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Corporations Legislation Amendment Bill 1994
House: House of Representatives
Portfolio: Attorney- General
Commencement: The legislation has multiple commencement dates. The specific commencement provisions are set- out at the conclusion of Main Provisions, below.
This is an omnibus Bill which will make numerous and miscellaneous amendments to the Corporations Law and related legislation. Amendments worth noting include:
* conferring civil jurisdiction under the Corporations Act 1989 and the Corporations Law on lower courts in the areas of debt recovery and monetary compensation;
* introducing the final stage of the legislative support for an enhanced electronic settlement system;
* extending the application of fundraising provisions of the Corporations Law to building societies and credit unions ("financial institutions");
* excluding the rules of natural justice from procedures to be observed in hearings by the Corporations and Securities Panel;
* introducing the system of penalty units ($100 per unit) in lieu of reference to a penalty expressed in a dollar amount; and
* allowing the conversion of certain companies limited by shares (eg. mining companies with fully- paid shares) to no liability companies.
There is no central theme to this Bill. The amendments are considered necessary to keep the somewhat complex and cumbersome Corporations Law current, and to the streamline, to some extent, the operations of the Australian Securities Commission (ASC) and the Corporations and Securities Panel ("the Panel"). The Explanatory Memorandum to the Bill recognises that the Government is committed to simplifying the Corporations Law but that the exercise will take "some little time" 1 .
[Readers should be aware of the distinction between the Corporations Act 1989 and the Corporations Law. The Corporations Act 1989 has 82 sections and it enacts the Corporations Law at section 82. The Corporations Law is an extensive piece of legislation in its own right and it currently runs to over 1300 sections commencing from section 1 through to section 1389. For convenience, these documents are referred to as separate pieces of legislation. Technically, the full reference to the Corporations Law is "the Corporations Law set out in section 82 of the Corporations Act 1989". Under the
national scheme, each State and the Northern Territory also has a uniform Corporations Act which applies the national Corporations Law in each of those jurisdictions.]
The main provisions in the Bill are grouped in a set of Schedules.
Schedule 1 introduces amendments to the Corporations Act 1989 and the Corporations Law to expressly provide that a lower court of a State or Territory has jurisdiction to hear civil claims made under the Corporations Law. A "lower court" means any court other than the Supreme Court of a State or Territory (eg. such as a District, County or Magistrates Court).
These amendments are desirable to enable litigants with small claims to avoid the higher costs that are often associated with taking an action in a "superior court" such as a State Supreme Court or the Federal Court.
The type of claim heard in a lower court is subject to the monetary limits which apply in that particular jurisdiction (ie. claims above a certain limit or claims involving complex considerations such as schemes of arrangements for a corporate group have to be heard by a higher court).
The main amendments are new sections 51B and 53AA in the Corporations Act 1989and a new section 58AA in the Corporations Law. To be fully effective, each State and the Northern Territory will have to make comparable amendments to their corresponding Corporations Acts. Commencement of the amendments will have to be simultaneous and uniform.
Schedule 2 introduces amendments to provisions contained in the Corporations Law which facilitate the Clearing House Electronic Subregister System ("CHESS"). CHESS is a system which will bring the settlement facilities of the Australian Stock Exchange ("ASX") to world best standards. The main goal of CHESS is to obtain a settlement for share transactions within the period of T + 3 business days, where "T" is the date of the trade. The system utilises electronic transfer through a clearing house ("SCH") subregister. CHESS reduces the risks for private investors and simplifies the process for a change in share ownership.
To enable the CHESS system to achieve its full operation, minor legislative amendments are necessary. Essentially, the amendments recognise the SCH electronic form of registering share transactions, and the authority of the SCH to record and cancel share certificates. The ASX has established a subsidiary company - ASX Settlement and Transfer Corporation Pty Ltd (ASTC) which has the responsibility for the implementation of CHESS. 2
The proposed amendments, such as Item 4 in Schedule 2, introduce security measures which will remove the requirement for a company to disclose on its public register the serial numbers of share certificates. This will avoid the potential fraudulent practice whereby a person might purport to cancel the serial numbers of existing share certificates and create an equivalent number of shares in CHESS (ie. a bogus or fraudulent transaction).
