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House of Representatives

Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, the Hon Stuart Robert MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation Definition
ASIC Australian Securities & Investments Commission.
ATO Australian Taxation Office.
Bill Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018.
consultation paper Reforms to Address Corporate Misuse of the Fair Entitlements Guarantee Scheme consultation paper.
corporate contraventions Contraventions of either, or both, of the following Acts:

·
the Corporations Act 2001 (Cth);
·
the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth).

Corporations Act Corporations Act 2001 (Cth).
DJSB Department of Jobs and Small Business.
DOCA Deed of Company Arrangement.
FEG Fair Entitlements Guarantee.
FWO Fair Work Ombudsman.
ICCPR International Covenant on Civil and Political Rights.

General outline and financial impact

Amendments to the Corporations Act to address corporate misuse of the Fair Entitlements Guarantee scheme

Schedule 1 to the Bill makes amendments to the Corporations Act.

The Bill strengthens enforcement and recovery options to deter behaviours that prevent, avoid or significantly reduce the recovery of employment entitlements in insolvency. These behaviours can cause the improper shift of employee entitlement costs onto Australian taxpayers through utilisation of the taxpayer funded FEG scheme.

The Bill also introduces new provisions that will facilitate the disqualification of company directors and other officers where they have a track record of corporate contraventions, and inappropriately using the FEG scheme to pay outstanding employee entitlements.

Date of effect: The amendments will apply from the day after Royal Assent.

Proposal announced: On 5 October 2017, the Government announced its intention to implement law reform to address corporate misuse of the FEG scheme.

Financial impact: Nil.

Human rights implications: This Bill is compatible with human rights as it does not raise any human rights issues.

Compliance cost impact: $150,000 annually.

Summary of regulation impact statement

Regulation impact on business

Impact: The proposed amendments will impose regulatory burdens and other costs on a very limited number of people and businesses engaging in inappropriate sharp corporate practices.

It will not impose costs on the majority of businesses, company directors and officers, and other persons who operate legitimately, as the behaviour of these entities and people is not within the scope of the reforms.

Main points:

·
Certain employers, and parties associated with them, are deliberately structuring their business affairs through the use of sharp corporate practices to avoid paying employee entitlements when their business enters winding up, resulting in inappropriate reliance on the FEG scheme to pay outstanding employee entitlements.
·
Such misuse of the FEG scheme is contributing to the increasing costs of the taxpayer funded scheme.
·
Enforcement and recovery related amendments to the Corporations Act will address key deficiencies in the law.
·
The reforms are expected to impose a small increase in compliance costs.

Chapter 1

Background to the reforms to address corporate misuse of the FEG scheme

Outline of chapter

1.1 Corporate misuse of the FEG scheme by adopting sharp corporate practices is contributing to the increasing costs of the taxpayer funded scheme.

1.2 Corporate misuse of the FEG scheme should be deterred to ensure the costs due to improper reliance on the scheme are reduced, so that the scheme remains sustainable.

1.3 This chapter provides background on corporate misuse of the FEG scheme, and why reforms are required.

Corporate misuse of the Fair Entitlements Guarantee scheme

1.1 On 17 May 2017, the Government released its consultation paper on options for law reform to address corporate misuse of the FEG scheme.

1.2 The consultation paper outlined that certain corporate employers and associated parties are increasingly adopting a range of inappropriate practices that rely on the protections for the payment of outstanding employee entitlements contained in the Fair Entitlements Guarantee Act 2012 (Cth). Relying on these protections allows employers to shift the cost of payment of those entitlements from their businesses to the FEG scheme, and ultimately to Australian taxpayers.

1.3 The practices adopted are broadly termed sharp corporate practices. Sharp corporate practices are a range of methods used by certain company representatives, company owners, pre-insolvency advisers, or other parties involved in corporate transactions, to prevent, avoid or reduce the payment of obligations to creditors (including employees and other creditors such as the ATO).

1.4 Sharp corporate practices includes phoenix activity. Phoenix activity involves the transfer of assets from an existing company to a new company without paying market value, before placing the first company in liquidation. The same business is continued under the new company, leaving any debts (such as taxes, amounts owing to creditors and employee entitlements) with the existing company, which is liquidated. Whilst not all phoenix activity is unlawful, what separates a legitimate business rescue from illegal phoenix activity is the business operators' aim to avoid paying debts and liabilities of the company.

1.5 The consultation paper also noted that corporate misuse of the FEG scheme is not isolated, with the relevant sharp corporate practices occurring across most industries.

1.6 The cost of these behaviours were also found to be significant, contributing to increasing costs for the FEG scheme. Average annual costs under the FEG scheme has more than tripled from $70.7 million in the four year period between 1 July 2005 and 30 June 2009, to $235.3 million in the four year period between 1 July 2014 and 30 June 2018.

1.7 In this context, it is important to note that the costs imposed on the FEG scheme from just a few select instances, by those attempting to avoid their employee entitlement payment obligations through using sharp corporate practices, equated to more than $100 million of taxpayer funded money in the last few years.

Addressing corporate misuse of the FEG scheme using current mechanisms

1.8 While the use of sharp corporate practices are not always illegal, they place an unfair burden on Australian taxpayers where those practices result in improper reliance on the FEG scheme.

1.9 These practices hurt all hard-working Australians - including small business creditors through lost payments for goods and services already supplied, employees through lost wages and superannuation entitlements, and ultimately all Australian taxpayers through not only the drain on the FEG scheme, but through lost taxation revenue.

1.10 In addition, those who pursue these practices gain an unfair advantage over their honest competitor businesses who comply with their legal obligations to pay their debts, which has a broader economic impact.

1.11 Further, the use of sharp corporate practices can also impact the recovery of FEG payments through the insolvency process. There are many reasons for this including that there is insufficient clarity around the circumstances and scenarios in which the existing civil recovery provisions should operate and as such, relevant parties such as liquidators and employees believe the provisions are too difficult to use.

1.1 The current legal framework does not adequately mitigate the risks and costs imposed on the community, nor does it appropriately deter or sanction the behaviours of:

·
those involved in agreements or transactions to prevent, avoid, or reduce the recovery of employee entitlements, causing inappropriate reliance on the FEG scheme;
·
those using a corporate group structure to avoid or reduce their exposure to employee entitlement obligations, also causing an inappropriate reliance on FEG; and
·
company officers and directors who have a history of involvement in corporate contraventions and insolvencies where FEG is inappropriately relied on.

1.2 The reforms in this Bill build upon other Government actions to address these types of behaviours, including:

·
announcing law reforms to combat illegal phoenix activities; and
·
introducing legislation to tackle non-payment of the Superannuation Guarantee by targeting employers that fail to meet their obligations.

1.3 Government departments and agencies have adopted a range of administrative actions and legal approaches to assist in mitigating the impacts of sharp corporate practices on the FEG scheme and other unsecured creditors within the current legal framework. These include:

·
undertaking recovery and legal action under the FEG Recovery Program to enforce the Commonwealth's rights in court against various parties to insolvencies;
·
engaging with industry stakeholder bodies to build awareness of the prevalence of relevant practices, and seek their assistance to correct misunderstandings of the law and to appropriately sanction conduct of members adopting inappropriate methods; and
·
pursuing relevant matters through the Government's Phoenix Taskforce and Serious Financial Crimes Taskforce to combat illegal phoenix activity and other fraudulent corporate operations.

1.4 While these administrative actions assist in mitigating the impact of some sharp corporate practices, they are largely targeted at illegal activities after they have occurred. They do not necessarily address all of the sharp corporate practices adopted by select corporate employers, their representatives and other parties to insolvencies, such as pre-insolvency advisers.

1.5 To better address these behaviours, and deter inappropriate and repeated use of the FEG scheme, it is necessary to make the reforms contained in the Bill.

Development of the Bill

1.6 The amendments to the Corporations Act contained in Schedule 1 to the Bill are the result of extensive public consultation processes conducted during 2017 and 2018, aimed at ensuring the reforms are appropriate and sufficiently targeted to address the corporate misuse of the FEG scheme that has been identified.

1.7 The public consultation processes included:

·
releasing the Government's consultation paper on 17 May 2017, seeking stakeholder views on a number of options to reform the law aimed at addressing corporate misuse of the FEG scheme;
·
considering submissions received on the consultation paper;
·
holding stakeholder roundtable meetings in Sydney and Melbourne to discuss and develop the reform options outlined in the consultation paper;
·
releasing an exposure draft of the Bill and draft supporting materials on 12 June 2018;
·
considering submissions received on the exposure draft Bill and materials; and
·
holding stakeholder roundtable meetings in Sydney, Melbourne and Brisbane to discuss and obtain feedback on the exposure draft.

12.8 The Government considered feedback from stakeholders throughout the consultation processes. The Bill has been tailored to achieve a targeted and balanced outcome.

Chapter 2

Employee entitlements

Outline of chapter

2.1 Part 1 of Schedule 1 to the Bill makes amendments to Part 5.8A of the Corporations Act to strengthen the protections provided for the recovery of employee entitlements in insolvency. This will enable the Part to operate more effectively to deter and penalise parties entering into or facilitating agreements or transactions to prevent or avoid the recovery of, or significantly reduce the amount that can be recovered of, those entitlements.

Context of amendments

2.2 The existing provisions in the Part were introduced into law by the Corporations Law Amendment (Employee Entitlements) Act 2000 (Cth) after a number of high profile insolvencies.

2.3 There are existing provisions designed to protect employee entitlements from relevant agreements and transactions that are entered into with the intention of defeating the recovery of those entitlements. These provisions:

·
make it a criminal offence for persons to enter into a relevant agreement or transaction with the intention of, or with intentions that include the intention of, preventing the recovery of or significantly reducing the amount that can be recovered of, a company's employee entitlements; and
·
allow a civil recovery action to be brought by the liquidator (or employees in select circumstances) to recover the loss or damage suffered as a result of a person contravening the criminal provisions by intentionally avoiding the recovery of employee entitlements or significantly reducing the employee entitlements that can be recovered.

2.4 The employee entitlements protected under the existing provisions are the same entitlements that receive preferential payment in a corporate winding up, as outlined in section 556 of the Corporations Act.

2.5 However, since its introduction into the law in 2000, there have been no successful criminal or civil recovery actions under the provisions of the Part.

2.6 The Government's consultation paper noted that:

·
the current provisions are not operating effectively to achieve their intended aims; and
·
reforms to improve and strengthen their operation is not just desirable but necessary.

2.7 These views received strong stakeholder support.

Summary of new law

2.8 Part 1 of Schedule 1 to the Bill makes amendments to the Corporations Act to strengthen the Part's operation to ensure it achieves the aim of deterring the avoidance of employee entitlements, and protecting such entitlements from agreements or transactions that would operate to defeat their recovery.

2.9 In summary:

·
the current criminal offence provision is extended to capture a wider range of situations by lowering the fault element to include circumstances when a person recklessly enters into transactions to avoid, prevent or significantly reduce the recovery of employee entitlements, or transactions that are likely to have those effects;
·
a new civil penalty provision with an objective 'reasonable person' test is introduced to increase the enforcement options available when transactions to avoid, prevent or significantly reduce the recovery of employee entitlements, have been entered into;
·
a new civil compensation provision is introduced to provide a mechanism to compensate those who have suffered loss or damage as a result of contraventions to the civil penalty provision;
·
the criminal offence and civil penalty provisions are expanded to capture officers of a company who cause the company to enter into a transaction that contravenes the criminal and civil penalty provisions;
·
similar to the criminal offence provisions, the civil penalty and compensation provisions captures those who are involved in contraventions of the civil penalty provisions;
·
the parties who can commence civil compensation proceedings are expanded to include the ATO, the DJSB and the FWO, to enhance recovery of unpaid employee entitlements; and
·
various drafting improvements of existing provisions have been made to enhance clarity and readability.

2.10 As a result of the amendments in the Bill, three primary actions are now available to address behaviours of persons that engage in and facilitate transactions in contravention of the Part:

·
proceedings to seek criminal sanctions for when a person intends to enter into, recklessly enters into, or causes the entry into, a transaction that avoids, prevents or significantly reduces the recovery of employee entitlements;
·
civil penalty proceedings for when a person knows, or it was reasonable for the person to know, a transaction is likely to avoid, prevent or significantly reduce the recovery of employee entitlements; and
·
civil compensation proceedings to allow the liquidator (or the ATO, FWO, DJSB and employees, in certain circumstances) to seek compensation for loss or damage suffered as a result of a contravention of the civil penalty provision.

Comparison of key features of new law and current law

New law Current law
The current criminal offence is extended to capture a person who enters into an agreement or transactions to prevent or avoid the recovery of, or significantly reduces the amount that can be recovered of, a company's employee entitlements, where the person is 'reckless' as to those possible outcomes. It is a criminal offence for persons to enter into a relevant agreement or transaction with the intention of, or with intentions that include the intention of, preventing the recovery of, or significantly reducing the amount that can be recovered of, a company's employee entitlement liabilities.
A new civil penalty with an objective 'reasonable person' test is introduced to increase the enforcement options available for a contravention of the Part. No equivalent.
A person is liable to pay compensation where they have contravened the civil penalty provision.

The civil compensation provision no longer operates in conjunction with the criminal offence provision.

The company's liquidator can bring a civil compensation action against persons to recover an amount equal to the loss or damage incurred.

The civil compensation provision operates in conjunction with the criminal offence provision.

The criminal offence and civil penalty provisions capture officers of a company who cause the company to contravene the criminal and civil penalty provisions. No equivalent.
The extension of criminal responsibility in Part 2.4 of the schedule to the Criminal Code Act 1995 (Cth) that applies to capture accessories to the commission of the criminal offence, remains.

The civil penalty provision extends liability to persons who are 'involved in' the contravention of the civil penalty provision.

The extension of criminal responsibility in Part 2.4 of the schedule to the Criminal Code Act 1995 (Cth) applies to capture accessories to the commission of the criminal offence.

No equivalent.

A company's former employees continue to be able to commence civil compensation proceedings with the consent of the liquidator or the leave of the Court.

The ATO, DJSB and FWO can also commence civil compensation proceedings with the consent of the liquidator or the leave of the Court.

Civil compensation proceedings can be brought by the company's former employees with the consent of the liquidator or the leave of the Court.

Detailed explanation of new law

2.11 Part 1 of Schedule 1 to the Bill makes amendments to the Corporations Act to reform, modernise and strengthen the Part's operation to ensure it achieves the intent of deterring the avoidance of employee entitlements, and protecting those entitlements from agreements and transactions that would prevent, avoid or significantly reduce the recovery of those entitlements.

Section 596AA: Objects and coverage of the Part

Objects of the Part

2.12 The amendments to subsection 596AA(1) clarify and restate the objects of the Part, which are:

·
to deter the avoidance of the payment of employee entitlements (which are protected under subsection 596AA(2)); and
·
to protect employees of companies from relevant agreements, arrangements and transactions that avoid or prevent the recovery of those entitlements, or significantly reduce the amount of those entitlements that can be recovered, in the winding up of the company.

[Schedule 1, items 3 and 4, subsection 596AA(1)]

Coverage of the Part

The Part can apply to a broad range of scenarios

2.13 The provisions have a broad application to ensure the different types of sharp corporate practices used to avoid, prevent or reduce the recovery of employee entitlements are captured.

