House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, the Hon Stuart Robert 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 (Strengthening Protections for Employee Entitlements) Bill 2018

6.1 This Bill is 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.

Overview

6.2 The Bill makes amendments to the Corporations Act to strengthen enforcement and recovery options relating to unpaid employee entitlements when a corporate employer becomes insolvent.

6.3 Part 1 of Schedule 1 to the Bill makes amendments to the Corporations Act to strengthen the Part's operation to ensure it achieves its policy aim of deterring and punishing the avoidance of employee entitlements and protecting such entitlements from agreements or transactions that would operate to defeat their payment or recovery. In summary:

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the current criminal offence provision is extended to capture a wider range of situations by lowering the fault element to include circumstances when a person recklessly enters into transactions to avoid, prevent or significantly reduce the recovery of employee entitlements or are likely to have those effects;

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a new civil penalty provision with an objective 'reasonable person' test is created to increase the enforcement options available when transactions to avoid, prevent or significantly reduce the recovery of employee entitlements has been entered into;

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a new civil compensation provision is introduced to provide a mechanism to compensate those who have suffered loss or damage as a result of contraventions to the civil penalty provision;

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the criminal offence and civil penalty provisions are expanded to capture officers of a company who cause the company to enter into a transaction that contravenes the criminal and civil penalty provisions;

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similar to the criminal offence provisions, the civil penalty and compensation provisions capture those who are involved in contraventions of the civil penalty provisions;

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the parties who can commence civil compensation proceedings are expanded to include the ATO, the DJSB and the FWO, to enhance recovery of unpaid employee entitlements; and

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various drafting improvements of existing provisions have been made to enhance clarity and readability.

6.4 Part 2 of Schedule 1 to the Bill inserts new provisions into Part 5.7B of the Corporations Act that allow contributions to be sought from certain entities in a corporate group or entities with a closely connected economic relationship, for the payment of outstanding employee entitlements of an insolvent company in limited circumstances. In summary, the amendments provide that:

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a liquidator (and, in certain circumstances, the ATO, FWO, and DJSB) will be able to seek an 'employee entitlements contribution order' that requires an entity within the same 'contribution order group' as an insolvent company to contribute to the payment of the insolvent company's employee entitlement liabilities where:

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it is 'just and equitable'; and

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the entity has benefited, directly or indirectly, from the labour of the employees of the insolvent company on other than arms-length terms;

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the scope of the 'employee entitlements contribution order' is limited to the entitlements protected under Part 5.8A; and

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the Court will determine, as part of the proceedings:

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the existence and composition of a 'contribution order group';

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the value of the 'benefit' that the contributing entity received, and whether it provided arm's length consideration for that benefit; and

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whether making the contribution order is 'just and equitable'.

6.5 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.

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

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

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on each occasion:

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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

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

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

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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

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on each occasion:

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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

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

6.8 ASIC will be able to disqualify company directors and officers for a period of up to five years. The Court will be able to disqualify company directors and officers for a period that the Court thinks is appropriate. Both ASIC and the Court must be satisfied that the disqualification is justified.

6.9 Part 4 of Schedule 1 to the Bill provides transitional rules for the amendments in the Bill. Part 4 provides that:

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the amendments in Part 1 will apply to agreements or transactions entered into at or after commencement;

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the amendments in Part 2 will apply in relation to the winding up of a company that begins at or after commencement; and

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the disqualification powers in Part 3 apply from commencement, but a person may be disqualified under the provisions on the basis of things that occurred in the 5 years prior to commencement if at least one of the corporate contraventions required to trigger the disqualification provisions takes place after commencement.

Human rights implications

6.10 The Bill engages the following human rights:

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criminal and civil penalties for persons entering into or causing entry into agreements and transactions to avoid employee entitlements (and accessories to this conduct);

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the right to be presumed innocent until proven guilty according to law under article 14(2) of the ICCPR;

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a person's right to freely determine their economic development and right not to be deprived of their means of subsistence under article 1 of the ICCPR.

Criminal and civil contraventions for agreements and transactions to avoid employee entitlements

6.11 The amendments in Part 1 of Schedule 1 to the Bill to:

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extend the existing criminal offence to capture persons that recklessly enter into, or cause entry into, agreements or transactions to prevent, avoid or significantly reduce the amount of employee entitlements that may be recovered; and

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create a new civil penalty provision for persons that enter into agreements or transactions that are likely to prevent or avoid or significantly reduce the amount of employee entitlements that may be recovered;

do not engage any human rights to the extent that they apply to corporations.

6.12 The amendments in Part 1 of Schedule 1 extend the existing criminal offence to capture persons that recklessly enter into, or cause entry into, agreements or transactions to prevent, avoid or significantly reduce the amount of employee entitlements that may be recovered. Natural persons can be captured by these amendments. It is appropriate for natural persons who contravene the criminal offence to be captured given the seriousness of entering into transactions or agreements to prevent or avoid or significantly reduce the amount of employee entitlements that may be recovered.

