Proposed new legislation will see some changes for directors that are likely to happen in 2019 if the legislation is introduced and passed. These include:
- significantly increasing civil and criminal penalties for breaches of the Corporations Act 2001 (Cth) (Corporations Act) through the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 (Penalties Bill);
- introducing a new objective test for ‘dishonesty’ in respect of whether someone has acted dishonestly under the Corporations Act;
- introducing a new Director Identification Number (DIN) regime that will assign unique identifier to every registered Australian director;1
- making directors personally liable for the unpaid GST debts of their companies by expanding the Directors’ Penalty Notice regime;
- prohibiting dispositions of company property to defeat creditors, penalising those directors involved and allowing liquidators and the Australian Securities and Investment Commission (ASIC) to recover the property; and
- improving the accountability of resigning directors.
So, what do these proposed changes mean for directors?
Increased penalties under the Corporations Act
The introduction of the Penalties Bill is a clear response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission
), with a significant change to penalties.
The Commonwealth Treasury warns that the Penalties Bill “… would double maximum imprisonment penalties for some of the most serious ‘white-collar’ criminal offences bringing Australia’s penalties in closer alignment with leading international jurisdictions”.2
The Penalties Bill proposes to significantly increase the civil and criminal penalties for breaches of the Corporations Act 2001 (Cth) from the current penalties, as summarised below, and also introduces new formulae to calculate the maximum penalties for civil and criminal contraventions as summarised below:
The Penalties Bill also proposes to increase the imprisonment terms from 5 to 10 years for certain contraventions, such as section 184 of the Corporations Act in respect of reckless and dishonest breach of duty by directors.
New objective test for dishonesty under the Corporations Act
The Penalties Bill also proposes to insert a definition of “dishonest”
into the Corporations Act that means “dishonest according to the standards of ordinary people”.
The effect of this new definition (and consequential amendments to ensure consistency) is to:
- establish a consistent meaning of the word throughout the Corporations Act;
- require an objective assessment of the dishonest act. This means that it will not be necessary to prove whether the defendant knew that the relevant conduct was dishonest or intended to act dishonestly; and
- lower the threshold test of whether someone acted dishonestly under the Corporations Act as it is often difficult to prove an offender’s intention or knowledge.
Section 184(1) of the Corporations Act is one example which will be amended to ensure consistency with the deletion of the word ‘intentionally’ before the word dishonest. Section 184(1) currently provides that:
(1) A director or other officer of a corporation commits an offence if they:
(a) are reckless; or
(b) are intentionally dishonest;
and fail to exercise their powers and discharge their duties:
(c) in good faith in the best interests of the corporation; or
(d) for a proper purpose.
The amendment will erase the requirement to prove the director (and other officers) intentionally
acted dishonestly and failed to discharge his/her duties in acting in the best interests of the corporation.
The impact of the proposed changes and the introduction of an objective test for dishonesty is that directors who consider their conduct as honest or may not have intended or known that their conduct was dishonest may still be found to have contravened the Corporations Act such as liability under subsections 184(2) and 184(3) for dishonest use of position or information, and section 588G for dishonestly trading while insolvent.
Introduction of a Director Identification Number regime
Under the draft Legislative Package,3
it is proposed to introduce a requirement that each registered director applies for and obtains a unique Director Identification Number (DIN
) under a newly inserted Part 9.1A of the Corporations Act and Part 6-7A of the Corporations (Aboriginal and Torres Strait Islander) Act 2006
In addition to the DIN requirement, the draft Legislative Package proposes to consolidate Australia’s thirty-five business registries administered by ASIC and the Australian Business Registry (ABR) (New Register). Operating alongside the DIN requirement, both changes should improve the traceability of directors’ relationships between entities and to better track illegal phoenix activities.
The following table summarises the proposed new obligations directors will have in respect of DINs and the maximum penalties for breaches of those obligations:
Proposed measures to combat illegal phoenix activities
The draft Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2018 (Combatting Illegal Phoenixing Bill
) is focused on stopping illegal ‘phoenix’ activities and proposes a number of measures that will impact on directors as set out below.
A ‘phoenix’ activity or ‘phoenixing’ is when a new company emerges from the collapse of another, with the intention of avoiding payment of the failed company’s liabilities and transferring its assets to the new company. A 2018 report prepared for the Pheonix Taskforce estimated that illegal phoenix activities cost the Australian economy about $2.9 billion to $5.1 billion annually.
Directors’ liability for unpaid GST
The Directors’ Penalty Notice (DPN
) regime currently allows the Commissioner to personally penalise directors for a company’s failure to meet its superannuation guarantee charge (SGC
) and PAYG withholding obligations within 21 days of being served with a DPN notice if it is not paid.4
The penalty is equal to the amount unpaid or an estimate of the unpaid amount.
The Federal Government is proposing to extend the DPN regime so that it also includes a company’s unpaid GST under Combating Illegal Phoenixing Bill. Like the current penalty for failing to pay the SGC and PAYG withholding by the due date, the Combatting Illegal Phoenixing Bill will make directors personally liable for the amount unpaid or the estimate of the unpaid amount, of GST after receiving a DPN and failing to comply with it.
