This is a Federal election year in Australia. Although the election is unlikely until later in the year, “campaigning” has well and truly begun and in typical style – name calling and mud slinging, breaches of ethical standards, ministerial resignations and histrionics over policy positions.
But the business of government and the law goes on. Much has happened since our last edition. Here is a snapshot.
The decision in Sons of Gwalia Ltd v Margaretic; ING Investment Management LLC v Margaretic [2007] HCA 1, a decision of the High Court of Australia, was probably the most eagerly awaited corporate law judgment in recent times.
It has significant implications for shareholders and creditors and Australia Watch will monitor and report on developments.
Sons of Gwalia (SOG) was a listed public gold mining company. On 18 August 2004, Luka Margaretic purchased 20,000 shares in the company for $26,200. On 29 August 2004, Administrators were appointed to the company. Mr Margaretic’s shares were worthless. The company subsequently entered into a Deed of Company Arrangement (DOCA).
Mr Margaretic alleged SOG failed to notify the ASX its gold reserves were insufficient to meet its gold delivery contracts and he had been misled and deceived into purchasing shares contrary to various provisions of the Trade Practices Act, the Corporations Act and the Australian Securities and Investment Commission (ASIC) Act. Mr Margaretic was just one of many shareholders in the same boat.
Mr Margaretic made a claim on SOG for damages or compensation and intended to lodge a proof for his loss in the DOCA. The SOG Administrators disagreed that Mr Margaretic could lodge a proof and issued proceedings for a declaration that his claim was not provable in the DOCA or alternatively, for a declaration that payment of any claim be postponed until all debts owed to, or claims made by persons otherwise than in their capacity as members of SOG were met.
The key sections at issue in this dispute were sections 553 and 563A Corporations Act.
Section 553 says:
"Subject to this Division, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company."
Section 563A says:
"Payment of a debt owed by a company in the person’s capacity as a member of the company, whether by way of dividends, profits or otherwise, is to be postponed until all debts owed to, or claims made by persons otherwise than as members of the company have been satisfied."
The Administrators were unsuccessful before the trial judge and on appeal to the Full Federal Court. In a 6 to 1 decision, the Administrators were also unsuccessful in the High Court.
The High Court was required to consider the legislative history of the above sections and relevant Australian (including one of its own decisions given in the ‘90s which the Administrators contended was determinative of the dispute) and English cases. Consideration was also given to the American position.
The majority decision of the High Court, in one way or another, either distinguished the precedent cases on the basis they did not stand for the propositions contended for by the Administrators (views held by many corporate lawyers), that they considered legislation no longer applicable or that they could not stand in the face of current consumer and investor protection provisions in the law.
The majority of the High Court was satisfied Mr Margaretic’s claims did not arise in his capacity as a member of the company and therefore was not covered by section 563A. It did not matter how the shares were acquired – whether by subscription or transfer from a third party, a distinction dwelt on by the Full Federal Court – as the issue was simply whether there was a debt owed to a person in their capacity as a member, whether by way of dividends, profits or otherwise. Claims of misleading and deceptive conduct pursuant to statute and deceit at common law were not claims owed by a company to a person in their capacity as a member of the company.
The fall-out from the decision has been considerable. Insolvency practitioners have complained that insolvent administrations where there are many shareholder claims will be harder to complete in a reasonable time and will inevitably cost more, especially if shareholder claims made by way of proofs need to litigated, thereby reducing dividends available to creditors. Capital market participants have complained Australian companies will be disadvantaged because overseas investors, especially Americans, who are used to shareholders’ claims being postponed to creditor claims because of section 510(b) US Bankruptcy Code, will be reluctant to lend either at all or on reasonable terms if they know their claims may have to compete with shareholders’ claims in an insolvency.
This clamour has resonated with the Federal Government. In February 2007, a reference was given to the Corporations and Markets Advisory Committee (CAMAC) by the Parliamentary Secretary to the Federal Treasurer to consider the impact of the High Court’s decision and whether any legislative reform is required. There is no time constraint on CAMAC to report. The outcome of the reference and the Federal Government’s response will be reported in a future edition of Australia Watch.
