Australia: Insolvency Perspective on CLERP 9

Key Point

• CLERP 9's provisions on officers, senior managers and employees are particularly relevant to insolvency practitioners and others involved management of corporations

The Corporate Law Economic Reform Program (Audit Reform And Corporate Disclosure) Act 2004 ("CLERP 9") was assented on 30 June 2004 and commenced on 1 July 2004. According to Mr Costello, CLERP 9 is designed to modernise business regulation and foster a healthy and vibrant economy.

Amendments to the Corporations Act 2001 contained in Schedule 9 to the CLERP 9 entitled "Officers, Senior Managers and Employees" are particularly relevant to insolvency practitioners and others involved management of corporations.

The HIH Royal Commission report identified a number of anomalies in respect of the effect some of the provisions of the Act have on certain persons. The amendments in Schedule 9 of the CLERP 9 are designed to clarify the classes of personnel who have duties and obligations under the Act. The amendments are intended to ensure clear and consistent use of various terms by:

• correcting current anomalies in relation to the definition of "officer";
• removing the definition of "executive officer" and replacing it with "senior manager";
• removing the definition of "examinable officer"; and
• making consequential changes as required to clearly specify the persons that are to be covered by particular provisions.

There were two overlapping definitions of the term "officer" found in sections 9 and 82A of the Act respectively. Schedule 9 of the CLERP 9 addressed the potentially confusing operation of these provisions by repealing the section 82A definition of "officer" and leaving the section 9 definition. An express reference to section 82A contained in section 530A of the Act, which relates to officers helping liquidators, was also removed.

Definitions of "officer" for specific purposes appearing other than in section 9 of the Act (ie. sections 82A, 418(2), 437C(4) and (5), 1307(4) and 1318(5)) were removed. In addition, section 448C(3) of the Act now contains a replacement definition for use in section 448C(1).

Particular provisions of the Act, dealing with personnel, which were intended to extend to employees, now expressly state that intention.

The section 9 of the Act definition of "officer" applies to "corporations", which, through the operation of section 57A of the Act, includes "bodies corporate". Section 82A of the Act applied its definition to "bodies corporate" and "entities". Section 64A of the Act defines the term "entity" to include bodies corporate, partnerships, individuals, and trusts (including trustees). An "entity" is also defined in section 9 of the Act for the sole purpose of Chapter 2E of the Act ("Related Party Transactions") to include also an "unincorporated body".

As there are provisions in the Act that regulate officers of "entities" other than corporations, a specific definition of "officer of an entity" was included in the Act. CLERP 9 inserted a definition of "officer" into section 9 of the Act specifically for entities other than individuals or corporations, such as partnerships and unincorporated associations. However, in section 57A(1)(c) of the Act the term "office holder" was substituted for the term "officer" of an unincorporated body within the meaning of the term "corporation" as set out in section 57A of the Act to avoid the occurrence of circular references.

Due to changes to the definitions, consequential amendments to a number of other sections of the Act were implemented by CLERP 9 to ensure that the range of persons to whom the particular provisions apply is maintained.

A large number of provisions of the Act imposed duties and obligations on "officers". The section 82A definition of "officer" included an "employee". The existing section 9 definition of "officer" generally covered persons who had a degree of influence or potential influence over the general conduct of the entity, through the office they held or otherwise. Although some employees fell within the section 9 definition, a large number did not.

The dual definitions gave rise to doubt about whether provisions that imposed duties and obligations on "officers" applied to ordinary employees. In many cases, it was not appropriate to extend the provision to such persons. Removal of section 82A of the Act and insertion of the definition of an "officer" into section 9 was designed to address those cases.

There were, however, some existing uses of the term "officer" in provisions that should have applied to employees. Those provisions had the term "employee" inserted into them so as to eliminate any doubt that employees fall within their scope (sections 411(7)(b) - (e); 418(1)(b), (c), (e) and (f); 422(1)(a) and (3)(a); 437D(5); 438D(1)(a) and (3)(a); 448C(1)(c) and (d); 466(3); 483(1); 486A(1)(a), (1)(b)(i), (1)(c) and (d), (2)(b) - (d); 500(3); 532(2)(c)(i) and (ii), (6) and (6)(b); 533(1)(a) and (3)(a); 590(1), (4) and (4A); 596(1); 628; 1043F, I(2) and (3), J(2); 1071G(3), H(6) and (7)(b); 1302(3); 1309(1) and (2); 1314(4)(a)(i) and (b)(3); 1317R(3)(b)(ii) and S(2)(b)(ii); 1318(4)(a) and (b)).

The need for the term "executive officer" was based on the section 82A definition of "officer", which included "employees". The term "executive officer" distinguished between officers who took part in management of the company and ordinary employees. CLERP 9 removed the definition of this term from the Act.

If uses of the term "executive officer" were simply replaced with the term "officer", it could undesirably widen the scope of the provisions. This was due to paragraphs (c) to (e) of the section 9 definition which identified certain persons such as receivers and liquidators as "officers".

CLERP 9 inserted a new sub-class of the term "officer" called "senior manager" into the section 9 definitions. The sections of the Act that relied on the term "executive officer" now use the new term "senior manager" (sections 585(a) and (b); 601JA(2)(b) and B(2)(a); 708(12)(a); 792B(5)(a); 821B(4)(a); 853B(a); 990I(2)(b) and (3); 1012D(9B)).

A number of sections of the Act had the term "officer" replaced with the term "senior manager" to avoid the confusion from the use of the wider term "officer" (sections 411(7)(b), (c) and (e); 418(1)(b), (c), (e) and (f); 448C(1)(c), (d) and C(3)).

The section 9 definition of "officer" did not include a "provisional liquidator". Certain sections of the Act had previously redefined the term "officer" to include a "provisional liquidator" for the purposes of those sections. CLERP 9 preserved the intention that a "provisional liquidator" be included within the ambit of those provisions (sections 437C(1) and (2); 596A(b)).

The term "examinable officer" as defined in section 9 is sufficiently covered by the section 9 of the Act definition of "officer" (apart from its inclusion of a "provisional liquidator"). Defining the term "examinable officer" separately was thought to be unnecessary. In the interests of simplification and clarity, CLERP 9 removed the definition of "examinable officer" and replaced the only instance of the term "examinable officer", found in section 596A(b) of the Act, with the term "officer or provisional liquidator".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.