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Thursday, 22 June 2017
Page: 7453

Mr BOWEN (McMahon) (11:20): This bill makes changes to Australia's corporate insolvency system, announced as part of the government's so-called National Innovation and Science Agenda in 2015. The bill aims to introduce two reforms: firstly, the creation of a safe harbour from personal liability for trading whilst insolvent; and secondly, ipso facto clauses which may allow for termination or variation of contracts based on a company's financial position or the commencement of certain insolvency proceedings will become unenforceable during and after formal insolvency procedures. The Labor Party will not oppose the passage of this bill through the House and will say more about our approach in the other place.

Firstly, in relation to safe harbour provisions, part 1 of the bill gives directors a safe harbour from civil insolvent trading provisions under section 588G of the Corporations Act. The general rule under section 588G is that a director of a company may be personally liable for debts incurred by the company if at the time the debt is incurred there are reasonable grounds to suspect the company is in fact insolvent. The concept of a safe harbour for directors in insolvency situations is not new. It is recognised that Australia has some of the strictest insolvency laws in the world—in my view, rightly so. It has been suggested, however, that this duty prevents trading whilst insolvent but can prevent directors from undertaking steps that could achieve better outcomes. As a matter of principle, everybody in this House would want to see as few companies as possible getting into such a situation that they could no longer trade. If there is a sensible situation in which companies that are technically insolvent can be continuing to trade with all the necessary protections in place for creditors and for employees, that is something which should be very seriously examined by the House and the Senate.

In fact, this is not a new matter at all. It is a matter I have been familiar with since I first became shadow assistant Treasurer in 2006. When I was Minister for Financial Services, Superannuation and Corporate Law in 2010, I asked the Treasury to release a discussion paper on the operation of Australia's insolvent trading laws in the context of attempts by business to rescue themselves outside of external administration. The paper outlined a number of possible options for reform. The paper went to whether we should retain the status quo, introduce a modified business judgement rule defence or give directors a moratorium from the duty not to trade whilst insolvent for the purposes of avoiding the company going into external administration. That was a good process and there was much feedback to the Treasury paper.

More recently, this matter has been referred to the Productivity Commission, and the Productivity Commission has made certain recommendations. I do note, however, that this bill does not implement the Productivity Commission recommendations as they were made. In the context of the global financial crisis in which I released that paper it was very important to ensure that Australia's corporate insolvency laws were capable of meeting the challenges that arose from the GFC. But it is more than that; it is an ongoing issue. I do recognise the government is attempting to deal with genuine issues here.

Specifically referring to informal workouts, we deemed it important that the insolvency laws complemented and assisted the conduct of informal workouts, recognising that the use of formal insolvency reorganisation procedures may not always be appropriate. The government's proposal here would facilitate more successful company restructures outside of an informal insolvency process, where doing so would achieve a better outcome for the company than immediately appointing an administrator or a liquidator. I have no in-principle objection to that concept. Our concerns, which we will pursue through a Senate inquiry, will go to the detail, and we will assess whether the government's model is the correct one. We will do that in good faith and in a genuine process.

Under the safe harbour provision, directors will only be liable for debts incurred while the company was insolvent where it can be shown that they were not developing or taking a course of action at the time that could be reasonably likely to lead to a better outcome for the company than proceeding with immediate administration or liquidation. As it is intended as a protection for competent directors who are acting honestly and diligently, safe harbour is only open to directors who have been ensuring that their company complies with its obligation to pay its employees—this is a particularly important matter for this side of the House—including superannuation, and meets its tax reporting obligations. The safe harbour would not be available when a company fails to meet its obligation to pay its employees, including superannuation; when a company fails to meet its tax reporting obligations; or when a person fails to provide an administrator or liquidator with certain required information, including the company's books.

We do recognise and acknowledge the intent of this legislation to ensure that directors who honestly and diligently seek to turn around a business are not penalised from doing so, and nor should they be. When a struggling business is successfully turned around, it is good for everyone, especially employees and creditors. I note that this is supported by organisations such as the AICD and the Australian Restructuring Insolvency and Turnaround Association. I have been briefed by the AICD. They have been to see me, and I have requested the AICD to brief some of my colleagues, most notably the shadow Assistant Treasurer and the member for Fenner, and also other honourable members. I am indebted to honourable members such as the member for Griffith and Senator Cameron in the other place, who I have consulted about these matters and who have provided very useful feedback to me.

