Download PDFDate Introduced: 8 December 1994
House: House of Representatives
Portfolio: Attorney-General
Commencement: Proclamation, but no later than 6 months after Royal Assent.
Purpose
This is the first Bill in what is likely to be a series of Bills to simplify the Corporations Law. The purpose of the Bill is to simplify the rules which regulate corporations and to express the law in plain English. This Bill deals with only certain parts of the Corporations Law.
Background
The Corporations Law is made under section 82 of the Commonwealth's Corporations Act 1989. The Corporations Law, in turn, contains over 1300 sections and, in addition, has 3 significant schedules. It is generally agreed that the Corporations Law is complex, detailed and voluminous. The basic approach of the existing Corporations Law is to state the law as it applies to corporations irrespective of whether the corporation is a major company with expert advisers or a small private company with limited resources (as a generalisation, small private companies are exempted from certain requirements of the law, where appropriate). The Corporations Law has now reached the point where it has become somewhat unwieldy for some small companies and others to use. Apart from the complexities of the existing provisions, the necessity for the application of some rules and procedures has also come under scrutiny.
In 1993, the Government established a Task Force to carry forward a program for the simplification of the Corporations Law. The Task Force comprises expert advisers from the private sector, the Office of Parliamentary Counsel and the Business Law Division of the Commonwealth Attorney-General's Department. The Task Force Plan of Action 1 was released in December 1993. The Plan has been followed by the release of a series of specific proposals for priority items considered suitable for early simplification, and a Plan of Action - Stage 2 (August 1994). 2 An exposure draft of the First Corporate Law Simplification Bill was released in July 1994.
For convenience, the words "company" and "corporation" will be used interchangeably in this Bills Digests but it should be noted that the Corporations Law also applies to other matters such as securities (e.g. shares) and futures dealings and advisers, as well as "outsized" partnerships. 3 In a strict sense, a company is only one example of a corporation. Similarly, "member of a company" and "shareholder" are used interchangeably.
The Bill addresses the following three areas of the Corporations Law:
.the ability of Australian companies to buy-back their own shares;
.reforms to the provisions on proprietary companies combined with a small business guide containing a summary of the rules applicable to smaller companies; and
.streamlining of the requirements for company registers.
1. Permitted Share Buy-Backs
Until 1989, Australian companies were not permitted to repurchase their own shares. There had been a long standing view that repurchase of shares was undesirable for a number of reasons including an assumption (perhaps even a fiction) that providers of credit assessed the credit-worthiness of companies on the strength of their issued capital (i.e. shares on issue). In addition, although a shareholder has a financial investment in the company, the shareholder ranks in priority behind a creditor when a company is liquidated. A share buy-back reduces the scope of that priority and it is technically regarded as reversing the priority. Counter-arguments maintain that a permitted repurchase of shares allows a financially sound company to buy-back its shares when they are undervalued. In addition, a reduction in the number of shareholders improves company efficiency e.g. reduces the costs and efforts of the company in addressing and administering shareholder dividend requirements. This old prohibition in Australian company law has been described as an "albatross". 4 Companies in the United States do not have the same prohibition on share repurchases.
There are some residual concerns about share repurchase and these include "greenmailing" (paying a premium above market value to a significant shareholder to avoid the possibility of a takeover). This concern may be adequately addressed in the Bill under selective buy-backs (see below).
Section 205 of the Corporations Law maintains the broad prohibition on the acquisition by a company of its own shares (or units of shares) but grants an exemption in certain circumstances including a permitted buy-back pursuant to Division 4B of the Corporations Law. Division 4B has been operative since 1 January 1991. Basically, Division 4B permits a buy-back in the following circumstances:
.when the company's articles of association permit a buy-back of shares;
.only ordinary shares can be repurchased (i.e. not other types such as redeemable preference shares);
.the buy-back does not exceed 10% of the company's shares in a 12 month period; and
.the directors have made a solvency declaration within 2 months of the buy- back commencing. 5
Criticisms of the existing provisions in Division 4B include that the Division is too long and complex and that compliance costs for share buy-backs are excessive.
