The Corporations Amendment (Strengthening Protections for Employee Entitlements) Act 2019 (Act) received Royal Assent on 5 April 2019.[1]  The Act amends Part 5.8A of the Corporations Act 2001 (Cth) (Corporations Act) to discourage the use of “sharp corporate practices” used by employers to avoid paying employee entitlements when their business enters winding up, including improper phoenix activity.[2]

Under section 596AB of the Corporations Act, it was already an offence if a person entered into an agreement with the intention of, or with an intention that includes: (i) preventing the recovery of entitlements of employees of the company; or (ii) significantly reducing the amount of entitlements of employees of a company that can be recovered.  Now, a person may also commit an offence if a person is reckless as to whether the relevant agreement will prevent or significantly reduce the recovery of employee entitlements.

Individuals charged and convicted under Part 5.8A of the Corporations Act, can be liable for imprisonment for 10 years or a fine of up to: (i) 4,500 penalty units (today $945,000); and/or (ii) three times the value of the benefits attributable to the offence.  The maximum fine for a body corporate is the greater of: (i) 45,000 penalty units (today up to $9,450,000); (ii) three times the value of the benefits obtained by the offence; or (iii) 10% of the body corporate’s annual turnover in the year leading up to the commission of the offence.[3]

Background

The Act was made as a result of the Government’s announcement on 5 October 2017, that it will reform the law to address corporate misuse of the Fair Entitlements Guarantee scheme (FEG) under the Fair Entitlements Guarantee Act 2012 (Cth) (FEG Act).[4]  The FEG Scheme provides financial assistance for certain unpaid employee entitlements where employees are made redundant due to the liquidation or bankruptcy of their employer.[5]

The Government considers that employers have increasingly been adopting a range of “sharp corporate practices”, such as phoenix activity, which seek to prevent, avoid or reduce the payment of obligations to creditors at the expense of Australian taxpayers.[6]

Significant amendments

Amendments to the Corporations Act include:

  • making it a criminal offence for a person to recklessly enter into transactions to avoid, prevent or significantly reduce the recovery of employee entitlements;[7]
  • creating a new civil penalty provision with an objective ‘reasonable person’ test to increase the enforcement options available when transactions to avoid, prevent or significantly reduce the recovery of employee entitlements, have been entered into. The objective test applies if the person knows, “or a reasonable person in the position of the person would know”, that the transaction is likely to avoid or significantly reduce the amount of employee entitlements which can be recovered;[8]
  • introducing a new civil compensation provision to provide a mechanism to compensate those who have suffered loss or damage as a result of contraventions to the civil penalty provision;[9]
  • expanding the list of parties who can commence civil compensation proceedings to improve recovery of unpaid employee entitlements, namely: the Commissioner of Taxation; the Fair Work Ombudsman; the Secretary of the Department administered by the Minister who administers the FEG Act; an organisation registered under the Fair Work (Registered Organisations) Act 2009; an employee of the company; and the company’s liquidator;[10] and
  • introducing the “employee entitlements contribution order”, which can be used when: (i) a company (the insolvent company) is being wound up; (ii) employee entitlements have not been paid; (iii) the contributing entity “is a member of the same contribution order group” as the insolvent company; (iv) the contributing entity has benefited, directly or indirectly, from work done by those employees; (v) the benefit exceeds the benefit that would be reasonable in the circumstances; and (vi) it is just and equitable to make such order.[11] These contribution orders are based on a concept of “contribution order group” which appears to be broader than the concept of related body corporate or subsidiary. Relevantly, in addition to being related bodies corporate, two entities are “members of the same contribution group” if both entities: (i) represent, or have represented, to the public that they are related to one another;[12] and (ii) are, or have been, part of a “collection of entities” that “functions or functioned as a single”,[13] terms which were not defined by the Act.

Key lessons

Due to the high risk of criminal liability for directors and officers if convicted under Part 5.8A of the Corporations Act, it is important that they seek legal advice on the turnaround strategies if their company becomes insolvent, in particular, if those actions may prevent or significantly reduce the amount of employee entitlements that can be recovered.

[1] See the full text of the Corporations Amendment (Strengthening Protections for Employee Entitlements) Act 2019 (Act) here.

[2] The Explanatory Memorandum of the Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018 (Cth) [at 1.4] (Explanatory Memorandum), indicates that phoenix activity involves the transfer of assets from an existing company to a new company without paying market value, before placing the first company in liquidation.  The same business is continued under the new company, leaving any debts (such as taxes, amounts owing to creditors and employee entitlements) with the existing company, which is liquidated.  Whilst not all phoenix activity is unlawful, what separates a legitimate business rescue from illegal phoenix activity is the business operators’ aim to avoid paying debts and liabilities of the company.

[3] See Schedule 3, item 145 of the Act.

[4] See the Government’s announcement in relation to reforms to address corporate misuse of the Fair Entitlements Guarantee Scheme (FEG) here.

[5] See the following link for more information about the FEG.

[6] Explanatory Memorandum [at 1.2].

[7] See s596AB of the Act.

[8] See s596AC of the Act.

[9] See s 596ACA of the Act.

[10] See s 596AF of the Act.

[11] See s 588ZA(1) of the Act.

[12] See s 588ZA(6)(d) of the Act.

[13] See s 588ZA(6)(f) of the Act.

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