Directors’ Liability for Employee Entitlements

In the December issue of the LexisNexis Inhouse Counsel Newsletter – Volume 22 Number 9&10, Tom Darbyshire looks into the implications of The Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018 (Cth) (the Bill) that was introduced into parliament on 20 September 2018.

“Over the last year, much has been written and said in Australia about phoenixing, the process whereby the directors of a company transfer its assets or operations to another entity, leaving its debts behind and its creditors unpaid.

Such a process can also be part of legitimate corporate reconstruction, but the deliberate non-payment of employee entitlements in the liquidation process is one of the main indicators of an illegal phoenix scheme. A Bill dealing with this specific issue is currently before parliament. It imposes severe penalties on the directors and officers of companies, if the company fails to meet all its obligations to its employees.

You don’t have to be involved in an illegal phoenixing scheme to be affected by these changes. In fact, you don’t even have to be a company director or officer. If a company has employees, then the board, the managers and the advisers of that company must know about the changes that could soon occur.

The Bill is aimed at a genuine problem that must be addressed, namely the misuse by dishonest directors of the FEG. It proposes to do this in a way that might be effective, but which is not particularly consistent with allowing directors more leeway to find solutions for companies in financial distress.

The Bill is not the only piece of proposed legislation on this issue that affects company directors, but its possible impact on directors is severe. If the Bill is passed in its current form, company directors, officers and managers will have to consider the risk of criminal prosecution with any transaction affecting employee entitlements.

The consequences for directors of FEG being utilised by a company’s employees are potentially so serious that directors, and any insolvency advisors working with them, are likely to be much more circumspect about reconstruction and turnaround options if the company gets into financial difficulty.

To that extent, the effect of the Bill seems inconsistent with earlier policies promoted by the  government last year.”

Click the link Directors’ Liability for Employee Entitlements by Tom Darbyshire to read the full article, courtesy of LexisNexis.

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The information published in this paper is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.