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Friday, 19 February 1932


Mr SPEAKER (Hon G H Mackay (LILLEY, QUEENSLAND) - I draw the attention of honorable members to the fact that, although interjections are disorderly, there appears to be a disposition in this new Parliament, on the part of certain honorable members, to interject- continuously. Such conduct will be severely dealt with. Some interjections are helpful and relevant, but others are discourteous, and I intend to deal very firmly with honorable members making interjections of the latter kind.


Mr LATHAM - This is a bill for the enforcement of what is generally known as the Financial Agreement. It is a measure directed to the enforcement of existing obligations. It deals with an existing agreement by which all the governments of Australia, Commonwealth and State, are bound, and its object is to make that agreement, with further subsidiary agreements - there are three altogether - effective in relation to all the parties. The object of the main financial agreement was the consolidation of the credit of the Commonwealth and the *> States. It was based upon the belief, which I consider to be well founded, that the financial standing of both the Commonwealth and the States would be improved if we put an end to the competition in borrowing which had raised interest rates, it was thought, against both the Commonwealth and the States. Provision was made for sinking funds, to be contributed to by the Commonwealth and the States, which would provide for the repayment of the debts of all parties within a specified period. The Financial Agreement assumed, as the Prime Minister (Mr. Lyons) said last night, the honesty of ail the parties to it, and their desire to carry out all its terms, to improve the credit of Australia and, therefore, benefit all classes of Australians.

Part I., clause 8. of the Financial Agreement sets up an Australian Loan Council, and confers upon the council the power to determine the amount and times of borrowing, on behalf of the Commonwealth and the States, with certain exceptions. Speaking generally, it is provided that future borrowings shall be arranged and made by the Commonwealth. Part II. is temporary in its nature, and it is not necessary to refer to it now. Part XII. demands very careful study in connexion with this bill. Many have assumed that the whole liability for the principal and the interest in regard to State as well at Commonwealth debts is legally imposed upon the Commonwealth by the provisions of the Financial Agreement, and that the substantial liability in respect of these matters falls on the Commonwealth. That was not the intention of those who prepared the agreement. The system which the agreement introduced is essentially a joint one, under which the Commonwealth and the States must perform their respective parts, and it would be quite impossible foi the Commonwealth to perform indefinitely the obligations of all the States as well as its own obligatons under the agreement. The interest liability of the Commonwealth and the States at the present time is £55,000,000 per annum, and it was obviously never intended that the whole of that sum should be paid from Commonwealth revenue. The plan of the agreement contained in Part III. is that in addition to the sinking fund contributions to be made by the Commonwealth and the States, the Commonwealth is to contribute annually toward* the payment of interest on State debts the sum of £7,584,912. That sum takes the place of what were known for many years as the per capita payments. It is provided that the Commonwealth will, in each year during a period of 58 years, provide this sum towards the interest payable by the*" States. That is set out in paragraph b of clause 2 of Part III. In paragraph c of section 2 it is provided that the States concerned shall supply the extra amount necessary, in addition to the equivalent of the per capita payments, to meet their interest a& it falls due from time to time. The words of paragraph c are -

Each Statu shall in each year during the same period of. fifty-eight years pay to the Commonwealth the excess over the amounts to be provided by the Commonwealth under the last preceding sub-clause necessary to make up a3 they fall due the interest charges falling due in that year on the public debt of that State taken over by the Commonwealth as aforesaid . . .

Therefore, the scheme is that the Commonwealth provides £7,5S4,912 towards the interest liability of the States, and the States provide the balance. The Commonwealth is to arrange all conversions, and the sinking fund provides ulti- mately for the repayment of the principal of the indebtedness of both the Commonwealth and the States.

Clause 1 of Part III. provides that, " subject to the provisions of this part," the Commonwealth will take over on the 1st July, 1929, the then existing public debts of the States, and will, in respect of the debts so taken over, assume as between the Commonwealth and the States the liabilities of the States to bondholders. Sir Edward Mitchell, K.C., at page 31 of his book on the Financial Agreement, states - lt is clear that, as regards all the Stat* debts taken over by the Commonwealth under clause 1 of Part III. of the first agreement " as between the Commonwealth and the States ", that language precludes the owners of those particular public debts, i.e., those borrowed up to 1st July, 1928, being able to enforce rights against the Commonwealth directly under that agreement. Their direct remedies remained against the States to whom they respectively originally lent.

This agreement, therefore, does not make a contract between the Commonwealth and the bondholders. There is another provision which is relevant in this connexion. It is paragraph a of clause 2, which reads as follows: -

Subject to this clause the Commonwealth will pay to bondholders from time to time interest payable on the public debts of the States taken over by the Commonwealth as aforesaid other than debts due by the States to the Commonwealth.

