Bills Digest no. 75 2008–09
Corporations Amendment (No. 1) Bill 2008
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
Financial implications
Main provisions
Concluding comments
Contact officer & copyright details
Passage history
Date introduced:
3 December 2008
House: Senate
Portfolio: Treasury
Commencement: Royal Assent
Links: The
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
The Bill amends the
Corporations Act 2001 (Cth) (the Act) to disqualify a
person from managing corporations in Australia if the person is
currently disqualified by a court of ‘foreign
jurisdiction’ from being a director of a foreign
company.[1]
While the amendment is not specifically limited to orders made
by a New Zealand court, it arises in the context of the Memorandum
of Understanding on Coordination of Business Law (MOU), signed by
Australia and New Zealand on 31 August 2000 and revised on 22
February 2006.[2] Specifically, paragraph (h) of the work programme
annexed to the revised (2006) MOU identifies the need to
‘[e]xplore the desirability of adopting a mechanism which
would allow for the disqualification of persons from managing
corporations in one jurisdiction to apply in the other
jurisdiction’.[3]
The MOU was signed in 2000 in furtherance of the
‘Australia New Zealand Closer Economic Relations Trade
Agreement’ (ANZCERTA) of 1983.[4] Article 1 of the ANZCERTA
contains the parties’ objectives in concluding the
Agreement:
- to strengthen the broader relationship between Australia and
New Zealand;
- to develop closer economic relations between the Member States
through a mutually beneficial expansion of free trade between New
Zealand and Australia;
- to eliminate barriers to trade between Australia and New
Zealand in a gradual and progressive manner under an agreed
timetable and with a minimum of disruption; and
- to develop trade between New Zealand and Australia under
conditions of fair competition.
The MOU is intended to create closer economic relations between
Australia and New Zealand through the coordination of business law
in the two nations. The laws need not be identical in both
countries, but they should not act as a barrier to trade or
investment. The coordination measures should also involve the
reduction of transaction and compliance costs for businesses.
The MOU provides for a review every five years. In July
2005, the Governments of Australia and New Zealand initiated the
first review. Some 30 submissions were received on the
operation of the MOU, achievements to date, and suggestions for
changing/updating work priorities.[5] Following the review, the text of the MOU
was slightly revised and a new MOU was signed on 22 February
2006.[6]
The mutual benefits arising from the MOU are stated in the
revised text as follows:
- The Governments of New Zealand and Australia recognise the
importance of accelerating, deepening and widening the relationship
that has developed through the growth of trans-Tasman trade,
particularly since the commencement of the Australia New Zealand
Closer Economic Relations Trade Agreement in 1983. Both Governments
consider that further coordination of significant areas of business
law (including consumer law but not taxation) can facilitate the
achievement of this goal.
- Both Governments also acknowledge the importance of a global
approach to business law issues (particularly in light of the
increasing prevalence of electronic commerce) and the significance
of the trans-Tasman relationship in that approach.
- Both Governments have committed to the objective of a single
economic market. The Australian Productivity Commission has defined
this as a geographic area comprising two or more countries in which
there is no significant discrimination in the markets of each
country arising from differences in the policies and regulations of
both countries.
- Both Governments are aware that some existing laws and
regulatory practices relating to business within each economy may
impede the development of trans-Tasman business activity. Through
the development of increased coordination and dialogue, both
parties Governments will endeavour to minimise such
impediments.
- An array of approaches exists to achieve the goal of increased
coordination in business law. Both Governments recognise that one
single approach would not be suitable for every area, that
coordination is multi-faceted and does not necessarily mean the
adoption of identical laws, but rather finding a way to deal with
any differences so they do not create barriers to trade and
investment. In working towards greater coordination, the efforts of
both Governments will focus on reducing transaction costs,
lessening compliance costs and uncertainty, and increasing
competition.
- This Memorandum of Understanding reflects our desire to deepen
the trans-Tasman relationship within a global market, through
increased coordination of business law, thereby creating a mutually
beneficial trans-Tasman commercial environment. Such an environment
will allow New Zealand and Australia to share a common outward
focus in commercial activities within the greater global
market.
