New laws proposed by government to combat “sharp corporate practices”

Originally introduced in September 2018 and passed by both Houses of Parliament in April 2019, the Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018 seeks to deter corporate employers from avoiding their obligations to pay employee entitlements when the company becomes insolvent. The Bill follows a number of significant reforms aimed at preventing corporate employers from engaging in “sharp corporate practices”, such as illegal phoenix activity.

 

Background of Bill

The Bill comes in the wake of increasing concerns about the misuse of the Fair Entitlement Guarantee Schemes (FEGS) by employers seeking to intentionally avoid or reduce their payment of employee entitlements at the expense of Australian tax payers. The FEGS provides financial assistance to eligible employees who have lost their job as a result of the bankruptcy or liquidation of their employers. In its 2017 consultation paper on the FEGS, the Government noted that reforms are necessary in order to tackle the inadequacy of current laws in addressing “corporate misuse” of the FEG.1

The provisions in the Bill will apply broadly to different categories of “sharp corporate practices”. These include, but are not limited to:


  • illegal phoenixing activities, which is discussed further here;
  • where a company owner avoids their obligations to pay out employee entitlements by recklessly or intentionally diverting assets away from the company before winding up the company;
  • where third parties deliberately procure a transaction for the purposes of assisting the company to avoid paying employee entitlements when the company winds up; and
  • where a corporate group deliberately restructures so that the employing entity is not able to pay employee entitlements during winding up.

Key amendments

The Bill seeks to make several amendments to Part 5.8A of the Corporations Act with the aim of bolstering enforcement and recovery options against corporate employers who seek to evade their obligations with respect to employee entitlements. Some of the key amendments include:

  • Making it a criminal offence for a person to recklessly enter transactions for the purpose of avoiding, preventing or minimising the entitlements that can be recovered by the employee.
  • Inserting a new civil penalty provision that relies on an objective “reasonable person” test. Specifically, the provision prohibits a person from entering into a relevant agreement or a transaction where a “reasonable person” in the same position would know that the agreement or transaction is likely to “avoid or prevent the recovery of the entitlements of employees of a company”, or “significantly reduce the amount of the entitlements of employees of a company that can be recovered”.2
  • Extending the current criminal offence and civil penalty provisions to capture company officers who cause the company’s contravention of the criminal and civil penalty provisions.
  • Widening the list of parties who can begin proceedings against corporate employers to include the Australian Taxation Office (ATO), the Fair Work Ombudsmen (FWO) and the Department of Jobs and Small Business.
  • Introducing “contributions orders”, which enables liquidators to seek contributions from entities in the same corporate group for outstanding employee entitlements owed by one of those entities. This is subject to a number of conditions, including that it is “just and equitable” for the Court to make the order and that the entity in the corporate group against whom the contribution order is sought has “benefitted, directly or indirectly, from the labour of the employees of the insolvent company on other than arms-length terms”3.
  • Introducing provisions enabling directors and officers to be disqualified by ASIC or the Court in circumstances where there have been breaches of the Corporations Act and the FEGS was used to meet employee entitlements with minimal or no return to the Commonwealth.

Practical significance

The Bill, which is expected to become law in the near future, is likely to have far-reaching implications for company directors and officers. In addition to bolstering enforcement options against employers engaged in sharp corporate practices, the amendments also strengthen the ability of parties, including employees, liquidators and various government departments, to pursue employers for deliberately avoiding their obligations to pay employee entitlements.

This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.


1 Reforms to address corporate misuse of the Fair entitlement Guarantee Scheme, Consultation Paper, May 2017, Department of Jobs and Small Business, Australian Government.
2 Explanatory Memorandum, Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018 (Cth), p25.
3 Explanatory Memorandum, Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018 (Cth), p40.

Contributors

Danyal Ibrahim Associate
Emily Truong Law Graduate