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Wednesday, 5 February 2020
Page: 158


Senator AYRES (New South Wales) (10:31): I rise to speak on the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 because it does give me an opportunity, while Labor is supporting the bill because it's marginally better than nothing, to point to the lack of genuine resolve on the government's part to deal with the practice of illegal phoenixing. The people on the other side, the government, really have had a consistent pattern. They've been the friends of unscrupulous businesspeople everywhere and the friends of shonky financial advisers. On this side, we're the friends of legitimate businesspeople who are doing it tough in an economy that is struggling and who want their bills paid on time.

Stripping away the ability of businesses to engage in phoenixing is a core Labor objective. Phoenixing is a crime against honest, hardworking businesspeople. It's a crime against honest taxpayers and it's often, in the examples that I've been involved in in Australian manufacturing and Australian construction, a crime against the people who work hard on behalf of these businesses and who see long-term entitlements ripped away.

This bill is a half-hearted and shallow attempt at combating the criminals who rip off creditors and taxpayers. It sets out highly technical provisions that don't expand ASIC's powers to combat phoenixing and it's likely to have a very limited impact on the incidence of phoenixing. One measure is designed to ensure that taxpayers satisfy their tax obligations and pay outstanding amounts before being eligible for a refund. The bill falls well short of what is required to combat fraudulent phoenixing activity.

That's why, whilst supporting the bill, Labor will move amendments that will require a statutory review to be conducted that will provide further evidence on the need to improve anti-phoenixing laws and to introduce a director identification number regime. The bill represents a slap in the face to small business and the families who have been the victims of phoenixing and have been pleading for legislation with teeth to combat the scourge of shonks, crooks and carpetbaggers whose business model is a parasite on legitimate Australian businesses.

To appreciate how negligent the coalition are when it comes to tackling illegal phoenixing, you only need to look at how much it costs unsecured creditors and government revenue in the form of unpaid tax liability. In 2015, the Senate Economics References Committee conducted an inquiry into insolvency in the construction industry. The inquiry was given impetus by the notorious collapse of Walton Construction, which left unsecured creditors with $70 million in unpaid debt. I'll return to Mr Walton shortly.

As a case study on the incidence and effects of illegal phoenixing, the Senate inquiry into construction industry insolvency is instructive as to how the Morrison government is failing to see what is blindingly obvious to small-business people across Australia: the law relating to illegal phoenixing needs substantial reform; it doesn't need tinkering at the edges. Illegal phoenix activity is rife in the construction industry. It's notorious for its use of illegal phoenix companies, and the industry has played host to some of the most flagrant examples of the practice. The economics committee report says:

The Cole Royal Commission into the Building and Construction Industry found that 'there is significant [illegal] phoenix activity in the building and construction industry, particularly in the eastern states'.

It was Commissioner Cole's only sound finding in that long-running and expensive royal commission.

Initial external administrators' reports lodged with ASIC support the conclusion of widespread incidents of illegal phoenix activity in construction. These reports show that the incidence of misconduct in the construction industry for contraventions associated with illegal phoenix activity under the Corporations Act is significantly higher than in other industries. In addition to external administrators' reports, ASIC receives reports of alleged misconduct directly from the public. ASIC informed the economics committee insolvency inquiry that its misconduct and breach reporting team received 13½ thousand reports of alleged misconduct involving civil and criminal breaches of the Corporations Act in the construction industry between 2009-10 and 2013-14.

According to the Melbourne Law School and Monash Business School, where the prevalence of illegal phoenix activity reaches a critical point, it becomes impossible for reputable businesses to continue. They face a difficult choice: between insolvency or, alternatively, the risk of being priced out of the construction industry. In some circumstances, the non-economic effect of illegal phoenix activity can be considerable. The Collins inquiry into construction insolvency in New South Wales reported that the frustration and anger expressed at the impunity of unscrupulous operators was palpable.

I want to turn now to the Walton Construction collapse. Walton Construction was founded in Melbourne in 1993 by Mr Craig Walton. In 2002 the company expanded, registering a Queensland arm, Walton Constructions (Qld) Pty Ltd. At its height the Walton group had an annual turnover of $300 million. In 2011-12, revenue dropped and the company recorded a loss of $14.6 million. This period marked the beginning of the end for Walton Constructions. In November 2012 the National Australia Bank, Walton's financial backer, reviewed its financial support for the company and commissioned Deloitte to prepare a report on the finances of the Walton Group and its financial viability. In 2013, the company won a major Melbourne project but NAB refused to provide a bank guarantee, so a competitor took over the project—so the bank had begun to figure out what was a secret to Walton's creditors.

