Second Reading Speech
Hockey, Joe, MP (North Sydney, Minister for Financial Services and Regulation, LP, Government)I move:
That the bill be now read a second time.
This bill will amend the Corporations Law to increase protection for employee entitlements. It will send a very clear message to corporate employers that deliberately avoid obligations to their employees and it says to them that their conduct is not acceptable. It is not expected that the bill will have a financial impact on the Commonwealth. At present, employee entitlements receive priority under the Corporations Law. The entitlements that are protected include wages, superannuation contributions, leave and retrenchment payments. Under the priority, employees are paid in full after the expenses of the winding up, to the extent of the company's available unsecured assets. As a result, employees are paid before the debts of other unsecured creditors, but not out of assets secured under a fixed charge, such as a mortgage. Employees are, however, paid out in priority to certain floating charge holders.
In the wake of a number of high profile failures of corporate employers in late 1998 and 1999, the government examined a number of options for increasing the protection for employee entitlements. In July last year, the government put proposals for the amendment of the Corporations Law to the states and territories at the Ministerial Council for Corporations. At that meeting, which I chaired, the ministerial council gave its in-principle approval to the proposals. Draft provisions were prepared to give effect to the proposals and were forwarded to the ministerial council for approval in November 1999, in accordance with the requirements of the Corporations Agreement.
Earlier this year, ministerial council members gave the necessary approval for introduction of the bill into parliament, allowing the government to proceed with the bill at the earliest available opportunity. This bill will increase the protection for employee entitlements in two ways: firstly, by extending the existing duty on directors to ensure that their company does not engage in insolvent trading and, secondly, by introducing a new offence which targets agreements and transactions entered into for the purpose of avoiding payment of employee entitlements. A breach of the new offence provision may lead to a court ordered payment of compensation by those involved. Further, serious breaches can result in criminal penalties.
The Corporations Law already contains a prohibition on insolvent trading by directors. However, the existing duty may not cover a situation where a company confers a financial benefit on another party that is not a debt. The first limb of the bill extends the current duty on directors not to engage in insolvent trading to include uncommercial transactions. Civil penalties and criminal sanctions may flow from a breach of this duty. Further, directors may be personally liable for losses suffered by creditors. It would not be appropriate for directors to be personally liable for a transaction required of a company by order of a court. For this reason, court ordered transactions do not fall within the scope of the expanded duty, even though such transactions could be voidable under other provisions of the Corporations Law.
This amendment has implications for the protection of employee entitlements. It also impacts on the prosecution of directors involved in `phoenix' activity and recovery actions by liquidators for the benefit of all creditors generally. Directors who breach the duty knowingly, intentionally or recklessly could be prosecuted under existing provisions of the Corporations Law. Further, they could 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 company's creditors on liquidation, including its employees.
The second limb of the bill inserts a new part 5.8A into the Corporations Law. The new part targets agreements and transactions entered into to prevent the recovery of employee entitlements. The entitlements that are protected are those that receive preferential payment on winding up under the Corporations Law-that is, wages, superannuation contributions, injury compensation, leave entitlements and retrenchment payments.
This bill makes it clear that the entitlements need not be owed to the employee. For example, they could be owed to a dependant.
The bill prohibits a person from entering into arrangements 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 other schemes to avoid the payment of entitlements to employees.
Persons who breach the new offence can be prosecuted. They could be subject to a fine and imprisonment of up to 10 years. Under the general principles of criminal law, a penalty may be imposed on people who aid or abet a breach of the provision.
There is no requirement that the person be a director of the company or related party. Therefore, the provisions of part 5.8A have a very wide effect. They cannot be avoided by arranging the prohibited transactions through non-related parties.
Court ordered compensation for employees
There are existing provisions in the Corporations Law that allow creditors to recover compensation. However, they are limited to instances where the company was trading when insolvent or, more generally, where a court has ordered damages in addition to, or in substitution for, the grant of an injunction.
To increase the scope for recovery of entitlements by employees, the bill provides that a person in breach of the new offence provision can be ordered to pay compensation to employees. The amount of compensation is the loss or damage arising from the breach that the employees have suffered.
The bill includes safeguards to ensure that an orderly winding up of a company is not hampered by actions to recover employee entitlements. The measures include notice to the liquidator of action under the new provisions and time limits to give the liquidator time to consider whether he or she will take action against a company's directors for alleged breaches of the Corporations Law.
These measures will enable the liquidator to maintain control of the settlement arrangements associated with liquidations. The bill also limits the exposure of persons in breach, to ensure that they are not subject to multiple penalties in respect of the same action.
The government is serious about protecting employee entitlements and assisting employees who have been short-changed by their employer. This bill will help prevent corporate employers from avoiding their obligations to their employees and will provide employees with greater confidence that the entitlements they earn will be paid to them.
In conjunction with other government initiatives in this area, this bill reflects the government's commitment to assist the employees of failed companies to receive their due entitlements.
I present the explanatory memorandum to this bill and recommend the bill to the House.