6.13 The amendments in Part 1 of Schedule 1 allow courts to order individual defendants:

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serve an imprisonment term of up to 10 years;

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pay a fine of up to a maximum of 4,500 penalty units (currently $945,000);

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if the court can determine the value of benefits obtained and are reasonably attributable to the commission of the offence, pay three times that total value; or

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both a term of imprisonment, and the greater of a fine or three times the value of benefits.

6.14 The existing criminal offence provisions operate to capture those involved in a contravention of those provisions. The amendments in Part 1 of Schedule 1 will now capture those involved (including natural persons) in a contravention of the civil penalty provision as accessories. It is appropriate for natural persons who are involved in contravening the civil penalty provisions to be captured given the seriousness of assisting a company enter into transactions or agreements to prevent or avoid or significantly reduce the amount of employee entitlements that may be recovered.

6.15 The introduction of the civil penalty provision to officers of companies and accessories more broadly will strengthen the enforcement options available to ASIC, the liquidator and the ATO.

6.16 Civil penalty provisions within the Corporations Act allow courts to order individual defendants to pay penalties of up to $200,000 where there has been a breach of a relevant civil penalty provision. Once a court decides a breach of a civil penalty provision has occurred, ASIC can apply to the Court to seek disqualification orders of relevant persons from managing corporations for a period of time the Court considers appropriate. As the civil penalty regime does not impose criminal sanctions, having it operate alongside the criminal offence is consistent with article 14 of the ICCPR.

6.17 The amendments in Part 1 of Schedule 1 also extend the criminal offence, civil penalty and civil compensation provisions so that they apply to a company officer who cause a company of which they are an officer, to enter into relevant agreements or transactions to prevent or avoid the payment of, or significantly reduce the amount of, employee entitlements liabilities which can be recovered from that company.

6.18 It is appropriate for company officers who cause a company to enter into transactions or agreements to prevent or avoid or significantly reduce the amount of employee entitlements that may be recovered to be subject to a criminal offence and civil penalty because of the seriousness of the conduct.

6.19 Civil penalty provisions within the Corporations Act allow courts to order individual defendants to pay penalties of up to $200,000 where there has been a breach of a relevant civil provision. Once a court decides a breach of a civil penalty provision has occurred, ASIC can apply to the Court to seek disqualification orders of relevant persons from managing corporations for a period of time the Court considers appropriate. As the civil penalty regime does not impose criminal sanctions, having it operate alongside the criminal offence is consistent with article 14 of the ICCPR.

Right to the presumption of innocence under article 14(2) of the ICCPR

6.20 Article 14(2) of the ICCPR provides that everyone charged with a criminal offence has the right to be presumed innocent until proven guilty according to law. Generally, consistency with the presumption of innocence requires the prosecution to prove each element of a criminal offence beyond reasonable doubt. It may, however, be appropriate to limit this right is certain circumstances.

6.21 The amendments in Part 1 of Schedule 1 provide for some offence specific defences where the evidential burden is shifted from the prosecution to the defendant. In these cases, a defendant has an evidential burden to point to some evidence that suggests a reasonable possibility that a matter exists or does not exist.

6.22 The first of the offence specific defences is new subsection 596AB(2B), which provides that the criminal offence provisions do not apply to a compromise or arrangement approved by the Court for the company, or a DOCA executed by the company.

6.23 In this case, it is appropriate for a defendant to have the burden of pointing to some evidence that the relevant agreement or transaction is a compromise or arrangement approved by the Court or a DOCA executed by the company because it will be peculiarly within the defendant's knowledge that the relevant agreement or transaction was entered into on this basis because:

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they would almost always be an officer of the company, or have a strong connection to the company;

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they would have been involved in a court process related to the compromise;

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they would be parties to a DOCA; and

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they would have access to company records and documents that would establish a compromise was proposed and approved, or a DOCA was executed.

6.24 It would also be significantly more difficult and costly for the prosecution to disprove the fact that the relevant agreement or transaction is a compromise or arrangement approved by the Court or a DOCA executed by the company.

6.25 The second of the offence specific defences is new subsection 596AB(2C) which provides that the criminal offence provisions do not apply to a liquidator or provisional liquidator of the company that causes a company to enter into the relevant agreement or transaction in the course of winding up the company.

6.26 In this case, it is appropriate for a liquidator or provisional liquidator to point to some evidence that the relevant agreement or transaction was entered into in the course of winding up the company because the circumstances of the agreement will be peculiarly within the liquidator or provisional liquidator's knowledge. Liquidators and provisional liquidators undertake a range of statutory duties when they are appointed to wind up a company. They are in charge of managing the company's affairs and will have access to information that would suggest whether a relevant matter in subsection 596AB(2C) exists or does not exist.

6.27 It would also be significantly more difficult and costly for the prosecution to disprove the fact that the relevant agreement or transaction was not entered into in the course of winding up the company.

