Wednesday, 8 August 2007
Corporations Amendment (Insolvency) Bill 2007
Debate resumed from 31 May, on motion by Mr Pearce:
That this bill be now read a second time.
The Corporations Amendment (Insolvency) Bill 2007 is a belated response by the government to the 1997 Review of the Regulation of Corporate Insolvency Practitioners; the 1998 Legal Committee of the Companies and Securities Advisory Committee report Corporate voluntary administration; the 2000 Companies and Securities Advisory Committee report Corporate groups; the 2004 Corporations and Markets Advisory Committee report Rehabilitating large and complex enterprises in financial difficulties; and the 2004 Parliamentary Joint Committee on Corporations and Financial Services report Corporate insolvency laws: a stocktake.
Updated insolvency laws that adequately respond to business practices, provide more clarity for creditors and in turn reduce the cost of obtaining finance are vital for the Australian economy. There is of course a social impact that should be considered, and this is something particularly important to the agenda of those on this side of the House. In 2003, the ACTU estimated that around 19,000 employees may lose up to $500 million—that is, half a billion dollars—in unpaid entitlements each year. Although other creditors have other sources of income sometimes, employees are likely to be dependent on the wages they receive from a company and, as such, the impact on them is likely to be substantial.
Labor does welcome the bill, overdue though it is. In particular, changes relating to finetuning of administration processes implement the CAMAC recommendations that date from 1998, and it is good to see, in 2007, that they are finally being implemented in this legislation. The changes that arise from this bill fall into four categories: improving the outcomes for creditors, including employees; deterring misconduct by company officers; improving regulation of insolvency practitioners; and finetuning voluntary administration procedures.
Outcomes for creditors are improved by the bill in a number of ways. In the current system, employees are afforded priority amongst unsecured creditors. However, this priority can be displaced by a deed of company arrangement. Employees have only a limited opportunity to challenge any change to this prioritisation in a deed in the event that their priority is displaced by a meeting of creditors. Changes in this bill mean that it will now be mandatory for a deed of company arrangement to preserve the priority of employee entitlements when a company is in voluntary administration unless employee creditors agree to waive their priority. The court may approve the employee creditors’ waiver and alter their priority in the deed of company arrangement where it is satisfied that it would be more beneficial for employee creditors than the immediate winding-up of the company. This is a sensible measure which the opposition supports.
Issues relating to the superannuation guarantee will also be clarified. Although the Corporations Act gives priority to the superannuation contributions of employees, it has been held by the courts that the guarantee, which is a statutory tax liability owed by the Commonwealth, cannot be characterised in the same way and therefore does not have the same priority. As the SGC is related to superannuation payments and exists to ensure that the benefits for employees are received, there is a need to clarify and address the priority of the SGC in a receivership, voluntary administration or deed of company arrangement, not just company liquidation. Changes to the superannuation guarantee act and the Corporations Act mean that the SGC will receive the same priority as wages and superannuation contributions.
Rights of subrogated creditors—those creditors who are entitled to be substituted for another creditor in a liquidation because they have advanced funds to meet a particular creditor’s debt—are clarified so that they have the same rights as the original creditors, even if an advance has not been made before the relevant date. New disclosure requirements for administrators are introduced to address the concerns about the independence of directors and to make sure that creditors can make well-informed decisions when engaging administrators. Administrators will be required to provide a declaration of any ‘relevant relationships’ and indemnities that apply to them in a document which is a maximum of two pages in length.
Greater guidance will be given to courts to set and review remuneration of administrators and deed administrators. A number of amendments are also made to streamline administration processes. The requirement that a company in a creditors’ voluntary liquidation hold an annual members meeting will be removed, as the economic interests of those members is not substantial enough when balanced against the cost of those meetings. However, if the liquidator chooses not to call an annual meeting of creditors, then they must lodge a report with ASIC on the progress of the administration and notify creditors that the report will be available to creditors free of charge. In the case of a members’ voluntary liquidation, where the economic interest is generally greater, the requirement for an annual meeting is retained.
Various requirements to publish notices and documents will also be made redundant unless there is a strong policy rationale for the publication of relevant documents. The bill will also allow various notices to be published together to reduce costs. Electronic communication will now be made available to administrators for the distribution of notices to creditors, provided that certain conditions are met. Currently, electronic distribution is only available to notify members of meetings.
In order to increase the opportunity to recoup funds for creditors, two types of pooling orders in liquidation, voluntary and court ordered, will be made available. Voluntary pooling will be available to occur when a liquidator of a group of companies that are in the process of winding up makes a determination that the group of companies can be pooled for the purposes of liquidation. Courts will be empowered to order that a group of companies is pooled for the purposes of winding up. An application for court ordered pooling may only be made by the liquidator or liquidators of the companies in the group as each company in the group will be taken to jointly and severally be liable for each debt payable in each claim against the company in that group.
The bill also puts forward a number of proposals to deter corporate misconduct. ASIC will now be able to use its compulsory powers to investigate a liquidator’s conduct if it has reason to suspect, for example, that they have failed to carry out their duties. Penalty privilege in relation to proceedings for disqualification, banning suspension or cancellation of orders or declarations to that effect will be removed. This was one of the amendments sought after privilege was claimed in the High Court’s Rich v ASIC case, where ASIC was unable to obtain certain documents in relation to the relevant orders.
Banning and disqualification orders and orders to cancel or suspend licences will help deter misconduct of company officers, including in relation to phoenix company activity. Insolvency practitioners will be better regulated under new provisions. Prohibitions on inducements to members or creditors of a company to secure an appointment will now be extended to include directors and providers of professional services, such as legal and accounting firms.
