House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Josh Frydenberg MP)

Chapter 6 - Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Corporations Amendment (Corporate Insolvency Reforms) Bill 2020

6.1 The Bill implements the Corporate Insolvency Reforms announced by the Government on 24 September 2020. The reforms are intended to reduce the costs and time associated with external administration and the compliance burden for insolvency practitioners, helping more Australian businesses remain viable and improving the returns to creditors and employees when the business is unviable.

6.2 The Bill:

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creates a debt restructuring process for eligible small companies;

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provides temporary relief protections for eligible small companies which intend to enter the debt restructuring process;

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creates a simplified liquidation process for a creditors' voluntary winding up of an insolvent company and amends the Insolvency Practice Schedule to refine the registration requirements for a liquidator; and

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expands the situations where documents relating to the external administration of a company may be given electronically. It also allows documents relating to the external administration of a company to be signed electronically.

Overview

Debt restructuring

6.3 Schedule 1 to the Bill inserts Part 5.3B into the Corporations Act to establish a new formal debt restructuring process for eligible small companies. This will enable financially distressed but viable firms to restructure their existing debts so that they can continue to trade.

Temporary relief for companies seeking a small business restructuring practitioner

6.4 Schedule 2 to the Bill provides temporary relief for eligible companies seeking to enter the debt restructuring process described in Chapter 1. The Schedule sets out the eligibility criteria for being for the temporary restructuring relief, the circumstances in which the relief will cease, and safeguards to deal with potential misuse of the relief.

Simplified liquidation

6.5 Schedule 3 to the Bill establishes a simplified liquidation process for the purpose of winding up the affairs and distributing the property of a company in a creditors' voluntary winding up. The Schedule inserts new rules that apply to elements of the liquidation process for liquidations that are eligible to adopt and have adopted the simplified liquidation process.

6.6 Schedule 3 also amends the requirements for registration as a liquidator under the Corporations Act and registration as trustee under the Bankruptcy Act.

Virtual meetings and electronic communications

6.7 Schedule 4 to the Bill allows electronic communication to be used to give a document under the external administration provisions in Chapter 5 of the Corporations Act, the Insolvency Practice Schedule, Chapter 5 of the Corporations Regulations, the Insolvency Practice Rules or any other instrument made under Chapter 5.

6.8 Schedule 4 also allows documents relating to the external administration provisions to be signed electronically by using any reliable method to identify the signatory and indicate the signatory's intention. Signatories may sign different copies of the document, provided that the copy includes the entire contents of the original document.

Human rights implications

6.9 In assessing the impact on human rights, consideration has been given to the Parliamentary Joint Committee on Human Rights' Guidance Note 2: Offence provisions, civil penalties and human rights (Guidance Note 2), and to the Guide to Framing Commonwealth Offences.

Debt restructuring

6.10 Schedule 1 to the Bill engages, or may engage, the right to a fair trial in Article 14 of the International Covenant on Civil and Political Rights. Article 14 ensures that everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law.

6.11 Schedule 1 inserts Part 5.3B into the Corporations Act. The new debt restructuring process in Part 5.3B draws heavily on the established voluntary administration framework in Part 5.3A of the Corporations Act and shares many of its features.

Right to a fair trial

6.12 The penalty provisions contained in Schedule 1 are consistent with existing penalties in the Corporations Act for similar offences in the voluntary administration framework.

6.13 A number of offences are imposed under the new debt restructuring process. The level of penalty imposed for each offence is consistent with those imposed for similar offences under the existing voluntary administration framework.

6.14 All offences in Schedule 1 are applied through the existing general offence provision in section 1311 of the Corporations Act. A person charged with an offence is subject to the well-established judicial framework applying to the existing penalty regime in the Corporations Act.

6.15 A small business restructuring practitioner must make a declaration of relevant relationships as soon as practicable after being appointed. They must give copies of the declaration to the company's creditors and ASIC. A penalty of 20 penalty units applies if they fail to make the declaration, or if they fail to provide a copy to creditors and ASIC. This penalty is appropriate, as failure to comply can raise doubts about their independence and undermine the integrity of the debt restructuring process.

