer and the employer terminates his employment or retires him on or after his reaching the age of 55, the employer shall pay severance allowance to the employee.
2. For the purposes of subsection (1)

• (a) an employee who works for his employer on 4 or more days in any week shall be deemed, in respect of that week, to have been in continuous employment.
• (b) no employee shall be held to have ceased to be in the continuous employment of an employer by reason of his participation in a strike which is not unlawful:

3. For the purposes of section 308 of the Companies Act. CAP 191 severance pay shall be deemed to be wages.
55. When Severance Allowance Not Due
1. Severance allowance shall not be payable to an employee who has been recruited outside Vanuatu and is not ordinarily resident in Vanuatu.
2. An employee shall not be entitled to severance allowance if he is dismissed for serious misconduct as provided in section 50.
3. Where:-

• (a) an employer dies and the employee is employed or offered employment by the personal representative of the deceased forthwith after the death;
• (b) employment by a partnership ceases on the dissolution of the partnership, and the employee is employed or offered employment by a member of the dissolved partnership or a new partnership forthwith after the dissolution;
• (c) employment by a body corporate ceases on the dissolution of that body, and the employee is employed or offered employment by some other corporate body in accordance with an enactment or a scheme or reconstruction forthwith after the dissolution; or
• (d) employment ceases on the disposal of the goodwill, or of the whole or a substantial part of the business as a going concern or of that part of the business in which the employee is employed and he is employed or offered employment by the person who acquires the goodwill or business or part of the business forthwith after disposal, on terms and conditions which are not less favourable than those of the former agreement, the employee shall not be entitled to severance allowance.

4. Where an employee to whom an offer is made in any of the circumstances in section 54(2) and that continuous employment is terminated in circumstances specified in subsection (3) accepts the offer he shall be deemed to have entered the employment of the person by whom the offer is made forthwith upon the cessation of his employment with the first employer.
5. Where an employee is deemed to be in continuous employment in accordance with section 54(2) and that continuous employment is terminated in circumstances in which severance allowance is payable, the employer in whose service the employee was employed immediately before the termination shall be deemed to be the employer during the whole of the period and shall be liable to pay severance allowance accordingly.
6. An employer who is liable to pay severance allowance under subsection (5) shall:-

• (a) be entitled to deduct any period and to make any deduction which any previous employer would have been entitled to deduct or to make had the previous employer become liable to pay severance allowance; and
• (b) be exempt from any liability to pay in respect of any period for which any previous employer was exempt from such liability."

It is urged upon the Court by Mr Blake that Section 54(2) (c) does not apply because of the effect of the Companies Act and that as a matter of public policy if there were deemed to be continuous employment, then lending institutions would not be prepared to give loans to companies on the security of a floating charge as it would be difficult to ascertain the liabilities of a borrower at any one time. It was submitted that Section 55(3) is very limited in its application and has been so limited in its application and has been so limited quite deliberately and that none of the situations there contemplated apply to the current facts. Thus, Section 55(4) would not apply and pursuant to Section 54(2)(c) there would be no deeming of continuous employment.

Mr Ozols, Counsel for the Respondent, urges upon the Court the view that there has been continuous employment and that the fiction of the termination and immediately re-employment of employees is ostensibly an accounting exercise or merely to enable the Receiver Manager to continue to run the business for the purpose of its sale to the highest bidder. Mr Ozols further submitted that Section 11 of the Employment Act was applicable if the court considered that there had been a change of ownership of the business of the Company upon the appointment of the Receiver and Manager.

Section 11 of the Employment Act provides:-

"the transfer of any contract of employment from one employer to another shall not be binding upon the employee except with the employee's consent which in the case of a written contract must be in writing:

Provided that if a change occurs in the ownership of the undertaking as a result of a sale thereof as a going concern, inheritance, formation of a company or similar cause every contract of employment valid at the time of the change taking place shall remain in force between the employee and the new employer".

It was submitted that if there had been a change of ownership of the business of the Company, or something amounting to a change of ownership, on the 14th of July 1992 by the appointment of the Receiver and Manager, then it was an occurrence within the contemplation of the expression "similar cause".

In my view the letter of the 14th July 1992 from Mr Tuttle to the employees of the Company did not amount to a termination of employment in any real sense. It is clear that it contained an immediate offer to re-employ on precisely the same conditions of employment as had been in existence immediately prior to the purported termination. It was clear that there was not intended to be any alteration of the business. The termination notice was tantamount to an adoption of the original contract of employment. It was to some degree thus a legal and accounting fiction in order to ensure that the provisions of the Companies Act applied and to give the Receiver and Manager a right of indemnity from the assets of the Company for the payment of wages, as is provided by Section 342(2) of the Companies Act. I set that section out below:

"342(2) - A Receiver & Manager of the property of a company appointed as aforesaid shall, to the same extent as if he had been appointed by order of the Court, be personally liable on any contract entered into by him in the performance of his functions, except in so far as the contract otherwise provides, and entitled in respect of that liability to indemnity out of the assets; but nothing in this subsection shall be taken as limiting any right to indemnity which he would have apart from this subsection, or as limiting his liability on contracts entered into without authority or as conferring any right to indemnity in respect of that liability".

