Protecting employee benefits after insolvency. Tough new laws.
Employers who employ staff through a company and structure their affairs in a way to attempt to avoid paying outstanding wages and statutory entitlements should be aware of the risks they now run for possible personal liability and criminal sanctions.
The Corporations Act 2001 (Cth) has recently been amended to discourage transactions which attempt to limit the amounts recovered by employees in liquidations. The previous legislation dealing with this area did not result in one successful case.
The amendments also aim to reduce the increasing cost to the Federal Government of its “GEERS” and then “FEG” schemes, which have been underwriting most employee entitlement shortfalls in liquidations. The cost of FEG has risen to about $235 million of taxpayer funds per year. The Queensland Nickel FEG payout related to Clive Palmer was the largest ever at $73.9 million.
The amendments have both criminal and civil sanctions and compensation recovery provisions. A related comprehensive anti-phoenix bill failed to pass parliament before the federal election was called.
These changes will likely change both the way corporate groups are initially structured and how people transact when informally restructuring. They are intended to discourage the use of stand-alone subsidiaries which employ group staff, unless a binding group cross indemnity is in place.
A summary of the changes follows.
The criminal sanctions apply to both the employer company and persons who are its officers, who cause the company to enter into the transaction with includes an intention to avoid or significantly reduce employee entitlement recoveries. Recklessness is also caught.
If convicted, an individual can face 10 years imprisonment, or a fine, being the greater of 4,500 penalty units or 3 times the benefit obtained, or both.
If convicted, a company can face a fine of the greater of:
- 45,000 penalty units;
- 3 times the benefits it received; or,
- 10% of the annual turnover for 12 months prior to the offence.
Civil contraventions apply where the company, or officers who cause the company to enter into the transaction know, or a reasonable person in the position of the person would know that the relevant agreement or transaction is likely to prevent the recovery of the entitlements or reduce the recovery amount.
These criminal and civil provisions apply:
- even if the agreement or transaction is approved by a court; or
- the agreement or transaction did not have the relevant effect; or
- the employee entitlements are recovered.
These clarifying provisions seem to be aimed at deterring people from even trying to achieve the prohibited result.
Advisors knowingly concerned in such transactions could also be liable. The amendments are highly relevant therefore to lawyers and accountants who advise in the corporate structuring and restructuring areas.
Exceptions are made for schemes of arrangement entered into pursuant to section 411 of the Corporations Act, Deeds of Company Arrangement, or liquidator or provisional liquidator conduct during a winding up.
If a liquidator has been appointed to the company, they may recover as a debt due to the company the loss or damage suffered by the transaction after a civil contravention.
Subject to a Court order or consent of a liquidator and also with rules avoiding duplicity of proceedings, compensation may also be sought in proceedings by, amongst others, the ATO, the Fair Work Ombudsman and certain Unions.
Those parties may also apply to a Court to be joined to a liquidator’s proceeding.
ASIC and a court on ASIC’s application are given powers to disqualify officers from managing corporations. ASIC may disqualify for up to 5 years, but a Court has no time limit on its discretion. The disqualification may occur, basically, if within the previous 7 years:
- the person was an officer either 12 months prior to a liquidator being appointed, or when a winding up began, in 2 or more corporations where money was advanced under the FEG scheme and a minimal return to FEG of 10 cents in the dollar or less has occurred or is likely; and,
- the officer contravened the Corporations Act, or the company of which they were an officer contravened that Act and they failed to take reasonable steps to prevent that contravention.
These provisions will make it paramount for incoming directors to do due diligence on the wages and superannuation debt status and the company structure, to see who employs and pays employees and whether their entitlements are likely to be affordable, before accepting a directorship.
Directors and officers of companies with significant payrolls, should ensure that those companies have not structured their affairs in a way that is intended to quarantine employee entitlements to an entity with insufficient income or assets to meet its obligations to employees.
Failure to do so could result in personal liability for any shortfalls and, in worst cases, jail time.
James Hamilton, Solicitor
(02) 9318 6423
Surry Partners Lawyers