Over the past few months a number of proposed and possible amendments to the Corporations Act have been outlined by the Federal Government around Phoenix companies, the test for payment of dividends and executive remuneration.
Similar Names Bill
The Corporations Amendment (Similar Names) Bill 2012 (Similar Names Bill) is the first of two pieces of draft legislation aimed at discouraging company directors from engaging in phoenix activity.
Phoenix activity occurs when a company incurs debts to unsecured creditors and is subsequently wound up without all of those debts being paid, while the company’s directors continue carrying on the business through a new company, often with the same assets, premises, employees, and the same, or a similar name. The new company is colloquially referred to as a “phoenix company”.
The Similar Names Bill proposes to impose liability on the directors of a phoenix company for the debts of that company.
Specifically, the Similar Names Bill proposes amendments to the Corporations Act that would impose liability on a person for the debts of a company (the debtor/phoenix company) if:
- the person was a director of the debtor company when the debt was incurred
- the person was a director of a failed company at any time during the 12 month period prior to the start of the winding up of the failed company
- when the debt was incurred the debtor company was known by a name that is the same as a pre-liquidation name of the failed company, or so similar to a pre-liquidation name of the failed company as to suggest an associate with it
- the debt was incurred after the commencement of the Similar Names Bill and within five years beginning at the start of the winding up of the failed company.
The Similar Names Bill also contains a number of important exemptions from personal liability which include:
- if the failed company has paid all of its debts in full
- if a court, on the application of a director, grants an order exempting the director from personal liability (the court may only make such an order if satisfied that the person has acted honestly and having regard to the circumstances ought fairly to be exempt from liability for the debtor company’s debts)
- if the debtor company was carrying on business in the 12 month period before the commencement of the winding up of the failed company.
The Corporations Amendment (Phoenixing and Other Measures Bill) 2012 (Phoenixing Bill) at the time of writing, has passed the House of Representatives and is currently before the Senate. This bill proposes further amendments to the Corporations Act that are directed at giving ASIC power to address phoenixing activity.
Specifically, the Phoenixing Bill proposes to amend the Corporations Act primarily to give ASIC administrative power to order that a company be wound up when, among other reasons, it appears to ASIC that the company is no longer carrying on its business.
In particular, ASIC may order that a company be wound up if:
- it is more than six months late in responding to a return of particulars sent to it by ASIC, has not lodged any other documents with ASIC in the past 18 months and ASIC therefore considers that the company is no longer carrying on a business
- it has not paid its annual review fee within at least 12 months of the due date
- ASIC has reinstated the registration of the company in the last six months under section 601AH(1) and has reason to believe that making the order is in the public interest
- ASIC has reason to believe that the company is not carrying on business and has given at least 20 business days notice to the company and each of its directors (and neither the company or its directors object to the notice).
Where ASIC makes a winding up order, the company is deemed to have passed a resolution that it be wound up voluntarily under section 491.
The Phoenixing Bill also makes other amendments to:
- Allow notices in relation to liquidations, voluntary administrations and receiverships to be advertised in a manner prescribed by regulations (which have not yet been released). The explanatory memorandum indicates that a prescribed website will be established by ASIC/ the Federal Government for the purposes of advertising such notices and that the notices will be required to be set out in a prescribed form and contain prescribed information, and
- Require the Department of Families, Housing, Community Services and Indigenous Affairs to be notified if an insolvency practitioner is appointed to a company that is a paid parental leave employer.
Test for payment of dividends
In June 2010 amendments were made to the Corporations Act to change the test for instances in which companies may pay dividends. Specifically, the pre-existing “profits based” test was replaced with a “net assets” based test. This test provides that a company may now pay dividends if:
- the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend
- the payment of the dividend is fair and reasonable to the company’s shareholders as a whole
- payment of the dividend does not materially prejudice the company’s ability to pay its creditors.
The Parliamentary Secretary to the Treasurer has released a discussion paper relating to further possible amendments to the dividend test. The Discussion Paper identifies a number of key issues which have arisen in relation to the new “net assets” based dividend test, examples of which include:
- the requirement that assets and liabilities be calculated in accordance with accounting standards for the purposes of the test, places an unreasonable burden on companies that are not otherwise required to comply with accounting standards
- the test can have little relationship with solvency (as it does not take into account the timing and magnitude of fund flows).
The Discussion Paper sets out the following four possible options for dealing with the problems perceived with the current dividend test:
- Leaving the test for the payment of dividends under the Corporations Act as is currently drafted.
- Adopting a solvency test - under this test a company would not be able to pay dividends unless the company’s assets would exceed its liabilities after the dividend is declared and the company will continue to be able to pay all of its debts as and when they fall due. This test lacks an express link to the Accounting Standards.
- Reinstating the profits based test - under this option a profits based dividends test would be reintroduced either as a replacement for the current “net assets test” or in conjunction with that test (see option 4 below).
- Adopting new arrangements under which a company would have two ways of determining whether it could pay a dividend - a company would only be able to pay dividends if:
- the company pays dividends out of its profits
all of the following are satisfied:
- the company’s assets exceed its liabilities immediately before the time the dividend is declared or the payment of the dividend and the excess is sufficient for the payment of the dividendt
- he payment of the dividend is fair and reasonable to the company’s shareholders as a whole
- the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.
Although these discussions are still in a preliminary form and the government is yet to outline which approach it favours, any proposed amendments resulting from the discussion paper are likely to have a significant effect on many companies, particularly on companies within corporate structures that require funds to be transferred between parents and subsidiaries.
Reforms to further enhance Australia’s executive remuneration framework
The Parliamentary Secretary to the Federal Treasurer has recently announced that the Federal Government intends to introduce further reforms aimed at enhancing Australia’s executive remuneration framework.
The proposed reforms will amend to the Corporations Act to:
- require listed companies to disclose to shareholders through the remuneration report, the steps they have taken to clawback bonuses and other remuneration where a material misstatement has occurred in relation to the company’s financial statements
- require more transparent disclosure on termination payments or “golden handshake” payments
- simplify remuneration reports
- relieve certain unlisted entities from the obligation to prepare a remuneration report
- insert disclosure requirements relating to related party transactions into the Corporations Regulations (as these disclosure requirements will be removed from the accounting standards from 1 July 2013).
Draft legislation to enact the reforms is expected to be released for public consultation in the second half of 2012.