2.14 The amendments contain appropriate exceptions to limit the application of the offences where it is not appropriate for them to apply, and to ensure legitimate transactions are not impacted by these changes.

2.15 For example, the Part could apply in circumstances where:

·
there is avoidance of the payment of employee entitlements due to illegal phoenixing activity;
·
a company owner recklessly or deliberately removes assets from a company before it is wound up, leaving outstanding unpaid employee entitlements;
·
a corporate group is intentionally restructured through inter-group asset and liability transfers so that an employing entity does not have the capacity to pay entitlements when the entity is wound up and its employees made redundant;
·
a company officer intentionally enters into a transaction that would avoid the payment of that company's employee entitlements, but ultimately the transaction fails to achieve the intended result and no entitlements are avoided; and
·
third parties (for example, pre-insolvency advisors) intentionally procure a transaction to help the company avoid the payment of employee entitlements when the entity is wound up.

Who the Part can apply to

2.16 To provide certainty, the amendments in the Bill clarify that the Part can apply to:

·
a company;
·
officers of that company;
·
other persons involved in the management of that company prior to it entering winding up; and
·
a range of additional parties, depending on the facts of the relevant case.

2.17 Additionally, the Bill provides that section 79 of the Corporations Act applies to capture those involved in contraventions of the civil penalty provisions, mirroring the application of Part 2.4 of the Criminal Code Act 1995 (Cth) to the criminal offence provisions.

An entitlement of an employee need not be owed to the employee

2.18 Subsection 596AA(2A) specifies that employee entitlements need not be owed directly to an employee of a company to still be within scope of the protections provided by the Part. [Schedule 1, item 6, subsection 596AA(2)]

2.19 Subsection 596AA(2A) lists four scenarios where entitlements need not be owed to an employee but may be owed to someone else and are still protected by the Part. These examples are not an exhaustive list of scenarios.

2.20 Paragraph 596AA(2A)(a) outlines that an amount owed to an employee's dependants is an entitlement protected by the Part. This could for example include amounts an employee has compulsorily deducted from their salary to satisfy child support obligations, or payments made to the employee's dependants by the company as a result of injury compensation payable to the employee. [Schedule 1, item 6, paragraph 596AA(2A)(a)]

Example 2.1

Under the Child Support (Registration and Collection) Act 1988 (Cth), Mike's employer, Kangaroo Museum Pty Ltd, is obliged to collect amounts from Mike's wages to meet his child support obligations for his daughter Elizabeth.

Corey, the owner of Kangaroo Museum Pty Ltd, withholds the amounts from Mike's salary but does not pay those amounts to the Department of Human Services. Soon afterwards, the Court orders Kangaroo Museum Pty Ltd to be wound up.

Though the amounts of Mike's child support obligations are legally payable to the Department of Human Services by Kangaroo Museum Pty Ltd, this does not prevent those unpaid amounts being employee entitlements protected by Part 5.8A.

2.21 Paragraph 596AA(2A)(b) further outlines that a superannuation contribution which is payable to a superannuation fund by an employee's corporate employer, is an entitlement protected by the Part. Such contributions could include compulsory superannuation contributions payable by the corporate employer, or voluntary additional superannuation contributions of the employee deducted from their salary by the employer but not remitted to a fund. [Schedule 1, item 6, paragraph 596AA(2A)(b)]

2.22 Paragraphs 596AA(2A)(c) and (d) clarify that outstanding employee entitlements that are owed by the employer, and which are subsequently paid to employees by the Commonwealth (for example, under the FEG scheme) or paid by another party (for example, an employer representative body), will not impact the protections provided by the Part for those entitlements which remain unpaid by the company. [Schedule 1, item 6, paragraphs 596AA(2A)(c) and (d)]

2.23 Payments made directly to the employees by the Commonwealth or another entity for some or all of their outstanding employee entitlements, does not absolve relevant persons from the consequences of possible contravention of the Part, or reduce the recovery options available to parties for payment of the entitlements that the company has not paid.

Example 2.2

Pluto Beach Pty Ltd has 100 employees. Mark, the owner of Pluto Beach Pty Ltd, transfers all the assets of the company to another entity, and soon after makes all the employees redundant.

The former employees' total unpaid employee entitlements (including redundancy payments) are $5 million. The company does not have any funds to pay the outstanding amount, so the company is wound up.

All the employees make applications under the FEG scheme for payment of their outstanding entitlements, of which $4 million is paid by the scheme.

Even though the $4 million of outstanding entitlements of the company are no longer payable in liquidation to the employees, this has no impact on the potential actions which the liquidator or relevant Commonwealth agencies (exercising the rights of the employees) may take under the Part.

2.24 Finally, subsection 596AA(2) is amended to remove wording relating to employee entitlements not needing to be owed to employees, as it is now reflected in subsection 596AA(2A). [Schedule 1, item 5, subsection 596AA(2)]

Section 596AB: Relevant agreements or transactions that avoid employee entitlements - offence provision

2.25 Amendments have been made to the heading of subsection 596AB to modernise language and better express the criminal offence provision. [Schedule 1, item 7, heading for section 596AB]

Subsection 596AB(1) - primary intention provision

2.26 The amendments made to subsection 596AB(1) modernise the criminal offence provision to simplify its language and clarify its operation. The key amendments are:

·
the criminal offence is no longer expressed in the negative; and
·
the physical and fault elements of the offence have been expressed in plain-English, so that it is easier to understand the physical and fault elements that apply.
[Schedule 1, item 8, subsection 596AB(1)]

2.27 The modernised criminal offence uses the same two limbs contained in the existing provision, but adds the additional term 'avoiding' into the first limb to align this with the reforms' broader objects. It is a criminal offence for a person to enter into a relevant agreement or transaction with the intention of:

·
avoiding or preventing the recovery of entitlements of employees of a company; or
·
significantly reducing the amount of the entitlements of employees that can be recovered.
[Schedule 1, item 8, paragraphs 596AB(1)(a) and (b)]

2.28 The first limb is aimed at addressing those circumstances where relevant agreements or transactions are entered into with the deliberate aim of avoiding or preventing the payment of the entitlements of the employees of a company.

2.29 For example, transferring the assets out of the company which could have been used to help pay the employee entitlements, is a way of avoiding or preventing the payment of the entitlements.

2.30 The second limb is aimed at addressing circumstances where relevant agreements or transactions are entered into that significantly reduce the amount of a company's employee entitlements which can be recovered.

2.31 The term 'significant' is intended to have its ordinary meaning and will be determined by the circumstances of each case. Broadly speaking, a 'significant' reduction in the entitlements of employees may:

·
require a material or substantial reduction in the amount of the entitlements that can be recovered;
·
involve consideration of the quantum of the reduction as well as the proportionate size of the reduction produced; and
·
be determined solely based on the quantum of the reduction, in certain circumstances.

Example 2.3

Mark, the owner of Pluto Beach Pty Ltd, transfers $1 million of assets to another entity. Soon afterwards, he makes all 100 of the company's employees redundant, who are then owed $5 million in employee entitlements.

The company eventually enters into liquidation. The amount available to pay the outstanding entitlements after the asset transfer was zero.

The assets which were transferred may have been able to pay for 20 per cent of the outstanding entitlements.

In the circumstances of the case, this transfer significantly reduces the entitlements that can be recovered. This is determined based on the relative percentage (being 20 per cent of the amount owed to the employees), as well as its quantum (which is $1 million).

2.32 Additionally, while an individual agreement or transaction may not itself produce a 'significant reduction' or fully avoid or prevent the recovery of employee entitlements, existing subsection 596AB(3) allows an agreement or transaction to be considered contextually as part of a series or combination of agreements and transactions which produces a 'significant reduction' or that avoid or prevent recovery.

2.33 Contravention of the offence provision does not require the intention to be the sole or dominant purpose of the transaction. Instead, the provision is contravened if the person has an intention:

·
which includes the relevant intention;
·
which is one of a number of other intentions; or
·
where the intention to prevent or avoid, or significantly reduce, the entitlements is subsidiary to, or a minor part of, a different primary intention.
[Schedule 1, item 8, subsection 596AB(1)]

Subsection 596AB(1A) - primary recklessness provision

2.34 Subsection 596AB(1A) extends the fault element necessary to contravene the criminal offence provision to include a person who enters into a relevant agreement or transaction that avoids, prevents the recovery of, or significantly reduces the amount that can be recovered of, employee entitlements where the person is 'reckless' as to those possible outcomes. [Schedule 1, item 8, section 596AB(1A)]

2.35 Subsection 596AB(1A) uses the same two limbs that are used in subsection 596AB(1) to outline the conduct that will contravene the section. These limbs are intended to be consistently defined with subsection 596AB(1). Additionally, the term 'significantly' has the same meaning as in subsection 596AB(1).

2.36 'Recklessness' with respect to a result, is defined in the schedule to the Criminal Code Act 1995 (Cth) as a person being aware of a substantial risk that a result will occur and, having regard to the circumstances known to the person, it is unjustifiable to take that risk.

2.37 This definition notes that the question of whether taking a risk in the circumstances is unjustifiable, is one of fact.

2.38 Further, as recklessness is the fault element for the physical element in subsection 596AB(1A), proof of intention, knowledge or recklessness will satisfy that fault element.

2.39 As such, in the context of subsection 596AB(1A), a person who enters into a relevant agreement or transaction will be reckless if they are aware that there is a substantial risk that entering into a relevant agreement or transaction will avoid or prevent the recovery of, or significantly reduce the recoverable amount of, employee entitlements, and doing so is unjustifiable in the circumstances.

Example 2.4

Susan, director and sole shareholder of Race Vehicles Pty Ltd, enters into a transaction which transfers all the liquid assets of the company (valued at $5 million) and some of its debts, to another company, at a significantly undervalued price.

Soon after, Race Vehicles Pty Ltd is wound up. All the employees of Race Vehicles Pty Ltd are made redundant. The unpaid employee entitlements are $3 million.

Before entering into the transaction, Susan was aware that transferring the assets from the company would mean the company would be unable to pay its employee entitlements if the employees were made redundant. Susan was aware of this substantial risk and made the decision to proceed with the transaction.

In these circumstances, Susan is reckless as to the result and could be prosecuted for contravening subsection 596AB(1A).

Subsections 596AB(1B) and 596AB(1C) - specific offence provisions applying to company officers

2.40 The Bill introduces two company officer specific criminal offences into the Part, which operate similarly to subsections 596AB(1) (the primary intent provision) and 596AB(1A) (the primary recklessness provision). [Schedule 1, item 8, subsections 596AB(1B) and 596AB(1C)]

2.41 These provisions apply to company officers who cause the company of which they are an officer, to enter into relevant agreements or transactions that avoid or prevent the recovery of, or significantly reduce the amount that can be recovered of, employee entitlements.

2.42 Subsection 596AB(1B) makes it a criminal offence for a company officer to cause the company to enter into a relevant agreement or transaction where the officer has the intention of, or has intentions including the intention of:

·
avoiding or preventing the recovery of entitlements of employees of a company; or
·
significantly reducing the amount of the entitlements of employees that can be recovered.

2.43 Subsection 596AB(1C) makes it a criminal offence for a company officer to cause the company to enter into a relevant agreement or transaction to avoid or prevent the recovery of, or significantly reduces the amount that can be recovered of, employee entitlements where the company officer is 'reckless' as to those possible outcomes.

2.44 'Cause' is a broad term and includes 'procure' (see section 9 of the Corporations Act).

2.45 A company officer who had the relevant intent or who acted recklessly, and who caused, or made other persons enter into relevant agreements or transactions on behalf of the company, would contravene subsections 596AB(1B) or 596AB(1C).

2.46 The officer specific offences are necessary to ensure the Part operates effectively and as intended, as officers of the company are the persons responsible for the relevant agreement or transaction taking place, but are unlikely to be parties to the agreement or transaction themselves.

2.47 All the concepts that are used in subsections 596AB(1B) and 596AB(1C) are intended to be interpreted with the concepts used in subsections 596AB(1) and 596AB(1A).

2.48 Overall, subsections 596AB(1B) and 596AB(1C) are inserted by the Bill to ensure company officers who act in the manners described, are held responsible for their actions and able to be sanctioned. The two new company officer provisions also enhance the deterrence effect of the Part.

Example 2.5

Alison, a company director of Space Pty Ltd, wants to transfer the intellectual property and other assets of her company to a new company, as the debt of Space Pty Ltd is too high.

After undertaking the transfers to her new company, she intends to make redundant her 50 employees and then have the company wound up, to avoid the entitlements. This will assist with lowering her debt obligations.

She advises Mark, an employee of the company, what she wants to do and instructs Mark to transfer the intellectual property and other assets, and then make all the staff redundant. Mark signs an agreement as an agent of the company, and enters into the transactions which Alison wants, making the 50 staff redundant.

The FEG scheme ends up advancing $3 million for the outstanding employee entitlements of Space Pty Ltd.

As Alison caused the company to enter into the relevant agreements as a result of instructing Mark, and had the intention of avoiding the employee entitlements of Space Pty Ltd, she has contravened section 596AB(1B).

Circumstances that affect the operation of the offence provisions

Subsection 596AB(2) - company does not need to be a party to the agreement or transaction

2.49 Subsection 596AB(2) clarifies that the primary intent and recklessness offences can apply even if the company which owes the employee entitlements to the employees is not a party to the relevant agreement or transaction. [Schedule 1, item 8, subsection 596AB(2)]

2.50 This provision ensures the offences operate effectively to capture different sharp corporate practices, for example, where other entities in a corporate group enter into agreements that impact the employee entitlements of another company in the group.

2.51 Commonly corporate groups are managed by the same controlling minds. Clarifying that the criminal offence provisions apply to a company that owes employee entitlements, but was not party to a transaction will address any risk that corporate groups could be used as a vehicle to frustrate the operation of the criminal offence provisions, and cause unpaid and outstanding employee entitlements to be funded by the FEG scheme.

Example 2.6

Chan Pty Ltd and Yip Pty Ltd are two companies that are part of a corporate group. Chan Pty Ltd holds the majority of the group's assets. Yip Pty Ltd employs all of the group's workers.

Eugene, the director of Chan Pty Ltd, enters into a transaction for Chan Pty Ltd to sell all of its assets to Parker Pty Ltd, a company that is not part of the corporate group, with the intention of avoiding Yip Pty Ltd having to pay outstanding employee entitlements.

Soon after the transaction, all the companies in the corporate group become insolvent and are wound up. Yip Pty Ltd owes $5 million of employee entitlements to its workers.

Eugene could be prosecuted for contravening the criminal offence provisions despite the fact that Yip Pty Ltd was not party to the transaction that transferred assets out of the corporate group.

Subsection 596AB(2A) - clarifying when the offences will still apply

2.52 Paragraph 596AB(2A)(a) provides that all the offence provisions will apply even where the relevant agreement or transaction has been approved by a court. This is because even if approved by a court, the agreements or transactions would have been entered into with the relevant intention or in circumstances where a person was reckless as to the possible results. [Schedule 1, item 8, paragraph 596AB(2A)(a)]

2.53 Paragraphs 596AB(2A)(b) and 596AB(2A)(c) specify that all the offence provisions are able to be contravened even where, despite the agreement or transaction, the employee entitlements are not ultimately avoided, prevented, or significantly reduced, or are able to be recovered, for example, because assets or compensation are recovered by the liquidator through the winding up process.

