House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, the Hon Stuart Robert MP)

Chapter 4

Disqualification from managing corporations

Outline of chapter

4.1 Division 1 in Part 3 of Schedule 1 to the Bill amends Part 2D.6 of the Corporations Act to introduce new provisions to disqualify company directors and other officers with a track record of involvement in corporate contraventions and insolvencies where the FEG scheme has been inappropriately relied on.

4.2 Division 2 in Part 3 of Schedule 1 of the Bill contains a minor consequential amendment to the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth), to ensure that Act aligns with the changes being made to the Corporations Act by this Bill.

Context of amendments

4.3 Under Part 2D.6 of the Corporations Act, company directors and officers can be disqualified from managing corporations in certain circumstances. Disqualification of persons can occur automatically, by a Court order, or by a determination of ASIC.

4.4 The amendments to Part 2D.6 in the Bill introduce new disqualification provisions that better target company directors and officers whose behaviours inappropriately impact the FEG scheme.

Summary of new law

4.5 The Bill amends Part 2D.6 of the Corporations Act to introduce new provisions enabling ASIC and the Court to disqualify company directors and other officers who have a track record of involvement in corporate contraventions and insolvencies where the FEG scheme has inappropriately funded the payment of outstanding employee entitlements and there has been a minimal return to the Commonwealth.

4.6 The Court can disqualify a person if, within the last seven years, in relation to two or more corporations:

•

there was a corporate contravention by the company, or the person, while the person was an officer of the company; and

•

on each occasion:

-

the Commonwealth has received a minimal or no return on a FEG advance (whether or not the corporation is still being wound up or has been wound up); and

-

the Court is satisfied that the Commonwealth is unlikely to receive more than a minimal return on the advance.

4.7 ASIC can disqualify a person if, within the last seven years, in relation to two or more companies:

•

ASIC has reason to believe that there was a corporate contravention by the company, or the person, while the person was an officer of the company; and

•

on each occasion:

-

the Commonwealth has received a minimal or no return on a FEG advance (whether or not the corporation is still being wound up or has been wound up); and

-

ASIC has reason to believe that the Commonwealth is unlikely to receive more than a minimal return on the advance.

4.8 ASIC will be able to disqualify a person for up to five years. The Court will be able to disqualify a person for a period that the Court considers is appropriate.

4.9 Both ASIC and the Court must be satisfied that the disqualification is justified.

Comparison of key features of new law and current law

Detailed explanation of new law

Section 206EAB: Court power of disqualification

4.10 Section 206EAB(1) allows a Court, on application by ASIC, to disqualify a person from managing corporations for a period of time that the Court considers appropriate, where the Court is satisfied the disqualification is justified and subsection 206EAB(2) applies to the person in relation to two or more corporations. [Schedule 1, item 26, subsection 206EAB(1)]

4.11 The Court can disqualify a person under section 206EAB where, within the last seven years, two corporations to which the person has been appointed as an officer had employees who relied on the FEG scheme for the payment of their outstanding employee entitlements and in relation to each corporation, within the seven year period:

•

there was a corporate contravention by the corporation while the person was an officer of the corporation which they did not take reasonable steps to prevent, or the corporate contravention was by the officer themselves while they were appointed to the corporation; and

•

an advance from the FEG scheme was made, and:

-

the Commonwealth has not received a return, or only received a minimal return of 10 per cent or less (whether the corporation is still being wound up or has been wound up); and

-

the Court is satisfied that the Commonwealth is unlikely to receive more than a 10 per cent return on its FEG advance.

[Schedule 1, item 26, subsections 206EAB(1), (2) and (3)]

4.12 The persons who may be disqualified by the Court are officers of a corporation and those who ceased being officers in the 12 months before the corporation began being wound up. This ensures that directors who engage in sharp corporate practices that result in insolvency and inappropriate reliance on FEG, but resign to avoid liability, are appropriately captured by the provisions. [Schedule 1, item 26, subsections 206EAB(1) and (2)]

4.13 The requirement in paragraph 206EAB(2)(c) for the Court to be satisfied that the Commonwealth is unlikely to receive more than a 10 per cent return on its FEG advance allows the provision to operate where a winding up has not yet been completed. Many liquidations can take several years to complete, and having to wait for a liquidation to be finalised could frustrate the objectives of the disqualification power in section 206EAB. This paragraph enables the Court to form a view on the likely return to the Commonwealth, and enables disqualification action to proceed even when a liquidation has not yet been finalised.

4.14 The Court might have regard to, for example, any reports provided by the liquidator to ASIC on the likely return to creditors in the winding up of the company, the potential impact of any litigation on foot in relation to the company, and other matters it considers relevant.

