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

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.

Steve Georganas (Hindmarsh, Australian Labor Party) Share this | Link to this | Hansard source

Is the amendment seconded?

Ed Husic (Chifley, Australian Labor Party, Shadow Parliamentary Secretary to the Shadow Treasurer) Share this | Link to this | Hansard source

It is, and I reserve my right to speak.

Steve Georganas (Hindmarsh, Australian Labor Party) Share this | Link to this | Hansard source

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.

Ted O'Brien (Fairfax, Liberal Party) Share this | Link to this | Hansard source

The address from the member for McMahon illustrates the very reason why the Labor Party cannot govern again in this country. Yet again, it demonstrates that their strategy is to publicly beat their hairy chests but then, behind closed doors, get trapped in analysis paralysis. There are two measures in this bill: one relates to safe harbour and the other relates to the ipso facto clause. On both measures, the member for McMahon says that the Labor Party agrees—in principle, agrees; understands and acknowledges the intent, and agrees. But the Labor Party wants to hold this up in the Senate and kick these measures—which, they have acknowledged, are needed in this fast-moving modern economy—down that time-honoured road. They want to kick the can down that road into analysis paralysis: 'Let us have another analysis of these potential measures'—despite the fact that they agree with them. The Labor Party cannot take action. But they will beat their chests. The chest beating that we heard from the member for McMahon today related to phoenixing practices. Yet again, the Labor Party stands up and says: 'We want action on this. We want action.' Then they are given an opportunity, through this bill, to take action on safe harbouring and the ipso facto clause, and they say, 'No, we want further analysis.'

So it is on phoenixing, despite their chest beating—and I do agree with the member for McMahon about the dishonourable activity of some taking place, and I certainly have seen it in the construction industry, and I suspect that in the vocational education industry there have been examples in recent times. However, the government currently has a phoenixing task force that is putting together recommendations for action. Now the Labor Party have latched on to one issue—this singular issue of director IDs. That of course will be considered in due course, as the task force looks at its recommendations and the minister does also, subsequently. So here we have a big issue of phoenixing. The Labor Party only has one potential solution—that solution being duly considered. If the Labor Party wants to free-ride on the government's proposals that will come in due course on phoenixing, then fair enough—they are more than welcome to free-ride. But Labor should not put the government and the people of Australia in the same situation that they have put them in today where, when push comes to shove and a vote needs to be taken, they refuse to support, despite the fact that the member for McMahon has said, as to the two measures being considered in this bill, that the Labor Party agrees. The Labor Party should not put us in the same position when it comes to phoenixing, where they will say, 'We agree in principle, but we're too afraid to actually take action. Instead, we want to kick it down that time-honoured road again.'

Let us now talk about these laws, which we hope to have introduced if the Labor Party can get over its analysis problem. In the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 the measures are, of course, part of the broader range of measures reflected in the government's National Innovation and Science Agenda that the Prime Minister and the Minister for Industry, Innovation and Science announced in late 2015. Deputy Speaker, did you hear that I mentioned '2015'? We are in 2017, so that was two years ago. And still the Labor Party, despite agreeing, say they need more time to think, reflect and analyse. Extraordinary!

The government's agenda was developed in recognition of the great challenges and opportunities facing Australia in a world where the pace of change has, over just a handful of years, become technologically turbocharged. The Prime Minister and the minister both recognised that, to keep up with and continue to be competitive with the most innovative economies and societies in the world, we had to recognise the extent of the behavioural transformation that is currently underway, driven by technology, and scale up to it across the board. Promoting innovation and supporting risk-taking are key initiatives to deliver that competitiveness because both are proven pathways to success. That has been the case for as long as humans have been enterprising, but it is especially true today in our highly competitive economy.

To help promote and deepen our culture of innovation and indeed of risk taking, the National Innovation and Science Agenda has many measures. They include, for example, tax rebates of up to $200,000 for investors in start-ups. The failure rate of start-ups is startling at over 90 per cent, and the biggest stumbling block—at least one of the major stumbling blocks—for the vast majority is not so much the soundness of their idea, the fundamentals of their business plan, but, rather, a lack of capital. If more investors can be lured away from the more traditional targets, like real estate and the share market, many more start-ups are much more likely to be successful and create more jobs.

Another key measure to promote innovation is the commitment of $500 million over four years towards restoring research funding. The CSIRO will have a $200 million innovation fund. The National Collaborative Research Infrastructure Strategy has a guaranteed $1.5 billion over a decade. There is $250 million to help private entities commercialise medical innovations, $520 million for the cyclotron and $294 million for the Square Kilometre Array telescope. These are measures recognising that cutting-edge science is, as it always has been, the cutting edge of business and the requirement for economic success for societies that build jobs and high standards of living, because they are out in front; they are the leaders of industry.

