Bills Digest No. 189 2004–05
Corporations Amendment Bill
(No 1) 2005
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Corporations Amendment Bill
(No 1) 2005
Date Introduced: 2 June 2005
House: House of
Representatives
Portfolio: Treasury
Commencement: Schedule 2 commences from 30 June 2004; the
remaining provisions commence on Royal Assent.
The purpose of the Bill is to
repeal the existing, and insert a new section 197
into the Corporations Act 2001 so as to correct a
perceived anomaly arising due to the interpretation placed upon the
section by the Supreme Court of South Australia. The Bill also
proposes a technical amendment to subsection 1462(2) of the
Corporations Act.
In order to understand the existing section 197 of the
Corporations Act and the proposed changes, it is necessary to have
an appreciation of trusts and the role of a corporate trustee. A
trust is a fiduciary relationship in which one person is the holder
of an interest in property but is subject to an equitable
obligation to use or keep that property for the benefit of another
person or for some committed object or purpose .(1) A
corporate trustee is a company that fulfils the role of the holder
of the interest subject to an equitable obligation in a trust. Like
all companies, corporate trustees act through their agents usually
their directors. When a trustee, individual or corporate, properly
incurs liabilities on behalf of the trust, they are entitled to be
indemnified out of the trust assets for those liabilities. Persons
contracting with trustees are entitled to be subrogated to that is,
entitled to assume the trustee s right against the trust assets. In
the case of persons seeking to enforce rights against corporate
trustees, two problems can arise:
-
where the trustee has lost its right to be indemnified out of
trust assets (which can occur either because of improper conduct by
the trustee or through terms of the trust limiting the right of
indemnity), then the creditor cannot access those assets or
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where the trust has no assets or insufficient assets to meet the
liability.
These are the circumstances that give rise to the issues
surrounding section 197 of the Corporations Act.
In 1985 section 229A (the forerunner to section 197 Corporations
Act) was inserted into the now defunct Companies Codes. Its purpose
was to ameliorate the consequences for creditors where there is no
access to trust funds to meet liabilities incurred by a corporate
trustee .(2) It achieved this by imposing liability on
both the trustee corporation and its directors where debts were
incurred by a trustee corporation and that corporation was for any
reason not entitled to be indemnified out of the assets of the
trust.(3) Both the wording of section 229A and the
explanatory material accompanying the relevant Bill made clear that
the phrase not entitled to be indemnified out of the assets of the
trust referred to the legal right of indemnity and not to
circumstances where the indemnification could not occur due to lack
of trust assets. (4)
In 1990 section 229A became section 233 of the Corporations Law
and in 1999 it was repealed and replaced with section 197 of the
Corporations Act, which had been rewritten apparently without any
intent to substantially change its effect.(5) The
rewritten section 197 was considered by the Supreme Court of South
Australia in Hanel v O Neill [2003] SASC 409. The
wording of the rewritten section is in much less clear terms than
its predecessor. By majority, the Court interpreted the phrase not
entitled to be indemnified out of the assets of the trust to
include circumstances where indemnity could not practically be
achieved because of a lack of trust assets. The most potent
objection to the decision is this:
The practical impact of the new interpretation is
that the directors of corporate trustees may be held to be
guarantors for any liability entered into by the trustee. As such,
directors of corporate trustees are now exposed to a greater
potential for personal liability than directors of other
companies.(6)
The proposed new section 197 will effectively return the
regulatory position to that under the original section 229A. Among
the critics of the decision in Hanel is the Business
Section of the Law Council of Australia and it is from a submission
of that body that the proposed new section 197 is, in substance,
drawn.(7) An article, in substantially the same terms as
the Law Council submission, has been published in the Company
and Securities Law Journal.(8)
In 2004 the Corporations Act was amended to provide for a new
auditor independence regime. Subsection 1462(2) is a transitional
provision applying the new regime for auditor independence to
financial years commencing after 1 July 2004. The intention was
that the requirements for auditor independence outlined in repealed
sections 324 and 331AA of the Corporations Act would continue to
operate in respect of financial years commencing prior to 1 July
2004. Because the latter was not expressly mentioned in section
1462(2), it could be argued that the provisions in sections 324 and
331AA no longer apply even in respect of financial years commencing
prior to 1 July 2004. The proposed amendment is intended to ensure
that the auditor independence provisions in sections 324 and 331AA
continue to apply in relation to financial years commencing prior
to 1 July 2004.
Schedule 1, clause 1 of the Bill repeals the
existing section 197 of the Corporations Act and inserts a new
section 197 which makes trustee corporations and their directors
liable to trust creditors where the trustee corporation is not
entitled to be fully indemnified out of trust assets solely because
of:
(i)
a breach of trust by the corporation
(ii)
the corporation s acting outside the scope of its powers as trustee
or
(iii)
a term of the trust denying, or limiting, the corporations right to
be indemnified against the liability.
Schedule 2, clause 1 clarifies the operation of
section 1462(2) of the Corporations Act.
Concluding Comments
In substance, the Bill overrides the decision of the South
Australian Supreme Court in Hanel v O Neill and
ensures that the liability of directors of trustee corporations
will extend only so far as intended when section 197 was introduced
in its original form in the corporations legislation.
-
B. Marks and R. Baxt, Law of Trusts, CCH Australia,
Sydney, 1981, p. 2.
-
Explanatory Memorandum, Companies and Securities Legislation
(Miscellaneous Amendments) Bill 1985, p. 88.
-
Companies Act 1981, section 229A(1).
-
Companies Act 1981, section 229A(2) and Explanatory Memorandum,
op. cit., note 2.
-
The explanatory memorandum to the Corporate Law Economic Reform
Bill 1998 (at p. 31) asserts that the provision of Part 3.2 (which
contained section 233) would be subject to a rewrite without
substantial change .
-
Explanatory Memorandum, Corporations Amendment Bill (No. 1)
2005, p. 6.
-
Corporations Committee, Business Law Section, Law Council of
Australia, The decision in Hanel v O Neill
legislative clarification required , 21 May 2004.
-
J. Cooper, Piercing the veil of obscurity the decision in Hanel
v O Neill , Companies and Securities Law Journal, vol. 22,
2004, p. 313.
Jerome Davidson
22 June 2005
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
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Published by the Parliamentary Library, 2005.
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