4.15 To be disqualified by the Court, a person must, within a seven year period, have contravened the requirements of the Corporations Act or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) in relation to each corporation while they were an officer of each corporation. Alternatively, at least two of the corporations of which they were an officer must have contravened either of those Acts while they were an officer and the person failed on each occasion to take reasonable steps to prevent those contraventions. [Schedule 1, item 26, paragraph 206EAB(2)(d)]

4.16 The requirement for a contravention to have occurred on each occasion by an officer of the corporation while appointed to that position, or by the corporation while the person was an officer of the corporation, is consistent with existing director disqualification provisions, being that:

•

a person can be disqualified from managing corporations by a Court where:

-

the person has, or the corporations they are responsible for have, contravened corporations law on multiple occasions; and

-

the person is responsible for multiple corporations which fail, and there is a resulting significant non-payment of each corporation's debts at the end of their winding up.

4.17 No causal connection is required between:

•

the contraventions by the officer of the corporation or the contraventions by the corporation mentioned in paragraph 206EAB(2)(d); and

•

either:

-

the resulting FEG advance made to former employees of the company; or

-

the resulting or likely minimal return of the FEG advance through the company's liquidation process.

4.18 The reason for not requiring a causal connection is to facilitate the protective purpose of section 206EAB.

4.19 Any corporate contravention the Court finds to have occurred, including minor contraventions by the company or the relevant person, could be sufficient to meet the requirements of paragraph 206EAB(2)(d). The Court could consider the nature and severity of the contraventions in determining whether the disqualification is justified.

4.20 Some examples of contraventions for the purposes of paragraph 206EAB(2)(d) include:

•

the failure of an officer to ensure the corporation kept books and records to the appropriate standard, or at all;

•

the destruction or loss of the books and records of the corporation, whether by an officer or employees of the corporation;

•

failing to assist or hindering the company's liquidator in their investigations;

•

failure by the person to comply with orders of ASIC, whether directed to them or the corporation; or

•

any other corporate contravention, such as contraventions of director duties, not providing required information or providing misleading information to ASIC, or not meeting financial reporting requirements.

Example 4.1

Arseni is the director of Whisky Bar Two Pty Ltd. Nik is the other director of that company. Whisky Bar Two Pty Ltd began its operations two years ago.

Arseni and Nik were previously the directors of Whisky Bar One Pty Ltd, which entered winding up three years ago. Arseni and Nik did not lodge any required documents with ASIC or keep any books and records for the company while it operated. All the former employees of Whisky Bar One Pty Ltd had their outstanding employee entitlements paid by FEG, totalling $2 million. At the finalisation of the liquidation a year ago, no return of that FEG advance was obtained.

Arseni and Nik have not lodged any required documents with ASIC in relation to Whisky Bar Two Pty Ltd since it began its operations. Further, they have not kept books and records for the company.

Arseni resigns from Whisky Bar Two Pty Ltd, and 11 months later, Nik has the company put into voluntary administration. The creditors of Whisky Bar Two Pty Ltd agree to have the company wound up four months later. $1 million in FEG is paid to the former employees of Whisky Bar Two Pty Ltd, and the liquidator has lodged a report with ASIC stating that there is no prospect of any return to creditors.

Even though the liquidation of Whisky Bar Two Pty Ltd is not finalised, ASIC will be able to apply to the Court to have both Nik and Arseni disqualified under section 206EAB because, within the last seven years:

•

Nik was the director of both companies at the time the companies were wound up and he or the company contravened the Corporation Act while he was a director;

•

Arseni was a director of Whisky Bar One Pty Ltd at the time when the company was wound up and he or the company contravened the Corporations Act while he was a director of the company;

•

Arseni was a director of Whisky Bar Two Pty Ltd 11 months prior to it being wound up and he or the company contravened the Corporations Act while he was a director of the company;

•

the former employees of Whisky Bar One Pty Ltd had some or all of their outstanding employee entitlements paid under the FEG scheme, and no return on the FEG advance was obtained in that liquidation; and

•

the former employees of Whisky Bar Two Pty Ltd had some or all of their outstanding employee entitlements paid under the FEG scheme, and it is unlikely that the Commonwealth will obtain more than a 10 per cent return of its advance.

It is a matter for the Court to decide if it is satisfied that the Commonwealth will receive no more than a minimal return of the FEG advances made to the former employees of Whisky Bar Two Pty Ltd.

If the Court is not satisfied of this, Arseni and Nik will not be able to be disqualified under section 206EAB.