The National Innovation and Science Agenda also seeks to address some issues that have developed over time in our law and practice and act as a brake on innovation and a brake on entrepreneurship. They hold back those who have the 'have a go' mentality that is so crucial when you are starting a business. Some of those measures in our system have developed over time into condemnation of failure rather than condemnation of breaking a law per se. Bankruptcy is a case in point. The historical constraint has been that, if declared bankrupt, you cannot start a new business for three years. The agenda suggests that one year is adequate. The majority of bankrupts do not leave a trail of ruin beyond their own finances. Many retain a determination to succeed and, with more experience and maybe better planning, and maybe better execution of plans, many ultimately do succeed.

In the same vein of encouraging and not discouraging entrepreneurship, this bill seeks to set in place two measures—one that has become known as the 'safe harbour provision' and the other deals with ipso facto clauses. The so-called 'safe harbour provision' aims to remedy a problem that can and does emerge when directors of companies feel vulnerable to personal responsibility for debts they incur when their business might be technically insolvent, even as they genuinely attempt to restore stability. What this has meant is that, in many instances, directors will call in outside administrators, even when a company is absolutely salvageable, simply because they do not want to take the risk of raising debt for which they could become personally liable. It is a fine line, obviously. The constraint on raising debt when there is knowingly no hope of restoring the fortunes of a company clearly needs to stay, but the unnecessary loss of jobs and economic activity that can flow from an overly cautious director bringing a company to a halt prematurely because of an unpreparedness to confront the risk of liability, even if he or she believes the debt could actually help save the business, deserves to go, and that is what this bill will do. With appropriate safeguards, it gives credit for what can be established to be good-faith actions by directors, even if those good-faith actions ultimately fail to save the business.

The bill also makes unenforceable, in certain circumstances, ipso facto clauses which currently allow the termination or variation of contracts during and after certain formal insolvency procedures are set in train, which can compound the impact that the reticence of directors to take good-faith steps to save their businesses can unleash. A supplier, for example, to a project that the threatened company is involved in can, when they learn there is a potential problem, pull the pin on contracts—a defensive measure to protect their own business or their own workers. That can lead to a sort of tailspin that makes the threat of insolvency a reality, when in fact the company might well be on the way to trading its way out of trouble.

This does not preclude, of course, two parties to a contract seeing that contract terminated for other reasons. It does not preclude other breaches of contracts allowing for one party to pull the pin. But what it seeks to avoid is a situation where the struggles of a business are used as an excuse for suppliers and other stakeholders to run for the doors—thereby creating an even greater problem for the struggling business, until it almost becomes a self-fulfilling prophecy—rather than encouraging businesses to trade their way out of problems when the business is still salvageable.

The enterprise incentives in this bill complement other aspects of the government's Innovation and Science Agenda, which is all about redoubling our efforts to build the national economy. As such, they are in line with the demands, the requirements, of being successful in the high-speed and challenging operating environment of the 21st century. In this digital age, which has so rapidly transformed the manner and speed by which business is done, there are increasingly the commercially quick and the commercially dead. When the concept is there, when the will is there, when the market is there and when you can access the capital when it is required, you have to act quickly, because, if that concept is good enough, somebody else will be onto it before you can blink. Within this fast-moving environment, it is almost unforgivable that the Labor Party, through the previous speaker, the member for McMahon, have confirmed that, while they understand it, they get it, they see the need for these laws to be introduced, they refuse to have them pass through the lower house and the Senate. They recognise their importance, but again they will hold them up and kick the can down the road.

The bill we have today is a necessary step in helping to foster a culture that gives our entrepreneurs a better chance, through research, through better financial backing and through more appropriate governance to encourage the 'have a go' spirit that is key to prospering in this very fast-moving 21st century. I ask that the Labor Party reconsider its position and do what the previous speaker said and knows is the right thing to do, and that is to allow passage of this bill through both the lower house and the Senate.

Andrew Leigh (Fenner, Australian Labor Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

We have just heard an extraordinary contribution from the member for Fairfax, who has said that it is absolutely outrageous that the Senate is currently conducting an inquiry into this bill, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017, despite the fact that the Senate inquiry is already underway. Submissions close next month. The inquiry will come down in August. Indeed, the inquiry will come down before the government has any intention of bringing this bill to the Senate. So there is no delay as a result of this inquiry. This is the final sitting day before the winter break. The Senate's inquiry is not delaying things.

Then he talked about our second reading amendment, which calls on the government to act on dodgy phoenix directors, who are costing Australia $3 billion, perhaps more. When it comes to dodgy phoenix directors, does the member for Fairfax say that we need to take action now? No, he does not. Does he say that we need what the Australian Institute of Company Directors, the Productivity Commission, the Tax Justice Network, the ACTU and every other sensible independent in the country say we need—a director identification number? No, he does not. He says, 'We've got a task force, we're looking into it and maybe at some stage we'll get around to dealing with dodgy phoenix directors.' We have to be serious about the scourge of dodgy phoenix directors.

