Andrew Murray (WA, Australian Democrats) Share this | Hansard source

The Corporations Amendment (Insolvency) Bill 2007 has been a long time coming. In fact, it has been nearly a decade since these measures were first discussed, and during that decade, which is most of my time in this place, I have been campaigning for amendments along these lines.

The Australian Democrats have worked hard to achieve a well-regulated corporate sector in Australia. It has always made sense to me that to have an effective corporate sector you must have a well-regulated, modernised corporate insolvency program. I proposed the inquiry, and the result was the June 2004 Parliamentary Joint Committee on Corporations and Financial Services report titled Corporate insolvency laws: a stocktake. It was a good report, if I may say so.

After two years, the coalition government responded favourably to that report, but it has still taken until late 2007 for the legislation to come forward. I do recognise that there was ongoing and quite considerable consultation between Treasury, ASIC and external stakeholders during that time, as well as the distribution of the exposure draft to the bill, and the committee report on that exposure draft earlier this year. However, it has been a slow process, and many Australians have been negatively impacted because of the delay in these reforms coming through.

In contrast to a determined and sprightly reform agenda for Corporations Law, the coalition has dragged its heels on insolvency reform. We have watched the misery on the faces of employees done over because their entitlements have been lost. We have seen the blight of phoenix companies in the building industry and property development. We have seen creditors and investors taken for a ride.

According to the Bills Digest, the purpose of the Corporations Amendment (Insolvency) Bill 2007 is to implement a package of reforms to improve Australia’s insolvency laws. There are six schedules to the bill, and the amendments to the Corporations Act by each schedule deal with the following reform themes.

Schedule 1 seeks to improve outcomes for creditors by: enhancing protection for employee entitlements; better informing creditor decisions; streamlining external administration; and facilitating pooling in external administration. Schedule 2 will implement measures to deter corporate misconduct. Schedule 3 has measures to improve regulation of insolvency practitioners. Schedule 4 includes measures to finetune voluntary administration in respect of rights to property during administration and liquidation following administration. Schedule 5 deals with miscellaneous amendments, including priority of administrative expenses in voluntary liquidation. Schedule 6 deals with transitional measures. According to the explanatory memorandum there is no direct revenue or financial impact from this legislation for the government.

Schedule 1 is welcome. Although it does not exactly reflect the recommendation of the Stocktake report, it does improve the position of employee entitlements. It does make it mandatory that the deed of company arrangement provides priority to employee creditors in a winding-up, unless the employees agree to waive the priority or the court makes an order differing from that.

I note that if a dispute arises, there is provision for creditors as a whole and eligible employee creditors to have the matter resolved by a court and the action can be initiated by the administrator so that an eligible employee creditor or an interested party is catered for. Although this is not ideal, and often employees may not feel in a position to initiate action to recover their entitlements, at least the avenue is now there and hopefully if an employee has been duped out of a significant sum of money then they would be motivated or able to bring an action.

The bill clarifies the way in which the superannuation guarantee charge should be treated in insolvency. The provisions ensure that the superannuation guarantee charge is given the highest priority, along with wages and entitlements that employees enjoy under the law. As has been pointed out, this significantly improves the recovery prospect of outstanding superannuation entitlements, if an employer becomes insolvent.

The bill also provides that insolvency practitioners will be under greater scrutiny and they must declare any prior advisory or other relevant relationships with the company to the creditors, and provide timely information on the fees they will charge. ASIC is working together with the IPAA on administrator independence. Although this is now enshrined in legislation, it has been part of the IPAA’s best practice guide since 2003. Such legislative change means that high-quality practitioners, who set the bar for quality work, will not have to change their practice at all, while those who have been doing less than is required are now legally obliged to meet that standard.

The report from the Joint Committee on Corporations and Financial Services also looked at the practice of phoenix companies, where a company is established, it goes bust and assets are transferred to another company, those involved with the company continue trading in the second company, while the creditors of the first company are left high and dry. And then unscrupulous business people repeat the process again and again. These companies avoid their liabilities to their creditors and to their employees. This was a practice endemic in the building industry for many years and it appears now to have gravitated to the property development area.

In response to the Stocktake report, the government and ASIC established the Assetless Administration Fund. This fund was established to finance investigations by liquidators into cases where it appeared to ASIC that further investigation and reporting may lead to enforcement actions. This combined effort, using the skills of insolvency practitioners in the private sector, paid for through the Assetless Administration Fund, provides ASIC with information to identify and pursue misconduct by company officers in the lead-up to company failure.