4.21 The Court can take into account, when determining whether disqualification of a person is justified under section 206EAB, the relevant person's conduct in relation to the management, business and property of any corporation. The Court may also have regard to any other matters that the Court thinks are appropriate in determining whether disqualification is justified. [Schedule 1, item 26, subsection 206EAB(4)]

4.22 For example, other matters the Court could consider for the purposes of subsection 206EAB(4) include:

•

whether the person, or corporation the person was an officer of, complied with their obligations under the Corporations Act;

•

the impact of disqualification on the person or corporations they are currently an officer of;

•

information relating to the person's fitness to continue managing corporations in the future;

•

the nature or severity of the relevant corporate contraventions;

•

the impact disqualification might have on the person, or on the corporations they may currently be an officer of; and

•

whether disqualification will further the objectives of the Part and would be in the public interest.

4.23 The Court has ultimate discretion to determine what conduct, matters and information it has regard to in any case, and the weight it considers appropriate to assign to those matters.

Example 4.2

Arseni and Nik were previously the directors of Whisky Bar Zero Pty Ltd, which was wound up five years ago. That company's employees had their employee entitlements paid by FEG, however FEG received a full return of its advance in the liquidation.

Arseni and Nik are also the directors of Whisky Bar Prime Pty Ltd, which has successfully been operating cafes for the last 10 years. Whisky Bar Prime Pty Ltd has up-to-date company records and its operations to date have not raised Corporations Act compliance issues for ASIC.

In considering ASIC's application under section 206EAB for Arseni and Nik to be disqualified from managing corporations in connection with their conduct relating to Whisky Bar One Pty Ltd and Whisky Bar Two Pty Ltd, the Court has discretion to consider, and the extent it wishes to consider, any of the following matters (among other things):

•

Arseni and Nik's management of Whisky Bar One Pty Ltd and Whisky Bar Two Pty Ltd over the life of those companies;

•

Arseni and Nik's successful management of Whisky Bar Prime Pty Ltd over the last 10 years, and that the entity appears compliant with the Corporations Act;

•

that the winding up of Whisky Bar Zero Pty Ltd resulted in a full return of the FEG advance; and

•

the impact on Arseni and Nik, and the management of Whisky Bar Prime Pty Ltd, of Arseni and Nik being disqualified as company directors.

4.24 For the avoidance of doubt, subsection 206EAB(5) outlines that a reference to a corporation for the purposes of disqualifying persons under section 206EAB includes a reference to an Aboriginal and Torres Strait Islander corporation. [Schedule 1, item 26, subsection 206EAB(5)]

Section 206GAA: ASIC's power of disqualification

4.25 Section 206GAA allows ASIC to disqualify a person from managing corporations for up to five years if ASIC is satisfied the disqualification is justified, and where subsection 206GAA(2) applies to the person in relation to two or more corporations.

4.26 ASIC can disqualify a person under section 206GAA where, within the last seven years, two corporations to which the person has been appointed as an officer had employees who relied on the FEG scheme for the payment of their outstanding employee entitlements and in relation to each corporation, in the seven year period:

•

ASIC has reason to believe there was a corporate contravention by the company while the person was an officer of the corporation and they did not take reasonable steps to prevent it, or ASIC has reason to believe there was a corporate contravention by the officer themselves while they were appointed to the corporation; and

•

an advance from the FEG scheme was made, and:

-

the Commonwealth has not received a return or only received a minimal return of 10 per cent or less (whether the corporation is still being wound up or has been wound up); and

-

ASIC has reason to believe the Commonwealth is unlikely to receive more than a 10 per cent return on its FEG advance.

[Schedule 1, item 28, subsections 206GAA(1), (2) and (3)]

4.27 ASIC must provide the person with a notice outlining that ASIC intends to disqualify them from managing corporations, and provide them with an opportunity to be heard. [Schedule 1, item 28, paragraph 206GAA(1)(b)]

4.28 The persons who may be disqualified by ASIC include current officers of a corporation and those who ceased being officers in the 12 months before the company began being wound up. This ensures that directors who engage in sharp corporate practices that result in insolvency and inappropriate reliance on FEG, but resign to avoid liability, are appropriately captured by the provisions. [Schedule 1, item 28, paragraph 206GAA(2)(a)]

4.29 The requirement in paragraph 206GAA(2)(c) for ASIC to have a reason to believe the Commonwealth is unlikely to receive more than a 10 per cent return on its FEG advance allows the provision to operate where a winding up has not yet been completed. Many liquidations can take several years to complete, and having to wait for a liquidation to be finalised could frustrate the objectives the disqualification power in section 206GAA. This paragraph enables ASIC to form a view on the likely return to the Commonwealth, and enables disqualification action to proceed even when a liquidation has not yet been finalised.

