Australian Manufacturing
Workers' Union
Registered as AFMEPKIU
National Research Centre
Level 3 133 Parramatta Rd
GRANVILLE  NSW  2142
PO Box 160 Granville  2142
Telephone 02 9897 9133
Facsimile   02 9897 9275 98979275
amwu2@amwu.asn.au

31 July 2003

Attention: The Secretary

Parliamentary Joint Committee 
on Corporations and Financial Services 
Room SG.64, Parliament House,
CANBERRA ACT 2600. 
corporations.joint@aph.gov.au 

INQUIRY INTO AUSTRALIA'S INSOLVENCY LAWS

Dear Dr Kathleen Dermody,                                              

Thank you for your invitation to comment in relation to the Inquiry into Australia's Insolvency Laws. I would also like to thank you for the extention you have provided to the AMWU for the lodgement of our submission. 

With respect to the Committee's consideration and reporting on the operation of Australia's insolvency and voluntary administration laws Australian Manufacturing Workers' Union (AMWU) would like to make the following submission.

The terms of reference for the enquiry included the following areas of interest:

(a)	the appointment, removal and functions of administrators and liquidators;
(b)	the duties of directors;
(c)	the rights of creditors;
(d)	the cost of external administrations;
(e)	the treatment of employee entitlements;
(f)	the reporting and consequences of suspected breaches of the Corporations Act 2001;
(g)	compliance with, and effectiveness of, deeds of company arrangement; and
(h)	whether special provision should be made regarding the use of phoenix companies. 

We have made our submission with respect to the direct impact on the capacity for employees to receive their owed entitlements in the unfortunate event of insolvency. Our submission is intended to highlight these issues for wider discussion. 

In addition Schedule A which is attached to our submission has been prepared by the AMWU's NSW Branch. As you will see Schedule A deals with issues concerning insolvency and workers entitlements. It is intended that our  main submission and Schedule A are read in conjunction with each other. 

Should you require any further information or assistance please do not hesitate to contact the undersigned.

Yours Sincerely

Glenn Thompson
Acting National Secretary

Australian Manufacturing
Workers' Union
Registered as AFMEPKIU
National Research Centre
Level 3 133 Parramatta Rd
GRANVILLE  NSW  2142
PO Box 160 Granville  2142
Telephone 02 9897 9133
Facsimile   02 9897 9275
amwu2@amwu.asn.au

Parliamentary Joint Committee
On Corporations and Financial Services

Inquiry into Australia's Insolvency Laws

Submission to Senate Select Committee

By
Australian Manufacturing Workers' Union
(AMWU)

Table of Contents
	Page	

1. Introduction	
6	

2. Insolvency	
7	
Impact of Insolvency	7	
Why the Government should protect Employee Entitlement	8	

3. Phoenix Companies	
9	
Increase Penalties for Phoenix Companies	9	
Protect employee entitlements from phoenix companies	10	

4. GEERS	
11	
Conceptual faulty	11	
A Political Band-Aid	11	
Excessively Long Waiting Periods 	12	
GEERS Limitations	13	
A Long Term Solution	14	

5. Corporations Amendment (Maximum Priority for Employee Entitlements) Bill - Maximum Priority Rule (MPR)	

15	
MPR should not be an issue for employee entitlements 	15	
Loss of the Capacity to do Business	15	
Measuring Vulnerability	16	
No Guaranteed Payment	16	
A Better Option	17	

6. The Trust Fund Option	
17	
Accounting Standard	17	
Shifting Responsibility	18	
A Comprehensive Solution	18	
Arms Length	19	
National Entitlements Security Trust (NEST)	19	
The Irrational Ideological Aversion	20	

7. Bibliography	
21	

Schedule A	

1. 		Introduction
In our Submission to the Parliamentary Joint Committee on Corporations and Financial Services in regards to the operation of Australia's insolvency and voluntary administration laws, we will be focusing our comments on point (e) treatment of employee entitlements and point (h) whether special provision should be made regarding the use of phoenix companies.  In the following five sections we will stipulate the key issues in regards to employee entitlements and insolvency and provide a comprehensive solution to these issues.

