Katy Gallagher (ACT, Australian Labor Party) Share this | Hansard source

I welcome the opportunity to speak on the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017. Labor supported passage of this bill in the other place, but in doing so, and in the speeches that my colleagues gave, we indicated that we would reserve our final position for debate in the Senate following further inquiries.

Labor have looked closely at this bill. We have listened to stakeholders, consulted further and, indeed, consulted with the government. We have determined through these discussions that we will move amendments to strengthen part 1 of schedule 1 of the bill, namely the new safe harbour provisions for directors in relation to insolvent trading. These amendments broadly align with the Productivity Commission's 2015 recommendations for how the safe harbour should operate.

Australia's insolvent-trading laws impose a duty on company directors to prevent a company from trading whilst insolvent. Directors who breach this duty can be personally liable for the company's debts if, at the time the debt is incurred, there are reasonable grounds to suspect that the company is insolvent. Part 1 of schedule 1 to this bill creates a new exception to these rules by creating a safe harbour for directors from personal liability for insolvent trading. The safe harbour applies if the directors take a course of action that is reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator.

According to the government, Australia's laws against insolvent trading currently push directors to prematurely enter a formal insolvency, even where the company may be viable in the longer term. The stated aim for this part of the bill is to encourage directors to:

keep control of their company, engage early with possible insolvency and take reasonable risks to facilitate the company's recovery instead of simply placing the company prematurely into voluntary administration or liquidation.

This new safe harbour shifts risks that are presently borne by directors onto creditors. It creates additional situations in which directors can oversee the incurring of debts that create a situation of insolvency for the firm for which they can escape personal liability. Where this leads to firms being able to trade out of trouble without going into voluntary administration or liquidation, then that is a good thing. If there is less loss overall, then that is a good thing. As the member for McMahon said in the other place:

As a matter of principle, everybody in this House would want to see as few companies as possible getting into such a situation that they could no longer trade. If there is a sensible situation in which companies that are technically insolvent can be continuing to trade with all the necessary protections in place for creditors and for employees, that is something which should be very seriously examined by the House and the Senate.

Overall we think the government's aim is good, but we think that the current bill goes too far and weakens protections against insolvent trading. We are concerned that the new safe harbour in the bill may be too easy for directors to access and that there are inadequate safeguards to stop it from being misused. We think that the bill at the moment weakens Australia's rules against insolvent trading and shifts the balance too far in favour of directors and against creditors, including employees. Instead of having the desired effect of reducing the amount of loss overall, it risks going further and transferring losses from directors to creditors.

As such, we will be moving two amendments to strengthen the safe harbour. We believe that these amendments strike a better balance. We believe our amendments will allow the safe harbour to operate in genuine situations where the directors remaining in control will allow for a better outcome for all concerned, while making sure that it can't be relied on by directors doing the wrong thing. In drafting these amendments, we've been informed by the Productivity Commission's 2015 recommendation about how the safe harbour should look. We have drafted the amendments to broadly align with recommendation 14.2 of the Productivity Commission in their 2015 report Business set-up, transfer and closure.

Under our amendments, it will be up to the director to prove that they are entitled to the safe harbour. The amendments would mean that the director who wants to access the safe harbour bears the legal burden of proof in showing that they are genuinely taking a reasonable course of action to turn the company around. This is consistent with other existing defences to our rules against trading whilst insolvent. The government's bill places a weaker burden on directors. Once directors point to or bring some evidence to satisfy an evidentiary burden, the burden of proof or the legal burden then falls onto the persons bringing proceedings to prove that the director is not entitled to the safe harbour. All directors have to do is bring evidence that suggests a reasonable possibility that the relevant matters exist or do not exist. The key matter is a course of action reasonably likely to lead to a better outcome for the company. Once they have discharged this low burden, it is up to ASIC or the liquidator to prove, on the balance of probabilities, that the directors are not entitled to the safe harbour.

