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Major corporate law reform bill



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M l news 4

RELEASE

ATTORNEY-GENERAL THE HON. MICHAEL DUFFY M P

13 February 1992 4/92

The Attorney-General, Michael Duffy, today released a major corporate law reform bill for three months' public exposure.

The Bill implements the recommendations of a number of major corporate law reform reports and is a major element in the Government's on-going response to the corporate excesses of the 1980s.

"The aim of this legislation is to redress deficiencies in'the law which contributed to those excesses, and to give companies the efficient and effective laws they need to get on with doing business in Australia", Mr Duffy said.

The Bill implements the recommendations of the Senate Standing Committee on Constitutional and Legal Affairs in its report on Company Directors' Duties, the Australian Law Reform Commission's report on insolvency law, and the Companies and Securities Advisory Ccmr.i t tee ’ s report cr. beans to directors,

loans between companies in a corporate group, executive remuneration and related topics.

Consistent with the Government's efforts to improve the international competitiveness of Australian business, the Bill also contains provisions to improve the efficiency of the Australian Stock Exchange's procedures for clearing and

settling securities transactions.

Mr Duffy said the release of the Bill for public exposure underscored the Government's commitment to public consultation in the corporate law reform process.

"Organisations and individuals share my concerns about the corporate collapses of the 1980s", he said.

"We need to put in place laws to ensure that the damage to our national reputation resulting from those collapses is never repeated."

"I am sure all organisations and individuals with an interest in this area will examine the Bill closely and provide the Government with advice to ensure the best possible corporate law reform bill is presented to Parliament."

MAJOR CORPORATE LAW REFORM BILL

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Among other reforms, the Bill contains proposals to:

. implement a new voluntary administration procedure, modelled on the United States "Chapter 11" procedure, to help struggling companies trade out of their financial difficulties;

. make a holding company liable for the debts of its insolvent subsidiary, where it knowingly allows the subsidiary to trade while insolvent;

. improve the requirements for disclosure of directors' remuneration; and

. scrap criminal liability for breaches of directors' duties which are committed without a dishonest intent, and replace it with a civil penalty regime.

Further details on the reforms in the Bill are attached.

Mr Duffy said copies of the Bill, the Corporate Law Reform Bill 1992, with an explanatory paper, will be available from Australian Government Bookshops. The closing date for comments is 15 May 1992.

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Canberra

DETAILS OF REFORMS

The Bill will:

Senate Standing Committee Report on "Company Directors' Duties"

- set out a list of key factors for a director to address in discharging the duty of care and diligence, to offer directors more guidance in this difficult area of the law than they have had previously;

- introduce civil penalties. Currently, company officers who breach key duties are liable to criminal prosecution, even if they acted without any dishonest intent. Under the proposed Bill, breaches committed without any

dishonest intent will be subject not to prosecution and possible imprisonment, but only to civil penalties. A civil penalty could comprise an order to pay a sum of money not exceeding $200,000 or disqualification from

future participation in company management, depending on the degree of any carelessness involved, and any other relevant factor. Once the Australian Securities Commission has commenced a civil penalty action, the

company will be able to join the action to recover compensation for any loss the breach caused to the company;

- increase the maximum penalties for breaches of directors' duties which are committed with a dishonest intent, to a maximum fine of $200,000 (up from $20,000) and 5 years imprisonment;

Australian Law Reform Commission Report - "General Insolvency Inquiry"

- introduce a new voluntary scheme for administering companies in financial difficulties, which will provide for:

- the appointment of an independent administrator;

- a moratorium on actions against the company while the administrator prepares a scheme of arrangement to put the company back on its feet; and

- the putting in place of the scheme of arrangement, subject to appropriate protections for creditors;

- help a trustee in bankruptcy to take control of the bankrupt's rights under shares in family companies;

