BILLS DIGEST NO. 114, 2011–12, 28 February 2012

Corporations Amendment (Phoenixing and Other Measures) Bill 2012

Margaret Harrison-Smith
Law and Bills Digest Section

Date introduced:  15 February 2012

House:  House of Representatives

Portfolio:  Treasury

Commencement:  Sections 1 to 3 commence on Royal Assent. Schedules 1 and 2 commence on a single day to be fixed by Proclamation—but no later than six months after the day of Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose

The Corporations Amendment (Phoenixing and Other Measures) Bill (the Bill) has two main purposes. 

First, it amends the Corporations Act 2001 (Corporations Act) to give ASIC the power to place a company into liquidation in order to remove current impediments to workers accessing their entitlements under the General Employee Entitlements and Redundancy Scheme (GEERS).[1]

Second, it amends the Corporations Act to require notices in external administrations to be published ‘in the prescribed manner’ rather than in the print media, or in the Australian Securities and Investments Commission (ASIC) Gazette.  The Government proposes to make regulations requiring the notices to be published on a single website, to be established as part of the ASIC website.[2]

Background

Winding up by ASIC

As part of the ‘Protecting Workers’ Entitlements Package’, announced during the 2010 election campaign, the Government undertook to give ASIC stronger powers ‘to place companies into liquidation when they have been abandoned by their directors[3], to ensure employees can get swifter access to their unpaid entitlements’.[4]

The undertaking is of particular significance to employees of a failed company, because it is currently a precondition of any payment under GEERS that the company has been formally wound up.[5]

The present position is that the employees of an abandoned company must apply to the courts to have the company wound up under the Corporations Act before they can access GEERS.  If ASIC has already deregistered the abandoned company, ASIC or the company’s employees must apply to the courts to have the company re-registered before it can be wound up.

To enable employees to access their entitlements under GEERS when the directors of a company simply abandon it, the Bill empowers ASIC to wind up the company without first going through either of these processes.

Publication of notices

The Corporations Act requires a range of corporate insolvency notices to be published in state or territory newspapers or in the ASIC Gazette.[6] This is in addition to obligations imposed by the Corporations Act on petitioning creditors and external administrators to provide direct notice to known creditors of certain events.

The Bill amends the Corporations Act to replace these publishing requirements, with a requirement to give notice ‘in the manner prescribed’.  The Government has indicated its intention to make regulations requiring notification on a single website, to be established as part of the ASIC website.[7]

The move from print media to electronic notification is consistent with the approach recommended in the Corporations and Markets Advisory Committee’s 2008 report, ‘Issues in External Administration’ which stated that:

Electronic publication is potentially a more effective way to disclose information in an easily accessible and retrievable form. It also affords considerable savings in cost and time. A move to Internet disclosure may enhance economic efficiency, provided that there is an appropriate transitional period to allow persons affected to adjust.[8]

The change to electronic notification is predicted to replace 53 000 newspaper advertisements over the next four years, and will make it easier for creditors to access insolvency information.[9] It is expected that the reform would save the industry around $15 million over the next four years.[10] Presently, these publishing costs are borne by creditors, who must also monitor newspapers for relevant notices.[11] 

The proposed change was raised in the course of consultation on wider reforms to the regulatory framework applying to insolvency practitioners in Australia.[12]

Basis of policy commitment

As part of the Protecting Workers’ Entitlement Package, the Government made an election commitment to provide ASIC with the administrative power to wind up companies that have been abandoned by their directors, so as to ensure swifter access by employees to their unpaid entitlements.[13]

The move from print media to web publication for corporate insolvency notices was announced by the Government in January 2010.[14]  A similar move for notices currently required to be published in the ASIC Gazette was announced by the Government on 14 December 2011.[15] 

As noted above, the move from print media to electronic notification is consistent with the approach recommended by the Corporations and Markets Advisory Committee in its 2008 report, ‘Issues in External Administration’.[16]

Committee consideration

The Bill has been referred by the House of Representatives Selection Committee[17] to the House of Representatives Standing Committee on Economics (Economics Committee) for inquiry and report. On 27 February 2012, Julie Owens MP advised the House of Representatives on behalf of the Economics Committee that:

The Committee considers that the bill comprises uncontroversial measures that will assist in curbing the amoral practice of phoenixing.  Indeed, in a briefing issued on 23 January 2012, the law firm Minter Ellison stated:

The ... bill contains some reasonable measures for facilitating the protection of workers' entitlements and these measures are unlikely to affect the position of the majority of directors.

Therefore, the committee has decided not to inquire into the bill and recommends that the House or the Federation Chamber consider the bill forthwith.[18]

Financial implications

The Explanatory Memorandum states that the Bill will have no financial impact, and that a fee is proposed to be prescribed by regulation for the publication of notices on the ASIC website.[19] The amendments to the notice requirements are expected to reduce industry advertising costs by approximately $15 million over the next four years.[20]

Main provisions

Winding up by ASIC

Item 1 of Part 1 of Schedule 1 inserts proposed Part 5.4C in the Corporations Act.