We think that the directors should bear the full legal burden to prove that they are entitled to the safe harbour, because they have the information and knowledge about what action they have taken and why. Placing the burden of proof on directors will also mean that they are more likely to take proper care and diligence when trying to turn around an insolvent company. Indeed, our amendments are consistent with the PC recommendation for how the safe harbour should work. This is because the Productivity Commission recommended that the new safe harbour should operate as a defence. There are existing defences to the insolvent trading provisions. With the existing defences, it's up to the director to prove that they meet the elements of the defence. It is currently a defence to liability for insolvent trading that the director had reasonable grounds to expect, and did expect, that the company was solvent. It's also a currently a defence that the director was not taking part in the management of the company because of illness or some other good reason.

A key point about these defences is that it is up to the director to prove that they apply, and the Productivity Commission recommended that this new safe harbour operate as a new defence. The bill departs from the Productivity Commission's recommendation because the safe harbour does not operate as a defence; it operates as a carve-out. Instead of putting the full burden onto the director to demonstrate the safe harbour applies, it imposes a less stringent burden, an evidentiary burden.

Our amendments would also mean that the director must meet five reasonable requirements—the five factors—to get the benefit of the safe harbour. Again, under our amendment, the director must be doing all of the following: properly informing themselves of the company's financial position; taking appropriate steps to prevent misconduct by officers or employees of the company that could affect the company's ability to pay its debts; taking appropriate steps to ensure that the company is keeping appropriate financial records; obtaining advice from an appropriately qualified entity, who is given sufficient information to give appropriate advice; and developing or implementing a plan for restructuring the company to improve its financial position.

The government's bill includes these five factors, but they are framed as things that the court may take into account in working out whether the director has acted appropriately. Labor believes that each of these factors should be non-negotiable if directors want access to the safe harbour. Indeed, the Productivity Commission explicitly recommended that having a turnaround plan and an appropriate adviser and keeping proper financial records should be mandatory requirements. These five criteria are good tests. They go to whether the director is genuinely implementing a plan to turn the business around. However, the government's bill does not require the directors to do them; they are merely five indicia—five things that the court can have regard to. This means that a director who is not doing all five of these things could still access the safe harbour. We believe that a director should have to satisfy all five of these areas. The bill currently says that doing these things is a 'nice-to-have' that a court may consider in working out whether the safe harbour is available. But we are saying that these should be criteria that directors must satisfy.

The first criteria should be mandatory. Why should a director who is not properly informing themselves of the company's financial position be entitled to the safe harbour? The second criteria should be mandatory. Why should a director who fails to take appropriate steps to prevent misconduct that could adversely affect the company's ability to pay its debts have the provision of a safe harbour? The third criteria, again, should be mandatory. Why should a director who fails to take steps to ensure that the company is keeping appropriate financial records enjoy protection? This criteria explicitly talks about appropriate financial records that are consistent with the size and nature of the company. It is not some onerous red-tape requirement. It just says that, if you want to trade while insolvent because you say you've got a plan to get out of trouble, you should keep the appropriate financial records. The fourth criteria, also, should be mandatory. The director should have to obtain advice from an appropriately qualified entity and should give that person sufficient information. Once again, this requirement isn't a one-size-fits-all. It recognises that companies are different in size and in the advice they might need. It just says that, if you want to trade while insolvent because you say you've got a plan to get out of trouble, you should get appropriate advice. The fifth criteria is also one that should be mandatory. The director should be developing or implementing a plan for restructuring the company to improve its financial position to get the benefit of the safe harbour.

As the explanatory memorandum correctly points out, hope is not a strategy. Indeed, in its submission to the Senate committee, ASIC recommended that directors should document proposed restructuring plans for a number of reasons: to support and assist the director to adduce evidence that the course of action developed and taken is reasonably likely to lead to a better outcome for the company; to promote market confidence and mitigate against inappropriate access to a safe harbour—that is, when achieving a genuine restructure or better outcome for the company is unlikely; and to assist liquidators and creditors to determine when the safe-harbour period commences and to decide the merits of prosecuting a claim of insolvent trading. The important thing about a defence, as recommended by the Productivity Commission, is that it places the legal burden of proof onto the directors. It would require the directors to bear the burden of proving that they had a legitimate, well-considered plan for getting a better outcome for the company.