2.54 Paragraphs 596AB(2A)(b) and 596AB(2A)(c) are included to ensure that there is a strong deterrent in the law for those that attempt to avoid the payment of a company's employee entitlements or significantly reduce those entitlements that can be recovered, even if the attempt does not happen or is not ultimately successful. [Schedule 1, item 8, paragraph 596AB(2A)(b) and (c)]

Example 2.7

Kanya, a company director of Destruction Pty Ltd, intends to make the current employees of the company redundant next week. She has the company enter into a transaction with the intention of transferring the assets of the company (valued at $5 million) to another company, so that she can place the company into liquidation and the company does not have to pay its outstanding employee entitlements.

During the winding up the liquidator is able to recover sufficient assets and compensation to pay the outstanding employee entitlements. As a result, the transaction did not have its intended effect of avoiding employee entitlements. Kanya may still be prosecuted for an offence under subsection 596AB(1) as she entered into a transaction with the intent of avoiding the entitlements.

Subsection 596AB(2B) - Comprise or arrangement approved by a Court or DOCA

2.55 Subsection 596AB(2B) outlines that offence provisions do not apply to relevant agreements or transactions if they were entered into:

·
because a compromise or arrangement was approved by a Court under section 411 of the Corporations Act for the company that has outstanding employee entitlements; or
·
as a result of a DOCA executed by the company which has the outstanding employee entitlements.
[Schedule 1, item 8, subsection 596AB(2B)]

2.56 The purpose of excluding compromises and DOCAs from the operation of the offence provisions is to avoid undermining these mechanisms as legitimate options to rescue, reorganise or restructure a financially distressed business.

2.57 Without these defences, compromises and DOCAs that include agreements or transactions which result in, or may have the effect of, avoiding the recovery of employee entitlements, could be at risk of contravening the criminal offence provisions.

2.58 The provisions on compromises in the Corporations Act provide broad powers to a Court to manage the process of, and provide approval for, compromises. Due to this level of oversight, and its protections for creditors (which would include employee creditors), the criminal offence provisions do not need to apply to compromises.

2.59 The provisions on DOCAs in the Corporations Act protect employee entitlements (see sections 444DA and 444DB). As there are already specific employee entitlement protections, the criminal offence provisions do not need to apply to DOCAs.

2.60 However, the DOCA defence is not intended to apply to a DOCA executed by another company that avoids or prevents the payment of, or significantly reduces the amount of, the employee entitlements that can be recovered of the company that has the outstanding entitlements.

2.61 The defendant bears the evidential burden in relation to the matters in subsection 596AB(2B). This is appropriate because it would be peculiarly within the knowledge of the defendants (such as officers of the company or other persons employed by the company), as to whether a relevant agreement and transaction was:

·
entered into because a compromise or arrangement was approved by a Court under section 411 for the company that has the outstanding employee entitlements; or
·
entered into for the purposes of effecting a DOCA which had been executed earlier by the company which has the outstanding employee entitlements.

2.62 The facts and evidence necessary to establish the matters in subsection 596AB(2B) would be peculiarly within the knowledge of defendants because:

·
they would almost always be an officer of the company, or have a strong connection to the company;
·
they would have been involved in a court process related to the compromise or arrangement;
·
they would be parties to a DOCA; and
·
they would have access to company records and documents that would establish a compromise was proposed and approved, or a DOCA was executed.

2.63 It would also be significantly more difficult and costly for the prosecution to disprove the fact that the relevant agreement or transaction is not a compromise or arrangement approved by the Court or a result of a DOCA executed by the company.

Subsection 596AB(2C) - Liquidators and provisional liquidators of the company

2.64 To avoid the inappropriate application of the criminal offence provisions to liquidators and provisional liquidators of a company, when such persons cause relevant agreements and transactions to be entered into in the course of winding up the company, subsection 596AB(2C) specifies that the primary recklessness offence and the company officer specific recklessness offence will not apply to liquidators and provisional liquidators. [Schedule 1, item 8, subsection 596AB(2C)]

2.65 Liquidators and provisional liquidators undertake a range of statutory duties when they are appointed to wind up a company. Liquidators' duties are to wind up and finalise the affairs of the company. Provisional liquidators can be appointed by a court in certain circumstances after a winding up application is filed, and have many of the same functions and powers as liquidators.

2.66 In carrying out their statutory duties, liquidators and provisional liquidators may cause the company to enter into agreements and transactions, for example, in realising the assets of and winding up the company.

2.67 The application of the recklessness offence provisions to the activities of liquidators could inappropriately impede their function in the winding up of a company. It is not intended that the recklessness offence provisions will apply to relevant agreements and transactions entered into in the course of winding up the company by a liquidator or provisional liquidator in the mentioned circumstances. The Government's 2016 reforms to the regulation of insolvency practitioners provide a sufficient safeguard to misconduct (see Schedule 2 to the Corporations Act) and appropriate remedies if misconduct occurs.

2.68 However, if a liquidator or provisional liquidator entered into agreements or transactions with an intention to avoid or prevent the recovery of entitlements of employees, or with an intention to significantly reduce the employee entitlements of a company which could be recovered, it would be appropriate for the intention criminal offence provisions to apply.

2.69 A liquidator or provisional liquidator also bears the evidential burden for the matters in paragraph 596AB(2C). This is appropriate because it would be peculiarly in a liquidator or provisional liquidator's knowledge as to why and when a relevant agreement or transaction was entered into in the course of the company's winding up. It would also be significantly more difficult and costly for the prosecution to disprove the fact that the relevant agreement or transaction was not entered into in the course of winding up the company.

Clarification and consequential amendments

2.70 Amendments have been made to subsection 596AB(3) to insert a note that clarifies what a relevant agreement may be. [Schedule 1, item 9, note to section 596AB(3)]

2.71 Subsection 596AB(4) has been repealed and inserted into subsection 596AC(10). [Schedule 1, item 10, subsection 596AB(4)]

Penalties for contravening the criminal offence provisions

2.72 Schedule 3 of the Corporations Act is amended to specify that subsections 596AB(1), 596AB(1A), 596AB(1B) and 596AB(1C) are criminal offence provisions. [Schedule 1, item 18, table item 145 in Schedule 3]

2.73 For an individual, the maximum penalty for contravening the criminal offence provisions are either or both of the following:

·
imprisonment for 10 years;
·
a fine the greater of the following:

-
4,500 penalty units; or
-
if the court can determine the total value of the benefits that have been obtained by one or more persons and are reasonably attributable to the commission of the offence - three times that total value;

2.74 For a body corporate, the maximum penalty for contravening the criminal offence provisions is:

·
a fine which is the greatest of the following:

-
45,000 penalty units;
-
if the court can determine the total value of the benefits that have been obtained by one or more persons and are reasonably attributable to the commission of the offence - three times that total value; or
-
10 per cent of the body corporate's annual turnover during the 12 month period ending at the end of the month in which the body corporate committed or began committing the offence.

2.75 The enhanced penalties which have been introduced reinforce the seriousness of the offences in question and aim to deter persons from engaging in these egregious behaviours.

Application of extensions of criminal responsibility to the Part's offence provisions

2.76 The extensions of criminal responsibility provisions contained in Part 2.4 of the schedule to the Criminal Code Act 1995 (Cth) apply to the criminal offence provisions.

2.77 The application of Part 2.4 means, amongst other things, that any person who is an accessory to the commission of any of the offences through aiding, abetting, counselling or procuring the commission of that offence, will be taken to have committed that offence.

Section 596AC: Entering into relevant agreements or transactions to avoid employee entitlements - contravention and civil penalty

2.78 The Bill repeals section 596AC and inserts a new civil penalty provision.

Subsection 596AC(1) - primary civil penalty provision

2.79 Subsection 596AC(1) specifies that a person contravenes the provision if:

·
they enter into a relevant agreement or transaction; and
·
the person knows, or a reasonable person in the position of the person would know, that the relevant agreement or transaction is likely to:

-
avoid or prevent the recovery of the entitlements of the employees; or
-
significantly reduce the amount of the entitlements that can be recovered.

2.80 Paragraph 596AC(1)(a) refers to the extended meaning of the terms 'relevant agreements and transactions' in section 596AB(3). This definition is used to ensure the criminal offence provisions and civil penalty provision apply to the same types of agreements and transactions. [Schedule 1, item 11, paragraph 596AC(1)(a)]

2.81 Paragraph 596AC(1)(b) outlines the new objective test against which an assessment is made to determine if there has been a contravention of the subsection. This objective test assesses whether the person knows, or a reasonable person in the specific circumstances of that person would have known or would be expected to have known, that the relevant agreements or transactions are likely to:

·
avoid or prevent the recovery of the entitlements of the employees; or
·
significantly reduce the amount of the entitlements of the company that can be recovered.
[Schedule 1, item 11, paragraph 596AC(1)(b)]

Example 2.8

Sally, a company director of Kitchen Rebuild Pty Ltd, is aware her company is facing financial difficulties. There are 30 employees currently working for the company.

Sally starts reorganising the company, and transfers most of the inventory of the company (worth $3 million), which is unencumbered, to another company she owns, for no value.

She then makes the 30 employees redundant and the company is wound up. There are no funds to pay the outstanding employee entitlements, which amount to $1.5 million. Sally states she did not know that taking this action would avoid or prevent the recovery of the entitlements of the employees.

In this case, a reasonable director in Sally's position would have known that transferring the only assets available to the company to pay employees entitlements, would avoid the recovery of those entitlements.

In this case, Sally has contravened subsection 596AC(1).

2.82 For the purposes of the objective test, it is intended that the term 'reasonable person' uses its common law definition.

2.83 Paragraph 596AC(1)(b) uses the same two limbs used in the offence provisions to outline the elements of the contravention. This construction is used to ensure:

·
that the criminal offence provisions and civil penalty provision apply to the same types of behaviours, but with different levels of culpability; and
·
consistency with the types of behaviours which are intended to be deterred, or will be sanctioned if they occur.

2.84 Additionally, the term 'significantly' used in subparagraph 596AC(1)(b)(ii) is intended to take its meaning depending on the circumstances of the relevant case. The term is to be interpreted consistently with other provisions in this Bill that contain the term.

Example 2.9

George, a company director of Space Fireworks Pty Ltd, is looking at expanding his business. He wants to take over a competitor and hire additional staff.

He currently has 50 employees working for his company, who have accrued employee entitlements of $3 million. He hires another 50 employees and buys out his main competitor for $5 million, using most of the cash in his business and by taking out an additional loan.

Six months after buying his main competitor, there is a major downturn in the fireworks market. George's business quickly begins losing money and the company is unable to meet its loan commitments. His financier has the business wound up six months later. There is no money now available to pay the employee entitlements, which now total $5 million.

The liquidator of Space Fireworks Pty Ltd is examining whether to bring an action under subsection 596AC(1).

In this case, George did not know, and a reasonable person in George's position would not have known, that buying the competitor's business was likely to avoid or prevent the recovery of the employee entitlements of Space Fireworks Pty Ltd, as the downturn was not foreseeable and George was aiming to expand his business.

George has not contravened subsection 596AC(1).

2.85 Finally, the note to subsection 596AC(1) states that subsection 596AC(1) is a civil penalty provision. [Part 1 of Schedule 1, item 11, note to subsection 596AC(1)]

2.86 The introduction of the civil penalty provision will strengthen enforcement options available for contraventions of the Part.

2.87 The table in subsection 1317E(1) is amended to list subsection 596AC(1) as a civil penalty provision. Civil penalty provisions within the Corporations Act allow courts to order individual defendants to pay penalties of up to $200,000 where there has been a contravention of a relevant civil provision. [Schedule 1, item 17, subsection 1317E(1)]

Subsection 596AC(2) - accessorial liability for those involved in contravention of subsection 596AC(1)

2.88 Any person who is involved in contraventions of subsection 596AC(1), contravenes subsection 596AC(2). This provision has been inserted to capture those who are involved in contraventions of subsection 596AC(1). Section 79 of the Corporations Act defines 'involved'. [Schedule 1, item 11, paragraph 596AC(2)]

2.89 Inserting new subsection 596AC(2) allows such accessories to be captured by the various sanctions and personal liability consequences in the Part. This includes the consequences for contravening a civil penalty provision as subsection 596AC(2) is, itself, a civil penalty provision. [Schedule 1, item 11, note to subsection 596AC(2)]

Example 2.10

Vivek is an unregistered adviser who provides restructuring advice to businesses which are in trouble.

Vivek advises Sandya, the owner of Zobee Pty Ltd, about transactions she can use which would avoid her needing to pay any of the entitlements of her employees. Vivek outlines a plan to Sandya which includes transferring the assets to another business at below market value and making all the employees redundant. Sandya carries out the plan and all the employees' entitlements are avoided.

Sandya has contravened subsection 596AC(1). In this case, Vivek is involved in Sandya's contravention and has therefore contravened subsection 596AC(2).

2.90 The table in subsection 1317E(1) is amended to list subsection 596AC(2) as a civil penalty provision. [Schedule 1, item 17, subsection 1317E(1)]

Subsection 596AC(3) -civil penalty provisions capturing company officers

2.91 The Bill introduces a specific civil penalty provision which brings company officers within the operation of the Part. The provision replicates the operation of subsection 596AC(1). [Schedule 1, item 11, subsection 596AC(3)]

2.92 Subsection 596AC(3) specifies that a person who is a company officer contravenes the provision if:

·
the person causes the company to enter into a relevant agreement or transaction; and
·
the company officer knows, or a reasonable person in the position of the company officer would know, that the relevant agreement or transaction is likely to:

-
avoid or prevent the recovery of the entitlements of the employees; or
-
significantly reduce the amount of the entitlements that can be recovered.

2.93 'Cause' is defined in section 9 of the Corporations Act and includes the term procure.

2.94 This specific civil contravention provision for company officers ensures that those company officers who act in the manner described, are able to be made liable and sanctioned for their actions.

Example 2.11

Veronica, a company director of Crazy Arts Pty Ltd, intends to transfer all the assets of her company to her personal family trust to avoid paying the company's creditors. She is aware that doing this will avoid the entitlements of the employees if they are made redundant and the company is wound up.

She currently has 100 employees working for her.

She advises Ben, the company secretary of Crazy Arts Pty Ltd, of what she wants to do. Ben is aware of the result for the employees. He instructs Susan, an employee of Crazy Arts Pty Ltd, to have the company enter into the relevant transactions and informs her of Veronica's aims.

Afterwards, all the employees are made redundant and a liquidator is appointed to wind up the company. The liquidator has indicated employees are not likely to receive any distribution of the company's assets.

In this case, both Veronica and Ben would contravene subsection 596AC(3) as they are company officers and caused the company to enter into the relevant transactions which are likely to avoid the employee entitlements.

2.95 The concepts in subsection 596AC(3) are intended to be interpreted consistently with the concepts used in subsections 596AC(1).

2.96 Subsection 596AC(3) is also a civil penalty provision.

2.97 The table in subsection 1317E(1) is amended to list subsection 596AC(3) as a civil penalty provision. [Schedule 1, item 17, subsection 1317E(1)]

Subsection 596AC(4) - accessorial liability for those involved in contravention of subsection 596AC(3)

2.98 Subsection 596AC(4) outlines that any person who is involved in contraventions of subsection 596AC(3), contravenes subsection 596AC(4). [Schedule 1, item 11, paragraph 596AC(4)]

2.99 Inserting new subsection 596AC(4) ensures that accessories are captured by the various sanctions and personal liability consequences in the Part. This includes the consequences for contravening a civil penalty provision as subsection 596AC(4) is, itself, a civil penalty provision.

