Explanatory Memorandum
(Circulated with authority of the Treasurer, the Hon Peter Costello, MP)Notes on clauses
1. Clause 1 specifies the short title of the Bill.
2. The Bill will commence on the day it receives royal assent.
3. Clause 3 provides that the Bill amends the Corporations Law, as set out in Schedule 1 to the Bill.
Schedule 1 - Employee entitlements
4. Item 1 inserts a definition of "entitlements" in section 9 of the Corporations Law. The word "entitlements" is defined to have the meaning given by new subsections 596AA(2) and (3) (see below).
5. Section 9 of the Corporations Law is amended to include a definition of "linked". The new definition relates to the interrelationship between section 588N (as amended by the Bill) and new section 596AB, for the purposes of avoiding double recovery.
Item 3: Subsection 588G(1A) (after table item 6)
6. The Corporations Law already contains a prohibition on insolvent trading by directors. Section 588G is directed at protecting the rights of creditors, and provides that a director of a company which incurs a debt when it is insolvent, or becomes insolvent by incurring the debt, contravenes a civil penalty provision. Civil penalties and criminal sanctions may flow from a breach of the duty not to engage in insolvent trading, including directors personal liability for the debts incurred. However, section 588G does not cover the situation where a company confers a financial benefit on another party rather than incurring a debt.
7. The conferral of a financial benefit may currently constitute an uncommercial transaction under the Corporations Law, which could be a voidable transaction should the company be or become insolvent. If the transaction is voidable, a liquidator may apply to the court for an order that the person who has received the benefit of the uncommercial transaction return the benefit so it can be distributed to all creditors. Such claims by liquidators are subject to a number of defences; for example, where a person entered into the transaction in good faith and had reasonable grounds to expect that the company was solvent.
8. There is currently no duty on directors not to engage in a non-debt uncommercial transaction where the company is or becomes insolvent, and no penalty for doing so. The amendment to subsection 588G(1A) in item 3 of Schedule 1 of the Bill addresses this by deeming that a company incurs a debt when it enters into an uncommercial transaction (as defined under the voidable transaction provisions) for the purposes of the insolvent trading provisions. This is effected by adding uncommercial transactions to the list of actions in section 588G(1A).
9. It would not be appropriate for directors to be personally liable for a transaction that a company is required to give effect to under a court order. For this reason, court-ordered transactions do not fall within the scope of the duty, event though such transactions could be voidable under other provisions of the Corporations Law. Hence, the proceeds of an uncommercial transaction that a company is ordered to enter into would be available for distribution to creditors, but the director(s) involved would not be liable for complying with the order. The amendment also provides the scope to specify in the regulations relevant agencies which may make orders or directions that are similarly to be exempt.
10. The inclusion of uncommercial transactions in section 588G(1A) has implications for the protection of employee entitlements, the prosecution of directors involved in phoenix activity and recovery actions by liquidators for the benefit of creditors generally. The amendment has general application to all uncommercial transactions, and is not restricted, for example, to transactions in relation to employee entitlements or transactions between related parties.
11. Directors who breach the duty knowingly, intentionally or recklessly could be prosecuted under existing provisions of the Corporations Law. Further, the relevant duty is part of the civil penalty regime of the Corporations Law, under which offenders may be subject to a court order to pay compensation to the company for their breach. This compensation would be available to be distributed amongst all the companys creditors on liquidation, including its employees.
12. Item 4 repeals existing section 588N of the Corporations Law, and replaces it with a new provision which limits the exposure of persons in breach of the Corporations Law, to ensure that they are not subject to double or multiple penalties.
13. Section 588N of the Corporations Law currently provides that compensation recovered in a proceeding under section 588M for loss or damage resulting from insolvent trading is to be taken into account in any other proceedings under that section in relation to the incurring of the debt. The substitute provision extends the operation of section 588N to include proceedings for contraventions of new section 596AC that are linked because the person contravened it by incurring a debt.
14. A new Part 5.8A is to be introduced into the Corporations Law to protect employee entitlements from agreements and transactions that are entered into with the intention of defeating the recovery of those entitlements.
Section 596AA: Objects and coverage of Part
15. New section 596AA provides that the entitlements protected are the same as those that receive preferential payment on a winding up under section 556(1) of the Corporations Law - that is: wages, superannuation contributions, injury compensation, leave entitlements and retrenchment payments (where applicable). The new section makes it clear that the entitlements need not be owed to the employee, for example, they could be owed to a dependant.
16. Subsection 596AA(3) provides that the protection provided by Part 5.8 for the entitlements of an excluded employee is limited to the extent to which they have priority under section 556 of the Corporations Law. Excluded employee include directors of the company, their spouses and other relatives.
17. Subsections (4) and (5) make it clear that Part 5.8 applies to entitlements owed to present and past employees of the company.
Section 596AB: Entering into agreements or transactions to avoid employee entitlements
18. New section 596AB prohibits a person from entering into relevant agreements or transactions with the intention of avoiding the payment of employee entitlements, or of significantly reducing the amount of entitlements that employees can recover. The object of this offence is to deter the misuse of company structures and of other schemes to avoid the payment of amounts to employees that they are entitled to prove for on liquidation of their employer.
