Katy Gallagher (ACT, Australian Labor Party) Share this | Link to this | Hansard source

I welcome the opportunity to speak on the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017. Labor supported passage of this bill in the other place, but in doing so, and in the speeches that my colleagues gave, we indicated that we would reserve our final position for debate in the Senate following further inquiries.

Labor have looked closely at this bill. We have listened to stakeholders, consulted further and, indeed, consulted with the government. We have determined through these discussions that we will move amendments to strengthen part 1 of schedule 1 of the bill, namely the new safe harbour provisions for directors in relation to insolvent trading. These amendments broadly align with the Productivity Commission's 2015 recommendations for how the safe harbour should operate.

Australia's insolvent-trading laws impose a duty on company directors to prevent a company from trading whilst insolvent. Directors who breach this duty can be personally liable for the company's debts if, at the time the debt is incurred, there are reasonable grounds to suspect that the company is insolvent. Part 1 of schedule 1 to this bill creates a new exception to these rules by creating a safe harbour for directors from personal liability for insolvent trading. The safe harbour applies if the directors take 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 liquidator.

According to the government, Australia's laws against insolvent trading currently push directors to prematurely enter a formal insolvency, even where the company may be viable in the longer term. The stated aim for this part of the bill is to encourage directors 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 prematurely into voluntary administration or liquidation.

This new safe harbour shifts risks that are presently borne by directors onto creditors. It creates additional situations in which directors can oversee the incurring of debts that create a situation of insolvency for the firm for which they can escape personal liability. Where this leads to firms being able to trade out of trouble without going into voluntary administration or liquidation, then that is a good thing. If there is less loss overall, then that is a good thing. As the member for McMahon said in the other place:

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.

Overall we think the government's aim is good, but we think that the current bill goes too far and weakens protections against insolvent trading. We are concerned that the new safe harbour in the bill may be too easy for directors to access and that there are inadequate safeguards to stop it from being misused. We think that the bill at the moment weakens Australia's rules against insolvent trading and shifts the balance too far in favour of directors and against creditors, including employees. Instead of having the desired effect of reducing the amount of loss overall, it risks going further and transferring losses from directors to creditors.

As such, we will be moving two amendments to strengthen the safe harbour. We believe that these amendments strike a better balance. We believe our amendments will allow the safe harbour to operate in genuine situations where the directors remaining in control will allow for a better outcome for all concerned, while making sure that it can't be relied on by directors doing the wrong thing. In drafting these amendments, we've been informed by the Productivity Commission's 2015 recommendation about how the safe harbour should look. We have drafted the amendments to broadly align with recommendation 14.2 of the Productivity Commission in their 2015 report Business set-up, transfer and closure.

Under our amendments, it will be up to the director to prove that they are entitled to the safe harbour. The amendments would mean that the director who wants to access the safe harbour bears the legal burden of proof in showing that they are genuinely taking a reasonable course of action to turn the company around. This is consistent with other existing defences to our rules against trading whilst insolvent. The government's bill places a weaker burden on directors. Once directors point to or bring some evidence to satisfy an evidentiary burden, the burden of proof or the legal burden then falls onto the persons bringing proceedings to prove that the director is not entitled to the safe harbour. All directors have to do is bring evidence that suggests a reasonable possibility that the relevant matters exist or do not exist. The key matter is a course of action reasonably likely to lead to a better outcome for the company. Once they have discharged this low burden, it is up to ASIC or the liquidator to prove, on the balance of probabilities, that the directors are not entitled to the safe harbour.

We think that the directors should bear the full legal burden to prove that they are entitled to the safe harbour, because they have the information and knowledge about what action they have taken and why. Placing the burden of proof on directors will also mean that they are more likely to take proper care and diligence when trying to turn around an insolvent company. Indeed, our amendments are consistent with the PC recommendation for how the safe harbour should work. This is because the Productivity Commission recommended that the new safe harbour should operate as a defence. There are existing defences to the insolvent trading provisions. With the existing defences, it's up to the director to prove that they meet the elements of the defence. It is currently a defence to liability for insolvent trading that the director had reasonable grounds to expect, and did expect, that the company was solvent. It's also a currently a defence that the director was not taking part in the management of the company because of illness or some other good reason.

A key point about these defences is that it is up to the director to prove that they apply, and the Productivity Commission recommended that this new safe harbour operate as a new defence. The bill departs from the Productivity Commission's recommendation because the safe harbour does not operate as a defence; it operates as a carve-out. Instead of putting the full burden onto the director to demonstrate the safe harbour applies, it imposes a less stringent burden, an evidentiary burden.

Our amendments would also mean that the director must meet five reasonable requirements—the five factors—to get the benefit of the safe harbour. Again, under our amendment, the director must be doing all of the following: properly informing themselves of the company's financial position; taking appropriate steps to prevent misconduct by officers or employees of the company that could affect the company's ability to pay its debts; taking appropriate steps to ensure that the company is keeping appropriate financial records; obtaining advice from an appropriately qualified entity, who is given sufficient information to give appropriate advice; and developing or implementing a plan for restructuring the company to improve its financial position.

The government's bill includes these five factors, but they are framed as things that the court may take into account in working out whether the director has acted appropriately. Labor believes that each of these factors should be non-negotiable if directors want access to the safe harbour. Indeed, the Productivity Commission explicitly recommended that having a turnaround plan and an appropriate adviser and keeping proper financial records should be mandatory requirements. These five criteria are good tests. They go to whether the director is genuinely implementing a plan to turn the business around. However, the government's bill does not require the directors to do them; they are merely five indicia—five things that the court can have regard to. This means that a director who is not doing all five of these things could still access the safe harbour. We believe that a director should have to satisfy all five of these areas. The bill currently says that doing these things is a 'nice-to-have' that a court may consider in working out whether the safe harbour is available. But we are saying that these should be criteria that directors must satisfy.