In relation to the safe harbour provision, as I have stressed, we understand the government's intent. We will not oppose the passage of this legislation through the House. In the Senate we will refer it to a Senate inquiry because I note there are divided views in the business community. I know that, for example, the Shareholders' Association has previously expressed grave concerns. From our point of view, we particularly want to explore the differences between the Productivity Commission-recommended model and the one that the government has embarked upon. We also want to understand the rationale for the government's proposed way forward when you consider the difference between an exemption model and a defence model. We would like to see that explored through a Senate inquiry, as to whether an exemption model or a defence model is the better way forward. These are matters that we will examine.

I referred to the Shareholders' Association. I want to refer, in particular, to their statements in 2015—which I recognise were obviously way before this bill. As a matter of principle, they said, 'We've got serious doubts that a safe harbour would work.' They went on to explain some of the reasons—that it would just allow directors to delay taking decisions and delay the process, to the detriment of the shareholder. They may be correct or they may be incorrect, but I think these are legitimate issues to be explored. The opposition here is not opposing for the sake of opposing—indeed, at this point we are not opposing at all; we are simply saying that there are issues that we think would be worthy of examination and aeration through a Senate inquiry, and that is what we will do. We will respond to the issues raised in a Senate inquiry. There will be a genuine process of getting AICD and others before the Senate inquiry to have these issues examined. Of course, Treasury will be called to give evidence as well, so that will be a good process.

The second part of the bill moves to ipso facto clauses. Part 2 of the bill sets out new provisions to stop the enforcement of ipso facto clauses that are triggered when a company enters into administration. An ipso facto clause creates a contractual right that allows one party to terminate or modify the operation of a contract upon the occurrence of some specific event. Currently, such rights may allow one party to terminate or modify the contract solely due to the financial position of the company, including insolvency, or due to the commencement of formal insolvency proceedings, such as on the appointment of an administrator. This type of termination can occur regardless of the counterparty's continued performance of its obligations under the contract. For example, if a company has a short-term lack of liquidity which leads the directors to appoint a voluntary administrator, an ipso facto clause might still allow a major supplier to cancel their contract. This may in turn deprive the business of the chance to continue to trade while they restructure—even though there has not otherwise been a breach of the contract—with a negative impact on the business, its employees and other creditors.

The operation of the ipso facto provisions can reduce the scope for a successful restructure, destroy the enterprise value of a business entering formal administration or prevent the sale of a business as a going concern. These outcomes can also reduce or eliminate returns in liquidation, because they disrupt a business's contractual arrangements and destroy goodwill, potentially prejudicing other creditors and defeating the purpose of voluntary administration. The aim is to allow breathing space for a company to continue to trade during a formal restructure. This may also improve the position for directors of companies facing severe financial hardship when entering into early negotiation with their creditors about pursuing a restructure, including under the safe harbour provisions, as they will know that future entry into formal insolvency will not necessarily trigger an ipso facto clause.

According to the government, this will assist in protecting asset values for the benefit of the company, its employees and its creditors, which in turn will assist to promote a culture of entrepreneurship and reduce the stigma of value. The counterparty will retain the right to terminate or amend an agreement with a debtor company for any other reason, such as breach involving non-payment or non-performance. The amendments will also apply prospectively to rights arising under the contracts, agreements or arrangements which are entered into after these amendments commence.

The bill includes a broad regulation-making power to prescribe reasons to which the stay will apply. This included as an anti-avoidance mechanism to ensure that the government can respond to possible contracts or agreements that are drafted or prepared in a way to circumvent the provisions in the section. Regulations may also set our exceptions where the ipso facto stay is not intended to operate. This amendment will not stop parties from terminating a contract with a company for any other reason, such as a breach involving non-payment or non-performance.

Again, the opposition can see the reasons that the government would bring this forward. We have no in-principle objection; however, we do reserve the right to see these matters aerated and examined in an inquiry in the other place to ensure the detail is to the satisfaction of the Senate and the parliament and can meet the support of the opposition. These are matters for which submissions should be called for and those who have any concerns can be allowed to have their say, and the opposition will take those concerns into account when finalising how we would vote in the other place.

This bill provides the Labor Party with an opportunity to progress the debate around the matter of phoenixing and the illegitimate use of that type of corporate structure, which is continuing to be a significant problem. Phoenixing activity occurs when directors of a struggling business transfer its assets into a new company, generally owned by the same people, and then actively ensure that the struggling business fails. This is a scourge and more needs to be done to deal with it.