2.100 The table in subsection 1317E(1) is amended to list subsection 596AC(4) as a civil penalty provision. [Schedule 1, item 17, subsection 1317E(1)]

Example 2.12

Following on from the previous example, Susan has contravened subsection 596AC(4) as she has been knowingly involved in the contraventions by Veronica and Ben.

Application of the civil penalty provisions in certain circumstances

Subsection 596AC(5) - company does not need to be a party to the agreement or transaction

2.101 Subsection 596AC(5) outlines that the primary civil penalty provisions can apply even if the company which owes the employee entitlements to the employees is not a party to the relevant agreement or transaction. This provision operates in the same way as subsection 596AB(2). [Schedule 1, item 11, subsection 596AC(5)]

Subsection 596AC(6) -when the civil penalty provisions will still apply

2.102 Paragraph 596AC(6)(a) outlines that the civil penalty provisions will apply even where the relevant agreement or transaction has been approved by a court. As such, the court's approval will not create immunity from contravention of the civil penalty provisions. [Schedule 1, item 11, paragraph 596AC(6)(a)]

2.103 Paragraph 596AC(6)(b) and (c) states that the civil penalty provisions will all still apply even where, despite the agreement or transaction, the employee entitlements are not ultimately avoided, prevented, or significantly reduced, or employee entitlements are able to be recovered, for example, because assets or compensation are recovered by the liquidator through the winding up process. [Schedule 1, item 11, paragraphs 596AC(6)(b) and (c)]

2.104 These provisions operate in a similar way to paragraphs 596AB(2A)(a), (b), and (c).

Paragraph 596AC(7) - When the civil penalty provisions do not apply

2.105 Paragraph 596AC(7)(a) outlines that all the civil penalty provisions do not apply to relevant agreements or transactions if they were entered into:

·
because a compromise or arrangement was approved by a Court under section 411 of the Corporations Act for the company that has outstanding employee entitlements; or
·
as a result of a DOCA executed by the company which has the outstanding employee entitlements.
[Part 1 of Schedule 1, item 11, paragraph 596AC(7)(a)]

2.106 These defences operate in a similar way, and have been included in the amendments for a similar reason, to the defences to the criminal offence provisions contained in subsection 596AB(2B), and explained above.

2.107 To avoid the inappropriate application of the civil penalty provisions to liquidators and provisional liquidators of a company, paragraph 596AC(7)(b) specifies that the civil penalty provisions do not apply when such persons cause relevant agreements and transactions to be entered into in the course of winding up the company. [Schedule 1, item 11, paragraph 596AC(7)(b)]

2.108 This defence operates in a similar way, and has been included in the amendments for a similar reason, to the defence to the criminal offence provisions contained in subsection 596AB(2C), and explained above.

Section 596AC(8) - Person who relies on subsection 596AC(7) has the evidential burden

2.109 Subsection 596AC(8) outlines that persons who wish to rely on the exceptions outlined in subsection 596AC(7) bear an evidential burden in relation to that matter. [Schedule 1, item 11, subsection 596AC(8)]

2.110 Subsection 596AC(11) defines what evidential burden means in section 596AC. In relation to a matter, it is the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist. [Schedule 1, item 11, subsection 596AC(11)]

2.111 The defendant bears the evidential burden in relation to the matters in subsection 596AC(7). This is appropriate in respect of compromises and DOCAs because it would be peculiarly in the knowledge of defendants (such as officers of the company or other persons employed by the company) as to whether relevant agreements and transactions were:

·
entered into because a compromise or arrangement was approved by a Court under section 411 for the company that has the outstanding employee entitlements; or
·
entered into for the purposes of effecting a DOCA which had been executed earlier by the company which has the outstanding employee entitlements.

2.112 The facts and evidence necessary to establish the matters in paragraph 596AC(7)(a) would be peculiarly within the knowledge of defendants because:

·
they would almost always be an officer of the company, or have a strong connection to the company;
·
they would have been involved in a court process related to the compromise or arrangement;
·
they would be parties to a DOCA; and
·
they would have access to company records and documents that would establish a compromise was proposed and approved, or a DOCA was executed.

2.113 It would also be significantly more difficult and costly for the prosecution to disprove the fact that the relevant agreement or transaction is not a compromise or arrangement approved by the Court or a result of a DOCA executed by the company.

2.114 A liquidator or provisional liquidator also bears the evidential burden for the matters in paragraph 596AC(7)(b). This is also appropriate because it would be peculiarly in a liquidator or provisional liquidator's knowledge as to why and when a relevant agreement or transaction was entered into in the course of the company's winding up. It would also be significantly more difficult and costly for the prosecution to disprove the fact that the relevant agreement or transaction was not entered into in the course of winding up the company.

Subsection 596AC(9) - Proceedings may only be begun after liquidator appointed

2.115 Subsection 596AC(9) specifies that relevant proceedings under section 1317E for a contravention of the civil penalty provisions can only be begun after a liquidator has been appointed to the company. [Schedule 1, item 11, subsection 596AB(9)]

2.116 This aims to ensure that actions for contravention of the civil penalty provisions and for compensation for loss or damage (which is linked to contravention of the civil penalty provision) are only commenced once the impact on employee entitlements becomes evident as part of the liquidation process and not while a company is still actively trading or restructuring its affairs.

Subsection 596AC(10) - contravention by incurring a debt

2.117 It is possible that a relevant agreement or transaction in contravention of any of the civil penalty provisions could also result in the company trading while insolvent, in contravention of section 588G of the Corporations Act. To ensure that there is no double recovery for loss due to overlapping actions under the Corporations Act, a set of minor consequential amendments are contained in the Bill.

2.118 First, subsection 596AC(10) outlines that if section 596AC is contravened by a person incurring a debt within the meaning of section 588G, the debt which is incurred and the contravention are 'linked'. [Schedule 1 item 11, subsection 596AC(10)]

2.119 Second, the existing definition of 'linked' in section 9 of the Corporations Act is amended to account for changes made to the structure of section 596AC. [Schedule 1, item 1, section 9]

2.120 Third, paragraph 588N(b) is amended to prevent double recovery of the 'linked' amount if there was an action under section 596ACA or under section 588M. [Schedule 1, item 2, paragraph 588N(b)]

Section 596ACA: Person who contravenes section 596AC liable to compensate for loss

2.121 The Bill repeals the existing compensation provision and replaces it with a modernised compensation provision. The new civil compensation provision no longer interacts with the Part's criminal offence provision, and reduces confusion about how the provision is intended to operate.

2.122 Under the civil compensation provisions, compensation for loss or damage suffered by the employees of the company due to the impact of relevant agreements or transactions can be awarded where the persons who entered those agreements or transactions have contravened the civil penalty provisions, and a liquidator has been appointed to the company. [Schedule 1, item 11, subsection 596ACA(1)]

2.123 A person may be liable to pay compensation, whether or not a Court has made a declaration of contravention under Part 9.4B of the Corporations Act, or the person is ordered to pay a penalty as a result of that declaration. [Schedule 1, item 11, paragraph 596ACA(2)(a)]

Example 2.13

Bob, the owner of Apex Cleaning Pty Ltd and Sarah, a director of that company, arrange a series of transactions which result in an asset being sold to a related entity for below market value consideration.

Soon after, Apex Cleaning Pty Ltd enters into liquidation. All 100 employees are made redundant. The unpaid employee entitlements when the company is wound up are $3 million.

The series of transactions entered into contravenes section 596AC(1).

ASIC initiates civil penalty proceedings against Bob and Sarah, with the Court declaring a contravention and ordering a civil penalty of $200,000 to be paid by both Bob and Sarah.

Even though the Court has penalised both Bob and Sarah, this does not prevent relevant parties taking action under section 596ACA to seek compensation from Bob and Sarah for the $3 million of unpaid employee entitlements.

2.124 Further, a person may still be liable to pay compensation notwithstanding that the person has been convicted of an offence under section 596AB. [Part 1 of Schedule 1, item 11, paragraph 596ACA(2)(b)]

Example 2.14

Bob is instead convicted of the criminal offence of entering a transaction with the intention of preventing the recovery of the entitlements of employees. He is penalised 4,500 penalty units.

Bob's conviction does not prevent relevant parties taking action under section 596ACA to seek compensation from Bob. Relevant parties would still need to prove Bob contravened subsection 596AC(1) or subsection 596AC(3).

2.125 Additionally, a person may still be liable to pay compensation under section 596ACA even after the relevant company (whose employees suffered the loss or damage) has been wound up. [Schedule 1, item 11, paragraph 596ACA(2)(c)]

2.126 The company's liquidator is able to take action against relevant persons for compensation for the contravention of the civil penalty provisions, where relevant agreements or transactions caused loss or damages to the employees. Compensation in such cases will be payable to the company for distribution by the liquidator in accordance with the usual priorities in section 556 of the Corporations Act. [Schedule 1, item 11, subsection 596ACA(3)]

2.127 The compensation that may be payable is the amount of the loss or damage which the employees of the company suffered because of the relevant agreement or transaction that was entered into by persons, or because of actions taken to give effect to the relevant agreement or transaction.

2.128 The maximum amount of loss or damage that could be recovered by a liquidator under section 596ACA is equal to the total amount of outstanding employee entitlements when the company enters winding-up. This will occur where relevant agreements or transactions are entered into by persons, or because of actions taken to give effect to those relevant agreements or transactions, which result in the employee entitlements of the company being avoided or not being paid.

2.129 Employees of the company are, in certain circumstances also able to seek compensation against relevant persons for contravention of the civil penalty proceedings. In such cases, the compensation payable for loss or damage an employee suffers will be a debt due to the employee. [Schedule 1, item 11, subsection 596ACA(4)]

2.130 Any recoveries made by the employee will be deducted from amounts that the employee has proved in the liquidation of the company. [Schedule 1, item 11, subsection 596ACA(5)]

Example 2.15

Sally is an employee of Apex Cleaning Pty Ltd who was made redundant when the company was wound up. Sally believes Bob, the company's owner, entered into a range of transactions to avoid the company's employee entitlement liabilities.

Sally complies with the formalities for bringing action under section 596ACA, after which she obtains judgment against Bob for the full outstanding employee entitlement amount.

Sally recovers her outstanding employee entitlements, which are paid to her. Her proof of debt against the company (for her outstanding employee entitlements) is reduced to zero.

2.131 Proceedings under section 596ACA may only be begun within six years after the company begins to be wound up. [Schedule 1, item 11, subsection 596ACA(6)]

Sections 596AD and 596AE: minor amendments

2.132 A consequential amendment is made to section 596AD to reflect the amended sections 596AC and 596ACA. [Schedule 1, item 12, section 596AD]

2.133 Paragraphs have also been inserted at the end of section 596AD to address issues of double recovery created by other amendments contained in this Bill. [Schedule 1, item 13, section 596AD]

2.134 The heading to the section 596AE is also amended to reflect the amendments to the civil compensation provision. [Schedule 1, item 14, section 596AE]

2.135 Similarly, references to the previous section 596AC in section 596AE have been updated to reference section 596ACA. [Schedule 1, item 15, section 596AE]

Sections 596AF, 596AG and 596AH: Proceedings for compensation

2.136 Sections 596AF, 596AG, 596AH and 596AI have been repealed and replaced with new provisions that deal with proceedings for compensation.

Section 596AF - Proceedings for compensation

Subsection 596AF(1) - Who can commence proceedings for compensation

2.137 The relevant parties who can bring a recovery action for loss or damage under section 596ACA are:

·
the Commissioner of Taxation;
·
the Fair Work Ombudsman;
·
the Secretary of the Department administering the Fair Entitlements Guarantee Act 2012 (Cth); and
·
employees of the company.
[Schedule 1, item 16, subsection 596AF(1)]

2.138 The parties who may begin compensation proceedings have been expanded to enhance the deterrent effect, and recovery potential, of the Part. Having a wider range of parties with an ability to take action will encourage greater usage of the civil compensation provision, which is expected to lead to enhanced recoveries of employee entitlements. It also addresses the circumstances where a liquidator cannot commence recovery actions due to insufficient assets in the company, for example, as a result of phoenix activity.

2.139 Employees can only recover their own loss or damage while the three government bodies can recover the loss or damage for all the employees of the company. The government bodies are therefore taking an action equivalent to that which the company's liquidator can take.

2.140 Subsection 596AF(1) does not prevent the liquidator of the company taking recovery action under section 596ACA.

Subsections 596AF(2) and 596AF(3) - Liquidator or Court consent is required to proceed

2.141 Subsection 596AF(2) outlines that where a liquidator has been appointed to a company, any parties wishing to take civil recovery action need to obtain the liquidator's written consent or leave of the Court, to proceed. [Schedule 1, item 16, subsection 596AF(2)]

2.142 A liquidator has 30 days to respond in writing to a written request from any of the parties to begin compensation proceedings. [Schedule 1, item 16, paragraphs 596AF(3)(a) and (b)]

2.143 A Court can grant leave to a party to begin compensation proceedings where the liquidator has refused or not responded to a request, if it is satisfied it is appropriate to grant leave. [Schedule 1, item 16, paragraph 596AF(3)(b)]

2.144 In deciding whether it is appropriate to grant leave, the Court needs to give regard to:

·
whether the liquidator will begin proceedings under section 596ACA;
·
whether the liquidator has applied under section 588FF for a court order that a transaction was a voidable transaction, and this same transaction also contravened section 596AC or was part of a contravention of that section;
·
whether the liquidator has intervened in an application for a civil penalty order under section 588G in relation to insolvent trading;
·
whether the liquidator has begun proceedings under section 588M for recovery of compensation for loss due to insolvent trading, where the relevant transaction also contravenes the Part; and
·
any other matters the Court considers relevant.
[Schedule 1, item 16, paragraph 596AF(3)(c)]

Section 596AG - Events preventing compensation proceedings

2.145 Section 596AG outlines events that prevent government bodies and employees beginning civil compensation proceedings.

2.146 Subsection 596AG(1) outlines that the government bodies and employees of the company cannot begin civil compensation proceedings if the company liquidator has taken action in relation to the contravention. [Schedule 1, item 16, subsection 596AG(1)]

2.147 Subsection 596AG(2) specifies that an employee cannot begin civil compensation proceedings where one of the government bodies has commenced proceedings. The employee is prevented from taking such action because the government bodies would already be taking action on behalf of that employee, and all the other employees, to recover their loss or damage. [Schedule 1, item 16, subsection 596AG(2)]

Section 596AH - Joining parties to proceedings

2.148 Subsection 596AH(1) allows the three government bodies and any of the employees of the company to apply to the Court to be joined as a party to the liquidator's proceedings under section 596ACA. These parties can be joined to proceedings because they have an interest in the proceedings that are underway. [Schedule 1, item 16, subsection 596AH(1)]

2.149 Subsection 596AH(2) allows the other government bodies, an employee of the company to which the proceedings relate, and the company's liquidator, to apply to the Court to be joined to proceedings begun by a government body. Such parties can seek to join the proceedings, as they are interested in the proceedings that are underway. [Schedule 1, item 16, subsection 596AH(2)]

Application and transitional provisions

2.150 The provisions in Part 1 of Schedule 1 to the Bill will apply in relation to a relevant agreement or a transaction that is entered into on or after the commencement of the Bill. [Schedule 1, item 33, section 1647]

Chapter 3

Contribution orders

Outline of chapter

3.1 Part 2 of Schedule 1 to the Bill inserts new provisions into Part 5.7B of the Corporations Act that allow contributions to be sought from certain entities in a corporate group, or entities with a closely connected economic relationship, for the payment of outstanding employee entitlements of an insolvent company, in limited circumstances.