One casualty of the introduction of CHESS will be the practice of some companies to include in their articles of association a provision to restrict or refuse to register the transfer of shares. To comply with the SCH business rules, a company is prohibited from refusing to register a proper SCH share transfer processed through CHESS (see also existing section 1109L - Issuing Body Not To Refuse To Register Proper SCH Transfer, already inserted in the Corporations Law). Ford in his Principles of Company Law explains the historic reason for some companies using this restrictive device. Ford says:
Several listed public companies have adopted articles which confer on their boards the power to refuse to register a transfer in favour of a company which is a foreign company for the purposes of the Foreign Acquisitions and Takeovers Act 1975 (Cth): see, for example, Equiticorp Industries Ltd v ACI International Ltd (1986) 12 ACLR 148. The justification for such articles is said to be that if transfers are registered in favour of foreign persons, the company may itself be classified as a foreign company and this may cause it to lose business opportunities in Australia. 3
A variation of the above restriction is one which confers on a company board the power to refuse to register a share transfer which would result in a contravention of a law of a State or Territory or of the Commonwealth. Such restrictions are sometimes essential, particularly where the company is under special statutory controls. Examples of relevant laws which have restrictions on share transfers include the Qantas Sale Act 1992 (Cth) and the Casino Control Act 1953 (Tas). It is observed that the relevant legislative amendments to these Acts will also be made to accommodate the CHESS system.
It has been suggested that one alternative to a "refusal- to- register" provision in the articles of association, is an article which will empower the board to disenfranchise a new share holder until such time as a statement confirming compliance with a law or identification of nationality. 4 Companies wishing to participate in CHESS and which have a provision in their articles of association empowering the board to refuse to register a share transfer will have to amend their constituent documents and, if relevant, consider a modified form of restriction.
Schedule 3 introduces amendments which will rationalise the interface between the Corporations Law and the State/Territory- based Financial Institutions Codes to enhance regulation of, principally, building societies and credit unions. At present, the Corporations Law has an uneven application to these financial institutions which are mainly regulated by the States and Territories.
[Readers should be aware that the States and Territories have enacted uniform laws to regulate financial institutions such as building societies and credit unions. Queensland's Australian Financial Institutions Commission Act 1992 contains the "AFIC Code" in its section 21. Queensland also enacted the Financial Institutions (Queensland) Act 1992 which contains the Financial Institutions Code in section 30. The other States and Territories have used the Queensland Codes as a template. There is, therefore, some degree of "overlap" between the national Corporations Law and the State/Territory Codes.]
The national Ministerial Council for Corporations and the Ministerial Council for Financial Institutions (State and Territory Ministers) have decided that rationalisation of national and State/Territory laws should occur, including the following:
* the fundraising provisions of the Corporations Law are to apply to financial institutions, with certain specified exemptions;
* duties of officers of financial institutions are to be regulated under the State/Territory Financial Institutions legislation;
* registration of financial institutions under the Corporations Law is no longer required;
* the takeover provisions of the Corporations Law will continue to apply; and
* the continuous disclosure provisions introduced by the Corporate Law Reform Act 1994 will generally apply.
A key amendment is the proposal to exclude financial institutions from the definition of "public company" ( Item 1 in Schedule 3). Another key amendment is the proposed definition of a "corporation" set out in Item 6 of Schedule 3. This proposed definition places financial institutions under the Corporations Law for the purpose of regulating conduct relating to securities (eg insider trading, and the issue of a prospectus) and offering securities for subscription, but excludes financial institutions from the other provisions of the Corporations Law.
A useful provision is the proposed new Part 1.2B - Financial Institutions, which will provide definitions of financial institutions and includes references to State and Territory Financial Institution Codes ( Item 24 of Schedule 3). The new Part contains a table to assist in identifying the various sections in the Corporations Law which no longer apply to financial institutions.
It is perhaps a reflection of just how complex the Corporations Law has become that it is useful to have the inclusion of tables and examples in the Corporations Law itself to assist in reading the voluminous provisions of the very large Principal Act.