I expected the member for Fairfax to take five minutes, but he took his full time, so I had a chance to read his first speech. I know he has a medium-sized business background. He must, deep in his heart of hearts, care about the issue of dodgy phoenix directors, yet he is not willing to support Labor's sensible, carefully calibrated move to tackle phoenixing activity in Australia, and that is deeply disappointing for those of us on this side of the House.

With the member for Gorton and Senator Gallagher, Labor announced in May our package for tackling dodgy phoenix activities in Australia. It addresses the fact that it is currently easier to become a company director than to open a bank account. It addresses the fact that, as tax commissioner Chris Jordan told Senator 'Wacka' Williams in a hearing, the tax commissioner could register Senator Williams as a director and he would not even know about it. It reflects the fact that media reports revealed last year that a member of this House was on the directors register not once but thrice. A member of this House appeared three times on the directors register with different birthdates. I will give the member the benefit of the doubt that this was an inadvertent error, but it does reflect the problems we have without a director identification number. If a member of this House can be three directors then surely it is easy for things to also go wrong.

One expert says that the laws are currently so lax that you could almost register your dog as a director. I have a lovely dog—a keeshond called Texas—but I still would not register him as a company director. According to the experts, the laws are so lax that I almost could. That is why Labor supports a unique director identification number, with a 100-point ID check. This proposal is supported by a plethora of organisations. In addition to those I have already mentioned, there is the Australian Restructuring Insolvency and Turnaround Association, the Senate Economics References Committee and the Productivity Commission.

We have also called on the government to increase penalties associated with phoenix activity, to introduce an objective test for transactions depriving employees of their entitlements, to clarify the availability of compensation orders against accessories, and to consult on targeted integrity measures based on recommendations from the Monash Business School-Melbourne Law School phoenix research team's recommendations. I commend those experts for the work that they have been doing. It is not as though this report has suddenly fallen into the government's lap in the last few days. This phoenix research project has been running for years now, and the government should have acted on dodgy phoenix directors, who are hurting workers, taxpayers and honest small businesses, which, according to the PwC report on the costs of phoenix activities, suffer the greatest harm from phoenix activities.

The Labor Party's determination to crack down on phoenix activity shows again Labor leading the policy debate, as we have done with superannuation taxation concessions, with cigarette excise and with appropriate funding of community legal centres. We saw this week, with the GST low-value imports bill, parliament backing Labor's approach on a one-year delay and a Productivity Commission inquiry.

Labor is again calling on the government to act on dodgy phoenix directors. It is not good enough to set up a task force and to say, 'Maybe sometime in the future we will deal with dodgy phoenix directors.' They are a scourge on the Australian economy, and there is a straightforward way to tackle it now. When the Australian Institute of Company Directors is joining with the Australian Council of Trade Unions, it is probably a sign that you have a sensible measure that enjoys support from across the political spectrum. The government needs to introduce legislation to this House to implement a director identification number.

The government should also act on our other proposals because, in the case of the objective test for transactions depriving employees of their entitlements—that is section 596AB(1), inserted into the Corporations Act in 2001—the Phoenix Research Team noted that that test has never been enforced because, without an objective test of reasonableness, it just is not possible to enforce it against dodgy directors. Clarifying the availability of compensation orders is vital, because it will provide additional tools to tackle dodgy directors. Doubling the base penalty for intentional disregard, doubling the penalty for failure to meet tax organisations, doubling the penalty for failure to withhold—all of these things are critical in making sure that directors do the right thing.

On its face, the bill has some policy merit. It was announced as part of the government's 2015 National Innovation and Science Agenda, with the aim of allowing more opportunities for businesses to be turned around. Providing safe harbour and the new provisions to stop the enforcement of ipso facto clauses may well be the appropriate route to follow.

The operation of ipso facto clauses could potentially destroy the ability of businesses to restructure the value of the business and prevent the sale of the business as a going concern. But it is vital that these changes do not adversely affect taxpayers and employees, and that is why Labor raises the issue of dodgy phoenix activity in our second reading amendment. These are issues which will be properly scrutinised by the Senate committee over the winter break. The reference was made on 15 June. Submissions close on 12 July, and the Senate Economics Legislation Committee will report by 8 August.

The member for Fairfax is misleading the House when he suggests that there will be any delays as a result of the Senate inquiry. The Senate inquiry will only improve the quality of this bill by subjecting it to the proper scrutiny that Australians, who are concerned about dodgy phoenix activity, want but who also want to see viable firms work through a restructure. Balancing those two concerns is absolutely what the Senate inquiry will do; that is why referring this bill in that way is the right approach.

I call on the government once more: come to your senses, tackle dodgy phoenix activity and get on board with Labor's director identification number. It is the right thing to do. Do it now.