19. Under the proposed new offence, persons who breach the provision could be subject to a penalty of up to 1000 penalty units and/or 10 years imprisonment (see item 6 of Schedule 1 of the Bill). The offence applies even where the transaction or agreement has been approved by a court, as it would still have been entered into with the relevant intention. Under the general principles of criminal law, a penalty could be imposed on people who aid or abet a breach of the provision.
20. Subsection 596AB(3) provides that the offence applies to a series or combination of relevant agreements and/or transactions. "Relevant agreement" is already defined in the Corporations Law to include a wide range of circumstances.
Section 596AC: Person who contravenes section 596AB liable to compensate for loss
21. To increase the scope for recovery of entitlements beyond these circumstances, a provision has been included which targets the same activity covered by the proposed new offence provision (section 596AB), that is, persons who enter into an agreement or transaction for the purpose of, or for purposes including, avoiding payment of employee entitlements.
22. New section 596AC provides that if the court is satisfied that a person has contravened section 596AB, that person could be ordered to pay compensation in respect of loss or damage suffered by employees as a consequence of the contravention or from action taken to give effect to an agreement or transaction involved in the contravention.
23. Subsection 596AC(2) provides that the companys liquidator may recover the compensation. Because employee entitlements are priority payments under section 556 of the Corporations Law, they have priority to any compensation recovered by the liquidator. Alternatively, Part 5.8 provides a mechanism for direct recovery of the compensation by employees (subsection 596AC(3) - see also new sections 596AI to 596AF below).
24. Amounts recovered are taken into account when the employee proves in the liquidation of the company. Actions under section 596AC must be commenced within 6 years of the beginning of the winding up.
25. The Corporations Law currently provides (section 1332) that it is enough for a court to be satisfied of a breach of a provision on the balance of probabilities in proceedings other than for an offence. As a result, whilst a breach of the new offence provision would need to be proved beyond reasonable doubt in order for a person to be convicted and fined and/or sentenced, it would only be necessary for a court to be satisfied of a breach of the offence provision on the balance of probabilities for it to make an order that the person pay some or all of the outstanding employee entitlements of the insolvent company.
Section 596AD: Avoiding double recovery
26. New section 596AD provides that amounts recovered in proceedings under section 596AC are to be taken into account for the purposes of other actions in relation to the same breach, or proceedings under section 588M (breaches of the insolvent trading provisions) that relate to a linked debt. The new provision limits the exposure of persons in breach to ensure that they are not subject to double or multiple penalties.
Section 596AE: Effect of section 596AC
27. New section 596AE provides that actions under section 596AC do not preclude action being taken in respect of a breach of any other duty a person may be under (for example, a breach of directors duties).
28. The new Part 5.8A includes safeguards to ensure that an orderly winding up of the company is not hampered by actions to recover employee entitlements. Such measures are necessary to ensure that the overall settlement arrangements that are associated with the winding up are conducted in an efficient manner, and do not unnecessarily interfere with distributions to creditors under the winding up regime.
29. Under section 596AC, the liquidator has standing to apply to the court for a payment order in relation to a breach of the new offence provision. However, if the liquidator decides not to take action, sections 596AF to 596AI establish a procedure to allow employees to apply directly to the court for a payment order. The procedure is in line with the existing safeguards in the Corporations Law in relation to actions for compensation arising from insolvent trading.
30. The time limits in sections 596AF to 596AI are based on the procedure currently in the Corporations Law relating to compensation for insolvent trading. The time limits are necessary to give the liquidator time to consider what action he or she will take against the companys directors for alleged breaches of the Corporations Law, and to enable the liquidator to maintain control of the settlement arrangements associated with liquidations.
Section 596AF: Employee may sue for compensation with liquidators consent
31. Section 596AF provides that a liquidator may consent at any time after winding up has commenced to an employee bringing proceedings for compensation under section 596AC in relation to a breach of section 596AB.
Section 596AG: Employee may give liquidator notice of intention to sue for liquidation
32. New section 596AG sets out how an employee may commence an action for compensation under section 596AC where the liquidator has not provided consent under section 596AF.
33. Where a liquidator has not taken action in respect of a breach of section 596AB within 6 months of the commencement of the winding up, an employee may give to the liquidator a notice under section 596AG specifying that he or she intends to begin proceedings in relation to the contravention, and asking for the liquidators written consent to the employees action or a statement of reasons why the liquidator thinks that proceedings under section 596AC should not be begun by the employee.
Section 596AH: When employee may sue for compensation without liquidators consent
34. New section 596AH provides that an employee may begin proceedings where a liquidator does not consent within 3 months after notice is given, if the court grants leave for the proceedings to begin.
35. Where a liquidator has responded to the employee by way of a written statement of reasons as to why the liquidator thinks that the proceedings should not be begun, new subsection 596AH(3) provides that the employee must file the statement with the court for its consideration when determining whether or not leave should be granted.
Section 596AI: Events preventing employee from suing
36. Section 596AI prescribes the circumstances in which an employee cannot being proceedings under section 596AC. Broadly, the prohibition applies when a liquidator has taken action in relation to the same contravention. Actions by the liquidator that are covered are applications under sections 588FF and 588G, and proceedings under new section 596AC and section 588M.
37. This item provides that the penalty for a breach of the new offence in section 596AB is 1000 penalty units or imprisonment for 10 years, or both.