Rumours began to spread in the industry and developers abandoned Walton, cutting off critical cash flow. Walton engaged the Mawson Group, a business management consultancy, to advise it. In the lead-up to the eventual collapse in October 2013, Mawson directors worked with Walton directors to transfer projects to two new companies, Lewton Asset Services Pty Ltd and Peloton Builders Pty Ltd. Companies within the Walton group had been customers of NAB since the 1990s. Walton creditors have long maintained that NAB should have done more to prevent Walton Constructions (Qld) from operating, long before it collapsed. When Walton collapsed, NAB knew about the precarious financial situation facing Walton creditors. NAB's failure to appoint a receiver at an early stage meant more unsuspecting subcontractors contracted with Walton and were caught up in the eventual collapse. The issue here is informational asymmetry—the subcontractors didn't know—and between Mawson Group and the NAB and Walton there was a conspiracy to continue the business when it shouldn't have continued.

It was the view of the initial liquidator, PKF Lawler, that Walton had been trading while insolvent for some time before it went into administration in October 2013. As noted above, NAB was in possession of a report, provided by Deloitte in early 2013, indicating that Walton was experiencing liquidity problems. Unsecured creditors believe that NAB must have known the true scale of Walton's financial problems. NAB introduced Walton to Mawson in order that Mawson would implement a pre-insolvency restructure of the Walton businesses, designed solely for protecting the interests of the bank and Mr Walton. NAB denied this in evidence to the Senate economics committee, and that evidence is scarcely believable.

Without wishing to take up my time in the debate going into the minutia of the pre-insolvency manoeuvres, what occurred was collusion in the provision of pre-insolvency advice, designed to facilitate a phoenix operation that caused very significant harm to unsecured creditors and advantaged one of Australia's biggest banks—ordinary businesses being ripped off in the interests of the host company and one of Australia's biggest banks. The practice of providing pre-insolvency advice designed to harm creditors of soon-to-be-insolvent companies is not regulated. ASIC expressed its concerns to the economics committee about the lack of regulation of pre-insolvency advice, citing a number of banned liquidators and administrators operating profitably in that field. This bill does nothing to deal with those questions.

NAB's denials to the Senate economics committee over its collusion with Mawson and Walton are not believable. There is no better authority for this than the Federal Court. In a recent judgement in a case brought against Walton in the Federal Court by Walton's liquidators, His Honour Justice Derrington said:

… it is clear from the conduct of Mawson, the NAB and Mr Craig Walton that none of them sought to advance the interests of the companies and their unsecured creditors and if the companies received any advantage from their actions it was purely coincidental.

He went on to say:

The evidence identified above establishes, and I so find, that the strategies leading up to the entry into the Restructure Agreements and the entry into those agreements themselves were directed to the purposes of extricating the NAB and relieving Mr Walton and his associated companies from potential liability under guarantees to the NAB … They were devised by Mawson for the purposes of achieving the identified objectives.

The end result was to increase the exposure of other unsecured creditors—ordinary small businesses run by Australians in the construction industry—to Walton, while NAB was extricated from its unsecured position.

Another recent judgement of the Federal Court has voided a number of critical transactions that were the result of pre-insolvency advice given to Walton. There will be a class action of creditors against the NAB for recovery of the $70 million owed to them in large part due to the conduct of the bank, colluding with the Mawson Group and Walton to cause harm to unsecured creditors while extricating itself from exposure. There is a statement of claim to that effect. The first claimant is Mr Les Williams, a civil works contractor who has doggedly and determinedly pursued Walton, Mawson and NAB for six long years and was well known to my predecessor in this place, Senator Cameron. It's my sincere hope that Mr Williams and his co-claimants finally find some justice in this matter.

Other senators will speak at some length on the merits of the system of director identification numbers to be introduced. As an ASIC officer pointed out in the economics committee's insolvency inquiry, it is easier to register as a company director than it is to register your dog with the local council. Indeed, two of the 44 recommendations made by that inquiry were that a director identification number be introduced and be backed up with proof-of-identity requirements. The government's response to that report, tabled in May 2017, said:

These recommendations align with recommendation 15.6 of the Productivity Commission's Report on Business Set-up, Transfer and Closure. The Government will give further consideration to Director Identification Numbers as part of its ongoing work to combat illegal phoenix activity in Australia.

Nearly three years on, we are still waiting. We are still waiting because the government is half-hearted in its pursuit of objectives in this area. People like Les Williams—and the victims of dodgy phoenix operators right across the country, particularly in construction, which this government seems determined to prop up—can be justified in asking: 'What is the point of this government? What is the purpose of this legislation?' The legislation makes a marginal improvement in some technical ways that will be unobservable to Australian small business. What is the point of a half-hearted attempt? What Australian small businesses need, particularly in the construction industry, is a government that will stand up for small business, that will stand up for certainty and security, that won't mouth the platitudes and that won't do the bills with the big names that achieve very little. They need a government that's interested in probity and integrity in our industries.

This is a government that, on the one hand, rabbits on about ensuring integrity for their opponents, but when it comes to integrity in the construction industry with illegal phoenixing they have run up the white flag and are nowhere to be seen. They've got the hide, this week of all weeks, to be talking about integrity when they have no integrity after a systematic industrial-scale rorting of $100 million of taxpayers' money designed to advantage them and their friends. The only interest that they show any interest in protecting is their own shallow, narrow self-interest.