Under that provision the Commonwealth agrees, subject to this clause, to pay the bondholders the interest due. That is an agreement between the Commonwealth and the States. The whole financial agreement is an agreement between the Commonwealth and the States, and the Commonwealth agrees with the States that, subject to this clause, it will pay ohe interest to the bondholders. I have already read the paragraph (c) which gives meaning to the phrase, "subject to this clause." The effect of those words is to import a condition into the liability of the Commonwealth to pay the interest to the bondholders. That condition is the provision of the necessary excess, or additional, amount by the States.

I am, at the moment, discussing entirely the technical, legal aspect of this matter. It is important that this should be understood in order that the first part of the bill now before the House may be' intelligible. The States owe money within Australia, and they also owe money outside it. There are internal and external liabilities of the States, and there are also internal and external liabilities of the Commonwealth. These may be divided into two classes, those incurred before and those incurred after the Financial Agreement was reached, and we may state the position in this way: - The Commonwealth is obviously directly liable with regard to all Commonwealth bonds, whether issued before or after the Financial Agreement, by virtue of the contract contained in the bonds. This liability attaches to both the internal and the external borrowing of the Commonwealth. In regard to the internal liabilities of the Stales, all these, whenever contracted, whether before or after the agreement, are now represented by Commonwealth bonds, and the Commonwealth is liable by virtue' of those bonds. There is yet another class of liability, namely, the external State public debts incurred before the Financial Agreement. It was in relation to a liability of this kind that default by New South Wales occurred recently. The contracts in those cases are not set out in Commonwealth bonds.

The loan in relation to which default took place was a pre-agreement State loan represented by New South Wales bonds, and in respect of which no bonds have been issued by the Commonwealth. The contract was between the bondholders and the State of New South Wales. The Commonwealth was bound to pay the interest, but it was bound, not to the State bondholders, but to the other States, in accordance with the terms of the Financial Agreement; that is to say, it was so bound if the conditions of the clause which I have just read were satisfied. The State which itself had failed to provide the moneys required under paragraph c of clause 2 of Part III. was not in a position to compel the Commonwealth to find a penny. So far as the other States were concerned they might or might not have such a right; on this occasion they were content to endorse the action of the Commonwealth, and to waive any rights they may have had. Accordingly, in this case, there has been no legal, technical default by the Commonwealth, either to the State bondholders concerned, because with them the Commonwealth had no contract, and no obligation to them was directly imposed on the Commonwealth by the Financial Agreement and the legislation validating it; or to the other States, because the conditions imposing an obligation on the Commonwealth had not been satisfied, as the money had not been provided under paragraph c. In particular, New South Wales was not in a position to sue on account of its own default.


Mr Scullin - Did the other States specifically waive their rights?


Mr LATHAM - I do not know that they specifically waived their rights, but their representatives were present, and sat silent in acquiescence. So far I have referred to the technical position in the strictest legal sense, and it is not an accident that this is the technical legal sense.It depends upon the recognition of the legal principle that an Australian parliament, Commonwealth or State, has no power to legislate with respect to contracts which are not subject to Australian law; that is, to other than Australian contract. If an Australian, whether a private individual or the representative of a government, makes a contract, say, in France, for the loan of money, and contracts to repay that money there, that is a French contract which is governed by French law, and no legislation in Australia can affect the matter. For example, we have recently passed through this Parliament a conversion act compelling certain dissentients to convert their holdings in Australian stock, State and Federal. If that act had been applied to contracts which were not Australian contracts, that is, to contracts made abroad in England or the United States of America, the legislation would be entirely ineffective - the contracts would have remained unaltered in their terms. Lawyers who are interested in the subject will probably remember the cases of Spiller v. Turner, and of the British Australasian Tobacco Company, in which" these principles were laid down. It was on that account that the Financial Agreement was drawn in the manner in which it now appears.

But whatever the technical legal aspect of the matter, I remind honorable members that, in the long run, all these external pre-agreement State debts - unless they are paid off on maturity out of the sinking fund or otherwise - will be concerted. They will then become Commonwealth debts, and so will be undoubtedly a direct liability on the Commonwealth. I have submitted to the House a legal argument based on the terms of the Financial Agreement. I do not suggest that that general legal position, even if it be accepted by all lawyers - and I think, myself, it is sound - has been present to the minds of the bondholders who hold securities, for whatever period of borrowing. There is no doubt that there was a general understanding that the credit of the Commonwealth was behind the public debts of the Commonwealth, and also of all the States. That being so, it is desirable that legal effect should be given to that general belief and understanding, and that, after the existing legal position has been made clear, no doubt should be left in the minds of the public as to the position hereafter to be occupied by the Commonwealth Government in relation to these matters.

