In Re Perthmetro Pty Ltd(in liq)
 FCA 671, the liquidator of Perthmetro Pty Ltd, a
construction company specialising in commercial buildings, sought a
determination from the Federal Court of Australia as to whether he
should allow four of Perthmetro's former employees to prove for
their unpaid employment entitlements in the
The liquidator questioned whether the employees should be
allowed to do so given their employment contracts were 'tainted
by illegality or [were] offensive to public policy'. The
contracts were said to be tainted because they were part of an
arrangement designed to reduce the income tax liability of the
The arrangement was relatively simple. Two of the employees
worked full-time at Perthmetro for which they received a salary.
However, in addition to that salary, the wives of these two
employees also received a further payment for their husbands'
work. One of the wives received this payment in addition to a
salary she earned working part-time for Perthmetro, while the other
wife did no work for Perthmetro at all, and received only the
payment from Perthmetro for her husband's work.
The application was made pursuant to section 511 of the
Corporations Act 2001 (Cth). This section allows
liquidators to apply to the Court to determine any question arising
in the winding up of a company. Whilst this is ordinarily used by
liquidators to obtain advice from the Court as to the proper course
of action, the Court also has the power to make orders affecting
substantive rights of third parties.
This discretionary power will only be used by the Court where
the third parties will not suffer injustice and where they are
offered an opportunity to be heard in respect of any such orders
that might adversely affect their rights or interests.
As each of the former employees had been served with a copy of
the originating process by the liquidator (which outlined what he
was asking the Court), but had declined to appear at the hearing,
the Court considered that it could proceed to determine the
The Court found that each of the four employment agreements
represented an "income splitting arrangement" and were
structured, with the knowledge of the husbands, the wives and the
company, so as to reduce the income tax which would otherwise have
The wives' employment agreements were said to be falsely
based as they were receiving payments forming part of their
husband's income with the sole purpose of reducing their
husband's tax liability.
It is well-established that a person who enters a contract with
the fraudulent purpose of deceiving and thereby defrauding the
revenue authorities is not entitled to have a court enforce the
rights conferred under the contract. In relying on this principle,
the Court ordered that, with the exception of the entitlements
genuinely earned by one wife for her part-time work, none of the
four 'employees' could prove their entitlements in the
Liquidators and other insolvency practitioners should consider
whether any arrangements entered into by the insolvent company are
fraudulent or otherwise tainted by illegality.
While some of these arrangements may give rise to substantive
claims against former directors, officers, or employees, this
decision demonstrates that fraudulent arrangements may also allow
the liquidator to apply to the Court for a determination that
fraudulent employees should be prevented from proving their
employment entitlements in the insolvency.
In the case of any obvious illegality, the Court will likely
grant such orders provided the former employees are given an
opportunity to be heard in respect of such issues.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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A recent NSW decision has implications for liquidators of trustee companies dealing with trust funds and priority debts.
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