- Both Governments recognise the trend towards increasing
international convergence of financial market and business
regulation and the need to comply with international standards.
Both Governments acknowledge the benefit of coordination in efforts
to influence evolving international regulatory standards and
regimes.
The revised (2006) MOU contains the following provisions dealing
with consultation:
- In addition to the items specified in the work programme (see
Annex), when either Government considers that a difference between
their respective business laws or regulatory practices gives rise
to an impediment to the development of the trans-Tasman
relationship, the two Governments will consult with a view to
resolving the impediment, whether or not the area of law is already
included in the programme and regardless of the priority accorded
to the matter at the time.
- Each Government will keep the other Government informed of
proposed reforms in the business law area. Further, each Government
will give the other the opportunity to be involved in the
other’s reform process at an early stage. Early consultation
is particularly important where a policy proposal has
extra-territorial application that impacts on the other country or
would have the potential to result in the removal of any right or
benefit that the other country currently enjoys.
- Each Government will take the necessary steps to facilitate
early examination of the areas of business law and regulatory
practices contained in the programme.
- Both countries also place great value on cooperation between
regulators, and between regulators and policy officers. The work
programme has been varied to reflect this and it is hoped that
Australian and New Zealand officers and regulators in each sphere
will meet together annually to discuss issues of mutual
interest.
In his second reading speech, Senator the Hon Nick Sherry,
Minister for Superannuation and Corporate Law, stated that the
Ministerial Council for Corporations (MINCO) ‘was consulted
in relation to these amendments to the laws in the national
corporate regulation scheme, and has approved them as required
under the Corporations Agreement’.[7] He also said that he had
commenced consultation with MINCO ‘on the accompanying
regulations’ and was hopeful that they would commence at the
same time as the proposed revisions to the Act.[8] (The Corporations
Regulations 2001 will prescribe the foreign jurisdictions to which
the amendments will apply.)
MINCO currently comprises the Minister for Superannuation and
Corporate Law (Senator the Hon Nick Sherry) and the
Attorneys-General of the Australian states and territories.
Its secretariat is based in the Treasury. According to the
Government Online Directory, MINCO was:
Established by the Heads of Agreement of June
1990 between Australian Government, State and Northern Territory
Ministers on future corporate regulation in Australia and the
subsequent Corporations Agreements. The Council’s principal
function is the consideration of amendments to the legislation
governing corporations and financial services, and the Australian
Securities and Investments Commission.[9]
The measure was announced in ‘the Minister for
Superannuation and Corporate Law’s Press Release No. 9 of 26
February 2008’.[10] That press release reads as follows:
Senator the Hon Nick Sherry, Minister for
Superannuation and Corporate Law, today announced that the
Government will introduce legislation to ensure that persons who
are disqualified from managing companies in New Zealand will also
be disqualified in Australia.
“The Government is focused on taking
practical steps that reinforce and improve the integrity of
Australia’s corporations and our financial markets.
“This legislation will directly address a
loophole in the existing law whereby people can effectively avoid
disqualification by simply moving across the Tasman. That’s
not good enough, so we’ll be closing the loophole”,
said Minister Sherry.
The amendments to the Corporations Act 2001
will further progress common regulatory frameworks across the
Tasman. The legislation will be modelled on the existing New
Zealand provisions to ensure cross-border consistency.
The amendments will mean that persons
disqualified from managing companies by the New Zealand Registrar
or a New Zealand court will be automatically disqualified in
Australia.
Additionally, disqualification in another
country will constitute a ground for the Australian Securities and
Investment Commission to apply to an Australian court for an order
that that person be disqualified in Australia.
“These are important pieces of the
regulatory framework that the Government will be correcting”,
said Minister Sherry.