The process allows them to avoid paying money owed to the failed company's creditors, which are often the company's employees, other small businesses and the Australian Taxation Office. I would have thought that the government would be more concerned about this than they have been. As long ago as 2012, which is quite a while ago, it is estimated that phoenixing activity cost $3.2 billion annually. Fraudulent phoenixing activity hurts employees, it hurts small business that are creditors, subcontractors and, importantly, the families of the workers affected.

At the end of May, my colleagues, the shadow minister for employment and workplace relations, the member for Gorton, the shadow minister for small business and financial services, Senator Gallacher, and the shadow Assistant Treasurer, the member for Fenner, announced our policy to protect employees and small business from dodgy phoenixing activity. Labor's policy would require all company directors to obtain a unique director identification number with a 100-point identification check; increasing penalties associated with phoenixing activity; introducing an objective test for transactions depriving employees of their entitlements; clarifying the availability of compensations orders against accessories; and consulting on targeted integrity measures based on the recommendations of the Melbourne Law School and Monash Business School phoenix research team recommendations.

The Labor Party's policy here is just plain common sense. No director doing the right thing has anything to fear from a director identification number. In fact, the directors who are doing the right thing would and should welcome this as being a way to stop those con artists who are doing the wrong thing and weed them out for good. There is no legitimate defence for phoenixing. It is just wrong. Everybody loses, except those who are avoiding their debts to their employees, their creditors and the Australian people through the tax office.

This is not a radical proposal, and in fact it is a proposal which has the support of the Productivity Commission. The Tax Justice Network, ACCI, the ACTU and indeed the Australian Institute of Company Directors all support it. There are not many policies which bring all those groups together. ACCI, the ACTU and the AICD and the Tax Justice Network are not generally of the same mind, but they all see the common sense of Labor's proposals. They all see that Labor has a commonsense answer to a big problem.

There is one group which does not support this, and it is a rather influential group. They are called the government of Australia. The government of Australia are the only group who do not seem to see the problem here and refuse to act on the solution. It is about time the government did act on the solution, and they could do it in this bill. This is relevant to insolvency. They could say, 'We're going to deal with safe harbour. We're going to deal with ipso facto and we're going to introduce a director identification number.' This would make it so much easier to track those directors who are engaging in this activity, which is just plain morally wrong and should be stamped out.

I move the following second reading amendment:

That all words after "That" be omitted with a view to substituting the following words:

"whilst not declining to give the bill a second reading, the House condemns the Government for its failure to implement a Director Identification Scheme to detect and deter fraudulent phoenix activity".

I move this because it is appropriate and right that the parliament debate the government's failure to act on this at the same time as acting on the government's legislative agenda. It is right and appropriate that members have the opportunity to discuss the company director identification number, and we would welcome the feedback from members opposite to explain why they are opposed to such a commonsense, straightforward reform. They should explain why they do not support a company director notification number, which is supported by the company directors, as instituted through the Australian Institute of Company Directors. It is a good organisation who I enjoy interacting with but do not always agree with. They are always well thought out and considered in their approach, and they have looked at this and said, 'Yes, phoenixing is wrong. We should crack down on it. We should have an identification number. It is not red tape for directors doing the right thing. Directors doing the right thing have nothing to fear. In fact, they would welcome this reform.'

We just hope the government takes the opportunity to reflect on the error of their approach here and adopt this policy. If they do not, an incoming Labor government will implement it, but it would be better that Australia did not need to wait for this commonsense reform. This is one thing which could sail through the parliament as bipartisan reform. We could pass it through both houses in a day, if that was what was required. But the government has just refused to act and has been asleep at the wheel on this issue. We will continue to pursue that and will continue to make the point that this is a necessary reform.

In the meantime, we will not stand in the way of the passage of this bill through the House. We do recognise what is intended to be achieved here and we will examine it closely through a Senate inquiry. We will hear evidence from all those affected, and our vote in the Senate will be determined by our response to the evidence which we hear through that process.

The DEPUTY SPEAKER ( Mr S Georganas ): Is the amendment seconded?

Mr Husic: It is, and I reserve my right to speak.

The DEPUTY SPEAKER: The original question was that this bill be now read a second time, and to this the honourable member for McMahon has moved an amendment. The question now is that the amendment be agreed to.