ATL005 CommLaw2 : entities and business structures 9781925554434, 1925554430

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Contents CommLaw2: Entities and Business Structures: Commentary Tax Institute CommLaw2 Module 1 [¶8-500] Sole proprietor [¶1-060] The referral of powers by the States to enable law making: s 3, 4 [¶8-910] Protection of business names [¶490] Functions and powers [¶35-110] Industrial relations legislation [¶35-060] Work Health and Safety Act [¶150-589] National consumer credit legislation [¶35-158] The APPs [¶8-510] Partnership [¶31-400] Requirement to incorporate: s 115

[¶3-340] Vicarious liability [¶26-938] Business affairs of a partnership: s 53AC [¶3-005] Promoters and pre-registration contracts [¶3-010] Ratifying pre-registration contracts [¶4-010] Procedure — Setting up a proprietary company [¶4-015] Procedure — Setting up a public company [¶4-020] Applying to register a company: s 117 [¶4-045] Selecting, reserving and registering the company name [¶37-300] Omission of “Limited” from name: s 150, 151 [¶35-000] Introduction — Internal management of companies: s 134 [¶9000-020] What is “corporate governance”? [¶32-010] What is the role of the board of directors? [¶32-810] Board of directors delegating to committees and management [¶42-020] Introduction — Directors’ & officers’ duties, responsibilities and obligations [¶42-240] Directors’ duty to exercise powers for a proper purpose [¶42-530] Director’s duty to disclose material personal interests: s 191 [¶197-100] Introduction — Continuous disclosure [¶50-100] Roadmap — Rights and remedies of members of a company and registered schemes [¶50-525] Examples of members’ rights [¶50-700] Statutory remedies open to members

[¶53-120] Actions based on oppressive conduct or unfair prejudice: s 232 & 233 [¶54-275] Criteria for granting leave to bring, or intervene in proceedings on behalf of company: s 237 [¶74-050] Notice of share issue: s 254X [¶42-367] Breach of duty to maintain share capital [¶76-025] Rationale and motivations underlying share buybacks [¶45-010] Roadmap — Related party transactions [¶152-040] Circumstances in which company may be wound up voluntarily: s 491 [¶132-520] Overview — privately appointed receiver [¶136-220] Object of administration: s 435A Tax Institute CommLaw2 Module 2 [¶8-530] Trust [¶21-340] Common intention and other constructive trusts [¶65-300] The nature of the member’s interest [¶162-730] Use of trust assets [¶8-590] Joint ventures [¶2-830] Operation of Cartels Act joint venture exception Tax Institute CommLaw2 Module 3 [¶35-050] Superannuation [¶277-320] Information for existing holders of superannuation products and RSA products: s 1017C [¶277-360] Trustees of superannuation entities — regulations may specify additional obligations to provide information: s

1017DA [¶274-750] Providing personal advice to retail clients: reasonable basis for advice requirement: repealed s 945A [¶2-950] Superannuation policies and other policies held under trust Tax Institute CommLaw2 Module 4 [¶1-100] Insolvency [¶1-140] Australian bankruptcy legislation [¶2-040] Briefing and advisory functions: is bankruptcy the best administration? [¶2-070] Bankruptcy by debtor’s petition (voluntary bankruptcy) [¶2-330] The Official Trustee in Bankruptcy [¶1-400] Functions common to bankruptcy and liquidation [¶10-600] The “relation back doctrine” [¶13-320] Specific examples of creditor control and rights to receive information [¶10-900] The administrative regime for recovery of income contributions [¶18-000] Meaning of “termination of bankruptcy” [¶18-040] General effect of discharge [¶19-500] Introduction to debt agreements [¶24-025] Effect of entering into controlling trusteeship [¶54-002] Purpose of administration [¶1-220] Receivership [¶32-300] Parties to liquidation and corporate insolvency

[¶32-310] Liquidators [¶32-660] Comparing court liquidation with other corporate insolvency administrations The flight of the phoenix, 13 August 1996 CommLaw2: Entities and Business Structures: Cases Tax Institute CommLaw2 Module 1 HIH Casualty & General Insurance Ltd v Building Insurers’ Guarantee Corporation Woodgate v Davis Briggs v James Hardie & Co Pty Ltd & Ors CommLaw2: Entities and Business Structures: Releases Tax Institute CommLaw2 Module 1 — ASIC regulatory guides [¶10-041] Regulatory Guide 41: Limited Partnerships Fundraising (Previously Policy Statement 41) Tax Institute CommLaw2 Module 3 — ASIC regulatory guides [¶10-243] Regulatory Guide 243: Registration Of SelfManaged Superannuation Fund Auditors

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Tax Institute CommLaw2 Module 1 — Commentary ¶8-500 Sole proprietor The main advantages of acquiring a business through a sole proprietor are: • It is the simplest form of vehicle, with the least legal and administrative procedures and costs of implementation. • The proprietor has full control of the business. • The proprietor is entitled to the entire profits of the business. • The proprietor is entitled to sell or to discontinue the business. • Discontinuance of the business requires minimum legal cost. Some disadvantages are: • The proprietor has unlimited personal liability for debts and for negligence (eg employees' errors) committed while conducting the business. • Success and continuance of the business are tied to the ability and health of the proprietor. • Management skill is confined to that of the proprietor and the employees. • Expansion and raising additional capital is more difficult than when more sophisticated vehicles are used. • It is unsuitable when more than one person is involved in providing capital for and in conducting the business and each desires to

share in control and management of the business. If this vehicle is suitable for a particular client and business acquisition, some of its major disadvantages can be ameliorated. For example, many risks of loss (including for negligence) can be protected by insurance. Some assets can be removed from the reach of creditors, eg by leasing instead of owning them.

¶1-060 The referral of powers by the States to enable law making: s 3, 4 The Corporations Act 2001 and the ASIC Act depend for their constitutional validity, at least in part, on the referral of powers by the States to the Commonwealth, under s 51(xxxvii) of the Constitution, to enable the Commonwealth to make laws with respect to corporations and financial markets. The reference of powers is in two parts, the first enabling the initial enactment of the Corporations Act and the ASIC Act, and the second enabling subsequent amendment of the Acts by the Commonwealth Parliament. In more detail, they are: • the “initial reference”, ie, a reference covering the initial Corporations Act and ASIC Act: s 4(4). This was a reference of the matters to which the two Acts relate, but only to the extent of the initial enactment of the Acts • the “amendment reference”, ie, a reference of “the matters of the formation of corporations, corporate regulation and the regulation of financial products and services”, but only to the extent of express amendments by Commonwealth legislation of the two Acts as in force from time to time: s 4(5). It is intended that the amendment reference will not restrict the capacity of the Commonwealth Parliament to amend the Corporations Act and the ASIC Act in the future, in reliance on the Parliament’s legislative powers that it has apart from the references. Section 4 is drafted so as to make it clear that each reference by each

State is limited to matters that are not otherwise included in the legislative powers of the Commonwealth Parliament (otherwise than pursuant to a reference under s 51(xxxvii) of the Constitution), and that are within the legislative powers of the State Parliament: s 4(1). A State which has referred powers on this basis is a “referring State”. Such a State will be a referring State even if: • its reference Act includes a provision to the effect that nothing in the reference Act is intended to enable the making of laws under the amendment reference which have the sole or main underlying purpose or object of regulating industrial relations matters even if, but for the provision in the reference Act, the resulting law would be a law with respect to a matter referred to the Commonwealth Parliament by the amendment reference: s 4(2), and/or • the State law merely provides that either or both of the initial reference or the amendment reference is to terminate in particular circumstances: s 4(3). A State will cease to be a referring State if its initial reference terminates: s 4(6). Similarly, a State will cease to be a referring State if its amendment reference terminates (s 4(7)), provided the circumstances set out in s 4(8) do not apply. Under that provision, a State whose amendment reference has terminated will not thereby cease to be a referring State if the termination is to take effect on a day to be fixed by proclamation, that day is no earlier than six months after the proclamation date, and the State’s amendment reference, and the amendment reference of every other State, terminates on that day. The effect of these rules is that a State can remain part of the Corporations Act scheme if it terminates its amendment reference, but only if it gives at least six months notice of the termination and if every other referring State terminates its amendment reference on the same day. Each State has passed a reference Act. They are as follows: New South Wales

Corporations (Commonwealth Powers) Act 2001 — No 1 of 2001, commenced operation 4 April 2001 (Royal Assent 29 March 2001) Victoria Corporations (Commonwealth Powers) Act 2001 — No 6 of 2001, commenced operation 21 June 2001 (Royal Assent 8 May 2001) Queensland Corporations (Commonwealth Powers) Act 2001 — No 43 of 2001, commenced operation 21 June 2001 (Royal Assent 21 June 2001) South Australia Corporations (Commonwealth Powers) Act 2001 — No 21 of 2001, commenced operation 21 June 2001 (Royal Assent 14 June 2001) Tasmania Corporations (Commonwealth Powers) Act 2001 — No 39 of 2001, commenced operation 29 June 2001 (Royal Assent 29 June 2001) Western Australia Corporations (Commonwealth Powers) Act 2001 — No 7 of 2001, commenced operation 29 June 2001 (Royal Assent 28 June 2001) A consolidated text of these Acts is reprinted in Australian Corporations and Securities Legislation. A very important point to note about the State reference Acts is that each contains a “sunset” provision, which will terminate the references on the fifth anniversary of the commencement of the Corporations legislation, unless either reference is terminated by proclamation before that date: see, eg, s 5 of the NSW Act. However, the references may be extended beyond the initial five-year term by proclamation made before the end of that period: see, eg, s 6 of the NSW Act.

¶8-910 Protection of business names Although generally the registration of a business name will preserve for its owner the exclusive entitlement to use that name, strictly that is

not the legal effect of the legislation. The need to register business names, ie when persons trade under a name which is not merely their own name, is enforced by penal sanction for contravention by failing to register (s 18 of the Business Names Registration Act 2011 (Cth)). However, registration under the Act does not mean the registered owner acquires property in the business name (s 17). To enable a trader to protect its name, and to prevent a rival trader from using it or a deceptively similar name, requires the trader to have established goodwill and reputation by use of that name. There are some decisions in which registered owners of a business name have been precluded by injunction from using that name, at the suit of a competitor who had not registered its business name, but had acquired a reputation over a period of time for its trade name. Such a trader could succeed against the owner of a business name in proceedings for passing off. See for example: • Australian Marketing Development Pty Ltd v Australian Interstate Marketing Pty Ltd (1972) VR 219 at pp 224–226 • BM Auto Sales Pty Ltd & Anor v Budget Rent A Car System Pty Ltd (1977) 51 ALJR 254. Use of a business name by its registered owner may in certain circumstances, also constitute a breach of the misleading and deceptive conduct provisions of the Australian Consumer Law (set out in Sch 2 of the Competition and Consumer Act 2010 — formerly the Trade Practices Act 1974) (Cth)) — see Tec & Tomas (Australia) Pty Ltd v Matsumiya Computer Co Pty Ltd (1984) ATPR ¶40-438.

CASES .40 Entitlements conferred through use of business name. Two rival business agencies involved with a striptease registered business names including “simply irresistible”. When one of these agencies sought to appropriate use of those terms, it failed. Reliance on registration as a business name was insufficient. Proof of reputation and goodwill in the name was required but was not established. Burica

Pty Ltd v Tops to Bottoms (Australia) Pty Ltd & Anor, Federal Court of Australia, Finn J, 24 October 1997, digest at ¶95-272. .41 Misleading and deceptive use of trading name. Mortgage House of Australia Pty Ltd & Ors v Mortgage House International Pty Ltd & Anor; Federal Court of Australia; Beaumont J; 8 October 2004; [2004] FCA 1279; digested at ¶95-410.

¶490 Functions and powers The Australian Competition and Consumer Commission (ACCC) is the statutory authority responsible for ensuring compliance with Pt IIIA, IV, IVB, IVA, VI, VIIA, X, XI, XIB, XIC of the Competition and Consumer Act 2010 (CCA) as well as the Competition Code under the national competition policy regime (see ¶300; ¶990). It shares responsibility for the enforcement of the Australian Consumer Law (ACL), Sch 2 of the Competition and Consumer Act 2010 (Cth) (the CCA) (formerly the Trade Practices Act 1974 (Cth) (TPA)) with the states and territories (see ¶18-220ff). In addition to its compliance responsibilities in respect of the CCA, the ACCC also has compliance and monitoring responsibilities under several other Acts — see ¶570. The ACCC also has a general research, public information and guidance role, especially in relation to matters affecting the interests of consumers. See ¶510. In ACCC v Oceana Commercial Pty Ltd (2004) ATPR (Digest) ¶46255, the Full Federal Court noted that the ACCC’s ability to enforce legislation derives from the conferral of such a function on the ACCC by legislation of the Commonwealth Parliament where either the Commonwealth Parliament is acting under a head of constitutional power or there has been a referral of power from a state or states [136–137]. In that case, the court concluded, at [158], that this extended to the ACCC not having standing to seek declaratory orders in respect of an alleged contravention of s 38 of the Fair Trading Act 1989 (Qld). ACCC’s objectives In the ACCC’s 2009–2010 Annual Report, it states that its objectives

are: (1) Promote vigorous, lawful competition and informed markets • Detect, pursue and stop anti-competitive conduct — including cartels — and misuse of market power. • Promptly deliver authorisation and notification decisions, particularly on small business collective bargaining arrangements. • Assess mergers promptly and efficiently across all industries, taking effective action to address substantial competition concerns arising from mergers. (2) Encourage fair trading, protection of consumers and product safety • Identify and focus effectively on national and cross-border (including international) consumer protection issues. • Pursue and achieve appropriate remedies for false and deceptive conduct, particularly conduct resulting in widespread detriment. • Ensure that trading conditions between big and small firms are fair. • Promote product safety through identification and regulation of emerging hazards, active engagement in recalls, and enforcement of standards and bans. (3) Regulate national infrastructure services and other markets where there is limited competition • Support and protect competition in markets that rely on networks with natural monopoly characteristics. • Provide consistent and independent regulation of the energy sector, encouraging competition within and between the gas and electricity markets to benefit industry and consumers.