In this bill, the government has departed from this model by proposing a safe harbour that operates not by way of defence but by way of carve-out. What this means is that the government has gone further than the Productivity Commission's recommendation and has reduced the proof that directors are required to show to prove they've acted properly. Our amendments will broadly bring the bill back into line with the Productivity Commission's recommendation that the safe harbour operate as a defence. We think that the Productivity Commission's recommendation did strike the right balance in giving honest directors scope to come up with a considered plan for recovery. At the same time, the Productivity Commission's model protected creditors by requiring the directors to prove that they'd acted reasonably and were entitled to the benefit of the safe harbour. This is as it should be. Information proving that the directors should be entitled to the benefit of safe harbour is far easier for the directors to produce. Placing the burden on them ensures that they are encouraged to make sure they go through a robust process in working out their recovery plan.

We also think that each of the five factors in the bill are good, but they should be non-negotiable requirements to access the safe harbour. There should be no doubt that directors in this situation must be informing themselves of the company's financial position, taking appropriate steps to prevent misconduct of the company's employees or officers, ensuring that the company is keeping appropriate records, obtaining appropriate advice and developing or implementing a restructuring plan. We will be watching the impact of the director's safe harbour legislation closely, particularly if it passes the Senate tonight or later this week.

To this end, we will also move an amendment to require the minister to initiate a review of the safe harbour by an independent panel two years after it commences. This is an opportunity to make sure the safe harbour is not having unintended consequences. In particular, we will be watching to make sure that it does not have a negative effect on workers being paid their entitlements. We know the bill has provisions that aim to prevent directors who fail to pay employee entitlements from getting the benefit of the safe harbour, and we will watch closely whether these are effective. The government needs to make sure and accept responsibility for making sure that safe harbour is not used to avoid workers being paid. If evidence comes to light that safe harbour is having the effect of employees missing out on entitlements, then Labor will move to make further changes.

Let me turn now briefly to part 2 of the bill, which Labor supports. Part 2 of the bill sets out new provisions to stop the enforcement of ipso facto clauses that are triggered when a company enters administration. An ipso facto clause creates a contractual right that allows one party to terminate or modify the operation of a contract upon the occurrence of a specific event. Currently, such rights may allow one party to terminate a contract just because of the financial position of the company, even though the company is still meeting its obligations under the contract. For example, if a company has a short-term lack of liquidity which leads the directors to appoint a voluntary administrator, an ipso facto clause might still allow a major supplier to cancel their contract. This may, in turn, deprive the business of the chance to continue to trade while they restructure, even though there has not otherwise been a breach of contract with a negative impact on the business, its employees and other creditors. The operation of such clauses may destroy the ability of the business to restructure and destroy the value of a business, and it prevent the sale of the business as a going concern. This amendment will not stop parties from terminating a contract with the company for any other reason, such as a breach involving non-payment or non-performance. Labor supports this part of the bill, and we will also watch the impact of it closely.

In conclusion, we acknowledge the intent of this legislation to ensure that directors who honestly and diligently seek to turn around a business are not penalised from doing so. Where a struggling business is successfully turned around, this is good for everyone involved, including employees, suppliers and customers. But, on the other hand, we have provisions that make directors personally liable for trading whilst insolvent for a reason. Trading whilst insolvent puts Australians at risk of providing goods, services and labour that they do not get paid for and can have a devastating effect. Our amendments will ensure that there is a review of the safe harbour in two years to make sure it's not having any undesirable effects. Our amendments to the safe harbour will mean that directors have to show more proof that they've done the right thing and will have to meet those reasonable requirements. We believe they strike a balance between allowing honest and diligent directors the opportunity to work the company out of trouble whilst making sure there are adequate safeguards to protect creditors.