Magazine article Journal of Banking and Financial Services

Break He Corporations Law Impasse -- Now!!

Magazine article Journal of Banking and Financial Services

Break He Corporations Law Impasse -- Now!!

Article excerpt

HAVE THE COMMONWEALTH AND THE STATES OVERCOME THE PROBLEM IN CO-OPERATIVE CORPORATE REGULATION? OR IS THERE STILL A CRISIS FOR AUSTRALIAN BUSINESS?

READERS probably recall that the relevant case, The Queen v Hughes(1), suggested that the High Court would not uphold the validity of the current co-operative scheme if it were to be challenged.

According to some observers, the Court made it abundantly clear that unless the legislation is overhauled, there may be "serious problems" in the future(2). The failure in negotiations between the Commonwealth and the States to resolve this problem led to the possibility of the Commonwealth introducing its own Federal legislation. However, on the eve of Christmas 2000 the Commonwealth, New South Wales and Victorian governments reached an agreement to overcome this impasse. But, the fruits of that agreement have yet to be seen, and there are some sceptics who will want to see the legislation relevant to the agreement enacted before they can breathe safely again. After all we have had one agreement already (in August 2000) which did not result in any legislation. Furthermore, the other four States have yet to agree to the arrangements which have been reached between the Commonwealth, New South Wales and Victoria and one or two Premiers have been critical of the agreement.

Earlier uncertainties led to a frenzy of media, professional and academic attention. In addition to the political concerns, the issues affect banks and other lenders. These organisations will still be asking the question of how can they lend to institutions in the light of the uncertainty that remains?

Already, two cases relying on Hughes case are before the High Court. These challenges have been brought by company directors who are potential defendants in matters brought by liquidators. The defendants have claimed the companies of which they were directors were not properly incorporated, because the Corporations Law was improperly enacted.

Anticipating such challenges, lawyers and other advisers are protecting themselves by introducing reservation clauses in documents that are being executed by companies.

The best example is in the recent AlintaGas prospectus. The company, which is being privatised, included a clause in its prospectus highlighting the uncertainty of the existing corporations regime. The clause draws attention to the risk associated with the current status of both incorporated companies, as well as acts performed by those companies.

The following excerpt from the prospectus highlights the business community's concerns:

THE CORPORATIONS LAW

The validity of the Corporations Law is being challenged in the courts on a number of grounds, including the legislative power of the Commonwealth to incorporate companies.

Each member of the AlintaGas Limited Group has been incorporated under the Corporations Law. There is a risk that if the High Court was to hold that the incorporation of a company by the Australian Securities and Investments Commission (ASIC) was invalid, then AlintaGas Limited and each of its subsidiaries would have not been validly incorporated.

This would mean that they lacked the legal capacity to enter into any transactions, including all transactions described in this Public Offer Document or contemplated by the Disposal Act.

Unless appropriate legislation is given effect to in a timely fashion by the Parliaments of the Commonwealth and the States, then there must be uncertainty about the legal status of aspects of the Corporations Law, of companies incorporated under the Corporations Law, and of acts of those companies."

THE NUB OF THE PROBLEM

Australian company law is currently controlled by a "novel legislative device"(3). Under the Constitution, the Commonwealth lacks the power to legislate on the formation of companies. Corporations powers are conferred on the Commonwealth by Section 51(xx), and have been interpreted to extend only to regulating various companies(4) that are already in existence(5). …

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