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Economics References Committee
Treasury Laws Amendment (2021 Measures No.1) Bill 2021, Provisions

FINCH, Ms Shannon, Chair, Corporations Committee of the Business Law Section, Law Council of Australia

MacDONALD, Mr Nathan, Principal Policy Lawyer, Law Council of Australia [by video link]


CHAIR: I now welcome representatives of the Law Council of Australia. Thank you for appearing before the committee today. Information on procedural rules governing public hearings has been provided to witnesses and is available from the secretariat. I'd like to advise witnesses that answers to questions on notice should be sent to the secretariat by 5.30 pm on Wednesday 16 June. Do you wish to make an opening statement?

Ms Finch : Yes.

CHAIR: Over to you.

Ms Finch : As the national body representing the Australian legal profession, the Law Council is grateful for the opportunity to appear today. The Law Council strongly endorses schedule 1 to the bill, which seeks to re-enliven a number of the important measures that were introduced temporarily during the COVID-19 pandemic in response to practical, regulatory and legal problems facing the corporate sphere as a result of novel social distancing requirements. The Law Council has previously expressed its support with necessary safeguards for the relevant changes to the Corporations Act allowing for virtual meetings and the electronic communication and execution of documents. Although not on the permanent basis the Law Council would prefer, the proposed reforms are workable and the Law Council recognises the importance of moving swiftly to provide a framework for continued use of virtual meetings, electronic communications and document execution. The need for urgency is heightened given the reforms lapsed on 21 March 2021 and the delay in implementation of the bill has caused uncertainty and disruption in corporate practice.

In the Law Council's written submission to the earlier inquiry by the Economics Legislation Committee, suggestions were made for improving or clarifying some of the proposed changes in schedule 1. These included that the Australian government should consider facilitating dialogue between states and territories to harmonise, where possible, electronic execution of document processes across jurisdictions, not just in the case of emergency. Further, the use of technology in meetings should be made on a permanent basis and in advance of the run-up to the significant AGM season from September to November 2021. In particular, the permanent framework should not be delayed by debate over nuances of stakeholder management for certain segments of the corporate world. Meaningful guidance that is suited to the context can be given via regulators and industry bodies to address these nuances without interference with directors' duties and the law of meetings. If concerns persist, particular measures could be addressed by regulation in due course. Under schedule 2 of the bill, the liability of directors and officers for civil penalties and misleading and deceptive conduct in relation to continuous disclosure obligations would become contingent on proof of the requisite mental element.

The Law Council represents a broad church of views within the legal profession, and some of these divisions hold varying views on these issues and have differing interests in the subject matter. The corporations committee of the Law Council, of which I've been the chair until recently, strongly supports these reforms, which address a significant ongoing concern that has been raised by that committee over many years. In the context of support for schedule 2, recommendations are made in our submission on further matters to be addressed and subject to broader review, as well as clarification in the text of the bill or explanatory materials if time permits. The corporations committee believes that it is consistent with the rule of law that severe sanctions and consequences must bear some proportion to fault. Civil penalties have been increased so as to be so severe that they are no longer an appropriate remedy pathway for no-fault scenarios, and they should not be threatened in those circumstances.

The linkage with the general no-fault misleading and deceptive conduct provision is an important one in this bill to prevent one pathway being used to undermine the other. Given the imposts of proceedings under the no-fault provision on other shareholders, the corporations committee asserts that it is not straightforward to say that section 1041H is a shareholder protection provision. It purports to compensate some shareholders at the cost of others, and there is a public policy issue as to whether that is appropriate in circumstances where there has been no corporate fault.

The corporations committee has concerns with anecdotal feedback as to the costs of directors and officers insurance for disclosure liability, and that it is leading to companies choosing to be uninsured, underinsured or having important coverage carved out of policies. It is a red flag that parliament should not ignore. The corporations committee is of the view that these reforms will not lead to a lower standard of conduct. They do not change the disclosure test. It will not lead to more limited disclosure. It will not lead to an inability to successfully prosecute cases of significant concern. It is rather suggested by my committee that these reforms may redress the technical imbalance in continuous disclosure laws that have contributed to inflated insurance costs.