Proposed section 489EA empowers ASIC to order the winding up of a company in four separate sets of circumstances.

These circumstances are: where the company otherwise meets the requirements for ASIC-initiated deregistration of the company (subsection 498EA(1)); if the company’s review fee in respect of a review date has not been paid in full at least 12 months after the date for payment (subsection 498EA(2))[21]; where ASIC has reinstated the registration of a company under subsection 601AH(1) of the Corporations Act and has reason to believe that the winding up of the company would be in the public interest (subsection 498EA(3)); and where ASIC has reason to believe that the company is no longer carrying on business, and the company or its directors do not object to a notice from ASIC informing them of the proposed winding up of the company (subsection 498EA(4)).[22]

Before making a winding up order, ASIC must give notice of its intention to make the order on the ASIC database, and publish notice of its intention, in the manner prescribed (subsection 498EA(6)).

ASIC is not to make a winding up order if an application is before the Court for the winding up of the company (subsection 498EA(7)).

Proposed section 489EB provides that where ASIC makes a winding up order under section 489EA, the requirements for winding up under existing sections 491 (passing by the company of a special resolution for the winding up of the company), section 494 (a declaration of solvency), and section 497 (a meeting of creditors) do not have to be complied with.

If ASIC winds up a company under section 498EA, it may appoint a liquidator to administer the winding up: the appointment must be with the prior written consent of the liquidator (proposed section 489EC)).

Transitional provisions relating to the application of these proposed amendments are set out in proposed section 1533, in item 1 of Schedule 2 of the Bill.

Item 2 of Part 1 of Schedule 1 inserts proposed subsections 601AA(6) and (7), to enable ASIC to refuse an application for the voluntary deregistration of a company where it considers that it would be more appropriate to wind the company up under section 489EA.

Item 3 inserts proposed subsections 601AB(6) and (7) to enable ASIC to make a winding up order under section 489EA where it decides this to be more appropriate than the involuntary deregistration of the company under existing subsections 601AB(1) and (2).

Item 4 adds a decision by ASIC to order the winding up of a company under section 489AE to the list of decisions not subject to review by the Administrative Appeals Tribunal (proposed paragraph 1327C(ca)).

A person aggrieved by an order by ASIC to wind up a company may apply to the Federal Court of Australia under existing section 482 for an order to stay or to terminate the winding up. According to the Explanatory Memorandum:

Whilst it is preferable for decisions that affect the rights of individuals to be subject to merits review by the Administrative Appeals Tribunal, once a company is placed into liquidation the process gives third party proprietary rights which would be affected by any decisions regarding the legality of the decision to commence the winding up.[23] 

The Explanatory Memorandum submits that ‘a court is the appropriate forum for determining an individual’s proprietary rights as opposed to an administrative tribunal’, and notes that similar decisions by ASIC, such as decisions with respect to the deregistration of a company, are not subject to merits review.[24]

Publication of notices

Item 26 of Part 2 of Schedule 1 inserts proposed section 1367A which establishes a new regulation making power to enable notices of events in external administrations that were previously required to be published in newspapers or the ASIC Gazette to be published in the manner prescribed in the regulations.

Items 5-25 amend provisions of the Corporations Act to provide that a range of notices currently required to be caused to be published or published in the print media or in the ASIC Gazette must now be published in the prescribed manner.

For example:

•       item 8 inserts proposed paragraph 439A(3)(b) requiring notice of a creditors meeting to be published in the prescribed manner, rather than, as presently in a national newspaper

•       item 9 inserts proposed paragraph 446A(5)(b) to require a winding up notice issued by a liquidators at the conclusion of an administration to be published in the prescribed manner rather than, as presently, in the print media, and 

•       item 25 amends existing subparagraph 1351(4)(a)(ii) to require ASIC, where it decides to deregister a company on its own initiative, to publish a notice of deregistration in the prescribed manner, rather than in the Gazette.

Transitional provisions relating to the application of these proposed amendments are set out in proposed section 1534, in item 1 of Schedule 2 to the Bill.

Miscellaneous Amendments

Item 28 of Part 3 of Schedule 1 to the Bill inserts proposed section 600AA which imposes an obligation on receivers, administrators and liquidators to advise the Secretary of the Department of Families, Housing, Community Services and Indigenous Affairs (FACHSIA) as soon as possible where a company to which they are appointed is a ‘paid parental leave employer’ (subsection 600AA(1)).[25]  The term ‘paid parental leave employer’ is defined in subsection 600AA(2).

Item 29 inserts proposed subsection 601AH(3) which extends the current power of the Federal Court to make directions and otherwise validate actions taken during a period of deregistration of a company which has had its registration reinstated by ASIC.  Currently, the Court only has this power where the company has been reinstated by the Court.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

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ISSN 1328-8091

[1].               See: General Employee Entitlements and Redundancy Scheme website, viewed 22 February 2012, http://www.deewr.gov.au/WorkplaceRelations/Programs/EmployeeEntitlements/GEERS/Pages/default.aspx. GEERS is a basic payment scheme established to assist employees who have lost their employment due to the winding up (placing into liquidation) or bankruptcy of their employer, and who are owed certain employee entitlements. GEERS covers capped unpaid wages, annual and long service leave, capped payment in lieu of notice and capped redundancy pay.