6.28 The third of the offence specific defences is new subsection 596AC(8) which provides that the new civil penalty provisions do not apply to:

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relevant agreements or transactions that are a compromise or arrangement approved by a Court or a DOCA executed by the company; or

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liquidators or provisional liquidators of a company that cause a relevant agreement or the transaction to be entered into in the course of winding up the company.

6.29 The civil penalty provisions are not criminal offences and the requirement for the prosecution to bear the burden of proof for criminal offences does not apply.

6.30 Even if this was not the case, it would still be appropriate for a defendant to have the burden of pointing to some evidence that the relevant agreement or transaction is a compromise or arrangement approved by the Court or a DOCA executed by the company because it would be peculiarly within the defendant's knowledge that the relevant agreement or transaction was entered into on that basis. This is because:

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they would almost always be an officer of the company, or have a strong connection to the company;

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they would have been involved in a court process related to the compromise;

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they would be parties to a DOCA; and

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they would have access to company records and documents that would establish a compromise was proposed and approved, or a DOCA was executed.

6.31 It would also be significantly more difficult and costly for the prosecution to disprove the fact that the relevant agreement or transaction is a compromise or arrangement approved by the Court or a DOCA executed by the company.

6.32 Similarly, it is also appropriate for a liquidator or provisional liquidator to point to some evidence that the relevant agreement or transaction was entered into in the course of winding up the company because the circumstances of the agreement will be peculiarly within their knowledge. Liquidators and provisional liquidators undertake a range of statutory duties when they are appointed to wind up a company. They are in charge of managing the company's affairs and will have access to information that would suggest whether a relevant matter in paragraph 596AC(7)(b) exists or does not exist.

6.33 It would also be significantly more difficult and costly for the prosecution to disprove the fact that the relevant agreement or transaction was not entered into in the course of winding up the company.

6.34 All three offence specific defences are therefore consistent with article 14(2) of the ICCPR.

Right to freely determine economic development and right not to be deprived of the means of subsistence under Article 1 of the ICCPR

6.35 Article 1 of the ICCPR provides that people have the right of self-determination which includes the right to freely pursue their economic development and should not be deprived of their own means of subsistence.

6.36 The amendments in Part 3 of Schedule 1 engage Article 1 of the ICCPR because they provide a Court or ASIC with the ability to disqualify someone from managing corporations if, within the last seven years in relation to two or more corporations:

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

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the person or corporation has been involved in insolvencies where the FEG scheme has funded the payment of outstanding employee entitlements and has received a nil or minimal return.

6.37 A person who is disqualified under these provisions would not be allowed to manage corporations for the period of the disqualification. Restricting a person's ability to manage a corporation in this way is consistent with Article 1 of the ICCPR. This is because the legitimate policy objective of the disqualification provisions is the protection of the community from the potential damage that officers of a corporation who have serially mismanaged corporations in the past would likely produce in the market in the future (including to employees, other company creditors and the taxpayer through the FEG scheme) if they were allowed to continue managing corporations.

6.38 Preventing company officers with a track record of serially mismanaging corporations and inappropriately relying on FEG to pay their employee's entitlements from managing corporations is the most effective way of preventing further misuse which would impact future employees, company creditors and the taxpayer through the FEG scheme.

6.39 The new disqualification powers are proportionate because they are only triggered when, on two separate occasions within a seven year period, there is a corporate contravention by the person or company, and the person or corporation was involved in insolvencies where the FEG scheme was inappropriately relied on.

6.40 The disqualification provisions are protective disciplinary measures rather than criminal sanctions. Having the disqualification powers apply alongside the criminal and civil penalty provisions in Part 1 of Schedule 1 is therefore appropriate and consistent the ICCPR, including Article 14 which provides for protections against double jeopardy for criminal offences.

6.41 The disqualification provisions only apply from the time the Bill commences and can only be used against someone prospectively. The transitional rules in Part 4 of Schedule 1 do, however, provide that past corporate contraventions or involvement in insolvencies where the FEG scheme has funded the payment of outstanding employee entitlements can be taken into account in limited circumstances.

6.42 Past conduct within the previous five years will only be taken into account where there is a corporation contravention again after the commencement of the provisions. This approach balances the need to protect the community from individuals who already have a track record of corporate contraventions and insolvent companies that inappropriately rely on FEG with the need to give notice to the individuals concerned that their behaviour could result in their disqualification.

6.43 Under the approach adopted, serial offenders who already have a track record of corporate contraventions and inappropriately relying on FEG will be subject to the disqualification powers after they commit another corporate contravention. For everyone else they will only be within scope of the disqualification power after they commit corporate contraventions and cause FEG to be invoked on two separate occasions within a 7 year period.

6.44 The disqualification powers in Part 3 of Schedule 1 are therefore consistent with the ICCPR.

Conclusion

6.45 This Bill is compatible with human rights as it does not raise any human rights issues.