House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon David Bradbury MP)

Chapter 1 - Winding up by ASIC

Outline of chapter

1.1 The Corporations Amendment (Phoenixing and Other Measures) Bill 2012 (the Bill) amends the Corporations Act to provide ASIC with a discretionary power to place a company into liquidation where:

•

ASIC otherwise has the power to deregister the company;

•

the company has not paid its annual review fee within one year of the fee being due;

•

ASIC has reinstated the registration of a deregistered company; and

•

ASIC has reason to believe that the company is no longer carrying on business and there is no objection to the company being placed into liquidation.

Context of amendments

1.2 The amendments contained in Part 1 of Schedule 1 give effect to the Government's election commitment, as announced as part of the Protecting Workers' Entitlements package, to provide ASIC with an administrative power to order the winding up of companies that have been abandoned by their directors. The Protecting Workers' Entitlements package was announced by the Prime Minister in July 2010. One of the aims of this measure was to assist employees of companies abandoned by their directors to receive payments from the General Employee Entitlements and Redundancy Scheme (GEERS) more expeditiously.

1.3 GEERS is a scheme funded by the Australian Government to assist employees who have lost their employment due to the liquidation or bankruptcy of their employer and who are owed certain employee entitlements. Where the employer is a corporation, a precondition for any payment from GEERS is that the company be placed into liquidation. Although large creditors, such as the Australian Taxation Office, may take steps to place a company into liquidation, this is not always the case. Where the company has limited or no assets and the company has been abandoned by the directors, creditors other than employees may have no incentive to fund the winding up of the company. The cost of placing a company into liquidation can be prohibitive for employees who have incurred losses in wealth due to the failure to receive their entitlements. In cases where companies are abandoned by their directors, ASIC may choose to exercise its power to place the company into liquidation so that employees of the company can access GEERS.

1.4 In addition, giving ASIC the power to place abandoned companies into liquidation will enable a liquidator to investigate and report on alleged misconduct related to possible phoenixing behaviour; or to investigate and take action in respect of uncommercial transactions entered into by the company's directors prior to deregistration or abandonment of the company.

Summary of new law

1.5 Under the new law, ASIC will be granted the power to place abandoned companies into liquidation in each of the four separate and distinct circumstances listed in Part 1 of Schedule 1.

1.6 ASIC will be able to place a company into liquidation where the company otherwise meets the requirements for ASIC-initiated deregistration of the company.

1.7 ASIC will also be able to place a company into liquidation where ASIC has reinstated the registration of a deregistered company under subsection 601AH(1) of the Corporations Act.

1.8 Finally, ASIC will be able to place a company into liquidation where ASIC has reason to believe that the company is no longer carrying on business, and there is no objection by the directors or company to being wound up once notified of ASIC's intentions.

Comparison of key features of new law and current law

Detailed explanation of new law

1.9 ASIC will be able to order the winding up of a company where:

•

the response to a compliance notice issued by ASIC on the company under section 348A of the Corporations Act is at least six months late; and

•

the company has not lodged any other documents under the Corporations Act in the preceding 18 months; and

•

ASIC has no reason to believe the company is carrying on business; and

•

ASIC has reason to believe that making the order is in the public interest. [Schedule 1, Item 1, subsection 489EA(1)]

1.10 In exercising its power under the new subsection 489EA(1), ASIC will not be acting in the same way, by the same process, or on the same grounds as a Court would be in ordering the winding up of a company. ASIC will be able to take into account policy considerations in ordering the winding up of the company, those considerations may include the ability for employees of the company to access GEERS, or suspicions of possible phoenixing behaviour by the directors of the company.

1.11 ASIC currently has the power to deregister a company if the company's review fee in respect of a review date has not been paid in full at least 12 months after the due date for payment. The Bill provides ASIC with a power to order the winding up of a company under these same circumstances. [Schedule 1, item 1, subsection 489EA(2)]

1.12 ASIC currently has the power to reinstate a company in circumstances where ASIC is satisfied that the company should not have been deregistered. The Bill will provide ASIC with an additional power to place a company into liquidation, once the company is reinstated, where ASIC believes that winding the company up will be in the public interest. [Schedule 1, item 1, subsection 489EA(3)]

1.13 Under the new law, ASIC will also be empowered to place a company into liquidation if ASIC has no reason to believe that the company is carrying on business. Where this is the only indicator that the company has been abandoned, ASIC may only make an order to place the company into liquidation once ASIC has notified the company and each director. The notice must: set out ASIC's intention to make the order to wind the company up; inform the company and directors that they have 10 business days after the receipt of the notice to object in writing to ASIC if they do not wish the company to be wound up; and be sent to the company and directors 20 business days before making the winding up order.