[2].               D Bradbury (Parliamentary Secretary to the Treasurer) and R McClelland (Attorney-General), Reform package to modernise and harmonise insolvency, Joint media release, 14 December 2011, viewed 20 February 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F1343688%22

[3].               This sort of corporate behaviour is known as ‘phoenixing’.  It typically involves a company closing down one day and opening up the next with a different name to avoid its obligations. There have been related consultations by the Government on tax law amendments to strengthen company director obligations and deter fraudulent phoenix activity: see Treasury website, Tax Law Amendments to Strengthen Company Director Obligations and Deter Fraudulent Phoenix Activity, Exposure Draft, 18 October 2011, viewed 20 February 2012, http://www.treasury.gov.au/contentitem.asp?ContentID=2184&NavID

[4].               Australian Labor Party, ‘Protecting Workers’ Entitlements Package’, ALP website, July 2010, viewed 20 February 2012, http://www.alp.org.au/protecting-workers-entitlements-package/

[5].               General Employee Entitlements and Redundancy Scheme website, op. cit.

[6].               Explanatory Memorandum, pp. 11-12, [2.6-2.7].

[7].               D Bradbury (Parliamentary Secretary to the Treasurer) and R McClelland (Attorney-General), Reform package to modernise and harmonise insolvency, Joint media release, op. cit.

[8].               Corporations and Markets Advisory Committee, Issues in external administration: discussion paper, November 2008, p. 63, viewed 27 February 2012, http://www.camac.gov.au/camac/camac.nsf/byHeadline/PDFFinal+Reports+2008/$file/External_administration_report_Nov08.pdf

[9].               D Bradbury (Parliamentary Secretary to the Treasurer), ‘Second reading speech: Corporations Amendment (Phoenixing and Other Measures) Bill 2012’, House of Representatives, Debates, 15 February 2012, p. 10, viewed 27 February 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F60564cf1-8e98-4f07-8d0e-51f3e8dd47ca%2F0028%22

[10].               Note that the Explanatory Memorandum initially stated that the amount would be $30 million.  However, a correction to the Explanatory Memorandum has been issued stating that the amount of the saving is $15 million: http://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r4753_ems_f52560eb-e4b9-4f1d-aecc-69d83da840fe/upload_pdf/365275.pdf;fileType=application%2Fpdf

[11].               D Bradbury, ‘Second reading speech: Corporations Amendment (Phoenixing and Other Measures) Bill 2012’, op. cit.

[12].               Australian Government, Proposals paper: a modernisation and harmonisation of the regulatory framework applying to insolvency practitioners in Australia, December 2011, viewed 20 February 2012, http://www.treasury.gov.au/documents/2264/PDF/Proposals_Paper_insolvency.pdf 

[13].               Australian Labor Party, ‘Protecting Workers’ Entitlements Package’, op. cit.

[14].              C Bowen (Minister for Financial Services, Superannuation and Corporate Law), Corporate Insolvency Law Reform Package, media release, no. 4, 19 January 2010, viewed 20 February 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F5OYV6%22

[15].              D Bradbury (Parliamentary Secretary to the Treasurer) and R McClelland (Attorney-General), Reform package to modernise and harmonise insolvency’, op. cit.

[16].               Explanatory Memorandum, p. 11, [2.2]. The report may be accessed through the following link: http://www.camac.gov.au/CAMAC/camac.nsf/byHeadline/Whats+NewIssues+in+External++Administration+Report+Nov08+Media+Release?openDocument 

[17].               House of Representatives Selection Committee, Report no. 44, Consideration of Bills, 16 February 2012, viewed 20 February 2012, http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=selc/index.htm

[18].               J Owens, ‘Economics Committee Report: Corporations Amendment (Phoenixing and Other Measures) Bill 2012’, House of Representatives, Hansard, 27 February 2012, p. 1, viewed 28 February 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2Fdfa1725a-aa28-48db-ba56-7995bad31f8c%2F0012%22

[19].               Explanatory Memorandum, p. 3.

[20].               Footnote 10 refers.

[21].               ASIC is currently able to deregister a company in these circumstances: Explanatory Memorandum, p. 7, [1.11].

[22].               The notification requirement (paragraph 489EA(4)(b)) and the absence of objection requirement of the part of the company or any of its directors (paragraph 489EA(4)(c)) do not apply if ASIC does not have the necessary information about the person’s identity or address (subsection 489EA(5)).

[23].               Explanatory Memorandum, p. 9, [1.96].

[24].               Ibid.

[25].               Such payments arise under the Paid Parental Leave scheme introduced by the Government in 2010: Explanatory Memorandum, p. 19, [3.1-3.4].