In Issue 2 of Australia Watch, we flagged the pending introduction of new anti-money laundering legislation for Australia.
The draft legislation and rules (not complete at the time) raised numerous concerns from several groups, such as banks, credit unions and superannuation funds, responsible for implementing it and as a result the Federal Government returned to the drawing board to refine the legislation.
The Federal Parliament has now passed the revised legislation. It consists of:
- the Anti-Money Laundering and Counter-Terrorism Financing Act 2006; and
- the Anti-Money Laundering and Counter-Terrorism Financing (Transitional Provisions and Consequential Amendments) Act 2006.
Further amending legislation is expected shortly. It will deal with technical amendments and concerns raised by reports on the legislation by the Federal Parliament’s Standing Committee on Legal and Constitutional Affairs and the Senate’s Standing Committee for the Scrutiny of Bills.
The legislation covers a variety of services provided by the financial services sector, gambling service providers and bullion dealers. The next round of legislation will deal with lawyers, accountants, real estate agents and jewellers.
The legislation focuses on “reporting entities” that provide “designated services” - those services that carry a risk of exposure to money laundering or terrorism financing. Specific “designated services” include opening an account, accepting money on deposit, making a loan, accepting a bet and paying out winnings and buying and selling bullion.
Reporting entities will be required to have rigorous customer identification and on-going customer due diligence procedures and will be subject to numerous reporting obligations.
The legislation comes into force at different times. The first round of obligations (record keeping and so on) became effective on 13 December 2006. The last round (further identification and reporting procedures) will come into force on 13 December 2008.
The Australian Transactions Reports and Analysis Centre (AUSTRAC) will administer the legislation. AUSTRAC has been empowered by the Policy (Civil Penalty Orders) Principles 2006, to refrain from applying for a civil penalty order for a breach of the legislation for differing periods, the minimum being a little over 13 months, provided that the AUSTRAC Chief Executive Officer is satisfied the reporting entity has taken reasonable steps to comply and otherwise has not conducted itself in a way that would disentitle it from the benefit of the “amnesty”.
In many finance transactions, direct or collateral security is taken over tangible and intangible personal property.
Personal property includes livestock, crops, intellectual property and receivables.
Under our Federal system, we do not have a uniform system that regulates personal property securities (PPS); this necessarily increases compliance costs and makes it difficult to know what laws apply to a transaction that extends beyond its initial jurisdiction.
There are more than 70 different Acts in Australia dealing with personal property securities. They are administered by at least 30 separate Federal, State and Territory government departments and agencies.
To overcome this unsatisfactory situation, the Federal Attorney General has initiated a reform process with its corner stone being the creation of a national PPS register. The intention is that a register would record traditional security interests such as mortgages and charges as well as retention of title arrangements and long term leases. Lenders, purchasers and members of the public would be able to search the register.
In November 2006, the Attorney-General’s Department released a discussion paper dealing with the proposed PPS register, registration and search issues. In the next few months, the Department intends to release further discussion papers that will consider priorities, conflict of laws, insolvency, enforcement and issues specific to possessory security interests.
There is strong support for the introduction of a PPS register. Hopefully this reform will see the light of day within the next 12 months or so.
In Issue 4 of Australia Watch, we reported on the contested takeover of Centennial Coal Company Limited and the Federal Court challenges successfully brought by a minority shareholder to findings of unacceptable conduct and consequential orders made against it by the Takeovers Panel.
In response to the Court decisions, the Federal Government has proposed to overcome them by amendments to the Corporations Amendment (Takeovers) Bill 2007.