Registered liquidators will have to obtain and maintain professional indemnity and fidelity insurance to cover their work as insolvency practitioners. The requirement that registered liquidators provide triennial statements to ASIC will be replaced with a requirement that a detailed statement be provided annually. This means that a liquidator’s suitability for registration will be reviewed more regularly. ASIC will be able to cancel the registration of a liquidator automatically where the liquidator becomes disqualified from managing a corporation or by reason of bankruptcy and where the liquidator does not maintain their insurance. An application will no longer need to be made to the company’s auditors and liquidators’ disciplinary board first. The board will be given more flexibility to deal with disciplinary matters. For example, it will be able to hold a prehearing conference to determine procedural matters.
Small changes will be made to increase the efficiency of voluntary administration procedures. New provisions will allow administrators to sell properties subject to a lien, pledge or retention of title clause if they have written consent of the property owner or the security holder, or with leave of the court. Administrators will also be able to consent to the transfer of shares if they are satisfied that it is in the best interests of the company as a whole. The bill will allow slightly longer periods to pass before the first and second meetings of the creditors are required to be held. There will also be some slight amendments to change ‘days’ to ‘business days’, which will consequently affect the timing for things such as when notices for meetings must be given.
Labor notes the consultation with stakeholders in insolvency areas, such as the Insolvency Law Advisory Group and the Insolvency Practitioners Association of Australia. As required by the Corporations Act, the amendments under this bill have also been approved by the states and territories through the Ministerial Council for Corporations. Labor supports this bill in the interests of modernising Australia’s corporate insolvency regime. We reiterate our concern that some of these changes were recommended almost 10 years ago and yet the government is acting only today to legislate. We do, however, support this as being ‘better late than never’ and support in particular the measures which protect employee entitlements upon insolvency.
I would like to thank the honourable member, Mr Bowen, for his contribution to this particular debate around the Corporations Amendment (Insolvency) Bill 2007. Well-designed insolvency laws are critical to any good-functioning economy. They are among the most basic laws that govern commercial life and are, I think, integral in ensuring that Australians can have some certainty when a company experiences some form of financial distress. In this regard, I note that Australia’s corporate insolvency laws are well regarded and essentially sound; they do not require fundamental revision. The government is therefore not proposing radical changes to the law in this bill; rather, this bill provides an integrated package of measured reforms which, together, are expected to have a significant impact on the efficiency and integrity of our corporate insolvency regime.
This bill responds to the recommendations of a number of committees, notably the Corporations and Markets Advisory Committee and, of course, the Parliamentary Joint Committee on Corporations and Financial Services. Both of these committees examined areas of corporate insolvency law. The bill also, of course, responds to many suggestions for improving the law that have been made by others, including creditors, practitioners and, indeed, members of the judiciary.
I would like to take this opportunity if I could to thank all of those who commented on this important bill and to note the role in particular of the Insolvency Law Advisory Group, otherwise known as ILAG, which did provide valuable and technical advice in the course of drafting this legislation. I also want to take the opportunity to note key industry stakeholders, such as the Insolvency Practitioners Association of Australia, the IPAA, who have welcomed the introduction of the bill and applauded the consultation process. They said:
The IPAA believes the legislation contains major improvements in the insolvency regime. It improves the efficiency, efficacy and fairness of the process. We commend the government’s consultative process, which has produced the balanced bill. We look forward to working with the government on the next round of reforms to other areas of insolvency.
The bill focuses on improving outcomes for creditors, deterring corporate misconduct, improving the regulatory framework for insolvency practitioners and finetuning the voluntary administration procedure. It also addresses public concerns about the independence of insolvency practitioners and practitioner remuneration. Key initiatives include mandating the priority of employee entitlements in deeds of company arrangement, clarifying the status and priority of the superannuation guarantee charge in insolvency and the introduction of a new statutory process for facilitating the winding-up of companies in corporate groups.
The bill will also require practitioners to provide creditors with sufficient information for them to assess whether a remuneration proposal is reasonable. The report will include a summary of the main tasks to be performed by the practitioner and, of course, the costs associated with them. Pooling will permit creditors to agree or a court to make an order that the assets of two or more companies in liquidation be combined so that the liquidation of the companies can proceed together as if they were indeed one company. This important facility will allow for more streamlined administration, consolidated accounts and consolidated meetings and minutes of meetings, thereby providing scope for cost reductions and better returns to creditors.
As part of the announced package of insolvency reforms, the government implemented two very important reforms in 2005-06. First, we allocated an additional $62 million over four years to improve the range of entitlements available to employees under the General Employee Entitlement and Redundancy Scheme, otherwise known as GEERS. Secondly, we also established an assetless administration fund involving expenditure of some $23 million over four years to target improper behaviour by directors in the lead-up to a company’s insolvency. The program is already delivering results.
Through this bill, the government is demonstrating that it is actively working to minimise the economic and social costs that can regrettably accompany a corporation’s insolvency. Those costs may include the disruption of trade and commerce, the loss of employment, the loss of savings, damage to suppliers and customers and the expenses of the insolvency process itself. This bill demonstrates that the government remains committed as always to improving the insolvency processes in the interests of all Australians and that we want to see the best possible results for all who may be affected by an individual company’s insolvency.
I want to take this opportunity to again thank all of the stakeholders who have participated in what has been a very good example of consultation. I also want to take the opportunity to thank the officials from the Department of the Treasury for all of the very hard work and the dedicated approach that they have taken to ensure that there has been effective consultation with our stakeholders. I commend the bill to the House.
Question agreed to.
Bill read a second time.
Ordered that the bill be reported to the House without amendment.