My committee also notes that the reforms are unlikely to adversely affect the integrity of markets, because knowing or intentional disclosure decisions will not be protected. To suggest that these reforms could impact what is disclosed or could impact the integrity of markets is illogical. However, I am conscious that others within the legal profession, particularly practitioners engaging in initiating class actions, are supportive of the regime that was in place prior to determination No. 2 of the COVID determinations. Unfortunately a representative from the class action committee of the Law Council has been unable to attend this morning's hearing. However, if there are specific questions that go to that committee's submissions, then we would be happy to take those on notice and provide a written response.

These are ultimately matters for parliament to determine, and the Law Council welcomes the opportunity to provide support throughout this process. With this in mind, we're very happy to answer any questions that you may have.

CHAIR: Thanks, Ms Finch, for the opening statement. Senator McAllister and I understand a broad church better than most. Senator McAllister, did you want to start?

Senator McALLISTER: Thanks very much for appearing, Ms Finch and Mr MacDonald. You may not have seen this, but as part of this committee's proceedings Treasury advised that they didn't consult anyone about the proposed measures in schedule 2, although they did rely on their consultation with the few stakeholders who were consulted when they made the temporary changes in September. One of the lucky stakeholders who was consulted last year was the corporations committee of the Law Council. Can I just ask who attended that consultation with Treasury on behalf of the Law Council?

Ms Finch : That consultation would not have been a specific consultation meeting. Throughout last year, Treasury and the Law Council and a number of other stakeholders were in constant discussion over necessary measures to support the markets through the COVID disruption. So there would have been numerous conversations around concerns being raised by various elements of the corporate community about continuous disclosure. Concerns about the continuous disclosure regime had been raised by the Law Council in previous submissions, inquiries and consultations with Treasury in past years.

Senator McALLISTER: In their answer to the question—and it's a little unfair because you don't have it in front of you—they've indicated that on 21 September 2020 Treasury officials meet with the business law section of the corporations committee. They have named a specific occasion when you met to discuss this temporary measure.

Ms Finch : I don't have the date in front of me, but I would have been part of those discussions. We certainly did discuss it with Treasury last year.

Senator McALLISTER: Which other personnel from the business law section of the corporations committee were involved?

Ms Finch : On that date, I can't be certain. There was an emergency measures working group which had representatives of many of the corporate firms and some academics as part of that working group. It could have been a discussion with that working group or it could have been a discussion just with me. Either way, I would have been privy to that discussion as chair of the committee.

Senator McALLISTER: I see. Can I ask you to provide on notice the other people who participated? And can I confirm that nobody from the class actions committee of the Law Council was consulted on either schedule 2 or the temporary change to continuous disclosure laws?

Ms Finch : I'll have to take that question on notice. I don't know what engagement the class actions committee had with Treasury throughout last year.

Senator McALLISTER: Where was the meeting on 21 of September held?

Ms Finch : I'll take that on notice and provide those details to you as part of the response to the earlier question.

Senator McALLISTER: Prior to that meeting between the Treasury officials and the corporations committee of the Law Council, did participants sign any sort of confidentiality agreements or exchange any form of written undertaking?

Ms Finch : No, that's not customary in any of the Law Council's consultations with Treasury. There's never an undertaking of that kind. However, discussions are kept confidential to at least committee members. So there's discussion of the subject amongst the committee, but we don't reveal the content of Treasury discussions publicly, beyond the committee.

Senator McALLISTER: Right, so that's a commitment that the Law Council has made amongst yourselves?

Ms Finch : It's a practice that we observe as a practical measure. It's for Treasury to communicate its position or the government's position to the market; not for us.

Senator McALLISTER: When we asked Treasury about that meeting that took place on 21 September, they said their meetings were undertaken on an understanding of confidentiality, and to disclose the minutes of those meetings or the individuals who attended them would be a breach of that confidence. Would that be a breach of confidence, from your perspective, Ms Finch? It sounds like it's Treasury's confidences that you're seeking to protect.

Ms Finch : I think it probably goes both ways. There is an expectation of confidence in any consultation with Treasury. So, yes, under the law of confidentiality, where there is an expectation of confidence, it is binding.

Senator McALLISTER: You think it's a legal obligation?

