I rise to support the member for McMahon's second reading amendment because, of course,
it is crucial that this nation acts to crack down on phoenixing by corporations and dodgy
directors.
When a corporation incurs debts that it cannot pay, winds itself up and then the next day
the directors go off and start a new corporation in the same type of business, that has real
effects on people's lives.
It has effects on: the lives of employees who did not get their full entitlements as
a consequence of this phoenixing behaviour; taxpayers, who often have to foot the bill
through taxpayer-funded guarantee schemes; employment entitlements, including superannuation;
and, of course, the small independent contractors and small-business suppliers, who have done
business with the phoenixed company, who miss out on being paid what they are rightfully
entitled to receive.
Phoenixing is a scourge that needs to be addressed in this nation and, as usual, Labor is leading
the way when it comes to public policy by announcing a policy of director identification
numbers.
The member for Fenner and others have worked on that policy.
It is a policy that will assist us to make sure that directors are tracked so that there
are not multiple records for the same person—with different dates of birth, for example—on
the ASIC registry.
It will help us as a nation crack down on this phoenixing behaviour that hurts taxpayers,
hurts employees and hurts small-business suppliers to firms.
I think it is very important that, when we consider this second reading amendment, the
government takes heed and understands that this announcement by Labor has been widely
accepted and widely approved of by the community—by everyone from the AICD to the ACTU.
I also want to make some comments about the bill itself.
As you would be well aware, the creation of a safe harbour shifts some of the risk that
is presently borne by directors onto creditors because, of course, it makes for additional
situations in which directors can oversee the incurring of debts which might, technically,
create a situation of insolvency for the firm.
The shifting of risk from directors onto creditors can absolutely be justified, if the overall
consequence is a reduction in the amount of loss that has to be borne.
In other words, if a measure like this can help firms trade through trouble thus saving
jobs, saving livelihoods and saving firms, that is absolutely something that should be
considered, but we must do so in a way that is thoughtful.
We must do so in a way that says, 'Well, if we're shifting risk around, is there going
to be an appropriate level of risk borne by the different interests in this situation?
And, is there going to be a reduction in the overall amount of loss?'
In other words, there is less loss to go around, if firms do not fail, which is absolutely
a good thing and a positive thing.
We need to be sure that that is going to be the outcome of such a measure, and we need
to be sure that that way risk is distributed between directors and creditors is appropriate
and fair.
When we are dealing with this specific bill, this proposal for a safe harbour, we are really
talking about creating a safe harbour in respect of a provision that prohibits insolvent trading
by corporations.
It is worth noting that the proceedings concerned are very rarely actually brought.
The Productivity Commission dealt with this point before recommending a safe harbour defence
when they said:
… the spectre of action looms larger than the actual (likely) consequence.
The rate of successful enforcement of insolvent trading actions is low.
There were only 103 insolvent trading cases between the law's introduction in 1961 and
2004.
The commission went on to say:
While the court ordered that compensation be paid in three quarters of those cases,
more serious sanctions were extremely rare.
Only 15 per cent of cases involved criminal proceedings, and only two cases involved an
order banning directors from managing companies.
The commission went on to say:
Since 2004, ASIC reports that they have commenced action for insolvent trading for circumstances
involving five companies only between 2005 and 2011.
And they noted some further criminal matters.
Of course, this Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 is
concerned with the civil proceedings under the insolvent trading provisions of the Corporations
Legislation, and it follows on from the Productivity Commission recommendation for the creation
of a safe harbour defence.
The Productivity Commission recommended that the Corporations Act should be amended to
allow for a safe harbour defence to insolvent trading.
It went on to suggest some conditions for the availability of the defence, saying that
defence would only be available when directors of a company have made and documented a conscious
decision to appoint a safe harbour advisor with a view to constructing a plan to turn
around the company; the advisor was presented with proper books and records; the adviser
had at least five years experience; the directors were able to demonstrate they had taken all
reasonable steps to pursue restructuring; and the advice had to be proximate to the
specific circumstance of financial difficulty, not a set of advice much earlier in relation
to something else.
There are some other components of the recommendation that are relevant, but readers can have a
look at the report themselves.
The concern I want to mention—hopefully, it will be something that can be ironed out
in the very timely Senate inquiry that is being undertaken in relation to the bill—is
that this bill does not actually fulfil the Productivity Commission's recommendation.
The Productivity Commission recommended the creation of a defence.
This bill does not create a safe harbour defence; instead, it creates a safe harbour exemption
from the operation of the civil prohibition in section 588G of the Corporations Act against
insolvent trading.
It is also worth noting that there are a range of existing defences to the insolvent trading
provisions and existing section 588H.