4.30 ASIC might have regard to, for example, any reports provided by the liquidator to ASIC on the likely return to creditors in the winding up of the company, the potential impact of any litigation on foot in relation to the company, and other matters it considers relevant.

4.31 To be disqualified from managing corporations by ASIC, ASIC must have reason to believe that a person must have contravened the requirements of the Corporations Act or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) in relation to each corporation, while they were an officer of each corporation. Alternatively, ASIC must have reason to believe that at least two of the corporations of which they were an officer contravened either of those Acts while they were an officer and the person failed to take reasonable steps to prevent those contraventions. [Schedule 1, item 28, paragraph 206GAA(2)(d)]

4.32 The requirement in paragraph 206GAA(2)(d) that ASIC must have a reason to believe there was a corporate contravention means that ASIC can disqualify a person without a court finding that a contravention has occurred. This allows ASIC to take regulatory action to prevent further misconduct by disqualifying relevant persons under this section in a timely manner. This facilitates the protective purpose of the section.

4.33 No causal connection is required between:

•

the contraventions by the officer or the contraventions by the corporation mentioned in paragraph 206GAA(2)(d); and

•

either:

-

the resulting FEG advance made to former employees; or

-

the resulting or likely minimal return of the FEG advance through the company's liquidation process.

4.34 Any corporate contravention ASIC believes to have occurred, including minor contraventions by the company or the relevant person, could be sufficient to meet the requirements of paragraph 206GAA(2)(d). ASIC could consider the nature and severity of the contraventions it believes to have occurred in determining whether the disqualification is justified.

4.35 Some examples of contraventions which ASIC could consider for the purposes of paragraph 206GAA(2)(d) include those that the Court can consider in relation to paragraph 206EAB(2)(d), above.

Example 4.3

Sandya is the company director of Magic Pty Ltd and Mystical Pty Ltd, two separate companies which were in the business of selling antiques.

Magic Pty Ltd was wound up three years ago, after which Sandya incorporated a new business, Mystical Pty Ltd. Mystical Pty Ltd has recently entered winding up.

All the former employees of Magic Pty Ltd had their outstanding employee entitlements paid by the FEG scheme. No return was received at the finalisation of the liquidation process, which occurred one year ago.

All the former employees of Mystical Pty Ltd have now had their outstanding employee entitlements paid by the FEG scheme. The liquidator of Mystical Pty Ltd does not anticipate a return to any creditors of the company.

On examining the two cases, ASIC has reason to believe that Sandya has contravened the Corporations Act in relation to both entities as she failed to assist the liquidator.

ASIC sends a notice to Sandya requiring her to demonstrate why she should not be disqualified under section 206GAA from managing corporations, as ASIC has reason to believe that the Commonwealth is unlikely to receive more than a minimal return on the FEG advance, and for failing to assist the liquidator.

In the notice, ASIC outlines the ways Sandya can demonstrate why she should not be disqualified, and how she can exercise her opportunity to be heard.

4.36 For the purposes of determining whether disqualification is justified under section 206GAA, ASIC must have regard to whether the two or more corporations in question are related within the meaning of section 50 of the Corporations Act. This means ASIC must have regard to the relationship between the corporations, which is particularly relevant to situations involving the failure of a corporate group involving multiple insolvent companies that have inappropriately relied on FEG. [Schedule 1, item 28, paragraph 206GAA(4)(a)]

4.37 In determining whether disqualification is justified, ASIC may also have regard to:

•

the person's conduct in relation to the management, business or property of any corporation;

•

whether disqualification would be in the public interest; and

•

any other matters ASIC considers appropriate such as:

-

whether the person, or corporation the person was an officer of, complied with their obligations under the Corporations Act;

-

information relating to the person's fitness to continue managing corporations in the future;

-

the nature and severity of the corporate contraventions; and

-

the impact disqualification might have on the person, or on the corporations they may currently be an officer of.

[Schedule 1, item 28, paragraph 206GAA(4)(b)]

Example 4.4

Sandya, the company director of Magic Pty Ltd and Mystical Pty Ltd, has set up a new venture, Sorcerer Pty Ltd. This company will continue selling antiques.

ASIC believes Sandya poorly managed both Magic Pty Ltd and Mystical Pty Ltd. Also, the liquidator of Magic Pty Ltd lodged a report with ASIC three years ago, outlining a range of suspected contraventions of the Corporations Act.

In determining whether it is justified to disqualify Sandya from managing corporations under section 206GAA, ASIC could have regard to a range of matters potentially including:

•

Sandya's management of Magic Pty Ltd and Mystical Pty Ltd while they were operating, including the period leading up to them being wound up;

•

the content of the report provided to ASIC by the liquidator of Magic Pty Ltd; and

•

whether disqualification would be in the public interest.