The first criteria should be mandatory. Why should a director who is not properly informing themselves of the company's financial position be entitled to the safe harbour? The second criteria should be mandatory. Why should a director who fails to take appropriate steps to prevent misconduct that could adversely affect the company's ability to pay its debts have the provision of a safe harbour? The third criteria, again, should be mandatory. Why should a director who fails to take steps to ensure that the company is keeping appropriate financial records enjoy protection? This criteria explicitly talks about appropriate financial records that are consistent with the size and nature of the company. It is not some onerous red-tape requirement. It just says that, if you want to trade while insolvent because you say you've got a plan to get out of trouble, you should keep the appropriate financial records. The fourth criteria, also, should be mandatory. The director should have to obtain advice from an appropriately qualified entity and should give that person sufficient information. Once again, this requirement isn't a one-size-fits-all. It recognises that companies are different in size and in the advice they might need. It just says that, if you want to trade while insolvent because you say you've got a plan to get out of trouble, you should get appropriate advice. The fifth criteria is also one that should be mandatory. The director should be developing or implementing a plan for restructuring the company to improve its financial position to get the benefit of the safe harbour.

As the explanatory memorandum correctly points out, hope is not a strategy. Indeed, in its submission to the Senate committee, ASIC recommended that directors should document proposed restructuring plans for a number of reasons: to support and assist the director to adduce evidence that the course of action developed and taken is reasonably likely to lead to a better outcome for the company; to promote market confidence and mitigate against inappropriate access to a safe harbour—that is, when achieving a genuine restructure or better outcome for the company is unlikely; and to assist liquidators and creditors to determine when the safe-harbour period commences and to decide the merits of prosecuting a claim of insolvent trading. The important thing about a defence, as recommended by the Productivity Commission, is that it places the legal burden of proof onto the directors. It would require the directors to bear the burden of proving that they had a legitimate, well-considered plan for getting a better outcome for the company.

In this bill, the government has departed from this model by proposing a safe harbour that operates not by way of defence but by way of carve-out. What this means is that the government has gone further than the Productivity Commission's recommendation and has reduced the proof that directors are required to show to prove they've acted properly. Our amendments will broadly bring the bill back into line with the Productivity Commission's recommendation that the safe harbour operate as a defence. We think that the Productivity Commission's recommendation did strike the right balance in giving honest directors scope to come up with a considered plan for recovery. At the same time, the Productivity Commission's model protected creditors by requiring the directors to prove that they'd acted reasonably and were entitled to the benefit of the safe harbour. This is as it should be. Information proving that the directors should be entitled to the benefit of safe harbour is far easier for the directors to produce. Placing the burden on them ensures that they are encouraged to make sure they go through a robust process in working out their recovery plan.

We also think that each of the five factors in the bill are good, but they should be non-negotiable requirements to access the safe harbour. There should be no doubt that directors in this situation must be informing themselves of the company's financial position, taking appropriate steps to prevent misconduct of the company's employees or officers, ensuring that the company is keeping appropriate records, obtaining appropriate advice and developing or implementing a restructuring plan. We will be watching the impact of the director's safe harbour legislation closely, particularly if it passes the Senate tonight or later this week.

To this end, we will also move an amendment to require the minister to initiate a review of the safe harbour by an independent panel two years after it commences. This is an opportunity to make sure the safe harbour is not having unintended consequences. In particular, we will be watching to make sure that it does not have a negative effect on workers being paid their entitlements. We know the bill has provisions that aim to prevent directors who fail to pay employee entitlements from getting the benefit of the safe harbour, and we will watch closely whether these are effective. The government needs to make sure and accept responsibility for making sure that safe harbour is not used to avoid workers being paid. If evidence comes to light that safe harbour is having the effect of employees missing out on entitlements, then Labor will move to make further changes.

Let me turn now briefly to part 2 of the bill, which Labor supports. Part 2 of the bill sets out new provisions to stop the enforcement of ipso facto clauses that are triggered when a company enters 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 a specific event. Currently, such rights may allow one party to terminate a contract just because of the financial position of the company, even though the company is still meeting 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 contract with a negative impact on the business, its employees and other creditors. The operation of such clauses may destroy the ability of the business to restructure and destroy the value of a business, and it prevent the sale of the business as a going concern. This amendment will not stop parties from terminating a contract with the company for any other reason, such as a breach involving non-payment or non-performance. Labor supports this part of the bill, and we will also watch the impact of it closely.

In conclusion, we 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. Where a struggling business is successfully turned around, this is good for everyone involved, including employees, suppliers and customers. But, on the other hand, we have provisions that make directors personally liable for trading whilst insolvent for a reason. Trading whilst insolvent puts Australians at risk of providing goods, services and labour that they do not get paid for and can have a devastating effect. Our amendments will ensure that there is a review of the safe harbour in two years to make sure it's not having any undesirable effects. Our amendments to the safe harbour will mean that directors have to show more proof that they've done the right thing and will have to meet those reasonable requirements. We believe they strike a balance between allowing honest and diligent directors the opportunity to work the company out of trouble whilst making sure there are adequate safeguards to protect creditors.

John Williams (NSW, National Party) Share this | Link to this | Hansard source

Senator Macdonald, could I congratulate you? It's 27 years today since your maiden speech to the Senate.

Ian Macdonald (Queensland, Liberal Party) Share this | Link to this | Hansard source

Thank you, Mr Acting Deputy President Williams. I appreciate that. I can barely remember that long ago, but they were interesting times.

The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 relates to an amendment of Australia's insolvency laws. It tries to redress the current insolvency laws which put too much focus on stigmatising and penalising failure. The reforms in this bill will help remove some of that stigma, promoting a culture of entrepreneurship and innovation, driving business growth and saving jobs.