So long as all parties intend and endeavour to carry out their obligations, no difficulty arises, and the technical legal position to which I have referred in relation to pre-agreement debts could be allowed to remain without causing any trouble or difficulty. But the position is radically changed when a government, a party to the agreement, neither intends nor endeavours to perform that agreement, and when it elevates the breaking of promises into a principle of public policy. In such circumstances it is the opinion of the Commonwealth Government that it becomes incumbent upon it and upon the Parliament to leave no room for doubt as to the true intention of the Commonwealth, at least. The Financial Agreement cannot be altered without the unanimous consent of the parties to it, or, in my opinion, at any rate, without an amendment of the Constitution.


Dr Earle Page - Has that consent been sought?


Mr LATHAM - No, and it would not be worth seeking.


Mr Paterson - - Does not the AttorneyGeneral think that the Premier of New South Wales would be only too glad to have the - agreement amended in such a way as to make the Commonwealth liable for the debts of the States \


Mr LATHAM - He might agree to * do it one day, but that would not be any guarantee as to what he would do the next. The Commonwealth can. if Parliament approves, accept obligations further than those laid down in the agreement. Therefore, to remove all doubt, and to get rid of the present technical position, this bill asks the Parliament to accept on behalf of the Commonwealth, unconditional, direct statutory liability to the bondholders in respect of State debts.

That is the object of clause 4, which contains these words -

The Commonwealth will pay to the bondholders from time to time interest payable on the public debts taken over by the Commonwealth from the States in pursuance of clause 1 of Part III. of the agreement contained in the schedule to the Financial Agreement Validation Act 1028, other than debts due by the States to the Commonwealth,-

Those words are, with certain necessary drafting amendments, the same words which I read from clause 2, of Part III., the only difference being the omission of the words " subject to this clause ". Clause 4 goes on to provide -

.   . and upon the maturity of any securities issued in respect of any such public debt, will pay to bondholders the principal moneys secured by those securities.

Sub-clause 2 gives rights to bondholders to sue in order to give effect to the liability, and sub-clause 3 appropriates the Consolidated Revenue of the Commonwealth to meet such liabilities.


Mr Scullin - What would be the position of the bondholders if Parliament amended this legislation?


Mr LATHAM - It would be open to Parliament to amend the legislation, but as time passes, all these debts will become Commonwealth securities, and I do not think that much difficulty will arise in the future.


Mr Beasley - Could a bondholder obtain the assistance of the High Court in collecting his money during the period for which the maturity date of his bonds was extended under the Financial Emergency Bill i


Mr LATHAM - Obviously all Commonwealth bonds are already the direct liability of the Commonwealth. Subclause 4 empowers the Commonwealth to sue for moneys which it pays on account of a State, and sub-clause 5 makes such power retrospective so as to validate beyond any doubt action taken last year in connexion with default which took place, and also to cover an existing pending action against New South Wales. So much for Part II. of the bill.

Honorable members are aware that last year New South Wales defaulted in regard to certain interest payments. The Commonwealth paid the amount, as it was entitled to do under the Financial Agreement, and as it was bound to do in the sense which I have explained. A writ was issued on the 13th of April, 1931, and proceedings continued in that and another action until November, when notice of discontinuance was filed. The first action, that which began in April, was for the recovery of £557,519, and the second, which began on the 10th of June, was for the recovery of £220,S75. A great deal of work was done in connexion with these actions, but an agreement was reached in October for their settlement, and the actions were discontinued in November. All that happened in the actions was the issue of the writ and preparation for the delivery of a statement of claim, but it was found that there was so much work in preparing the statement of claim, that it was not possible to draft and deliver it to the defendants, The actions were settled on the basis of an agreement by New South Wales to pay the amount owing, and this was done by what I regard as the mere giving of an I.O.TJ. A further condition was that New South Wales should enter the Loan Council and be bound by the. provisions of the Premiers plan. At the time I agreed with what was done last year, and I agree with it still. I believe that the Government, in the circumstances then existing, acted in the right way. It was the proper course to issue a writ, and then seek to arrange an agreement rather than continue protracted litigation between the Commonwealth and a State on such a matter. It was right for the Commonwealth Government to act, at that time at least, upon the assumption that the agreement wouldbe carried out by New South Wales, and I have no objections to offer to what the Commonwealth Government then did. This year, however, the position is very different. Last year the Government of New South Wales at least gave a week's notice of its intention to default. This time there was no reason to suppose, until the evening before the interest accrued, that it would default. On this occasion there was not only a more deliberate breach of the Financial Agreement than occurred last year, but also a deliberate breach of the agreement upon which the action was settled last year, which was that the Premiers' plan would be faithfully complied with. Further, the Premier of New South Wales stated that he had in hand an amount of £458,000, and on being asked on the Friday afternoon if he would on the Saturday morning pay that sum into the Commonwealth account towards meeting the interest commitments of his State, he promised to do so. Yet, when inquiry was made on the Saturday morning as to whether that had been done, it was discovered that that promise also had been broken.