Without the right of indemnity as provided by Section 342(2) of the Companies Act the Receiver & Manager would have been personally liable for the wages, subject of course to a recourse agreement with the debenture holder that one may assume was in place.

I further note that the party purporting to terminate was SCHH Limited (Receiver & Manager Appointed) and the party re-employing on the same terms of employment was SCHH Limited (Receiver & Manager Appointed). That is, exactly the same legal entity.

I am supported in this view by a number of authorities:-

In Re Mack Trucks (Britain) Ltd [1967] 1 All ER 977 per Pennyquick J, it was said:-

"Termination will occur where the Receiver & Manager negotiates with the employee a new agreement inconsistent with the continuation of his original contract with the Company". This is entirely consistent with the view that if the re-employment is on the same terms as before then the original contract of employment will continue.

The learned author of O'Donovan on Receivers & Managers - Law Book Company 1981, said at p70:-

"If it (the Company) purports to terminate the contract of service but states that the employees shall be immediately re-employed on the same terms and conditions , the Court may find that the employment of the Company employees has not been disturbed". See also Automatic Fire Sprinklers Pty Ltd v Watson [1946] HCA 25; (1946) 72 CLR 435.

I thus find that there was no cessation or disturbance of employment of the employees of the Company, thus there has been continuity of employment for the purposes of the Employment Act. The Court will therefore not make the declaration sought in respect of paragraph 1 of the Originating Summons.

The Second Declaration Sought

Section 99 of the Companies Act provides:-

"1. Where either a receiver is appointed on behalf of the holders of any debentures of a company secured by a floating charge, or possession is taken by or on behalf of those debenture holders of any property comprised in or subject to the charge, then if the company is not at the time in the course of being wound up, the debts which in every winding up are under the provisions of Part VI relating to preferential payments to be paid in priority to all other debts, shall be paid out of any assets coming into the hands of the receiver or other person taking possession as aforesaid in priority to any claim for principal or interest in respect of the debentures [ie. priority payments rank in priority to payment of principal or interest due under a debenture.]
2. In the application of the said provisions, section 308 shall be construed as if the provision for payment of accrued holiday remuneration becoming payable on the termination of employment before or by the effect of the winding up order or resolution were a provision for payment of such remuneration becoming payable on the termination of employment before or by the effect of the appointment of the receiver or possession being taken as aforesaid.
3. The periods of time mentioned in the said provisions of Part VI shall be reckoned from the date of the appointment of the receiver or of possession being taken as aforesaid, as the case may be.
4. Any payments made under this section shall be recouped as far as may be out of the assets of the company available for payment of general creditors.

Section 308 of the Companies Act provides:-

1. Notwithstanding any provision in any other law in a winding up there shall be paid in priority to all other debts:-

• (a) all wages or salary (whether or not earned wholly or in part by way of commission) of any clerk or servant in respect of services rendered to the company during 4 months next before the relevant date and all wages (whether payable for time or for piece work) of any workman or labourer in respect of services other than severance pay;
• (b) all accrued holiday remuneration becoming payable to any clerk, servant workman or labourer (or in the case of his death to any other person in his right) on the termination of his employment before or by the effect of the winding-up order or resolution;
• (c) unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, or unless the company has at the commencement of the winding up under a contract with insurers rights capable of being transferred to and vested in the workman, all amounts due in respect of personal injury to workmen under any law in force relating to workman's compensation accrued before the relevant date, and all amounts in respect of contributions payable by the company to any provident fund established by law.

2. Notwithstanding anything in subsection (1)(a), the sum to which priority is to be given under that paragraph shall not, in the case of any one claimant, exceed VT 100,000.
3. Where any compensation under any law in force relating to workmen's compensation is a weekly payment, the amount due in respect thereof shall, for the purposes of subsection (1)(c), be taken to be the amount of the lump sum for which the weekly payment could, if redeemable, be redeemed if the employer made an application for that purpose under the said law.
4. Where any payment has been made:-

• (a) to any clerk, servant, workman or labourer in the employment of a company, on account of wages or salary; or
• (b) to any such clerk, servant, workman or labourer or, in the case of his death, to any other person in his right, on account of accrued holiday remuneration; out of money advanced by some person for that purpose, the person by whom the money was advanced shall in a winding up have a right of priority in respect of the money so advanced and paid up to the amount by which the sum in respect of which the clerk, servant, workman or labourer, or other person in his right, would have been entitled to priority in the winding up has been diminished by reason of the payment having been made.