Draft legislation will be developed over the
coming months.[11]
The Australian Institute of Company Directors (AICD) is the
membership institute for Australian company directors. It is
‘dedicated to making a positive impact on the economy and
society by promoting professional directorship and good
governance’. [12] In its Position Paper No. 14 (December 2008), the
AICD supports the Bill:
The Australian Institute of Company Directors
(AICD) supports the Corporations Amendment (No 1) Bill 2008 in
principle. That is, a person disqualified by a court from
being involved in the management of a company in their home (a
foreign) jurisdiction (New Zealand in the first instance) is also
automatically disqualified in Australia. AICD supports this
mutuality where the foreign jurisdiction observes the rule of law
in relation to disqualification proceedings including a system of
appeals.
As a national membership organisation for
directors, AICD excludes directors who are disqualified in
Australia. It would assist us to be able to rely on such an
assumption in relation to directors governed under New Zealand law
(and other jurisdictions as may be added in the future).
Without a detailed analysis it is not easy to
understand the full impact of such harmonisation in relation to New
Zealand. However, even if the disqualification criteria are more
onerous in New Zealand, with the proposed change, AICD will be in a
better position to judge the suitability of applicants for
membership. We also note that New Zealand has recently
extended the grounds for disqualification for directors to include
disqualified directors under Australian law.
Disqualification under New Zealand law should,
in our view, constitute a ground for automatic disqualification
under the current section 206B Corporations Act 2001 and as such,
automatically act as a bar to the disqualified person becoming a
director of another company, pursuant to section 201B of the
Act.
AICD supports the automatic disqualification
initiative and looks forward to its further development.[13]
The Senate Selection of Bills Committee met on 4 December 2008
and resolved to recommend that the Bill not be referred to a
committee.[14]
According to the Explanatory Memorandum for the Bill, the
financial impact will be ‘Nil’.[15] Further, the compliance cost
impact on business will be ‘very low’ and will result
only ‘from the need to keep abreast of new regulatory
requirements’.[16]
Item 1 of Schedule 1 amends
note 1 to subsection 199A(3) of the Act by adding reference to
proposed section 206EAA (see item 3 below).
Subsection 199A(3) sets out the circumstances when a company or
related body corporate cannot indemnify a person against legal
costs:
- A company or related body corporate must not indemnify a person
(whether by agreement or by making a payment and whether directly
or through an interposed entity) against legal costs incurred in
defending an action for a liability incurred as an officer or
auditor of the company if the costs are incurred:
- in defending or resisting proceedings brought by ASIC or a
liquidator for a court order if the grounds for making the order
are found by the court to have been established;
The effect of the amendment is that the term
‘proceedings’ in paragraph 199A(3)(c) will include
proceedings brought by the Australian Securities and Investments
Commission (ASIC) to have a person disqualified from managing
corporations in Australia where the person is disqualified by an
order made by a court of ‘foreign jurisdiction’ from
being a director, or being concerned in the management of a foreign
company, or from carrying on activities that are
‘substantially similar to being a director’ (see
item 3 below).
Item 2 inserts proposed subsections
206B(6) and (7). Section 206B sets out the
circumstances when a person is automatically disqualified
from managing corporations. Proposed subsection
206B(6) provides that a person is disqualified from
managing corporations if the person is currently disqualified
by a court of ‘foreign jurisdiction’ from being a
director of a foreign company or being concerned in the management
of a foreign company. Proposed subsection
206B(7) defines ‘foreign jurisdiction’ as
‘a foreign country, or part of a foreign country, prescribed
by the regulations as a foreign jurisdiction for the purposes of
this section’. At this stage, the Government proposes
to prescribe only New Zealand as a ‘foreign
jurisdiction’, but in reality any country could be prescribed
for the purposes of section 206B, particularly ‘if it is
considered that there is sufficient similarity with
Australia’s regulatory regime’.[17]
Item 3 inserts new proposed section
206EAA, which deals with the Court’s power (on
application by ASIC) to disqualify a person from managing
corporations if the person is currently disqualified under a law of
a foreign jurisdiction from being a company director or being
concerned in the management of a foreign company, or carrying
activities that are ‘substantially similar to being a
director’. The power is a discretionary one. That
is, the Court is not obliged to disqualify the person from managing
corporations in Australia. The person need not be
disqualified by an order made by a court of foreign jurisdiction;
the person need only be disqualified under the law of the foreign
jurisdiction (for example, he or she may have been disqualified by
a regulatory body). (This situation is to be contrasted with
proposed subsection 206B(6), where the person must
be disqualified by a court order in the foreign
jurisdiction.).