6.16 This declaration must be kept up to date for changes in the small business restructuring practitioner's circumstances, and any replacement declarations must again be provided to creditors and ASIC. Failure to comply with any of these obligations is similarly subject to an offence of 20 penalty units. This ensures that creditors can continue to rely on the independence of the small business restructuring practitioner following a change in their circumstances. A defence is available to the small business restructuring practitioner where they have made reasonable enquiries and have no reasonable grounds for believing that a matter should have been included in the declaration.

6.17 Where a replacement small business restructuring practitioner is subsequently appointed to the company during restructuring, they have the same obligations to make a declaration of relevant relationships and to provide a copy to creditors and ASIC as soon practicable. The declaration must be maintained up to date. The same penalties apply for failure to comply with these obligations (20 penalty units), and the same defences are also available to them.

6.18 Directors of a company under restructuring must not enter into transactions or dealings that are not in the ordinary course of business, other than with the consent of the small business restructuring practitioner or under an order of the Court. Failure to comply is an offence, subject to a penalty of six months imprisonment. This penalty is appropriate, as transactions that are outside the ordinary course of the company's business could be an indicator of illegal phoenixing or other dishonest behaviour. Such transactions can have serious detriment for creditors and undermine the integrity of the debt restructuring process.

Strict liability offences

6.19 Schedule 1 applies strict liability offences in relation to the eligibility criteria for a small business restructuring practitioner, and the obligation on company directors to help the small business restructuring practitioner (including giving them relevant information about the company's affairs).

6.20 These provisions may engage, but do not limit, the presumption of innocence under Article 14(2) of the International Covenant on Civil and Political Rights.

6.21 Strict liability offences are appropriate in these circumstance, as it is necessary to strongly deter misconduct that can have serious detriment for creditors. This is because the nature of the offence means that it is appropriate for a person to be penalised if:

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they act as a small business restructuring practitioner without having the requisite qualifications, knowledge and experience necessary to support a distressed small business through the debt restructuring process and to develop a debt restructuring plan to put to creditors (offence: 50 penalty units);

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they act as a small business restructuring practitioner despite having a relationship with the company, undermining their independence, the integrity of the restructuring process and ultimately the debt restructuring plan being put to creditors (offence: 50 penalty units); or

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as a director of a company under restructuring, they fail to provide relevant information to the small business restructuring practitioner thus preventing the small business restructuring practitioner from making an accurate declaration to creditors in relation to a proposed plan (offence: 120 penalty units).

6.22 Strict liability offences reduce non-compliance, which bolsters the integrity of the new debt restructuring process. Strict liability is particularly beneficial to regulators as they need to deal with offences expeditiously to maintain public confidence in the regulatory regime.

6.23 The strict liability offences in this Schedule meet all the conditions listed in the Guide to Framing Commonwealth Offences. The strict liability offences preserve the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of such offences.

6.24 To the extent that these provisions do engage this right, it is considered to be reasonable, necessary and proportionate to do so in order to meet a legitimate objective.

Reverse burden of proof

6.25 Several offences in Schedule 1 contain exceptions in relation to which a defendant bears an evidential burden. These relate to:

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the eligibility to consent to be appointed, or to act, as the small business restructuring practitioner for a company or for a restructuring plan;

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the actions of company directors while the company is under restructuring; and

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safe harbour protections in relation to a director's duty to prevent insolvent trading.

6.26 These provisions may engage, but do not limit, the presumption of innocence under Article 14(2) of the ICCPR.

6.27 A person is not eligible to be appointed or to act as a small business restructuring practitioner unless they are a registered liquidator. Failure to comply is an offence of strict liability with a penalty of 50 penalty units. The reversal of the evidential burden of proof is appropriate in this instance as the information-relating to the defendant's registration as a liquidator-is peculiarly within the knowledge of the defendant. Further, the reversal of the evidential burden is proportionate as record keeping in this instance does not unduly burden the defendant.