I have some interest in this bill, which I will speak about shortly, but I do hope that Senator Wong, the Leader of the Opposition in the Senate, is listening to me, because clearly she didn't listen to my last speech on the communications package, where I spent most of my speech advocating for the National Women's Basketball League to make sure that they got proper recognition from pay TV. Part of the package is to put $30 million into the promotion of unique sports, sports that aren't as regularly seen, particularly women's sports, and I was very keen to speak about that. But, for some reason, the Leader of the Opposition in the Senate, Penny Wong, criticised me for that and accused me of filibustering. If I was filibustering in supporting Townsville Fire, the best National Women's Basketball League team ever, then can I please do that all the time? It had nothing to do with filibustering, Senator Wong—if I may, through you, Mr Acting Deputy President, respond to Senator Wong's ungracious attack on me. I was trying to promote women's basketball in Australia.

I'm just wondering what Senator Wong has against women's basketball in Australia and what she has against the leading team in the National Women's Basketball League. To accuse me in my speech on the Townsville Fire as simply filibustering is not only something that I resent, but I am sure the people of Townsville and particularly those associated with the Townsville Fire, the most successful national women's basketball team in the national competition ever, will also be offended by Senator Wong's baseless accusation.

Senator Wong also obviously didn't listen to me when I was talking about the ABC. I was delighted to hear Senator Fifield say that the legislation will include legislation requiring what I call the UBC, the Ultimo broadcasting corporation, which used to be the Australian Broadcasting Corporation, to have fairness in their approach to the presentations they make. That is slightly off subject, Mr Acting Deputy President, but I do hope Senator Wong is listening to me on this bill because, quite clearly, she didn't listen to me during my last speech when she accused me of filibustering when all I was doing was promoting women's basketball in Australia. I cannot understand why Senator Wong would be opposing that or criticising me for highlighting what a wonderful sport it is and how the communications package will actually help women's basketball in Australia and will bring about fairness, which we all thought was part of the charter of the old Australian Broadcasting Commission, now the Ultimo broadcasting corporation.

But, Mr Acting Deputy President, I digress only slightly from the bill before us, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017. Part (1) of this bill will create a safe harbour for honest and diligent company directors from personal liability for insolvent trading if they're pursuing a restructure outside formal insolvency. I listened with some intent to Senator Gallagher's presentation on behalf of the Labor Party, and I'll be interested in some of the amendments that they're proposing. The two-year review seems to have some merit to it. So I will watch that debate carefully.

The Labor Party talked about workers' entitlements, and I'm hoping that none of the amendments will in any way support Clive Palmer, who indirectly is responsible for the Labor Party receiving the vote it received at the last federal election. You will remember that Mr Palmer was the director of Queensland Nickel Industries, QNI, which had its nickel refinery up in Townsville, and left the refinery owing some $80-odd million in workers' entitlements, which the Turnbull government has paid out, thanks to legislation that the Liberal-National government under Mr Howard introduced to make sure that workers would not be the losers and that, if something like the QNI collapse happened, the workers would not miss out. The taxpayers, through the federal government of Mr Howard, originally, and now Mr Turnbull, will make sure those workers receive their just entitlements.

Of course I remember how Mr Palmer was the card in the pack that completely mistook the 2013 election. I remember how the Labor Party and their allies, including Mr Katter in Kennedy, were only elected because of the preferences of Mr Palmer. I well remember that Mr Palmer's money, which he apparently—I shouldn't say this because I understand it is before the court. But let me say that some people allege Mr Palmer siphoned money out of QNI into his political party that not only elected him; it elected Senator Jacqui Lambie and former senator Glenn Lazarus to this parliament. So the workers of Townsville, and ultimately the Townsville taxpayers, by the transfer of that money from QNI to the Palmer United Party, saw Senator Lambie elected to this parliament from Tasmania. Nobody knew her. She was only elected because of Clive Palmer's money and the particular notoriety he had at that time. He stood for election and got himself elected. He got Senator Lambie elected and also the thankfully former senator Glenn Lazarus. Neither of them, I might say, showed any loyalty to Mr Palmer once they got in on his millions. They left his party and left poor old Clive floundering in the dark. I'm hoping none of the Labor amendments to this bill dealing with workers' entitlements would in any way support the sorts of activities that Mr Palmer engaged in a few years ago.

By contrast, a long time ago, before I was in this chamber, I was a solicitor in practice in a small country town. I occasionally had clients who ran wonderful businesses and employed a lot of people. But, because of some banking arrangements at the time, the business that for years had been the leading business in my hometown had run into some financial difficulties. It was not that they were in a situation of not being able to get out of it, but the bank at the time—and I don't want to mention the name of the bank, because it's a bank that I have criticised in other areas in recent times in the Senate—insisted on putting this group of companies into liquidation. I wasn't this man's solicitor at the time; I was actually in parliament at the time and I had severed my connection with the legal practice that was this person's legal adviser. But I do know that this person wanted to trade out of the difficulties. I know, because it was my town and my community that I had worked in for years, that he could have done that. He could have arranged to get his group of companies out of the difficulties. It would have taken a little bit of time and a little bit of readjustment, and the best person to do that was the managing director. He and his family owned the company, but he and his family would have been able, given some latitude from the bank, to get the company out of the difficulties. I always thought how stupid it was at the time that the bank, using the law that it did at the time and the law being what it was at the time, made it impossible for this person to trade the company out of difficulties. As a result, the bank lost a lot of money; the Australian Taxation Office lost a lot of money. I have to say most of the other creditors in the local community were paid out one way or another. So it achieved nothing.

