House of Representatives

Second Reading Speech

Mr Costello (Treasurer)

I move:

That this bill be now read a second time.

Outline

This is a bill to amend the Corporations Act 2001 to permit liquidators to reclaim unreasonable payments made to the directors of insolvent companies.

The object of the bill is to assist in the restoration of funds, assets and other property to companies in liquidation for the benefit of employees and other creditors, where unreasonable payments have been made to directors in the lead-up to liquidation

Background

In the wake of the collapse of One.Tel, the government announced it intended to pursue an amendment to the Corporations Act to enable the recovery of bonuses paid to the directors of companies that later collapse. In this bill, the government delivers on that commitment.

The Corporations Act already contains a range of measures, known as the voidable transaction provisions, that allow a liquidator access to moneys paid out by a company. The provisions permit the reversal of certain transactions entered into by an insolvent company in the lead-up to a liquidation. The Bankruptcy Act provides trustees with similar powers in relation to personal insolvency.

In certain limited circumstances, liquidators can attack payments made while a company is still solvent. This bill adds to those circumstances, by explicitly extending them to include unreasonable payments made to directors of companies.

The amendments cover transactions made to, on behalf of, or for the benefit of a director or close associate of a director. To be caught, the transaction must have been unreasonable, and entered into during the four years leading up to a company's liquidation, regardless of its solvency at the time the transaction occurred.

Provisions of the bill

The main provision inserted by the bill is new section 588FDA, entitled `Unreasonable director-related transactions'.

Subsection 588FDA(1) outlines the kinds of company transactions caught by the bill. It targets transactions that a reasonable person in the company's circumstances would not have entered into.

The reasonableness of the transaction is determined with regard to a number of factors. They include the respective costs and benefits of the transaction to the company, and the benefits received by the recipient.

The meaning of `transactions' is broadly described to prevent avoidance. It includes a payment made by the company, as well as conveyances, transfers and other dispositions of property. It also includes the issue of securities, including options. Further, incurring an obligation to enter into any these transfers in the future would be a `transaction' for the purposes of the bill.

The focus of the bill is transactions entered into by the company with its directors, and accordingly the recipients covered by it include directors of the company.

The bill covers two further categories of person. It includes company transactions with close associates of a director. A `close associate' is defined under the bill to mean a relative or de facto spouse of a director, as well as the relative of a director's spouse or de facto spouse.

It will also apply to transactions entered into with third parties, where they are made on behalf of, or for the benefit of, either a director or close associate. This will prevent people avoiding the new provisions through restructuring or redirecting transactions.

Subsection 588FDA(2) provides that the reasonableness of entering into the transaction is determined at the time the company actually enters into the transaction, regardless of its reasonableness at the time the company incurred the obligation to enter the transaction. This enables liquidators to recover payments where the true magnitude of the unreasonableness involved only becomes apparent when the company actually makes the payment, even if it appeared reasonable at the time the company agreed to make the payment.

Under subsection 588FDA(3), a transaction may be caught by the new provision regardless of whether a creditor of the company is a party to the transaction, and even if the payment was made pursuant to a court order. This mirrors existing provisions in part 5.7B in relation to uncommercial transactions entered into by an insolvent company (existing subsection 588FB(2)).

For the avoidance of constitutional doubt, the amendments will apply to unreasonable director-related transactions entered into on or after commencement of the bill. Subsection 588FE(1) is amended accordingly.

The bill provides that an unreasonable director-related transaction is voidable where it was entered into or given effect to within four years of the relation-back day. That day is usually the date of filing of an application to wind up the company, and is the usual point in time for measuring the reach of voidable transactions.

The Corporations Act already provides that the court may make a range of orders in relation to unreasonable director-related transactions. This bill makes it clear that the court may make these orders in relation to the unreasonable portion of the total transaction, taking into account the reasonable value (if any) that is attributable to it.

Approval of MINCO

In accordance with the Corporations Agreement, I can advise that the government has consulted with the Ministerial Council for Corporations in relation to the bill. The council provided the necessary approval for the text of the bill, as required under the agreement for amendments of this kind.

Conclusion

This bill makes amendments that will provide a valuable addition to the existing range of powers available to the liquidators of insolvent companies. It permits the restoration of funds and property to a company for the benefit of employees and other creditors.

It also gives a strong statutory expression of the government's intention that directors do not receive unreasonable remuneration, particularly when creditors, employees and shareholders are at risk. Directors are in a better position than most to know the true state of affairs of the company in the short to medium term, and should not profit from this knowledge at the expense of employee and ordinary creditors.

I commend the bill to the House and present the explanatory memorandum to the bill.

Debate (on motion by Mr Melham) adjourned.