• Regulate and advise on industries where market structures are changing, including where the market structure impedes effective competition (for example, water, transport and communications). • Monitor prices to assess and advise on the effect of market conditions (including deregulation) on the price levels of specified goods and services, including groceries, petrol, and a range of airport prices including car parking. Australian Consumer Law The ACCC together with state and territory consumer agencies jointly administer and enforce the Australian Consumer Law (ACL), Sch 2 of the Competition and Consumer Act 2010 (Cth) (the CCA) (formerly the Trade Practices Act 1974 (Cth) (TPA)). The Australian Securities and Investments Commission (ASIC) will continue to enforce the consumer protection provisions of the ASIC Act 2001. The ACL is an application law, in that the CCA applies the ACL as a law of the Commonwealth, and the ACCC enforces the ACL as a law of the Commonwealth. There are mirror provisions in the ASIC Act 2001, in relation to laws for consumer protection in financial services that are administered by ASIC, and the ACL is applied by each state, NT and ACT as a law of each state and the nominated territories, so that law can be enforced by the relevant state or territory agency. Compliance and enforcement policy Where the ACCC has discretion on whether or not to act, the ACCC states in its Compliance and enforcement policy that it gives enforcement priority to matters that demonstrate one or more of the following factors: • conduct of significant public interest or concern • conduct resulting in a significant consumer detriment • conduct demonstrating a blatant disregard for the law • conduct involving national or international issues

• conduct detrimentally affecting disadvantaged or vulnerable consumer groups • conduct involving a significant new or emerging market issue • conduct that is industry-wide or is likely to become widespread if the ACCC does not intervene • whether ACCC action is likely to have a worthwhile educative or deterrent effect, and/or • the person, business or industry has a history of previous contraventions of competition, consumer protection and fair trading laws. The policy also states that, where appropriate, the ACCC may also pursue matters that test or clarify the law. The ACCC is less likely to pursue matters that: • are one-off, isolated events, unless the conduct involves a blatant and deliberate breach of the law • are more appropriately resolved directly between the parties under an industry code (for example by way of mediation) • involve issues more effectively dealt with at the local level by state and territory agencies, or • are primarily contractual or private right disputes (the CCA provides complainants with a private right of action in these circumstances). International activities In the context of the growing internationalisation of financial markets, the ACCC has become part of an international scheme for mutual cooperation and assistance between national business regulators under the Mutual Assistance in Business Regulation Act 1992, which came into operation on 23 October 1992. Under that Act, the ACCC

can, with the Attorney-General’s consent, compel the provision of information, documents and sworn testimony in aid of requests from foreign agencies. (The scheme complements the obtaining and exchange of information between countries for the purposes of criminal prosecutions established under the Mutual Assistance in Criminal Matters Act 1987.) .01 Law: Mutual Assistance in Business Regulation Act 1992.

¶35-110 Industrial relations legislation Industrial relations and employment are regulated by a combination of federal and state legislation, industrial awards and agreements, and individual non-statutory employment contracts. These instruments place obligations on both the employer and individual employees. An industrial relations compliance system should take account of each of the following issues. • A system with operating procedures (including appropriate forms) should assist management to ensure that statutory procedures are properly carried out. • Staff involved in industrial relations and employment matters — including human resources staff, pay office staff, managers (who have to deal with shop-floor issues) and industrial relations negotiators — require knowledge of industrial relations/employment law, as well as the procedures described above. The information should include the key instruments which apply in each case (that is, statutes, awards and contracts), and procedural guidelines for handling both individual and collective disputes and grievances. • As with other areas of compliance, staff do not require intimate technical knowledge of the law, but precise information on what to do, when to do it, and when/where to seek further assistance. • When preparing employment contracts, care is needed to ensure that no terms breach the law and that all terms are enforceable.

Both drafting and checking guidelines and procedures are advisable. • Training managers in skills such as counselling employees, grievance/dispute handling and conflict resolution will help to reduce the chances of small problems snowballing into bigger ones. Commonwealth industrial relations legislation Over the past few years, there has been a move away from reliance on state and territory legislation to regulate employer-employee relationships and towards Commonwealth regulation. The Workplace Relations Amendment (WorkChoices) Act 2005 (WorkChoices) amended the Workplace Relations Act 1996 (Cth). As far as is possible, given the limitations on the Commonwealth Government’s power over industrial relations imposed by the Australian Constitution, WorkChoices created a single industrial relations system applying throughout Australia. Employees not covered by WorkChoices included those employed by: • unincorporated sole traders and unincorporated entities and partnerships, and • state government authorities. The Workplace Relations Act made provision for a number of different types of workplace agreements. Permissible agreements included an individual employment contract between an employer and an employee (an AWA) and various categories of collective agreements. The Federal Labor Government elected in November 2007 announced that it would abolish AWAs. The Workplace Relations Amendment (Transition to Forward with Fairness) Act 2008 provides that AWAs may not be made after 28 March 2008. Also, with only very limited exceptions, existing AWAs cannot be varied after this date. Registered AWAs made before 28 March 2008 continue to operate until they are terminated or are replaced.

In 2009, the federal parliament passed legislation (discussed below) for a new workplace relations system. This legislation makes no provision for individual statutory employment contracts. The Fair Work Act 2009 The current workplace relations system commenced on 1 July 2009 and became fully operational on 1 January 2010. The two main Acts supporting the system are the Fair Work Act 2009 (the Act) and the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 (the Transitional Provisions Act). The Transitional Provisions Act repeals all but Sch 1 and 10 of the Workplace Relations Act 1996, which was the basis of the previous federal workplace relations system. Schedules 1 and 10 of the Workplace Relations Act 1996 have been renamed the Fair Work (Registered Organisations) Act 2009. There is also the Fair Work (State Referral and Consequential and Other Amendments) Act 2009 which, as the name suggests, facilitates the transfer by the states of their industrial relations powers to the Commonwealth. The option to transfer powers to the Commonwealth has been taken up by all states except Western Australia. As a result, generally speaking, the Act applies to all employees in all states (other than WA) with the exception of politicians and those employed in the public sector, judiciary, law enforcement and local government (other than Tasmanian local government employees who are covered by the national system). Coverage of the Act Although the Act has been drafted as widely as possible, the Constitution does limit the Commonwealth Government’s legislative power in relation to industrial relations. The Act applies to “national system employees” and “national system employers”. A “national system employer” is defined in s 14 as: • a foreign corporation, or a trading or financial corporation formed in Australia (given the transfer of powers by all the states, except WA, this provision is now less significant) • the Commonwealth

• a Commonwealth authority • a person who, in trade or commerce, employs an individual as a flight crew officer, a maritime employee or a waterside worker • a company incorporated in a territory of the Commonwealth, and • a person who carries on an activity in a territory. By virtue of s 30D, any person in a state that has referred its industrial relations powers to the Commonwealth who employs, or usually employs, an individual is also a national system employer. The vast majority of companies formed in Australia are trading or financial corporations. A company is a trading corporation if it is involved in buying or selling which generates revenue. A national system employee is defined simply as an employee of a national system employer, other than persons who are on a vocational placement. Section 26 provides that the Act applies to the exclusion of all state or territory industrial laws that would otherwise apply to national system employers or employees. It is important to note that it is only industrial laws that are affected; state and territory legislation dealing with matters such as equal opportunity, anti-discrimination, superannuation, workers compensation and work health and safety is not excluded by s 26. A modern award or enterprise agreement made under the Act prevails over a law of a state or territory, to the extent of any inconsistency (s 29). The Act also has some limited application to employers and employees who are not national system employers or employees. For example, Pt 6-3 and 6-4 of the Act rely on the external affairs power in the Constitution to extend the entitlement to unpaid parental leave and to notice of termination, or payment in lieu of notice, to employees who are not national system employees. State and territory laws are not excluded by Pt 6-3 and Pt 6-4 and continue to apply if they provide

more beneficial employee entitlements in relation to parental leave or notice of termination. National Employment Standards Under the Act, national system employees’ wages and conditions are governed by: • the 10 National Employment Standards (NES) which are set out in the Act, and provide a “safety net” for employees, and • modern awards (which are new and established under the Act), or • enterprise agreements (or in limited circumstances, workplace determinations). The NES deal with the following matters: • maximum weekly hours (Pt 2-2, Div 3 of the Act) • requests for flexible working arrangements (Div 4) • parental leave and related entitlements (Div 5) • annual leave (Div 6) • personal/carer’s leave and compassionate leave (Div 7) • community service leave (Div 8) • long service leave (Div 9) • public holidays (Div 10) • notice of termination and redundancy pay (Div 11), and • Fair Work Information Statement (Div 12). The NES set out the minimum entitlements of employees who are national system employees. Contravening a provision of the NES (except s 65(5) and 76(4) which state that an employer may refuse a

request for flexible working arrangements, or an application to extend unpaid parental leave, only on reasonable grounds) is punishable by a civil penalty not exceeding 60 penalty units (see ¶35-015) for an individual and 300 penalty units for a body corporate. The employer may also be ordered to pay to an employee an amount that the employer has failed to pay the employee, in contravention of a NES provision. Modern awards Part 2-3 of the Act deals with modern awards, which set out the minimum terms and conditions of employees in particular industries and occupations. A modern award must contain a coverage term, flexibility term, a term about settling disputes, ordinary hours of work and rates of pay. Section 139 sets out the terms that may be included in a modern award, including types of employment and overtime rates. The Act also contains a list of terms that must not be included in a modern award. Further, s 55(4) states that a modern award or enterprise agreement may include terms which: • are ancillary or incidental to NES entitlements, and • supplement NES entitlements. Section 55(4) allows for the inclusion of terms which, for example, deal with issues such as when a payment for leave must be made, and also for the inclusion in awards and enterprise agreements of terms which are more favourable to employees than the NES. An award or agreement may also deal with such other matters as are permitted by the regulations to the Act (s 55(2)). To date, no regulations specifying other matters have been made. A modern award or enterprise agreement must not exclude the NES or any provision of the NES (s 55(1)), and a term of an award or an agreement that contravenes s 55 is of no effect (s 56). A modern award applies to an employee, employer, organisation or

outworker entity if the award covers them and no other provision of the Act provides that the award does not apply (s 47(1)). Modern awards will not apply to employees who: • are high income employees (and have entered into a high income employee agreement) (s 47(2)), or • are covered by an enterprise agreement (s 57). The high income threshold for the period from 1 July 2016 to 30 June 2017 is $138,900 per annum (excluding superannuation). The effect of s 47(2) and 57 is that the award will cease to apply, but if an employee ceases to be a high income employee or ceases to be covered by an enterprise agreement, then the award will again apply to that employee. The same civil penalty and compensation provisions apply to the contravention of a term of a modern award as apply to the contravention of a NES provision (s 45). One of the final tasks of the Australian Industrial Relations Commission (AIRC) was the making of a comprehensive set of modern awards. On 1 January 2010, Fair Work Australia (FWA) replaced the AIRC. On 1 January 2013, the tribunal’s name was changed from FWA to the Fair Work Commission (FWC). Section 156 requires the FWC to conduct four yearly reviews of all modern awards. Enterprise agreements It is the federal government’s intention that enterprise agreements will be the main method of regulating terms and conditions of employment. An enterprise agreement is made between employees and their employer at the enterprise level and provides the terms and conditions of employment of the employees it covers. An agreement cannot be made with just a single employee. An enterprise agreement may be made in relation to permitted matters, which are set out in s 172 of the Act. The Act also sets out the mandatory terms of an enterprise

agreement. Like modern awards, an enterprise agreement can include terms that are ancillary or supplementary to the NES. An agreement applies to an employee, employer or employee organisation if it covers them, and no other provision of the Act provides that the agreement does not apply (s 52(1)). An enterprise agreement may be either a single enterprise or a multi enterprise agreement. A single enterprise agreement may be made between an employer, or two or more employers who are single interest employers, and the employees who are employed at the time the agreement is made and who will be covered by the agreement. An example of single interest employers are franchisees of the same franchisor. A multi enterprise agreement covers two or more employers that are not all single interest employers. The Act imposes an obligation to bargain in good faith which must be met by bargaining representatives involved in negotiating a proposed enterprise agreement. This is a new obligation not found in previous federal industrial relations legislation. The requirements for good faith bargaining are set out in s 228, and include giving genuine consideration to the proposals of other bargaining representatives and giving reasons for the representative’s response to those proposals. All employees have the right to be represented by a bargaining representative during bargaining for an enterprise agreement. If a bargaining representative is not meeting the good faith bargaining requirements, another bargaining representative may apply to the FWC for a bargaining order (s 229). The FWC can then make an order to facilitate the bargaining process. Contravening a bargaining order is punishable by a civil penalty of an amount not exceeding 60 penalty units (see ¶35-015) for an individual and 300 penalty units for a body corporate (s 233). If a bargaining order is contravened and certain other conditions are met, the FWC may make a serious breach declaration (s 235). If the making of a declaration does not lead to the resolution of the matters at issue, then the FWC must make a bargaining related workplace

determination (s 269). In addition to applying for a bargaining order, a bargaining representative may ask the FWC to deal with a dispute about an agreement if the bargaining representatives are unable to resolve the dispute (s 240(1)). The FWC may arbitrate the dispute, if arbitration is agreed to by the bargaining representatives (s 240(4)). Once an enterprise agreement has been negotiated, two steps must be taken before the agreement can come into operation. Employees must be given a copy of the agreement, or access to a copy of the agreement, and they must approve the agreement by voting for it. An application must then be made to the FWC for the approval of the agreement. If the requirements set out in sections 186 and 187 are met, the FWC must approve the agreement. These requirements include: • the employees have agreed to the agreement • the terms of the agreement do not contravene the NES • the agreement passes the “better off overall test” (the employees are better off under the agreement than under the Act, or relevant modern award) • the agreement does not include any unlawful terms • the agreement specifies a date as its nominal expiry date and that date will not be more than four years after the date on which the FWC approves the agreement, and • the agreement includes a term that provides for disputes about the agreement or the NES to be settled by the FWC or another independent person. Section 194 sets out a number of unlawful terms (for example, discriminatory terms) which are prohibited from inclusion in an enterprise agreement. A discriminatory term is a term that discriminates against an employee because of, or for reasons including, the employee’s race, colour, sex, sexual preference, age,

physical or mental disability, marital status, family or carer’s responsibilities, pregnancy, religion, political opinion, national extraction or social origin. An enterprise agreement approved by the FWC comes into operation seven days after the agreement is approved, or if a later date is specified in the agreement — on that later date (s 54). The same civil penalty and compensation provisions apply to the contravention of a term of an enterprise agreement as apply to the contravention of a NES provision, or a term of a modern award (s 50). Registered individual employment agreements The Workplace Relations Act 1996 allowed for the making of registered individual employment agreements between an employer and employee, called Australian Workplace Agreements (AWAs). Under the Fair Work Act 2009, there is no provision for the making of a statutory individual employment agreement, as an alternative to a modern award or enterprise agreement. Of course, an employer may still enter into a common law contract of employment with any employee who is not covered by a modern award or enterprise agreement. The NES apply to all national system employees, including those employed under a common law contract of employment. AWAs continue to operate past their nominal expiry date until terminated or replaced. Of course, after the nominal expiry date of an AWA, the parties can negotiate an enterprise agreement. The FWC’s powers In addition to powers already discussed, other important FWC powers include: • Setting minimum wages: Under Pt 2-6 of the Act, the FWC must set and vary minimum wages for all national system employees. The FWC is to conduct an annual review of modern award minimum wages and the national minimum wage order. • Unfair dismissal: An unfair dismissal claim can be bought by a