2. 		Insolvency

Impact of Insolvency
The loss of employee entitlements via insolvency has a tremendous impact on the Australian community with many detrimental social and economics effects.  In March 2003 alone 636 companies came under the control of liquidation for the first time insolvent (ASIC. 2003a.), and according to the ASIC Submission to this inquiry during the twelve months to 31 December 2002 there were 6,208 companies (ASIC. 2003b). Insolvency is a continuing presence in the Australian economy and employees are often hit hardest by companies' incapacity to meet their obligations.

     (ASIC. 2003.).
Why the Government should protect Employee Entitlement

	Ensuring the provision by employers for workers' entitlements should be a core principle of government for three reasons:

· 	Reduces the likelihood of workplace disputes by improving the cordiality of the relationship between employees and employers
· 	It reduces and will ultimately remove the liability of government and the taxpayer to fund entitlement shortfalls through the GEERS scheme
· 	Decrease government expenditure not merely through GEERS but also through funding allocated in the pursuit of incompetent directors.  For instance, in the 2003 budget ASIC will receive ``$53 million over four years to pay for its continuing chase after the former directors and employees of HIH'' (The Australian. 2003: 28.).

3. 		Phoenix Companies

Increase Penalties for Phoenix Companies
At AMWU we believe harsher penalties and more stringent regulation should be instigated to impede the devastating effects of a rampage from a phoenix company. Currently the Corporations Act 2001 penalises persons who deliberately enter into agreements or transactions for the purpose of avoiding payment of employee entitlements. This gives the courts the power to order employers to pay compensation to employees who have suffered loss or damage because of the agreements or transactions (Attorney-General's Department. 2003.).  This legislation is not enough to protect employees from these activities, as employees are still victims of the phoenix company phenomena. 

There is currently little pursuit of directors who avoid paying employee entitlements due to a lack of ASIC funding and in some cases such as in regards to workers compensation there is no legislation to implement penalties. Penalties need to be more severe to reduce the emergence of phoenix companies. The government needs to give ASIC the powers to track the money trail. It is not enough to only prosecutor the large and high profile companies as the small operators commit the bulk of the damage. Criminals are keeping their businesses small so they fly below ASIC's radar. They avoid detection and are able to commit the offence again. These activities destroy the lives of hard working Australians who do not have the resources to overcome the financial strain of loss entitlements. More measures must be undertaken to impede the growth of phoenix companies. 

Protect employee entitlements from phoenix companies
The only way to ensure the protection of employee entitlement from a phoenix company is to obligate an employer to set aside accrued employee entitlements at arms length from the company. This could be achieved with the implementation of an independent trust fund, where employers are legally required to make monthly contributions of the currently accrued employee entitlements. This would ensure regardless of their intention they are forced to live up to their legal and moral obligation to pay their employees their entitlements. 

4. 		GEERS

Conceptually faulty
GEERS is an administratively based government scheme that is completely taxpayer funded and can be removed at any time without any legislative ramifications. GEERS is faulty on a conceptual level as this scheme forcing taxpayers to fund incompetent directors. A well-managed company would have employee entitlements accrued and set aside as stipulated by required Accounting Standards. Government schemes such, as GEERS are nothing more than taxpayer funded measure to compensate for perfunctory management. The Australian community cannot afford to take much needed resources away from our hospitals and roads simply because an employer has acted irresponsibly. 

A Political Band-Aid
This scheme is nothing more then a political band-aid and is unable to live up to its expectation. According to Robert McClelland the Shadow Minister for Workplace Relations, ``GEERS scheme has only paid out 70% of total workers' entitlements, not 90% as Workplace Relations Minister Tony Abbott has claimed'' (AMWU. 2002.).  Even with the assistance of a levy the government has been unable to pay all of the owed entitlements to Ansett employees. ACTU President Sharon Burrow reported one year after Ansett collapse $400 million was still owed to former Ansett workers (NEST. 2002.). The federal government is collecting millions from the $10 ``Ticket Tax'' levied on every air traveller specifically to help pay lost entitlements. It is estimates that on average Ansett workers have been short-changed more that $25,000 each, while the Federal Government accumulates over $10 million per month from the travelling public. GEERS and levies do not work, and a new, fairer and functional system should be considered, such as the trust fund model.

