Submission: Addressing the misuse of FEG
In addition to ARITA’s responses to the questions raised in the discussion paper, ARITA raised the following points about the proposed reforms:
- ARITA supports the concept of director responsibility or contribution orders against related entities where action is taken to intentionally avoid employee entitlements
- ARITA does not support further “tinkering” with Chapter 5 of the Corporations Act 2001 (the Act) prior to a comprehensive review of Australia’s insolvency regime as recommended by the Parliamentary Joint Committee in its “Corporate Insolvency in Australia” report, other than the immediate reforms identified in that report. Proposed changes reflect issues experienced by FEG but fail to consider wider issues around employee entitlements2 and the corporate insolvency regime generally that continue to hamper the efficient operation of the legislation and lead to increased costs which diminish returns to stakeholders, including employees (and those who have subrogated rights).
- ARITA does not support reforms that are proposed to manage specific issues experience by FEG (as a subrogated creditor or otherwise), where those reforms will also adversely impact properly governed corporate groups, that do not exhibit, or have not exhibited, concerning behaviour in respect of employee entitlements.
- Legislative changes to impose financial penalties on directors must consider practical limitations. In many cases, particularly in relation to small business, directors have no available personal assets or have protected their personal assets, limiting the effectiveness of penalties. Additionally, directors are often subject to multiple claims from different parties, including personal guarantees and recoveries pursuant to a Director Penalty Notice. This would create competition among stakeholders for access to a limited pool of recoverable funds or possibly just result in an increase in creditor claims in a personal insolvency. If it is intended that a directors’ personal liability for employee entitlements be in priority to other debts of a director, then both the Act and Bankruptcy Act 1966 would need to make this clear. This would be a significant change to the current position that should not be made outside of a comprehensive review of the insolvency system.
- Ringfencing recoveries for employees would also impact the broader liquidation process. If specific recoveries are set aside solely for the benefit of employees and excluded from the general pool, fewer funds will be available to cover the overall costs of the liquidation. This would make it harder for liquidators to carry out their statutory duties, such as investigations and reporting. While these tasks might not immediately result in employee recoveries, they are foundational steps in the process. It is appropriate and necessary that liquidators are remunerated for these efforts, and in practice, their ability to be paid often depends on the success of broader recovery actions.
Through our work on the submission, we also identified many significant concerns with the proposed reforms, such as interaction with the safe harbour regime, undermining of the small business restructuring process, impacts on the wider insolvency system and significant implications for corporate groups. The proposed reforms should not proceed until these issues have been properly analysed and further consultation conducted.
Read ARITA's Submission