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Legislation and proposed legislation - September 2017
A round up of key relevant legislation, enacted or proposed, over the last month including the director safe harbour and ipso facto insolvency reforms, the proposed anti-phoenixing reforms, further development of Australia’s crowd-sourced equity funding regime, the proposed whistleblowing reforms and the proposal to include email addresses in members’ registers.
In this issue, you will find:
- Director safe harbour and ipso facto insolvency reforms receive Royal Assent
- Anti-phoenixing reforms announced
- Further development of Australia’s crowd-sourced equity funding regime
- Whistleblower reforms are on the way
- Proposal to include email addresses in members’ register not recommended by Senate Economics Legislation Committee
- Giving with one hand and taking with the other – affordable housing, managed investment trusts and residential property
The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth), which introduces a safe harbour for directors of insolvent companies and a stay on the operation of ‘ipso facto’ clauses during and after certain formal insolvency processes, received Royal Assent on 18 September 2017.
Director safe harbour
The Act amends the Corporations Act 2001 (Cth) (Corporations Act) to create a new safe harbour for company directors from personal liability for insolvent trading under section 588G where a company is undertaking a restructure outside of formal insolvency. The safe harbour is available where a debt is incurred as part of a course of action, within a reasonable time period, that is reasonably likely to lead to a better outcome for the company than an immediate liquidation or administration. There are also certain other conditions that must be met including paying employee entitlements as they fall due and giving notices, statements, applications or other documents as required by taxation laws.
The safe harbour reforms commenced on 19 September 2017.
As result of amendments made in the Senate, the Minister must cause an independent review of the impact of the safe harbour on the conduct of directors of companies and the interests of creditors and employees of those companies within 2 years of commencement.
Ipso facto clauses
An ipso facto clause is a provision that allows one party to terminate or modify the operation of a contract solely upon the occurrence of a particular event (including insolvency) regardless of continued performance of the contract by the counterparty.
The Act amends the Corporations Act and the Payment Systems and Netting Act 1998 to introduce a stay on the enforcement of ipso facto clauses which are triggered by a company’s formal restructure (or, once a formal restructure has commenced, by the company’s financial position before or during the restructure) including where:
- a company is placed into administration;
- a company enters a compromise or arrangement aimed at avoiding insolvent liquidation; or
- where a managing controller has been appointed over all or substantially all of the property of the company.
Amendments made in the Senate clarify that the stay applies to both the exercise of rights by a counterparty and self-executing provisions which automatically terminate or amend existing rights.
The ipso facto reforms will commence on a date to be fixed by proclamation, but if they haven’t commenced by the later of 30 June 2018 or 6 months after Royal Assent, they will commence the day after the later of those 2 dates. The stay will apply to contractual rights under contracts made after the date of commencement.
On 12 September 2017, the Hon Kelly O'Dwyer MP, Minister for Revenue and Financial Services, announced the Government's plans to crack down on illegal phoenixing activity (ie, the stripping and transferring of assets from one company to another to avoid paying liabilities) and ensure that those involved face tougher penalties.
As part of the reform package, the Government is engaging with key stakeholders on the introduction of a Director Identification Number to enable the tracking of directors and the mapping of their relationships with other individuals and companies.
In addition, on 28 September 2017, Treasury released a Consultation Paper – Combatting illegal phoenixing which seeks views on proposed reforms to corporations and tax laws to deter and disrupt the core behaviours of phoenix operators, including non-directors such as facilitators and advisers, while minimising any unintended impacts on legitimate businesses and honest restructuring.
Reforms proposed in the Consultation Paper include:
- the establishment of a dedicated phoenix hotline;
- specific phoenixing offences to better enable regulators to take decisive action against those who engage in illegal phoenix activity;
- preventing directors from backdating their resignations to avoid personal liability or from resigning and leaving a company with no directors;
- restricting the rights of creditors related to a phoenix operator to vote at creditors’ meetings and “stack” votes;
- the extension of the penalties that apply to those who promote tax avoidance schemes to capture advisers who assist phoenix operators;
- making directors personally liable for GST liabilities as part of extended director penalty notice provisions; and
- stronger powers for the ATO to recover a security deposit from suspected phoenix operators.
In addition, the Government is consulting on the best ways to identify high risk individuals who will be subject to new preventative and early intervention tools including:
- a next-cab-off-the-rank system for appointing liquidators;
- allowing the ATO to commence immediate recovery action following the issue of a director penalty notice (without having to wait 21 days); and
- allowing the ATO to retain tax refunds.
Submissions on the Consultation Paper are due by 27 October 2017.
Extension of the crowd-sourced equity funding (CSF) regime to proprietary companies
Following the release of draft legislation extending the CSF regime to proprietary companies, the Government has now introduced a Bill to Parliament. Key features of the Bill remain the same as the draft legislation, but the Bill has been amended in some respects following consultation.
For further information on the Bill, see:
- Two’s company: Proprietary Companies to Access Crowd-sourced Equity Funding Regime by Peter Reeves, Deborah Johns, Georgina Willcock and Jack Coles dated 11 May 2017 which examines the draft legislation; and
- G+T Fintech Update: September 2017 by Peter Reeves, Georgina Willcock and Jack Coles which looks at the changes in the Bill since the draft legislation.
