It is crucial that this nation acts to crack down on phoenixing by corporations and dodgy directors - Terri Butler MP, Labor for Griffith

It is crucial that this nation acts to crack down on phoenixing by corporations and dodgy directors

Terri Butler MP speaking in the House of Representatives on the 22nd June.

Read the full speech below. 

Ms BUTLER (Griffith) (12:03): I rise to support the member for McMahon's second reading amendment because, of course, it is crucial that this nation acts to crack down on phoenixing by corporations and dodgy directors. When a corporation incurs debts that it cannot pay, winds itself up and then the next day the directors go off and start a new corporation in the same type of business, that has real effects on people's lives. It has effects on: the lives of employees who did not get their full entitlements as a consequence of this phoenixing behaviour; taxpayers, who often have to foot the bill through taxpayer-funded guarantee schemes; employment entitlements, including superannuation; and, of course, the small independent contractors and small-business suppliers, who have done business with the phoenixed company, who miss out on being paid what they are rightfully entitled to receive.

Phoenixing is a scourge that needs to be addressed in this nation and, as usual, Labor is leading the way when it comes to public policy by announcing a policy of director identification numbers. The member for Fenner and others have worked on that policy. It is a policy that will assist us to make sure that directors are tracked so that there are not multiple records for the same person—with different dates of birth, for example—on the ASIC registry. It will help us as a nation crack down on this phoenixing behaviour that hurts taxpayers, hurts employees and hurts small-business suppliers to firms.

I think it is very important that, when we consider this second reading amendment, the government takes heed and understands that this announcement by Labor has been widely accepted and widely approved of by the community—by everyone from the AICD to the ACTU.

I also want to make some comments about the bill itself. As you would be well aware, the creation of a safe harbour shifts some of the risk that is presently borne by directors onto creditors because, of course, it makes for additional situations in which directors can oversee the incurring of debts which might, technically, create a situation of insolvency for the firm. The shifting of risk from directors onto creditors can absolutely be justified, if the overall consequence is a reduction in the amount of loss that has to be borne. In other words, if a measure like this can help firms trade through trouble thus saving jobs, saving livelihoods and saving firms, that is absolutely something that should be considered, but we must do so in a way that is thoughtful. We must do so in a way that says, 'Well, if we're shifting risk around, is there going to be an appropriate level of risk borne by the different interests in this situation? And, is there going to be a reduction in the overall amount of loss?' In other words, there is less loss to go around, if firms do not fail, which is absolutely a good thing and a positive thing. We need to be sure that that is going to be the outcome of such a measure, and we need to be sure that that way risk is distributed between directors and creditors is appropriate and fair.

When we are dealing with this specific bill, this proposal for a safe harbour, we are really talking about creating a safe harbour in respect of a provision that prohibits insolvent trading by corporations. It is worth noting that the proceedings concerned are very rarely actually brought. The Productivity Commission dealt with this point before recommending a safe harbour defence when they said:

… the spectre of action looms larger than the actual (likely) consequence. The rate of successful enforcement of insolvent trading actions is low. There were only 103 insolvent trading cases between the law's introduction in 1961 and 2004.

The commission went on to say:

While the court ordered that compensation be paid in three quarters of those cases, more serious sanctions were extremely rare. Only 15 per cent of cases involved criminal proceedings, and only two cases involved an order banning directors from managing companies.

The commission went on to say:

Since 2004, ASIC reports that they have commenced action for insolvent trading for circumstances involving five companies only between 2005 and 2011.

And they noted some further criminal matters.

Of course, this Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 is concerned with the civil proceedings under the insolvent trading provisions of the Corporations Legislation, and it follows on from the Productivity Commission recommendation for the creation of a safe harbour defence. The Productivity Commission recommended that the Corporations Act should be amended to allow for a safe harbour defence to insolvent trading. It went on to suggest some conditions for the availability of the defence, saying that defence would only be available when directors of a company have made and documented a conscious decision to appoint a safe harbour advisor with a view to constructing a plan to turn around the company; the advisor was presented with proper books and records; the adviser had at least five years experience; the directors were able to demonstrate they had taken all reasonable steps to pursue restructuring; and the advice had to be proximate to the specific circumstance of financial difficulty, not a set of advice much earlier in relation to something else. There are some other components of the recommendation that are relevant, but readers can have a look at the report themselves.

The concern I want to mention—hopefully, it will be something that can be ironed out in the very timely Senate inquiry that is being undertaken in relation to the bill—is that this bill does not actually fulfil the Productivity Commission's recommendation. The Productivity Commission recommended the creation of a defence. This bill does not create a safe harbour defence; instead, it creates a safe harbour exemption from the operation of the civil prohibition in section 588G of the Corporations Act against insolvent trading.