The simplification process proposed in the Bill retains the broad prohibition in section 205 of the Corporations Law and replaces Division 4B with modified rules expressed in plain English.
2. Proprietary Companies
A formally incorporated company can fall within the following classification of liability:
.a company limited by shares [mostly favoured by small business];
.a company limited by guarantee;
. a company limited by both shares and guarantee;
.an unlimited company [not a commonly used form - sometimes used for mutual funds]; and
. a no-liability company [developed for investment in the Australian mining industry].
Within the above classification, an incorporated company can be a:
.proprietary company; or
.a public company, which may or may not be listed on the Stock Exchange.
A proprietary company (other than a no liability company) is defined by section 116 of the Corporations Law and it must satisfy the following criteria:
.it must have a share capital, and its memorandum and articles of association must restrict the right to transfer its shares;
.it must not have more than 50 members (shareholders);
.it is prohibited from issuing any invitation to the public to buy shares or debentures in the company; and
. it is prohibited from seeking deposits of money from the public.
As a generalisation, proprietary companies are often "family" companies. Public companies, by comparison, tend to have their shareholding spread more widely, and can be "listed" so that the public can buy their shares on the stock exchange.
Proprietary companies do not have as many obligations as public companies under the Corporations Law. At present a proprietary company need only have 2 members (e.g. shareholders) - a public company must have 5; there need only be 2 directors - a public company must have 3 directors two of whom must ordinarily reside in Australia. An exempt proprietary company is one where none of its shares are owned by a public company. An exempt proprietary company need not appoint a company auditor.
One fundamental change which the Bill proposes is a provision to allow the incorporation of a small proprietary company to be formed by one person and operate with one director. The Bill also replaces the distinction between exempt and non-exempt proprietary companies by using a new classification of small and large proprietary companies.
The introduction of an incorporated single member and single director company will recognise the reality of the "sole trader", thus allowing a small business to be incorporated and run by one person without the strict obligation to obtain a second shareholder and a second director. Such small companies should not have onerous obligations under the Corporations Law and the Bill proposes the streamlining of reporting requirements for proprietary companies.
3. Company Registers
Companies are, at present, required to maintain a range of company registers. The primary purpose of the registers is to provide certain key information so that the public (e.g. investors and creditors) may, when necessary, examine the registers to ascertain the status of the company and who is involved in the company. The Australian Securities Commission ("ASC"), which is the national regulator for companies and securities, has developed a comprehensive database from information lodged by companies pursuant to obligations under the Corporations Law. In practical terms, it is now far easier for a member of the public to obtain key information on a company from the ASC rather than visit the registered office of the company. The present system (i.e registers maintained by companies and the separate lodgement of information with the ASC) duplicates the retention of what is the same information.
The types of registers currently maintained by companies include:
.register of directors, principal executive officers and company secretaries (contains consent to appointment, name, residential address, date and place of birth, occupation and other directorships held);
.register of directors' shareholdings;
.register of substantial shareholders in listed companies;
. register of buy-backs; and
.register of members (lists the name and address and details of the interests held by shareholders; there is also registration of debenture and share option holders).
Apart from the obvious duplication of key information there is a concern, based on considerations of personal safety, that the private address of a director or company officer should not necessarily be made available in every case. The Bill proposes a mechanism whereby, in certain circumstances, such information can be withheld from public disclosure and that information provided by way of an alternative address.
As noted above, the main focus in this part of the Bill is a reform in the number of company registers to be maintained by a company.
Main Provisions
Clause 3 implements a series of amendments, by way of Schedule 1 and Schedule 2 to the Bill, to simplify the provisions in the Corporations Law dealing with share buy-backs. Schedule 1 is a complete replacement and re-write (in plain English) of Division 4B - Permitted Buy-Backs of Shares of Part 2.4 of the Corporations Law.