Further guidance and relief for the public company CSF regime
In addition, ASIC has released the following guidance and relief for the CSF regime for public companies which commenced on 29 September 2017:
- Regulatory Guide 261 Crowd-sourced funding: Guide for public companies to assist companies seeking to raise funds through CSF to understand and comply with their obligations in the new regime, particularly as many of these companies will not have experience in making public offers of their shares;
- a template CSF offer document to help companies prepare their CSF offers;
- Regulatory Guide 262 Crowd-sourced funding: Guide for intermediaries to assist crowd funding platform operators (intermediaries) seeking to provide a crowd-funding service, particularly as this is a new type of financial service and there are unique gatekeeper obligations for operating platforms for CSF offers.
ASIC has also issued:
- Report 544 Response to submissions on CP 288 and CP 289 on crowd-sourced funding detailing ASIC's response to consultation on its guidance and relief in June 2017;
- updated Regulatory Guide 166 Licensing: Financial requirements, including new Appendix 9 which provides guidance on the financial resource requirements that will apply to a CSF intermediary;
- updated Regulatory Guide 148 Platforms that are managed investment schemes and nominee and custody services, providing guidance on the requirements for a platform operator or nominee and custody service operator acquiring shares under a CSF offer on behalf of an investor;
- ASIC Corporations (Financial Requirements for CSF Intermediaries) Instrument 2017/339 which outlines specific minimum requirements for CSF intermediaries;
- ASIC Corporations (Amendment) Instrument 2017/817 which updates ASIC Corporations (Consents to Statements) Instrument 2016/72 to reduce the compliance burden associated with obtaining consent for statements in CSF offer documents; and
- ASIC Corporations (Amendment) Instrument 2017/821 which amends ASIC class orders [CO 13/762], [CO 13/763] and ASIC Corporations (Nominee and Custody Services) Instrument 2016/1156.
See the ASIC website for further information on the CSF regime, including information on applications:
- by intermediaries for an AFS licence with an authorisation to provide CSF services; and
- to register new public companies or convert existing proprietary companies to public companies, to be eligible to raise funds using CSF and to access the corporate governance concessions.
On 13 September 2017, the Joint Parliamentary Committee on Corporations and Financial Services (PJC) released its report on its inquiry into whistleblower protections in the corporate, public and not-for-profit sectors.
The Committee identified that current whistleblower protections remain largely theoretical with little practical effect, due, in large part, to the near impossibility under the current legislation of:
- protecting whistleblowers from reprisals;
- holding those responsible for reprisals to account;
- effectively investigating alleged reprisals; and
- whistleblowers being able to seek redress for reprisals.
The Committee also attributed the difficulties to the fragmented and inconsistent nature of whistleblower legislation across public and private sectors, with the public sector perceived to be more robust than the private sector.
Key recommendations of the Committee include:
- establishing a Whistleblower Protection Authority to support whistleblowers, assess and prioritise the treatment of whistleblower allegations, conduct investigations of reprisals and oversee the implementation of the whistleblower regime for both the public and private sectors;
- broadening protections in the private sector and introducing a single Act to regulate whistleblowing in the private sector;
- broadening the definition of a ‘whistleblower’ to include former staff and also contractors and volunteers, and broadening the scope of ‘disclosable conduct’;
- replacing the ‘good faith’ test with a requirement to have a ‘reasonable belief of the existence of disclosable conduct’;
- extending the whistleblowing protections to anonymous disclosures;
- establishing a tiered reporting system;
- establishing a reward system for corporate whistleblowers;
- allowing civil proceedings and remedies to be pursued if a criminal case is not pursued; and
- availability of uncapped financial compensation for whistleblowers through a tribunal system.
On 28 September 2017, the Hon Kelly O'Dwyer MP, Minister for Revenue and Financial Services also released the Terms of Reference for, and details of the members of, an Expert Advisory Panel on whistleblower protections to review and comment upon draft legislation which the Government expects to introduce this calendar year that:
- establishes whistleblower protections for people who disclose information about tax avoidance and other breaches of tax laws administered by the Commissioner; and
- strengthens existing corporate whistleblower protections under statutes administered by ASIC and APRA.
The Panel will also review and advise the Government in respect of the PJC’s recommendations for legislative reforms to enhance whistleblower protections in the private, public and not-for-profit sectors, and any further stakeholder or community consultation required.
In its report dated 11 September 2017, the Senate Economics Legislation Committee has recommended against passing the Corporations Amendment (Modernisation of Members Registration) Bill 2017 (Bill). The Bill proposes to amend section 169(1)(a) the Corporations Act 2001 (Cth) (Act) to include an email address in the information that must be contained in a register of members.
Key findings of the Committee in making its recommendations included:
- unintended consequences of the Bill have the potential to result in a significant and costly burden on all types of corporate structures;
- failure to maintain a register under section 169 of the Act is a strict liability offence but the Bill does not contain provisions to deal with the situation where a member does not, or is not willing to, provide an email address. (The Committee noted that while the optional provision of an email address may assist companies in this regard, such a proposal does not form part of the Bill as drafted); and
- privacy and cybersecurity concerns.
Despite its recommendation not to pass the Bill, the Committee did advocate for more technological neutrality in communication methods and the incorporation of such neutrality into the Act, and encouraged Treasury to continue consulting with a view to proposing a ‘holistic approach to modern communication methods’ throughout the Act.
As we reported back in May 2017, the Treasurer announced measures to assist with housing affordability in the 2017/2018 Federal Budget. Draft legislation has recently been released for consultation, but with a couple of kickers, including the denial of certain tax benefits to investors in trusts that would otherwise qualify as managed investment trusts. Yet again, the Government is in damage control, defending another policy announcement that could have been better handled.