Senate debates

Thursday, 29 March 2007

Committees

Corporations and Financial Services Committee; Report

10:08 am

Photo of Grant ChapmanGrant 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.

10:16 am

Photo of Penny WongPenny Wong (SA, Australian Labor Party, Shadow Minister for Corporate Governance and Responsibility) Share this | | Hansard source

I also rise to speak briefly to this report of the Joint Committee on Corporations and Financial Services, as I have had an interest both as a shadow minister and as a backbencher in the issue of insolvency. I start by echoing the chair’s thanks to the committee secretariat for their contribution in managing this inquiry and this report. My best wishes also go to Mr Palethorpe, and we look forward to welcoming him to the Standing Committee on Finance and Public Administration.

I indicate to the Senate that this committee undertook quite a lengthy inquiry which I was involved in, along with Senator Chapman and Senator Murray, in 2004 in relation to Australia’s insolvency laws. That was quite a comprehensive inquiry and I think a very important and useful contribution to the discussion about the state of Australia’s insolvency laws. We in the Labor Party remain somewhat concerned that there are a number of aspects of the report of that inquiry which the government has as yet failed to act upon. Leaving aside the minority reports from the Australian Democrats and the ALP, there were quite a number of very sound recommendations which had bipartisan support but have not been acted upon.

I am only going to speak briefly in relation to three particular recommendations which I want to emphasise. The first is recommendation 1, which relates to the committee’s previous recommendation in the 2004 report to remove the prerequisite of insolvency for the purposes of the definition of uncommercial transaction. I place on the record our disappointment that the government has not sought to take that recommendation on. I suggest to the chamber that the evidence presented by Treasury on that issue overstated any concern about alteration of that provision. I commend to the government this bipartisan recommendation whereby the committee has suggested a shortening of the time frame—

Photo of Andrew MurrayAndrew Murray (WA, Australian Democrats) Share this | | Hansard source

Cross-party.

Photo of Penny WongPenny Wong (SA, Australian Labor Party, Shadow Minister for Corporate Governance and Responsibility) Share this | | Hansard source

Senator Murray rightly corrects me and says ‘cross-party’. It is a cross-party recommendation whereby we say this to the government: you should remove the prerequisite of insolvency because, on the evidence that we were presented with both in the 2004 inquiry and, I would suggest, in this inquiry, it is unnecessarily restrictive. We have the view that this provision can impede the recovery of property for the company for the benefit of creditors, and we think it needs to be reconsidered by government. We are conscious of the issues Treasury raised, which is why the committee, again on a cross-party basis, has suggested a shortening of the time frame in which such clawback can occur, through an uncommercial transaction process, to 12 months. We encourage the government to consider that.

The second point I want to raise relates to recommendation 3, which is the right of an administrator to use a casting vote in relation to his or her removal. We have raised this previously. It seems extraordinary, in terms of general principles about the conflicts of interest and the desire that administrators not only act independently but be seen to be independent, that an administrator can exercise a casting vote in favour of or against their removal. We strongly encourage the government, consistent with the principles of independence, which the insolvency system to a large extent depends upon, to consider an alternative voting mechanism to deal with that issue. It seems to be a fairly patent conflict of interest that ought not to be permitted under the legislation and needs to be dealt with.

Finally, I want to deal with recommendations 5 and 6, which relate to the keeping of proper financial records. The evidence before this inquiry and, as I recall, also before the 2004 inquiry was that they are clearly a minority but there are some directors of insolvent companies who have not kept appropriate records. Not only does that make the administrator’s or liquidator’s job very hard, but it can potentially create a significant cost burden to the administration, to the detriment of creditors, which may include employees but also independent contractors and other persons or entities with whom the company contracts. In other words, the creditors get stung twice: first, the company goes into insolvency and they may not get the entirety or any of the moneys that they are owed; and, second, they then effectively have to wear the cost of the fact that the directors have not complied with their obligations under the law.