Ms Finch : If there is an expectation of confidence in a particular engagement, then, yes, the law of confidentiality does impose obligations.

Senator McALLISTER: Right. But that's never been written down or formally communicated?

Ms Finch : Not that I'm aware of, although it's possible that there are protocols around some Treasury consultations that I don't recall. But we certainly observe confidentiality, if that goes to your question.

Senator McALLISTER: It does, although it's kind of unusual. Government consultation is usually for the purpose of elucidating public views about measures that are proposed. It's quite unusual for it all to happen in confidence. What I'm trying to understand from you is whether it is the Law Council that's insisting on all of this being conducted in secret or whether that's Treasury's preference.

Ms Finch : No, it's not something we've insisted on. Generally, it would be unusual for the output of a verbal consultation to be attributed to individuals and published as distinct from written submissions. In any Treasury consultation process, there is generally the opportunity to indicate whether you wish your submission to be made confidentially or not. Where we provide written submissions, in most cases we tend to agree to that submission being made public. But there is always a choice for anyone providing a written submission as to whether submissions are confidential or not.

Senator McALLISTER: Just to tidy that up, did the Law Council make written submissions as part of this rolling process of consultation that was taking place last year?

Ms Finch : Not on emergency measures per se. Given the speed at which the government was moving last year, there were not necessarily formal consultation processes in the traditional way over every measure. There was broad discussion with stakeholders across the market, as I understand it. There are some initiatives where there is more time, in which case a formal consultation paper is issued and then written submissions are made against that. But, if there is not a formal consultation paper, then written submissions typically are not made.

Senator McALLISTER: Okay. I think that most senators would understand that last year was an unusual year, so I offer this is a positive description rather than a normative one—it was a rushed process undertaken in the context of urgency. That's how you would characterise what happened?

Ms Finch : No. There was urgency in the circumstances of last year, although this was not one of the earliest measures to be introduced. I would expect that there had been concern expressed from very early in 2020 by various segments of the community around continuous disclosure and how it was operating in the context of particular uncertainty last year.

Senator McALLISTER: I understand.

Ms Finch : So I wouldn't suggest that the reforms were rushed in that sense.

Senator McALLISTER: But they occurred in a particular context of uncertainty?

Ms Finch : Yes.

Senator McALLISTER: Two years ago, the Australian Law Reform Commission recommended there be a comprehensive review of continuous disclosure laws and that that review undertake wide consultation, collect and draw from an evidence base, and be conducted by agencies with sophisticated understandings of the regulatory provisions, class action law and procedure in the securities market. The process that occurred last year is not a substitute for such a wide ranging review, is it?

Ms Finch : No. But I don't think it was purporting to be.

Senator McALLISTER: Okay. Thank you.

Ms Finch : The process this year, I think, has had more structure around it, and there have been submissions in relation to the proposed reforms in this bill.

Senator McALLISTER: Have there?

Ms Finch : Yes. There have been submissions made to earlier committees in relation to the proposals in this bill. A wide range of stakeholders have now provided written submissions on this content.

Senator McALLISTER: Right. To the parliament, but not to the government, Ms Finch.

Ms Finch : No. But I presume that the government is also having regard to them.

Senator McALLISTER: They may be.

Ms Finch : Those submissions have been made publicly.

Senator McALLISTER: I'm not part of the government, so I don't know. I'm trying to understand the extent to which the government has conducted a formal process of consultation. Their indication to us is that they haven't consulted anybody about schedule 2 of this bill. So I'm just trying to understand what's actually going on behind the scenes, and you may know more than I do. Alright. The corporations committee of the Law Council—and you spoke about it this morning—suggests that the measure will address the problem of inflated insurance premiums for directors and officers insurance. What evidence is the committee relying on when it suggests that the measures in schedule 2 will result in cheaper insurance premiums?

