Andrew Murray (WA, Australian Democrats) Share this | Link to 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.

Linda Kirk (SA, Australian Labor Party) Share this | Link to this | Hansard source

I seek leave to incorporate a speech by Senator Wong.

Leave granted.

Penny Wong (SA, Australian Labor Party, Shadow Minister for Corporate Governance and Responsibility) Share this | Link to this | Hansard source

The incorporated speech read as follows—

The Corporations Amendment (Insolvency) Bill is a belated response to a number of recommendations made in the 1997 Review of the Regulation of Corporate Insolvency Practitioners; the 1998 Corporations and Market Advisory Committee (CAMAC) Report Corporate Voluntary Administration; the 2000 CAMAC Report Corporate Groups; the 2004 CAMAC Report Rehabilitation of Large and Complex Enterprises and the 2004 Parliamentary Joint Committee on Corporations and Financial Services Report Corporate Insolvency Laws: A Stocktake.

Updated insolvency laws that adequately respond to business practices, provide more clarity for creditors and in turn reduce the cost of obtaining finance, are vital for a strong Australian economy.

There is also the social impact of insolvency that should be considered. In 2003, the ACTU estimated that around 19,000 employees may lose up to $500 million in unpaid entitlements each year. Although other creditors may have other sources of income, employees are likely to be dependent on the wages they receive from the company and as such the impact on them is likely to be substantial.

Labor welcomes the Bill, however, a number of the changes proposed are well overdue. In particular, those relating to fine-tuning of administration processes implement CAMAC recommendations that date back to 1998. It seems extraordinary that the Howard Government has taken so long to deal with these issues.

The changes that arise from this Bill fall into four categories. These are: improving outcomes for creditors, including employees; deterring misconduct by company officers; improving regulation of insolvency practitioners and fine tuning voluntary administration procedures.

Outcomes for creditors are improved by the Bill in a number of ways. In the current system, employees are afforded a priority amongst unsecured creditors. However this priority can be displaced by a Deed of Company Arrangement. Employees have only a limited opportunity to challenge any change to this prioritisation in a deed in the event that their priority is displaced by a meeting of creditors. Changes in this Bill mean that it will now be mandatory for Deed of Company Arrangement to preserve the priority of employee entitlements when a company is in voluntary administration unless employee creditors agree to waive their priority.

The court may approve the employee creditors’ waiver and alter their priority in the Deed of Company Arrangement where it is satisfied that it would be more beneficial for employee creditors than immediate winding-up of the company.

Issues relating to the Superannuation Guarantee will also be clarified. Although the Corporations Act gives priority to superannuation contributions of employees, it has been held by the courts that the SGC, which is a statutory tax liability owed by the Commonwealth, cannot be characterised in the same way and therefore does not have the same priority.

As the SGC is related to superannuation payments and exists to ensure that the benefits for employees are received, there is a need to clarify and address the priority of the SGC in a receivership, voluntary administration or Deed of Company Arrangement, not just company liquidation.

Changes to the Superannuation Guarantee Act and the Corporations Act mean that SGC will receive the same priority as wages and superannuation contributions.

Rights of subrogated creditors, being those creditors who are entitled to be substituted for another creditor in a liquidation because they have advanced funds to meet a particular creditor’s debt, are clarified so that they have the same rights as original creditors even if an advance has not been made before the relevant date.

New disclosure requirements for administrators are introduced to address concerns about the independence of directors and make sure that creditors can make well-informed decisions when engaging administrators.

Administrators will be required to provide a declaration of any ‘relevant relationships’ and indemnities that apply to them, in a document which is a maximum of two pages in length.

Greater guidance will be given to courts to set and review remuneration of administrators and deed administrators.

A number of amendments are also made to streamline administration processes.

The requirement that a company in a creditors’ voluntary liquidation hold an annual members’ meeting will be removed as the economic interests of those members is not substantial enough when balanced against the cost of these meetings. However, if the liquidator choses not to call an annual meeting of creditors, then they must lodge a report with ASIC on the progress of the administration and notify creditors that the report will be available to creditors free of charge.

In the case of a members’ voluntary liquidation, where the economic interest is generally greater, the requirement for an annual meeting is retained.

