The use of the company structure to limit liability has afforded some business owners the confidence to take risks that they otherwise would never have taken.  Some sharp operators have used the option of going into liquidation as a means to avoid payment of employee entitlements, only to rise from the ashes and recommence trading free of that debt.

There have been laws against this type of phoenix activity since 2000; they just weren’t effective – until now.  Enter (almost two decades later) the Corporations Amendment (Strengthening Protections for Employee Entitlements) Act 2019.

This month a range of measures were introduced to address corporate misuse of the Fair Entitlements Guarantee (FEG) Scheme and the unfair commercial advantage illegal operators enjoy over businesses that do the right thing.

These include:

  1. Making it easier to successfully prosecute the criminal offence of entering into an agreement or transaction that avoids or significantly reduces the recovery of employee entitlements by requiring ‘recklessness’ as an alternative to ‘intent’ (this applies to officers of companies too). Penalties apply:
    • for individuals – up to 10 years’ jail or a fine the greater of $945,000 or 3 x the value of benefits reasonably attributable to the offence, or both;
    • for companies – a fine the greater of $9.45m, 3 x the value of benefits reasonably attributable to the offence, or 10% annual turnover;
  2. Introducing new civil contravention provisions that allow employees to seek compensation from persons who enter into an agreement or transaction knowing it is likely to avoid the recovery of employee entitlements or significantly reduce them (or if a reasonable person in their position would know this was the likely result). This applies to persons involved[1] in the contravention too.  The employing entity need not be involved in the offending agreement or transaction;
  3. Extending the right to bring compensation recovery proceedings beyond liquidators and employees (who often lack funds) to the ATO, the Fair Work Ombudsman, registered organisations and the Secretary of the Department in charge of the FEG Scheme;
  4. Introducing contribution orders which are orders to be made by a court to recover unpaid employee entitlements from entities in a corporate group or with a closely connected economic relationship to the insolvent company. These entities must have unfairly benefited from the work of the dudded employees (other than on arm’s length terms).  Contribution orders may be made against entities that meet the criteria set by at least one of six legislative tests: Are they (or were they) related to the insolvent company? Are they (or were they) related to a current or former relative of the insolvent company?  Do they pass the control test?  Has there been a public representation that the entities are related?  Are they consolidated or functioning as a single entity?
  5. Allowing a court to disqualify a person from managing corporations if they have been involved in a company that has placed a drain on the FEG Scheme.

This legislative development[2] will likely make the topic of asset protection relevant for a broader range of business people.  Those working alongside business owners who engage in illegal phoenixing activity will need to rethink the benefits of doing so.

[1] Aided, abetted, counselled, procured, induced, directly or indirectly, knowingly concerned in or party to the contravention, or conspired with others to effect the contravention.

[2] Also note that the three month grace period for directors to avoid personal liability for a company’s Superannuation Guarantee Charge debt was revoked earlier this month.  If not paid by the due date, the Commissioner of Taxation can issue a Director Penalty Notice which automatically makes a director liable for a penalty equal to the unpaid amount of the company’s liability.  The DPN regime may soon be extended to GST liabilities and more.