Strengthening Employee Entitlement Protections in the Corporations Act Amendment in focus – disqualification from managing corporations

Earlier this year, the Corporations Amendment (Strengthening Protections for Employee Entitlements) Act (Cth) commenced.  This article will focus on the provisions introduced to disqualify wrongdoers from managing corporations.

Please refer to our article summarising the other critical changes and key concepts for more information.

The amendments introduce provisions empowering ASIC and the Court to disqualify company directors or officers from managing corporations.  These provisions target directors or officers who have a history of being involved in contraventions and have improperly relied on the Fair Entitlements Guarantee (FEG) scheme under the Fair Entitlements Guarantee Act 2012 (Cth) to pay employee entitlements.

Significantly, there was no equivalent provision in the former legislative framework.

When can the Court disqualify directors/officers?

On application by ASIC, the Court may disqualify a person from managing a corporation for a period the Court considers appropriate if, in relation to 2 or more corporations within the last 7 years:

• While the person was an officer, or within 12 months after ceasing to be an officer, the corporation began being wound up;
• The Commonwealth paid employee entitlements under the FEG scheme;
• The Commonwealth has received a minimal, or no return, and is unlikely to receive more than a minimal return;
• The corporation or the person contravened the Corporations Act 2001 (Cth) (the Act)[1] whilst the person was an officer of the company and the person failed to take reasonable steps to prevent the contravention; and
• The Court is satisfied that the disqualification is justified.

What does ‘minimal return’ mean?

If the amount of the advance under the FEG scheme recovered by the Commonwealth is 10 cents in the dollar or less, the ‘minimal return’ requirement will be met.

What contraventions of the Act are considered?

The Explanatory Memorandum sets out a number of examples of contraventions for the purposes of the Act.  By way of example, this includes the failure of a company officer to ensure that the corporation kept books and records to the appropriate standard.

When can ASIC disqualify directors/officers?

ASIC has a similar power to disqualify a person from managing corporations for up to 5 years if, in relation to 2 or more corporations within the last 7 years:

• While the person was an officer, or within 12 months after ceasing to be an officer, the corporation began being wound up;
• ASIC has reason to believe that there was a contravention by the company or the person in question (whilst that person was a company officer) and the person failed to take reasonable steps to prevent that contravention.  Significantly, this means that ASIC may disqualify a person without a formal court finding that a contravention has occurred;
• The Commonwealth paid employee entitlements under the FEG scheme;
• The Commonwealth has received a minimal, or no return, and is unlikely to receive more than a minimal return; and
• ASIC is satisfied that the disqualification is justified.

For procedural fairness, ASIC must provide the person with notice setting out ASIC’s intention to disqualify them from managing corporations and also provide that person with the opportunity to be heard.

Key Takeaways:

• These welcome amendments aim to deter unscrupulous company officers and directors from preventing, avoiding or significantly reducing their company’s liability for employee entitlements; practices that shift the burden to the taxpayer.
• These new powers compliment the recent amendments targeting phoenixing activity in line with the Federal Government’s ongoing changes to the Australian insolvency landscape.

For further information, see our article considering employee entitlement contribution orders.

[1] Or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth).

Authored by:

Kimberley Arden, Partner

Tahlia O’Connor, Associate