person covered by a modern award, an enterprise agreement, or a national system employee earning less than $138,900 per year. In addition, the person must have been employed for a period of one year, if employed by a small business, or six months for all other employees. A small business is a business employing less than 15 employees. A small business is not subject to a claim for unfair dismissal if the employer has complied with the Small Business Fair Dismissal Code. The Code is a legislative instrument made by the Minister for Employment and Workplace Relations. The unfair dismissal provisions of the Act are different to the provisions of the Workplace Relations Act 1996 which exempted employers with less than 100 employees from unfair dismissal claims. Liability under the Act Section 793 provides that any conduct engaged in on behalf of a body corporate: • by an officer, employee or agent (an official) of the body corporate with the scope of his or her actual or apparent authority, or • by any other person at the direction, or with the consent or agreement of an official of the body corporate, if the giving of the direction, consent or agreement is within the scope of the actual or apparent authority of the official is taken to have been engaged in also by the body corporate. If it is necessary to establish the state of mind of a body corporate in relation to particular conduct, it is enough to show: • that the conduct was engaged in by an official or by another person at the direction, or with the consent or agreement of an official, and • that person had that state of mind. Under s 550, a person who is involved in a contravention of a civil remedy provision (which are listed in s 539) is taken to have

contravened that provision. The Fair Work Ombudsman The functions of the Fair Work Ombudsman include promoting and monitoring compliance with the Act, and providing education, assistance and advice to employers and employees. The Ombudsman’s website provides resources to assist employers to comply with the Act. These resources include: • a self-audit checklist which employers can complete to determine whether or not they are complying with the Act • fact sheets that cover a range of topics and set out minimum rights and responsibilities under workplace law • Guidance Notes which set out the Ombudsman’s interpretation of the Act and detail internal policies and procedures • Best Practice Guides which provide best practice guidance on a number of workplace issues • templates that deal with various employment issues, and • online training courses for employers and managers. An important function carried out by the Ombudsman’s office is the conduct of investigations, which are carried out by fair work inspectors. These investigations fall into three categories: • Wages and conditions investigations which are usually the result of a complaint by an employee, or former employee. • Investigations into other matters such as (for example) industrial action or sham contracting. • Proactive campaigns and compliance audits conducted to ensure compliance with Commonwealth workplace laws. Information on what is required of an employer if they are chosen for a compliance audit and on current and future campaigns, as well as

the results of completed campaigns is available on the Ombudsman’s website: www.fairwork.gov.au. If an investigation discloses a breach of the Act, in most cases, the employer is given an opportunity to remedy the breach voluntarily. If the employer does not do so, the Ombudsman may take further action such as obtaining an enforceable undertaking from the employer, or commencing court proceedings. A recent focus of enforcement activity for the FWO has been persons or companies who are involved in the underpayment or non-payment of wages, but who are not the employer. In 2015/16, 92% of the matters the FWO took to court involved an accessory as well as the person directly responsible under the law for the conduct in question. Like other regulators, the FWO emphasises the importance of a compliance culture. The FWO’s Corporate Plan sets out activities it undertakes that are aimed at building a culture of compliance with workplace laws. The FWO encourages employers “that want to publicly demonstrate their commitment to creating compliant, productive and inclusive” workplaces to enter into a proactive compliance deed. Such deeds, which usually cover a two or threeyear period, are signed by the FWO and the business and outline the steps the parties will take to make sure the business is compliant with workplace laws. One of the benefits for a business is that a deed may include a clause that the FWO will, in the first instance, refer any employee requests for assistance to the employer for self-resolution. Proactive compliance deeds are published on the FWO’s website. Amendments to the Fair Work Act In the explanatory memorandum to the Fair Work Bill 2008, the Federal Government stated that the operation of the Act would be reviewed two years after it was fully implemented. On 20 December 2011, the Minister for Employment and Workplace Relations announced that the Fair Work Act review would be conducted by Reserve Bank board member John Edwards, former Federal Court Judge Michael Moore and legal and workplace relations academic Professor Ron McCallum.

Under its terms of reference, the review examined and reported on: • the extent to which the Fair Work legislation is operating as intended, and • areas where the evidence indicates that the operation of the Fair Work legislation could be improved consistent with the objects of the legislation. The review panel released a background paper which outlines the process that should be followed when making a submission to the review and included a list of questions stakeholders may wish to consider when preparing their submissions. A criticism of the review when it was announced was that workplace productivity was not included in the terms of reference, but the background paper made it clear that productivity issues could be discussed in submissions. Submissions to the review closed on 17 February 2012. Over 200 initial submissions and over 30 supplementary submissions were made to the review. The review panel also conducted meetings with key stakeholders and roundtable discussions to allow the participants to outline their experiences with the Fair Work legislation. The panel’s report was delivered to the government on 15 June 2012, and was publicly released on 2 August. The report makes 53 recommendations, but does not recommend fundamental changes to FW Act. The panel believes that the current laws are working well and the system of enterprise bargaining underpinned by the national employment standards and modern awards is delivering fairness to employers and employees. The panel was not persuaded that the legislative framework for industrial relations accounts for Australia’s productivity slowdown over the past decade. In making its recommendations, the panel did not accept that: • the FW Act should be amended to permit easier access to arbitration in the case of long running disputes, or that the FW Act should be amended to further permit Fair Work Australia to

terminate prolonged industrial action • the permitted matters for negotiation in enterprise agreements should be restricted to those permitted in the Work Choices framework • the government should permit individual agreements with provisions that undercut award provisions. In the panel’s view this is contrary to the objects of the FW Act and inimical to both the making of collective agreements and the safety net role of modern awards. A copy of the panel’s report and other review documents can be downloaded from www.employment.gov.au/fair-work-act-review. On 15 October 2012, the federal government announced that it had decided to proceed with amendments to the Act to implement the recommendations which had broad support. These recommendations constituted about a third of the review’s 53 recommendations. The government has said that it will continue to consult with stakeholders on the remaining recommendations. The Fair Work Amendment Act 2012 passed federal parliament on 28 November 2012, and received assent on 4 December 2012. One of the amendments made by the Act is to change the name of the tribunal from Fair Work Australia to the Fair Work Commission, in order to better differentiate it from the Fair Work Ombudsman. The Fair Work Amendment Act 2013, which received assent on 29 June 2013, implements further review recommendations and “a number of reforms which reflect the government’s policy priorities”. Possibly the most controversial of these priorities is found in sch 2 of the Bill which will require that the Fair Work Commission to take into account the need to provide additional remuneration for employees working overtime, unsocial, irregular or unpredictable hours, working on weekends or public holidays, or working shifts, when ensuring that modern awards together with the National Employment Standards provide a fair and relevant minimum safety net of terms and conditions.

¶35-060 Work Health and Safety Act In July 2008, the Commonwealth Government and the governments of all states and territories signed the Inter-Governmental Agreement for Regulatory and Operational Reform in Occupational Health and Safety (IGA). The agreement committed the parties to developing and implementing model work health and safety (WHS) legislation. The model WHS Act, as amended following a public consultation process, was adopted at a meeting of the Workplace Relations Ministers’ Council (WRMC) held on 11 December 2009. The next step in the process was the release of an exposure draft of the model WHS Regulations, model Codes of Practice and an issues paper in December 2010. The model regulations and codes, which were amended as a result of public consultation, were endorsed in principle by a majority of ministers at the August 2011 meeting of the WRMC. In order to ensure that the WHS laws of the Commonwealth, the states and the territories remain consistent over time, the IGA requires that any future changes affecting the operation of the laws be agreed to at a national level. Under the IGA, if an amendment is agreed to, all jurisdictions must adopt the amendment in order to maintain national consistency. The model Act is in force in the Commonwealth, Queensland, New South Wales, Tasmania, South Australia, the Australian Capital Territory and the Northern Territory. A Western Australian version of the national model Act, the Work Health and Safety Bill 2014, was tabled in the state’s parliament in November 2014 and released for public comment. To date, the Bill has not progressed further. The Victorian Government announced that it supports harmonisation of work health and safety laws in principle, but advised that the government will not implement the model Act in its current form and will seek changes to it. The legislation currently in force in those states is the Occupational Safety and Health Act 1984 (WA) and the Occupational Health and

Safety Act 2004 (Vic). At its meeting held on 13 April 2012, COAG agreed that the current occupational health and safety laws would be reviewed by the end of 2014. Work Health and Safety Act (Cth) The section references below are to the Work Health and Safety Act 2011 (Cth). There may be some differences in section numbering in other jurisdictions. Duty of care Part 2 of the Act contains important sections setting out health and safety duties. The primary duty of care is found in s 19. Under this section, a person conducting a business or undertaking (a PCBU) must ensure so far as is reasonably practicable, the health and safety of: • workers engaged, or caused to be engaged by the person, and workers whose activities in carrying out work are influenced or directed by the person, while the workers are at work in the business or undertaking, and • other persons is not put at risk from work carried out as part of the conduct of the business or undertaking. This second element of s 19 extends a PCBU’s duty of care to other persons who are not workers. Section 5 defines a PCBU as a person who conducts a business or undertaking whether alone or with others, and whether or not the business or undertaking is conducted for profit or gain. “Worker” is widely defined by s 7 and includes employees, contractors, employees of contractors, subcontractors, labour hire workers, apprentices, trainees, students undertaking work experience, and volunteers. A duty imposed on a person to ensure health and safety requires the person: • to eliminate risks to health and safety so far as is reasonably practicable, and

• if it is not reasonably practicable to eliminate risks to health and safety, to minimise those risks so far as is reasonably practicable (s 17). Section 18 explains what is meant by “reasonably practicable”. Under the section, reasonably practicable, in relation to a duty to ensure health and safety, means that which is, or was at a particular time, reasonably able to be done to ensure health and safety, taking into account all relevant matters, including: • the likelihood of the hazard or the risk concerned occurring, and • the degree of harm that might result from the hazard or risk, and • what the person concerned knows, or ought reasonably to know, about the hazard or the risk, and ways of eliminating or minimising the risk, and • the availability and suitability of ways to eliminate or minimise the risk. After taking into account these four factors, the section provides that only then can the PCBU also consider the cost of eliminating or minimising the risk, including whether the cost is grossly disproportionate to the risk. Because s 18 does not set an absolute standard, PCBUs should ensure that they create and retain documentation and other evidence which demonstrates that they have done all that is reasonably practicable to ensure health and safety. Section 274 of the Act provides that codes of practice may be approved for the purposes of the Act. Along with the model Act and regulations, a number of codes of practice have been endorsed by the WRMC. Copies of these codes can be downloaded from the Safe Work Australia website www.safeworkaustralia.gov.au/sites/SWA. The foreword to the code of practice, How to Manage Work Health and Safety Risks, states: “An approved code of practice is a practical guide to achieving the

standards of health, safety and welfare required under the [Act and regulations]. Codes of practice are admissible in court proceedings under the [Act and regulations]. Courts may regard a code of practice as evidence of what is known about a hazard, risk or control and may rely on the code in determining what is reasonably practicable in the circumstances to which the code relates. The [Act and regulations] may be complied with by following another method, such as a technical or an industry standard, if it provides an equivalent or higher standard of work health and safety than the code.” Under s 275(2) of the Act, an approved code of practice is admissible in a proceeding for an offence against the Act as evidence of whether or not a duty or obligation under the Act has been complied with. Other sections in Pt 2 impose additional duties on certain persons. These sections provide: □ A person with management or control of a workplace must ensure, so far as is reasonably practicable, that the workplace, the means of entering and exiting the workplace and anything arising from the workplace are without risks to the health and safety of any person (s 20). □ A person with management or control of fixtures, fittings or plant at a workplace must ensure, so far as is reasonably practicable, that the fixtures, fittings and plant are without risks to the health and safety of any person (s 21). □ A person (the designer) who conducts a business that designs a plant, substance or structure (PSS) must ensure, so far as is reasonably practicable, that the PSS is designed to be without risks to the health and safety of persons at a workplace who carry out the activities set out in the section in relation to the PSS. In addition, the designer has the same duty to persons who are at or in the vicinity of a workplace and who are exposed to the PSS, or whose health or safety may be affected by the activities set out in the section (s 22). The designer must also carry out calculations, analysis, testing or examination of the PPS, or provide

information regarding the PSS in the circumstances set out in the section. The duties in s 22 apply to a designer who conducts a business that designs a PSS that is to be used, or could reasonably be expected to be used, as, or at, a workplace. □ Under s 23, a person (the manufacturer) who conducts a business that manufactures a PSS that is to be used, or could reasonably be expected to be used, as, or at, a workplace, is subject to the same duties as are imposed on a designer by s 22. □ Under s 24, a person (the importer) who conducts a business that imports a PSS that is to be used, or could reasonably be expected to be used, as, or at, a workplace, is subject to the same duties that apply to designers and manufacturers. □ Under s 25, a person (the supplier) who conducts a business that supplies a PSS that is to be used, or could reasonably be expected to be used, as, or at, a workplace, is subject to the same duties that apply to designers, manufacturers and importers. □ A person who conducts a business that installs, constructs or commissions plant or a structure that is to be used, or could reasonably be expected to be used, as, or at, a workplace must ensure, so far as is reasonably practicable, that it is installed, constructed or commissioned so that it does not pose a risk to the health and safety of persons at a workplace who carry out the activities set out in the section. In addition, the person has the same duty to persons who are at or in the vicinity of a workplace and whose health or safety may be affected by the activities set out in the section (s 26). Duty of officers Section 27(1) provides that if a PCBU has a duty or obligation under this Act, an officer of the PCBU must exercise due diligence to ensure that the PCBU complies with that duty or obligation. “Officer” is defined in s 4 of the Act as:

