Chris Bowen (Prospect, Australian Labor Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

On behalf of the Parliamentary Joint Committee on Corporations and Financial Services, I present the committee’s report entitled Corporations Amendment (Insolvency) Bill 2007 [exposure draft]; Corporations and Australian Securities and Investments Commission Amendment Regulations 2007 [exposure draft], together with the evidence received by the committee.

Ordered that the report be made a parliamentary paper.

by leave—The bill introduces comprehensive reforms into the corporate insolvency framework to strengthen creditor protections and improve the efficiency of the insolvency process. The objective of insolvency law is to promote and maximise trust in the operation of the system on the part of the community in general and the business and corporate sector in particular. Of course, we see constant reminders of the importance of this with corporate shutdowns across the country.

Four broad themes or issues were identified by the committee: strengthening creditor protections through enhancements to the General Employee Entitlements and Redundancy Scheme, or GEERS; deterring potential misconduct by company officers through the establishment of an assetless administration fund and a new ASIC enforcement program targeted at phoenix company behaviour; improving the regulation of insolvency practitioners through enhanced disclosure requirements in relation to independence and remuneration; and fine-tuning voluntary administration through a package of technical amendments to enhance the efficiency and cost-effectiveness of the process.

The main insolvency and accounting bodies endorsed the draft bill as reflecting much needed reforms, and expressed strongly the view that there were no matters of such significance raised by the bill that would justify any delay to its introduction and passage through the parliament this year. The committee certainly supports that; however, the committee had some concerns which we asked the government to address either by amending this bill or by bringing in subsequent legislation to amend the act further.

The bill builds on the work of the corporations committee’s earlier report, Corporate insolvency laws: a stocktake, tabled in June 2004. I note that unfortunately the government rejected the majority of the recommendations of that report despite the fact that it was a unanimous and bipartisan report. The report’s recommendations are wide ranging and aim to encourage greater flexibility in insolvency situations. I welcome all of the committee’s recommendations. In particular, I would like to focus my brief remarks on recommendations 3 and 5 of the committee’s report.

In recommendation 3 the committee recommends that the government and industry stakeholders review the right of the administrator to use a casting vote in relation to his or her removal, and develop an alternative mechanism that would satisfy the committee’s intent in avoiding conflicts of interest. The committee sees this as a relatively clear-cut matter. We do not believe it is appropriate for administrators to have a casting vote on whether they should continue in that role. We believe there should be another mechanism. The government response stated that the current practice is sufficiently regulated by the requirement that it must be exercised in what the administrator perceives to be the overall best interests of the company, and the right of creditors to challenge the exercise of the vote in court.

The committee contends that it is appropriate that the right thing not only be done but be seen to be done. We do not believe that it is an appropriate situation for administrators to have the casting vote on their own continued connection with the company. The issue of conflicts of interest and how to avoid them is central to all business dealings. In this context, the power of an administrator to exercise a casting vote may call into question his or her independence and give rise to an apparent conflict of interest.

The accounting bodies agreed with the committee. The joint ICAA/CPA Australia submission noted that recommendation 3:

... gives underpinning to independence as one of the cornerstones of external administration.

Clearly, the current system does not provide adequate safeguards in the event of a conflict of interest and the measures to overcome this are inefficient and costly to creditors. Creditors should not be forced to appeal. There should be an alternative mechanism which avoids the need for them to appeal to a court or tribunal.

I encourage the government to adopt this recommendation and consult with industry to reach a compromise solution between the government’s existing position of retaining the administrator’s casting vote on his or her removal and the position that prohibits the use of a casting vote in those same situations.

Recommendation 5 deals with the role of directors in reconstructing financial records. The committee recommends that the penalty provisions for breach of section 286 of the Corporations Act be significantly increased to act as an effective deterrent for directors to ensure that proper financial records are kept. The committee recommends that Treasury develop an appropriate scale of penalties which apply to companies of a different size.

This recommendation was rejected by the government on the grounds that it would create uncertainty as to the liability of individual, non-culpable directors and the quantum of any potential liability. Under current law directors are required to keep proper accounts which would enable liquidators to discharge their duties. However, the current penalty provisions for breach of section 286 of the Corporations Act do not provide a significant deterrent, in the committee’s view.

The IPAA provided an example of what currently happens in practice when a director fails to provide a liquidator with any books or records. When a company goes into official liquidation the directors may know that they owe that company some money by way of a directors’ loan account, or that there has been a transaction where that would ultimately cost them money. They go to the liquidator and say, ‘I’m sorry, I don’t have any records; they have been tossed in the bin.’ Or they may say that they’ve been shredded or the great flood of 1956 meant that they were no longer in existence. The liquidator would then report that to ASIC and the liquidator assistance unit would then take the matter off to a local court. The result of that process would be that they could be fined between $500 and $2,000. So, in terms of an out for them, it is easier for them to take the fine of $500 than to admit the liability.

As pointed out by the example above, provided by the IPAA, the current penalties do not provide a sufficient deterrent to unscrupulous directors, in the committee’s unanimous view. The committee came to the view—a view supported by the CPA and IPAA—that the current penalties need to be increased. There is a direct responsibility and accountability for directors to keep proper financial records, and in the event of corporate insolvency administrators who are left to reconstruct financial records should be authorised to extract costs or penalties from those directors in breach of section 286 of the Corporations Act.

Recommendation 5 supports the earlier developed recommendation 10 of the committee’s report of 2004, which I referred to in my opening remarks. There is no question, in our view, that the government and the Treasury will need to re-visit this area of corporate law.

The quality of the evidence and submissions before the committee was very high and the strong stance taken by the committee in some of its recommendations is such that the government should be considering this. We do not support delaying this bill but we do call on the government to have another good look at the bill and perhaps, in any event, to bring in further legislation at a future time to correct these anomalies.

As always, I thank and congratulate the committee’s secretary, Mr David Sullivan, his support staff, including Mr Stephen Palethorpe, and the committee’s deputy chair, the honourable member for Chisholm, who is not in the chamber today due to other commitments. She has worked very hard on this report. I thank everybody involved in the committee report for their hard work.