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Wednesday, 30 November 1983
Page: 3038

Mr JACOBI(11.29) —I suppose that the critical test in dealing with the Companies and Securities legislation (Miscellaneous Amendments) Bill is whether it is effective or whether it is efficient. On 30 August, the Attorney-General ( Senator Gareth Evans) made a speech dealing with the future of a limited liability. He dealt with the complexities of company law and he said:

. . . notable activist is Senator Peter Rae who made his mark as Chairman of the Senate Select Committee on Securities and Exchange. The influential 1974 report recommended the establishment of a national Securities and Exchange Commission in preference to the joint Commonwealth-State scheme now in operation .

Labor is committed:

in the short term, to retaining the co-operative scheme while it demonstrates progress in the achievement of its aims . . .

in the longer term, to a national system of companies and securities regulation administered by the national parliament.

Just when the short term becomes the long term is a question of some interest to the Government as a whole, not only in the company law area. I am, however, increasingly impressed by the strength of the calls from the business and legal sectors for national legislation, and increasingly convinced that a ministerial meeting every few months, at which any number of significant policy and administrative decisions may be made in a single day, is no way to run a national regulatory system.

Dealing with the Law Review Committee, he said:

It will provide the first opportunity in Australia's history for an examination of some of the fundamental issues in this area of the law: The theory of legitimate use of the corporate form; the relationship between limited liability and public disclosure; the rights and obligations of shareholders, directors, employees and creditors; the objectives and methods of takeover regulation; the power of the courts to 'lift the corporate veil'.

I put it to the honourable member for North Sydney (Mr Spender): In dealing with the question of costs, not just the question of regulation, who pays the cost of corporate fraud, white collar fraud, white collar crime, corporate crime, corporate taxation evasion, and bank fraud? It is the consumer who ultimately pays the penalty, not the corporate sector. One article states:

Ron Brierley, the Chief executive of Industrial Equity and long-time critic and adversary of takeover legislation, supports the latest move. 'It (central control from Canberra) is very desirable,' Brierley says. 'If you started from scratch, the current system is not the one you would come up with'.

In my view this co-operative legislation is a clear abrogation of national responsibility. I suggest that if shareholders, small investors, the business community, and particularly the community as a whole, are to gain any sense of stability, comfort, or long term security from this piece of legislation and the complementary legislation we dealt with some two years ago, they will be seriously disillusioned.

Effective regulation of the security market involves the capacity of the administrative body to react quickly to market developments. I should have thought that that would have been the critically important test of any Federal Act or co-operative uniform law. That test does not operate in this case. The co -operative system has failed utterly to address the critical issues, despite the fact that such provisions have been embodied in European and Canadian law and, in large measure, United States law for well over two decades. For instance, we have not really addressed the problems of minimum paid up capital, non-cash consideration for share issues, funds available for payment, payment of dividends out of profits, special procedures following a serious loss of capital , or the pre-emptive right of members to new share issues. For well over three years I have bombarded the Notice Paper with a series of questions, and they are all set out in Question No. 319. Regrettably, to this time the Ministerial Council has refused even to consider rectifying clear drafting errors in the existing legislation, including, amongst other issues, the class rights provisions. This matter is an utter shambles, and I make no apology for saying so. The sooner the Government grasps the nettle and brings in a national Act the better for the corporate sector.

I wish to address three issues that urgently need review. First, there is an old common law rule to the effect that unanimous resolution of a company's members will bind the company as to all matters except those that are ultra vires the company's objects. Thus shareholders may sell property to a company at a grossly inflated value and, provided other members acquiesce in the transaction, nothing can be done by future shareholders or liquidators to challenge the unfair deal. The same would be true if the company loaned funds to its members on terms advantageous to them but highly prejudicial to the company' s creditors or future members. The common law has a fraud-on-the-minority concept which allows minority members to challenge unreasonable majority actions , but this concept by its very nature is inapplicable if there was no minority at the relevant time; that is, if all members or shareholders were implicated in the unfair conduct. In order to protect future members and the company's creditors, some courts have declared such conduct to be ultra vires the company. This means that not even a unanimous resolution of the members could affirm or validate such action.

The reasoning in many of these cases is conceptually unsatisfactory and, in any event, since an amendment in this Bill makes the adoption of an objects clause optional, the ultra vires doctrine is clearly on the way to oblivion. This underscores the need for a rule that a resolution or agreement of a company's members can be declared invalid if no reasonable person could consider it to be in the company's interests as distinct from the interests of its members at the time. The interests of current members may and often will be quite different from those of its creditors and future members. Why should a person who becomes a shareholder of a company today not be able to complain that yesterday all of the company's members had voted themselves excessive or commercially unreasonable benefits? If those benefits cannot be challenged the company's creditors as well as the new members may well materially suffer.

There have been recent indications that at least some members of the English Court of Appeal have perceived the problem. There are a number of cases to support that contention. It may be that the common law will create a fraud on the company concept to replace the existing fraud on the minority concept, but this may be a slow process. The legislature ought to step in clearly to circumscribe the powers of company members acting unanimously. The need is all the greater because of the weakening of the ultra vires concept involved in this Bill. If no action is forthcoming the position of future company shareholders, and particularly creditors, will be invidious.

