Paul Scarr (Queensland, Liberal Party) Share this | Hansard source

I'm very pleased to rise to speak in favour of the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. Perhaps I could commence by referring to some remarks Senator Griff made. This is not about inhibiting the free market; this is about holding directors to account to both their legal and, dare I say, moral obligations with respect to the discharge of their duties.

I have been in situations, including the global financial crisis, where I've had to advise directors in difficult positions in relation to solvency—directors who were seeking to do the right thing by their creditors, to do the right thing by their employees and to do the right thing by the array of stakeholders impacted by their business decisions. Prior to the introduction of the safe-harbour rule, directors were quite often in extremely difficult positions. In many cases the easy thing for a director to do was to appoint administrators and walk away. The harder thing to do was to raise the capital, negotiate with creditors, adjust the business model and navigate through the difficulties associated with running a business in the context of events such as the global financial crisis.

I'm extremely pleased that in 2017 a safe-harbour rule was introduced for directors in terms of insolvent trading liability. And in starting this debate I think I'd like to refer to that first, as one end of the spectrum. The safe-harbour rule allows directors of a company that is in financial distress to continue to trade and to incur debts if that is in connection with the course of action that is reasonably likely to lead to a better outcome for the company, a better outcome for the creditors as a whole. That is directors performing their duties responsibly. At the other end of the spectrum is the phenomenon of illegal phoenixing. As Senator McAllister referred to in her remarks, illegal phoenixing has a devastating effect on a range of stakeholders.

The PwC report that Senator McAllister referred to estimated that the total direct costs for 2015-16 to be in the range of between $2.85 billion and $5.13 billion. Let's break down those costs. The first element is $1.162 billion to $3.171 billion for unpaid trade creditors, large and small. Those unpaid debts and the impact on cash flow can have a devastating impact on those trade creditors and can actually lead to them being placed in insolvency. The second element of that aggregate total is employees' unpaid entitlements of $31 million to $298 million. Senator McAllister gave an example of the personal impact that can have on employees. There is also the impact on government and the Australian people. PwC estimated that in 2015-16 the total cost to government was approximately $1.66 billion.

Then there are the indirect costs, and I want to say something about them as well. Firstly, there's the stress on employees. I've dealt with employees and trade creditors who are facing the prospect of a company they're engaged with becoming insolvent. It is extraordinarily stressful and it takes a huge mental and physical toll. So there's that indirect cost. Secondly, there's the discouragement effect, the demoralisation effect on those small trade creditors, many of whom make the decision that it's just too hard; they've worked too long and too hard to see their businesses jeopardised by illegal phoenixing activity. There is the social welfare burden of those employees who are in need that's transferred to the government. There's also the burden that's placed upon non-government organisations who help those people in those dire situations, as they should do. Then there's the competition effect. For every illegal phoenix company and every director engaging in illegal phoenix activity, there are many, many Australians who are doing the right thing, who are paying entitlements to their employees, who are paying their trade creditors, who are complying with their obligations, be it under the Corporations Act or otherwise, and they're being put at a competitive disadvantage by the illegal phoenix activity of some who avoid those costs and thereby obtain a competitive advantage. So there are both direct and indirect costs.

As to whether or not these amendments would work, I will make a few points. First, we should note that ASIC has been bringing prosecutions and disqualifying directors for illegal phoenix activity. This has been occurring. When I was looking at the literature in preparation for this speech, a number of directors were indeed disqualified from acting as directors in just the last three or four months. ASIC is taking action. They do need to be resourced to undertake this activity; there is absolutely no question about that. The second point I would make is that quite often in the context of Corporations Act issues coming before the courts it is necessary to get into the detail and to provide technical support through amendments such as those contained in this act that allow the regulator to discharge their evidentiary burden of proof. In my view, there are a number of very effective provisions in this legislation which will help in that regard. They include presumptions that are raised in the context of companies not maintaining correct corporate records. In many situations, when an administrator or a liquidator moves into a company that has entered into insolvency because of illegal phoenixing activity, there are simply no records. There's no way for the administrator or the liquidator to get their head around what has actually occurred. So there are a number of very important presumptions that are raised with respect to the calculation of the value of assets which have been transferred out of a company in the event that records have not been kept in accordance with the law, and I think those presumptions are extremely important.

The second technical amendment brought about by this legislation, which I believe is extremely important, prevents directors from improperly backdating resignations or from resigning from the board of a company when they're the last standing director.

I've given advice to directors in positions where they've been faced with extremely difficult trading conditions. They've been concerned about their own personal liability, and they've talked to me and sought my advice about what the right thing to do is—and they have done the right thing. They have done the right thing by the company, by creditors and by shareholders, and they've stayed the course. At the other end of the spectrum, you have illegal activity, in essence, where directors are simply seeking to structure their resignations, to abandon their duties and obligations as directors, to make it more difficult for the regulator to prosecute for illegal phoenix activity. This bill does address that situation.

The reforms in this bill build on other actions that the government has taken to combat illegal phoenixing and, more broadly, crime and fraud in the economy, and these should be noted. They include the amendment of the Insolvency Practice Rules to restrict the voting rights of certain creditors related to the phoenix company. Secondly, they increase funding for the Assetless Administration Fund by $8.7 million over four years. This will increase ASIC's ability to fund liquidators, who play a vital role in investigating and reporting illegal phoenix activity. We should note that most liquidators in our country do the right thing.

Thirdly, the reforms establish a phoenix hotline to make it easier to report suspected phoenix behaviour directly to the ATO. Fourthly, they establish various task forces to tackle illegal phoenixing activities—the Phoenix, Black Economy and Serious Financial Crime task forces. Fifthly, they introduce legislation to address the corporate misuse of the Fair Entitlements Guarantee scheme, to protect Australian workers and limit the excessive drain on the taxpayer funded scheme as a result of sharp corporate practices, including illegal phoenixing.

In summary, the government recognises that illegal phoenixing is a very separate activity from legitimate attempts by a business owner or director to restructure where a business may have failed. The Morrison government is committed to tackling illegal phoenixing activity to protect honest and hardworking Australian small businesses, employees and taxpayers.