Terri Butler (Griffith, Australian Labor Party) Share this | Link to this | Hansard source

I rise to support the member for McMahon's second reading amendment because, of course, it is crucial that this nation acts to crack down on phoenixing by corporations and dodgy directors. When a corporation incurs debts that it cannot pay, winds itself up and then the next day the directors go off and start a new corporation in the same type of business, that has real effects on people's lives. It has effects on: the lives of employees who did not get their full entitlements as a consequence of this phoenixing behaviour; taxpayers, who often have to foot the bill through taxpayer-funded guarantee schemes; employment entitlements, including superannuation; and, of course, the small independent contractors and small-business suppliers, who have done business with the phoenixed company, who miss out on being paid what they are rightfully entitled to receive.

Phoenixing is a scourge that needs to be addressed in this nation and, as usual, Labor is leading the way when it comes to public policy by announcing a policy of director identification numbers. The member for Fenner and others have worked on that policy. It is a policy that will assist us to make sure that directors are tracked so that there are not multiple records for the same person—with different dates of birth, for example—on the ASIC registry. It will help us as a nation crack down on this phoenixing behaviour that hurts taxpayers, hurts employees and hurts small-business suppliers to firms.

I think it is very important that, when we consider this second reading amendment, the government takes heed and understands that this announcement by Labor has been widely accepted and widely approved of by the community—by everyone from the AICD to the ACTU.

I also want to make some comments about the bill itself. As you would be well aware, the creation of a safe harbour shifts some of the risk that is presently borne by directors onto creditors because, of course, it makes for additional situations in which directors can oversee the incurring of debts which might, technically, create a situation of insolvency for the firm. The shifting of risk from directors onto creditors can absolutely be justified, if the overall consequence is a reduction in the amount of loss that has to be borne. In other words, if a measure like this can help firms trade through trouble thus saving jobs, saving livelihoods and saving firms, that is absolutely something that should be considered, but we must do so in a way that is thoughtful. We must do so in a way that says, 'Well, if we're shifting risk around, is there going to be an appropriate level of risk borne by the different interests in this situation? And, is there going to be a reduction in the overall amount of loss?' In other words, there is less loss to go around, if firms do not fail, which is absolutely a good thing and a positive thing. We need to be sure that that is going to be the outcome of such a measure, and we need to be sure that that way risk is distributed between directors and creditors is appropriate and fair.

When we are dealing with this specific bill, this proposal for a safe harbour, we are really talking about creating a safe harbour in respect of a provision that prohibits insolvent trading by corporations. It is worth noting that the proceedings concerned are very rarely actually brought. The Productivity Commission dealt with this point before recommending a safe harbour defence when they said:

… the spectre of action looms larger than the actual (likely) consequence. The rate of successful enforcement of insolvent trading actions is low. There were only 103 insolvent trading cases between the law's introduction in 1961 and 2004.

The commission went on to say:

While the court ordered that compensation be paid in three quarters of those cases, more serious sanctions were extremely rare. Only 15 per cent of cases involved criminal proceedings, and only two cases involved an order banning directors from managing companies.

The commission went on to say:

Since 2004, ASIC reports that they have commenced action for insolvent trading for circumstances involving five companies only between 2005 and 2011.

And they noted some further criminal matters.

Of course, this Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 is concerned with the civil proceedings under the insolvent trading provisions of the Corporations Legislation, and it follows on from the Productivity Commission recommendation for the creation of a safe harbour defence. The Productivity Commission recommended that the Corporations Act should be amended to allow for a safe harbour defence to insolvent trading. It went on to suggest some conditions for the availability of the defence, saying that defence would only be available when directors of a company have made and documented a conscious decision to appoint a safe harbour advisor with a view to constructing a plan to turn around the company; the advisor was presented with proper books and records; the adviser had at least five years experience; the directors were able to demonstrate they had taken all reasonable steps to pursue restructuring; and the advice had to be proximate to the specific circumstance of financial difficulty, not a set of advice much earlier in relation to something else. There are some other components of the recommendation that are relevant, but readers can have a look at the report themselves.

The concern I want to mention—hopefully, it will be something that can be ironed out in the very timely Senate inquiry that is being undertaken in relation to the bill—is that this bill does not actually fulfil the Productivity Commission's recommendation. The Productivity Commission recommended the creation of a defence. This bill does not create a safe harbour defence; instead, it creates a safe harbour exemption from the operation of the civil prohibition in section 588G of the Corporations Act against insolvent trading.

It is also worth noting that there are a range of existing defences to the insolvent trading provisions and existing section 588H. These include that the director in question who is potentially able to be held liable for the insolvent trading 'had reasonable grounds to expect, and did expect, that the company was solvent'; had reasonable grounds to believe, and did believe 'that a competent and reliable person was responsible' for providing the director with 'adequate information about whether the company was solvent' and that they were fulfilling their responsibility; and expected, on the basis of that advice and information, that the company was solvent; if, 'because of illness or for some other good reason', the director was not taking part in the management of the company; or 'the person took all reasonable steps to prevent the company from incurring the debt'. As one would expect, with all of these defences, it is a matter for the director to prove that they have the benefit of that defence. Once the insolvent trading is proved, the director then has to prove that one of these defences applies. That is how defences would be expected to work.

