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Monday, 11 September 2017
Page: 6886


Senator WHISH-WILSON (Tasmania) (20:56): Not much good comes out of companies going bankrupt. From my experience, the liquidation process generally doesn't have much to hand out to creditors and stakeholders. Companies go bankrupt for a lot of reasons—sometimes it's poor management; sometimes it's taking on excessive debt. We could probably do a whole speech just on why companies go to the wall, figuratively speaking. But not much good comes out of the process. Often the creditors and the shareholders, the debtors, get very, very little back—a few cents in the dollar in some cases. Certainly other stakeholders, such as suppliers and workers, often lose out of the process. So it's not something that we like to see. I accept the premise behind this bill, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017—the concept that we should look at an opportunity of giving company directors a second chance to see if they can turn the ship around before it goes under, to try and avoid the kinds of complications and the heartache and the issues that we see with the liquidation process or with receivership.

I know from experience, not just here in the Senate but personal experience—I was a director of a small company for well over a decade—that the only people who do well out of the liquidation and receiver process are the liquidators and the receivers themselves. In fact, I can think of some Senate inquiries that I have been on, around forestry managed investment schemes, where the receivers themselves have got up to 30 or 40 per cent of the value of the assets, charged in fees over a long period of time. I have had a lot of people knocking at my door to complain about the behaviour of receivers or liquidators. So I'm not necessarily a big fan of liquidators per se, and I accept the logic and the intent of this bill, which is to look at options that allow another path to be explored before companies go to the wall.

Let's think about companies making bad decisions and why companies end up being put into liquidation and ultimately go bankrupt—and 'bankrupt', technically speaking, is a personal term that applies to US law, but I do like to use it figuratively. Companies go bankrupt for lots of reasons. We need good directors. A good board of directors with good experience, good skill sets, good perspective and good balance is necessary to prevent companies going down that road in the first place. Healthy companies make profits but they employ people, and that is important for our society. If we want to have healthy companies that are able to survive—and it's cut-throat and competitive in a lot of businesses; let's be completely honest—then we need good people on boards of directors.

I know people, even friends of mine, who've recently done the Australian Institute of Company Directors course. It's very difficult; it's not easy. There are a lot of requirements on directors these days if they're going to take up a position on a company board. In saying that, we need to be very careful that something like a safe-harbour clause doesn't end up becoming a bottom-of-the-harbour clause where we see abuses or potential abuses of a process that we're going to put in place here today. As Senator Gallagher said, we need to watch that very, very carefully. The government's intent on this bill reads:

… this Bill will create a safe harbour for company directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency.

It's almost a binary choice. If your company reaches a point of technical insolvency—and this relates to your debts and your ability to service that debt—you have two choices: you can continue trading insolvent, which is illegal and which, potentially, levies heavy fines on the directors of that company, or you can put yourself into liquidation and see a receiver.

This provides for a process, a restructure of the company, outside of this formal insolvency process. The government believes this will drive cultural change amongst company directors by encouraging them to keep control of their company, engage early with possible insolvency and take reasonable risks to facilitate the company's recovery, instead of simply placing the company prematurely into voluntary administration or liquidation. I've met with many stakeholders who've told me that it's easier for company directors, based on current laws, to put companies prematurely into insolvency rather than face the personal risk that being a company director entails.

Under section 588G of the Corporations Act, a director of a company may be personally liable for debts incurred by the company if they are a director of a company at the time when the company incurs the debt; the company is insolvent at that time, or becomes insolvent by incurring that debt; and, at the same time, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent.