• an officer within the meaning of s 9 of the Corporations Act 2001, other than a partner in a partnership, or • an officer of the Commonwealth within the meaning of s 247, or an officer of a public authority within the meaning of s 252, other than an elected member of a local government acting in that capacity. Under s 9 of the Corporations Act, an officer of a corporation means a director or secretary of the corporation, or a person appointed to act in the place of the directors (such as a receiver or liquidator), or a person: • who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation, or • who has the capacity to significantly affect the corporation’s financial standing, or • in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation). Section 9 also defines an officer of an entity that is neither an individual nor a corporation as an office holder of an unincorporated association if the entity is an unincorporated association, or a person: • who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the entity, or • who has the capacity to significantly affect the entity’s financial standing. Section 27(5) of the Act states that due diligence includes taking reasonable steps: • to acquire and keep an up-to-date knowledge of WHS matters,

and • to gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations, and • to ensure that the PCBU has available for use, and uses, appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking, and • to ensure that the PCBU has appropriate processes for receiving and considering information regarding incidents, hazards and risks and responding in a timely way to that information, and • to ensure that the PCBU has, and implements, processes for complying with any duty or obligation of the PCBU under this Act, and • to verify the provision and use of the resources and processes mentioned in the last three items. Effectively, s 27(5) requires an officer to take reasonable steps to ensure that a PCBU implements compliance measures. It is important to note that the subsection sets out a non-exhaustive list of actions an officer must take to discharge their duty to exercise due diligence, meaning that, in particular circumstances, there may be other actions that an officer would be required to take to discharge their duty. In relation to s 27(5), the Explanatory Memorandum (at pp 21 and 22) states: “An officer must have high, yet attainable, standards of due diligence. These standards should relate to the position and influence of the officer within the PCBU. What is required of an officer should be directly related to the influential nature of their position. This is because the officer governs the PCBU and makes decisions for management. A high standard requires persistent examination and care, to ensure that the resources and

systems of the PCBU are adequate to comply with the duty of care required by the PCBU. This also requires ensuring that they are performing effectively.” The use of the words “reasonable steps” means that an officer must do what the hypothetical reasonable person would do in the circumstances. This may, of course, be different to what the officer in question believed were reasonable steps. Under s 27(2), if an officer fails to exercise due diligence to ensure that a PCBU complies with their health and safety duties under Pt 2, then the officer is subject to the penalties prescribed in s 31–33. If an officer fails to exercise due diligence to ensure that a PCBU complies with any other duty or obligation in the Act, the officer is liable for the same penalty that applies to the individual who has failed to comply with the duty or obligation (s 27(3)). An officer of a PCBU may be convicted of an offence under this Act relating to a duty under this section whether or not the PCBU has been convicted of an offence in relation to the duty or obligation (s 27(4)). Duty of workers and others Section 28 imposes a duty on workers to take reasonable care for their own health and safety, and to take reasonable care that their acts or omissions do not adversely affect the health and safety of other persons. A worker is also required to assist the PCBU to carry out their duties by: • complying, so far as the worker is reasonably able, with any reasonable instruction that is given by the PCBU to allow the person to comply with the Act, and • cooperating with any reasonable policy or procedure of the PCBU relating to health or safety at the workplace that has been notified to workers. Section 29 sets out health and safety duties which apply to all persons at a workplace (for example, customers or visitors), whether or not the

person has another duty under Pt 2. The duties are the same as three of the four duties imposed on workers (the duties to take reasonable care, and to comply, so far as the person is reasonably able, with any reasonable instruction that is given by the PCBU to allow the PCBU to comply with the Act). Health and safety duties — offences and penalties A health and safety duty is a duty imposed by s 19–29, inclusive. The penalty for a person or a body corporate for breaching a health and safety duty depends on the seriousness of the breach. Reckless conduct is a category 1 offence (the most serious breach) and is dealt with by s 31. Under this section, a person commits a category 1 offence if: □ the person has a health and safety duty, and □ the person, without reasonable excuse, engages in conduct that exposes an individual to whom that duty is owed to a risk of death or serious injury or illness, and □ the person is reckless as to the risk to an individual of death or serious injury or illness. The penalty for a category 1 offence is: □ for an offence committed by an individual, other than as a PCBU or as an officer of a PCBU, $300,000 and/or five years imprisonment, or □ for an offence committed by an individual as a PCBU or as an officer of a PCBU, $600,000 and/or five years imprisonment, or □ for an offence committed by a body corporate, $3,000,000. Under s 32, a person commits a category 2 offence if: □ the person has a health and safety duty, and □ the person fails to comply with that duty, and

□ the failure exposes an individual to a risk of death or serious injury or illness. The penalty for a category 2 offence is: □ for an offence committed by an individual, other than as a PCBU or as an officer of a PCBU, $150,000, or □ for an offence committed by an individual as a PCBU or as an officer of a PCBU, $300,000, or □ for an offence committed by a body corporate, $1,500,000. Section 33 provides that a person commits a category 3 offence if: □ the person has a health and safety duty, and □ the person fails to comply with that duty. The penalty for a category 3 offence is: □ for an offence committed by an individual, other than as a PCBU or as an officer of a PCBU, $50,000, or □ for an offence committed by an individual as a PCBU or as an officer of a PCBU, $100,000, or □ for an offence committed by a body corporate, $500,000. There is no requirement that the prosecution prove that a person has acted recklessly in order to obtain a conviction for a category 2 or 3 offence. In order to obtain a conviction, it is up to the prosecution to prove all elements of these offences beyond a reasonable doubt. This includes proving that the defendant failed to do what was reasonably practicable to protect the health and safety of the persons to whom the duty was owed. Section 34 states that a volunteer cannot be prosecuted for a failure to comply with a health and safety duty, other than for a breach of a duty

imposed on workers by s 28 or a duty imposed on other persons at a workplace by s 29. Even though an unincorporated association may be a PCBU, s 34(2) provides unincorporated association does not commit an offence, and is not liable for a civil penalty, for a failure to comply with a duty or obligation imposed on the unincorporated association by the Act. Instead, under the section: • an officer of an unincorporated association (other than a volunteer) is liable for a failure to comply with a duty imposed on officers of a PCBU by s 27, and • a member of an unincorporated association is liable for a failure to comply with a duty imposed by s 28 or 29. Other duties or obligations Other duties or obligations under the Act include: • A PCBU must ensure that the regulator is notified immediately after becoming aware that a notifiable incident has occurred (s 38(1)). A “notifiable incident” is an incident involving death, serious injury or illness, or a dangerous incident. • A PCBU must keep a record of each notifiable incident for at least five years from the day that notice of the incident is given to the regulator (s 38(7)). • The person with management or control of a workplace at which a notifiable incident has occurred must ensure, so far as is reasonably practicable, that the site where the incident occurred is not disturbed until an inspector arrives at the site, or any earlier time that an inspector directs (s 39(1)). • If more than one person has a duty in relation to the same matter under the Act, each person with the duty must, so far as is reasonably practicable, consult, cooperate and coordinate activities with all other persons who have a duty in relation to the same matter (s 46).

• A PCBU must, so far as is reasonably practicable, consult, as required by Pt 5, Div 2 of the Act and any regulation, with workers who carry out work for the business or undertaking who are, or are likely to be, directly affected by a matter relating to work health or safety (s 47(1)). • A PCBU must consult, so far as is reasonably practicable, on WHS matters with any health and safety representative for a work group of workers carrying out work for the business or undertaking (s 70). • A PCBU at a workplace must establish a health and safety committee for the business or undertaking within two months after being requested to do so by a health and safety representative for a work group of workers, or by five or more workers at that workplace (s 75). • A PCBU must allow each member of the health and safety committee to spend the time that is reasonably necessary to attend meetings of the committee or to carry out functions as a member of the committee (s 79(1)). • A person must not, without reasonable excuse, refuse or unduly delay entry into a workplace by a WHS entry permit holder (s 144). • A person must not, intentionally and unreasonably, hinder or obstruct a WHS entry permit holder in entering a workplace, or in exercising their rights at a workplace (s 145). Health and safety committees An important feature of the Work Health and Safety Act is the requirement that a PCBU at a workplace must establish a health and safety committee for the business or undertaking within two months after being requested to do so by a health and safety representative for a work group of workers, or by five or more workers at that workplace A health and safety committee, if properly utilised, is an

excellent method of embedding compliance with the Act. At least half of the members of the committee must be workers who are not nominated by the PCBU (s 76). Part of the committee’s role is to bring potential health and safety risks to light for action. In the real world, it is often those at the operating level who are best able to see possible danger areas and practical possibilities for improving the system. Features of such a system include those mentioned at ¶35070 in relation to environmental laws. Committees have the power to make recommendations only. The authority to make decisions remains with the PCBU, who is not bound to implement the committee’s recommendations. Appointing representatives or establishing committees may assist with compliance with other Acts (such as anti-discrimination or equal opportunity Acts), provided that they do not detract from the statutory requirements of the Act. Setting up a health and safety committee does not relieve the PCBU from legal responsibility for workplace health and safety, and the PCBU needs to continue to take other compliance steps to prevent problems arising. Proper training of management is also essential to ensure that they encourage, not discourage, the work of the committees, representatives and safety officers. In factories and other places that may have potential hazards, regular inspections by engineers and other qualified staff are important. As with all compliance systems, taking proactive steps to endeavour to identify potential danger spots, and appropriate action to prevent problems arising, is important. If an existing business is purchased, it is important that a thorough assessment of the work health and safety system of the business is conducted. The fact that a deficient system was created by the previous owners of the business is not a defence to prosecution for the new owners. Apart from the above, work health and safety compliance systems generally should have a similar structure and reporting arrangements to the others discussed in this publication. As with all compliance systems, reports should be made to the board or compliance committee. If a work health and safety committee has been

established, the board or compliance committee should also have access to the committee’s reports and recommendations. In some companies, there appears to be a lack of commitment to making the safety committees really work. It is important to overcome any such tendency, as it can be a vital factor if the directors ever have to establish that they have done all that is reasonably practicable in relation to work health and safety. It is also important that directors who inspect the workplace note any potential danger areas and cause proper steps to be taken to remedy the danger, even if the matter has not been raised in formal reports. If they fail to do this, it is unlikely that they will be able to establish that they have done all that is reasonably practicable. There needs to be a list of required and prohibited work practices. It needs to be made clear, and regularly reinforced, that prohibited work practices will not be tolerated. As always, breaches of operating procedures should lead to appropriate disciplinary action. Industrial manslaughter A controversial development in work health and safety has been the inclusion in legislation of industrial manslaughter or wrongful death provisions. The heaviest penalties are found in the Australian Capital Territory Crimes Act 1900. Part 2A of the Act deals with industrial manslaughter. Under this Part, an employer, or a senior officer of an employer is guilty of an offence if: • a worker dies in the course of employment, or is injured and later dies • the conduct of the employer or senior officer caused the death, and • the employer or senior officer was reckless about causing serious harm to the worker, or negligent about causing the death of the worker. An employer includes a company or other organisation. In the case of a corporation that is not a government corporation, any officer of the

corporation (as defined by the Corporations Act) is a “senior officer”. The maximum penalty that may be imposed on an offender who is an individual is $220,000 or imprisonment for 20 years, or both. A corporation is liable for a maximum penalty of $1.1m. In addition to or instead of a fine, a court may make other orders against a corporation, including an order to publicise the offence.

¶150-589 National consumer credit legislation On 25 June 2009, the federal government introduced into parliament the National Consumer Credit Protection Bill 2009 (NCCP Bill) and the National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009 (the legislation). The legislation formed a large part of the federal government’s National Consumer Credit Reform Package which was announced in October 2008. The legislative package made the following changes: • the Australian Securities and Investment Commission (ASIC) became the sole regulator of the National Credit Code (NCC) framework • established a national licensing scheme which requires consumer credit providers and credit-related brokering services and advisors to be licensed with ASIC • replaced the current state-based Uniform Consumer Credit Code (UCCC) with a new NCC • extended the NCC to cover residential investment property mortgages • included margin loans as “financial products” under the Corporations Act 2001 (Cth) • increased the threshold for hardship cases, allowing consumers to request changes to terms of their credit contract (for contracts up to $500,000), and

• required consumer credit providers and brokers to take out mandatory membership to an external dispute resolution body. The second stage of the reforms began in mid-2011 with the federal government making further changes to limit unfavourable lending practices. This included a review of credit card limit extension offers, interest rate caps and other lending issues. Other measures included further regulating investment loans and the provision of credit to small businesses, reforming mandatory comparison rates and default notices, and enhancing regulation and tailored disclosure notices of reverse mortgages. Licensing scheme As part of the new regime, a comprehensive licensing scheme was introduced. The key elements of the licensing scheme include: • a requirement that persons engaged in credit activities initially register with ASIC and subsequently hold an Australian Credit Licence (ACL). Applications for registration with ASIC are required to be made between 1 November and 31 December 2009. From 1 January 2010 all registered persons have six months to apply for an ACL • registration and licensing standards will allow ASIC to refuse an application where those standards are not met. The standards include minimum training requirements, enhanced standards of conduct (including a requirement to act “honestly, efficiently and fairly”) and mandatory membership of an external dispute resolution body, and • standards of conduct for consumer credit providers and brokers with respect to credit activities. Responsible lending requirements Consumer credit providers and brokers are required to maintain standards of conduct and comply with the “responsible lending requirements” proposed by the changes. Providers and brokers may not provide, suggest or assist with a credit contract that is unsuitable

to a consumer. They are also required to assess whether the consumer has the capacity to meet the financial obligations of the credit contract. If the consumer is found to lack that capacity, they should not be provided with the credit contract. Consumers will need to be provided with a credit guide containing details of the provider or broker, their obligations under the legislation and disclosures in relation to fees, charges and commissions. If a consumer is being provided with credit assistance, they must be given a binding quote. The responsible lending obligations on credit providers, lessors and credit assistance providers state that a credit contract or lease will be unsuitable for a consumer if it is unlikely that the consumer will be able to comply with their financial obligations, or will only be able to do so with substantial hardship. The legislation defines “substantial hardship” as a situation in which a consumer could only comply with the relevant obligations by selling their principal place of residence. The commencement of the responsible lending conduct obligations was deferred until 1 January 2011 to give industry time to put in place the systems, processes and training needed to comply with these obligations. Certain exemptions from the licensing and responsible lending obligations are built into the scheme. ASIC will have power to exempt certain credit activities, or classes of credit activity. Point-of-sale retailers such as car dealerships and retail outlets will be exempt from the requirements that relate to giving credit assistance to consumers. There will be an exemption, for the first 12 months only, for state or territory licensed debt collectors. The federal government will examine the regulatory oversight of these entities within the next 12 months. Changes from consultation draft The substance of the NCC is largely unchanged from the consultation draft other than: • credit to refinance a loan which was provided to purchase, renovate or improve residential property for investment purposes will be regulated by the NCC

• there is a new offence of inducing a debtor to make a false purpose declaration • there has been a change to the new requirement for a notice on the first dishonour of a direct debit. The credit provider will have 10 business days after the default to give this notice rather than just 10 days, and • provisions have been introduced to allow ASIC to exclude certain types of credit from the NCC. These provisions contemplate, in particular, that credit above a certain amount and credit of a certain class might be excluded. ASIC powers ASIC powers of regulation and enforcement include: • the power to commence investigations, examine individuals and inspect records in the context of investigations • the power to conduct hearings • the power to ban, suspend or cancel an ACL of a provider or broker where ASIC believes that it is necessary to protect consumers from financial harm • the ability to issue fines to penalise providers and brokers for strict liability offences, and • significant criminal penalties for misconduct, including possible imprisonment for up to five years for breaching the responsible lending requirements. Civil penalties for misconduct of up to $220,000 for an individual and $1.1m for a corporation apply. Consumers will also be able to apply to a court for compensation or to have their credit contract varied due to loss and damage suffered as a result of a infringement of the NCCP regime.