Obviously, none of those defences covers the safe harbour we are discussing today, but it is certainly the case that the Productivity Commission recommended a new defence of safe harbour. Instead of doing that, this bill creates an exemption. Instead of having to prove that they have the benefit of the defence, the director just has an evidential burden, so their obligation is simply to bring 'evidence that suggests a reasonable possibility that the matter exists or does not exist'. So they have to put out an affidavit or give evidence that suggests a reasonable possibility that the matter exists—the matter being, of course, action 'reasonably likely to lead to a better outcome'. That is from the explanatory memorandum.

Once the evidence has been educed, it then falls to the person bringing the proceedings for insolvent trading—which would ordinarily be ASIC or possibly a liquidator—to prove that the director was not developing or taking a course of action that at the time was reasonably likely to lead to a better outcome for the company. So what the decision to create an exemption rather than a defence has done is to make the proposed safe harbour much more favourable to directors than the Productivity Commission possibly had anticipated in making the recommendation. There may well be very good reasons for that. There may well be very good reasons to set this up as an exemption rather than as a defence, but I think it is reasonable to want to have those reasons explored through a Senate inquiry in relation to the bill.

There are just a couple of other things I wanted to flag. Firstly, the protection for employee entitlements requires only substantial compliance and not full compliance unless there has been more than one failure over the preceding 12 months. It is also drafted in the present tense—it is about whether a company is paying employee entitlements. I am quite interested in making sure that would cover any situations where there might be outstanding employee entitlements which, as you know, Mr Deputy Speaker, include superannuation. The consequences for the failure to pay superannuation obviously are long term, but there can be short-term serious consequences as well. For example, if your income protection is based on superannuation and your employer has not made the contributions you can be left uncovered by income protection, which can have terrible consequences if you suffer an illness or injury whilst you are not covered.

I also wanted to mention the other slight distinction between what the Productivity Commission recommended and what this bill does. The Productivity Commission, as you will have gathered from the recommendation when I cited it, made the operation of the safe harbour fairly contingent on a range of things—contacting the adviser, et cetera. The bill that we have here seems to apply a much more general test about whether the person has started 'developing one or more courses of action' and 'reasonably likely to lead to a better outcome for the company'. It then sets what the Productivity Commission would have seen to be conditions for having access to the safe harbour and instead just a range of indicia that might guide the court in determining whether one is meeting the general test of setting out to develop one or more courses of action that are reasonably likely to lead to a better outcome. Given there is some difference between the approach the government is taking and the recommendation of the Productivity Commission inquiry, I think it would be quite useful to hear what the Senate inquiry has to say and what the Senate report has to say about the design of this legislation.

Everybody wants to get to a point where we have good, strong legislation that makes sure that the Corporations Act is not engendering overcautious behaviour on the part of directors, where directors are not constrained from doing what they need to be able to do to help their firm trade out of trouble in the interests of the firm, in the interests of shareholders, in the interests of employees and in the interests of unsecured creditors. We would all like to get to that position and, in principle, a safe harbour can be supported on that basis but we need to make sure that the detail is right.

In relation to the possibility of insolvent trading, we are talking about a redistribution of the risk away from directors who presently bare a reasonable amount of risk because of the possibility of being pursued for insolvent trading towards people like independent contractors; small business suppliers ,who might be doing something that has been outsourced by the firm; cleaning contractors; and of course employees who at least have the benefit of getting the priority in the administration or have the benefit of having some protection in this bill. If we are going to be shifting risk around in that way then we want to be able to be satisfied and assured that there will be genuine benefits from doing so, that it will lead to fewer corporate insolvencies and fewer situations where firms have to be liquidated or have to go into administration. If we can work together to continue to pursue those calls, that will be a very useful thing. As I say, in principle, the safe harbour is something that can be very much supported on that basis.

Ed Husic (Chifley, Australian Labor Party, Shadow Parliamentary Secretary to the Shadow Treasurer) Share this | Link to this | Hansard source

Thank you, Deputy Speaker Vasta, and also my friend and colleague the member for Parramatta, who has kindly allowed me to sneak up the speaker list and contribute in this debate on a matter that has been a long time coming. This will not be a new matter for members of Australia's start-up community, who have for some time considered what is required to improve the strength of the community in Australia and the ability of new firms to emerge and be able to deal with the two things that confront the growth of start-ups, which is access to talent and access to capital. Access to talent, in many respects, is very broad insofar as it is not just the people that start-ups need to help grow the firm but the talent that sits around providing strategic advice at various stages of a start-up's growth and, importantly, through those difficult periods of enormous pressure—and when those pressures become existential as to whether a start-up will succeed or fail. There has been a lot of commentary and consideration about how to retain directors with expertise. Generally in this country, directors are worried about whether they should stay on with a fledgling firm or get out. There has been a lot of discussion about how we treat those situations and how to retain that talent, particularly at key times.

