It is well known that ordinary employees enjoy priority over directors when their company is wound up.

But what happens if an ex-employee is also an ex-director?

A recent court case provides some welcome rules for dealing with this tricky situation. Among other things, the NSW Court of Appeal rejected an argument to the effect that a director could enjoy the priorities of an ordinary employee simply by standing down from the board before the company collapsed.

The decision also establishes that annual leave is taken to have been taken in the order in which it accrued
Background

Employees' retrenchment payments are afforded statutory priority by section 556(1)(h). However, there is no priority for retrenchment benefits that are "attributable" to the time an employee was also a director

Mr Sturesteps had been a former employee and director of an HIH subsidiary. He ceased to be a director in 2000, but remained an employee until the company went into liquidation in 2001.

Mr Sturesteps lodged a proof of debt for his full retrenchment payment under his employment contract. This was:

his annual remuneration package; plus
5/52 of his annual remuneration package for each completed year of service.

Mr Sturesteps had become entitled to his retrenchment payment on the day HIH collapsed. However, the actual amount of the payment was attributable to his past service as both a director/employee and mere employee.

The Court of Appeal held that the correct method was to apportion the retrenchment payment between the period when Mr Sturesteps was a director and the period when he was not. As he had been a director for 91.5 percent of his time with HIH, only the remaining 8.5 percent was entitled to priority.