There was some very compelling evidence at one point in the inquiry where I think one of the representatives of the insolvency bodies pointed out that the penalties under the act for the nonkeeping of these financial records were probably less than it might cost some directors to remedy any noncompliance. It is a practical absurdity to have a situation where it is potentially cheaper for people to not comply with the law than to comply with it. I urge the government to consider both recommendations 5 and 6. Recommendation 5 is a recommendation to significantly increase the penalties pursuant to section 286. In my view, this is absolutely required. I suggest to the chamber that most businesses do the right thing. We need a compliance mechanism to ensure that the directors who do not do something as simple as keeping proper financial records of the operations of a company are subjected to appropriate penalties as a deterrent to that sort of behaviour.

10:22 am

Photo of Andrew MurrayAndrew Murray (WA, Australian Democrats) Share this | | Hansard source

Speaking to the same motion, I say at the outset that I fully support the remarks of both the Chair of the Joint Committee on Corporations and Financial Services, Senator Chapman, and of Senator Wong, the shadow minister, with respect to this report. I therefore do not intend to repeat the very strong statements made in the report itself and in their supporting remarks. I concur absolutely. What I do want to do is express my appreciation to the secretariat and also join in congratulating Stephen Palethorpe, who is a particularly able and very nice person, I might say. I wish him well in his new post. He comes to a committee on which I also sit, so I look forward to working with him further.

This is a particularly well-written report. It is tightly constructed, well argued and thoroughly referenced. It draws my attention again to an issue which concerns me—that is, by and large, the government have been active and productive and effective in advancing legislative change in the broad arena of Corporations Law and the laws which attach to it, but this insolvency law that we are discussing is not one of those areas to which the government have paid proper attention.

The chair correctly made the remark that the law has not been addressed for 11 years. The committee, and indeed I, felt strongly that law change was required. The community of interests concerned with insolvency law felt that law change was required. It has taken a long time for the government to get around to addressing this vital issue. The real advances made in insolvency administration and practice in recent years have been as a result, in my view, of committee pressure applied to the Australian Securities and Investments Commission, who have really lifted their game with respect to what they do under the existing law.

The point has been made too that what we are looking at here are unanimous recommendations from serious, engaged, long-term parliamentarians who have a portfolio and a personal interest in matters that affect corporations. Yet considered recommendations have not been responded to in time and many have been rejected or ignored. When you arrive at unanimous recommendations in this area, generally speaking it means that they are the result of a careful distillation of evidence and the agreement of the parties and the personalities concerned in the committee as to what the best outcome is. When you are dealing with characters with strong intellects and wills, as is the case with the members of this committee, you are not going to find weak, half-hearted outcomes which are the result of a lowest common denominator compromise. Unanimous recommendations are only arrived at where the committee feels that they are so justified. So I say to the government that they need to focus more on what the committee is saying.

One of the reasons I wanted to address my remarks in this way is that my attention has been drawn this week to the Fincorp problem. I recall that in 2005 the committee produced a report with respect to property advice. The government to date has not got around to giving a response to that report. If there is anything which affects Australians’ wealth and Australians’ view of their financial security and their household balance sheets, it is the issue of property. If there is anything which affects the way in which their property interests are managed, it is the potential for schemers, promoters, con artists and so on to take advantage of Australians. I think the property advice report from the committee would have assisted in addressing some of the issues which surround matters such as Fincorp, because they would have tightened up on the kind of advice and the kind of recommendations that can be made by promoters and by people using financial prospectuses to gather investors into schemes such as these.

Without preconceiving the outcomes of what will occur with the Fincorp matter, I nevertheless say that one of the parties I will point the finger at is the government for not moving quickly enough when the committee unanimously—all parties—had said to them, ‘There is a problem with respect to property advice and property as real assets and you should attend to it.’

I use the opportunity of discussing this particular insolvency report to draw attention to a broader problem—that is, of the government in its formal sense and the bureaucracy not responding quickly enough and with sufficient respect for the process to considered, unanimous, detailed committee reports such as these, which are drawn together by serious people on serious issues and deserve a quicker response and more consideration than I feel they are getting at present.

Question agreed to.