The thrust of the amendments is:
- to ensure that the Takeovers Panel can give full effect to the spirit of the takeover provisions (known colloquially as the “Eggleston Principles”) without having to also establish a contravention of the Corporations Act or an effect on control or potential control of a company or on the acquisition or proposed acquisition of a substantial interest in a company;
- to broaden the key definition of “substantial interest” in a company to ensure the Takeovers Panel has sufficient flexibility to deal with new and developing interests and tactics in takeovers;
- to broaden the powers of the Takeovers Panel to act to prevent the effects of actual or apprehended “unacceptable circumstances” even where the effect has not yet occurred;
- to limit the opportunity to make submissions to the Takeovers Panel about a proposed order to persons to whom the order is directed and to enable the Takeovers Panel to make orders to protect the rights or interests of persons where it is satisfied those rights and interests have been, are being, will be or are likely to be affected by “unacceptable circumstances”.
Australia, as in other jurisdictions, has seen a recent increase in private equity involvement in takeovers. The Takeovers Panel was motivated by this development to prepare a draft Guidance Note dealing with insider involvement in control transactions. The Takeovers Panel soon realised that to confine its position to private equity dealings would be too narrow a focus. It therefore decided to publish its views in terms of insider participation regardless of the nature of the Bidder.
The takeovers Panel has now released a Position Paper and draft Guidance Note,
"Insider Participation in Control Transactions”, and invited comments on whether it should issue the Guidance Note to “provide market participants with guidance on circumstances that may arise where there is insider participation in control transactions and where the Panel may declare such circumstances to be unacceptable having regard to the purposes of [the takeover provisions of the Corporations Act]". Submissions close on 6 April 2007.
Several important reviews and consultations are under way. They are:
- The Coercive Information Gathering Powers Review - conducted by the Administrative Review Council (a Federal administrative law review body). The review deals with the powers of six major agencies including, the Australian Competition and Consumer Commission, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office. The ARC has issued a draft report. Submissions on the draft report closed on 23 February 2007;
- The Insider Trading Review - conducted by the Corporations and Markets Advisory Committee (CAMAC). The Federal Government has just issued its response to the review – which is mostly favourable – but has posed further questions for public comment before finalising its position. Submissions close on 2 June 2007;
- The Infringement Notice Review. The ASIC is empowered by the Corporations Act to issue an Infringement Notice to a company that breaches its continuous disclosure obligations under the Act and/or the Australian Stock Exchange Listing Rules rather than initiate court action to deal with the breach. The Infringement Notice procedure is a relatively quick and painless enforcement procedure compared with court proceedings and, if accepted by an offending company (there is no compulsion to do so but rejection may result in court action by ASIC), brings with it a fixed penalty that cannot exceed A$100,000.
ASIC has only issued six Infringement Notices since the relevant provisions commenced on 1 July 2004. The review seeks comment on whether the existence of this regulatory tool has improved compliance with the continuous disclosure provisions. Submissions close on 1 June 2007;
- The Social Responsibilities of Corporations Review - conducted by CAMAC (first mentioned in Issue 2 of Australia Watch). The review considered, among other issues, whether the Corporations Act should be amended to clarify the extent to which directors may take into account the interest of various parties other than shareholders when making corporate decisions or require them to do so.
CAMAC has recommended against legislating to ensure directors take into account CSR (corporate and social responsibility) issues when making corporate decisions. An adequate legislative framework is already in place for companies to “do the right thing”; and
- The Sanctions in Corporate Law Review - conducted by the Federal Treasury. The review will look at civil and criminal sanctions in the Corporations Act and ASIC Act with a view to considering options for reform. Submissions close on 1 June 2007.
The Australian Stock Exchange (ASX) is also undertaking a review of its Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations. The principles are applicable to ASX listed companies. While not mandatory, if they are not followed by a listed company, the reason for not doing so needs to be explained.
Taxpayers and their advisers will be watching keenly to see whether the Australian Taxation Office changes its approach to the administration of tax legislation following recent criticism by the Full Federal Court and the Inspector-General of Taxation.
In May 2006, the Inspector-General of Taxation presented a comprehensive report to the Federal Government on the Australian Taxation Office’s management of tax litigation.