As I said earlier, boards of companies are always trying to attract good people, and that's important for companies. If the risks are skewed so that company directors are actually protecting their own back pocket—in the sense that they might be liable for payment of potential debts—then, human nature being what it is, they would put the company into receivership, rather than allowing it to trade. We also don't want to see companies trading insolvent, and there is a reason why we have insolvency laws. The longer a company trades insolvent, the more the snowball moves and, potentially, we see more damage as stakeholders get drawn into this process—such as businesses who may have contracts with the company, suppliers who have contracts with the companies, shareholders, workers—so we need to be very careful of the fact that providing safe harbour is a good concept in principle when we're talking about company directors who want to do the right thing. Such company directors want to try and turn a company around, to save jobs for the workers and protect suppliers and other contractors. That's a good principle. Unfortunately, my experience of life is that not all people will necessarily behave the right way, and so we need to have some safeguards in place to make sure that we don't see unethical or illegal behaviour. We also need to ensure that this process isn't an indefinite process where new suppliers and new stakeholders are brought in, and they might be put at risk by—for example, long-term, three- or five-year restructure, which might count as a safe harbour.

So I accept there are concerns over inadvertent breaches of insolvent trading laws and I know these are frequently cited as a reason that early-stage or angel investors and professional directors are reluctant to become involved in start-ups. I was talking to my colleague Senator McKim earlier about implications of innovation of this bill and he said he met with a number of stakeholders who wanted the Greens to support this bill. I'll talk a little bit about the amendments that we've got before us in a second. But I think as a principle this is a good one, if it actually helps solve a problem and means that fewer companies go into liquidation and that creditors and other stakeholders, such as workers, are better protected.

In relation to Labor's amendments—and I presume we will go into the committee stage; so I won't go through it in a lot of detail—we certainly have some sympathy with Labor's third amendment that the minister be required to commission a review of the safe harbour amendment legislation before us today, with an independent panel after it has been in place for two years. My concern—and maybe we can go into this in more detail in committee—is about exactly how that's going to work. I understand from speaking to the minister's office tonight—and I must say that we haven't had a lot of time to speak to them; we didn't know this was going to be on tonight—that there's no plan at this stage for any kind of disclosure if corporations or companies have decided to opt for the safe harbour process or the safe harbour route, and that concerns me.

I understand why a public disclosure to, for example, shareholders or other stakeholders such as suppliers would be problematic, given the ipso facto clause and the potential for this to be counterproductive, but I do believe that, if we are going to have an effective review after a couple of years, we actually need some data or some set of data, so that we can actually see how often these safe harbour clauses are taken up by company directors and how well they pan out.

My understanding at this stage, and I admit that it may be fairly limited, is that the only way we'll find out if companies have opted to go down the safe harbour route is if a company goes into liquidation and that liquidation process then explores whether a company has gone into the safe harbour process, and we won't know for two years how many companies will have gone through liquidation. From my personal understanding, liquidation takes a long time; it can take many, many years. I have a suggestion, which off the top of the hat, is: why wouldn't ASIC, for example, be required to keep a database or a register of companies that have opted for or directors who have opted to go down the safe harbour route? That way we can collate that information and have it available.

Of course, companies may go down the safe harbour route and successfully trade out of trouble—it may take years or it may take a short period of time—and we'll never know whether they've opted to go down this road, because the data won't be available. That could help us decide whether this was a good piece of legislation, and that would reinforce whether we want to keep it in place with not too many changes. So I like the idea of Labor's third amendment, to have a review, but, if we can't measure how many companies have gone down this road, then I'm not sure how effective that is going to be. So I would like to receive some information from the minister on that when we explore that amendment. I do have concerns about the length of time that companies could opt to go down the safe harbour route. Restructuring of businesses can take some time. It may take many, many years to turn a business around. Nevertheless, I'm prepared to see what a review would show in that respect.

There is another thing I would like to get more information: if a company or directors go down the safe harbour route and enter into a restructuring process, are there any restrictions on those directors, for example, selling equity in their businesses over that period of time? With continuous disclosure laws, if they are a public company listed on the stock market, I would hope that that kind of thing would be transparent. I have raised with the minister's office that if private companies do sell equity in their businesses—and I know from personal experience that they do—and certain directors are aware of problems, but there is no requirement for them to flag a sale of equity or even raise new equity, and I think that presents some risks where the business is currently trading in safe harbour. Certainly it presents risks to new investors and new stakeholders in the company. I hate to say it, but, yes, I do assume some cynicism with human behaviour on these matters and I would like to see some safeguards in that respect. Of course, if the companies rise out of that restructuring process successfully and go on, that's great, but I've seen too many rats leave sinking ships in the past. So there are a couple of things there that I think would be important to note and provide some information on during the committee stage.