Context of amendments

3.2 Many businesses operate using a group structure comprising several companies, with a parent company controlling the group, and each company in the group being a separate legal entity with limited liability. Such groups are often referred to as 'company groups' or 'corporate groups'.

3.3 Corporate groups can structure themselves in a multitude of ways. A group can legitimately be structured so that one or more companies in the group hold the employees and associated liabilities while other companies in the group hold the assets of the group.

3.4 Where corporate groups adopt such structures and legally operate as if they are a single unit or entity (for example, by all the entities in the group entering a deed of cross guarantee for all the group's liabilities), the insolvency of a group member with employee entitlement liabilities may not adversely impact the ultimate payment of those entitlements because the insolvent member can draw on the guarantee.

3.5 Where corporate groups do not enter into a deed of cross guarantee or similar arrangement, the insolvency of a corporate group member with employee entitlement liabilities can result in those entitlements not being paid, even if there are funds within the corporate group to pay them.

3.6 In some cases, other entities in the corporate group will have obtained economic benefits from the work carried out by the employees of the now insolvent group member, but these other entities might not have been charged the full arm's-length value of the benefit they obtained.

3.7 Insolvency of entities in such circumstances can have the consequence of inappropriately shifting the costs of the corporate group's outstanding employee entitlement liabilities to the FEG scheme.

3.8 Further to corporate groups, companies can flexibly use other companies to employ and pay employees who provide services on behalf of the first company. Companies can also flexibly use other types of entities, such as partnerships or trusts, to operate specific parts of a business or to structure their assets and liabilities. In many instances, these groupings of entities have such a close economic and commercial relationship that they effectively function as a single entity.

3.9 In these circumstances, some entities may have obtained economic benefits from the work carried out by the employees of the now insolvent company, but might not have been charged the full arm's-length value of the benefit they obtained.

3.10 The Bill introduces new provisions into the Corporations Act to address the circumstances where an insolvent company has unpaid employee entitlements, and there are funds held by other entities within the larger corporate group, or in a closely connected economic relationship with the insolvent company, that have unfairly benefited from the work of those employees. These provisions are similar to those which exist in New Zealand's Companies Act 1993 (NZ). They allow contributions to be sought from entities across a corporate group or entities with a closely connected economic relationship, for the payment of outstanding employee entitlements of insolvent corporate entities in appropriate circumstances.

Summary of new law

3.11 Part 2 of Schedule 1 to the Bill inserts new provisions into the Corporations Act that will allow recovery of unpaid employee entitlements of an insolvent company from certain entities in limited circumstances.

3.12 In summary, the amendments provide that:

·
a liquidator (and, in certain circumstances, the ATO, FWO, and DJSB) will be able to seek an 'employee entitlements contribution order' that requires an entity within the same 'contribution order group' as an insolvent company to contribute to the payment of the insolvent company's employee entitlement liabilities where:

-
it is 'just and equitable'; and
-
the entity has benefited, directly or indirectly, from the labour of the employees of the insolvent company on other than arms-length terms;

·
the scope of the 'employee entitlements contribution order' is limited to the entitlements protected under Part 5.8A; and
·
the Court will determine, as part of the proceedings:

-
the existence and composition of a 'contribution order group';
-
the value of the 'benefit' that the contributing entity received, and whether it provided arm's length consideration for that benefit; and
-
whether making the contribution order is 'just and equitable'.

Comparison of key features of new law and current law

New law Current law
A liquidator (and, in certain circumstances, the ATO, FWO and DJSB) can apply to the Court to seek an 'employee entitlements contribution order' from an entity or entities in the same 'contribution order group' as an insolvent company to contribute to the payment of unpaid employee entitlements of the company where:

·
the entity has benefited from the labour of the employees of the insolvent company on other than arm's-length terms; and
·
it is just and equitable.

No equivalent.

Detailed explanation of new law

3.13 Part 2 of Schedule 1 to the Bill makes amendments to the Corporations Act to insert new provisions which will allow the Court to make an 'employee entitlements contribution order' that requires an entity or entities in the same 'contribution order group' as an insolvent company to contribute to the payment of the employee entitlement liabilities of the company where:

·
the entity has benefited from the labour of the employees of the insolvent company on other than arms-length terms; and
·
it is 'just and equitable' to make the order.

3.14 Part 2 of Schedule 1 to the Bill inserts new Division 8 into Part 5.7B of the Corporations Act.

Subsection 588ZA - Employee entitlements contribution orders

3.15 Under section 588ZA, the Court can make an order (an 'employee entitlements contribution order') requiring an entity within a 'contribution order group', to contribute, in certain circumstances, to the payment of the employee entitlement liabilities of an insolvent company in the same contribution order group. [Schedule 1, item 20, subsections 588ZA(1), (2) and (6)]

3.16 A definition of 'employee entitlements contribution order', which is taken to have the meaning given by subsection 588ZA(1) of the Corporations Act, has been inserted into section 9 of the Corporations Act. [Schedule 1, item 19, section 9]

When the Court can make an employee entitlements contribution order

3.17 The Court needs to be satisfied of the things specified in paragraphs 588ZA(1)(a) to (f) before it can make an employee entitlements contribution order.

First requirement - a company is being wound up

3.18 The first requirement is the Court must be satisfied that a company (the 'insolvent company') is being wound up. Winding up can be established by showing that, for example, a company's creditors have resolved to wind up the company and a liquidator has been appointed. [Schedule 1, item 20, paragraph 588ZA(1)(a)]

Second requirement - outstanding employee entitlements

3.19 The second requirement is the Court must be satisfied at the time of making the order that the insolvent company has unpaid employee entitlements of the type within the meaning of Part 5.8A of the Corporations Act. [Schedule 1, item 20, paragraph 588ZA(1)(b)]

3.20 The employee entitlements that can be the subject of a contribution order are the same employee entitlements that would receive preferential payment in a winding up.

3.21 It is open to the Court to rely on reasonable estimates by the liquidator of the debts owed by the company to its former employees. This would relieve liquidators from having to complete the formal proof of debts process for the company prior to an application for an employee entitlements contribution order being made to the Court.

Example 3.1

Brian is appointed as the liquidator of Hatchback Pty Ltd, a parcel delivery company. Due to the way the company operated, Brian is considering applying to the Court for an employee entitlements contribution order, however no books and records of the company are able to be located, because they have been destroyed.

As part of his investigations, Brian examines the company's bank accounts, and contacts the ATO to obtain information about payments made to employees by the company. Additionally, Brian verifies information for the DJSB for the payment of FEG to former employees of Hatchback Pty Ltd.

Using the information collected, Brian is able to construct a reasonable estimate that the amount of unpaid employee entitlements is $3 million.

Third requirement - contributing entities and contribution order group

3.22 The third requirement is the Court must be satisfied that the contributing entity is a member of the same contribution order group as the insolvent company. [Schedule 1, item 20, paragraph 588ZA(1)(c)]

3.23 Subsection 588ZA(6) lists six tests which the Court can use to determine whether two entities (one of which must be the insolvent company) are members of the same contribution order group. [Schedule 1, item 20, paragraphs 588ZA(6)(a) to (f)]

3.24 These tests are designed to capture different types of corporate groups, and diverse and sophisticated business structures used by sharp corporate operators. The tests are largely based on established principles commonly used to determine corporate control, and tax and financial reporting obligations. While the concept of a contribution order group is broad reaching in its application, the provisions contain appropriate safeguards as the entity in the group must have benefited from the employees' labour on other than arms-length terms, and the Court must be satisfied the order is just and equitable.

3.25 With the first two tests outlined in paragraphs 588ZA(6)(a) and (b) (which relate to related bodies corporate), the Court would consider whether the entities are or were related to one another, for example, because they are subsidiaries with the same holding company, or where one entity is a subsidiary or holding company of the other entity (see section 50 of the Corporations Act, which sets out the meaning of related bodies corporate).

3.26 With the third test in paragraph 588ZA(6)(c) (which relates to control relationships between entities), the Court would consider whether an entity currently has, or previously had, the capacity to determine the outcome of decisions about another entity's financial and operating policies (see section 50AA of the Corporations Act, which outlines when an entity controls a second entity).

3.27 The fourth test outlined in paragraph 588ZA(6)(d) (the entities both represent or have represented to the public that they are related to one another) aims to capture circumstances where two entities represent in their business dealings that they are related to one another (even though they may not be). In these circumstances, employees may be led to believe or form the impression they are working for entities that are related to each other and may provide services on that basis.

3.28 In determining whether the entities have represented to the public they are related to one another, the Court could consider:

·
promotional material and other business documents published by the relevant entities;
·
information in documents lodged with ASIC or other Government entities;
·
communications between the entities and employees and other stakeholders of the entities; and
·
annual reports of the relevant entities.

3.29 The fifth test outlined in paragraph 588ZA(6)(e) (both entities are, or have been, part of the same consolidated entity) captures entities in consolidated groups for accounting and financial reporting purposes (see the definition of 'consolidated entity' in section 9 of the Corporations Act). For the purposes of this test, the Court could consider materials such as:

·
consolidated accounts prepared according to relevant accounting standards in the current and previous years;
·
financial reports and other documents lodged with ASIC related to the relevant entities; and
·
materials provided to financial institutions for purposes of financing for the consolidated entity.

3.30 With the sixth test outlined in paragraph 588ZA(6)(f) (both entities are, or have been, part of a collection of entities that as a matter of economic and commercial substance, function or functioned as a single entity), the Court could consider examining the legal, commercial and operating structures of the group of entities, as well as the day-to-day operation of the businesses, to make a determination as to whether entities operated in this way.

3.31 For entities to operate as, or comprise, a single entity, they need to operate closely together to achieve a set of common aims. The more integrated the operation of the entities, the more likely they will be operating as a single entity.

3.32 For example, if each of the entities supported each other to achieve a common aim and the employees of the different entities worked together on common tasks, or if the assets and employees of an entity were held by separate entities in a group, but the employees worked with the assets to derive profits ultimately for the group, it would be more likely the entities would be operating as a single entity.

3.33 Conversely, if a group of entities operated relatively independently and were not intertwined in their operations, the entities would less likely be functioning as a single entity.

Example 3.2

Chardonnay Pty Ltd is a trading entity which employs all the employees that work across the Mountain Group of companies. The assets of the group, being a winery, vineyards and its land, are held by Shiraz Pty Ltd.

Chardonnay Pty Ltd and Shiraz Pty Ltd have different boards of directors and different shareholders.

On a day to day basis, the employees of Chardonnay Pty Ltd worked on the vineyards and in the winery of Shiraz Pty Ltd, to generate revenue for the Mountain Group.

Chardonnay Pty Ltd is wound up and the company's liquidator makes an application for an employee entitlements contribution order.

When considering whether the two entities were members of the same contribution order group, the Court could conclude that Chardonnay Pty Ltd and Shiraz Pty Ltd operated as a single entity by virtue of paragraph 588ZA(6)(f).

3.34 The Court need only apply one of the six tests to determine that two entities are members of the same contribution order group.

Fourth requirement - contributing entity benefited from the work done by employees of the insolvent entity

3.35 The fourth requirement is the Court must be satisfied that the contributing entity has benefited, directly or indirectly, from work done by the employees of the insolvent entity. [Schedule 1, item 20, paragraph 588ZA(1)(d)]

3.36 The Court may examine the entities which make up the 'members of the same contribution order group', and determine whether they received any benefits. Only entities that receive benefits can be 'contributing entities'.

3.37 In determining whether the contributing entity has benefited from the work done by employees of the insolvent company, the Court could consider which entities in the contribution group the employees did work for, and which entities made payments for that labour.

Fifth requirement - benefit exceeds that which is reasonable in the circumstances

3.38 The fifth requirement is the Court must be satisfied that the benefit that the contributing entity has received exceeds the benefit that would be reasonable in the circumstances if the insolvent company and the contributing entity were dealing at arm's length. [Schedule 1, item 20, paragraph 588ZA(1)(e)]

3.39 To be satisfied of this requirement, the Court would determine the difference between a market rate for the services provided by the employees, and the actual amount paid or value of the consideration provided for those services. The following factors could be considered by the Court in making a determination of the excess benefit:

·
the price other entities in the contributing group, or a similar industry, pay for the work done by the employees;
·
what the labour cost incurred by the insolvent company for the employees that provided those services would have been if all obligations related to the employees were met;
·
any other dealings or offset type arrangements between the entities.

Example 3.3

Cabernet Pty Ltd is being wound up and the liquidator of the company, Jeremy, has applied to the Court for an employee entitlements contribution order.

Merlot Pty Ltd, Semillon Pty Ltd and Cabernet Pty Ltd are members of the same contribution order group.

The employees of Cabernet Pty Ltd undertook work for both Merlot Pty Ltd and Semillon Pty Ltd. Cabernet Pty Ltd charged both Merlot Pty Ltd and Semillon Pty Ltd $100,000 for that work. The actual market value of the work done by the employees is $200,000 for each of those entities.

Both Merlot Pty Ltd and Semillon Pty Ltd have benefited from the work done by those employees, and that benefit exceeds the arm's length value of the labour.

Sixth requirement - it is just and equitable to make the order

3.40 The sixth requirement is the Court must be satisfied that it is just and equitable to make the order in the particular case. [Schedule 1, item 20, paragraph 588ZA(1)(f)]

3.41 To assist the Court in making a determination that it is just and equitable to make an order, subsection 588ZA(4) outlines a number of factors that the Court may have regard to. These factors are:

·
the size of the excess benefit obtained by the contributing entity referred to in paragraph 588ZA(1)(e) (for example, if the benefit is nominal or immaterial or significant in nature);
·
the nature of the relationship between the contributing entity and the insolvent company;
·
any efforts made by the potential contributing entity or officers of the contributing entity, and officers of the insolvent company, to pay or to provide for the payment of the unpaid entitlements amount;
·
if the potential contributing entity is solvent, whether the order is likely to result in the contributing entity becoming insolvent;
·
the extent (if any) to which the order is likely to result in the contributing entity becoming unable to pay the entitlements of its own employees or make distributions to its creditors; and
·
any other matters that the Court considers are appropriate.
[Schedule 1, item 20, paragraphs 588ZA(4)(a) to (f)]

3.42 Matters the Court could consider under paragraph 588ZA(4)(f) could include:

·
the control and management relationship between the members of the contribution order group, and whether the insolvent entity had common officers with some or all of the other members of the contribution order group; and
·
efforts made by other members of the same contribution order group to avoid or prevent the making of a contribution order, such as by transferring assets from entities which received an excess benefit from the employee labour so that a contribution order would make the entity insolvent (note that paragraph 588ZA(4)(c) provides that the Court may have regard to whether making a contribution order is likely to result in the contributing entity becoming insolvent).