As has been outlined by the opposition, there are a lot of things that this legislation has going for it. It was pointed to in the National Innovation and Science Agenda released back in December 2015, but, as an observation, it has taken a while to get this legislation here. There is a simple reason for that: this is very complex. What is being proposed is not an easy thing to do. As the shadow Treasurer has indicated, it is not our intention to stand in the way of this. You heard from the member for Griffith, who is also a co-chair of the Parliamentary Friends of Innovation and Enterprise and who has a lot of interested in this as well. Out of her contribution to this debate, I acknowledge there are things that are definitely worthy of consideration, like safe harbours and the way they have been structured in this bill. Every time there is a winner in some laws that are put forward in this place, there is also someone who will not necessarily be as warm to what you are proposing—it is understandable. That is particularly the case in some of the arrangements here where, for want of a better term, there is 'forgiveness' to allow people to sidestep what would normally be their obligations to others who have provided service, particularly to fledgling firms. They are rightly extending support to a firm where they expect to be paid for that service and to have a return for that service. In some instances, forgiving debts, for instance, or creating that type of leeway through the various mechanisms that are provided for in this Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 means that there is one person who wins and there is another person who is not going to be so happy. I do not say that they are losers per se, because I do not think it is a finite process. If the firm are able to trade their way out of their problems through some of the measures that are foreseen in this bill, it may be the case that the other firms that are affected by this on the other side of the ledger will win longer term, so we do need to take a longer-term view on this. That is what this bill allows for, and I think it is important that it does that.

As an opposition, I think we have tried to be constructive in the amendments and the contributions that have been made today, flagging that we should go through a Senate inquiry process to test this and to explore some of the concerns that have been raised. Without traversing ground that has already been covered by the shadow Treasurer, we should test some of these things out and then be able to determine a position—especially for the other place, which will consider this ultimately. I think there will be a lot in the start-up community that welcome what is being put here today, which is understandable. There will be others that will not necessarily share that view. There will be others that will say, for instance, that you should not be cutting corners—if I can use that phrase—and you should give people some allowances as to what is being foreshadowed here because business can be tough. You need to frame your operations in a way that meet your obligations to creditors, employees and investors, and do it in a way that means that you are behaving just like every other business in the country. I certainly understand the point that would be made through that.

If this does provide some ability, particularly in terms of safe harbours, for people to stay on board and for that expertise to be retained within a company so that, in the case that I am putting forward for the consideration of the House, that start-up is able to survive through a difficult patch and then ultimately go on and become one of our biggest and best firms not just on the Australian scene but on the world stage, as many start-ups have in this country, then it is worth considering. We have flagged to the government that we do not stand in an obstructionist way before this bill. I think the concerns that have been raised, particularly around phoenixing, are legitimate concerns. We would hope that these could be teased out through the mechanisms that have been advanced by the opposition, primarily through a Senate inquiry process, and we look forward to seeing the outcome of that. But I did want to offer some remarks in this debate on some of the concerns that might exist, particularly for small enterprises and Australia's start-up community.

Julie Owens (Parramatta, Australian Labor Party, Shadow Parliamentary Secretary for Small Business) Share this | Link to this | Hansard source

I am pleased to stand and speak to the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017, a bill that has really important intent behind it, and one that we on this side of the House support. Before I talk about the bill itself and the changes it makes to Australia's corporate insolvency system that are designed to assist businesses trade through difficult patches, I want to remind the House of the kinds of circumstances that businesses find themselves in from time to time, quite often not necessarily even because of their own actions.

This legislation will not apply to every business in these circumstances, but it is worth thinking about the circumstances in our own communities, where we see businesses that, on a normal day, are viable. But changing circumstances can require them to rethink or sometimes just hold out for a short period of time. We see small businesses like the coffee shop down at Pendle Hill, where Baulderstone Hornibrook is building the big, new over-the-station ramp. They have not had any passing customers for the last six months, and they will have another six months without passing customers. That is a small business that probably will not be captured in this, but it is an example of a business that is perfectly viable on a normal day, but circumstances change. You may see a really great little coffee shop or restaurant where the building they are renting is sold. Suddenly the building is demolished and they have to move. Again, a perfectly viable business is in a circumstance that they have to find their way through.

There are businesses that have been affected by fire. Many go to the wall because of the effects of fire, including the loss of their customer relationship during the time that they are rebuilding. Again, they are perfectly viable businesses. We see it in natural disasters and we saw it in the global financial crisis, not just because of the slowing of the market but also because of the rapid increase of the Australian dollar—something that was not going to last forever, so we thought, and it did not, but something that sent many viable, perfectly good businesses to the wall. The circumstance was largely out of their control and they were unable to respond to it with our current laws. We see what happens in the motor vehicle industry when a large buyer closes its doors and thousands of small businesses have to find ways to expand into new markets to deal with the fragmented supply chains. Again, they are perfectly good businesses with viable products that need to rethink the way they operate in a rapidly changing market. We see across the whole spectrum of our community at the moment disruption, rapid change and new opportunities which businesses need to be able to pursue. The pursuit of a new opportunity brings with it risks associated with the need to rethink and restructure, but we need our businesses to be able to do that.