Proposed new section 206C in Schedule 1 provides a table which specifies the steps involved and the sections applicable to a share buy-back, as well as an explanation of the terms used (e.g. the "10/12 limit" means 10% of the company's shares in 12 months). The types of buy-backs are covered in the proposed new Division 4B include:
. equal access scheme which allows equal access to all shareholders (proposed section 206C(2));
. selective buy-back which targets particular shareholders; such a scheme requires approval by all shareholders, or by a special resolution which does not involve voting by selling shareholders or their associates (proposed new section 206E); and
.others, such as, on-market, employee and odd lot buy-backs (see table references in proposed section 206C).
Schedule 1 also deals with the lodgement of the company's buy-back scheme documentation i.e disclosure, with the ASC (proposed sections 206F, 206G and 206J). Schedule 1 also "signposts" other section in the existing Corporations Law which are relevant to matters ancillary to share buy-backs (proposed section 206K).
Schedule 2 contains consequential amendments and definitions relevant to the proposed reform of Division 4B - Share buy-backs, outlined in Schedule 1. One significant amendment is a proposed new section 588G(1A) which will make a director personally liable if a buy-back scheme causes the company to become insolvent (Item 11 in Schedule 2). This amendment adds to the existing provisions in the Corporations Law covering a director's duty to prevent insolvent trading by the company.
Clause 4 (1) introduces a plain English Small Business Guide (see Schedule 3 to the Bill). The Small Business Guide will form part of the Corporations Law. Once introduced, the Small Business Guide will be updated by way of Regulations or when the Corporations Law itself is amended. The Small Business Guide is a brief but useful document containing the basic information on company formation and obligations. The Small Business Guide will be inserted as new Parts 1.4 and 1.5 of the Corporations Law.
Comment: While the preparation of such a guide is commendable, its provisions have no legal application i.e. it is simply an explanatory guide and it is not an operative part of the law. While not wanting to dampen innovation, there still remains the threshold issue of whether it is really appropriate to include such guides within a substantive law of the Parliament. As noted above, because the guide is to be part of the Corporations Law, regulations will be needed, when necessary for significant changes, to amend the guide. The use of subordinate legislation to amend an explanatory guide seems excessive but it is necessary to satisfy what is a desire to keep the guide within the text of the statute itself.
It is conceded, however, that the traditional approach of law making (e.g. only put into black letter law that which is necessary) has come under close scrutiny in recent years and there is an understandable view that the laws made by Parliament should be more easily comprehensible to the public at large. There is substance in the view that a departure from the old-style of drafting laws is necessary. Laws can be written in a simpler style. 6 The point being made above is that writing the law in a simpler form is different to also including explanatory guides (which have no operative legal effect) in a simplified law.
Inclusion of the guide in the text of the Corporations Law may, however, overcome the discretionary element in section 15AB of the Acts Interpretation Act 1901 (that section permits the use of extrinsic material - material outside an Act - to aid in interpretation of legislation). If material is already part of the statute then it is not extrinsic and the new Small Business Guide may possibly assist in interpretation. It is noted that the guide makes numerous references to the substantive sections (and Regulations) of the Corporations Law.
On balance, it would appear that the guide has been included so as to send a signal to the business community that the Government acknowledges the importance of the simplification program. The option is available to also publish the guide separately. The end result will be that the guide is there "up-front" in the Corporations Law and may be available as a separate publication (clarification of this matter may become available when the Second Reading Speech is made).
Without meaning to trivialise the issue, it is hoped that the reduction in size of the substantive Corporations Law will not see a compensating increase in subordinate legislation (e.g. Regulations).
Clause 4(2) introduces significant amendments to the existing provisions dealing with proprietary companies, by way of Schedule 4 to the Bill. A key provision is a proposed new section 45A which removes the "old" distinction of an exempt proprietary company and non-exempt proprietary company and replaces it with a differentiation based on a small proprietary company and a large proprietary company (Item 4 in Schedule 4). The differentiation is made by reference to gross revenue(> or $10m), gross assets (> or < $5m), and the number of employees.
Perhaps the most significant amendment in the Bill is the introduction of the fundamental change in the formation of proprietary companies. A proprietary company will now be able to be formed by one person and need only have one director (Item 7 and Item 25, respectively in Schedule 4). As noted above, this proposal recognises the reality of a "sole trader".