The Court may order a contributing entity to pay the liquidator

3.43 The Court may order the contributing entity to make a payment to the liquidator of the insolvent company that reflects the additional non-arm's length benefit obtained by that entity. This benefit is the excess amount referred to in paragraph 588ZA(1)(e), and is calculated as the difference between what was directly or indirectly paid for the benefit and what the Court believes would be reasonable in the circumstances if the insolvent entity and the contributing entity operated as if they were dealing at arm's-length terms. [Schedule 1, item 20, paragraph 588ZA(2)(a)]

3.44 The contribution order cannot exceed the unpaid employee entitlements of the insolvent company which are protected under Part 5.8A of the Corporations Act. [Schedule 1, item 20, paragraph 588ZA(2)(b)]

Example 3.4

Cabernet Pty Ltd had outstanding employee entitlements of $75,000 as a result of being wound up.

The Court determines the value of the extra benefit which Semillon Pty Ltd and Merlot Pty Ltd received due to them not dealing at arm's length with Cabernet Pty is $100,000.

The Court is satisfied of the other requirements in subsection 288ZA(1), and that it is just and equitable to make the order. However paragraph 588ZA(2)(b) limits the amount that Semillon Pty Ltd and Merlot Pty Ltd can contribute to the unpaid entitlements of Cabernet Pty Ltd to $75,000. The additional $25,000 benefit which Semillon Pty Ltd and Merlot Pty Ltd received, is not recoverable because it would exceed the amount of the outstanding employee entitlements.

Amount paid under a contribution order does not have priority

3.45 When a contributing entity pays the amount owing under the contribution order, this payment is not to be taken to be an advance of money for the purposes of section 560 of the Corporations Act. [Schedule 1, item 20, subsection 588ZA(3)]

3.46 Without this provision, a contributing entity could claim that the payment of a contribution order is an advance on account of wages or other employee entitlements, and the contributing entity could then seek to be repaid the amount as a priority creditor in the winding up of the company.

The Court has discretion to give effect to a contribution order

3.47 Where a contributing entity is a company, the Court has the discretion to order that an amount that the company has to pay under the contribution order, is to be treated, if the company eventually enters into winding up, as a priority employee entitlement under section 556 owing to the liquidator. [Schedule 1, item 20, paragraph 588ZA(5)(a)]

3.48 Additionally, the Court may make any orders and give any directions that the Court believes are necessary to give effect to a contribution order, and to ensure it is paid to the insolvent company's liquidator. [Schedule 1, item 20, paragraph 588ZA(5)(b)]

Section 588ZB - Applying to the Court for an employee entitlements contribution order

3.49 A Court can make an employee entitlements contribution order on receiving an application for such an order from:

·
the liquidator of the insolvent company;
·
the ATO;
·
the FWO; or
·
the Secretary of the Department administering the Fair Entitlements Guarantee Act 2012 (Cth).
[Schedule 1, item 20, subsection 588ZB(1)]

3.50 The liquidator of the insolvent company does not require permission from any party before making an application to the Court for an employee entitlements contribution order and is usually the primary person who would seek such an order. However, to provide flexibility in the operation of these provisions should the liquidator fail to or be unable to commence proceedings seeking a contribution order (for example, because the liquidator is not adequately funded), the government bodies mentioned in subsection 588ZB(1) may also commence proceedings subject to the requirements in subsection 588ZB(2).

3.51 The listed government bodies can only seek employee entitlements contribution order where they have either obtained the written consent of the liquidator or have obtained the leave of the Court. [Schedule 1, item 20, subsection 588ZB(2)]

3.52 In cases where the liquidator does not commence proceedings, the Court can grant leave to any of the government bodies to make an application for an employee entitlements contribution order. Before leave can be granted, the government body needs to request the liquidator's consent to make an application. If more than 30 days have passed since the government body made the request and the liquidator has not provided consent, or the liquidator has decided not to give consent, the Court can, if satisfied it is appropriate to do so, grant leave for the government bodies to commence the proceedings. [Schedule 1, item 20, subsection 588ZB(3)]

3.53 In determining whether it is appropriate to grant leave, the Court may have regard to:

·
whether the liquidator is likely to make an application for an employee entitlements contribution order; and
·
any other matters the Court considers relevant in each case.

Time limits for making an application for a contribution order

3.54 An application for an employee entitlements contribution order must be made within six years after the beginning of the winding up of the insolvent company. [Schedule 1, item 20, subsection 588ZB(4)]

Consequential amendments

3.55 There are no consequential amendments.

Application and transitional provisions

3.56 The provisions will apply from the day after Royal Assent, and will apply in relation to the winding up of a company (the insolvent company) that begins at or after commencement of the provisions. [Schedule 1, item 33, section 1648]

Chapter 4

Disqualification from managing corporations

Outline of chapter

4.1 Division 1 in Part 3 of Schedule 1 to the Bill amends Part 2D.6 of the Corporations Act to introduce new provisions to disqualify company directors and other officers with a track record of involvement in corporate contraventions and insolvencies where the FEG scheme has been inappropriately relied on.

4.2 Division 2 in Part 3 of Schedule 1 of the Bill contains a minor consequential amendment to the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth), to ensure that Act aligns with the changes being made to the Corporations Act by this Bill.

Context of amendments

4.3 Under Part 2D.6 of the Corporations Act, company directors and officers can be disqualified from managing corporations in certain circumstances. Disqualification of persons can occur automatically, by a Court order, or by a determination of ASIC.

4.4 The amendments to Part 2D.6 in the Bill introduce new disqualification provisions that better target company directors and officers whose behaviours inappropriately impact the FEG scheme.

Summary of new law

4.5 The Bill amends Part 2D.6 of the Corporations Act to introduce new provisions enabling ASIC and the Court to disqualify company directors and other officers who have a track record of involvement in corporate contraventions and insolvencies where the FEG scheme has inappropriately funded the payment of outstanding employee entitlements and there has been a minimal return to the Commonwealth.

4.6 The Court can disqualify a person if, within the last seven years, in relation to two or more corporations:

·
there was a corporate contravention by the company, or the person, while the person was an officer of the company; and
·
on each occasion:

-
the Commonwealth has received a minimal or no return on a FEG advance (whether or not the corporation is still being wound up or has been wound up); and
-
the Court is satisfied that the Commonwealth is unlikely to receive more than a minimal return on the advance.

4.7 ASIC can disqualify a person if, within the last seven years, in relation to two or more companies:

·
ASIC has reason to believe that there was a corporate contravention by the company, or the person, while the person was an officer of the company; and
·
on each occasion:

-
the Commonwealth has received a minimal or no return on a FEG advance (whether or not the corporation is still being wound up or has been wound up); and
-
ASIC has reason to believe that the Commonwealth is unlikely to receive more than a minimal return on the advance.

4.8 ASIC will be able to disqualify a person for up to five years. The Court will be able to disqualify a person for a period that the Court considers is appropriate.

4.9 Both ASIC and the Court must be satisfied that the disqualification is justified.

Comparison of key features of new law and current law

New law Current law
ASIC and the Court may disqualify persons from managing corporations where there has been a track record of involvement in:

·
corporate contraventions;
·
insolvencies; and
·
inappropriate reliance on the FEG scheme.

No equivalent.

Detailed explanation of new law

Section 206EAB: Court power of disqualification

4.10 Section 206EAB(1) allows a Court, on application by ASIC, to disqualify a person from managing corporations for a period of time that the Court considers appropriate, where the Court is satisfied the disqualification is justified and subsection 206EAB(2) applies to the person in relation to two or more corporations. [Schedule 1, item 26, subsection 206EAB(1)]

4.11 The Court can disqualify a person under section 206EAB where, within the last seven years, two corporations to which the person has been appointed as an officer had employees who relied on the FEG scheme for the payment of their outstanding employee entitlements and in relation to each corporation, within the seven year period:

·
there was a corporate contravention by the corporation while the person was an officer of the corporation which they did not take reasonable steps to prevent, or the corporate contravention was by the officer themselves while they were appointed to the corporation; and
·
an advance from the FEG scheme was made, and:

-
the Commonwealth has not received a return, or only received a minimal return of 10 per cent or less (whether the corporation is still being wound up or has been wound up); and
-
the Court is satisfied that the Commonwealth is unlikely to receive more than a 10 per cent return on its FEG advance.
[Schedule 1, item 26, subsections 206EAB(1), (2) and (3)]

4.12 The persons who may be disqualified by the Court are officers of a corporation and those who ceased being officers in the 12 months before the corporation began being wound up. This ensures that directors who engage in sharp corporate practices that result in insolvency and inappropriate reliance on FEG, but resign to avoid liability, are appropriately captured by the provisions. [Schedule 1, item 26, subsections 206EAB(1) and (2)]

4.13 The requirement in paragraph 206EAB(2)(c) for the Court to be satisfied that the Commonwealth is unlikely to receive more than a 10 per cent return on its FEG advance allows the provision to operate where a winding up has not yet been completed. Many liquidations can take several years to complete, and having to wait for a liquidation to be finalised could frustrate the objectives of the disqualification power in section 206EAB. This paragraph enables the Court to form a view on the likely return to the Commonwealth, and enables disqualification action to proceed even when a liquidation has not yet been finalised.

4.14 The Court might have regard to, for example, any reports provided by the liquidator to ASIC on the likely return to creditors in the winding up of the company, the potential impact of any litigation on foot in relation to the company, and other matters it considers relevant.

4.15 To be disqualified by the Court, a person must, within a seven year period, have contravened the requirements of the Corporations Act or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) in relation to each corporation while they were an officer of each corporation. Alternatively, at least two of the corporations of which they were an officer must have contravened either of those Acts while they were an officer and the person failed on each occasion to take reasonable steps to prevent those contraventions. [Schedule 1, item 26, paragraph 206EAB(2)(d)]

4.16 The requirement for a contravention to have occurred on each occasion by an officer of the corporation while appointed to that position, or by the corporation while the person was an officer of the corporation, is consistent with existing director disqualification provisions, being that:

·
a person can be disqualified from managing corporations by a Court where:

-
the person has, or the corporations they are responsible for have, contravened corporations law on multiple occasions; and
-
the person is responsible for multiple corporations which fail, and there is a resulting significant non-payment of each corporation's debts at the end of their winding up.

4.17 No causal connection is required between:

·
the contraventions by the officer of the corporation or the contraventions by the corporation mentioned in paragraph 206EAB(2)(d); and
·
either:

-
the resulting FEG advance made to former employees of the company; or
-
the resulting or likely minimal return of the FEG advance through the company's liquidation process.

4.18 The reason for not requiring a causal connection is to facilitate the protective purpose of section 206EAB.

4.19 Any corporate contravention the Court finds to have occurred, including minor contraventions by the company or the relevant person, could be sufficient to meet the requirements of paragraph 206EAB(2)(d). The Court could consider the nature and severity of the contraventions in determining whether the disqualification is justified.

4.20 Some examples of contraventions for the purposes of paragraph 206EAB(2)(d) include:

·
the failure of an officer to ensure the corporation kept books and records to the appropriate standard, or at all;
·
the destruction or loss of the books and records of the corporation, whether by an officer or employees of the corporation;
·
failing to assist or hindering the company's liquidator in their investigations;
·
failure by the person to comply with orders of ASIC, whether directed to them or the corporation; or
·
any other corporate contravention, such as contraventions of director duties, not providing required information or providing misleading information to ASIC, or not meeting financial reporting requirements.

Example 4.1

Arseni is the director of Whisky Bar Two Pty Ltd. Nik is the other director of that company. Whisky Bar Two Pty Ltd began its operations two years ago.

Arseni and Nik were previously the directors of Whisky Bar One Pty Ltd, which entered winding up three years ago. Arseni and Nik did not lodge any required documents with ASIC or keep any books and records for the company while it operated. All the former employees of Whisky Bar One Pty Ltd had their outstanding employee entitlements paid by FEG, totalling $2 million. At the finalisation of the liquidation a year ago, no return of that FEG advance was obtained.

Arseni and Nik have not lodged any required documents with ASIC in relation to Whisky Bar Two Pty Ltd since it began its operations. Further, they have not kept books and records for the company.

Arseni resigns from Whisky Bar Two Pty Ltd, and 11 months later, Nik has the company put into voluntary administration. The creditors of Whisky Bar Two Pty Ltd agree to have the company wound up four months later. $1 million in FEG is paid to the former employees of Whisky Bar Two Pty Ltd, and the liquidator has lodged a report with ASIC stating that there is no prospect of any return to creditors.

Even though the liquidation of Whisky Bar Two Pty Ltd is not finalised, ASIC will be able to apply to the Court to have both Nik and Arseni disqualified under section 206EAB because, within the last seven years:

·
Nik was the director of both companies at the time the companies were wound up and he or the company contravened the Corporation Act while he was a director;
·
Arseni was a director of Whisky Bar One Pty Ltd at the time when the company was wound up and he or the company contravened the Corporations Act while he was a director of the company;
·
Arseni was a director of Whisky Bar Two Pty Ltd 11 months prior to it being wound up and he or the company contravened the Corporations Act while he was a director of the company;
·
the former employees of Whisky Bar One Pty Ltd had some or all of their outstanding employee entitlements paid under the FEG scheme, and no return on the FEG advance was obtained in that liquidation; and
·
the former employees of Whisky Bar Two Pty Ltd had some or all of their outstanding employee entitlements paid under the FEG scheme, and it is unlikely that the Commonwealth will obtain more than a 10 per cent return of its advance.

It is a matter for the Court to decide if it is satisfied that the Commonwealth will receive no more than a minimal return of the FEG advances made to the former employees of Whisky Bar Two Pty Ltd.

If the Court is not satisfied of this, Arseni and Nik will not be able to be disqualified under section 206EAB.

4.21 The Court can take into account, when determining whether disqualification of a person is justified under section 206EAB, the relevant person's conduct in relation to the management, business and property of any corporation. The Court may also have regard to any other matters that the Court thinks are appropriate in determining whether disqualification is justified. [Schedule 1, item 26, subsection 206EAB(4)]

4.22 For example, other matters the Court could consider for the purposes of subsection 206EAB(4) include:

·
whether the person, or corporation the person was an officer of, complied with their obligations under the Corporations Act;
·
the impact of disqualification on the person or corporations they are currently an officer of;
·
information relating to the person's fitness to continue managing corporations in the future;
·
the nature or severity of the relevant corporate contraventions;
·
the impact disqualification might have on the person, or on the corporations they may currently be an officer of; and
·
whether disqualification will further the objectives of the Part and would be in the public interest.

4.23 The Court has ultimate discretion to determine what conduct, matters and information it has regard to in any case, and the weight it considers appropriate to assign to those matters.

Example 4.2

Arseni and Nik were previously the directors of Whisky Bar Zero Pty Ltd, which was wound up five years ago. That company's employees had their employee entitlements paid by FEG, however FEG received a full return of its advance in the liquidation.

Arseni and Nik are also the directors of Whisky Bar Prime Pty Ltd, which has successfully been operating cafes for the last 10 years. Whisky Bar Prime Pty Ltd has up-to-date company records and its operations to date have not raised Corporations Act compliance issues for ASIC.

