Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Legal and Constitutional Affairs Legislation Committee
05/03/2018

PANGBOURNE, Mr Mark, Senior Specialist, Australian Securities and Investments Commission

STOGDALE, Mr George, Senior Executive, Australian Securities and Investments Commission

[12:03]

CHAIR: Welcome, gentlemen. What do you guys do when you're not appearing before Senate committees?

Mr Stogdale : You'll be pleased to know that there is quite an abundance of work down at ASIC that actually keeps us busy.

CHAIR: I'm pleased to hear that, actually, because I know you're often before us in one form or another. I won't waste time going through the normal requirements. You understand about parliamentary privilege, about protection of witnesses and giving opinions which are not usefully valid. We have your submission. Did you want to make an opening statement? If so, we will then ask you some questions.

Mr Stogdale : I'd like to read a short statement. It concerns our submissions which are directed towards the enterprise incentives bill and that bill alone. ASIC welcomes the opportunity to attend before this committee to assist as it can by responding to any queries or concerns that the committee may have arising out of ASIC's submission dated 30 January 2018 or otherwise in relation to the proposed reform.

ASIC's submission and these opening remarks are limited to the proposed reduction in the bankruptcy period from three years to one year. ASIC has not and does not offer its views in relation to any other aspects of the proposed reforms. ASIC's express mandate includes the promotion of efficient markets as well as the promotion of investor and consumer trust and confidence. ASIC notes that the change that is proposed will also bring the bankruptcy period in Australia into line with jurisdictions such as the US and the UK.

In this context, ASIC is concerned to highlight to this committee what it sees as the possible unintended consequences of this reform. ASIC's perspective is particularly informed by its regulation of the financial markets, which raise finance from retail investors and shareholders, and also by its regulation of companies that conduct businesses that become insolvent.

ASIC's observation is that there is well-identified and repeated misconduct by a limited but still significant number of persons who operate in Australia's financial markets, which is likely to be enabled by this amendment. This group of persons are typically directors of companies who either do not understand or disregard the standards expected of them that are imposed through the Corporations Act.

Other submissions have referred to the concern that phoenix activity will be given greater or increased scope. ASIC's particular concern includes that, in its current form, the reform will require greater supervision by regulators of that demographic of business people who engage in phoenix activity but, more importantly, pose greater and repeated risk to Australia's retail investors and consumers.

So ASIC's proposals are that the reforms should be accompanied by complementary measures that will provide safeguards against those unintended outcomes. ASIC's submission describes these. Perhaps the guiding principle is that individuals who carry on business through limited liability companies, thereby avoiding personal responsibility for that business's obligations, ought to have adequate business acumen, particularly where their customers are retail investors, failing which, they should be barred from that role. The safeguards proposed reflect this by: (a) requiring that a person who has been bankrupt cannot be the sole director of a proprietary limited company for the current period of three years, as is the case with public companies in any event; (b) in relevant cases, enabling ASIC to direct a person to undertake training; (c) providing for extended disqualification periods for egregious conduct, including phoenix activity; (d) creating a new class of automatically disqualified persons where there has been repeat conduct; and (e) enabling ASIC to apply to court for a period of disqualification with bankruptcy as a relevant ground. It is acknowledged that each of these suggestions would require legislative reform so that wide consultation would be required. We're available to assist you by taking your questions.

CHAIR: Mr Pangbourne, you didn't want to add any to that?

Mr Pangbourne : No.

CHAIR: Thank you very much for that, for your submission, for your opening statement and for giving us a copy of it. First of all, you were obviously involved in the consultation with the Attorney-General's Department when this legislation was being prepared; although, I understand it was three years ago now.

Mr Stogdale : We made representations or submissions to the Attorney-General's Department at that stage.

CHAIR: Which would have been along the lines of the suggestions you have made in your submission here?

Mr Stogdale : Yes.

CHAIR: And obviously they weren't actioned there. Was any explanation given to you?

Mr Stogdale : No, it wasn't.

CHAIR: This doesn't involve corporate insolvency—

Mr Stogdale : No.

CHAIR: It is individual insolvency. Are you assuming then that the directors that you speak about would have also been personally bankrupted as an associated result of the corporate insolvency?

Mr Stogdale : Yes. That occurs in some cases but not all.

CHAIR: But your recommendations would only be where the individual director personally was bankrupted, perhaps associated, as I said, with the company insolvency?

Mr Stogdale : Yes. That's right.

CHAIR: I'm not sure how long you've been here but I've been mentioning Mr Skase and Alan Bond et cetera. You are probably too young to remember them, but they were the kings of corporate fraud. You don't currently have power to do some of the things that you are suggesting you should do—for example, greater supervision by regulators of the business people who engage in phoenix activity. You don't currently have that power?

