Grant Chapman (SA, Liberal Party) Share this | Hansard source

I present the report of the Parliamentary Joint Committee on Corporations and Financial Services on the exposure draft of the Corporations Amendment (Insolvency) Bill 2007, together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be printed.

I move:

That the Senate take note of the report.

This report relates to the exposure draft of the Corporations Amendment (Insolvency) Bill 2007, which was released for public comment by the government in November last year. I am pleased to say that this report of the Parliamentary Joint Committee on Corporations and Financial Services on the exposure draft bill was unanimous. The committee welcomes the release of the bill, the first to address Australia’s insolvency laws in almost 11 years.

The committee is unanimous in supporting the major policy objectives of the bill, which include introducing greater flexibility into insolvency proceedings, removing unnecessary regulatory burdens and modernising legal frameworks to reflect market developments. In support of these objectives, the bill includes the most comprehensive package of insolvency law reforms since the Harmer review in 1988. The committee notes that the bill provides for a range of measures to strengthen creditor protections and improve the efficiency of the insolvency process.

It is significant that, in developing this package, the government took into consideration a number of reviews and inquiries, including my committee’s comprehensive 2004 report on corporate insolvency laws. The committee notes in particular that a number of its recommendations were supported by the government and have been incorporated into this draft bill. In deciding to hold a short inquiry into the bill, we agreed that it would not cover the same broad ground covered in our 2004 inquiry. Instead we agreed to narrow the focus of our inquiry to the recommendations from our 2004 report which the government rejected, agreed with in principle or argued were matters falling under the jurisdiction of the Australian Securities and Investments Commission. In doing so, we sought the views of insolvency practitioners, regulators and industry stakeholders to see if there were any issues of continuing relevance.

The committee’s inquiry addressed issues under three broad categories. The first is the regulation of the insolvency process. We picked up on two issues dealt with at length in the 2004 report: uncommercial transactions and the procedure for creditors’ voluntary liquidation. We believe that the interests of creditors and shareholders must be balanced in any proposal to change the clawback provisions of the Corporations Act. We have recommended that the government reconsider its position on this issue so that a liquidator may challenge company transactions that have taken place within the one-year period preceding formal insolvency. While the committee acknowledges that the draft bill will improve the existing creditors’ voluntary liquidation process, it does not believe the government has done enough to further modify and simplify the process. We have recommended that the government revisit this issue to examine ways to enable a company to be placed into liquidation immediately to maximise recoveries for the benefit of creditors.

The second category of issues considered relates to the role of administrators and directors. Uppermost in the committee’s mind is ensuring that any potential or real conflicts of interest involving liquidators are avoided. We remain concerned that an administrator’s use of a casting vote in a resolution concerning his or her replacement may give rise to an apparent conflict of interest. We have recommended that the government consult with industry stakeholders to find an innovative solution which neither mandates a prohibition on the use of a casting vote nor mandates discretion in all circumstances. The committee also found support for its previous recommendation that so-called ‘ipso facto’ clauses be removed. We believe the government has not given sufficient weight to the safeguard built into the recommendations that we made—namely, that a court must be satisfied that a contracting party’s interests will be protected adequately. We urge the government to reconsider its position and pay particular attention to the operation of ipso facto clauses.

The committee examined two important issues relating to the role of directors: ensuring directors keep accurate and up-to-date financial records, and criteria which should apply before a person is disqualified from being a director. We heard evidence from stakeholders which provided strong support for our previous recommendations. To progress the issue of whether administrators should be permitted to recover from directors the cost of reconstructing company records, we have recommended that the government consider an alternative and arms-length administrative process which would place any decision to recover costs in the hands of an objective third party such as the Australian Securities and Investments Commission.

Evidence before the committee demonstrates that further change to the law is necessary to permit ASIC or a court to take swift and significant action in the event of corporate misconduct which may or may not relate to phoenix activity. We believe that the draft bill should be amended to reflect our previous recommendation 31 and that ASIC should benchmark the effectiveness of programs to combat phoenix companies. In the light of its concern about the lack of available data on the nature and extent of fraudulent phoenix activity, the committee believes a more concerted and cooperative policy effort is required to enable ASIC to provide liquidators with background information about company officers convicted of a serious criminal offence.

The third and final set of issues relate to the protection of employee entitlements. The committee believes strongly that the protection of employee entitlements is an important public policy issue. We remain concerned at the incidence of employees who are unable to receive entitlements under GEERS due to a lack of company records. The committee, therefore, has recommended that the government compile data on this issue and come up with practical measures to assist directors and company officers to maintain appropriate company records.

During this inquiry the committee was mindful of the multiple and even conflicting policies and objectives which need to be balanced in striving for an effective and efficient insolvency regime. This balancing act was foremost in our deliberations.

The committee notes the overwhelming support for the bill from the major insolvency and accounting bodies and believes there are no matters of such significance raised by the bill that would justify a delay to its introduction and passage through the parliament if possible before the end of this financial year. While the committee supports the bill, it found that the accounting bodies, the Insolvency Practitioners Association of Australia and the Law Council of Australia continue to support our previous recommendations which the government rejected. This is why this report strongly urges the government to reconsider its position with respect to a number of those recommendations and to consult with industry stakeholders on a range of issues.

In conclusion, I commend the report to the Senate. I thank our committee secretary, David Sullivan, and our committee staff for their effective contribution to our work on this issue. In particular, I want to refer to Stephen Palethorpe, who has been for some time a valued member of the staff of the Parliamentary Joint Committee on Corporations and Financial Services and a significant contributor to our work. I congratulate him on his promotion to become the secretary of the Senate Standing Committee on Finance and Public Administration. His leaving will be a loss to our committee, but I congratulate him on his promotion and wish him well.