Ms Finch : We have not conducted a survey of insurers. I think to address that you need to speak with insurers themselves. The concerns that we have raised are about the escalating cost of insurance. Our members represent every major law firm in this country and they are approached on a regular basis around directors and officers insurance. We get some visibility into the costs of it, and the costs appear to have been rising exponentially in recent years. When those concerns are raised with insurers, my understanding is that companies are receiving feedback that this relates to the risk profile of Australia's disclosure regime. That has been a matter that has been of concern to the corporations committee for a significant period of time. The original continuous disclosure liability regime did have fault elements. They were removed, effectively by legislative accident, when the Criminal Code was introduced and the fault elements to it, which were criminal provisions only at that stage, were located in the Criminal Code rather than in the primary provisions. Then, when the civil penalty regime was subsequently introduced, the fault elements not being in the primary provision meant that the civil penalty regime cut across that. But it was never intended, as we see it, as part of the original design of the continuous disclosure liability regime. So the reason we have been raising concerns is to try to address a problem that is longstanding and we do not believe was originally intended.

CHAIR: I think the comment used in the opening statement was 'anecdotal feedback'.

Ms Finch : Anecdotal feedback regarding insurance costs, because we have not ourselves undertaken a direct survey. I don't have direct data, but I do have feedback from the members of the committee who are all advising companies who have to take out and renew directors and officers insurance. I've also seen that myself in direct practice and we are also seeing companies—and this is also endorsed by other members of the committee—making enquiries as to whether it is now worth it to become uninsured with directors and officers insurance; as to whether it is better to take the risk of having no insurance because the presence of insurance is expensive and there are concerns that it can actually attract class action activity. So they're inclined to say, 'Well, maybe we just shouldn't take it out.' I don't think that's a wise or prudent business decision, but businesses do have to weigh the cost of D&O insurance against their business and the rationality of that cost in the context of their business. For very large companies this is manageable, but for the smaller companies it's a very heavy impost, and smaller companies need that insurance.

Senator McALLISTER: Senator Chisholm, did you have any follow-up questions?


Senator McALLISTER: The Insurance Council has made a submission and they have said of the impact of the schedule 2 measures:

in the short to medium term at best stem the rate of increase in D&O premiums, but will quite likely have no discernible effect; and

in the medium to long term may lead to some reduction in D&O premiums, but quite likely will have no discernible effect.

I'm just surprised that you're so willing to connect the schedule 2 provisions to a reduction in premiums given that the insurers themselves are saying it will quite likely have no discernible effect.

Ms Finch : I think you should distinguish the Insurance Council from insurers themselves. It's a question to direct to the Insurance Council, but I understand that insurers themselves have made different representations in their submissions. So that's not a question for the Law Council; it's a question for the Insurance Council.

Senator McALLISTER: But you've made submissions on it nonetheless.

Ms Finch : We have, based on our experience, and we've we have identified that is anecdotal, but it is nonetheless consistent with our experience, which is really all that we can address.

Senator McALLISTER: Perhaps on notice I might invite you to consider some of the evidence that has been provided to the committee by the Insurance Council and to explain whether or not, having reviewed that, the Corporations Committee still believes that schedule 2 will affect insurance premiums, and on what basis. I think it is important for the committee. So it's up to you to consider how you respond to that question.

Ms Finch : We will take that question on notice. Having said that, when we made our submission, we were aware of the Insurance Council's position.

Senator McALLISTER: In the submission—and you may not be in a position to answer this, Ms Finch, given that you come from the other bit of the Law Council—the Class Actions Committee expresses concern that changes in schedule 2 will have a direct impact on accountability concerning published reports. Is anyone able to elaborate on this, or might that be something you wish to take on notice?

Ms Finch : I have seen that comment. I will take it on notice for that committee to respond to, but the Corporations Committee does have a view on that, which is that we consider that a lot of the comment around the likely effect of these changes on the ability to bring regulatory action, the ability to bring class actions in the case of conduct which people have tended to describe as being egregious, that it would have some effect on that—I cannot see any basis for that suggestion. I think it's exaggerated, because this change really only provides a carve-out in the case where there is no knowledge, there is no intention, there is no breach of a standard of care. Negligence is an extremely low bar. It does not provide a dramatic amount of protection. So, if there has been knowledge and a decision made to not do something when there was knowledge of the elements, it strikes me that, if you are going to influence conduct, there is no impact of this reform, other than on unknowing or innocent conduct. It strikes me that these changes cannot have any effect on what people choose to disclose or how they choose to behave. It does not alter the disclosure standard. If there were a knowing action to withhold or to change disclosure in response to this, then it would fall within the net of negligence or intentional conduct. If it were purely innocent conduct, which is what this is directed to, then this reform can have no effect on what people do or choose to disclose.