At this time, perhaps more than any other time in living memory, we need to be able to support business to rethink, restructure, engage with new markets and see themselves through some of the tougher times on certain conditions. That is what this bill does. As the shadow Treasurer and all of the speakers on this side have said, the intention of this bill is really good and we will support it in this House. The bill makes changes to allow more opportunities for businesses to be turned around. It does it in two ways. Firstly by creating a safe harbour from personal liability for trading while insolvent. This is for company directors who are honestly and diligently taking a course of action that is reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or a liquidator. Secondly, the ipso facto clauses may allow the 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 certain formal insolvency procedures. So there are those two things—firstly, the safe harbour for directors who are behaving exactly the way we would want them to behave, diligently and responsibly, to trade their companies out, and, secondly, the ipso facto clauses which prevent what you could describe in many ways as a run on a bank, where someone believes a company is in financial trouble and, even though it is continuing to pay its debts and staff, under the old laws it has the right to withdraw from contracts. This protects companies that are doing the right thing from that response by some of its creditors.

When you are talking about something this complex, it is very much an issue of finding the balance. We obviously want fewer insolvencies and we want companies to be able to trade through, but we want to do that in a way which does not increase the severity of some insolvencies, by having companies trading for longer than they should, and does not damage shareholders. We want as much benefit as we can have but the least harm. It is a standard ethics dilemma: the most good for the most and the least harm for the fewest. On this side of the House we believe we need to continue to look at the possible consequences of the bill: the unintended consequences for the community, shareholders and other businesses that have contracts with the companies that are affected by this law.

We are looking forward to the Senate inquiry's report. The Senate is already inquiring into this and the committee will report before the House resumes after the winter recess. When we come back the Senate inquiry will have reported. In contrast to the member for Fairfax's statements, the Senate inquiry will not cause a delay of this bill. Its findings will be back in plenty of time for the Senate to consider this bill. We believe that the inquiry is incredibly important because it allows many stakeholders to contribute to this place's understanding of the effects of this bill across the range of people that it affects.

While the industry as a whole believes that the intent of this bill is very good, not everybody believes that it is in its best form at the moment. The Shareholders Association, for example, has concerns for its members, who are shareholders in some of the companies that will be affected by this bill. The Productivity Commission has made a number of recommendations, none of which are in this bill. So there is another course of action recommended by the Productivity Commission, and we need to consider whether we are looking at an exemption or a defence model. So there are things for us to work through, and it will be great to watch the Senate inquiry take place. It will be good to see the submissions so that we can fully understand exactly how this works.

We have moved a second reading amendment because we on this side of the House have a particular concern with phoenixing activity. It is worth noting how long there has been concern about this. There are some areas in the Australian business sector—construction is a huge one—where the level of phoenixing is extraordinary. We all know that, when a company phoenixes, it is quite often small businesses that are found in a very fragile state, sometimes with major contracts—sometimes with their biggest contracts—effectively disappearing beneath them and tied up with legal challenges et cetera for quite some time. You see a lot of businesses go to the wall because of phoenixing.

It is a particularly pernicious activity, where you see one business transfer its assets to another company and then deliberately send the first one broke so that they can basically start clean—same people, new business and assets from before. Let's face it, it is theft. It is a rather sophisticated form of theft. It is rife throughout our community and everybody on both sides of the House knows that it is. We on this side came up with a policy some time ago of a director identification number, which would ensure that each director is recognised as an individual and we do not get what we get now with, I guess you could call them, 'fake directors' and even some people being registered more than once.

There was an article back in May 2017 in The Startup Magazine which talked through the recent history of this and talked about the Productivity Commission's report in December 2015, which recommended director identity numbers for directors—way back then, in December 2015. It took the government 16 months to respond to that. The response has only just come down. The government is now looking at it and there is a task force, but this is something that both sides of this House have known about for a long time. It is something that the tax office is looking at. It is something that government bodies that look at money laundering are looking at. It is rife through our communities and it is time that the government took action on it.

We have recommendations from just about everybody. The Institute of Company Directors and the ACTU both agree. The Productivity Commission agrees. It seems everybody agrees that we need director identification numbers in order to shut down this particular, pernicious form of theft. I would strongly urge the government to act on it. If the government are genuinely concerned about viable businesses that go to the wall because of external activities and if they are genuinely concerned that legitimate and viable businesses are able to trade, they need to deal with phoenixing.