5. The foregoing debts shall:-

• (a) rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions; and
• (b) so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claim of holders of debentures under any floating charge created by the company, and be paid accordingly, out of any property comprised in or subject to that charge.

6. Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing debts shall be discharged forthwith so far as the assets are sufficient to meet them.
7. In the event of a landlord or other person distraining or having distrained on by goods or effects of the company within 3 months next before the date of a winding up order, the debts to which priority is given by this section shall be a first charge on the goods or effects so distrained on, or the proceeds of the sale thereof; provided that in respect of any money paid under any such charge, the landlord or other person shall have the same rights of priority as the person to whom the payment is made.
8. For the purposes of this section:-

• (a) any remuneration in respect of a period of holiday or of absence from work through sickness or other good cause shall be deemed to be wages in respect of services rendered to the company during that period;
• (b) the expression "accrued holiday remuneration" includes, in relation to any person, all sums which, by virtue either of his contract of employment or of any enactment (including any order made or direction given under any law), are payable on account of the remuneration which would, in the ordinary course, have become payable to him in respect of a period of holiday had his employment with the company continued until he became entitled to be allowed the holiday;
• (c) the expression "the relevant date" means:-
  • (i) in the case of a company ordered to be wound up complusorily, the date of the appointment (or first appointment) of a provisional liquidator, or, if no such appointment was made, the date of the winding-up order unless in either case the company had commenced to be wound up voluntarily before that date: and
  • (ii) in any case where sub-paragraph (i) does not apply, means the date of the passing of the resolution for the winding up of the company".

In my view it is clear that the payments in respect of wages, salary and severance allowance are given a general priority up to the payment of VT 100,000 and thereafter the balance must be paid with the employees ranking along with other unsecured creditors in respect of payment of the balance of their entitlements. It is equally clear then that the giving of priority to part of the debt does not extinguish the balance of any debt owing.

The declaration sought by paragraph 2 of the Originating should be made. However the making of this declaration may not assist the Company as the Employment Act provides for other obligations upon a sale of the business. If the Company had wished to avoid the consequences of the Employment Act, it could have liquidated, but the debenture holder chose not to do that preferring to maximise its return by selling the business of the Company as a going concern. Thus the claims by the employees for severance allowance, wages and holiday pay beyond the VT 100,000 are still debts due by the company, although it may as a matter of fact not be in a position to pay them.

The Third Declaration Sought

This declaration goes to the interpretation of clause 9(4) of the Sale of Business Agreement when seen in part in the light of the findings of the Court in respect of the other declarations. It is submitted by the Company that there is a limitation of the amount of the payment of severance allowance to the Respondent pursuant to clause 9(4) based upon a period of employment from the 15 July 1992 to 6th December 1993. For reasons already expressed I am unable to make such a declaration as I have found that there has been continuity of employment in respect of the entire period of employment of an employee where that employment commenced before the appointment to the Company of the Receiver & Manager.

Clause 9(4)(b) of the sale of business agreement must be examined more fully.

The import of the clause is that their must be an adjustment at completion of the contract of Sale between the Company and the Respondent of "annual holiday pay and long service and severance allowance which would be payable if the Employee's employment were terminated at completion".

In my view the word "payable" there refers to a debt due, and is not to be limited merely to an amount that is "able to be paid" or "that sum in respect of which there is an obligation to pay as a priority". To limit the meaning of "payable" to either or both of those expressions is not justified. "Payable" is a word of simple meaning in the relevant sense and is defined in the Shorter Oxford Dictionary as "what is to be paid, due, falling due.....".

If the Receiver & Manager of the Company had wished to limit the payments he should have clearly specified that limitation. He did not.

That fact that the word "payable" is qualified by the expression "if the Employee's employment were terminated at completion" does no more than provide the date upon which the calculation in respect of the amount due is to be made. Those words cannot be seen as a qualification importing a limitation on the obligation to pay the full amount due.

The Court thus declines to make the third declaration.

The effect of this finding is that the Company should make the appropriate adjustment in respect of severance pay for the whole period of employment of an employee. The Company has clearly contracted to make such an allowance.

Orders

The Court will make a declaration in the terms of the second paragraph of the Originating Summons.

In this matter it is appropriate that the Company pay the costs of the Respondent including reserved costs, which, failing agreement are to be taxed.

Dated at Port Vila this 21st day of April 1994.

R M DOWNING
JUDGE