It is also worth noting that there are a range of existing defences to the insolvent trading provisions and existing section 588H. These include that the director in question who is potentially able to be held liable for the insolvent trading 'had reasonable grounds to expect, and did expect, that the company was solvent'; had reasonable grounds to believe, and did believe 'that a competent and reliable person was responsible' for providing the director with 'adequate information about whether the company was solvent' and that they were fulfilling their responsibility; and expected, on the basis of that advice and information, that the company was solvent; if, 'because of illness or for some other good reason', the director was not taking part in the management of the company; or 'the person took all reasonable steps to prevent the company from incurring the debt'. As one would expect, with all of these defences, it is a matter for the director to prove that they have the benefit of that defence. Once the insolvent trading is proved, the director then has to prove that one of these defences applies. That is how defences would be expected to work.

Obviously, none of those defences covers the safe harbour we are discussing today, but it is certainly the case that the Productivity Commission recommended a new defence of safe harbour. Instead of doing that, this bill creates an exemption. Instead of having to prove that they have the benefit of the defence, the director just has an evidential burden, so their obligation is simply to bring 'evidence that suggests a reasonable possibility that the matter exists or does not exist'. So they have to put out an affidavit or give evidence that suggests a reasonable possibility that the matter exists—the matter being, of course, action 'reasonably likely to lead to a better outcome'. That is from the explanatory memorandum.

Once the evidence has been educed, it then falls to the person bringing the proceedings for insolvent trading—which would ordinarily be ASIC or possibly a liquidator—to prove that the director was not developing or taking a course of action that at the time was reasonably likely to lead to a better outcome for the company. So what the decision to create an exemption rather than a defence has done is to make the proposed safe harbour much more favourable to directors than the Productivity Commission possibly had anticipated in making the recommendation. There may well be very good reasons for that. There may well be very good reasons to set this up as an exemption rather than as a defence, but I think it is reasonable to want to have those reasons explored through a Senate inquiry in relation to the bill.

There are just a couple of other things I wanted to flag. Firstly, the protection for employee entitlements requires only substantial compliance and not full compliance unless there has been more than one failure over the preceding 12 months. It is also drafted in the present tense—it is about whether a company is paying employee entitlements. I am quite interested in making sure that would cover any situations where there might be outstanding employee entitlements which, as you know, Mr Deputy Speaker, include superannuation. The consequences for the failure to pay superannuation obviously are long term, but there can be short-term serious consequences as well. For example, if your income protection is based on superannuation and your employer has not made the contributions you can be left uncovered by income protection, which can have terrible consequences if you suffer an illness or injury whilst you are not covered.

I also wanted to mention the other slight distinction between what the Productivity Commission recommended and what this bill does. The Productivity Commission, as you will have gathered from the recommendation when I cited it, made the operation of the safe harbour fairly contingent on a range of things—contacting the adviser, et cetera. The bill that we have here seems to apply a much more general test about whether the person has started 'developing one or more courses of action' and 'reasonably likely to lead to a better outcome for the company'. It then sets what the Productivity Commission would have seen to be conditions for having access to the safe harbour and instead just a range of indicia that might guide the court in determining whether one is meeting the general test of setting out to develop one or more courses of action that are reasonably likely to lead to a better outcome. Given there is some difference between the approach the government is taking and the recommendation of the Productivity Commission inquiry, I think it would be quite useful to hear what the Senate inquiry has to say and what the Senate report has to say about the design of this legislation.

Everybody wants to get to a point where we have good, strong legislation that makes sure that the Corporations Act is not engendering overcautious behaviour on the part of directors, where directors are not constrained from doing what they need to be able to do to help their firm trade out of trouble in the interests of the firm, in the interests of shareholders, in the interests of employees and in the interests of unsecured creditors. We would all like to get to that position and, in principle, a safe harbour can be supported on that basis but we need to make sure that the detail is right.

In relation to the possibility of insolvent trading, we are talking about a redistribution of the risk away from directors who presently bare a reasonable amount of risk because of the possibility of being pursued for insolvent trading towards people like independent contractors; small business suppliers ,who might be doing something that has been outsourced by the firm; cleaning contractors; and of course employees who at least have the benefit of getting the priority in the administration or have the benefit of having some protection in this bill. If we are going to be shifting risk around in that way then we want to be able to be satisfied and assured that there will be genuine benefits from doing so, that it will lead to fewer corporate insolvencies and fewer situations where firms have to be liquidated or have to go into administration. If we can work together to continue to pursue those calls, that will be a very useful thing. As I say, in principle, the safe harbour is something that can be very much supported on that basis.

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