In considering ASIC's application under section 206EAB for Arseni and Nik to be disqualified from managing corporations in connection with their conduct relating to Whisky Bar One Pty Ltd and Whisky Bar Two Pty Ltd, the Court has discretion to consider, and the extent it wishes to consider, any of the following matters (among other things):

·
Arseni and Nik's management of Whisky Bar One Pty Ltd and Whisky Bar Two Pty Ltd over the life of those companies;
·
Arseni and Nik's successful management of Whisky Bar Prime Pty Ltd over the last 10 years, and that the entity appears compliant with the Corporations Act;
·
that the winding up of Whisky Bar Zero Pty Ltd resulted in a full return of the FEG advance; and
·
the impact on Arseni and Nik, and the management of Whisky Bar Prime Pty Ltd, of Arseni and Nik being disqualified as company directors.

4.24 For the avoidance of doubt, subsection 206EAB(5) outlines that a reference to a corporation for the purposes of disqualifying persons under section 206EAB includes a reference to an Aboriginal and Torres Strait Islander corporation. [Schedule 1, item 26, subsection 206EAB(5)]

Section 206GAA: ASIC's power of disqualification

4.25 Section 206GAA allows ASIC to disqualify a person from managing corporations for up to five years if ASIC is satisfied the disqualification is justified, and where subsection 206GAA(2) applies to the person in relation to two or more corporations.

4.26 ASIC can disqualify a person under section 206GAA where, within the last seven years, two corporations to which the person has been appointed as an officer had employees who relied on the FEG scheme for the payment of their outstanding employee entitlements and in relation to each corporation, in the seven year period:

·
ASIC has reason to believe there was a corporate contravention by the company while the person was an officer of the corporation and they did not take reasonable steps to prevent it, or ASIC has reason to believe there was a corporate contravention by the officer themselves while they were appointed to the corporation; and
·
an advance from the FEG scheme was made, and:

-
the Commonwealth has not received a return or only received a minimal return of 10 per cent or less (whether the corporation is still being wound up or has been wound up); and
-
ASIC has reason to believe the Commonwealth is unlikely to receive more than a 10 per cent return on its FEG advance.
[Schedule 1, item 28, subsections 206GAA(1), (2) and (3)]

4.27 ASIC must provide the person with a notice outlining that ASIC intends to disqualify them from managing corporations, and provide them with an opportunity to be heard. [Schedule 1, item 28, paragraph 206GAA(1)(b)]

4.28 The persons who may be disqualified by ASIC include current officers of a corporation and those who ceased being officers in the 12 months before the company began being wound up. This ensures that directors who engage in sharp corporate practices that result in insolvency and inappropriate reliance on FEG, but resign to avoid liability, are appropriately captured by the provisions. [Schedule 1, item 28, paragraph 206GAA(2)(a)]

4.29 The requirement in paragraph 206GAA(2)(c) for ASIC to have a reason to believe the Commonwealth is unlikely to receive more than a 10 per cent return on its FEG advance allows the provision to operate where a winding up has not yet been completed. Many liquidations can take several years to complete, and having to wait for a liquidation to be finalised could frustrate the objectives the disqualification power in section 206GAA. This paragraph enables ASIC to form a view on the likely return to the Commonwealth, and enables disqualification action to proceed even when a liquidation has not yet been finalised.

4.30 ASIC might have regard to, for example, any reports provided by the liquidator to ASIC on the likely return to creditors in the winding up of the company, the potential impact of any litigation on foot in relation to the company, and other matters it considers relevant.

4.31 To be disqualified from managing corporations by ASIC, ASIC must have reason to believe that a person must have contravened the requirements of the Corporations Act or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) in relation to each corporation, while they were an officer of each corporation. Alternatively, ASIC must have reason to believe that at least two of the corporations of which they were an officer contravened either of those Acts while they were an officer and the person failed to take reasonable steps to prevent those contraventions. [Schedule 1, item 28, paragraph 206GAA(2)(d)]

4.32 The requirement in paragraph 206GAA(2)(d) that ASIC must have a reason to believe there was a corporate contravention means that ASIC can disqualify a person without a court finding that a contravention has occurred. This allows ASIC to take regulatory action to prevent further misconduct by disqualifying relevant persons under this section in a timely manner. This facilitates the protective purpose of the section.

4.33 No causal connection is required between:

·
the contraventions by the officer or the contraventions by the corporation mentioned in paragraph 206GAA(2)(d); and
·
either:

-
the resulting FEG advance made to former employees; or
-
the resulting or likely minimal return of the FEG advance through the company's liquidation process.

4.34 Any corporate contravention ASIC believes to have occurred, including minor contraventions by the company or the relevant person, could be sufficient to meet the requirements of paragraph 206GAA(2)(d). ASIC could consider the nature and severity of the contraventions it believes to have occurred in determining whether the disqualification is justified.

4.35 Some examples of contraventions which ASIC could consider for the purposes of paragraph 206GAA(2)(d) include those that the Court can consider in relation to paragraph 206EAB(2)(d), above.

Example 4.3

Sandya is the company director of Magic Pty Ltd and Mystical Pty Ltd, two separate companies which were in the business of selling antiques.

Magic Pty Ltd was wound up three years ago, after which Sandya incorporated a new business, Mystical Pty Ltd. Mystical Pty Ltd has recently entered winding up.

All the former employees of Magic Pty Ltd had their outstanding employee entitlements paid by the FEG scheme. No return was received at the finalisation of the liquidation process, which occurred one year ago.

All the former employees of Mystical Pty Ltd have now had their outstanding employee entitlements paid by the FEG scheme. The liquidator of Mystical Pty Ltd does not anticipate a return to any creditors of the company.

On examining the two cases, ASIC has reason to believe that Sandya has contravened the Corporations Act in relation to both entities as she failed to assist the liquidator.

ASIC sends a notice to Sandya requiring her to demonstrate why she should not be disqualified under section 206GAA from managing corporations, as ASIC has reason to believe that the Commonwealth is unlikely to receive more than a minimal return on the FEG advance, and for failing to assist the liquidator.

In the notice, ASIC outlines the ways Sandya can demonstrate why she should not be disqualified, and how she can exercise her opportunity to be heard.

4.36 For the purposes of determining whether disqualification is justified under section 206GAA, ASIC must have regard to whether the two or more corporations in question are related within the meaning of section 50 of the Corporations Act. This means ASIC must have regard to the relationship between the corporations, which is particularly relevant to situations involving the failure of a corporate group involving multiple insolvent companies that have inappropriately relied on FEG. [Schedule 1, item 28, paragraph 206GAA(4)(a)]

4.37 In determining whether disqualification is justified, ASIC may also have regard to:

·
the person's conduct in relation to the management, business or property of any corporation;
·
whether disqualification would be in the public interest; and
·
any other matters ASIC considers appropriate such as:

-
whether the person, or corporation the person was an officer of, complied with their obligations under the Corporations Act;
-
information relating to the person's fitness to continue managing corporations in the future;
-
the nature and severity of the corporate contraventions; and
-
the impact disqualification might have on the person, or on the corporations they may currently be an officer of.
[Schedule 1, item 28, paragraph 206GAA(4)(b)]

Example 4.4

Sandya, the company director of Magic Pty Ltd and Mystical Pty Ltd, has set up a new venture, Sorcerer Pty Ltd. This company will continue selling antiques.

ASIC believes Sandya poorly managed both Magic Pty Ltd and Mystical Pty Ltd. Also, the liquidator of Magic Pty Ltd lodged a report with ASIC three years ago, outlining a range of suspected contraventions of the Corporations Act.

In determining whether it is justified to disqualify Sandya from managing corporations under section 206GAA, ASIC could have regard to a range of matters potentially including:

·
Sandya's management of Magic Pty Ltd and Mystical Pty Ltd while they were operating, including the period leading up to them being wound up;
·
the content of the report provided to ASIC by the liquidator of Magic Pty Ltd; and
·
whether disqualification would be in the public interest.

4.38 For the avoidance of doubt, subsection 206GAA(5) outlines that a reference to a corporation for the purposes of disqualifying persons under section 206GAA includes reference to an Aboriginal and Torres Strait Islander corporation. [Schedule 1, item 28, subsection 206GAA(5)]

4.39 When ASIC disqualifies a person under section 206GAA, they must serve the person with a notice that advises them they have been disqualified. [Schedule 1, item 28, subsection 206GAA(6)]

4.40 The disqualification of the person takes effect from the time the notice is served on the person. [Schedule 1, item 28, subsection 206GAA(7)]

4.41 A person dissatisfied with ASIC's decision to disqualify them under section 206GAA can seek review of the disqualification decision by the Administrative Appeals Tribunal under section 1317B of the Corporations Act.

Section 206GAB: ASIC power to grant leave to manage corporations

4.42 Section 206GAB allows ASIC to grant leave to persons who have been disqualified from managing corporations by ASIC under sections 206F and 206GAA of the Corporations Act, to manage a particular corporation or corporations. [Schedule 1, item 28, section 206GAB]

4.43 ASIC can determine any conditions and exceptions which it considers are appropriate if it grants leave to a person to manage corporations. [Schedule 1, item 28, section 206GAB]

4.44 ASIC previously had a power to grant leave to persons to manage corporations, if ASIC disqualified those persons for contravention of section 206F. Subsection 206F(5) which provided ASIC this power, has been repealed and incorporated into the new section 206GAB. [Schedule 1, item 27, subsection 206F(5)]

4.45 The legislative amendment to repeal subsection 206F(5) requires a number of minor consequential amendments to the Corporations Act to update cross references which referred to the power to grant leave to relevant persons to be able to manage corporations under section 206F. [Schedule 1, items 21, 22, 23, 24 and 25, subsection 201B(2), section 203B, subsection 204B(2), section 204G, and subsections 206A(1B) and (2)]

Section 1274AA: Register of disqualified company directors and other officers

4.46 Minor amendments are made to section 1274AA to outline that ASIC's register of disqualified persons must include:

·
details of those persons disqualified by the Court under section 206EAB.
·
details of those persons disqualified by ASIC under section 206GAA;
·
information on every notice of disqualification issued by ASIC to persons under subsection 206GAA(6); and
·
information on every permission ASIC has given to disqualified persons to be able to manage certain corporations, under section 206GAB.
[Schedule 1, items 29, 30 and 31, paragraphs 1274AA(1)(a), 1274AA(2)(ab) and 1274AA(2)(c)]

Consequential amendments

4.47 Division 2 in Part 3 of Schedule 1 to the Bill contains a consequential amendment to paragraph 279-35(2)(b) of the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth).

4.48 The minor amendment to this paragraph specifies that a person who has been disqualified from managing Aboriginal and Torres Strait Islander corporations is not able to apply to the Court for a grant of leave to manage such corporations, if ASIC has disqualified the person from managing corporations under section 206GAA of the Corporations Act. [Schedule 1, item 32, paragraph 279-35(2)(b)]

4.49 This minor amendment is consistent with the current prohibition contained in paragraph 279-35(2)(b) of the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth), which prevents a person who is disqualified from managing Aboriginal and Torres Strait Islander corporations from applying to the Court for leave to manage such corporations, if ASIC has disqualified the person from managing corporations under section 206F of the Corporations Act.

Application and transitional provisions

4.50 Part 10 of the Corporations Act is amended to insert transitional provisions concerning the application of new sections 206EAB and 206GAA. [Schedule 1, item 33, section 1649]

4.51 The seven year period in which the two new provisions can apply is able to include a period up to five years before the day on which the new disqualification begin operation. [Schedule 1, item 33, subsection 1649(1)]

4.52 A person can only be disqualified from managing corporations under the new sections by a Court or ASIC if at least one of the corporate contraventions by the officer, or by the corporation while the person was an officer, is:

·
proven to the satisfaction of the Court to have occurred (for the purposes of section 206EAB) after the commencement of that section; or
·
something which ASIC has reason to believe occurred (for the purposes of section 206GAA) after the commencement of the section.
[Schedule 1, item 33, subsection 1649(2)]

4.53 A permission given by ASIC to a person that they can manage certain corporations under subsection 206F(5) that was in force immediately before the commencement of the Bill, continues to be in force (and may be dealt with) as if it had been given under section 206GAB. [Schedule 1, item 33, subsection 1649(3)]

Chapter 5

Regulation impact statement

The problem

5.1 The Australian Government operates the FEG scheme which assists certain employees when their employer's business fails and the employer has not made adequate provision for employee entitlements (such as accrued leave, redundancy payments and unpaid wages). It is a scheme of last resort to support redundant workers.

5.2 Average annual costs under the FEG scheme has more than tripled from $70.7 million in the four year period between 1 July 2005 and 30 June 2009, to $235.3 million in the four year period between 1 July 2014 and 30 June 2018.

5.3 Certain employers are deliberately structuring their corporate affairs using sharp corporate practices to avoid paying employee entitlements when a business becomes insolvent. This is contributing to the upward cost trend of the scheme.

Case for government action/objective of the reforms

5.4 While use of such corporate practices is not always unlawful, they place an unfair burden on taxpayers where those practices result in improper reliance on the FEG scheme. Sharp corporate practices also impact other parties such as suppliers of goods and services who are not paid, and commercially disadvantage other businesses who pay all their debts including their employee entitlements.

5.5 Government departments and agencies are adopting a range of administrative actions and legal approaches to assist in mitigating the impacts of sharp corporate practices on the FEG scheme.

5.6 While this assists, the actions are largely targeted at illegal activities after they have occurred and do not address all the sharp corporate practices adopted by corporate employers, their representatives and other parties to insolvencies.

5.7 The current law does not adequately mitigate the risks and costs imposed on the community and appropriately deter or sanction the behaviour of:

·
those involved in agreements or transactions which result in the intentional avoidance or reduction of the recovery of employee entitlements, which results in inappropriate reliance on FEG;
·
those using a corporate or other entity group structure to avoid or reduce their exposure to meet employee entitlement obligations which results in inappropriate reliance on FEG; and
·
company officers and directors who have a history of corporate contraventions and involvement in insolvencies, where FEG is repeatedly and inappropriately used to pay part or all of the outstanding employee entitlements.

5.8 To address these behaviours, enforcement focussed law reform is required.

5.9 The key objective of the targeted law reforms is to mitigate the impact of misuse of the FEG scheme and to improve recovery of FEG payments and outstanding employee entitlements.

Policy options and consultation

5.10 The enforcement related reforms in the Bill were the subject of extensive public consultation processes conducted during 2017 and 2018, aimed at ensuring the reforms were appropriate and sufficiently targeted to address the corporate misuse that has been identified.

5.11 This process included consultation on potential policy reform options in 2017, and consultation on an exposure draft of the Bill in 2018.

5.12 The consistent feedback from stakeholders throughout the consultation processes was that law reforms to address corporate misuse of the FEG scheme should be made, and that those responsible for such behaviours need to be appropriately sanctioned.

Regulatory impacts of the reforms

5.13 The enforcement related reforms in this Bill will only:

·
impact companies, company directors and officers and other persons, who have undertaken or engaged in inappropriate transactions to avoid, reduce or prevent the payment of employee entitlements, in breach of Part 5.8A of the Corporations Act;
·
apply to a small minority of corporate or entity groups which have avoided paying the costs related to redundant employees of their group, where the group has capacity to pay for those costs but does not do so; and
·
apply to sanction a small number of company directors and officers, being those with a track record of corporate contraventions and involvement in insolvencies where FEG is inappropriately relied upon.

5.14 There will be one-off education costs on the wider business community related to the reforms. These have been estimated at $150,000 on an annualised basis.