I'm hopeful that this bill that will create a safe harbour for honest and diligent company directors to save them from personal liability for insolvent trading would have been appropriate had it been in place 30 or so years ago. If they were pursuing a restructure outside of formal insolvency, then this bill, had it been in place then, would have protected directors from personal liability for insolvent trading. With the introduction of the safe harbour, directors will be able to remain in control of the company. And, as I've just mentioned, they are probably the best ones to be in control of the company because they know what it's about. Particularly in a small country town, if you bring in outside liquidators and managers, they, of course, have no idea of the particular business or how it works. So this legislation will allow directors to remain in control of the company and to take proactive steps to restructure a company when that is reasonably likely to deliver a better outcome for creditors, employees and shareholders. If that's what this legislation does, it is very good. I only lament that it wasn't like this years ago. I mentioned one instance but I was aware of other instances where allowing directors to remain in control of the company and to take proactive steps to restructure a company, when that would have been reasonably likely to deliver a better outcome for creditors, employees and shareholders, would have been appropriate. It would have been better for everyone had this law been in place 30 or so years ago.

The safe harbour provisions contain safeguards to deter illegal phoenixing. For example, a safe harbour would not be available to a director of a company which failed to pay its employees' entitlements, did not fulfil its tax reporting obligations or kept information or financial records from an insolvency practitioner during any formal insolvency that occurred after the attempted restructure. So this bill has safeguards and it moves in what, I think, is a long overdue direction.

Part 2 of the bill will also make ipso facto clauses unenforceable during and after certain formal insolvency procedures. An ipso facto clause in a contract can allow the contract to be terminated for the sole reason that one party is, or might become, insolvent. This could happen even if all other contractual obligations are met—for example, even if payments are still being made on schedule. I wasn't a practitioner in insolvency, but clients of mine in the old days fell into situations where this clause, as amended, would have been very useful to them in being able to trade out of their difficulties and making sure that the fewest people suffered from any collapse of the business.

The stay of ipso facto clauses in part 2 will create a breathing space for a company to continue to trade through formal insolvency and improve its chances of being turned around. It will protect asset values for the benefit of the company, and that's particularly important. Too often, when liquidators come in, they sell assets for whatever is the easiest to get and whatever is the easiest to put money in the pocket of the insolvency expert, I might say.

This clause will protect the asset value for the benefit of a company and its employees and its creditors, and it will remove a deterrent to entrepreneurs who might otherwise invest to turn that particular company around. Broadly, the safe harbour and ipso facto measures encourage Australians to take a risk, to leave behind the fear of failure and to be more innovative and ambitious. More often than not, entrepreneurs will fail several times before they experience success and will usually learn a great deal throughout the process. Helping these entrepreneurs succeed requires both a legislative and a cultural shift.

These sorts of laws, I think, are long overdue. They can make sure, where a business is failing, that it has the very best chance to continue to operate in such a way that if it eventually fails, the least people possible suffer. They can make sure that directors who know the business, who are the best ones to understand what's happening and to understand the local market, are left in charge without fear of breaching the insolvency laws. So this amendment bill can only be positive. As I say, I look forward to hearing more about the Labor Party's amendments. Some of them seem to be appropriate, but it is a bill that I think does deserve the support of the Senate.

James Paterson (Victoria, Liberal Party) Share this | Link to this | Hansard source

I too am very pleased to rise tonight to contribute to the debate on the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017. It is always a pleasure to follow my friend and learned colleague Senator Macdonald, who drew on his deep well of experience as a lawyer to make a very erudite contribution to this debate. I hope I don't cover too much of the same ground that he did, but it was such a valuable contribution, there is a risk it might happen.

There are four things I would like to do in this debate tonight—a couple of things initially to set up the bill, and then I'll talk about the bill. Firstly, I want to talk about why entrepreneurship and business innovation is important and why it's worthy of encouragement. Secondly, I want to talk a little bit about what the recent data shows about entrepreneurship in Australia, and there are some interesting facts and figures about the trends in rates of new business creation that are worth commenting on and observing. Thirdly, I want to address how we in government, in a very general sense of the word, can help this process and also how we can impede this process and the way we should avoid impeding this process. Finally, I will turn to the bill itself.

Firstly, I think it is generally assumed by anyone who has heard of the concept of entrepreneurship or business innovation that it's just a logical and good thing to support and a good thing that should happen. I think it is important that we understand why it's an important part of our economy and why government should want to see more of it and not less of it. It is important that we understand why government has a role in promoting it and what government's role is in promoting it.

There are obvious social benefits to entrepreneurship and business innovation. As citizens, we all benefit from new businesses which come into being that offer new ways of doing things, new products or services, new technology, more efficient ways of doing things and different ways of thinking about doing things. Standing here today in 2017, all of us have vastly more choices available to us in our lives as consumers than our parents ever did, and certainly more than our grandparents or great-grandparents ever did. One of the reasons that is the case is entrepreneurship and business innovation. People have come up with new ways and new ideas. They have tested those ideas. They have brought them to market, and we as consumers are the ultimate beneficiaries of that. There are lots of really good practical examples of that, and some of them are technological in nature. But some of them are not about technology and are just about better and more efficient processes in the ways of doing things. That is one of the reasons why we live in a more prosperous economy than anyone before us and why we enjoy the fruits of that prosperity today. It is something we should be grateful for. That is obvious in and of itself, in terms of the benefits we have as individual citizens. But it is also important to reflect on why entrepreneurship is important to economic theory and why it's important to economic growth. It turns out that entrepreneurship plays a very central role in driving economic growth. Societies or nations which have higher rates of entrepreneurship also have higher rates of growth and are more materially prosperous, and that is a really positive thing.