Various requirements to publish notices and documents will also be made redundant unless there is a strong policy rationale for the publication of relevant documents.

The Bill will also allow various notices to be published together to reduce costs.

Electronic communication will now be made available to administrators for the distribution of notices to creditors provided that certain conditions are met. Currently electronic distribution is only available to notify members of meetings.

In order to increase the opportunity to recoup funds for creditors, two types of pooling orders in liquidation, voluntary and court ordered, will be made available.

Voluntary pooling will be able to occur where the liquidator of a group of companies that are all in the process of winding up makes a determination that the group of companies can be pooled for the purposes of liquidation.

Courts will be empowered to order that a group of companies is pooled for the purposes of winding-up. An application for court-ordered pooling may only be made by the liquidator or liquidators of the companies in the group as each company in the group will be taken to be jointly and severally liable for each debt payable by and each claim against each other company in that group.

The Bill also puts forward a number of proposal to deter corporate misconduct.

ASIC will now be able to use its compulsory powers to investigate liquidator’s conduct if it has reason to suspect for example, that they have failed to carry out or perform their duties.

Penalty privilege in relation to proceedings for disqualification, banning, suspension or cancellation orders or declarations to that effect, will be removed. This was one of the amendments sought after privilege was claimed in the High Court’s Rich v ASIC case where ASIC was unable to obtain certain documents in relation to the relevant orders.

Banning and disqualification orders, and orders to cancel or suspend licenses will help deter misconduct of company officers including in relation to phoenix company activity.

Insolvency practitioners will be better regulated under new provisions.

Prohibitions on inducements to members or creditors of a company to secure an appointment will now be extended to include persons such as directors, providers of professional services such as accounting and legal firms.

Registered liquidators will have to obtain and maintain professional indemnity and fidelity insurance to cover their work as insolvency practitioners.

The requirement that registered liquidators provide triennial statements to ASIC will be replaced with a requirement that a detailed statement be provided annually. This means that a liquidator’s suitability for registration will be reviewed more regularly.

ASIC will be able to cancel the registration of a liquidator automatically where the liquidator becomes disqualified from managing a corporation or by reason of bankruptcy and where the liquidator does not maintain their insurance. An application will no longer need to be made to the Companies Auditors and Liquidators Disciplinary Board (CALDB) first.

The CALDB will be given more flexibility to deal with disciplinary matters. For example, it will be able to hold a pre-hearing conference to determine procedural matters.

Small changes will be made to increase the efficiency of voluntary administration procedures.

New provisions will allow administrators to sell property subject to a lien, pledge or retention of title clause if they have the written consent of the property owner or security holder, or with the leave of court. Administrators will also be able to consent to transfer of shares if they are satisfied that it is in the best interests of the company as a whole.

The Bill will allow slightly longer periods to pass before the first and second meetings of creditors are required to be held. There will also be some slight amendments to change ‘days’ to ‘business days’ which will consequently affect the timing for things such as when notices for meetings must be given.

Labor notes the consultation with stakeholders in the insolvency area such as the Insolvency Law Advisory Group and the Insolvency Practitioners Association of Australia. And, as required by the Corporations Act, the amendments under this Bill have also been approved by the states and territories through the Ministerial Council for Corporations.

Labor supports this Bill in the interests of modernising Australia’s corporate insolvency regime. We reiterate our concern that the Howard Government has moved so slowly in relation to reforms in this area, particularly given the number of reports recommending changes dating back to 1997.

Brett Mason (Queensland, Liberal Party, Parliamentary Secretary to the Minister for Health and Ageing) Share this | Link to this | Hansard source

I would like to acknowledge Senator Murray’s longstanding interest in the area of insolvency. I note his admonishment of the government’s performance and also his mild congratulations. I thank him for his contribution this afternoon.

As Senator Murray said, the Corporations Amendment (Insolvency) Bill 2007 contains a comprehensive set of reforms that will modernise our insolvency laws and assist Australian businesses. The bill will improve protections for employee entitlements. The bill also contains groundbreaking reforms in respect of corporate groups to reduce costs and improve returns without exposing creditors to new risks. I commend the bill to the Senate.

Question agreed to.

Bill read a second time.