Mr Stogdale : When you say 'supervision', could I ask you to clarify what you mean by that?

CHAIR: I'm really just quoting from your statement: 'ASIC's particular concern includes that in its current form the reform will require greater supervision by regulators of that demographic of regulators who engage in phoenix activity' et cetera.

Mr Stogdale : Yes.

CHAIR: So you don't currently have that power?

Mr Stogdale : No. I don't think we do.

Mr Pangbourne : Not as an express separate head of power, no. Here, what we are talking about essentially arises by default. When someone is made bankrupt, they are automatically disqualified from being directors for a period of three years, which can sometimes take care of some of the regulatory concerns. But, if that doesn't happen—except for a much shorter period—then that reinvigorates the regulatory concern and potentially requires regulatory action to be taken where otherwise it would not have been.

CHAIR: It is irrelevant in the committee hearing or even in government what I personally think, but I'm attracted to the suggestions you make. Can I quickly go through them. You say in your first dot point: 'safeguards would require a person who has been bankrupted cannot be the sole director of a proprietary company for three years', whereas under these reforms they will be able to do that within one year. Is that the point?

Mr Stogdale : Yes. That's the point.

CHAIR: In that case, you're saying that ASIC should be able to direct a person to undertake training? Is that feasible? Is that practical? Can that be done?

Mr Stogdale : Yes, it can. We do it with other people whom we regulate—auditors, liquidators. As part of our regulation of those industries, we, on a regular basis, arrange with them, when we have issues with their conduct, to undergo periods of further study and familiarisation, so that they come back after sometimes a period of suspension and they have learned how to improve their practices.

CHAIR: That would raise a lot of questions, I guess. You can direct them to undertake training; I guess it is a different thing as to whether they learn anything from the training. But that already happens in your—

Mr Stogdale : Yes, it does.

CHAIR: Okay. So there must be rules around that.

Mr Pangbourne : And in the regulation of financial services licensees also, the people who sit behind them are required to undertake particular training before they can hold themselves out or act as licensees.

CHAIR: Talk about an extended period of disqualification for phoenix activity. It would become a legislative/legal evidence nightmare, wouldn't it, to prove phoenix activity? Or is that something you already do?

Mr Stogdale : We don't see it as being a particularly difficult exercise in terms of the legislation, but certainly what we had in mind was increasing the limit at the moment of five years up to seven years so that it won't require terribly much to change at all.

CHAIR: On 'a new class of automatically qualified persons where there has been repeated contact', you're saying that if this bill goes through and someone after a year does the same thing again then trades for a little while and then after another year is in the same situation, they shouldn't automatically be disqualified as a director. Is that what you're saying?

Mr Stogdale : Yes, that's right. That's precisely what we're saying.

CHAIR: And when you talk about 'repeat conduct' do you mean a repeat of one or two or three? How many chances do you get?

Mr Stogdale : What we suggested in our original paper was that four or more corporations over a period of seven years would be sufficient to trigger an automatic disqualification. The paper points out the four would not be treated as four if, in fact, they're all a part of the same group—if you ran your business and it required more than one company to do that. If they all collapse, we're not saying that they should be treated as, for example, three or four separate failures. You'd need to have four quite separate failures within that period of seven years.

CHAIR: Can you explain the last of your dot points? I did briefly skim through it when I was reading the other submissions, but what are you actually talking about there when you said 'enabling ASIC to apply to court for a period of disqualification with bankruptcy as a relevant ground' Do you mean disqualification as a director?

Mr Stogdale : Yes, that's right. Currently, there is a period of disqualification which is imposed where a breach of the Corporations Act resulting in a penalty of imprisonment of no less than 12 months triggers a period of disqualification. What we're suggesting there is that bankruptcy should be added to that.

CHAIR: But that is contrary to the government's intention in doing this, as I understand it, of trying to encourage genuine entrepreneurs as opposed to crooks—how you define that, I'm not quite sure. The government is saying, 'Well, they've had a go and it hasn't turned out, but that shouldn't prevent them from having another go.'

Mr Stogdale : That's right. That's why we'd need to apply to a court in particularly egregious cases to impose that sort of penalty.

CHAIR: We might put a question on notice to the Attorney-General's Department to see what they say about their suggestions, because, on the face of it, they seem sound. Do you think they're all practical, without major legislative change?

Mr Stogdale : Certainly there will be some legislative change, but nothing that's insuperable.

