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Employee Entitlements and Secured Creditors: Assessing the Effects of the Maximum Priority Proposal

Author

Listed:
  • Jeannette Anderson

    (Group Risk Infrastructure ANZ Bank, Melbourne.)

  • Kevin Davis

    (Department of Finance, The University of Melbourne & Melbourne Centre for Financial Studies.)

Abstract

Corporate failures and consequent default on obligations have, in some circumstances, led to significant losses for employees with accumulated unpaid leave entitlements. The Australian government responded initially to this problem by implementing a government-funded compensation scheme. Subsequently it announced a proposal involving legislating for seniority (maximum priority) of entitlements in corporate liquidation which has not been implemented. This paper analyses and provides quantitative estimates of the consequences of changing creditor priority in this manner. Contrary to conventional wisdom and arguments mounted in opposition to such a change, the effect on corporate funding costs would be extremely small. The paper argues that legislation to effect such a change warrants further consideration as a complement to the existing compensation scheme.

Suggested Citation

  • Jeannette Anderson & Kevin Davis, 2009. "Employee Entitlements and Secured Creditors: Assessing the Effects of the Maximum Priority Proposal," Australian Journal of Management, Australian School of Business, vol. 34(1), pages 51-71, June.
    • Handle: RePEc:sae:ausman:v:34:y:2009:i:1:p:51-71
    DOI: 10.1177/031289620903400104
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    References listed on IDEAS

    as
    1. Burgess, J. & Lewer, J. & Waring, P., 2006. "Protecting Employee Entitlements: Corporate Governance and Industrial Democracy in Australia," Australian Bulletin of Labour, National Institute of Labour Studies, vol. 32(4), pages 365-380.
    2. Longstaff, Francis A & Schwartz, Eduardo S, 1995. "A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
    3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    4. Franks, Julian R. & Torous, Walter N., 1994. "A comparison of financial recontracting in distressed exchanges and chapter 11 reorganizations," Journal of Financial Economics, Elsevier, vol. 35(3), pages 349-370, June.
    Full references (including those not matched with items on IDEAS)

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