Senator McALLISTER: Although negligent or intentional conduct is not insured.

Ms Finch : That's not correct.

Senator McALLISTER: Is that right? You should tell me.

Ms Finch : Yes. Insurers do not like paying out on insurance. If there is a claim to be made that they will not pay under their insurance because there has been negligent conduct, as a result, in most class actions that are brought, which have generally been in relation to conduct that is fairly extreme or fairly significant, you would find that the insurance never pays out, because there has been some default in the standard of care or some intention or knowledge. The two statements are completely illogical. Insurance does cover some circumstances where the company is at fault. It doesn't cover criminal conduct; it doesn't cover fraud. But it will cover things like ordinary negligence, because ordinary negligence happens all the time. People do tend to fall short of a standard; that is normal. That's why I say it does not offer significant protection. It shouldn't be changing the way that companies behave. It shouldn't be encouraging them to take greater risks in their conduct. Negligence is a very low bar, but I think that this committee does need to be careful of some of the exaggerated claims that are being made about the effect of this, which simply are illogical.

Senator McALLISTER: Ms Finch, you indicated at the beginning that the representation from the other part of the Law Council, which has a different view, was not possible today because of illness. Should we expect some further representations from your other committee?

Ms Finch : We can give them the question on notice and ask them to address it. The example that I am aware of them having flagged is a concern that it will be more difficult for class actions to be pursued in circumstances of negligence on the part of an auditor—

CHAIR: As there are problems with the audio, we will suspend the hearing.

Proceedings suspended from 09 : 59 to 10 : 01

CHAIR: We'll resume the committee hearing and I'll hand back to Senator McAllister.

Senator McALLISTER: Thanks very much, Chair. In fact, before we suspended I was nearly finished. What I was really asking was: obviously the Law Council has a range of views, and you've been very upfront about that. I should say that, in this committee and in other committees, participation of the Law Council is enormously helpful and provides a great deal of guidance to the Senate in the way that we do our work, and we're always very grateful for your contributions. If there are things that your other committee wishes to contribute but weren't able to contribute today, I really just wanted to indicate that we of course welcome any follow-up material or information that they wish to provide.

Ms Finch : We're very happy to provide some additional responses from that committee. The question as we see it, though, is that there seems to be a lot of focus on: do these reforms prevent people bringing actions that should be brought? I cannot see how that can be the case. It's also a question, I think, for parliament to consider. The parliament has set its own principles for legislation, and one of those principles is that where there is strict liability, where there is no-fault liability, that should not relate to circumstances where there is no element of judgement involved. Strict liability should apply to things which are a simple binary: did you do something or did you not? And not things where there are shades of grey or elements of judgement to be made.

One of the Law Council's concerns, which I think is shared across the board, is that as a whole the Law Council stands for the rule of law, first and foremost. From the corporations committee's perspective, what we see is a provision that has effectively been a strict liability provision being used in circumstances where parliament's own principles say it should not. It has been exacerbated by the reform to the penalties regime, where, as you may recall, the consultation on the increases to civil penalties was suspended soon after it began. So the consultation was not completed on the substantial revision of the penalties regime for the Corporations Act. Now, the corporations committee also believes in rigorous enforcement, and we believe in there being substantial penalties for misconduct. We are not an anti-enforcement cohort—quite the opposite—but we do believe in proportionality. Without proportionality, our laws are regarded as arbitrary. It discourages foreign investment. We are out of line with law in the United States, which is our biggest investment partner. We invest in them; they invest in us. And our law is out of line with the equivalent regime there.

There have also been representations made that this reform would take us out of line with the United Kingdom, and I think that mischaracterises the position. There are some strict liability provisions in the United Kingdom, but not of this scale and not with this scale of penalties. They are not used for prosecution of continuous disclosure conduct in the way that this regime is. So it is being mischaracterised. It is important that we actually hold to the rule of law in the design of our laws.

CHAIR: Thanks very much. There being no other questions, I thank witnesses for appearing before us today. We will now have a short break.

Pr oceedings suspended from 10:05 to 10:23