Again, in the construction sector, we hear the government talk a lot about lawlessness from one sector but we do not hear them talk about lawlessness in this way—and it is rife in that sector. Every single one of us would know a subcontractor or a small business that is struggling beyond its capacity and that goes to the wall because of phoenixing activity in that sector. I strongly urge the government to act on it.

This bill's intent is really quite good, and the government has included in it some of the protections that we on this side would be concerned about. It ensures that the company continues to comply with its obligation to pay its employees, including their superannuation, for example. It is incredibly important for we on this side that that is the case. Where the ipso facto clause applies, it does not protect a company that is not paying its contractors. The contractors can still withdraw from a contract if the contract terms are not being met, but it removes the ability for a business to break its contract simply because the company has moved into this particular form of safe harbour. So it has some protections in it.

Again, we are concerned through the Senate inquiry to explore that further and ensure that those protections are in place. With some sectors of the business community, particularly those engaged in phoenixing activity, there can be remarkable mechanisms and attempts to find their way through the law as they are, and we need to ensure that the safeguards are absolutely there so that we do not have a greater harm to some by companies continuing to trade when they really are insolvent. We all know that directors of companies and owners of companies, particularly entrepreneurs, have such incredible faith in their ideas—if they did not, they would not be doing it—but sometimes that faith is misplaced, and we need to ensure that the safeguards are there so that we get the most good and the least harm.

I commend the government for taking action on this. I am sorry to hear members opposite so critical of an opposition that seeks to look at some of these issues in greater detail. That is actually the role of an opposition, by the way. I think the remarks on this side have really been quite measured. We support the bill's intent. We just want to make sure that, in this really complex area, where you are dealing with human beings with different motivations that interact with other businesses, with employees, with shareholders and with superannuation funds, we actually get it right and we do not create another problem for one that we are solving. It was a pleasure to speak on this bill. As I said, it has great intent, and I look forward to the outcome of the Senate inquiry.

Michael McCormack (Riverina, National Party, Minister for Small Business) Share this | Link to this | Hansard source

The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 amends the Corporations Act 2001 to improve Australia's corporate insolvency system. I would like to thank those members who have contributed to this debate. This bill, as I said, reforms Australia's insolvency laws by introducing a safe harbour for company directors undertaking corporate restructures outside of formal insolvency proceedings and restricting ipso facto clauses which make it harder for businesses to successfully recover from financial difficulties.

It is a bill that promotes a culture of entrepreneurship and innovation to drive business growth and global success and help to save local jobs. For too long our insolvent trading laws have put too much focus on stigmatising and penalising failure and, combined with uncertainty over the precise moment a company becomes insolvent, have long been driving directors to seek voluntary administration, even in circumstances where the company may be viable in the longer term. Concerns over inadvertent breaches of insolvent trading laws have frequently been cited as a deterrent on early stage investors and professional directors becoming involved in start-ups.

This is why the government announced in December 2015, as part of its National Innovation and Science Agenda, that it would introduce a safe harbour for directors from the insolvent trading provisions of the Corporations Act 2001 and make ipso facto clauses unenforceable in certain formal insolvency procedures. This bill delivers on those commitments. Part 1 of this bill creates a safe harbour for company directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency. This measure will drive a 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 into voluntary administration or, indeed, into liquidation.

The amendments in part 2 of this bill will make certain contractual rights unenforceable while a company is restructuring under certain formal insolvency processes. Currently, ipso facto clauses allow one party to terminate or modify the operation of a contract upon the occurrence of some specific event such as the appointment of an administrator, regardless of the otherwise continued performance of the company. The operation of these clauses can reduce the scope for a successful restructure or prevent the sale of the business as a going concern. This measure will enable the businesses to continue to trade in order to recover from an insolvency event, instead of these clauses preventing their successful rehabilitation.

Together, these reforms will reduce a company's need to go into a formal insolvency process, and, where companies do enter into particular formal insolvency procedures, they will have a better chance of being turned around or of preserving value for creditors and for shareholders. This in turn will promote the preservation of enterprise value for companies, their employees and their creditors, reduce the stigma of failure associated with insolvency and encourage a culture of entrepreneurship and innovation. The measures contained in this bill have been extensively consulted upon and have the strong support of a number of peak industry bodies, including the Australian Institute of Company Directors, the Australian Private Equity and Venture Capital Association, the Law Council of Australia and the Australian Restructuring Insolvency and Turnaround Association. A discussion paper containing various proposals for improving bankruptcy and insolvency laws was released for consultation on 29 April 2016. The exposure draft legislation was released for consultation on 28 March. With that, I commend this bill to the House.

Ross Vasta (Bonner, Liberal Party) Share this | Link to this | Hansard source

The original question was that this bill be now read a second time. To this, the honourable member for McMahon has moved as an amendment that all words after 'That' be omitted with a view to substituting other words. The immediate question is that the amendment be agreed to.

Question negatived.

Original question agreed to.

Bill read a second time.