I would like to talk now a little bit more about Labor's amendments. I can see some merits in what the Labor Party is suggesting with these amendments. In their first amendment, at (a), it would be up to the director to prove that they're entitled to the safe harbour, rather than the other way around. At the moment the government's bill has that, once directors point to some evidence—that is, satisfy an evidentiary burden—it is up to the creditor to then prove that the director is not entitled to the safe harbour. I think Labor is proposing that liquidators or receivers be approached to provide essentially a tick of approval for a company before they go down the safe harbour road.

I just don't know how that's going to work. Liquidators and receivers have a specific role and, if they do that, then essentially they are going to be corporate consultants or corporate doctors. It is a different role to what they play now, and I see a conflict of interest if a liquidator provides that tick of approval to go down the safe harbour road, it doesn't work and the company goes into liquidation. What if it is the same liquidator that is actually liquidating the company that provided that advice? Is there liability attached to providing advice to a company? Even if it's extended to go into corporate consultants like Arthur Andersen or other experts, is there any liability attached to providing that advice that Labor has set out in (1)(a)? I'm not sure that that would be workable, but I would be happy to talk to the Labor Party about that further.

In (1)(b), to be entitled to the safe harbour, the director must satisfy all five factors. Those five factors are very important. Labor is suggesting that upfront a director must meet the five reasonable requirements to get the benefit of the safe harbour. They include properly informing themselves of the company's financial position, taking appropriate steps to prevent misconduct by officers or employees of the company that could affect the company's ability to pay its debts, taking appropriate steps to ensure that the company is keeping appropriate financial records, obtaining advice through an appropriately qualified entity who is given sufficient information to give appropriate advice and, lastly, developing or implementing a plan for restructuring the company to improve its financial position.

It would be very useful for companies to go through their own internal processes to tick those boxes to make sure that that has been done. I don't know how getting essentially certification of those issues would work. I'm not sure how workable that would be either. Who's capable of providing that independent advice? Once again would there be legal liability attached to the provision of that advice by an independent third party? I'm not sure how that would work. Possibly it could be ASIC or another body that is set up to do this. That's a possibility, but with little time and the complications in rewriting that out in legislation, perhaps that's something that could be looked at in a review in two years time.

Certainly it would be useful to have companies which go through this process of choosing not to go into liquidation but opting for a safe harbour registered—privately, if that has to be—with someone like the regulator so that we have that data and we have a record that that company is in that situation. Like Senator Gallagher, I will be watching very closely to see how this unfolds and to see whether company directors use this in ways that would be counterproductive to the intent of the bill.

I will just quickly summarise in the last minute or so that I've got left. While there are the concerns which I've outlined here tonight, these concerns could be addressed in terms of regulation around the legislation, in some detail—and they are the kinds of things that could potentially be addressed once we have a dataset, once we see how this has unfolded in a couple of years time. I personally believe that avoiding companies going into liquidation and receivership is important. I don't think it benefits anyone really, except the liquidators and receivers. They tend to do very well out of the process, thank you very much. It's not necessarily good for the workers, the small business suppliers, the shareholders or the other stakeholders, so, if we can find a way forward that helps avoid more frequent liquidation or companies becoming bankrupt, then that's something we should look at.

I have met over the last couple of years with the Institute of Company Directors and other stakeholders, and they've made this point clear. I think it's rational, but I think we need to be very careful that we're not giving cover or protection to company directors who may do the wrong thing. The intent of this bill is that they will do the right thing. My experience in life is that that is not necessarily the case. It's great while we get good people on boards that are set up to help revive a company and support workers. We just need to make sure there are some safeguards put in place to make sure that the bill is not counterproductive.