Parliament introduces Bill targeting corporate misuse of the FEG Scheme

On 20 September 2018, the Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018 (Cth) (Bill) was introduced to the House of Representatives.

The Bill aims to deter the use of "sharp corporate practices", including improper phoenix activity, used by employers and associated parties to avoid paying employee entitlements when their business enters winding up. This follows the Government's announcement that it will reform the law to address corporate misuse of the Fair Entitlements Guarantee (FEG) scheme on 5 October 2017.

The amendments mainly address perceived weaknesses in s 596AB of the Corporations Act, 2001 (Cth), which deals with transactions entered into with the intention of preventing the recovery of employee entitlements, or reducing the amount which can be recovered. Contravention of the section may be considered an offence under s 1311 and persons breaching the section can be required to provide compensation.

Key amendments

The Bill seeks to amend Part 5.8A of the Corporations Act and related provisions to:

• lower the fault element to capture officers and other people who enter into relevant agreements or transactions and are merely "reckless" as to whether these agreements or transactions will have the effect of avoiding or preventing the recovery of employee entitlements or significantly reducing the employee entitlements that can be recovered;
• introduce new civil penalty provisions prohibiting entry into a relevant agreement or transaction where a reasonable person would know that the relevant agreement or transaction is likely to avoid or prevent the recovery of employee entitlements or significantly reduce the amount of employee entitlements that may be recovered, which are also expressed to apply to people involved in the contravention;
• provide that a person may be liable to pay compensation for loss or damage suffered by employees because of the relevant agreement or transaction, or because of action taken to give effect to the relevant agreement or transaction, whether or not the person has been convicted of an offence in relation to the matters giving rise to the contravention or the Court has made a declaration that the person has convened a civil penalty provision;
• increase the penalties applicable for a breach of s 596AB and the new civil penalty provisions to bring the penalties to be imposed in line with the current penalties applicable to offences for market manipulation and other prohibited conduct relating to financial products and financial services; and
• provide that the parties who can commence proceedings for civil compensation include the Commissioner of Taxation, the Fair Work Ombudsman, the Secretary of the Department administering the FEG Act 2012 (currently the Department of Jobs and Small Business) or an employee, with the written consent of the liquidator or with leave of the Court. Currently only employees are nominated as having standing to take action under the section.

Practical significance

The existing section is not limited in its application to transactions which are exposed following an external administration. The proposed Bill has equally wide effect.

The Explanatory Memorandum says that the provisions of the Bill have a broad application and may apply to a wide range of circumstances and not just improper phoenix activity. Phoenix activity typically involves a transfer of the company's assets (undervalue) to a new company which continues the business while the first company is left with the debts (often due to employees and the Commissioner of Taxation) and is subsequently wound up.

The Bill includes exceptions to the new offences and civil penalty provisions to exclude agreements or transactions entered into by a liquidator or provisional liquidator as well as Deeds of Company Arrangement and Schemes of Arrangement approved pursuant to s 411 of the Corporations Act. The Explanatory Memorandum to the Bill refers to the need to exclude these mechanisms from the operation of the proposed provisions as legitimate options to rescue, reorganise or restructure a financially distressed business.

But there is no carve out for transactions implemented by directors when they are conducting the business with the benefit of so called safe harbour protection, which is afforded to them if they have been trading the company while it is insolvent; s 588GA, even though the directors of the company may not be exposed to personal liability, because the so called safe harbour defence is proposed to be extended to apply to their conduct.

There is therefore concern that the proposed provisions, as currently drafted, are broad enough to extend to capture other good faith restructuring and turnaround practices and related commercial agreements entered into outside formal insolvency processes and schemes of arrangement. In this regard, the Bill also states that the civil penalty provisions will apply even if:

• the relevant agreement or transaction is approved by a Court;
• the relevant agreement or transaction does not actually have the effect of avoiding or preventing the recovery of employee entitlements or significant reducing the amount of employee entitlements that can be recovered; or
• the entitlements of employees are in fact recovered, despite the relevant agreement or transaction being entered into.

View a copy of the Bill