In anticipation of the bill becoming law, directors should reflect on their companies’ GST balances and consider how to ensure compliance in the future to avoid potential personal liability.
Prohibiting creditor-defeating property dispositions
The Corporations Act does not currently contain provisions that specifically concern creditor-defeating property disposition. Instead, broader provisions that protect creditors are contained in the duties owed by directors such as sections 181, 184 and 588G, which oblige directors to act in good faith, for a proper purpose and to prevent trading while insolvent. Although breaches of those sections can result in serious civil and/or criminal liabilities, these sections are considered to be inadequate in preventing the creditor-defeating property dispositions or allowing for the speedy recovery of those assets.
The proposed new laws in the Combatting Illegal Phoenixing Bill aim to expand the director duties by aiming to prevent, deter and recover company property that is disposed to either prevent or significantly delay creditors’ access to the company’s assets.
Subject to safeguards that protect legitimate business transactions, the proposed new provisions to the Corporations Act will make directors (and other company officers) face criminal and/or civil liabilities if they:
- facilitate creditor-defeating dispositions; and/or
- fail to prevent the company from making creditor-defeating dispositions.
The proposed amendments to the Corporations Act also propose to:
- make creditor-defeating dispositions voidable if the disposition is made while the company is insolvent or becomes insolvent due to the disposition within the following 12 months;
- allow liquidators to seek recovery of assets by application to the courts; and
- provide ASIC with powers to make orders for the benefit of creditors, for the recovery of assets of voidable.
The purpose of the credit-defeating disposition provisions is clear, and directors should be conscious of the serious civil and criminal penalties for the proposed offences with the penalties for individuals who fail to prevent creditor-defeating dispositions or procure creditor-defeating dispositions, being imprisonment for 10 years or a fine of the greater of the following:
- $945,000 (4,500 penalty units);
- the value of the benefit obtained by one or more persons and are reasonably attributed to the commission of the offence, multiplied by three; or
Improving accountability of resigning directors
The draft Combatting Illegal Phoenixing Bill also aims to prevent directors from resigning or improperly backdating resignations to avoid personal liability for phoenixing by preventing a sole director from resigning from a company without appointing a new director.
Often directors involved in ‘phoenixing’ resign and deliberately shift accountability to other directors such as a ‘straw director’. ‘Straw directors’ have no actual involvement in a company and have limited assets to frustrate recovery purposes, or may be a deceased or fictitious person.
Under the current provisions of the Corporations Act, companies must have at least one director. However, the current laws allow:
- directors to resign at any time in writing subject to the company’s constitution, with the company or former director to notify ASIC within 28 days of the resignation;
- former directors to backdate the effective date of resignation to shift accountability to a new director in accordance with the company’s constitution; and
- sole directors to abandon a company by resigning without the company appointing another director. In these situations, the company is left without the director or secretary to notify ASIC of the director’s resignation or appointment of a new director, and the company remains registered leaving creditors unpaid for some time until the company is wound up. This occurs despite the current law requiring the resigning director to notify ASIC.
The proposed changes seek to ensure that:
- directors cannot backdate their resignation in breach of the 28 day rule. If ASIC receives notice of resignation more than 28 days after the purported resignation, the effective date of resignation is the date that ASIC receives notice of the resignation;
- the date of resignation can only be backdated by application to ASIC or the Court. The change to the effective date of registration by notification to ASIC will increase scrutiny on companies left with ‘straw directors’; and
- directors cannot resign from a company or be removed by a resolution of members if it would leave a company with no director (except in the winding up of a company). The ‘end of day test’ will be applied, which will deem a director’s purported resignation ineffective unless a replacement director is appointed by the company by the end of the same day.
These changes will impact all directors and will need to be complied with to avoid investigation by ASIC and potential harsh penalties. For example, a company’s failure to notify ASIC within 28 days of an appointment or resignation of a director may be liable to $12,600 (60 penalty units), imprisonment for 1 year, or both.
Introduced in the backdrop of the Royal Commission, the proposed changes serve an expected reminder that corporate and financial misconduct will not be tolerated.
Company directors need to be aware of the proposed changes as they will impact on directors and will require directors to take positive steps to ensure compliance with the proposed changes to the Corporations Act, the Taxation Administration Act, and a new Commonwealth Registers Act 2018 (Cth).
It is anticipated that the proposed legislative changes will likely come into effect in 2019 if they are all introduced – so watch this space.
1 Via a legislative package containing three draft bills (Legislative Package)
2 Treasurer of the Commonwealth of Australia, ‘Government consults on stronger penalties for corporate and financial sector misconduct’ (Joint Media Release, 26 September 2018) 3.
3 The Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2018 proposes to amend the Corporations Act and the Corporations (Aboriginal and Torres Strait Islander) Act 2006.
4 Set out in Division 269 in Schedule 1 of the Taxation Administration Act 1953 (Cth) (Taxation Administration Act).