By Mark Roufeil, Mark RoufeilBusiness Recovery and Insolvency Partner
31 March 2020
Lending or Borrowing to Pay Employee Costs? – The section 560 Priority should be used.
Are you or your clients financing the payment of payroll and employee entitlements to survive this current cash crisis? The statutory priority under section 560 of the Corporations Act is a useful tool for both lenders and borrowers, especially right now. Using section 560 is a quick, easy and relatively cheap way of getting priority for advances to pay employees.
What is the section 560 Priority?
Section 560 of the Corporations Act is a statutory priority afforded to advances made to an employer specifically to pay wages, superannuation and leave entitlements. If the employer later becomes insolvent, the advances or loans made are given the same priorities as employees in the order of distribution of assets. In other words, the lender stands in the shoes of the employees for the advances paid toward the employees’ entitlements. Read section 560 here.
Why is it important right now?
A lot of businesses are in cash crisis right now. The JobKeeper payment announced by the Government is a welcomed and prudent support package for businesses but won’t be received by employers for more than a month. Employee costs still will need to be financed by most businesses from now, until the payment becomes accessible. For businesses whose revenue or customer collections have evaporated in the last few weeks, some to no revenue at all, continuing to pay employees is a challenge hence why many have been stood down or made redundant.
Banks, financiers and business owners will be asked to fill that gap with loans to ensure employees continue to get paid whilst the pause button is pressed on our economy now and probably for at least three months. The survival and revival of businesses is dependent upon keeping staff employed and bridging that payment gap between now and the JobKeeper payments being received.
Lenders: Using section 560 is a fast and simple way to get priority for urgent loans to businesses to pay its employees. If loans are drawn and applied to fall within section 560, lenders can take some degree of comfort from section 560 that their loan advance will be afforded employee level priority if the business becomes insolvent and requires a formal restructuring, is placed into receivership or is wound-up. This priority benefit can apply to business owners advancing money to their businesses to pay their employees, not just bank and finance loans, without the time delays and costs of complicated security and loan documents.
Borrowers: If you need to fund the JobKeeper payment gap, make sure your lender knows of and applies for the section 560 priority. Show them this article. It may be the factor that gets your loan application over the line and accepted. It should quicken up the lending process because it is a simple way for the lender to get priority for their loan without complicated and costly loan and security documents.
How can the section 560 priority be applied?
To obtain the priority under section 560, two main steps should be taken at the time of the loan advances to record and evidence the purpose of the advances was specifically to pay employees wages, superannuation or leave entitlements:
- The documents, letters and emails for the loan application request by the borrower and the agreement to advance by the lender should plainly state the purpose was to pay employees’ entitlements. Making the amount of the advance equivalent to payroll or a stated amount of entitlements to pay would add to that evidence.
- The times of the transactions of the advances and drawdowns and the payment of the employee entitlements should clearly show that the advance was used to pay employees’ entitlements so any subsequent review of bank statements will show the connection between the loan advances and employee entitlement payments.
Need more information?
Contact PKF if we can help you in any way in this time of economic crisis. Our Business Recovery experts are experienced and licenced to advise and help businesses in distress to give them the best chance of survival and an eventual revival.