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

27 Pages Posted: 22 Nov 2005

See all articles by Kevin Thomas Davis

Kevin Thomas Davis

University of Melbourne - Department of Finance; Australian Centre for Financial Studies

Jeannette Lee

Ernst & Young, Australia; Black Rock Financial Management, Inc. - Risk Analytics Group; University of Melbourne

Date Written: September 28, 2005

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.

Keywords: Insolvency, Credit Risk, Employee Entitlements

JEL Classification: G33

Suggested Citation

Davis, Kevin Thomas and Lee, Jeannette and Lee, Jeannette, Employee Entitlements and Secured Creditors: Assessing the Effects of the Maximum Priority Proposal (September 28, 2005). Available at SSRN: https://ssrn.com/abstract=853524 or http://dx.doi.org/10.2139/ssrn.853524

Kevin Thomas Davis (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Business and Economics
Parkville, Victoria 3010 3010
Australia
+613 8344 5098 (Phone)
+613 8344 6914 (Fax)

Australian Centre for Financial Studies ( email )

Level 46, 525 Collins St
Melbourne, Victoria 3079
Australia

Jeannette Lee

Ernst & Young, Australia ( email )

321 Kent Street
Sydney, NSW 2000
Australia

Black Rock Financial Management, Inc. - Risk Analytics Group ( email )

345 Park Avenue
New York, NY 10154

University of Melbourne

185 Pelham Street
Carlton, Victoria 3053
Australia

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