¶35-158 The APPs The most important part of the Privacy Act is the Australian Privacy Principles (APPs) which are set out in Sch 1 of the Act and regulate the way an individual’s “personal information” is handled by agencies and organisations. The APPs are principles-based legislation. That is, while the APPs set out the privacy principles applying to APP entities, generally speaking they do not prescribe the way in which entities must comply with those principles. An entity can tailor its compliance to meet the needs of its business and the needs of its customers and others with which it interacts. What is personal information? □ Section 6 of the Act defines “personal information” as information or an opinion about an identified individual, or an individual who is reasonably identifiable: (a) whether the information or opinion is true or not, and (b) whether the information or opinion is recorded in a material form or not. □ A subset of personal information is “sensitive information”. Sensitive information includes information or an opinion about an individual’s racial or ethnic origin, political opinions, membership of a political association, religious beliefs or affiliations, sexual orientation, criminal record or health information (for the full definition, see s 6). □ Health information includes information about the health or disability of an individual or information collected in the course of providing health services (for the full definition, see s 6). Example: An example of information that is personal information would be: “Bill Smith, male, 186 cm tall, fair complexion.” It is personal information because it is information about an identified

individual. An example of non-personal information is: “Male, 186 cm tall, fair complexion.” This information is not personal information because it is not information about an identified individual, or information about an individual who is reasonably identifiable. To whom does the Act apply? The Act applies to an “APP entity” which is defined as an agency or organisation. An “organisation” means: □ an individual □ a body corporate □ a partnership □ any other unincorporated association, or □ a trust. Included in the definition of “agency” are ministers, departments, bodies (whether incorporated or not), or a tribunal, established or appointed for a public purpose by or under a Commonwealth enactment (except an incorporated company, society or association), the federal courts and the Australian Federal Police (see s 6 for the full definition). The APPs apply to acts or practices by an entity within Australia. The APPs extend to an act done, or practice engaged in, outside Australia and the external Territories by an entity, or small business operator, that has an Australian link (s 5B(1A)). Exemptions The following organisations are not covered by the Act: □ small businesses (ie less than $3m annual turnover) (note that a small business that provides a health service and holds any

health information, trades in personal information (unless they do so with the consent of the individual) or is a service provider under a Commonwealth contract, is not exempt) □ registered political parties, and □ state or territory government bodies such as government departments, agencies and authorities and local government — government-owned corporations are not exempt. Also not covered by the Act are: □ non-business/family/household/personal activities □ the transfer of information from an old partnership to a new partnership where at least one partner is common to the new and old partnerships □ the acts and practices of employers in relation to employee records □ the acts and practices of media organisations in the course of journalism □ the acts or practices of contracted service providers under a contract for the provision of services to a state or territory authority, where the authority, or the state or territory was a party to the contract □ the collection or disclosure of personal information by a body corporate from or to a related body corporate, and □ the acts and practices of political representatives. The Information Commissioner has issued the Australian Privacy Principles guidelines (the guidelines) which can be downloaded from OAIC’s website. The guidelines outline: □ the Commissioner’s interpretation of the APPs, including matters that the OAIC may take into account when exercising functions

and powers relating to the APPs □ examples that explain how the APPs apply in particular circumstances, and □ the Commissioner’s view of what constitutes good privacy practice. This guidance can be adopted by entities who wish to do more than meet the minimum mandatory requirements of the APPs. While the guidelines are not legally enforceable, they do set out the Commissioner’s interpretation of the APPs, which should be taken into account by all APP entities when designing their privacy compliance systems. A number of the APPs require an organisation and/or an agency to take “reasonable steps”. For example, APP 1.2 provides that an APP entity must take reasonable steps to implement practices, procedures and systems that will ensure it complies with the APPs and any binding registered APP code, and is able to deal with related inquiries and complaints. As the guidelines observe, the “reasonable steps” test is an objective test. An APP entity has taken reasonable steps if they have done what a reasonable person would be expected to do in the circumstances. This means that what is reasonable: □ is a question of fact that must be determined according to the circumstances of the case □ can be influenced by current standards and practices, and □ may be different from what the entity believed was reasonable. It is the responsibility of the entity to be able to prove that reasonable steps were taken. What actions constitute reasonable steps will depend on the prevailing circumstances. These circumstances may include: □ the nature of the personal information held. More rigorous steps may be required as the amount and sensitivity of personal

information handled by an APP entity increases. □ the possible adverse consequences for an individual. More rigorous steps may be required as the risk of adversity increases. □ the nature of the APP entity. Relevant considerations include an entity’s size, resources and its business model. For example, the reasonable steps expected of an entity that operates through franchises or dealerships, or gives database and network access to contractors, may differ from the reasonable steps required of a centralised entity. □ the practicability, including time and cost involved. The “reasonable steps” test recognises that privacy protection must be viewed in the context of the practical options available to an APP entity. However, an entity is not excused from implementing particular practices, procedures or systems only because it would be inconvenient, time-consuming or impose some cost to do so. Whether these factors make it unreasonable to take a particular step will depend on whether the burden is excessive in all the circumstances. This section provides a summation of the APPs, and the OAIC’s guidance as well as our comments on the APPs. APP 1 — Open and transparent management of personal information APP 1 requires entities to manage personal information in an open and transparent way and sets out what an entity must do to meet this requirement. It provides that: □ An APP entity must take reasonable steps to implement practices, procedures and systems that will ensure it complies with the APPs and any binding registered APP code, and is able to deal with related inquiries and complaints (AAP 1.2). □ An APP entity must have a clearly expressed and up to date APP Privacy Policy about how it manages personal information (APP

1.3 and 4). □ An APP entity must take reasonable steps to make its APP Privacy Policy available free of charge and in an appropriate form (APP 1.5) (a note to APP 1.5 states that an APP entity will usually make its APP privacy policy available on its website). □ An APP entity must, upon request, take reasonable steps to provide a person or body with a copy of its APP Privacy Policy in the particular form requested (APP 1.6). An APP entity can decline to provide a copy of its APP Privacy Policy in a particular form if it would not be reasonable in the circumstances to meet the request. Effectively, APP 1.2 requires an entity to have a privacy compliance system. An entity’s compliance obligations under APP 1.2 are qualified by the proviso that an entity need only take reasonable steps to ensure compliance with the APPs. At a minimum, an entity’s privacy policy should be easy to understand (avoiding jargon, legalistic and in-house terms), easy to navigate, only include information that is relevant to the management of personal information by the entity and be up to date. APP 1.4 contains a nonexhaustive list of information that an APP entity must include in its APP Privacy Policy: □ the kinds of personal information collected and held by the entity (APP 1.4(a)) □ how personal information is collected and held (APP 1.4(b)) □ the purposes for which personal information is collected, held, used and disclosed (APP 1.4(c)) □ how an individual may access their personal information and seek its correction (APP 1.4(d)) □ how an individual may complain if the entity breaches the APPs or any registered binding APP code, and how the complaint will be

handled (APP 1.4(e)), and □ whether the entity is likely to disclose personal information to overseas recipients (APP 1.4(f)), and if so, the countries in which such recipients are likely to be located if it is practicable to specify those countries in the policy (APP 1.4(g)). The OAIC has issued a Guide to developing an APP privacy policy which provides guidance on how to write a privacy policy. The Guide can be downloaded from the OAIC website. APP 2 — Anonymity and pseudonymity □ Individuals must have the option of not identifying themselves, or of using a pseudonym, when dealing with an APP entity in relation to a particular matter (APP 2.1). □ Subclause 2.1 does not apply if, in relation to that matter: (a) the APP entity is required or authorised by or under an Australian law, or a court/tribunal order, to deal with individuals who have identified themselves, or (b) it is impracticable for the APP entity to deal with individuals who have not identified themselves or who have used a pseudonym (APP 2.2). In other words, what APP 2 provides is that, unless APP 2.2 is applicable, an entity must not require an individual to identify themselves when dealing with the entity. In practice, what this means is that unless an entity is required or authorised by or under an Australian law, or a court or tribunal order, to deal with individuals who have identified themselves, entities are expected to design and maintain information collection systems that incorporate anonymous and pseudonymous options. Obviously, there will be many circumstances where it will be impracticable for an entity to deal with individuals who have not identified themselves or who have used a pseudonym. The guidelines give two examples:

□ in dispute resolution, it may be impracticable to investigate and resolve an individual’s particular complaint about how their case was handled or how the staff of an APP entity behaved unless the complainant provides their name or similar information, and □ where an entity is delivering goods purchased by an individual, it may not be able to do so without knowing that individual’s address, or their name (for example, where the individual needs to sign for delivery of the goods). APP 3 — Collection of solicited personal information APP 3 sets out when an APP entity may collect solicited personal information, and how the information can be collected (unsolicited personal information is dealt with by APP 4). An APP entity solicits personal information if it explicitly requests another entity to provide personal information, or it takes active steps to collect personal information. □ For personal information (other than sensitive information), an APP entity that is: (a) an agency, may only collect this information where it is reasonably necessary for, or directly related to, the agency’s functions or activities (APP 3.1), and (b) an organisation, may only collect this information where it is reasonably necessary for the organisation’s functions or activities (APP 3.2). □ Unless one of the exceptions in APP 3.4 applies, an APP entity may only collect sensitive information where the above conditions are met and the individual concerned consents to the collection (APP 3.3). □ Personal information must only be collected by lawful and fair means (APP 3.5). □ Personal information must be collected from the individual concerned, unless this is unreasonable or impracticable

(exceptions apply to agencies) (APP 3.6). APP 3.4 lists five exceptions to the requirements of APP 3.3. Under this subclause, the consent of the individual to the collection of sensitive information is not necessary if: □ the collection is required or authorised by law □ a “permitted general situation” exists in relation to the collection. Section 16A of the Privacy Act lists seven permitted general situations (for example, the entity reasonably believes the collection is necessary to lessen or prevent a serious threat to the life, health or safety of any individual, or to public health or safety (s 16A(1), Item 1)). □ the APP entity is an organisation and a permitted health situation exists in relation to the collection of the information by the entity. Permitted health situations include: □ where health information is necessary to provide a health service to the individual, or □ where the collection if necessary for conducting research; compiling or analysing statistics; management, funding or monitoring of a health service. For full details of these exceptions, see s 16B of the Act. □ the collection is for an enforcement related activity, and □ the information is collected by a non-profit organisation and conditions set out in APP 3.4(e) are met. “Lawful” and “fair” are not defined in the Act. The guidelines state that collecting information in a way that is a breach of legislation, by a means that would constitute a civil wrong or contrary to a court or tribunal order is not a lawful collection. The Privacy Amendment Act explanatory memorandum notes that the OAIC has interpreted “fair” to mean without intimidation or deception and the concept of fair also

includes an obligation not to use means that are unreasonably intrusive. As the guidelines observe, whether it is “unreasonable or impracticable” to collect personal information only from the individual concerned will depend on the circumstances of the particular case. Considerations that may be relevant include: □ whether the individual would reasonably expect personal information about them to be collected directly from them or from another source □ the sensitivity of the personal information being collected □ whether direct collection would jeopardise the purpose of collection or the integrity of the personal information collected □ any privacy risk if the information is collected from another source, and □ the time and cost involved of collecting directly from the individual. An APP entity is not excused from collecting from the individual rather than another source by reason only that it would be inconvenient, time-consuming or impose some cost to do so. Whether these factors make it unreasonable or impracticable will depend on whether the burden is excessive in all the circumstances. Section 13B(1) of the Privacy Act provides that the collection or disclosure of personal information about an individual (other than sensitive information) by a body corporate from or to a related body corporate is generally not an interference with the privacy of an individual. What is a related body corporate? Section 6(8) of the Privacy Act provides that, for the purposes of the Act, bodies corporate are related to each other if they are deemed by the Corporations Act 2001 to be related. Under s 50 of the Corporations Act, where a body corporate is:

(a) a holding company of another body corporate, or (b) a subsidiary of another body corporate, or (c) a subsidiary of a holding company of another body corporate, the body corporate and the other body are related bodies corporate. APP 4 — Dealing with unsolicited personal information □ APP 4 sets out the steps an APP entity must take if it receives unsolicited personal information. □ Unsolicited personal information is personal information received by an APP entity where the entity has taken no active steps to collect the information. □ If an APP entity receives unsolicited personal information, it must decide whether it could have collected the information under APP 3 (Collection of solicited personal information). □ If the entity determines it could not have collected the personal information under APP 3, different rules apply according to whether or not the information is contained in a “Commonwealth record”. □ If the unsolicited personal information is contained in a Commonwealth record, APP 4 does not require it to be destroyed or de-identified. □ Other unsolicited personal information that could not have been collected under APP 3, must be destroyed or de-identified as soon as practicable if it is lawful and reasonable to do so. □ If an APP entity is not required to destroy or de-identify the unsolicited personal information under APP 4, the entity may retain the personal information but must deal with it in accordance with APPs 5 to 13. The objective of APP 4 is to ensure that unsolicited personal

information that is received by an APP entity is afforded privacy protection, even though the entity has not solicited the information. Section 6(1) of the Act defines “solicits” but does not define “unsolicited”. An entity solicits personal information if the entity requests another entity to provide the personal information, or to provide a kind of information in which that personal information is included. Personal information received by an entity that does not fall within the definition of “solicited” should be treated as unsolicited personal information. Examples of unsolicited personal information include: □ misdirected mail or unsolicited correspondence received by an entity □ an employment application sent to an entity on an individual’s own initiative and not in response to an advertised vacancy, and □ personal information provided to an APP entity that is additional to the information that has been requested by the entity. In simple terms, a “Commonwealth record” is a record that is the property of the Commonwealth or of a Commonwealth institution. For the full definition of the term, see s 3 of the Archives Act 1983 (Cth). APP 5 — Notification of the collection of personal information □ APP 5.1 provides that an APP entity that collects personal information about an individual must take reasonable steps either to notify the individual of certain matters or to ensure the individual is aware of those matters. This notification must be given at or before the time the entity collects the information or, if that is not practicable, as soon as practicable after it is collected. □ The matters must be notified are set out in APP 5.2 and include: □ the APP entity’s identity and contact details □ the fact and circumstances of collection □ whether the collection is required or authorised by law

□ the purposes of collection □ the consequences (if any) if personal information is not collected □ any other APP entity, body or person, or the types of other APP entities, bodies or persons, to which the APP entity usually discloses personal information of the kind collected by the entity □ information about the entity’s APP Privacy Policy, and □ whether the entity is likely to disclose personal information to overseas recipients, and if practicable, the countries where they are located. The requirement to notify or ensure awareness of the matters in APP 5.2 applies to all personal information collected about an individual, either directly from the individual or from a third party. It applies to solicited personal information and also unsolicited personal information that is not destroyed or de-identified by the APP entity. Reasonable steps that may be taken either to notify the individual of the matters in APP 5.2 or to ensure the individual is aware of those matters include: □ if the entity collects personal information directly from an individual who completes a form or uses an online facility, clearly and prominently displaying the APP 5 matters in the form, or providing a readily accessible and prominent link to an APP 5 notice □ if personal information is collected by telephone, explaining the APP 5 matters to the individual at the commencement of the call (perhaps following a template script or using an automated message), and □ if the entity collects personal information from another entity, ensuring that the other entity has notified or made the individual aware of the relevant APP 5 matters on its behalf (such as through an enforceable contractual arrangement).