Logically, this makes some intuitive sense. A small new business, which is a start-up, entering into the market for the first time, is often going to try and do things differently to the way that existing players in a sector might, particularly large existing players, because it has really powerful incentives to do so. If the new business wants to enter into a market where there are existing players, in order to compete they will have to do things in a different way. Otherwise, they run the very great risk that they will just be replicating what an existing business does, they will likely be no more efficient than the existing business in doing it and they will find it very difficult to compete. Particularly if the existing business has, over time, accrued market power or market dominance, it would be very difficult for a new business to enter the market and compete. A new, innovative start-up business has the incentive to experiment and to try things differently and not just do things the same way that existing players in the market do, and so we find that often they are more willing to be innovative and experiment and do things in different ways. Those ideas do not always succeed; in fact, often they fail, and that is part of the process of creative destruction that occurs in our economy: people take risks and they fail, but often we learn a great deal from that failure and we are the beneficiaries of it.

I'm not saying that large existing businesses don't do innovation. There are a lot of really good examples of large businesses in Australia that are very innovative, that do push the boundaries with technology, that do try new ways of doing things and that have a good internal culture of floating and trying new ideas. But there's something in the very nature of a small, new start-up business that means that they are more nimble and that they are forced to explore new and different ways of doing things, and that leads to entrepreneurship. Sometimes they happen upon a really good idea and a really different way of doing things which completely reshapes the industry that they are in, and the existing larger players have to adapt to it and follow. That is a really positive part of our free-market economy and part of the capitalist economy.

I should point out that this entrepreneurship and innovation doesn't only occur for the benefit of profit-seeking, although that is certainly a very powerful motivator and, in my view, a very worthy motivator of entrepreneurship. But many entrepreneurs start out because they want to solve a social problem or an environmental problem, or they want to cater to a need in their community that isn't being met by either government or existing corporate players. So there are lots of positive reasons why government should have an interest in promoting entrepreneurship.

I would like to turn now to what the recent data shows about entrepreneurship in Australia, because, although it's not overwhelmingly negative, there are certainly some sobering statistics that I think we should be mindful of in this debate. To assist me in doing that, I'm going to quote from the recent Productivity Commission report into business start-ups, Business set-up, transfer and closure, specifically from the second chapter: 'Recent trends in business set-up, transfer and closure'. It is the report on which this legislation is partly based—that is, the government's response to this report is this legislation. It's a very informative tool. To start with some basic facts, there are about 2.65 million businesses in Australia and the overwhelming majority of those, numerically, are small—97.6 per cent of them are small; 2.2 per cent of them are medium; and 0.2 per cent of them are large, according to some ABS statistics that the Productivity Commission has identified. When we are talking about business entries, it follows logically that most of the new businesses that are entering into the market are smaller businesses. It is pretty hard to enter the market as a big business, although from time to time, in some circumstances, that does occur, particularly if you have a significant amount of start-up capital behind you that allows you to enter the market. You will find that 99.3 per cent of business entries are in the 'small' category, which is above the existing representation of small businesses; 0.6 per cent of start-ups are in the 'medium-sized' category; and only 0.1 per cent are in the 'large' category. If you are a new business in the 'large' category, I would hazard a guess that you probably came about as the result of a merger, for example, of an existing business.

When we talk about business exits, which is an equally important piece of evidence when calculating entrepreneurship, the results are similar. Most businesses which leave the market, which have ceased operating, are also small. I guess this makes intuitive sense as well: if you have made it to being a medium-size business or a large size business, your prospects for longer term survival are strong. Of the business exits that take place each year, 99.1 per cent are in the small-business category, only 0.8 per cent are in the medium-size category and 0.1 per cent are in the large-size category. It should be said at the outset that businesses entering and exiting trading is a normal part of the economy. We certainly wouldn't want an economy where there were no businesses exiting, because some businesses do fail; that is just a part of a capitalist economy. We shouldn't necessarily seek to prevent businesses from failing. Certainly, if they're failing as a result of government policy, we have a great deal of interest in that, but, if they're failing because their business model didn't work or their business idea didn't work, it is not the role of government to intervene.

The number of businesses did increase in 2013-14. There was an uptick in that financial year, which was a really positive trend identified by the Productivity Commission. As a general observation, over the last decade the proportion of business entries has declined. What you can see—I can't show you, because it's a graph, but I will represent it—is a declining rate of entry of new businesses and a fairly flat rate of exit. What that effectively means is that there are fewer new businesses starting up and entering the economy. This is something that as a government and as a society we should be concerned about. As I mentioned before, the majority of those are small businesses.

It's also interesting to reflect on what the relationship is between rates of entrepreneurship or business entries minus business exits and the overall health of the economy. It would follow logically in some ways that, if the economy is growing, more businesses would be entering and, if the economy is weak, more businesses would be exiting. But that doesn't always hold; it's not always strictly true. There's not a direct relationship between those two things. Certainly, a prosperous, growing economy, generally speaking, is better for entrepreneurship and starting a new business, and a declining economy, you would think, is a difficult environment, but the overall trend of declining business entries that we've seen in recent years has occurred despite the fact that the economy has been growing, and that is worrying. Generally speaking, more businesses being created is a good thing, and you would hope that would in turn drive economic growth. It would logically flow that population growth would also facilitate new business entry. They're issues that the Productivity Commission has looked at.

I think it's worth comparing Australia to our international competitors to see how they're performing. I think it would be fair to say that we are about middle of the pack in terms of rates of entrepreneurship. There are countries that do it better than us and have higher rates than us. Particularly noticeable in recent years has been Israel, which is at a very high rate of entrepreneurship. Korea is another country with a very high rate of entrepreneurship. Generally speaking, around the world we have seen a holistic trend applying to all countries of declining business entry rates and declining entrepreneurship. This is not a problem which Australia is tackling in isolation. That points to the fact that it is not just a question of public policy and not just a question of what we here in government can do to help; there are wider cultural factors that are driving these things. What is it that causes people, in a cultural sense, to engage in entrepreneurial activity—to take risks and to start businesses?