6.28 Company directors are required to help the small business restructuring practitioner, including giving them information about the company's business, property, affairs and financial circumstances. Failure to comply is an offence of strict liability with a penalty of 120 penalty units. However, a company director may seek to rely on a defence of reasonable excuse. The reversal of the evidential burden of proof is appropriate in this instance as the information-relating to the defendant's defence of reasonable excuse-would be peculiarly within the knowledge of the defendant. It would not be onerous for the defendant to produce this evidence should the need arise.

6.29 Company directors have a duty not to trade while insolvent. Failure to comply is subject to a civil penalty. However, safe harbour protections provide company directors with a defence against breach of this duty. Schedule 1 extends the existing safe harbour protections to companies under restructuring. If a director intends to rely on this safe harbour, the director will bear the evidential burden in relation to requirements of the safe harbour. The effect of this is that a director who seeks to rely on the safe harbour is required to adduce or point to evidence that suggests a reasonable possibility that the safe harbour applies.

6.30 In this instance, the reversal of the evidential burden is necessary and reasonable as information about the company's activities during the restructuring period would be readily and specifically within the knowledge of the defendant. Instead, it would be particularly onerous for the regulator to undergo lengthy and unnecessary investigations to find out this information. It would not be onerous for the defendant to produce the evidence should the need arise.

6.31 The reversal of the evidential burden of proof is also appropriate in these instances as it is limited to reliance by a small business restructuring practitioner or director on the relevant codified exception, and not the proving of innocence in and of itself.

6.32 The inclusion of a reversal of evidential burden in these instances is consistent with section 13.3(3) of the Criminal Code Act 1995, where a defendant who wishes to rely on any exception, provided by the law creating an offence, bears an evidential burden in relation to that matter; the exception need not accompany the description of the offence.

6.33 This approach is also consistent with the principle in the Guide to Framing Commonwealth Offences which establishes the general rule that a defendant should only bear an evidential burden of proof for an offence-specific defence. In these instances, the person seeking to use the exemption is required to bear an evidential burden in showing that the specific exemption applies.

Temporary relief for companies seeking a small business restructuring practitioner

6.34 Schedule 2 to the Bill engages, or may engage, the right to a fair trial in Article 14 of the ICCPR. Article 14 of the ICCPR ensures that everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law.

Right to a fair trial

Civil penalties are not 'criminal' for the purposes of human rights law

6.35 Schedule 2 applies the existing civil penalty regime contained in the Corporations Act for when the directors of a company fail to notify ASIC that the company is no longer eligible for temporary restructuring relief.

6.36 In accordance with the Committee's guidance, the civil penalty applies where the directors of a company fail to notify ASIC. This is imposed with consideration to the nature, purpose and severity of the penalty.

6.37 The penalty is imposed through the existing civil penalty regime contained in section 1317E of the Corporations Act, and penalises individual directors for the wrongful conduct.

6.38 The penalty is consistent with the civil penalty regime contained in the Corporations Act which provides a penalty equal to greater of 5,000 penalty units for individuals, or if the Court can determine the benefit derived and detriment avoided because of the contravention-that amount multiplied by 3.

6.39 The penalty is regulatory and protective in nature, and is aimed to encourage compliance by directors to withdraw from the debt restructuring regime, once they hold a reasonable belief that the company does not meet the eligibility requirements. The purpose of the penalty is to ensure that the integrity of the debt restructuring regime is upheld, and that directors who are not eligible for debt restructuring do not take advantage of the temporary relief protections.

6.40 Consistent with the existing civil penalty regime, it is expected that the maximum penalty will only be applied in the most egregious cases. In addition to this, the penalty is contained, and will only be applied to a sector or class of people who should be reasonably aware of their obligation to inform ASIC and who should be aware of the penalties available to ASIC if they do not comply with the obligation.

6.41 Further, the provisions do not apply to the general public, but to a sector or class of people who should reasonably be aware of their obligations under the relevant legislation.

6.42 Finally, the civil penalties carry no sanction of imprisonment for non-payment of the penalty.

6.43 Based on the above factors, the nature and severity of the civil penalties in the Schedule are not 'criminal' for the purposes of human rights law.