In some circumstances, it may be reasonable for an APP entity to not take any steps to provide a notice or ensure awareness of all or some of the APP 5.2 matters. An example of such a circumstance is that notification would be inconsistent with a legal obligation, for example, s 123 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 provides that if a reporting entity has made a suspicious matter report to AUSTRAC about a person, this fact must not be disclosed to anyone else. APP 6 — Use or disclosure of personal information APP 6 regulates the use or disclosure of personal information by an APP entity. □ An APP entity can only use or disclose personal information for a purpose for which it was collected (known as the “primary purpose”), or for a secondary purpose if an exception applies (APP 6.1). □ Exceptions include: □ the individual consented to a secondary use or disclosure (APP 6.1(a)) □ the individual would reasonably expect the secondary use or disclosure, and this use is related to the primary purpose of collection or, in the case of sensitive information, directly related to the primary purpose (APP 6.2(a)) □ the secondary use or disclosure of the personal information is required or authorised by or under an Australian law or a court/tribunal order (APP 6.2(b)) □ a permitted general situation exists in relation to the secondary use or disclosure of the personal information by the APP entity (APP 6.2(c)) □ the APP entity is an organisation and a permitted health situation exists in relation to the secondary use or disclosure of the personal information by the organisation (APP 6.2(d))

□ the APP entity reasonably believes that the secondary use or disclosure is reasonably necessary for one or more enforcement related activities conducted by, or on behalf of, an enforcement body (APP 6.2(e)) □ the APP entity is an agency (other than an enforcement body) and discloses personal information that is biometric information or biometric templates to an enforcement body, and the disclosure is conducted in accordance with guidelines made by the Information Commissioner for the purposes of APP 6.3 (APP 6.3). □ An APP entity that collects personal information from a related body corporate is taken to have the same primary purpose of collection as its related body corporate (APP 6.6). □ APP 6 does not apply to the use or disclosure by an organisation of personal information for the purpose of direct marketing (this is covered by APP 7) or government related identifiers (covered by APP 9) (APP 6.7). An APP entity may use personal information for a secondary purpose with the consent of the individual. Section 6(1) of the Act defines “consent” as express or implied consent. The guidelines are largely silent on what constitutes implied consent, observing that an APP entity cannot infer consent simply because it provided an individual with notice of a proposed collection, use or disclosure of personal information and the individual did not object. The guidelines suggest that the use of an opt-out mechanism may allow an entity to infer that an individual has consented. In the view of the OAIC, the more that the following factors are present, the more likely it is that consent can be inferred from the use of an opt-out mechanism: □ the opt-out option was clearly and prominently presented □ it is likely that the individual received and read the information about the proposed collection, use or disclosure, and the option to

opt out □ the individual was given information on the implications of not opting out □ the opt-out option was freely available and not bundled with other purposes □ it was easy for the individual to exercise the option to opt out, for example, there was little or no financial cost or effort required by the individual □ the consequences of failing to opt out are not serious □ an individual who opts out at a later time will, as far as practicable, be placed in the position as if they had opted out earlier. An entity should keep records of how consent was obtained. APP 6.2(a) permits an APP entity to use or disclose personal information for a secondary purpose if the individual would reasonably expect the entity to use or disclose the information for that secondary purpose. The use of the word “reasonably” imports an objective test, ie if a reasonable person would expect the secondary use or disclosure, then the entity is within this exception. An APP entity that collects personal information from a related body corporate is taken to have the same primary purpose of collection as its related body corporate (APP 6.6). The effect of APP 6.6 is to place the entity in the same position as the related body corporate, ie the entity may only use or disclose the personal information for a secondary purpose if one of the exceptions in APP 6.2 applies. “Permitted general situation” and “permitted health situation” have the same meaning as in APP 3. APP 7 — Direct marketing APP 7.1 states that if an organisation holds personal information about an individual, the organisation must not use or disclose the information for the purpose of direct marketing. Subsequent

paragraphs provide exceptions to this prohibition. APP 7.2 and 7.3 deal with personal information other than sensitive information. Under APP 7.2, an organisation may use or disclose personal information about an individual for the purpose of direct marketing if: □ the organisation collected the information from the individual, and □ the individual would reasonably expect the organisation to use or disclose the information for that purpose □ the organisation provides a simple way for the individual to request not to receive direct marketing communications from the organisation (also known as “opting out”), and □ the individual has not made such a request to the organisation. APP 7.3 provides that an organisation may use or disclose personal information about an individual for the purpose of direct marketing if: □ the organisation collected the information: • from the individual and the individual would not reasonably expect the organisation to use or disclose the information for that purpose or • someone other than the individual, and □ either: • the individual has consented to the use or disclosure of the information for that purpose, or • it is impracticable to obtain that consent, and □ the organisation provides a simple means by which the individual may easily request not to receive direct marketing communications from the organisation, and □ in each direct marketing communication with the individual: • the organisation includes a prominent statement that the

individual may make such a request, or • the organisation otherwise draws the individual’s attention to the fact that the individual may make such a request, and □ the individual has not made such a request to the organisation. A simple means for opting out should include: □ a visible, clear and easily understood explanation of how to opt out, for example, instructions written in plain English and in a font size that is easy to read □ a process for opting out, which requires minimal time and effort □ an opt out process that uses a straightforward and accessible communication channel, or channels. For example, the same communication channel that the organisation used to deliver the direct marketing communication or a different channel that is easier to access, and □ an opt out process that is free, or that does not involve more than a nominal cost, for example, the cost of a local phone call, text message or postage stamp. Despite subclause 7.1, an organisation may use or disclose sensitive information about an individual for the purpose of direct marketing if the individual has consented to the use or disclosure of the information for that purpose (APP 7.4). An organisation that is a contracted service provider for a Commonwealth contract may use or disclose personal information for the purpose of direct marketing if the conditions in APP 7.5 are met. An individual may request an organisation not to use or disclose their personal information for the purpose of direct marketing, or for the purpose of facilitating direct marketing by other organisations (APP 7.6). The organisation must not impose a fee for giving effect to such a request and must give effect to the request within a reasonable period of time (APP 7.7). According to the guidelines, a reasonable

period will generally be no more than 30 days. In addition, an organisation must, on request, and within a reasonable period of time, notify an individual of the source of the individual’s personal information that it has used or disclosed for the purpose of direct marketing unless it is impracticable or unreasonable to do so (APP 7.7). Again, the guidelines state that a reasonable period will generally be no more than 30 days. If an organisation asserts that it is impractical or unreasonable to notify an individual of the source of their personal information, the onus is on the organisation to justify this assertion. Possible justifications may include: □ the possible adverse consequences for the individual if they are not notified of the source □ the length of time that has elapsed since the personal information was collected by the organisation □ for personal information collected before commencement of APP 7, whether the source of the personal information was recorded, and □ the time and cost involved. This does not mean that an entity is excused from taking particular steps by reason only that it would be inconvenient, time-consuming or there would be a cost to do so. Whether these factors make it unreasonable to take particular steps will depend on whether the burden is excessive in all the circumstances. The Spam Act 2003 (Cth) and the Do Not Call Register Act 2006 (DNCR Act) (Cth) contain specific provisions regarding direct marketing. Where the act or practice of an APP entity is subject to the Spam Act, DNCR Act or other legislation prescribed under the regulations, APP 7 does not apply to the extent that this legislation applies (APP 7.8). APP 8 — Cross-border disclosure of personal information

The general rule regarding the disclosure of personal information to overseas recipients is stated in APP 8.1, which provides that an entity must take such steps as are reasonable in the circumstances to ensure that the overseas recipient does not breach the APPs (other than APP 1) in relation to the information. APP 8.1 defines an “overseas recipient” as a person who is not in Australia or an external Territory and who is not the entity or the individual. The guidelines note that if an entity engages a contractor located overseas to perform services on its behalf, in most circumstances, the provision of personal information to that contractor is a disclosure. Although “disclosure” is not defined in the Privacy Act, the guidelines express the view that the provision of personal information to a contractor is generally considered a disclosure where: □ an Australian based retailer outsources the processing of online purchases through its website to an overseas contractor and, in order to facilitate this, provides the overseas contractor with personal information about its customers □ an Australian entity, as part of a recruitment drive, provides the personal information of job applicants to an overseas services provider to perform reference checks on behalf of the Australian entity □ an Australian organisation relies on its overseas parent company to provide technical and billing support, and as part of this, provides the overseas parent company with access to its Australian customer database (which includes personal information). According to the guidelines, in limited circumstances providing personal information to an overseas contractor to perform services on behalf of the APP entity may be a use, rather than a disclosure. This will be the case where the entity does not release the subsequent handling of personal information from its effective control. For example, where an APP entity provides personal information to a cloud service provider located overseas for the limited purpose of performing the services of storing and ensuring the entity may access

the personal information, this may be a use rather than a disclosure of personal information. The guidelines state that it is generally expected that an APP entity will enter into an enforceable contractual arrangement with the overseas recipient that requires the recipient to handle the personal information in accordance with the APPs. Although the guidelines use the words “generally expected” rather than making a contract an essential requirement, we suggest it will be hard for an entity to satisfy the reasonable steps test if it does not enter into a contractual arrangement with the overseas recipient and monitor compliance with the contract. Section 16C deals with the consequences for an APP entity if an overseas recipient behaves in a way that is inconsistent with the APPs. This section applies if: □ an APP entity discloses personal information about an individual to an overseas recipient, and □ APP 8.1 applies to the disclosure of the information (in other words, none of the exceptions in APP 8.2 apply to the disclosure), and □ the APPs do not apply, to an act done, or a practice engaged in, by the overseas recipient in relation to the information, and □ the overseas recipient does an act, or engages in a practice, in relation to the information that would be a breach of the APPs (other than APP 1) if those APPs applied to that act or practice. If these circumstances apply, then the act or practice is taken to have been done by the APP entity and the act or practice constitutes a breach of the APPs by that entity (s 16C(2)). APP 8.2 contains a list of exemptions to the general rule. It provides that APP 8.1 does not apply to the disclosure of personal information about an individual by an APP entity to the overseas recipient if: (a) the entity reasonably believes that:

(i) the recipient of the information is subject to a law, or binding scheme, that has the effect of protecting the information in a way that, overall, is at least substantially similar to the way in which the APPs protect the information, and (ii) there are mechanisms that the individual can access to take action to enforce that protection of the law or binding scheme, or (b) both of the following apply: (i) the entity expressly informs the individual that if he or she consents to the disclosure of the information, APP 8.1 will not apply to the disclosure (ii) after being so informed, the individual consents to the disclosure, or (c) the disclosure of the information is required or authorised by or under an Australian law or a court/tribunal order, or (d) a permitted general situation (other than the situation referred to in item 4 or 5 of the table in s 16A(1)) exists in relation to the disclosure of the information by the APP entity, or (e) the entity is an agency and the disclosure of the information is required or authorised by or under an international agreement relating to information sharing to which Australia is a party, or (f) the entity is an agency and both of the following apply: (i) the entity reasonably believes that the disclosure of the information is reasonably necessary for one or more enforcement related activities conducted by, or on behalf of, an enforcement body, and (ii) the recipient is a body that performs functions, or exercises powers, that are similar to those performed or exercised by an enforcement body.

With respect to the requirement that the entity have a reasonable belief in APP 8.2(a), the guidelines observe that an APP entity must have a reasonable basis for its belief, and not merely a genuine or subjective belief. A reasonable belief could, for example, be based on independent legal advice obtained by the entity. A substantially similar law or binding scheme is one that provides a comparable, or a higher level of privacy protection to that provided by the APPs. Each provision of the law or scheme is not required to correspond directly to an equivalent APP. Rather, it is the overall effect of the law or scheme that determines whether or not it is substantially similar. Factors that may indicate that the overall effect is substantially similar, include: □ the law or scheme includes a comparable definition of personal information that would apply to the personal information disclosed to the recipient □ the law or scheme regulates the collection of personal information in a comparable way □ the law or scheme requires the recipient to notify individuals about the collection of their personal information □ the law or scheme requires the recipient to only use or disclose the personal information for authorised purposes □ the law or scheme includes comparable data quality and data security standards, and □ the law or scheme includes a right to access and seek correction of personal information. In order to obtain consent under APP 8.2(b), an entity should explain to the individual the consequences of providing consent. At a minimum, the individual should be advised that if they consent to the disclosure and the overseas recipient handles the personal information in breach of the APPs: □ the entity will not be accountable under the Privacy Act, and

□ the individual will not be able to seek redress under the Act. An APP does not need to obtain consent before every proposed cross-border disclosure. It may obtain an individual’s consent to disclose a particular kind of personal information to the same overseas recipient for the same purpose on multiple occasions. The permitted general situations referred to in 8.2(d) are set out in s 16A of the Act. The section allows an APP entity to disclose personal information to an overseas recipient if the disclosure is: □ for the purpose of lessening or preventing a serious threat to life, health or safety □ for the purpose of taking appropriate action in relation to suspected unlawful activity or serious misconduct □ for the purpose of locating a person reported as missing □ necessary for a diplomatic or consular function or activity, or □ necessary for certain Defence Force activities outside Australia. For a full definition of the situations in which these exemptions apply, see s 16A. APP 9 — Adoption, use or disclosure of government related identifiers APP 9 provides that: 9.1 An organisation must not adopt a government related identifier of an individual as its own identifier of the individual unless: (a) the adoption of the government related identifier is required or authorised by or under an Australian law or a court/tribunal order, or (b) APP 9.3 applies in relation to the adoption. 9.2 An organisation must not use or disclose a government related identifier of an individual unless:

