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Bankruptcy no protection for directors

April 24, 2017

By Alex Millman and Troy Wild, NRA Legal

On 13 April 2017 Judge Hartnett of the Federal Circuit Court handed down her decision in Balemain v Mobilia Manufacturing & Anor, an application for lost remuneration and pecuniary penalties for sham contracting.

The application named both the employer company and the individual director, Mr Bedros Bahar, as respondents, with the employee seeking to recover payment of lost remuneration and pecuniary penalties from both.

As Mr Bahar was an undischarged bankrupt, her Honour was required to consider whether the Bankruptcy Act 1958 protected him from legal action.

Section 58(3) of the Bankruptcy Act 1958 provides that after a debtor becomes bankrupt, a creditor requires the leave of the Court to commence legal action against the bankrupt debtor with respect to a ‘provable debt’.

Whilst this might seem to protect Mr Bahar, section 82(3) expressly excludes ‘penalties or fines imposed by a Court in respect of an offence against a law’ from the scope of a ‘provable debt’.

On this basis, her Honour concluded that whilst the lost remuneration was a ‘provable debt’ and therefore unable to be claimed from Mr Bahar without leave, the application for pecuniary penalties was not a provable debt and could therefore be brought against Mr Bahar without any hindrance.

This decision confirms the long arm of the civil remedy provisions of the Fair Work Act 2009 and highlights the risks that non-compliance has for individuals involved in contraventions.

With the Fair Work Amendment (Protecting Vulnerable Workers) Bill likely to pass Parliament and significantly increase the maximum penalties for systematic contraventions, individuals such as directors, human resources managers and payroll staff may find themselves facing severe pecuniary penalties without the protection usually afforded by bankruptcy.

The business and personal case for ensuring compliance with the Fair Work Act has never been stronger. If you have any concerns about any risks posed to your business, contact the National Retail Association Hotline and speak to one of our Workplace Advisors on 1800 RETAIL (1800 738 245).

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