Schedule 4 contains amendments to the Australian Securities Commission Act 1989 ("ASC") and the Corporations Law in relation to the operations of the Corporations and Securities Panel ("the Panel"). The Panel is established under the Australian Securities Commission Act 1989 (section 171). On application by the ASC, the Panel examines such matters as corporate takeover conduct and the Panel can make a declaration of unacceptable conduct. The Panel may also make an order prohibiting such conduct and that order is enforceable in a court.
The panel has encountered some difficulties in its operation. In March 1992, the Companies and Securities Bulletin noted (after the Panel's first hearing):
There is clear dissatisfaction with the way the panel became bogged down in legal issues- largely because of its power both to make declarations and to issue orders.
This ability seriously to affect individuals' rights and issues of natural justice led to the involvement of a long list of barristers in the case in a way that was not envisaged when the panel was mooted. 5
The proposed amendments in the Bill include a small but very significant amendment to streamline the activities of the Panel. Item 20 in Schedule 4 excludes the application of the rules of natural justice from the procedures for an inquiry by the Panel.
The rules of natural justice are applied to ensure fairness in how a tribunal or panel conducts itself in hearing a matter before it. Natural justice is a common law doctrine which the Courts apply when reviewing the conduct of a decision- maker. The principles should also be fundamental considerations for the primary decision- maker. Two main principles are involved. These are, that a party whose interests are affected has a right to be heard, and that the decision- maker should not be biased. Two additional principles are sometimes added and these are the need for probative evidence and reasons for decisions. 6
The Explanatory Memorandum to the Bill, at paragraph 324, states that " [d]elays caused by over zealous demands that procedural fairness be afforded may be a major impediment to an expeditious hearing as required by the [Corporations] Law." In essence, the amendments in the Bill will expressly exclude the common law rules of natural justice and replace them with procedures (to be specified in Regulations) which will allow the Panel to make decisions more quickly without the disruptions caused by parties and their legal advisers raising common law principles of natural justice.
An Act of Parliament can override the common law and it is possible for the rules of natural justice to be excluded by a statute. In this Bill, the rules of natural justice will be excluded, and, as noted above, to ensure procedural fairness, use will be made of procedures specified in Regulations.
There are two issues which need to be considered in relation to these proposed amendments. Firstly, adherence to the rules of natural justice and corporate regulation in Australia is a topical issue. The ASC has been the subject of public criticism in relation to alleged denial of natural justice in some of its activities. 7 This Bills Digest simply notes that allegations were made. The ASC has denied the allegations. The allegations were made at a public hearing of the Senate Standing Committee on Legal and Constitutional Affairs on 15 February 1994. The Committee is yet to report its findings.
The Panel is, of course, not one and the same as the ASC but the Panel is established under the ASC Act. The Panel has observed the laws of natural justice but the reason for the proposed amendment is that the costs and delays involved have impeded prompt decision- making by the Panel. The rules of natural justice do, however, provide a standard for ensuring fairness and their exclusion should be carefully considered.
Secondly, it is suggested that the amendment in question (ie. exclusion of the rules of natural justice) is of some significance and it does not sit well with what are described in paragraph 1 of the Explanatory Memorandum as a Bill containing "miscellaneous amendments".
Schedule 5 of the Bill contains amendments to the Administrative Appeals Tribunal Act 1975, the Australian Securities Commission Act 1989 and the Corporations Law to exempt certain decisions of the ASC from notifying all persons whose interests are affected by a reviewable decision of the ASC (ie.to be notified of that decision).
Reviewable decisions of the ASC have had a blanket exemption under section 27A and Regulations made under the Administrative Appeals Tribunal Act 1975 ("the AAT"). This exemption has recognised the difficulty that the ASC faced in its initial operations in identifying each person likely to be affected by a reviewable decision of the ASC (eg. the class of persons would extend to individual shareholders of numerous companies).
The proposed amendments (eg. Item 2 in Schedule 5) now places an onus upon the ASC to take such steps as are reasonable in the circumstances to notify persons affected by a reviewable decision made by the ASC. The ASC can determine whether notice is warranted having regard to the costs involved in notifying that person and the way in which the persons interests are affected. A person who is not notified still has an opportunity under "special circumstances" (eg. the Tribunal's discretion to extend the period of time) to seek review before the AAT.