1.14 If the company or its directors object for any reason during that 10 business day period, ASIC cannot use that power to wind the company up. [Schedule 1, item 1, subsection 489EA(4)]

1.15 The obligation on ASIC to notify directors or the company does not extend to circumstances where ASIC does not possess information such as contact details for the directors or the company. This includes circumstances when ASIC has unsuccessfully attempted to contact directors based on information that ASIC has. [Schedule 1, item 1, subsection 489EA(5)]

1.16 ASIC is also required to give notice of its intention to make the order on the ASIC database and once it has made the order, publish the order in the prescribed manner. [Schedule 1, item 1, subsection 489EA(6)]

1.17 ASIC is not able to make a winding up order under this Part if an application has been filed in the Court and the Court is yet to deal with the application. If the Court has heard the application to wind the company up and not made a winding up order, or has otherwise dismissed the application to wind the company up, ASIC's powers to wind up a company are not limited by this clause. [Schedule 1, item 1, subsection 489EA(7)]

1.18 Only directors that fall within paragraph (a) of the definition of director contained in section 9 of the Corporations Act need to be notified by ASIC. These are directors who are formally appointed to being directors of the company. [Schedule 1, item 1, subsection 489EA(8)]

1.19 Each of the powers that ASIC has that are listed in subsections 489EA(1) to (4) are distinct powers which are separate from each other. For ASIC to use any of its powers under each of subsections 489EA(1) to (4), only the requirements of each sub clause need to be satisfied. If the requirements of one of the subsections are not met, this does not in any way prevent ASIC using its powers in circumstances where one of the other subsections in section 489EA otherwise permits ASIC to wind a company up. [Schedule 1, item 1, subsection 489EA(9)]

1.20 If ASIC exercises its powers to wind up a company under the new law, the company is deemed to have passed a special resolution under existing section 491 of the Corporations Act that the company be wound up voluntarily. The resolution is deemed to have been made on the day that ASIC uses its administrative power to order the winding up and does not require a declaration of solvency to have been made under existing section 494 of the Corporations Act. A meeting of creditors under existing subsection 497(1) of the Corporations Act is not required where the winding up has been ordered by ASIC. [Schedule 1, item 1, section 489EB]

1.21 If ASIC exercises its power to order that a company be wound up, it may appoint a liquidator to administer the winding up of the company. Where ASIC orders the winding up of a company under its new power, the statutory powers of the liquidator appointed to wind the company up will not be limited in any way. ASIC will be able to determine the liquidator's remuneration and in so doing will not be restricted in how it may choose to structure the remuneration of the liquidator. ASIC must obtain the consent of the liquidator before appointing the liquidator. ASIC may fill any vacancy in the office of liquidator, with a liquidator who has provided consent in writing to being appointed as a liquidator. [Schedule 1, item 1, section 489EC]

1.22 Currently, the company, a director or member of the company, or a liquidator may apply to ASIC and lodge an application to deregister the company. Applications for deregistration can only be made when: all of the company's members agree to the deregistration; the company is no longer carrying on business; the company does not have debts; and the other circumstances listed in existing subsection 601AA(2) of the Corporations Act apply. Although ASIC can request information in relation to the company, ASIC must deregister the company unless it is aware of a failure to comply with these obligations.

1.23 Under the new law, ASIC will be able to refuse an application to voluntarily deregister a company where ASIC decides that it is more appropriate for the company to be placed into liquidation. Once the company is in liquidation, the liquidator could investigate the affairs of the company. [Schedule 1, item 2, section 601AA]

1.24 ASIC has the power to initiate a deregistration in the circumstances listed in existing subsections 601AB(1) and 601AB(2). The Bill provides ASIC with the power to refuse to exercise its power to initiate the deregistration of a company where ASIC chooses to use its powers to make an order placing the company into liquidation. [Schedule 1, item 3, section 601AB]

1.25 Section 1317B of the Corporations Act provides that any decision by ASIC that is not excluded by section 1317C is subject to merits review. The Bill excludes any decision by ASIC to order a winding up from being subject to merits review. A person aggrieved at an order by ASIC to wind up a company can apply to the Court for orders to stay or terminate the winding up under existing section 482 of the Corporations Act. [Schedule 1, item 4, subsection 1317C(c)]

1.26 Whilst it is preferable for decisions that affect the rights of individuals to be subject to merits review by the Administrative Appeals Tribunal, once a company is placed into liquidation the process gives third parties proprietary rights which would be affected by any decision regarding the legality of the decision to commence the winding up. In relation to any dispute concerning proprietary rights, a court is the appropriate forum for determining an individual's property rights as opposed to an administrative tribunal. Similar decisions made by ASIC, including deregistering a company, are currently not subject to merits review.

Application and transitional provisions

1.27 ASIC can exercise its power under the new provisions after the commencement of Schedule 1 of the Bill.