Excessively Long Waiting Periods
One of the most detrimental effects of GEERS is the extensive waiting periods employee endure to receive their entitlements. The period directly after a company becomes insolvent is the most difficult time for employees. They have no income to pay their bills and are under great pressure looking for new jobs. An employee entitlement trust fund would pay employees within days of insolvency, such as in the case of National Entitlement Security Trust (NEST) paying Miggins employees all due entitlement two day after the Miggins Group Pty Ltd became insolvent (Tucker. 2002: 9.). Whereas employees awaiting benefits from GEERS may have to wait four months for their entitlements as stipulated in this year's Budget target of ``80 percent of claims processed within 16 weeks''. (Department of Employment and Workplace Relations. 2003: 45.). The bureaucratic systems of GEERS lack the efficient the trust fund model can provide.

In the case of Vincena Pty Ltd liquidation, the company had a liquidator appointed 10 December 2001 had 5 employees owed a total employee entitlement of $49,348.89. 
``3 employees received payments from GEERS in September 2002. 4th employee received payment in January 2003. Fifth employee who had resigned prior to Liquidator being appointed and was owed LSL received no payment either through Liquidator or GEERS'' (TCFUA. 2003: 124.).  
Due to this kind of delay in payment ex-employees are faced with the horrendous issue of a compounded debt. GEERS is evidently engulfed in a bureaucracy that is failing to help employees and their families when they are most in need.

GEERS Limitations
The concept of GEERS is based on the premise that employees will only receive their entitlements from the government only when an employer has no capacity to pay any part of their entitlements. GEERS payment is considered a loan to insolvent companies until they are able to pay it back. GEERS is not a comprehensive scheme, as it will not `top-up' any underpayment. In addition it will not cover entitlements such as redundancy, superannuation, RDOs, accrued sick leave and various other entitlements employers are legally obligate to provide. Furthermore employees are restricted in their capacity to claim their entitlements with GEERS, as they must fall within a very strict definition.  For instance, employees who have lost their entitlements and the employer has shutdown operations without the appointment of a liquidator or administrator are not able to claim. 

A Long Term Solution
GEERS cannot handle the ever-increasing loss employee entitlements in the long term, but may still be of some use. GEERS and its predecessor EESS are a safety net scheme that could never provide the comprehensive solution required.
``EESS is a safety net scheme, and does not preclude the adoption of additional measures, by particular employers and employees.  It would be possible for employers interested in a trust fund approach to group together with other employers, and this might be an appropriate response depending on the circumstances of the employers'' (Abbott. 2001: 8.).
GEERS could be used to facilitate the period of transition required to transfer funds to a trust through legislation. The Trust fund model is a long-term solution that should be supported by government to relieve the business community, employees and the public purse of an unnecessary burden.

5. 	Corporations Amendment (Maximum Priority for Employee Entitlements) Bill - Maximum Priority Rule (MPR)

MPR should not be an issue for employee entitlements
AMWU's view on MPR is that if employers were responsibly conducting their business, there would be no need of MPR for employee entitlement. If a company were conducting business responsibly, they would already be set aside employee entitlements as non-company funds - at arms length of the employer. There is a better solution to ensure employee receive their entitlements after insolvency and that is to force company to act responsibly and place employee entitlements in an independent trust fund.