Strict liability offence

6.44 Schedule 2 applies a strict liability offence to the obligation on the liquidator to report to ASIC where the liquidator suspects that there are reasonable grounds to believe that the company is not eligible for temporary restructuring relief. The strict liability offence is applied through the existing general offence provision in section 1311 of the Corporations Act.

6.45 This may engage, but does not limit, the presumption of innocence under Article 14(2) of the ICCPR.

6.46 A strict liability offence is appropriate in this circumstance, as it is necessary to strongly deter misconduct that can have a serious detriment for creditors. This is because the nature of the offence means that it is appropriate for a person to be penalised if a liquidator allows a company to enter the debt restructuring process where it is not appropriate for them to do so.

6.47 The strict liability offence reduces non-compliance, which bolsters the integrity of the regime enforced by the ASIC. Strict liability is particularly beneficial to regulators as they need to deal with offences expeditiously to maintain public confidence in the regulatory regime.

6.48 The strict liability offence in this Schedule meets all the conditions listed in the Guide to Framing Commonwealth Offences. For example, the fines for the offences do not exceed 60 penalty units for persons other than a body corporate or 300 penalty units for a body corporate. Instead, the fine is 20 penalty units. In addition to this, the application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of such offences.

6.49 To the extent that the provision does engage this right, it is considered to be reasonable, necessary and proportionate to do so in order to meet a legitimate objective.

Reversal of burden of proof

6.50 Schedule 2 provides a safe harbour in relation to a director's duty, under section 588G(2), to prevent insolvent trading. This means that-for the purposes of the civil penalty in section 588G(2)-a director is not required to prevent the company from incurring a debt while insolvent.

6.51 If the director intends to rely on this safe harbour, the director will bear the evidential burden in relation to requirements of the safe harbour. The effect of this is that a director who seeks to rely on the safe harbour is required to adduce or point to evidence that suggests a reasonable possibility that the safe harbour applies.

6.52 This may engage, but does not limit, the presumption of innocence under Article 14(2) of the ICCPR.

6.53 The reversal of the evidential burden is necessary and reasonable as information about the company's activities for the specified period would be readily and specifically within the knowledge of the defendant. Instead, it would particularly onerous on the regulator to undergo lengthy and unnecessary investigations to find out this information. As opposed to the defendant, where it would not be onerous for them to produce the evidence should the need arise.

6.54 The reversal of the evidential burden of proof is also appropriate in this instance as it is limited to reliance by a director on the codified exception, and not the proving of innocence in and of itself.

6.55 The inclusion of a reversal of evidential burden is consistent with section 13.3(3) of the Criminal Code Act 1995, where a defendant who wishes to rely on any exception, provided by the law creating an offence, bears an evidential burden in relation to that matter; the exception need not accompany the description of the offence.

6.56 This approach is also consistent with the principle in the Guide to Framing Commonwealth Offences which establishes the general rule that a defendant should only bear an evidential burden of proof for an offence specific defence. In this case, the person seeking to use the exemption is required to bear an evidential burden in showing that the specific exemption applies.

Simplified liquidation

6.57 Schedule 3 to the Bill does not engage any of the applicable rights and freedoms.

Virtual meetings and electronic communications

6.58 Schedule 4 to the Bill does not engage any of the applicable rights and freedoms.

Conclusion

6.59 To the extent that Schedules 1 and 2 to the Bill engage the rights under Article 14 of the International Covenant on Civil and Political Rights, they are compatible with human rights as the limitations:

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achieve the legitimate objective of maintaining the integrity of the debt restructuring regime; and

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are rationally connected to the legitimate objective by improving the likelihood of directors and liquidators being compliant with their legal obligations during the debt restructuring process, and honestly assessing eligibility to meet the requirements to be eligible for temporary restructuring relief; and

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impose proportionate and appropriate penalties to deter any potential misconduct.

6.60 Therefore, Schedules 1 and 2 to the Bill are compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

6.61 Schedules 3 and 4 to the Bill are compatible with human rights obligations as they do not raise any human rights issues.