New legislation is now in force that toughens penalties for company directors and officers who avoid paying employee entitlements during insolvencies or restructures.
The Corporations Amendment (Strengthening Protections for Employees Entitlements) Act 2019 (the Act) targets and punishes employers and directors and officers who deliberately structure their business affairs to avoid paying employee entitlements resulting in misuse of the Fair Entitlements Guarantee (FEG) scheme.
The key amendments to the Corporations Act 2001 include:
- strengthening enforcement and recovery options to deter and penalise companies and company directors that evade their obligations and impact the recovery of employee entitlements. Notably, the fault element necessary to contravene the criminal provisions now only requires a director to have been “reckless” rather than having a specific intention to avoid the payment of employee entitlements;
- the introduction of new powers to disqualify directors where there have been two or more instances of corporate contraventions and insolvencies inappropriately relying on the FEG scheme; and
- the ability to seek contributions from entities in a corporate group in certain circumstances to recover unpaid employee entitlements of another related entity.
Notwithstanding the AICD’s support for strong action against directors who abuse the FEG scheme, the AICD queried in its submission on the Exposure Draft whether new disqualification powers were necessary given existing penalties in the Corporations Act, and separately challenged the proposed contribution order regime as being unwarranted given the new offence and civil penalty provisions. The AICD’s preferred position on these issues was not accepted, however, many of its recommended amendments to the draft provisions were reflected in the Act.
Other reforms to address illegal phoenix activity – including passage of the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 and the introduction of director identification numbers – will be matters for the next Federal Parliament to consider, after the upcoming election.
Implications for directors
The reforms increase the avenues open to liquidators, employees and others to take action against directors who use sharp corporate practices to avoid paying employee entitlements.
Although the changes are intended to target and punish only those directors who seek to avoid their obligations and exploit the FEG scheme, directors need to familiarise themselves with the new provisions (summarised below) and obtain legal advice when looking to undertake corporate restructures so that they do not inadvertently breach the new provisions.
Key changes to the Corporations Act
Extension of criminal liability for avoidance of employee entitlements
The fault element necessary to contravene the criminal offence provision is broadened to include a wider range of situations by lowering the threshold to include circumstances where a person recklessly enters into a transaction that avoids the payment of, or significantly reduces the recovery of, employee entitlements.
This means that a director who enters into a relevant agreement or transaction will be ‘reckless’ if they are aware that:
- there is a substantial risk that entering into the agreement or transaction will avoid or prevent the recovery of, or significantly reduce the recoverable amount of, employee entitlements; and
- doing so is unjustifiable in the circumstances.1
For individuals the maximum penalty for a breach of this provision has been increased from 1,000 penalty units ($210,000) or imprisonment for 10 years (or both) to 4,500 penalty units ($945,000) or three times the benefit gained (whichever is the greater), or imprisonment for 10 years (or both).
For a corporation, the maximum penalty for a breach of the provision is a fine of 45,000 penalty units ($9,450,000) or three times the benefit gained or 10 per cent of the annual turnover of the entity (whichever is the greater).
Civil liability for avoidance of employee entitlements
A new civil recovery provision has also been introduced that is triggered if a person enters into a relevant agreement or transaction where a reasonable person would know that the relevant agreement will avoid or prevent the recovery of, or significantly reduce the recoverable amount of, employee entitlements.
A breach of the civil penalty provisions may result in a person being liable for a maximum pecuniary penalty of up to $200,000. In addition, a person may be required to pay compensation for the loss or damage caused by a breach of the civil liability provision.
The parties who can initiate civil recovery proceedings have also been expanded from former employees to now include the Australian Taxation Office, the Department of Jobs and Small Business and the Fair Work Ombudsman.
Disqualification of directors and officers from managing corporations
Under the new provisions, ASIC and the courts may disqualify persons from managing corporations where companies to which they have been appointed have been liquidated, and the former employees of those companies relied on the FEG scheme to pay their outstanding employee entitlements.
This may occur where, within seven years, there were two or more separate occasions where:
- there was a breach by the company or the director of the Corporations Act; and
- FEG did not receive any return or only a minimal return (being 10 cents or less in the dollar), through the liquidation process or other recovery processes.
ASIC will be able to disqualify company directors and officers under the new provisions for a period of up to five years from the date a notice of disqualification is served. The courts will be able to disqualify directors and officers for a period the judge determines is appropriate.
A director dissatisfied with ASIC’s decision can request that ASIC review the disqualification or pursue their rights to have the decision reviewed by the Administrative Appeals Tribunal.
Notably the AICD’s submission to reduce the lookback period for disqualifications to seven years was accepted, down from 10 years under the Exposure Draft of the Act. The seven-year period may include any period that is not more than five years before 6 April 2019. However, a person may only be disqualified from managing corporations if at least one of the contraventions occurs on or after 6 April 2019.
New provisions have also been introduced into Part 5.7B of the Corporations Act, which allow contribution to be sought from entities in a corporate group for the payment of outstanding employee entitlements of an insolvent member of that group, even if it did not hire the employees directly.
Importantly, this will include any entities which are represented to the public as being related regardless of whether they are actually related entities for the purposes of the Corporations Act.
Directors of large groups should satisfy themselves that employee entitlements can be satisfied when undertaking corporate restructures to avoid these provisions being triggered.
1 Explanatory Memorandum, p. 18
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