Mr Ward - Was such promise given ?


Mr Beasley - It has been officially denied.


Mr LATHAM - A public statement was issued on the Friday, recording the arrangement that had been made for the paying in of this £458,000. This statement was issued with the concurrence of the Premier of New South Wales. Further, on the day before the announcement of the default, the Government of New South Wales received from the Commonwealth the sum of £243,000 representing its monthly share of the per capita payments then due. That money was provided by the Commonwealth to meet the interest payments of New South Wales, and for no other purpose. Yet the Government of New South Wales was not prepared to utilizeeven that money for meeting its interestcommitments. In view of these facts and circumstances, it appeared to the Commonwealth Government that some other course was necessary than to merely issue a writ and hope for another agree ment, which, like the last, might be broken as soon as it became inconvenient to keep it. The Commonwealth Government was faced with entirely unprecedented circumstances, and the House, in considering this legislation, must realize that. The Government of New South Wales has adopted as a deliberate policy the practice of making agreements when a benefit can be obtained thereby, and of breaking them when it suits its purpose to do so. This practice has not only been adopted as a deliberate policy in action, but has actually been publicly defended by those who claim their place in public life because of their support of this policy. The mere word of an honorable man is sufficient to bind him. A legal agreement binds all who are parties to it, and such an agreement can be enforced against an ordinary individual by suing him upon it, and, if judgment is obtained, by issuing execution against his goods, chattels, land or other possessions. But in the case of default by a State, such measures are neither efficient nor adequate. Our experience last year showed the difficulty of obtaining a judgment against a State, and the delay incidental to such procedure. Further, a judgment obtained against a State could not be enforced by the sale of the State's property, because that would be impracticable, and if, as some persons have suggested, a receiver were appointed, and put into State offices under a judgment of the High Court, forcible resistance might lead to serious civil trouble. Accordingly it is desirable to apply some other method.

The party to which I belong has been returned to this House with a definite and clear mandate from the people of the Commonwealth, including, I believe, the people of New South Wales, to deal with this matter by an appropriate and effective method. The Country party has been returned with an equallyclear mandate, and I believe that the members of the Labour party, who form the Opposition, are with us in principle on this matter. When the financial agreement was drafted, it was foreseen that there was just a possibility of default on the part of a party, and, accordingly, special legislative powers were conferred upon this Parliament. Section 105 a3 represents a compromise in language between the various parties represented at the negotiations, and it is uponthat section that the legislation now before the House is founded. Section 105 a3 is in these terms: " The Parliament" - that is, the Commonwealth Parliament - " may make laws for the carrying out by the parties thereto of any such agreement ". The object of the section is to enable the Commonwealth Parliament, by legislative action, to compel any party, the. Commonwealth Government or Executive, or a State Government or Executive, to fulfil its obligations under the agreement. It is in pursuance of that power that the legislation now being discussed has been introduced. It is legislative action to compel the performance of an obligation which exists. When the question whether an obligation exists or not, or whether or not an obligation has been performed arises, the party affected is entitled, in relation to all matters falling within federal jurisdiction, to a decision of the High Court upon the matter. This Parliament is not able, by its own mere word, tosay " we state, allege or enact that the obligations of a particular State under this agreement are so-and-so and it must perform those obligations " ; but it has power to legislate to compel the States to carry out such obligations as do exist. The final decision as to whether a particular obligation exists or not, and its extent and the degree to which it has been performed, is necessarily a matter for judicial determination, and that principle has been carefully borne in mind in the preparation of this measure. Any State or person against whom action is taken under this legislation will, if he takes the appropriate procedure, have his liability determined by the High Court, and a provision is contained in. clause 19 of the bill to the effect that if any question arises as to the liability of the Commonwealth or a State under the financial agreements, or the liability of any person to make a payment to the Commonwealth or a State under this legislation or by virtue of this legislation, it is at once to be removed to the High Court for determination.