I now turn to how we in government can help this process of entrepreneurship and business creation and also the risk that we impede and limit in that process. We do have a role to play here. Governments can, by putting good settings in place, really facilitate an environment where entrepreneurship is valued, where risk-taking is valued and where starting a new business is an easy thing to do. One of the best international comparisons is how many days it takes to register a business. In Australia, in a technical, legal sense, it's very easy. We're one of the quickest countries in the world in which to register a business. You can go to business.gov.au and get an ABN very quickly—in fact, you can get it in 24 hours. In some countries, that can take a month or six months, depending on the type of business you want to start and how you want to start it. In a technical sense, we do that quite well. We should always be very mindful in this place, particularly when we're considering new regulations in whatever area, that that is a barrier to entrepreneurship and new business creation.

We should remember that it is often the case that incumbent businesses, particularly large ones, in a perverse way benefit from regulation because it increases the barriers to entry. A small new business starting out in whichever sector, which has to contend with extensive and complex government regulation, is going to struggle to do so much more than a large existing business. That is obviously because, generally speaking, complying with government regulation is a fixed cost. If it's a fixed cost, then your incentive is to get as large as possible as quickly as possible so you can spread that fixed cost over as many customers and clients as possible. If you are a small business and you have to meet that same fixed cost that an existing large player has to meet, then you are going to find it very difficult. In a general sense, we should avoid, where absolutely possible, any red tape regulation that is unnecessary because it is a disincentive to starting a new business.

I want to refer to an article that demonstrates an even more concrete way that regulation has sometimes impeded innovation. In the interests of full disclosure, it was an article that I edited in my previous life as editor of the IPA Review at the Institute of Public Affairs, and it was written by Richard Allsop in the August edition of the magazine. Richard took us through the fascinating history of technological adoption in Australia, and there are some extraordinary examples of how, intended or unintended, governments delay the introduction of new technology and business start-ups. One particularly memorable example he gave was how delayed the introduction of FM radio was in Australia compared to the rest of the world. As Richard pointed out:

It was developed in the United States in the 1930s and was first used on an experimental basis in Australia in 1947. However, it was then effectively banned until 1974. So certain was everyone that the frequency and number of radio stations was set in concrete that Baby Boomers grew up listening to radios where the names of stations were printed on the radios. If the possibility of new AM stations was so unlikely, then FM seemed a world away.

Eventually, FM was allowed to be used by community classical music stations in Sydney and Melbourne, followed by an ABC station and finally, in 1980, by commercial radio. So, for more than 30 years, Australian radio listeners had been denied the opportunity to listen to music sounding better than it did on the traditional AM band.

There are lots of other examples like this—colour television is one, pay television is another—where government regulation actually prevented the introduction of new technology and new businesses. I think that the recent experience Australia has had with Uber versus taxi cartels is another pretty powerful example of where many other countries have had this service legalised far more quickly and for longer than Australia has, and Australian consumers are only now starting to benefit from it.

Finally, I want to turn to the bill that is before us—the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill. As Senator Macdonald very articulately outlined in his contribution to the debate, this is about encouraging a culture of entrepreneurship. This is about encouraging risk taking and saying that it is acceptable for a business to start and sometimes even fail. We certainly hope that all new business start-ups are a success, but we know the reality is that that's not going to be the case, and so we have to design laws which are fit for purpose and which allow that experimentation and failure to happen without it coming at too great a cost.

This bill amends the Corporations Act 2001 to improve our corporate insolvency system. No. 1, and most importantly, it will create a safe harbour for honest, diligent and competent company directors from personal liability for insolvent trading, if they are pursuing a restructure outside formal insolvency. Secondly, ipso facto clauses, which 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. I think it's fair to say that our current insolvency laws put far too much focus on penalising and stigmatising failure.

As I mentioned, the Productivity Commission released their report in 2015, entitled Business Set-up, Transfer and Closure, which identified that Australia's broader insolvency regime generally works well but it could be enhanced by targeted reform. These insolvency reforms reflect two of those recommendations from the Productivity Commission.

The report identified that Australia's insolvent trading laws, combined with inherent uncertainty of determining the precise moment of insolvency, have been a driver behind companies entering into voluntary administration prematurely. Fear of personal liability deters angel investors from stepping in where they might otherwise help save a business. In response, the Productivity Commission recommended that a safe harbour defence for insolvent trading should be legislated. The report argued that:

… a properly constructed safe harbour defence is the best approach to both encourage good corporate governance and improve genuine opportunities for restructure.

The Productivity Commission also identified that the operation of ipso facto clauses can reduce the scope for a successful restructure or prevent the sale of a business as a going concern. Many countries restrict the use of such terms. Therefore, the Productivity Commission report recommended that insolvency related ipso facto clauses should be made unenforceable if the company is in voluntary administration or in the process of forming a scheme of arrangement.

Australia's insolvency system is often compared to the United States chapter 11 regime, and some people regard the chapter 11 regime in a positive way. In the US, if a company enters into a chapter 11 process, creditor rights are frozen and the court is then empowered to oversee the proceedings. In the Productivity Commission's view, in the Australian context increasing the role of the courts is unlikely to improve the speed and cost-effectiveness of external administration, and therefore the Productivity Commission doesn't recommend Australia going with the chapter 11 model, because it is potentially unwarranted and certainly undesirable.

Broadly, these measures are intended to encourage Australians to take risks, leave behind a fear of failure and be more innovative and ambitious. More often than not, as I said before, entrepreneurs will fail several times before they experience success, and they will generally learn very valuable lessons during that process. To help these entrepreneurs succeed requires a cultural shift. That is something that government can help with, and that is something that I think this bill goes some way to addressing. I commend it to the Senate.

