By Tim Edmeades
Large fines and criminal penalties are complimented by civil action. This change necessitates accurate legal advice, especially when facing turnaround requirements
The Corporations Amendment (Strengthening Protections for Employee Entitlements) Act 2019 (the Act) was granted Royal Assent on 5 April last year.[1] The Act responds to the increased prevalence of ‘’sharp corporate practices’ (including ‘phoenixing’)’ that limit or prevent ‘recovery of employment related entitlements during a corporate insolvency’.[2] These ‘sharp practices’ have been viewed as shifting the responsibility for employee entitlements onto the Australian taxpayer by their leaning on the taxpayer funded Fair Entitlements Guarantee scheme (FEG).
When a corporate entity becomes insolvent some businesses have sought to limit their exposure to employee entitlements through the practice of pheonixing. One relevant example under this practice involves assets being moved into new corporate entities prior to the dissolution of the existing entity. Existing employee entitlements that would have been paid from the division or sale of those assets are left unpaid leaving payment to the FEG and in effect the Australian tax payer. Practices with this effect have tripled in volume over the last 10 year period.[3]
Individuals who are charged and convicted under the new legislation in Part 5.8A of the Corporations Act can be liable for imprisonment for up to 10 years or can be fined up to $945,000 (4,500 penalty units) and or three times the value of the benefits of the offence. A body corporate can be fined the greater of 45,000 penalty units ($9.45m) or three times the value of the benefits obtained by the offence or 10% of the body corporate’s annual turnover for the year preceding the offence.
Alongside creating a criminal offence structure, where recklessness can be a sufficient fault standard, the Act also introduces civil penalties that use an objective ‘reasonable person’ standard to widen enforcement and recovery options. This is accompanied by an expansion of the list of parties with the required standing to commence proceedings.
Careful legal advice on strategies required of turnarounds is now required to shield individuals and corporate bodies from falling foul of these new provisions.
[1] https://www.legislation.gov.au/Details/C2019A00044