Proposed subsection 206EAA(2) provides that in
determining the period of disqualification, the Court ‘may
have regard to the period for which the person is disqualified
under the law of the foreign jurisdiction’, with the word
‘may’ indicating that the Court has a discretion to
disqualify the person for a different period than that imposed
under the law of the foreign jurisdiction.
Item 4 inserts reference to proposed
sections 206B(6) and 206EAA in existing section 206H,
which deals with the territorial application of Part 2D.6 of the
Act (which deals with disqualification from managing
corporations). Section 206H currently provides:
This Part does not apply in respect of an act
or omission by a person while they are managing a corporation that
is a foreign company unless the act or omission occurred in
connection with:
- the foreign company carrying on business in this jurisdiction;
or
- an act that the foreign company does, or proposes to do, in
this jurisdiction; or
- a decision by the foreign company whether or not to do, or
refrain from doing, an act in this jurisdiction.
The effect of the proposed amendment is that the situations
mentioned in paragraphs 206H(a) to (c) do not need to exist in the
case of disqualification under proposed sections 206B(6)
and 206EAA.
Items 5 and 6 insert reference to
proposed section 206EAA in existing paragraphs
1274AA(1)(a) and 1274AA(2)(aa). Section 1274AA currently
provides for the keeping of a register of disqualified company
directors and other officers:
- ASIC must keep a register of persons who have been disqualified
from managing corporations under:
- section 206C, 206D, 206E, 206EA or 206F of this Act; or
- a provision of a law of a State or Territory that:
- was in force at any time before the commencement of this Act;
and
- corresponds, in whole or in part, to one of the provisions
referred to in paragraph (a).
- The register must contain a copy of:
- every order made by the Court under section 206C, 206D or 206E;
and
- every court order referred to in section 206EA; and
- every notice that was served under subsection 206F(3); and
- each permission given under subsection 206F(5); and
- every order lodged under subsection 206G(4); and
- every order, notice or permission that was made, served, given
or lodged under a provision of a law of a State or Territory that:
- was in force at any time before the commencement of this Act;
and
- corresponds, in whole or in part, to one of the provisions
referred to in paragraph (a), (b), (c) or (d).
- Subsections 1274(2) and (5) apply to a copy of an order, notice
or permission referred to in subsection (2) as if that copy were a
document lodged with ASIC.
- A reference in this section to a provision of a law of a State
or Territory includes a provision as applied as a law of that State
or Territory.
Item 6 may raise an issue of inappropriate
drafting. It proposes to insert new paragraph
1274AA(2)(ab): ‘every court order referred to in
section 206EAA’. The difficulty is that
proposed section 206EAA does not refer to
any court order. By implication, an Australian court may make
its own order disqualifying a person from managing corporations in
Australia under proposed section 206EAA, but, as
mentioned above, there does not need to be an order of a court of
foreign jurisdiction disqualifying the person from being the
director of a foreign company for an Australian court to make an
order under this provision—the person need only be
disqualified ‘under the law of a foreign
company’. (If such a foreign order exists, the person
would be automatically disqualified under proposed
subsection 206B(6)—see item 2
above.) The proposed paragraph may thus be better worded as
‘every court order made under section 206EAA’.
Item 7 inserts proposed Part
10.11 of the Act, dealing with transitional arrangements
following the enactment of the Bill. It contains two proposed
sections: section 1485, dealing with the
application of proposed subsection 206B(6), and
section 1486, dealing with the application of
proposed section 206EAA. The new substantive
provisions will apply to orders made by a court of foreign
jurisdiction, or disqualification under a law of a foreign
jurisdiction, ‘on or after the commencement’ of
items 2 and 3 of Schedule 1.