Loss of the Capacity to do Business
The loss of employee entitlements is an important issue that does not need to cost business the capacity to do business.  Elevating employee entitlements above secured creditors with fixed charges against the company's assets will increase lending rates, reduce, or withdraw available credit to many businesses and hinder company growth. ``Potentially this could result in other innocent workers losing their jobs and bearing the price, or small business simply being unable to afford new employees'' (Abbott. 2001: 11). Changing the MPR will only raise the cost of doing busy and therefore adversely effect Australia's international competitiveness. It will increase the degree of risk to lenders, which naturally will be passed on through higher charges. Increased risk of business lending exists, and that rates of interest on lending are thereby increased as a function of that heightened risk. There is no change required to the status quo and elevate employees above fixed charge holders if entitlements are set-aside in trust.  Businesses will not suffer needless rate increase and employee will enjoy the protection they deserve. 

Measuring Vulnerability
Based on the reasoning that the most vulnerable creditor will receive payment first seems to be the theory behind the MPR.  Yet in the case of insolvency this does not necessarily mean the employees would be first. For instance sub-contractors are defacto employees and consequently are just as vulnerable as employees. But if the MPR were applied for employee entitlements, sub contractors would be less likely to receive their payment, even though they are just as vulnerable to the effects of insolvency. Hence to place employee entitlements above sub-contractors does not comply with this reasoning. 

No Guaranteed Payment 
The hard truth is that moving the priority of employee entitlements will not ensure payment. The 2001 federal government report ``Protection of Employee Entitlements on Insolvency'' stipulated: 
``There is no guarantee that even secured assets will necessarily be sufficient to satisfy employee entitlements in any given case.'' (Commonwealth of Australia. 2001: Paragraphs 49-52).

Therefore MPR is not a comprehensive solution. If funds were continuously set aside to pay employee entitlements then the incapacity of an employer to pay would be unable to become an issue.6. 

A Better Option
If MPR is merely a mechanism for government to recoup some expenditure of GEERS, we have a better one: employee entitlement trusts.  This option to cheaper for the government and far more effective.
6.		The Trust Fund Option
Accounting Standards
In theory, all employers should set aside employee entitlements to operate in accordant with Accounting Standards.  However within current legislative and industrial environments there is insufficient incentive/compulsion for a company to adequately cover their obligation to pay employee entitlement. ``The introduction of trust funds would oblige an employer to provide for an entitlement as it accrues''. (Blake. 2000: 13.). Setting aside employee entitlement will ensure all employers function within Accounting Standards, regardless if they are exempt from complying with Accounting Standards. This will ensure across the board protection for all employees.

Shifting Responsibility
As a nation we cannot afford to keep shifting the responsibility to pay employee entitlements.  It is the employers' legal and ethical responsibility to provide the entitlements our society has elected as minium remuneration for the sale of an individual's labour. These funds DO NOT belong to the company and therefore should not be considered part of a company's working capital. Why should we as a society expect the community to pay for the wrongs of inept employers? We should ensure that all employers pay what they are legally required to pay their employees. We need to implement a mechanism that enforces employers to live up to their responsibilities without business losing its capacity to do business. This can be achieved via an independent employee entitlement trust fund.

A Comprehensive Solution
 The trust fund option if instigated Australia wide will guarantee payment of entitlements in the event of insolvency, providing a comprehensive solution to this issue. We propose this to be implemented with no exemptions to ensure the protection of all employees. The trust fund option ``overcomes the need to rely on specific legislation to provide a legal remedy to protect employee entitlements, and would also remove the need for a union or group of employees to take court action to obtain a remedy'' (The Australian. 2001: 11.). Employers will be forced to meet their legal obligation, without the taxpayer bailing out them of their responsibilities or decreasing the lending capacity of business.   

Arms Length
The key aspect of this model is that employee entitlements are kept at arms length of the employer.  By removing the employer's capacity to tamper with accrued entitlement, vulnerable employees will be protected from the detrimental effects of phoenix companies and general insolvent companies.

National Entitlement Security Trust (NEST)
A good example of the trust fund option is with the already functional National Entitlement Security Trust (NEST). NEST is an independent not for profit trust facility established to receive employer contributions towards employee entitlements such as annual leave, long service leave, redundancy, severance pay, and other entitlements following agreement between the parties or an industrial award governing their relationship.  The trustees consist equally of employer and employee representatives with an independent Chairman.  Under its trust deed, NEST is empowered to invest contributed funds at interest in approved securities but is unable to reduce the capital base of the trust.  The trust's income funds administration and is then distributed to either employers, employees or, at the employer's direction, applied to future obligations to contribute.  By this means, an element of self-funding of employee entitlements is provided.  This solution effectively deals with the issue of employee entitlement in insolvency while providing benefits to all related stakeholders. 