(a) the use or disclosure of the identifier is reasonably necessary for the organisation to verify the identity of the individual for the purposes of the organisation’s activities or functions, or (b) the use or disclosure of the identifier is reasonably necessary for the organisation to fulfil its obligations to an agency or a state or territory authority, or (c) the use or disclosure of the identifier is required or authorised by or under an Australian law or a court/tribunal order, or (d) a permitted general situation (other than the situation referred to in item 4 or 5 of the table in s 16A(1)) exists in relation to the use or disclosure of the identifier, or (e) the organisation reasonably believes that the use or disclosure of the identifier is reasonably necessary for one or more enforcement related activities conducted by, or on behalf of, an enforcement body, or (f) APP 9.3 applies in relation to the use or disclosure. 9.3 APP 9.3 applies in relation to the adoption, use or disclosure by an organisation of a government related identifier of an individual if: (a) the identifier is prescribed by the regulations, and (b) the organisation is prescribed by the regulations, or is included in a class of organisations prescribed by the regulations, and (c) the adoption, use or disclosure occurs in the circumstances prescribed by the regulations. The objective of APP 9 is to restrict use of government related identifiers by organisations so that they do not become universal identifiers. That could jeopardise privacy by enabling personal information from different sources to be matched and linked in ways that an individual may not agree with or expect. An individual cannot

consent to the adoption, use or disclosure of their government related identifier. “Government related identifier” is defined in s 6(1) of the Act as an identifier of an individual that has been assigned by: (a) an agency, or (b) a state or territory authority, or (c) an agent of an agency, or a state or territory authority, acting in its capacity as agent, or (d) a contracted service provider for a Commonwealth contract, or a state contract, acting in its capacity as contracted service provider for that contract. APP 10 — Quality of personal information APP 10 states that: 10.1 An APP entity must take such steps (if any) as are reasonable in the circumstances to ensure that the personal information that the entity collects is accurate, up to date and complete. 10.2 An APP entity must take such steps (if any) as are reasonable in the circumstances to ensure that the personal information that the entity uses or discloses is, having regard to the purpose of the use or disclosure, accurate, up to date, complete and relevant. As APP 10 implies, in some circumstances it will be reasonable for an APP entity to take no steps to ensure the quality of personal information. For example, where an entity collects personal information from a source known to be reliable (such as the individual concerned) it may be reasonable to take no steps to ensure the quality of personal information. It is the responsibility of the entity to be able to justify any such decision. The guidelines give a number of examples of reasonable steps that an APP entity could consider taking: □ implementing internal practices, procedures and systems to audit,

monitor, identify and correct poor quality personal information (including training staff in these practices, procedures and systems). For example, if the entity commonly uses or discloses personal information in time-critical situations such that it may not be possible to take steps to ensure quality at the time of the use or disclosure, the entity might take steps to ensure the quality of personal information at regular intervals □ implementing protocols that ensure personal information is collected and recorded in a consistent format. For example, to help assess whether personal information is up to date, an entity might, where practicable, note on a record when the personal information was collected and the point in time to which it relates, and whether or the information is an opinion rather than a fact □ ensuring updated or new personal information is promptly added to relevant existing records □ providing individuals with a simple means to review and update their personal information on an ongoing basis, for example through an online portal □ asking individuals to update their personal information each time the entity engages with the individual □ contacting the individual to verify the quality of personal information when it is used or disclosed, particularly if there has been a lengthy period since collection □ checking that a third party, from whom personal information is collected, has implemented appropriate practices, procedures and systems to ensure the quality of personal information. Depending on the circumstances, this could include: • making an enforceable contractual arrangement to ensure that the third party implements appropriate measures to ensure the quality of personal information the entity collects from the third party

• undertaking due diligence in relation to the third party’s quality practices prior to the collection, and □ if personal information is to be used or disclosed for a new purpose that is not the primary purpose of collection, assessing the quality of the personal information having regard to that new purpose before the use or disclosure. Many of the above examples are steps that should be included in an entity’s CMS. APP 11 — Security of personal information An APP entity must take reasonable steps to protect personal information it holds from misuse, interference and loss, as well as unauthorised access, modification or disclosure (APP 11.1). Where an APP entity no longer needs personal information for any purpose for which the information may be used or disclosed under the APPs, the entity must take reasonable steps to destroy the information or ensure that it is de-identified. This requirement applies except where: □ the personal information is part of a Commonwealth record, or □ the APP entity is required by law or a court/tribunal order to retain the personal information (APP 11.2). APP 11 requires an APP entity to take active measures to ensure the security of personal information it holds, and to actively consider whether it is permitted to retain personal information. What are the reasonable steps that an APP entity must take to protect personal information? The OAIC publication, Guide to securing personal information: “Reasonable steps” to protect personal information (which replaces its previous publication, Guide to information security: “reasonable steps” to protect personal information), discusses relevant considerations and gives examples of steps that it may be reasonable for an APP entity to take. The guide states that reasonable steps could including taking steps and

implementing strategies concerning: □ Governance, culture and training: Privacy and security governance arrangements should include appropriate training, resourcing and management focus to foster a privacy and security aware culture among staff. Personal information security should be an integrated component of the entire business and not left to the compliance or the information and communication technologies (ICT) area alone. The creation of this culture will require the active support of and promotion by, senior management. □ Internal practices, procedures and systems: For the purposes of APP 11, an entity should document the internal practices, procedures and systems that it uses to protect personal information. Documentation should outline the personal information security measures that are established and maintained against the risks and threats to personal information. These documents should be regularly reviewed and updated to ensure they reflect the entity’s current acts and practices. □ ICT security: Effective ICT security requires protecting both hardware and software from misuse, interference, loss, unauthorised access, modification and disclosure. □ Third party providers (including cloud computing): Entities that outsource part or all of their personal information handling will need to consider whether they still “hold” that personal information. If so, APP 11 will apply and the entity will need to take reasonable steps to comply with APP 11. □ Data breaches: In the event of a data breach, having a response plan that includes procedures and clear lines of authority can assist an entity to contain the breach and manage its response. Ensuring that staff (including contractors) are aware of the plan and understand the importance of reporting breaches is essential for the plan to be effective.

□ Physical security: Physical security is an important part of ensuring that personal information is not inappropriately accessed. Entities should consider what steps, if any, are necessary to ensure that physical copies of personal information are secure. Entities should also consider whether the workspace itself is designed to facilitate good privacy practices. □ Destruction or de-identification of personal information: Where an entity holds personal information it no longer needs for a purpose that is permitted under the APPs, it must ensure that it takes reasonable steps to destroy or de-identify the personal information (APP 11.2) — depending on the circumstances, one or the other may be more appropriate. This obligation applies even where the entity does not physically possess the personal information, but has the right or power to deal with it. □ Standards: Entities should consider using relevant international and Australian standards, policies, frameworks and guidance on risk management and information security. The media has reported a number of privacy breaches that have occurred as a result of the improper disposal of personal information (for example, by placing files containing personal information in an ordinary rubbish bin). The guidelines observe that disposal through garbage or recycling collection would not ordinarily constitute taking reasonable steps to destroy personal information, unless the personal information had already been destroyed through a process such as pulping, burning, pulverising, disintegrating or shredding. APP 12 — Access to personal information APP 12.1 sets out the general rule — if an APP entity holds personal information about an individual, the entity must, on request by the individual, give them access to the information. APP 12.2 and APP 12.3 provide exceptions to this rule. An agency is not required to give access to personal information if the agency is required or authorised to refuse access to that information by or under: □ the Freedom of Information Act 1982 (APP 12.2(b)(i)), or

□ any other Act of the Commonwealth, or a Norfolk Island enactment, that provides for access by persons to documents (APP 12.2(b)(ii)). APP 12.3 lists ten grounds on which an organisation can refuse to give access to personal information: □ the organisation reasonably believes that giving access would pose a serious threat to the life, health or safety of any individual, or to public health or public safety (APP 12.3(a)) □ giving access would have an unreasonable impact on the privacy of other individuals (APP 12.3(b)) □ the request for access is frivolous or vexatious (APP 12.3(c)) □ the information relates to existing or anticipated legal proceedings between the organisation and the individual, and would not be accessible by the process of discovery in those proceedings (APP 12.3(d)) □ giving access would reveal the intentions of the organisation in relation to negotiations with the individual in such a way as to prejudice those negotiations (APP 12.3(e)) □ giving access would be unlawful (APP 12.3(f)) □ denying access is required or authorised by or under an Australian law or a court/tribunal order (APP 12.3(g)) □ the organisation has reason to suspect that unlawful activity, or misconduct of a serious nature, that relates to the organisation’s functions or activities has been, is being or may be engaged in and giving access would be likely to prejudice the taking of appropriate action in relation to the matter (APP 12.3(h)) □ giving access would be likely to prejudice one or more enforcement related activities conducted by, or on behalf of, an enforcement body (APP 12.3(i)), and

□ giving access would reveal evaluative information generated within the organisation in connection with a commercially sensitive decision-making process (APP 12.3(j)). APP 12.4 deals with the time frame and method of access. Under APP 12.4, an entity must: (a) respond to the request for access to the personal information: (i) if the entity is an agency, within 30 days after the request is made, or (ii) if the entity is an organisation, within a reasonable period after the request is made, and (b) give access to the information in the manner requested by the individual, if it is reasonable and practicable to do so. In relation to APP 12.4(a)(ii), the guidelines observe that the factors that may be relevant in deciding what is a reasonable period include the scope and clarity of a request, whether the information can be readily located and assembled, and whether consultation with the individual or other parties is required. Generally speaking though, a reasonable period should not exceed 30 calendar days. Factors relevant in assessing whether it is reasonable and practicable to give access in the manner requested by an individual include: □ the volume of information requested. For example, it may be impracticable to provide a large amount of personal information by telephone. □ the nature of the information requested. For example, it may be impracticable to give access to digitised information in hard copy and it may be unreasonable to give access to information of a highly sensitive nature by telephone if the APP entity cannot sufficiently verify the individual’s identity over the telephone. APP 12.5 applies where an APP entity refuses to give access to personal information because of APP 12.2 or 12.3, or refuses to give

access in the manner requested by the individual. The entity must take reasonable steps to give access in a way that meets the needs of the entity and the individual. In the view of the Information Commissioner, the APP entity should consult the individual to try to satisfy their request for access and access should be provided within 30 calendar days where practicable. An agency cannot impose upon an individual any charge for providing access to personal information under APP 12 (APP 12.7). An organisation cannot impose a charge for the making of a request to access personal information, but it can impose a charge for giving access to requested personal information, provided the charge is not excessive (APP 12.8). The guidelines state that whether a charge is excessive will depend on the nature of the organisation, including the organisation’s size, resources and functions, and the nature of the personal information held. This suggests that different organisations may be justified in charging different amounts for providing the same type of information. The guidelines list a number of charges that may be considered excessive: □ a charge that exceeds the actual cost incurred by the organisation in giving access □ a charge associated with obtaining legal or other advice in order to decide how to respond to an individual’s request □ a charge for consulting with the individual about how access is to be given, and □ a charge that reflects shortcomings in the organisation’s information management systems. An individual should not be disadvantaged because of the deficient record management practices of an organisation. A charge by an organisation for giving access must not be used to discourage an individual from requesting access to personal information. To the extent practicable, an organisation should advise

an individual in advance if a charge may be imposed, and the likely amount of the charge. The individual should be invited to discuss options for altering the request to minimise any charge. This may include options for giving access in another manner that meets the needs of the entity and the individual. APP 12.9 provides that if an APP entity refuses to give access, or to give access in the manner requested by the individual, the entity must give the individual a written notice setting out: (a) the reasons for the refusal, except to the extent that it would be unreasonable to do so, having regard to the grounds for refusal (b) the complaint mechanisms available to the individual, and (c) any other matters prescribed by regulations made under the Act. An APP entity is not required to explain the ground of refusal to the extent that it would be unreasonable to do so. This course should be adopted only in justifiable circumstances. Examples include that an explanation may prejudice action by an organisation in response to unlawful activity (APP 12.3(h)) or may prejudice enforcement action by an enforcement body (APP 12.3(i)). In order to meet the requirements of 12.9 (b), an individual should be advised that: □ a complaint should first be made in writing to the APP entity (s 40(1A)) □ the entity should be given a reasonable time (usually 30 days) to respond □ a complaint may then be taken to a recognised external dispute resolution scheme of which the entity is a member (if any), and □ lastly, a complaint may be made to the Information Commissioner (s 36). APP 13 — Correction of personal information

APP 13.1 requires an APP entity to take reasonable steps to correct personal information to ensure that, having regard to the purpose for which it is held, it is accurate, up to date, complete, relevant and not misleading. This requirement applies where: □ the APP entity is satisfied the personal information is inaccurate, out of date, incomplete, irrelevant or misleading, having regard to a purpose for which it is held, or □ the individual requests the entity to correct the personal information. APP 13 also sets out other requirements in relation to correcting personal information. An APP entity must: □ upon request by an individual whose personal information has been corrected, take reasonable steps to notify another APP entity of a correction made to personal information that was previously provided to that other entity (APP 13.2) □ give a written notice to an individual when a correction request is refused, including the reasons for the refusal (except to the extent that it would be unreasonable to do so) and the complaint mechanisms available to the individual (APP 13.3) □ upon request by an individual whose correction request has been refused, take reasonable steps to associate a statement with the personal information that the individual believes it to be inaccurate, out of date, incomplete, irrelevant or misleading. The statement must be associated in such a way that will make the statement apparent to users of the information (APP 13.4) □ if the entity is an organisation, respond within a reasonable period of time to an individual’s request to correct personal information or to associate a statement with the personal information. if the entity is an agency, the agency must respond within 30 days after the request is made (APP 13.5(a)). □ not charge an individual for making a request to correct personal

information or associate a statement, or for making a correction or associating a statement (APP 13.5(b)). APP 13.2 provides that an entity must take reasonable steps to notify another APP entity of a correction made to personal information that was previously provided to that other entity. According to the guidelines, to satisfy the requirement in APP 13.3 to give notice of the complaint mechanisms available, an individual should be advised that: □ a complaint should first be made in writing to the APP entity (this is required because s 40(1A) of the Privacy Act provides that the Commissioner must not investigate a complaint if the complainant did not complain to the respondent before making the complaint to the Commissioner under s 36.) □ the entity should be given a reasonable time (usually 30 days) to respond □ a complaint may then be taken to a recognised external dispute resolution scheme of which the entity is a member (if any), and □ that a complaint may be made to the Information Commissioner (s 36). APP 13.4 provides that when a correction request is refused, upon request by the individual, an entity must take reasonable steps to associate a statement. The statement must be associated in such a way that will make the statement apparent to users of the information. The guidelines suggest that, for example, a statement may be attached physically to a paper record, or by an electronic link to a digital record of personal information. Further, the statement should be associated with all records containing personal information claimed to be incorrect. APP 13.5 provides that an agency must respond to a request to correct a record or to associate a statement within 30 calendar days. There is no time period specified for an organisation — APP 13.5

simply provides that organisations must respond within a reasonable period after the request is made. The guidelines state that as a “general guide”, a reasonable period for organisations is also 30 days.