CHAIR: And none of that would impact on the sort of bankrupts that the previous witness were talking about. They were saying that, principally speaking, they are people that don't even have a home and who have got into credit card debt, so that wouldn't affect any of them.

Mr Stogdale : No, it wouldn't.

Senator PRATT: You have, in your remarks, talked about the need for consultation to adopt your suggestions. I am concerned that the government seems to have been talking about a lot of these issues for quite a long time as it is and has put up a fairly narrow scope of amendments to help this particular cohort of people, some of whom should be encouraged to take out bankruptcy as an alternative to unsustainable debt agreements. Are we placing at risk the timely passage and reform to benefit those people if we go down the path of needing to adopt and examine these other measures?

Mr Stogdale : I don't know that I can really answer your question. How long it takes depends upon how the government wants to proceed.

Senator PRATT: Would you prefer this legislation to pass now or not pass now if it takes more time to unpick these issues?

CHAIR: That's getting into the grounds of opinion, which you may not want to express. But if you feel comfortable enough, it is the government's intention.

Mr Stogdale : I don't know I am in a position to express an opinion one way or the other.

Senator PRATT: I can understand why that is. The issue for me is I understand the point you are making about those who might be at risk of bankruptcy, to pursue phoenix companies et cetera. But I am unclear about how easy it would be to unpick that without putting the respite that is required for people who could and should perhaps be encouraged to take out bankruptcy and a whole range of other things in the scope of this bill. How real is that risk? Or is that not your key constituency as ASIC and that is really a problem for us?

Mr Stogdale : The people that the previous group were talking about are not really the people that we are concerned about here. That is why we phrased our submissions in the way in which we have. They are designed to pick out those particular issues that arise in corporate law where there is the overlap into bankruptcy.

Senator PRATT: I guess this isn't a question for you either but, given the consultations on these issues have been going on for such a long time, I am somewhat surprised that this issue is before us without that separation having been made already. The government was quite clear this morning in saying that it wanted to support entrepreneurialism and people who had been previously declared bankrupt getting back into creating businesses. How do we separate out phoenix companies from that?

Mr Stogdale : First of all, we don't want to comment on the policy that the government has adopted. Secondly, what we have endeavoured to do is identify those issues that arise in the corporate space on a regular basis and make recommendations to you that will assist the people who are, as you say, being encouraged to get back into the business sphere, are able to do so, and are able to do so without putting other people's money risk and without exposing customers of those businesses to any risk as well.

Senator PRATT: If the legislation was left as is, how real is that risk?

Mr Stogdale : There is a real risk.

Senator PRATT: I can't imagine that was the government's intent but is it aware of that level of risk, do you think?

Mr Stogdale : I'm afraid I can't answer that. I just don't know.

Senator PRATT: That's fine but you have made that sense of risk clear.

Senator HINCH: Just to follow up on Senator Pratt, I did a lot of work on stories on the bottom-of-the harbour schemes. I think the phoenix stuff is very important here. I'm surprised the government hasn't paid more attention to it. I think four over seven years is being very generous. Can you stress, even more, how important this is to ASIC. You say that people could get a period of disqualification for egregious conduct, but they could do a hell of a lot of damage in six or seven years in getting to that point.

Mr Stogdale : Yes, you're correct. They do do damage. At ASIC we see, on a daily basis, the damage that they do. It's an important issue raised before the committee.

Senator HINCH: I don't know if you were here when Senator Macdonald made that point. He said when you see a proprietary limited close down on a Friday and start up again with the same director on the Monday, the debtor gets stung. That's happened around this country a lot in the last 20 or 30 years. How do you judge if someone has adequate business acumen?

Mr Stogdale : That's a good question. There are people who provide courses on all areas of business, and it's a question of finding one and ensuring that their program is satisfactory. That would require a little bit of thought and fleshing out. The concept, however, is one that is not a difficult one.

Senator HINCH: I'd like your views on this one though. If you have been bankrupt for three years, can you be a sole director, as we speak today?

Mr Stogdale : Once you're discharged from bankruptcy.

Senator HINCH: Once your three years is up you can be a sole director, again?

Mr Stogdale : Yes, a proprietary limited company.

Senator HINCH: If you closed that loophole, that could help, couldn't it? You may get a bloke and his brother doing it, but, at least, if you're not letting him be a sole director you've got some sort of protection.

Mr Stogdale : That's right.

Senator PRATT: That would be reasonably simple to do, because you're not preventing someone from not being bankrupt anymore; you're just preventing them from being a sole director. Is that right?

Mr Stogdale : That's correct, yes.

CHAIR: Gentleman, thank you very much for that; that's interesting and it gives us something to think about. We very much appreciate your contribution.