According to ASIC’s website, in 2006 they banned 40 directors for a total of 144 years for engaging in misconduct following company failures and repeat phoenix activity. Of those 40 bannings, 15 were based on information provided by liquidators who received funding from the Assetless Administration Fund, and ASIC further banned 25 people as part of its efforts against phoenix activity. I point out that it was the corporations committee that first focused ASIC’s mind on phoenix behaviour. I commend the government for the level of funding that it is willing to provide to ASIC to continue with this important work.

When the Stocktake report came out in 2004, the committee was looking back at a couple of the most spectacular corporate failures in Australian history: HIH and One.Tel. Now, as I make these remarks, we know that those two were not the end of it. In the last couple of years we have watched with some horror as Westpoint, Fincorp, Bridgecorp and others have collapsed, taking with them much of the life savings of those Australians who had invested in them.

Although this bill addresses one aspect of insolvency in Australia, there is still the ability of corporations to limit their liability by restructuring their companies using related companies to deprive creditors, including employees, of access to assets when a subsidiary collapses. In fact, this government at the end of the last sitting passed the Financial Sector Legislation Amendment (Restructures) Bill 2007, which created a legal mechanism whereby companies could achieve this through non-operating holding companies. As I have said previously, when companies were originally conceived, it was intended that they would provide a benefit of limited liability to their owners—namely, the shareholders. It was not intended that they should be able to be manipulated to allow for the separation of assets in one company and liabilities in another, resulting in those to whom money is owed having access to no significant assets to satisfy their entitlements or not being able to recover liabilities from the parent or holding company.

On behalf of the Democrats, I have several times over the last decade brought an amendment to the Senate in an attempt to implement the recommendations of the Harmer Law Reform Commission report in 1988. Harmer proposed making related companies liable for the debts of insolvent companies in limited circumstances. With those limited circumstances it would still be up to a court to consider matters like the extent to which the related company took part in the management of the insolvent company, the conduct of the related company towards the creditors of the insolvent company and the extent to which the circumstances that gave rise to the winding-up are attributable to the actions of the related company.

Labor has supported these Democrat initiatives a number of times in the Senate, but for the same number of times the coalition has refused what I regard as an obvious reform. Its refusal continues to benefit those who wish to abuse the system. In the light of the new legislation before us and of the government’s refusal to adopt that particular aspect of the Harmer Law Reform Commission Report, this legislation is welcome, but I fear that it will not be as effective as it could be in the circumstances without the Harmer Law Reform Commission’s recommendation being put into law.

Since the Stocktake report of 2004, the government has been in ongoing consultation with a number of industry bodies and stakeholders, as was evidenced by the corporations committee March 2007 report on the Corporations Amendment (Insolvency) Bill 2007 exposure draft and the Corporations and Australian Securities and Investments Commission Amendment Regulations 2007 exposure draft. The committee commented that evidence received during that inquiry justified the committee’s decision to revisit a number of recommendations from its 2004 Stocktake report. I hope that the government will take them into account and respond favourably to them. In 2007 the committee reported that it found either in-principle or strong support for most of the recommendations rejected by the government from the accounting bodies, the IPAA and the Law Council. It is unfortunate these were not included in this legislation; it is unfortunate the committee’s recommendations have not been brought forward.

The main insolvency and accounting bodies endorsed the exposure draft bill and stated that it reflects much needed reforms. As I said previously, the IPAA have implemented some of the aspects of this legislation in their best practice guide already and should be commended for doing so. Although the committee recommended that the bill pass before the end of the financial year 2006-07, and although that was not achieved, I am grateful that at least this bill will pass prior to the calling of the election. I have deliberately, on behalf of the Democrats, ensured that this should happen in the non-controversial period of the Senate’s deliberations.

I note in passing that Treasury has confirmed that there is probably a need for additional amending legislation relating to insolvency to address new developments, in particular those arising from the collapse of the Sons of Gwalia. I am hopeful, as I am sure are many investors and employees in Australia, that these amendments will tighten the insolvency laws considerably and that future corporate collapses will not throw up too many more shortcomings in the legislation that need to be fixed. In conclusion, the Democrats support this bill in full.