Peter Whish-Wilson (Tasmania, Australian Greens) Share this | Link to this | Hansard source

Not much good comes out of companies going bankrupt. From my experience, the liquidation process generally doesn't have much to hand out to creditors and stakeholders. Companies go bankrupt for a lot of reasons—sometimes it's poor management; sometimes it's taking on excessive debt. We could probably do a whole speech just on why companies go to the wall, figuratively speaking. But not much good comes out of the process. Often the creditors and the shareholders, the debtors, get very, very little back—a few cents in the dollar in some cases. Certainly other stakeholders, such as suppliers and workers, often lose out of the process. So it's not something that we like to see. I accept the premise behind this bill, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017—the concept that we should look at an opportunity of giving company directors a second chance to see if they can turn the ship around before it goes under, to try and avoid the kinds of complications and the heartache and the issues that we see with the liquidation process or with receivership.

I know from experience, not just here in the Senate but personal experience—I was a director of a small company for well over a decade—that the only people who do well out of the liquidation and receiver process are the liquidators and the receivers themselves. In fact, I can think of some Senate inquiries that I have been on, around forestry managed investment schemes, where the receivers themselves have got up to 30 or 40 per cent of the value of the assets, charged in fees over a long period of time. I have had a lot of people knocking at my door to complain about the behaviour of receivers or liquidators. So I'm not necessarily a big fan of liquidators per se, and I accept the logic and the intent of this bill, which is to look at options that allow another path to be explored before companies go to the wall.

Let's think about companies making bad decisions and why companies end up being put into liquidation and ultimately go bankrupt—and 'bankrupt', technically speaking, is a personal term that applies to US law, but I do like to use it figuratively. Companies go bankrupt for lots of reasons. We need good directors. A good board of directors with good experience, good skill sets, good perspective and good balance is necessary to prevent companies going down that road in the first place. Healthy companies make profits but they employ people, and that is important for our society. If we want to have healthy companies that are able to survive—and it's cut-throat and competitive in a lot of businesses; let's be completely honest—then we need good people on boards of directors.

I know people, even friends of mine, who've recently done the Australian Institute of Company Directors course. It's very difficult; it's not easy. There are a lot of requirements on directors these days if they're going to take up a position on a company board. In saying that, we need to be very careful that something like a safe-harbour clause doesn't end up becoming a bottom-of-the-harbour clause where we see abuses or potential abuses of a process that we're going to put in place here today. As Senator Gallagher said, we need to watch that very, very carefully. The government's intent on this bill reads:

… this Bill will create a safe harbour for company directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency.

It's almost a binary choice. If your company reaches a point of technical insolvency—and this relates to your debts and your ability to service that debt—you have two choices: you can continue trading insolvent, which is illegal and which, potentially, levies heavy fines on the directors of that company, or you can put yourself into liquidation and see a receiver.

This provides for a process, a restructure of the company, outside of this formal insolvency process. The government believes this will drive 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 prematurely into voluntary administration or liquidation. I've met with many stakeholders who've told me that it's easier for company directors, based on current laws, to put companies prematurely into insolvency rather than face the personal risk that being a company director entails.

Under section 588G of the Corporations Act, a director of a company may be personally liable for debts incurred by the company if they are a director of a company at the time when the company incurs the debt; the company is insolvent at that time, or becomes insolvent by incurring that debt; and, at the same time, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent.

As I said earlier, boards of companies are always trying to attract good people, and that's important for companies. If the risks are skewed so that company directors are actually protecting their own back pocket—in the sense that they might be liable for payment of potential debts—then, human nature being what it is, they would put the company into receivership, rather than allowing it to trade. We also don't want to see companies trading insolvent, and there is a reason why we have insolvency laws. The longer a company trades insolvent, the more the snowball moves and, potentially, we see more damage as stakeholders get drawn into this process—such as businesses who may have contracts with the company, suppliers who have contracts with the companies, shareholders, workers—so we need to be very careful of the fact that providing safe harbour is a good concept in principle when we're talking about company directors who want to do the right thing. Such company directors want to try and turn a company around, to save jobs for the workers and protect suppliers and other contractors. That's a good principle. Unfortunately, my experience of life is that not all people will necessarily behave the right way, and so we need to have some safeguards in place to make sure that we don't see unethical or illegal behaviour. We also need to ensure that this process isn't an indefinite process where new suppliers and new stakeholders are brought in, and they might be put at risk by—for example, long-term, three- or five-year restructure, which might count as a safe harbour.

So I accept there are concerns over inadvertent breaches of insolvent trading laws and I know these are frequently cited as a reason that early-stage or angel investors and professional directors are reluctant to become involved in start-ups. I was talking to my colleague Senator McKim earlier about implications of innovation of this bill and he said he met with a number of stakeholders who wanted the Greens to support this bill. I'll talk a little bit about the amendments that we've got before us in a second. But I think as a principle this is a good one, if it actually helps solve a problem and means that fewer companies go into liquidation and that creditors and other stakeholders, such as workers, are better protected.

In relation to Labor's amendments—and I presume we will go into the committee stage; so I won't go through it in a lot of detail—we certainly have some sympathy with Labor's third amendment that the minister be required to commission a review of the safe harbour amendment legislation before us today, with an independent panel after it has been in place for two years. My concern—and maybe we can go into this in more detail in committee—is about exactly how that's going to work. I understand from speaking to the minister's office tonight—and I must say that we haven't had a lot of time to speak to them; we didn't know this was going to be on tonight—that there's no plan at this stage for any kind of disclosure if corporations or companies have decided to opt for the safe harbour process or the safe harbour route, and that concerns me.

I understand why a public disclosure to, for example, shareholders or other stakeholders such as suppliers would be problematic, given the ipso facto clause and the potential for this to be counterproductive, but I do believe that, if we are going to have an effective review after a couple of years, we actually need some data or some set of data, so that we can actually see how often these safe harbour clauses are taken up by company directors and how well they pan out.