Another change is the removal of the obligation for a proprietary company to hold an annual general meeting (Item 35 in Schedule 4). This means that annual financial statements and annual reports need no longer be tabled at an annual general meeting. Small proprietary companies will not be required to prepare annual financial statements, apply accounting standards and have the statements audited unless 5% of shareholders (or the ASC) request the company to do so (Item 41 in Schedule 4).
Comment: This lessening of the burden of providing information may seem to run counter, in principle, to the concept that companies should keep shareholders better informed. As a broad statement, the separate continuous disclosure regime recently introduced into the Corporations Law (by the Corporate Law Reform Act 1994 - Act No.31 of 1994) really only applies in such cases as where a company is listed on the stock exchange, to schemes which raise funds from the public in circumstances where a prospectus is required, and to companies which offer debentures, or whose securities are traded on the stock exchange. It is conceded that lessening the information burden proposed in the Bill, particularly on small proprietary companies, is not inconsistent with the concept of improved disclosure of information by companies because this Bill defines companies by their economic significance. Under the existing Corporations Law, it is technically possible to have some anomalies such as an exempt proprietary company which is economically significant but that company could enjoy exemptions from certain financial reporting requirements.
The approach adopted in the Bill appears to be an approvement in defining proprietary companies. It is, at least, a more rational approach.
Large proprietary companies are required to prepare accounts, have them audited and lodge them with the ASC. The same requirement applies to those small proprietary companies which are under foreign control and not covered by consolidated accounts (proposed section 283B). This appears to be an adequate information regime.
Clause 5 inserts, by way of Schedule 5 and Schedule 6 to the Bill, a reform of the types of company registers to be kept. These registers are specified in proposed new section 216A. The information that is to be recorded in those registers is also specified (see generally Schedule 5). Of significance, Item 35 in Schedule 6 includes a proposed repeal and substitution of section 242 to allow, in certain circumstances (e.g. where there are concerns over personal safety), a person whose address is listed in a company register to provide a substitute address for notifications in lieu of a home address.
Clause 5(3) makes a minor amendment (dealing with the service of documents) to section 86 of the Australian Securities Commission Act 1989, by way of Schedule 7 to the Bill.
Clause 6 repeals several redundant pieces of legislation which were intended to implement the concept of a close corporation. The legislation was intended to simplify corporate rules for small business. This legislation encountered constitutional difficulties when the initial Corporations Act 1989 was challenged in the High Court in New South Wales v. Commonwealth (1990) 169 CLR 482.
Endnotes
1. Task Force - Plan of Action, Corporations Law Simplification Program, Attorney-General's Department, Canberra, December 1993.
2. Task Force - Plan of Action : Stage 2, Corporations Law Simplification Program, Attorney-General's Department, Canberra, August 1994.
3. A partnership is not an incorporated company but a group of persons carrying on a business in common (but see s.112 of the Corporations Law).
4. Partlett D. and Burton G. 'The Share Repurchase Albatross and Corporation Law Theory' in Australian Law Journal (1988) 62 ALJR 139.
5. See Latimer P. Australian Business Law, 14th Edition, CCH Australia Limited, Sydney, 1995: 827.
6. See Law Reform Commission of Victoria, Plain English and the Law - report No.9, Melbourne, 1987: 109. See also Turnbull I. 'Clear Legislative Drafting: New Approaches in Australia' in Statute Law Review, Vol 11(3), Oxford University Press, Oxford, Winter 1990: 165; and, Cutts M. Unspeakable Acts: Clarifying the language and typography of an Act of Parliament, Words at Work, Stockport (UK), 1993.
B. Bailey (06 2772434)
Bills Digest Service
Parliamentary Research Service 19 January 1995
This Digest does not have any legal status. Other sources should be consulted to determine whether the Bill has been enacted and, if so, whether the subsequent Act reflects further amendments.
Commonwealth of Australia 1995.
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Published by the Department of the Parliamentary Library, 1995.