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enable a liquidator of an insolvent company to sue the company's holding company if the holding company allowed the subsidiary to trade when the holding company knew or should have known that the

subsidiary was insolvent;

impose a positive duty on directors to prevent insolvent trading and remove the current defence which "rewards" directors for being totally ignorant about the operations of their company;

spell out (in the Explanatory Memorandum) what practical steps a director can take to minimise the chances of liability for insolvent trading;

remove the costly and barren technicalities concerning statutory demands, and focus on the reality of inability to pay;

streamline procedures for challenging statutory demands, so that any genuine dispute about the debt involved is raised early and dealt with expeditiously;

set out clear rules concerning the unwinding of past insolvent transactions and unfair loans, replacing the current obscure and complex cross-references to bankruptcy law;

widening the net of related party transactions which can be unwound by liquidators, both by extending the period of review to a uniform period of 4 years and also by catching related companies and trusts;

guarantee, for unpaid employer superannuation contributions, the same special priority in a liquidation that applies to unpaid wages;

give liquidators the power to apply for seizure and arrest orders where company officers or related persons plan to remove assets or flee Australia;

set out clearer rules on when a winding up is taken to have begun, to make sure that liquidators are able to attack past insolvent trading and to clarify a company's legal position where an application to wind the company up is pending;

assist liquidators to wind up companies cheaply and recover preference payments efficiently, by allowing a court to presume that a company was insolvent on a critical day if the accounting records relating to that day have been lost or destroyed, or were never kept;

ensure that all creditors (and not just the first to take action) get the benefit of compensation recovered in respect of insolvent trading;

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- allow the Court to overturn a resolution of creditors, if it was obtained through the votes of creditors who are related to the company or its officers;

- prevent utilities from holding an insolvent company "to ransom" by refusing to provide service to an insolvency administrator until past debts are paid;

- impose positive duties on company officers to assist liquidators and other insolvency administrators;

- clarify the powers of provisional liquidators to do all things necessary to preserve the company's position, pending determination of the winding up application;

- remove current technical restrictions on the information that a liquidator can obtain through an examination;

- clarify a liquidator's power to disclaim onerous property;

- require receivers and mortgagees-in-possession to make available a full report on the financial position of the company within 2 months of appointment;

- empower the Court to remove a receiver or mortgagee-in-possession for misconduct, and to prevent an excessively prolonged administration;

- oblige a receiver or a mortgagee-in-possession to obtain the best price that is reasonably obtainable when they sell company assets;

Companies and Securities Advisory Committee Report

- tighten up the existing section 234 in the Corporations Law, which concerns loans to directors, and extend the scope of regulation to other corporate financial transactions, by:

(a) broadening the class of regulated transactions (presently only loans, guarantees and security relating to loans and guarantees) to encompass all types of financial assistance;

(b) subject to certain exemptions, such as for approved employee share acquisition schemes and housing assistance schemes, prohibiting a company from entering into loans (and other transactions) with its directors (and certain persons

associated with directors);

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(c) subject to analogous exemptions (which will cover most group treasury operations), prohibiting a company from entering into transactions such as loans to related bodies corporate, or bodies corporate to which it is 'linked' - that is, in which one body corporate has a significant

influence over the other - unless a strict members' approval procedure is followed and approval obtained; and

(d) subject also to appropriate exemptions, prohibiting a company from entering into asset transfer transactions with associates of the company (defined in wide terms), except in

accordance with a strict members' approval procedure.

- require greater disclosure to the company by directors of matters which may give rise to a conflict of interest;

- extend the operation of existing section 239, relating to the disclosure of benefits given to directors, by:

(a) requiring disclosure (subject to a $50,000 threshold) of all benefits given to a director of a company or a related company, to relatives of such a director, relatives of the spouse of such a director and to companies and trustees so associated with a director that the director might be the ultimate beneficiary of the payment

(in particular, the Division is designed to require disclosure of benefits received by way of artificial devices such as 'consultancies’ and 'management companies');

(b) requiring such disclosure to be made to the ASC, as well as in the company's annual accounts and director's report; and

Settlement Reforms

allow the Australian Stock Exchange to implement its new electronic share settlement scheme, called the Clearing House Electronic Sub-Register System (CHESS).