My understanding at this stage, and I admit that it may be fairly limited, is that the only way we'll find out if companies have opted to go down the safe harbour route is if a company goes into liquidation and that liquidation process then explores whether a company has gone into the safe harbour process, and we won't know for two years how many companies will have gone through liquidation. From my personal understanding, liquidation takes a long time; it can take many, many years. I have a suggestion, which off the top of the hat, is: why wouldn't ASIC, for example, be required to keep a database or a register of companies that have opted for or directors who have opted to go down the safe harbour route? That way we can collate that information and have it available.

Of course, companies may go down the safe harbour route and successfully trade out of trouble—it may take years or it may take a short period of time—and we'll never know whether they've opted to go down this road, because the data won't be available. That could help us decide whether this was a good piece of legislation, and that would reinforce whether we want to keep it in place with not too many changes. So I like the idea of Labor's third amendment, to have a review, but, if we can't measure how many companies have gone down this road, then I'm not sure how effective that is going to be. So I would like to receive some information from the minister on that when we explore that amendment. I do have concerns about the length of time that companies could opt to go down the safe harbour route. Restructuring of businesses can take some time. It may take many, many years to turn a business around. Nevertheless, I'm prepared to see what a review would show in that respect.

There is another thing I would like to get more information: if a company or directors go down the safe harbour route and enter into a restructuring process, are there any restrictions on those directors, for example, selling equity in their businesses over that period of time? With continuous disclosure laws, if they are a public company listed on the stock market, I would hope that that kind of thing would be transparent. I have raised with the minister's office that if private companies do sell equity in their businesses—and I know from personal experience that they do—and certain directors are aware of problems, but there is no requirement for them to flag a sale of equity or even raise new equity, and I think that presents some risks where the business is currently trading in safe harbour. Certainly it presents risks to new investors and new stakeholders in the company. I hate to say it, but, yes, I do assume some cynicism with human behaviour on these matters and I would like to see some safeguards in that respect. Of course, if the companies rise out of that restructuring process successfully and go on, that's great, but I've seen too many rats leave sinking ships in the past. So there are a couple of things there that I think would be important to note and provide some information on during the committee stage.

I would like to talk now a little bit more about Labor's amendments. I can see some merits in what the Labor Party is suggesting with these amendments. In their first amendment, at (a), it would be up to the director to prove that they're entitled to the safe harbour, rather than the other way around. At the moment the government's bill has that, once directors point to some evidence—that is, satisfy an evidentiary burden—it is up to the creditor to then prove that the director is not entitled to the safe harbour. I think Labor is proposing that liquidators or receivers be approached to provide essentially a tick of approval for a company before they go down the safe harbour road.

I just don't know how that's going to work. Liquidators and receivers have a specific role and, if they do that, then essentially they are going to be corporate consultants or corporate doctors. It is a different role to what they play now, and I see a conflict of interest if a liquidator provides that tick of approval to go down the safe harbour road, it doesn't work and the company goes into liquidation. What if it is the same liquidator that is actually liquidating the company that provided that advice? Is there liability attached to providing advice to a company? Even if it's extended to go into corporate consultants like Arthur Andersen or other experts, is there any liability attached to providing that advice that Labor has set out in (1)(a)? I'm not sure that that would be workable, but I would be happy to talk to the Labor Party about that further.

In (1)(b), to be entitled to the safe harbour, the director must satisfy all five factors. Those five factors are very important. Labor is suggesting that upfront a director must meet the five reasonable requirements to get the benefit of the safe harbour. They include properly informing themselves of the company's financial position, taking appropriate steps to prevent misconduct by officers or employees of the company that could affect the company's ability to pay its debts, taking appropriate steps to ensure that the company is keeping appropriate financial records, obtaining advice through an appropriately qualified entity who is given sufficient information to give appropriate advice and, lastly, developing or implementing a plan for restructuring the company to improve its financial position.

It would be very useful for companies to go through their own internal processes to tick those boxes to make sure that that has been done. I don't know how getting essentially certification of those issues would work. I'm not sure how workable that would be either. Who's capable of providing that independent advice? Once again would there be legal liability attached to the provision of that advice by an independent third party? I'm not sure how that would work. Possibly it could be ASIC or another body that is set up to do this. That's a possibility, but with little time and the complications in rewriting that out in legislation, perhaps that's something that could be looked at in a review in two years time.

Certainly it would be useful to have companies which go through this process of choosing not to go into liquidation but opting for a safe harbour registered—privately, if that has to be—with someone like the regulator so that we have that data and we have a record that that company is in that situation. Like Senator Gallagher, I will be watching very closely to see how this unfolds and to see whether company directors use this in ways that would be counterproductive to the intent of the bill.

I will just quickly summarise in the last minute or so that I've got left. While there are the concerns which I've outlined here tonight, these concerns could be addressed in terms of regulation around the legislation, in some detail—and they are the kinds of things that could potentially be addressed once we have a dataset, once we see how this has unfolded in a couple of years time. I personally believe that avoiding companies going into liquidation and receivership is important. I don't think it benefits anyone really, except the liquidators and receivers. They tend to do very well out of the process, thank you very much. It's not necessarily good for the workers, the small business suppliers, the shareholders or the other stakeholders, so, if we can find a way forward that helps avoid more frequent liquidation or companies becoming bankrupt, then that's something we should look at.

I have met over the last couple of years with the Institute of Company Directors and other stakeholders, and they've made this point clear. I think it's rational, but I think we need to be very careful that we're not giving cover or protection to company directors who may do the wrong thing. The intent of this bill is that they will do the right thing. My experience in life is that that is not necessarily the case. It's great while we get good people on boards that are set up to help revive a company and support workers. We just need to make sure there are some safeguards put in place to make sure that the bill is not counterproductive.

Mathias Cormann (WA, Liberal Party, Minister for Finance) Share this | Link to this | Hansard source

I thank all senators who have contributed to this debate and I commend this bill to the Senate.

Question agreed to.

Bill read a second time.