No rule of law for directors

Sunday, 01 July 2012


    Despite much lobbying, John H C Colvin says a revised Bill, aimed at tackling phoenix company activity, still erodes the rule of law for all directors for any unpaid super entitlements, regardless of their culpability.

    Just when you think real progress is being made in the area of director liability reform and that it’s safe to go back in the water, the sharks begin to circle again – this time in the guise of phoenix company tax legislation.

    When we first saw the headlines in the paper about the Tax Law Amendment (2011 Measures No. 8) Bill 2011, now the Tax Law Amendment (2012 Measures No. 2) Bill, they seemed pretty innocuous.

    At first glance, we thought it unlikely that this would be an area of great concern to our members and the wider Australian director community. That was because we believed the headlines and the Government’s spin that these laws would only apply to phoenix companies – that is, companies that have been fraudulently used and re-created into new entities to avoid proper liabilities to employees, creditors and so on.

    Unfortunately, when I asked our policy team to take a quick look to confirm this was the case, they found no such definition of fraudulent phoenix company existed in the Bill and, as a consequence, that it applied to all of Australia’s 2.2 million directors, including directors of small and family businesses, schools, hospitals and charities. These directors are all at risk of being personally liable for the company’s unpaid superannuation guarantee charge, regardless of their culpability.

    My initial reaction was that if a company put out a media release or press statement that was similarly misleading, they would be caught out by the misleading and deceptive conduct provisions in the Corporations Act 2001 and Australian Securities and Investments Commission Act 2001.

    However, after the shock subsided it was incumbent on us to strongly put director views on director liability forward yet again. This is particularly given that the Bill:

    • Does not apply to other employers, such as trade unions and the Government, even though they also pay superannuation and wages;
    • Directors, under this Bill, are liable for a company’s unpaid superannuation guarantee entitlements, regardless of their culpability and;
    • More offensively, new directors who weren’t even on the board at the time of an offence are also liable after 30 days of becoming a director.

    When the Bill first came out, we wrote detailed submissions to Treasury, which can be seen on our website. We also went to Canberra with the head of our Law Committee, Professor Bob Baxt AO, and Shayne Carter, one of Australia’s leading tax and super experts, to put forward our case.

    We gave evidence to the House of Representatives Standing Committee on Economics and were pleased to see some positive results. Significantly, the committee recommended that the Bill be withdrawn to at least look at the insertion of a proper definition of a phoenix company and to strengthen the defences for directors.

    While an extra defence was subsequently added, the revised Bill, when released for further consultation by Treasury, did not limit its scope to fraudulent phoenix activity.

    After providing a further written submission to Treasury, we then went back to the House of Representatives in Canberra for a second time.

    It was ironic that as we entered the room where the committee session was being held, we walked past the Magna Carta – among the best-known documents in the English legal history, which established the rule of law.

    Although it was argued against us that this Bill simply follows PAYG tax laws, it still amazes me that overreaching legislation of this sort, and the erosion of the rule of law for directors, can be regarded as acceptable, whether it be in the taxation or superannuation legislation, or any other Act.

    Either there is a rule of law that applies to all citizens, or there is no rule of law. Politicians should not be selective as to when it applies to people they consider to be politically expedient to ignore.

    It has been said that democracy is paper thin, and the only thing standing between democracy and tyranny is the rule of law. A way to test this proposition is to simply take out the word directors, replace it with any other member of society and read this Bill in that context.

    Apart from this important legal principle, the fact that no proper Regulatory Impact Statement has been conducted to assess the added burden of this legislation on directors and boards, when not confined to phoenix activity, is also of major concern. It flies in the face of other government initiatives, including the COAG Reform Agenda and deregulation more generally. It is disappointing that at a time when COAG is working to remedy the economic problems caused by this type of legislation on the one hand, the Federal Government is hindering these efforts by adding to the director liability burden with the other.

    It would appear that just as the price of democracy is eternal vigilance, the fight for the rule of law, especially for business and directors, needs to continue to be hard fought, particularly by us.

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