The bill is based upon the view that a more prompt and effective procedure than that by way of action in the High

Court is required, and that it is necessary to have a procedure which cannot indefinitely be delayed by an objecting party. The essential provisions of the bill are to be found in clauses 7, 8, 9, 10, and 11. Honorable members, by reading clause 7, will see that when the proper procedure has been adopted, certain specified revenue of a State becomes payable to the Treasurer of the Commonwealth. Under clause8 payment to the Commonwealth Treasurer operates as a discharge of the liability of the individual to a State. Under clause 9 the Commonwealth may sue for the recovery of moneys falling within the specified revenue. Under clause 10 a person is prohibited within the relative period from paying the moneys falling within the specified revenue to any one other than the Treasurer of the Commonwealth or a person appointed by him.


Mr Scullin - Does that mean the whole of the specified revenue?


Mr LATHAM - It means certain selected revenues. Clause 11 is, perhaps from a practical point of view, the most important provision in the bill. It reads -

A payment made in contravention of the last preceding section-

For example, a payment made to a State or State authority when it should have been made to the Commonwealth Treasurer or a person appointed by him - shall not operate in discharge or reduction of any liability to the State of the person by whom or on whose behalf the payment is made, but, notwithstanding any agreement to the contrary or any payment to the State, or any assignment (whenever made) by the State of its rights in any liability, the liability shall, subject to this Act, continue to exist until it is discharged by payment to the Commonwealth in accordance with this Act.

The effect of that provision is that where revenue has been specified in the proper manner, an obligation of the debtor - for example, a person who is liable to pay income tax to the State - is not discharged by payment to the State, and if the taxpayer pays the State he is not only guilty of an offence, but also still owes the money to the Commonwealth. With this provision in operation it is unlikely that a State which is within the operation of the Act will receive very much of the specified revenue. The object of these provisions is to prevent the State from receiving what I have called the specified revenue, and to require the State to provide funds for the purpose of satisfying its obligations, and for no other purpose.

Two alternative procedures are provided in the bill. One procedure may normally be. adopted if similar circumstances recur, although I should think that the passing of the legislation itself ought to bring about a solution of the existing difficulties; that there should be no need to put it into operation. Another procedure set out in clause 6 is designed to dealwith cases of great urgency. The procedure under clause 5 is that, first of all, the Auditor-General can be required to give a certificate to the Treasurer of the Commonwealth setting out the amount of money due and payable and unpaid by a State to the Commonwealth under the financial agreements, and the items in respect of which the sums making up the amount are payable.


Mr Hughes - Is it on the certificate of the Auditor-General that legal action will be taken?


Mr Scullin - Can the AuditorGeneral act only after the close of the financialyear?


Mr LATHAM - He can act "whenever requested by the Treasurer to do so ". Such a certificate may be obtained at any time. We thought it might be undesirable to wait until the close of the financial year.

The next step is the publication of the certificate in the Government Gazette.


Mr Paterson - How many of the general public read the Gazette?


Mr LATHAM - The Gazette is available to all who will be interested. Having obtained the certificate of the Auditor-General and had it published in the Government Gazette, the next step is for the Attorney-General to apply to the High Court for a declaration that the amount set' forth in the certificate is due and payable and unpaid. The Treasurer may apply for a declaration as to the whole amount or as to any one or more of the sum's included in the certificate. It is provided that the certificate of the Auditor-General shall . be prima facie evidence of the matters which it sets forth. It is hoped that this will save a good deal of time. After a declaration has been obtained from the High Court the matter must come before Parliament.

To recapitulate, honorable members will see that first the certificate of the Auditor-General must be obtained; secondly, the certificate must be published in the Government Gazette; and, thirdly, an application must be made to the High Court for a declaration that the amounts referred to in the certificate are due by the States to the Commonwealth.

The next step is the parliamentary procedure. It is provided that each House of the Parliament may resolve that the provisions to which I have referred shall apply in relation to the State specified in the motion, to the extent of the amount declared by the High Court, with respect to the " specified revenue " of that State. " Specified revenue " means " such revenue or class of revenue of a State as is specified or described in a resolution passed by each House of the Parliament in pursuance of this act ". The parliamentary resolutions may provide that the income tax revenue of the State concerned, or any other State revenue, may be applied for the purposes set out.


Mr Scullin - Would such a decision apply to every taxpayer who contributed to that class of revenue?


Mr LATHAM - Yes.


Mr Scullin - What would happen if more money was received than was required ?


Mr LATHAM - Certain adjustment provisions are included in the bill.

Honorable members interjecting,







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