The Irrational Ideological Aversion

AMWU would like to comment on the ideological aversion to the establishment of NEST, that has been generated by the AiGroup simply because the initiative to establish an employee entitlement trust was taken by a group of unions. The trust fund option provides a positive solution that can benefit all stakeholders, such as the structure of NEST offers. The unwarranted suspicions of NEST that has been condemned as an entity with a hidden agenda, simple because began as a union initiative is completely irrational. The stubborn, ideologically based opposition to employee entitlement trusts is full of illogical nominalises and has yet been able to present a single creditable argument or undertaken proper due diligences to assess NEST's capacity to deliver on its promises. AiGroup lobbyist use intimidation tactics on interested employers, and use their resources to fund full time lobbyist against initiatives to protect employee entitlements.  If any opposition had taken the time to investigate NEST, they would find it is a model of corporate governance that set an example for other organisation. It is time to set aside the politics and do what is best for the community. Employee and employer must work together to provide the needed changes that will benefit the community.  When comparing the social cost of unpaid employee entitlements to an ideological aversion to a trust fund model, it is simply obtuse to expect the community to accept such reasoning and the AMWU welcomes a debate on any of these issues.

7. Bibliography

Abbott, Tony. 2001. ``PROTECTION OF EMPLOYEE ENTITLEMENTS ON EMPLOYER INSOLVENCY: A REBUTTAL OF LABOR.S SUPPPOSED ALTERNATIVES TO THE COMMONWEALTH GOVERNMENT'S EMPLOYEE ENTITLEMENTS SUPPORT SCHEME''. Employment, Workplace Relations and Small Business: Canberra.

AMWU. 2002. ``Budget shows workers to wait even longer for their entitlements - ALP''. http://www.amwu.asn.au/default.asp?Action=LoadArticle&ID=600

ASIC. 2003a. ``Companies entering external administration during the month ended 31 March 2003''. http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/insolv_Mar03.pdf/$file/insolv_Mar03.pdf.

ASIC. 2003b. ``Submission to the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Australia's Insolvency Laws February 2003''. http://www.aph.gov.au/senate/committee/corporations_ctte/ail/submissions/sub024.doc. 

Attorney-General's Department. 2003. ``CORPORATIONS LAW AMENDMENT (EMPLOYEE ENTITLEMENTS) ACT 2000 No. 78, 2000'' in ``ScalePlus Law Resources''. http://scaleplus.law.gov.au/html/comact/10/6190/top.htm.  

Blake, Nick. 2000. ``PROTECTION OF AWARD AND AGREEMENT ENTITLEMENTS WHEN AN EMPLOYER BECOMES INSOLVENT'' in ``Australian Nursing Journal''. Apr2000, Vol. 7, Issue 9 p13.

Commonwealth of Australia. January 2001. ``Protection of Employee Entitlements on Insolvency''.

Department of Employment and Workplace Relations. 2003. ``Portfolio Budget Statements 2003-2004 Portfolio Employment and Workplace Relations''.  Canprint: Canberra.

NEST. 2002. ``National Entitlement Security Trust Newsletter October/November 2002''. NEST: Sydney.

TCFUA. 2003. ``Submission to the productivity commission post 2005 textile, clothing and footwear assistance arrangements MARCH 2003''. TCFUA: Campsie.

The Australian. - 2001. ``Sensible reform the only way out for workers'' in ``The Australian'' AUG 09, 2001 p11.
 - 2003. ``Bigger brothers to watch over you - BUDGET   2003'' in ``The Australian''. MAY 14, 2003 p28.

Tucker, Scott. 2002. ``Payouts take sting out of sackings'' in ``Newcastle Herald''. 17/8/2002. p9.