4.38 For the avoidance of doubt, subsection 206GAA(5) outlines that a reference to a corporation for the purposes of disqualifying persons under section 206GAA includes reference to an Aboriginal and Torres Strait Islander corporation. [Schedule 1, item 28, subsection 206GAA(5)]

4.39 When ASIC disqualifies a person under section 206GAA, they must serve the person with a notice that advises them they have been disqualified. [Schedule 1, item 28, subsection 206GAA(6)]

4.40 The disqualification of the person takes effect from the time the notice is served on the person. [Schedule 1, item 28, subsection 206GAA(7)]

4.41 A person dissatisfied with ASIC's decision to disqualify them under section 206GAA can seek review of the disqualification decision by the Administrative Appeals Tribunal under section 1317B of the Corporations Act.

Section 206GAB: ASIC power to grant leave to manage corporations

4.42 Section 206GAB allows ASIC to grant leave to persons who have been disqualified from managing corporations by ASIC under sections 206F and 206GAA of the Corporations Act, to manage a particular corporation or corporations. [Schedule 1, item 28, section 206GAB]

4.43 ASIC can determine any conditions and exceptions which it considers are appropriate if it grants leave to a person to manage corporations. [Schedule 1, item 28, section 206GAB]

4.44 ASIC previously had a power to grant leave to persons to manage corporations, if ASIC disqualified those persons for contravention of section 206F. Subsection 206F(5) which provided ASIC this power, has been repealed and incorporated into the new section 206GAB. [Schedule 1, item 27, subsection 206F(5)]

4.45 The legislative amendment to repeal subsection 206F(5) requires a number of minor consequential amendments to the Corporations Act to update cross references which referred to the power to grant leave to relevant persons to be able to manage corporations under section 206F. [Schedule 1, items 21, 22, 23, 24 and 25, subsection 201B(2), section 203B, subsection 204B(2), section 204G, and subsections 206A(1B) and (2)]

Section 1274AA: Register of disqualified company directors and other officers

4.46 Minor amendments are made to section 1274AA to outline that ASIC's register of disqualified persons must include:

•

details of those persons disqualified by the Court under section 206EAB.

•

details of those persons disqualified by ASIC under section 206GAA;

•

information on every notice of disqualification issued by ASIC to persons under subsection 206GAA(6); and

•

information on every permission ASIC has given to disqualified persons to be able to manage certain corporations, under section 206GAB.

[Schedule 1, items 29, 30 and 31, paragraphs 1274AA(1)(a), 1274AA(2)(ab) and 1274AA(2)(c)]

Consequential amendments

4.47 Division 2 in Part 3 of Schedule 1 to the Bill contains a consequential amendment to paragraph 279-35(2)(b) of the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth).

4.48 The minor amendment to this paragraph specifies that a person who has been disqualified from managing Aboriginal and Torres Strait Islander corporations is not able to apply to the Court for a grant of leave to manage such corporations, if ASIC has disqualified the person from managing corporations under section 206GAA of the Corporations Act. [Schedule 1, item 32, paragraph 279-35(2)(b)]

4.49 This minor amendment is consistent with the current prohibition contained in paragraph 279-35(2)(b) of the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth), which prevents a person who is disqualified from managing Aboriginal and Torres Strait Islander corporations from applying to the Court for leave to manage such corporations, if ASIC has disqualified the person from managing corporations under section 206F of the Corporations Act.

Application and transitional provisions

4.50 Part 10 of the Corporations Act is amended to insert transitional provisions concerning the application of new sections 206EAB and 206GAA. [Schedule 1, item 33, section 1649]

4.51 The seven year period in which the two new provisions can apply is able to include a period up to five years before the day on which the new disqualification begin operation. [Schedule 1, item 33, subsection 1649(1)]

4.52 A person can only be disqualified from managing corporations under the new sections by a Court or ASIC if at least one of the corporate contraventions by the officer, or by the corporation while the person was an officer, is:

•

proven to the satisfaction of the Court to have occurred (for the purposes of section 206EAB) after the commencement of that section; or

•

something which ASIC has reason to believe occurred (for the purposes of section 206GAA) after the commencement of the section.

[Schedule 1, item 33, subsection 1649(2)]

4.53 A permission given by ASIC to a person that they can manage certain corporations under subsection 206F(5) that was in force immediately before the commencement of the Bill, continues to be in force (and may be dealt with) as if it had been given under section 206GAB. [Schedule 1, item 33, subsection 1649(3)]