Concluding comments
The measures contained in the Bill have been modelled on New
Zealand law in ‘the interests of cross-border
consistency’.[18]
Where a person has been disqualified from being a company
director by an order made by a court of ‘foreign
jurisdiction’ (that is, New Zealand), the person will be
automatically disqualified from managing corporations
(etc) in Australia. However, where the person has been
disqualified under ‘the law of a foreign jurisdiction’,
rather than a court order, an Australian court may
disqualify the person from managing corporations if the Court is
satisfied that disqualification (under proposed section
206EAA) is justified. Thus, a person who is
disqualified from managing corporations under New Zealand law (but
not a New Zealand court order) is not automatically disqualified
under Australian law.
It is not clear why this distinction is made, particularly as
the Bill is intended to prevent disqualified directors from simply
moving from one country (namely, New Zealand) to Australia and
managing companies here. The distinction seems to cast doubt
on the integrity of New Zealand’s regulatory bodies, which
may not have the status of a court but still have the power to
disqualify a person from being a director in New Zealand. It
also seems to dilute the desire to ‘enhance protection for
investors and the integrity of Australia’s
markets’.[19] It may, however, be that the distinction is made
on the basis that the Government could prescribe other foreign
jurisdictions in due course.
There may, of course, be circumstances where a person is not
disqualified by a New Zealand (or other country’s) court
order but is disqualified under the foreign law, and it may be
appropriate that the person be disqualified by an Australian court
order from managing corporations in Australia.
Interestingly, an Australian court order under proposed
section 206EAA would create a ground for a New Zealand
court to disqualify the person from being a director under section
383 of the Companies Act 1993 (NZ), which currently
provides (emphasis added):
Where—
- (a) A person has been convicted on indictment of an offence in
connection with the promotion, formation, or management of a
company, or has been convicted of a crime involving dishonesty as
defined in section 2(1) of the Crimes Act 1961; or
- (b) A person has committed an offence for which the person is
liable (whether convicted or not) under this Part of this Act;
or
- (c) A person has, while a director of a company and whether
convicted or not,—
- (i) persistently failed to comply with this Act or the
Companies Act 1955, the Securities Act 1978, the Securities Markets
Act 1988, the Takeovers Act 1993, or the takeovers code in force
under that Act or, if the company has failed to so comply,
persistently failed to take reasonable steps to obtain compliance
with those Acts or the code; or
- (ii) Been guilty of fraud in relation to the company or of a
breach of duty to the company or a shareholder; or
- (iii) Acted in a reckless or incompetent manner in the
performance of his or her duties as director; or
- (ca) a person has been prohibited in a
country, State, or territory outside New Zealand from carrying on
activities that the Court is satisfied are substantially similar to
being a director or promoter of or being concerned or taking part
in the management of a body corporate; or
- [Repealed]
- A person has become of unsound mind,—
the Court may make an order that the
person must not, without the leave of the Court, be a director or
promoter of, or in any way, whether directly or indirectly, be
concerned or take part in the management of, a company for such
period not exceeding 10 years as may be specified in the
order.[20]
In a circular fashion, the making of a New Zealand court order
under this provision (predicated upon the making of an Australian
court order under proposed section 206EAA) would
become a ground for automatic disqualification of the person under
proposed section 206B(6) of the Australian
Act.
Members, Senators and Parliamentary staff can obtain further
information from the Parliamentary Library on (02) 6277 2795.
Back to top
Morag Donaldson
27 January 2009
Bills Digest Service
Parliamentary Library
© Commonwealth of Australia
This work is copyright. Except to the extent of uses permitted
by the Copyright Act 1968, no person may reproduce or transmit any
part of this work by any process without the prior written consent
of the Parliamentary Librarian. This requirement does not apply to
members of the Parliament of Australia acting in the course of
their official duties.
This work has been prepared to support the work of the Australian
Parliament using information available at the time of production.
The views expressed do not reflect an official position of the
Parliamentary Library, nor do they constitute professional legal
opinion.
Feedback is welcome and may be provided to: web.library@aph.gov.au. Any
concerns or complaints should be directed to the Parliamentary
Librarian. Parliamentary Library staff are available to discuss the
contents of publications with Senators and Members and their staff.
To access this service, clients may contact the author or the
Library’s Central Entry Point for referral.
Back to top