The second point I wish to raise is that an urgent review of the existing laws and procedures relating to companies in financial difficulties is required. It is long overdue. The review should seek to ensure that companies are not unnecessarily sent to the wall and that if liquidation is inevitable all interested parties are treated rationally and equitably in the legislation. In the United Kingdom the Cork Committee recently presented a lucid analysis of the important area of commercial law and practice. Many of that Committee's criticisms and recommendations are equally applicable here. Australia should follow the lead. Among the Committee's suggestions were firstly, that the parent company of an insolvent subsidiary should sometimes be responsible for the debts of the subsidiary, a position that already applies in New Zealand; and, secondly , that a percentage of an insolvent company's assets should always be available to the company's unsecured creditors. The secured creditors should not be allowed to take all the assets. There reforms are long overdue, particularly in the insurance field.

My third point is this: When will the Companies Act adequately define the limits of the fund which a company may use for the purpose of paying dividends to shareholders? The current legislation merely states that dividends must be paid out of profits, yet nowhere is the word 'profits' defined. I have raised this matter for five consecutive years and still have not received an answer. It has generally been thought that the English decisions of nineteenth century judges to the effect that dividends cannot be paid out of a company's share capital are directly relevant to our rule that dividends must be paid out of profits. The English decisions are permissive and allow, for example, dividends to be paid out of the current year's trading profits without regard to trading losses or losses of share capital in the preceding year. Yet there is a strong argument that the English decisions are largely irrelevant to the Australian rules which are, firstly, that dividends must not be paid out of capital and, secondly, that dividends are payable only out of profits and are quite different and cannot be seen merely as the two sides of a single coin. Given that most of the Australian literature on the topic is probably misconceived, it is particularly important that the legislature spells out in detail what the word ' profit' means. This was done in the United Kingdom three years ago. By the time the Ministerial Council for Companies and Securities gets around to doing it another decade will pass.

I pay tribute to the Deputy Prime Minister (Mr Lionel Bowen) because we have had a long struggle to establish an Accounting Standards Review Board. We raised this matter, from memory, four or five years ago. At long last it is to be put in place. The old Ministerial Council acts like a geriatric slug suffering from arthritis. It takes an enormously long time to reach a decision. I raise some pertinent points. One can only hope that the people who constitute the Board will be extremely competent in two particular areas, that is, accountancy and business administration and not necessarily the law because we are not likely to get any radical reforms or procedures from lawyers. The second matter I would be interested in is whether the penalties for non-conformity with the approved standards and the criteria fixed by the Board will be large enough to enforce and not merely encourage compliance. I suppose the third important critical element will be whether the Board has the confidence of the accounting profession and the business community as a whole. That will be critically important. The fourth matter is that the Board make decisions speedily. The last matter-I hope the Deputy Prime Minister will take this up with his colleague-is that the Board be adequately staffed and that Board members receive adequate remuneration to ensure that the Board attracts the people with the best credentials. In my view, if the co-operative system is going to continue-I hope it is abolished as quickly as possible-the two critical areas will be the Law Review Board, whose recommendations ought to be brought back to this Parliament for scrutiny and debate, and the Accounting Standards Review Board. In the Adelaide Advertiser of Friday, 25 March, there is an article headed 'NCSC crackdown on property trusts'. I quote from that article:

The National Companies and Securities Commission is planning a crackdown on property trusts to reduce the scope for trustees and management companies to act in conflict with the interest of unitholders.

The article goes on:

Mr Greenwood--

he is on the Commission-

Was critical of the covenant in existing legislation requiring management companies to use their best endeavours to conduct the business in an efficient and proper manner. If a management company was only required to use its best endeavours, it could be lawful for an incompetent company to act against the interests of the unitholders, he said.

The NCSC is considering a proposal that the covenant require management companies to exercise in the interests of unitholders a degree of care, diligence and skill that a reasonably prudent person would exercise in relation to his own business.

With all due deference, I would have thought that when we set off to embody provisions in a companies and securities law as important as this legislation is to the corporate sector, one of the important initial pieces of incorporation would be the fact that directors would be obliged to act with the maximum degree of care, diligence and skill. Not only that, there ought to be adequate and proper provision in the Companies Act to ensure the directors and company directors are fit and proper persons.

I will enter into debate later on today on insurance companies provisions. If ever there were a need for a fit and proper persons provision it is in the Insurance Act. This provision was put in the British Act as far back as 1973. My good friend from Royal Insurance Australia Ltd in Melbourne made an address to the Law Society of New South Wales in Sydney a month ago and clearly indicated that if the fit and proper persons provision had been inserted in the Insurance Act after 1973, Stathis could never have become a director of Bishopsgate Insurance Australia Ltd. It is an appalling indictment of the ministerial system that we have to wait until there is a scandal in the trust area before these sorts of provisions are put into the Act.

Finally-and I make no apology at all for this-I again commend the Deputy Prime Minister who brought in a national Act when we were in opposition. The corporate sector in this country deserves better than it is getting. The corporate sector is over-regulated. There ought to be a single national Act and it ought to be in two sections. There ought to be an Act to cover the large corporations and there ought to be a separate division, if you like, for small business. The sooner we apply our minds to that the better it will be for the corporate sector as a whole.