The Australian Taxation Office (ATO) came in for considerable criticism of its litigation management practices – or lack of them and its lack of transparency in articulating to taxpayers and their advisers its philosophy and approach to the administration of the tax legislation.
Of particular concern to taxpayers, who made submissions to the Inspector-General, was the perceived approach by the ATO that it used precedent (decisions) selectively depending upon whether the ATO supported the precedent or not and that it did not clearly articulate how it would apply a final court or tribunal decision. The Inspector-General sympathised with these concerns.
The report also highlighted the fact that in certain cases, the ATO did not follow court decisions adverse to its view and instead continued to persist with its view. The Inspector-General criticised this approach and observed that it was contrary to guidelines laid down by the Solicitor General and Chief General Tax Counsel.
These observations apparently had no impact on the ATO.
One of the areas the ATO was accused of “ignoring” court decisions in, was the application of Fringe Benefits Tax (FBT) to employee incentive trust schemes. The ATO, in Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd [2007] FCFCA 16, a decision of the Full Federal Court, persisted in arguing an interpretation of the fringe benefits tax legislation as it applied to employee incentive trust schemes that another court had already rejected.
For reasons that are unimportant for this note, the decision that the ATO did not agree with was not appealed by the ATO and it did not apply to the Court for a declaration as to how the law should be interpreted.
The Full Court delivered what, in judicial language, was nothing short of a stinging rebuke to the ATO for its approach to the litigation. The ATO’s appeal was dismissed unanimously.
Allsop J, with whom Stone and Edmonds JJ agreed, had this to say:
"I wish, however, to add some comments about the attitude apparently taken by, and some of the submissions of, the appellant. From the material that was put to the Full Court, it was open to conclude that the appellant was administering the relevant revenue statute in a way known to be contrary to how this Court had declared the meaning of that statute. Thus, taxpayers appeared to be in the position of seeing a superior court of record in the exercise of federal jurisdiction declaring the meaning and proper content of a law of the Parliament, but the executive branch of the government, in the form of the Australian Taxation Office, administering the statute in a manner contrary to the meaning and content as declared by the Court; that is, seeing the executive branch of government ignoring the views of the judicial branch of government in the administration of a law of the Parliament by the former. This should not have occurred. If the appellant has the view that the courts have misunderstood the meaning of a statute, steps can be taken to vindicate the perceived correct interpretation on appeal or by prompt institution of other proceedings; or the executive can seek to move the legislative branch of government to change the statute. What should not occur is a course of conduct whereby it appears that the courts and their central function under Chapter III of the Constitution are being ignored by the executive in the carrying out of its function under Chapter II of the Constitution, in particular its function under s 61 of the Constitution of the execution and maintenance of the laws of the Commonwealth."
Duly chastised, the ATO recently issued an Impact of Court Decisions Report stating it would not appeal the Full Court’s decision, that it would review FBT assessments associated with outstanding employee benefit arrangement cases, that it was unaware that it could have sought a declaration from the Court to obtain a ruling on how to construe the law (an incredible statement given the significant legal resources available to the ATO) and that it was seeking advice from the Solicitor General and the Australian Government Solicitor.
Legal Professional Practice is under attack again, this time in the context of the coercive investigatory powers of Federal regulatory agencies and Royal Commissions.
Legal Professional Privilege has been employed by a number of witnesses called to give evidence before recent Royal Commissions into the affairs of certain high profile and controversial companies. A perception has been created that the invoking of legal professional privilege before the Royal Commissions either unnecessarily interfered with and delayed its work or perhaps was misused.
As a result, the Federal Attorney General has asked the Australian Law Reform Commission (ALRC) to investigate the use of legal professional privilege to see whether it should be modified or abrogated in the performance of Federal investigatory functions.
An Issues Paper is expected in April this year with a detailed discussion paper to follow in late August or early September 2007. The ALRC is to deliver its report to the Attorney-General on 3 December 2007.
Lawyers and clients will be watching closely and making submissions to this review.