Chapter 6

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018

6.1 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

6.2 The Bill makes amendments to the Corporations Act to strengthen enforcement and recovery options relating to unpaid employee entitlements when a corporate employer becomes insolvent.

6.3 Part 1 of Schedule 1 to the Bill makes amendments to the Corporations Act to strengthen the Part's operation to ensure it achieves its policy aim of deterring and punishing the avoidance of employee entitlements and protecting such entitlements from agreements or transactions that would operate to defeat their payment or recovery. In summary:

·
the current criminal offence provision is extended to capture a wider range of situations by lowering the fault element to include circumstances when a person recklessly enters into transactions to avoid, prevent or significantly reduce the recovery of employee entitlements or are likely to have those effects;
·
a new civil penalty provision with an objective 'reasonable person' test is created to increase the enforcement options available when transactions to avoid, prevent or significantly reduce the recovery of employee entitlements has been entered into;
·
a new civil compensation provision is introduced to provide a mechanism to compensate those who have suffered loss or damage as a result of contraventions to the civil penalty provision;
·
the criminal offence and civil penalty provisions are expanded to capture officers of a company who cause the company to enter into a transaction that contravenes the criminal and civil penalty provisions;
·
similar to the criminal offence provisions, the civil penalty and compensation provisions capture those who are involved in contraventions of the civil penalty provisions;
·
the parties who can commence civil compensation proceedings are expanded to include the ATO, the DJSB and the FWO, to enhance recovery of unpaid employee entitlements; and
·
various drafting improvements of existing provisions have been made to enhance clarity and readability.

6.4 Part 2 of Schedule 1 to the Bill inserts new provisions into Part 5.7B of the Corporations Act that allow contributions to be sought from certain entities in a corporate group or entities with a closely connected economic relationship, for the payment of outstanding employee entitlements of an insolvent company in limited circumstances. In summary, the amendments provide that:

·
a liquidator (and, in certain circumstances, the ATO, FWO, and DJSB) will be able to seek an 'employee entitlements contribution order' that requires an entity within the same 'contribution order group' as an insolvent company to contribute to the payment of the insolvent company's employee entitlement liabilities where:

-
it is 'just and equitable'; and
-
the entity has benefited, directly or indirectly, from the labour of the employees of the insolvent company on other than arms-length terms;

·
the scope of the 'employee entitlements contribution order' is limited to the entitlements protected under Part 5.8A; and
·
the Court will determine, as part of the proceedings:

-
the existence and composition of a 'contribution order group';
-
the value of the 'benefit' that the contributing entity received, and whether it provided arm's length consideration for that benefit; and
-
whether making the contribution order is 'just and equitable'.

6.5 Division 1 in Part 3 of Schedule 1 to the Bill amends Part 2D.6 of the Corporations Act to introduce new provisions to disqualify company directors and other officers with a track record of involvement in corporate contraventions and insolvencies where the FEG scheme has been inappropriately relied on.

6.6 The Court can disqualify a person if, within the last seven years, in relation to two or more corporations:

·
there was a corporate contravention by the company, or the person, while the person was an officer of the company; and
·
on each occasion:

-
the Commonwealth has received a minimal or no return on a FEG advance (whether or not the corporation is still being wound up or has been wound up); and
-
the Court is satisfied that the Commonwealth is unlikely to receive more than a minimal return on the advance.

6.7 ASIC can disqualify a person if, within the last seven years in relation to two or more companies:

·
ASIC has reason to believe that there was a corporate contravention by the company, or the person, while the person was an officer of the company; and
·
on each occasion:

-
the Commonwealth has received a minimal or no return on a FEG advance (whether or not the corporation is still being wound up or has been wound up); and
-
ASIC has reason to believe that the Commonwealth is unlikely to receive more than a minimal return on the advance.

6.8 ASIC will be able to disqualify company directors and officers for a period of up to five years. The Court will be able to disqualify company directors and officers for a period that the Court thinks is appropriate. Both ASIC and the Court must be satisfied that the disqualification is justified.

6.9 Part 4 of Schedule 1 to the Bill provides transitional rules for the amendments in the Bill. Part 4 provides that:

·
the amendments in Part 1 will apply to agreements or transactions entered into at or after commencement;
·
the amendments in Part 2 will apply in relation to the winding up of a company that begins at or after commencement; and
·
the disqualification powers in Part 3 apply from commencement, but a person may be disqualified under the provisions on the basis of things that occurred in the 5 years prior to commencement if at least one of the corporate contraventions required to trigger the disqualification provisions takes place after commencement.

Human rights implications

6.10 The Bill engages the following human rights:

·
criminal and civil penalties for persons entering into or causing entry into agreements and transactions to avoid employee entitlements (and accessories to this conduct);
·
the right to be presumed innocent until proven guilty according to law under article 14(2) of the ICCPR;
·
a person's right to freely determine their economic development and right not to be deprived of their means of subsistence under article 1 of the ICCPR.

Criminal and civil contraventions for agreements and transactions to avoid employee entitlements

6.11 The amendments in Part 1 of Schedule 1 to the Bill to:

·
extend the existing criminal offence to capture persons that recklessly enter into, or cause entry into, agreements or transactions to prevent, avoid or significantly reduce the amount of employee entitlements that may be recovered; and
·
create a new civil penalty provision for persons that enter into agreements or transactions that are likely to prevent or avoid or significantly reduce the amount of employee entitlements that may be recovered;

do not engage any human rights to the extent that they apply to corporations.

6.12 The amendments in Part 1 of Schedule 1 extend the existing criminal offence to capture persons that recklessly enter into, or cause entry into, agreements or transactions to prevent, avoid or significantly reduce the amount of employee entitlements that may be recovered. Natural persons can be captured by these amendments. It is appropriate for natural persons who contravene the criminal offence to be captured given the seriousness of entering into transactions or agreements to prevent or avoid or significantly reduce the amount of employee entitlements that may be recovered.

6.13 The amendments in Part 1 of Schedule 1 allow courts to order individual defendants:

·
serve an imprisonment term of up to 10 years;
·
pay a fine of up to a maximum of 4,500 penalty units (currently $945,000);
·
if the court can determine the value of benefits obtained and are reasonably attributable to the commission of the offence, pay three times that total value; or
·
both a term of imprisonment, and the greater of a fine or three times the value of benefits.

6.14 The existing criminal offence provisions operate to capture those involved in a contravention of those provisions. The amendments in Part 1 of Schedule 1 will now capture those involved (including natural persons) in a contravention of the civil penalty provision as accessories. It is appropriate for natural persons who are involved in contravening the civil penalty provisions to be captured given the seriousness of assisting a company enter into transactions or agreements to prevent or avoid or significantly reduce the amount of employee entitlements that may be recovered.

6.15 The introduction of the civil penalty provision to officers of companies and accessories more broadly will strengthen the enforcement options available to ASIC, the liquidator and the ATO.

6.16 Civil penalty provisions within the Corporations Act allow courts to order individual defendants to pay penalties of up to $200,000 where there has been a breach of a relevant civil penalty provision. Once a court decides a breach of a civil penalty provision has occurred, ASIC can apply to the Court to seek disqualification orders of relevant persons from managing corporations for a period of time the Court considers appropriate. As the civil penalty regime does not impose criminal sanctions, having it operate alongside the criminal offence is consistent with article 14 of the ICCPR.

6.17 The amendments in Part 1 of Schedule 1 also extend the criminal offence, civil penalty and civil compensation provisions so that they apply to a company officer who cause a company of which they are an officer, to enter into relevant agreements or transactions to prevent or avoid the payment of, or significantly reduce the amount of, employee entitlements liabilities which can be recovered from that company.

6.18 It is appropriate for company officers who cause a company to enter into transactions or agreements to prevent or avoid or significantly reduce the amount of employee entitlements that may be recovered to be subject to a criminal offence and civil penalty because of the seriousness of the conduct.

6.19 Civil penalty provisions within the Corporations Act allow courts to order individual defendants to pay penalties of up to $200,000 where there has been a breach of a relevant civil provision. Once a court decides a breach of a civil penalty provision has occurred, ASIC can apply to the Court to seek disqualification orders of relevant persons from managing corporations for a period of time the Court considers appropriate. As the civil penalty regime does not impose criminal sanctions, having it operate alongside the criminal offence is consistent with article 14 of the ICCPR.

Right to the presumption of innocence under article 14(2) of the ICCPR

6.20 Article 14(2) of the ICCPR provides that everyone charged with a criminal offence has the right to be presumed innocent until proven guilty according to law. Generally, consistency with the presumption of innocence requires the prosecution to prove each element of a criminal offence beyond reasonable doubt. It may, however, be appropriate to limit this right is certain circumstances.

6.21 The amendments in Part 1 of Schedule 1 provide for some offence specific defences where the evidential burden is shifted from the prosecution to the defendant. In these cases, a defendant has an evidential burden to point to some evidence that suggests a reasonable possibility that a matter exists or does not exist.

6.22 The first of the offence specific defences is new subsection 596AB(2B), which provides that the criminal offence provisions do not apply to a compromise or arrangement approved by the Court for the company, or a DOCA executed by the company.

6.23 In this case, it is appropriate for a defendant to have the burden of pointing to some evidence that the relevant agreement or transaction is a compromise or arrangement approved by the Court or a DOCA executed by the company because it will be peculiarly within the defendant's knowledge that the relevant agreement or transaction was entered into on this basis because:

·
they would almost always be an officer of the company, or have a strong connection to the company;
·
they would have been involved in a court process related to the compromise;
·
they would be parties to a DOCA; and
·
they would have access to company records and documents that would establish a compromise was proposed and approved, or a DOCA was executed.

6.24 It would also be significantly more difficult and costly for the prosecution to disprove the fact that the relevant agreement or transaction is a compromise or arrangement approved by the Court or a DOCA executed by the company.

6.25 The second of the offence specific defences is new subsection 596AB(2C) which provides that the criminal offence provisions do not apply to a liquidator or provisional liquidator of the company that causes a company to enter into the relevant agreement or transaction in the course of winding up the company.

6.26 In this case, it is appropriate for a liquidator or provisional liquidator to point to some evidence that the relevant agreement or transaction was entered into in the course of winding up the company because the circumstances of the agreement will be peculiarly within the liquidator or provisional liquidator's knowledge. Liquidators and provisional liquidators undertake a range of statutory duties when they are appointed to wind up a company. They are in charge of managing the company's affairs and will have access to information that would suggest whether a relevant matter in subsection 596AB(2C) exists or does not exist.

6.27 It would also be significantly more difficult and costly for the prosecution to disprove the fact that the relevant agreement or transaction was not entered into in the course of winding up the company.

6.28 The third of the offence specific defences is new subsection 596AC(8) which provides that the new civil penalty provisions do not apply to:

·
relevant agreements or transactions that are a compromise or arrangement approved by a Court or a DOCA executed by the company; or
·
liquidators or provisional liquidators of a company that cause a relevant agreement or the transaction to be entered into in the course of winding up the company.

6.29 The civil penalty provisions are not criminal offences and the requirement for the prosecution to bear the burden of proof for criminal offences does not apply.

6.30 Even if this was not the case, it would still be appropriate for a defendant to have the burden of pointing to some evidence that the relevant agreement or transaction is a compromise or arrangement approved by the Court or a DOCA executed by the company because it would be peculiarly within the defendant's knowledge that the relevant agreement or transaction was entered into on that basis. This is because:

·
they would almost always be an officer of the company, or have a strong connection to the company;
·
they would have been involved in a court process related to the compromise;
·
they would be parties to a DOCA; and
·
they would have access to company records and documents that would establish a compromise was proposed and approved, or a DOCA was executed.

6.31 It would also be significantly more difficult and costly for the prosecution to disprove the fact that the relevant agreement or transaction is a compromise or arrangement approved by the Court or a DOCA executed by the company.

6.32 Similarly, it is also appropriate for a liquidator or provisional liquidator to point to some evidence that the relevant agreement or transaction was entered into in the course of winding up the company because the circumstances of the agreement will be peculiarly within their knowledge. Liquidators and provisional liquidators undertake a range of statutory duties when they are appointed to wind up a company. They are in charge of managing the company's affairs and will have access to information that would suggest whether a relevant matter in paragraph 596AC(7)(b) exists or does not exist.

6.33 It would also be significantly more difficult and costly for the prosecution to disprove the fact that the relevant agreement or transaction was not entered into in the course of winding up the company.

6.34 All three offence specific defences are therefore consistent with article 14(2) of the ICCPR.

Right to freely determine economic development and right not to be deprived of the means of subsistence under Article 1 of the ICCPR

6.35 Article 1 of the ICCPR provides that people have the right of self-determination which includes the right to freely pursue their economic development and should not be deprived of their own means of subsistence.

6.36 The amendments in Part 3 of Schedule 1 engage Article 1 of the ICCPR because they provide a Court or ASIC with the ability to disqualify someone from managing corporations if, within the last seven years in relation to two or more corporations:

·
there was a corporate contravention by the company, or the person, while the person was an officer of the company; and
·
the person or corporation has been involved in insolvencies where the FEG scheme has funded the payment of outstanding employee entitlements and has received a nil or minimal return.

6.37 A person who is disqualified under these provisions would not be allowed to manage corporations for the period of the disqualification. Restricting a person's ability to manage a corporation in this way is consistent with Article 1 of the ICCPR. This is because the legitimate policy objective of the disqualification provisions is the protection of the community from the potential damage that officers of a corporation who have serially mismanaged corporations in the past would likely produce in the market in the future (including to employees, other company creditors and the taxpayer through the FEG scheme) if they were allowed to continue managing corporations.

6.38 Preventing company officers with a track record of serially mismanaging corporations and inappropriately relying on FEG to pay their employee's entitlements from managing corporations is the most effective way of preventing further misuse which would impact future employees, company creditors and the taxpayer through the FEG scheme.

6.39 The new disqualification powers are proportionate because they are only triggered when, on two separate occasions within a seven year period, there is a corporate contravention by the person or company, and the person or corporation was involved in insolvencies where the FEG scheme was inappropriately relied on.

6.40 The disqualification provisions are protective disciplinary measures rather than criminal sanctions. Having the disqualification powers apply alongside the criminal and civil penalty provisions in Part 1 of Schedule 1 is therefore appropriate and consistent the ICCPR, including Article 14 which provides for protections against double jeopardy for criminal offences.

6.41 The disqualification provisions only apply from the time the Bill commences and can only be used against someone prospectively. The transitional rules in Part 4 of Schedule 1 do, however, provide that past corporate contraventions or involvement in insolvencies where the FEG scheme has funded the payment of outstanding employee entitlements can be taken into account in limited circumstances.

6.42 Past conduct within the previous five years will only be taken into account where there is a corporation contravention again after the commencement of the provisions. This approach balances the need to protect the community from individuals who already have a track record of corporate contraventions and insolvent companies that inappropriately rely on FEG with the need to give notice to the individuals concerned that their behaviour could result in their disqualification.

6.43 Under the approach adopted, serial offenders who already have a track record of corporate contraventions and inappropriately relying on FEG will be subject to the disqualification powers after they commit another corporate contravention. For everyone else they will only be within scope of the disqualification power after they commit corporate contraventions and cause FEG to be invoked on two separate occasions within a 7 year period.

6.44 The disqualification powers in Part 3 of Schedule 1 are therefore consistent with the ICCPR.

Conclusion

6.45 This Bill is compatible with human rights as it does not raise any human rights issues.


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