These include that the director in question who is potentially able to be held liable
for the insolvent trading 'had reasonable grounds to expect, and did expect, that the
company was solvent'; had reasonable grounds to believe, and did believe 'that a competent
and reliable person was responsible' for providing the director with 'adequate information about
whether the company was solvent' and that they were fulfilling their responsibility;
and expected, on the basis of that advice and information, that the company was solvent;
if, 'because of illness or for some other good reason', the director was not taking
part in the management of the company; or 'the person took all reasonable steps to prevent
the company from incurring the debt'.
As one would expect, with all of these defences, it is a matter for the director to prove that
they have the benefit of that defence.
Once the insolvent trading is proved, the director then has to prove that one of these
defences applies.
That is how defences would be expected to work.
Obviously, none of those defences covers the safe harbour we are discussing today, but
it is certainly the case that the Productivity Commission recommended a new defence of safe
harbour.
Instead of doing that, this bill creates an exemption.
Instead of having to prove that they have the benefit of the defence, the director just
has an evidential burden, so their obligation is simply to bring 'evidence that suggests
a reasonable possibility that the matter exists or does not exist'.
So they have to put out an affidavit or give evidence that suggests a reasonable possibility
that the matter exists—the matter being, of course, action 'reasonably likely to lead
to a better outcome'.
That is from the explanatory memorandum.
Once the evidence has been educed, it then falls to the person bringing the proceedings
for insolvent trading—which would ordinarily be ASIC or possibly a liquidator—to prove
that the director was not developing or taking a course of action that at the time was reasonably
likely to lead to a better outcome for the company.
So what the decision to create an exemption rather than a defence has done is to make
the proposed safe harbour much more favourable to directors than the Productivity Commission
possibly had anticipated in making the recommendation.
There may well be very good reasons for that.
There may well be very good reasons to set this up as an exemption rather than as a defence,
but I think it is reasonable to want to have those reasons explored through a Senate inquiry
in relation to the bill.
There are just a couple of other things I wanted to flag.
Firstly, the protection for employee entitlements requires only substantial compliance and not
full compliance unless there has been more than one failure over the preceding 12 months.
It is also drafted in the present tense—it is about whether a company is paying employee
entitlements.
I am quite interested in making sure that would cover any situations where there might
be outstanding employee entitlements which, as you know, Mr Deputy Speaker, include superannuation.
The consequences for the failure to pay superannuation obviously are long term, but there can be
short-term serious consequences as well.
For example, if your income protection is based on superannuation and your employer
has not made the contributions you can be left uncovered by income protection, which
can have terrible consequences if you suffer an illness or injury whilst you are not covered.
I also wanted to mention the other slight distinction between what the Productivity
Commission recommended and what this bill does.
The Productivity Commission, as you will have gathered from the recommendation when I cited
it, made the operation of the safe harbour fairly contingent on a range of things—contacting
the adviser, et cetera.
The bill that we have here seems to apply a much more general test about whether the
person has started 'developing one or more courses of action' and 'reasonably likely
to lead to a better outcome for the company'.
It then sets what the Productivity Commission would have seen to be conditions for having
access to the safe harbour and instead just a range of indicia that might guide the court
in determining whether one is meeting the general test of setting out to develop one
or more courses of action that are reasonably likely to lead to a better outcome.
Given there is some difference between the approach the government is taking and the
recommendation of the Productivity Commission inquiry, I think it would be quite useful
to hear what the Senate inquiry has to say and what the Senate report has to say about
the design of this legislation.
Everybody wants to get to a point where we have good, strong legislation that makes sure
that the Corporations Act is not engendering overcautious behaviour on the part of directors,
where directors are not constrained from doing what they need to be able to do to help their
firm trade out of trouble in the interests of the firm, in the interests of shareholders,
in the interests of employees and in the interests of unsecured creditors.
We would all like to get to that position and, in principle, a safe harbour can be supported
on that basis but we need to make sure that the detail is right.
In relation to the possibility of insolvent trading, we are talking about a redistribution
of the risk away from directors who presently bare a reasonable amount of risk because of
the possibility of being pursued for insolvent trading towards people like independent contractors;
small business suppliers ,who might be doing something that has been outsourced by the
firm; cleaning contractors; and of course employees who at least have the benefit of
getting the priority in the administration or have the benefit of having some protection
in this bill.
If we are going to be shifting risk around in that way then we want to be able to be
satisfied and assured that there will be genuine benefits from doing so, that it will lead
to fewer corporate insolvencies and fewer situations where firms have to be liquidated
or have to go into administration.
If we can work together to continue to pursue those calls, that will be a very useful thing.
As I say, in principle, the safe harbour is something that can be very much supported
on that basis.
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