Consultation: Reforms to address corporate misuse of the FEG scheme

On 2 May the Senate Inquiry into Superannuation Guarantee Non-Payment released its final report (available here), discussed here.

For restructuring and turnaround practitioners one of the noteworthy recommendations was that:

‘the government consider amending the Corporations Act to ensure that the priorities in section 556 apply during all liquidations, regardless of whether the business being liquidated was operated through a trust structure.’

Only a fortnight later, the government has released a Consultation Paper: Reforms to address corporate misuse of the FEG scheme.  Pleasingly, one of the issues raised is whether that Inquiry recommendation should be implemented, and so there is the possibility that the law will be amended a great deal more quickly than anyone expected.

Other significant areas of potential reform include:

• Possible amendments to the Corporations Act so that receivers and liquidators may not deduct any part of their general costs from the proceeds from of realisations of circulating assets – unless employee entitlements have been paid in full.
• Changes to reinvigorate section 596AB, which has not been used in litigation since its introduction in 2000. Section 596AB provides for criminal prosecution and civil recovery against someone who enters into a transaction with the intention of avoiding the payment of employee entitlement liabilities.  Options here include:
  • Changing the ‘fault element’ from ‘intention’ to ‘recklessness.’
  • Increase the maximum penalty for criminal convictions.
  • Sidestepping the difficulties with proving intent by adding a civil penalty provision based on an objective test.
• Allowing parties other than a liquidator to initiate recovery action: including FEG, and in some specific circumstances, the Fair Work Ombudsman or the ATO.
• Preventing abuse of corporate group structures, possibly by implementing a contribution regime similar to that in New Zealand – where parties may apply to Court for a ‘contribution order’ against solvent group members, where it is just and equitable to do so.
• Modifying the existing director disqualification provisions to target behaviour which impacts FEG – for example reliance on the FEG scheme to pay redundant workers their outstanding employee entitlements where there is minimal or no return of the FEG advances on two more occasions.

However, there are other issues which could helpfully be addressed:

• The ‘traditional’ view was that a liquidator’s job was to convert all assets into cash, and then allocate that fund in accordance with the priorities in section 556.  A more recent alternative suggests that the section 556 priorities be applied in real time.  That theory arguably results in the difficult proposition that a liquidator should close a business down rather than risk employee entitlements in trading a business on – even to achieve a sale which might avoid the need to pay entitlements at all!
• Another problematic area is the question as to whether trading losses should be allocated against the circulating or non-circulating asset pools.  Sometimes businesses are knowingly traded at a loss, to improve circulating asset recovery such as the conversion of WIP, or collection of debtors – however there seems to be a view more recently expressed that trading losses should not be allocated against circulating assets.

Interested parties are invited to make a submission by Friday, 16 June 2017.