These appear to be reasonable amendments.
Schedule 6 contains amendments which simply convert dollar amounts for offences for breaches of the Australian Securities Commission Act 1989 and the Corporations Law to penalty units. One unit equal $100. These amendments bring the legislation into line with a uniform approach to the expression of penalties in Commonwealth legislation.
Schedule 7 contains amendments to the Corporations Act 1989 and the Corporations Law to transfer administrative responsibility for unclaimed money from the Minister to the ASC. Unclaimed money arises when a shareholder fails to claim shares or dividends, or does not claimed relevant money from the sale of property arising from the liquidation of a corporation. A person who has failed to claim shares or money may make a subsequent claim upon the Companies Unclaimed Money Account and the claim is considered for payment. It is an appropriate administrative function for the ASC.
Schedule 8 contains miscellaneous amendments to the Corporations Law. These amendments reflect the need to keep the Corporations Law current. For example, two areas which have seen increased activity in terms of securities are derivative products (which, in simple terms, have the features of both equitable and futures products), and investments offered through foreign banking. Another miscellaneous amendment will ensure that certificates issued by the ASC are accepted as conclusive evidence in all courts throughout Australia. Item 14 in Schedule 8 will be of particular interest to the mining industry. The proposed amendment to section 167 of the Corporations Law will allow companies limited by shares to convert to no liability companies. Previously, the permissible change of status was only "one way" eg. from a no liability company to a company limited by shares (provided the shares were fully paid- up). No liability companies are a feature of speculative mining ventures. A no liability company is permitted to offer shares at a discount without a requirement to obtain court approval for the offer. This flexibility allows speculative mining companies to more readily attract investors.
Schedule 9 contains machinery provisions to co- ordinate the commencement and application of the numerous amendments made by the other Schedules in the Bill. The amendments also include transitional amendments (eg. transitional amendments relating to unclaimed money referred to in Schedule 7, above - see Item 3 in Schedule 9).
The following provisions commence on the day on which the Act receives the Royal Assent:
* Part 1 (short title and commencement provisions);
* Part 2 (description of schedules of miscellaneous amendments);
* Part 3 (interpretation and saving provisions);
* Schedule 5 (various amendments relating to reviewable decisions); and
* Schedule 9 (commencement relating to amendments proposed by other Schedules).
Schedule 1 (amendments relating to civil jurisdiction of lower courts) and Schedule 3 (amendments relating to financial institutions) commence on a day or days to be fixed by Proclamation.
Schedule 2 (amendments relating to clearing house subregister system), Schedule 4 (amendments relating to corporations and securities panel), Schedule 7 (amendments relating to unclaimed property) and Schedule 8 (miscellaneous amendments) commence on a day or days to be fixed by Proclamation, or otherwise, 6 months after the day on which the Act receives the Royal Assent.
Schedule 6 (amendments introducing penalty units) commences after all of the other amendments, and the provisions of the separate Corporate Law Reform Act 1994, have commenced.
1. Explanatory Memorandum, Corporations Legislation Amendment Bill 1994, 1994: 1.
2. A description of the key concepts involved in CHESS is found in Richards, A. Clearing House Electronic Subregister System, Companies Securities Bulletin, No. 125, September 1993, Corporate Adviser, Melbourne, 1993: 2- 6.
3. Ford H.A.J., Principles of Company Law, 5th Edition, Butterworths, Sydney, 1990: 718.
4. Richards, A. Clearing House Electronic Subregister System, Companies Securities Bulletin, No. 125, September 1993, Corporate Adviser, Melbourne, 1993: 5- 6.
5. Companies and Securities Bulletin, No. 107, March 1992, Corporate Adviser, Melbourne, 1992: 8.
6. See Enright, C. Judicial Review of Administrative Action, Branxton Press, Sydney, 1985: 457.
7. P.M. Radio Program, Australian Broadcasting Corporation; Tuesday, 15 February 1994.
Brendan Bailey (06 2772434)
Bills Digest Service 21 April 1994
Parliamentary Research Service
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Commonwealth of Australia 1994.
Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.
Published by the Department of the Parliamentary Library, 1994.