¶8-510 Partnership Some advantages of acquiring a business through a partnership of two or more individuals (or corporations) are: • The legal and administrative procedures and costs of formation are relatively inexpensive. • A partnership provides for the business the combined labour, expertise, management skills and financial resources of the partners. • There is greater ability to overcome the consequences of the disability, sickness or accident of a partner than for a single proprietor. Some disadvantages are: • The unlimited liability of each partner for debts and the conduct of the business, including for the activities of each partner. • The potential for disputes and breakdown in the mutual trust of the partners. • More potential for raising further capital than sole proprietor, but less than corporate proprietor. • Potential problems relating to the retirement or admission of partners. • There is the potential for termination in the event of disputes and there may be considerable legal and other costs in the event of a disputed dissolution of the partnership. • A partnership is not a separate legal entity for most purposes and

requires the participation of all partners for many legal transactions.

¶31-400 Requirement to incorporate: s 115 The general rule is that a partnership or association of more than 20 persons, which has as an object the gain for itself or any of its members, must not be formed unless it is incorporated or formed under Australian law: s 115(1). Certain “professional” partnerships (such as lawyers, accountants and doctors) have been exempted from this requirement (see below). The policy behind the rule, according to Sir William James in Smith v Anderson (1880) 15 ChD 247, is to prevent mischief arising where persons deal with large fluctuating objects not knowing who they are dealing with and incurring great difficulty and expense in the process. For an example of such a difficulty in a more recent context, see Pacific Acceptance Corporation v Forsyth (1967) 85 WN (NSW) 662; (1969) 89 WN (NSW) 316. Even though an association may originally consist of less than 20 members, it nevertheless comes within the prohibition if its membership subsequently exceeds 20: Re Thomas (1884) 14 QBD 379. Requirement to incorporate The requirements of the section may be satisfied by incorporation in the normal way under the Corporations Act or another law, for example, the Associations Incorporations Acts of each state and territory. Corporate status for certain bodies is also provided by co-operative societies legislation and trade union legislation. A trade union cannot incorporate under the Corporations Act: s 116. What are the effects of illegality? At common law, associations formed contrary to this provision are not only illegal, but void: Re Tasmanian Forests & Milling Co Pty Ltd (1932) 27 Tas LR 15. They cannot sue or be sued: Sunkissed

Bananas (Tweed) Ltd v Banana Growers Federation Co-operative Ltd (1935) 35 SR (NSW) 526; Phillips v Davies 5 TLR 98. A contract entered into for the purpose of carrying on business of the association is unenforceable: Leonard v Booth (1954) 91 CLR 452. However, if the person who contracts with the association does not know that the membership is excessive, each member of the association will be liable to that person as if the partnership were lawful: Mailer v Clayton (1898) 1 WALR 3. A partner may call for an account of profits even though the partnership may be illegal: Greenberg v Cooperstein (1926) Ch 657. However, under the Corporations Act, an act, transaction, agreement, instrument, matter or thing is not void, voidable or unenforceable merely because of a contravention of s 115: s 103(2). This provision post-dates the abovementioned common law cases. Arguably, the effect of this provision is to affirm the protection to outsiders to enforce contracts where they were not aware of the illegality. How is a “partnership” defined? A “partnership” is defined according to the various participating jurisdictions’ partnership legislation. The definition universally involves three aspects: • an agreement between the parties • to carry on a business in common • with a view to sharing profits. Under partnership law, if the legal relationship complies with this definition, then a partnership will exist, despite any agreement or labels to the contrary adopted by the parties: Canny Gabriel Advertising Pty Ltd v Volume Sales Pty Ltd (1974) 131 CLR 321. Association To establish an association, a legal relationship must be created between the members giving rise to joint rights or obligations or mutual rights or duties: Re Commonwealth Homes and Investment Company Ltd [1943] SASR 211. Thus, an employees’ benevolent

society did not constitute a partnership or association because there was no contractual relation between the members inter se: Re Caledonian Employees’ Benevolent Society (1928) SC 633. The same applies to unit trusts in which the unit holders are not joined together by a contract creating mutual rights or obligations: Playfair Development Corporation Pty Ltd v Ryan [1969] 2 NSWR 66. A deed of inspectorship does not constitute a partnership between the debtors and their creditors or between them and the inspector and the committee: Marconi’s Wireless Telegraph Company Ltd v Newman & Others [1930] 2 KB 292. “Object of gain” The prohibition applies only where the association have an “object of gain”, by the association or for any of its members. According to Jessel MR: “‘Gain’ means exactly acquisition. Gain is something obtained or acquired. It is not limited to pecuniary gain. In fact, we should have to put the word ‘pecuniary’ in to show it. It is not ‘gains’, but ‘gain’ in the singular. Commercial profits, no doubt, if acquired are gain; but I cannot find any word limiting it simply to a commercial profit. I take the word as referring to a company which is formed to acquire something, as distinguished from a company formed for spending something and in which the individual members are simply to give something away or to spend something, and not to gain anything.” (Re Arthur Average Association (1875) 10 ChD 546.) It is not necessary that it be the association’s gain — the gain of the individual members will be sufficient: Shaw v Benson (¶31-400.50); Re Riverton Sheep Dip [1943] SASR 344. Every profit is a gain but every gain is not necessarily a profit: Vandyke v Minister of Pensions and National Insurance [1955] QB 29. In earlier legislation the prohibition was expressed to apply to associations “formed for the purpose of carrying on business which has for its object the acquisition of gain”. The reference to carrying on business was dropped from the UCA in 1971–1972, and does not

appear in the present Act. Accordingly, an association may be caught even though it is involved in simply a profit-making venture or a passive receipt of moneys, rather than carrying on a business in the strict sense. The English and earlier Australian cases must be read in the light of this change. Participation in formation of an illegal association is an offence Contravention of s 115, ie participating in the purported formation of an illegal association is an offence and the penalty is 5 penalty units: s 115, 1311. An offence based on s 115(1) is an offence of strict liability within the meaning of s 6.1 of the Criminal Code: s 115(3). For an explanation of “strict liability”, see ¶301-050. The applicability of this provision in a case where the association becomes illegal only at a subsequent time (eg because its membership increases above 20) is not clear. Professional partnerships As already noted, there are important exemptions given to professional partnerships. In the absence of these exemptions, such groups would often be limited to 20 members because of the restrictions placed on the incorporation of professional practices. Note, however, that there is currently an easing of these restrictions in certain professions. Regulation 2A.1.01 essentially provides that the following professional partnerships are not under an obligation to incorporate while the number of partners do not exceed the following thresholds:

Registration of building societies, credit unions and friendly societies Building societies, credit unions and friendly societies, once previously regulated by state-based Australian Financial Institutions Commission Codes (AFIC Codes), are regulated by the Corporations Act 2001. This transfer of jurisdiction occurred in July 1999, a time during which the Corporations Law was in existence. Following the assent of the Financial Sector Reform (Amendments and Transitional Provisions) Act (No. 1) 1999, Pt 1.2B of the former Corporations Law, which formerly dealt with financial institutions, was repealed and the Corporations Regulations were amended. All states and territories have passed complementary legislation to effect the regulatory transfer and the “transfer date” was proclaimed to be 1 July 1999. The reforms brought the regulation of building societies and credit unions into line with the regulation of other authorised deposit taking institutions (including banks) and established a single regulatory framework for life insurance companies and friendly societies, while recognising the special features of friendly societies. Transfer from previous jurisdiction to the Corporations Law On the transfer day, entities were deemed to be registered as the company type under the Corporations Law that corresponded the most closely to their former structure, unless they elected to be

registered as a different category before transfer. The “default setting” company structure that provided the “best fit” for the institution was implemented if the institution had not chosen an alternative structure by 24 June 1999. For example, a credit union that had shares on issue was automatically converted to a public company limited by shares. The transfer of jurisdiction occurred even if the institution were under some form of external administration. Transfer from the Corporations Law to the Corporations Act Schedule 4 to the Corporations Act 2001 retains the operative provisions in Sch 4 of the former Corporations Law (concerning the transfer to the Corporations Law of entities formerly registered under the Friendly Societies Codes and the AFIC Codes of the states) with the changes required to reflect the constitutional basis of the Act as a law of the Commonwealth. Schedule 4 does not include a number of spent transitional provisions included in the former Corporations Law; acts done under those spent provisions are saved by other provisions included in Sch 4 or by the general transitional provisions of Pt 10.1 of the Act. Act: Section 115. .40 Superannuation fund. An unincorporated association was formed with the object of providing superannuation allowances to employees of a municipal corporation. On joining, each member agreed that his contribution to the fund be deducted from his weekly wages. It was held that the fund was not an illegal association as it was not formed for the purpose of carrying on any business which had for its object the acquisition of gain. Armour v Liverpool Corporation [1939] 1 All ER 363. [CCH Note: s 115 now contains no reference to “carrying on business”.] .42 Forbidden purpose. A syndicate of more than 20 persons transferred their interests to another party. This syndicate was unregistered but the court was of the opinion that even if it was illegal the agreement was not tainted with illegality because it (the agreement) was not designed to carry out the purpose forbidden by the section. Desmond v Booth & Ors (1954) 91 CLR 452. (See CCH

Note at ¶31-400.40.) .45 Non-profit association Trade Protection Association was formed by manufacturers, wholesalers and retailers making and dealing in a particular class of goods. The association neither traded nor made any profit. Membership was voluntary and at the relevant time there were 1,340 members. The association was not required by the Companies Act to be registered as a company. In re Proprietary Articles Trade Association of South Australia Incorporated [1949] SASR 88. (See CCH Note at ¶31-400.40.) .47 Sickness and accident assurance. An association, formed of more than 20 persons who are to contribute sums of money to be applied in relieving cases of sickness, etc amongst themselves, the balance being distributable among the members at the end of each year, is not an illegal association. Re The One and All Sickness and Accident Assurance Association (1909) 25 TLR 674. (See CCH Note at ¶31-400.40.) .50 Building Society. An unregistered society consisting of more than 20 members had as its object a fund from which money could be advanced to enable shareholders to build or purchase a home or other building or to lend money to each other on approved personal security. Interest was paid on all moneys advanced to the society. The court held that this was an association where object was the acquisition of gain. “Perhaps the association itself does not gain any profit by the business but the individual members do and this seems to be sufficient to bring the society within the prohibition of the section.” Shaw v Benson (1883) 11 QBD 563. .52 Loan society. A society which took subscriptions from members in order to make loans at interest to other members and which made profits shared by those members was a society carrying on business for the acquisition of gain. Wilkinson & Others v Levison (1925) 42 TLR 97. (See CCH Note at ¶31-400.40.) .55 A mutual insurance. An association formed to insure members against loss and not for the purpose of gain of the association and having members in excess of statutory limit was illegal. Re Padstow Total Loss and Collision Assurance Association (1882) 20 ChD 137.

.57 Club. An association having members in excess of statutory limit, formed for purposes of a club only and not for gain by individual members or the club itself was not illegal under the section. Re St James Club (1852) 2 De GM & G 383. (See CCH Note at ¶31-400.40.) .90 Collaborative scientific research and development. A limit of 50 members for partnerships or associations that have as their primary purpose collaborative scientific research and development involving at least one private sector participant and at least one university, and which may also include government agencies or publicly funded research bodies is provided for under the Corporations Amendment Regulations 2006 (No 1). The term “private sector participant” is defined in the amendment as an entity that obtains the majority of its revenue from sources other than Commonwealth, state or territory appropriations. As larger collaborative scientific projects generally have been evidenced to have better quality outcomes, the purpose of the regulations is to facilitate scientific research and development collaborations, by raising the limit over which partnerships and associations in this sector would have to be incorporated. Research outcomes will be facilitated by a cross-disciplinary approach to expertise, and expensive infrastructure will be more affordable as a result of greater access to a critical mass of infrastructure and resources.

¶3-340 Vicarious liability Vicarious liability is a policy device for shifting liability for the consequences of a wrongful act from the person who committed it to another person: it is not a separate tort. It is most often used in the employment situation (¶13-200 et seq) and traffic accident cases (¶12370), although in traffic cases the necessary requirement of agency is not always easy to establish. The issue of vicarious liability in relation to a defendant’s independent contractor is considered at ¶13-190. At common law the Crown can not be sued personally or vicariously for the acts of its employees. Legislation in all jurisdictions renders the

Crown, as an employer, open to claims for vicarious liability in the same way as any private employer (¶3-340.01). In New South Wales, any statutory exemption, exclusion or limitation from liability available to a person is to be disregarded in determining whether or not another person (including the Crown) is vicariously liable in respect of a tort committed by that person (¶3-340.02). In Rose v Plenty (1976) 1 All ER 97, a 13-year-old boy was offered a chance to assist a milkman on a milkfloat, contrary to specific instructions which the milkman had received from his employer. The boy was injured by the negligent driving of the milkman. Scarman LJ said, at p 103: “I think it important to realise that the principle of vicarious liability is one of public policy. It is not a principle which derives from a critical or refined consideration of other concepts in the common law, e.g. the concept of trespass or indeed the concept of agency. No doubt in particular cases it may be relevant to consider whether a particular plaintiff was or was not a trespasser. Similarly, when, as I shall indicate, it is important that one should determine the course of employment of the servant, the law of agency may have some marginal relevance. But basically, as I understand it, the employer is made vicariously liable for the tort of his employee not because the plaintiff is an invitee, nor because of the authority possessed by the servant, but because it is a case in which the employer, having put matters into motion, should be liable if the motion that he has originated leads to damage to another.” In Aircraft Technicians of Australia Pty Ltd v St Clair; St Clair v Timtalla Pty Ltd [2011] QCA 188 the Queensland Court of Appeal considered the question of control in relation to establishing agency. The proceedings arose out of a helicopter accident which seriously injured the plaintiff, St Clair, and left him an incomplete paraplegic. At the time, St Clair was running a cattle mustering business and had hired the helicopter he was using from Timtalla Pty Ltd (Timtalla). Timtalla in turn hired Aircraft Technicians of Australia Pty Ltd (ATA) to conduct a 100-hourly service on the helicopter approximately one year

before the accident occurred. It was determined at trial that the helicopter had crashed to the ground because of the installation of a non-specified part. The part which failed was in fact a commercial substitute for the approved part. The manual for the helicopter warned that this part could not be substituted as it was integral to the safe operation of the helicopter. At first instance, judgment was entered for St Clair against ATA but his claim against Timtalla was dismissed. The claim against Timtalla was based on the argument that the faulty part had been installed by Choppercare Pty Ltd (Choppercare), a wholly owned subsidiary of Timtalla and therefore Timtalla was liable or vicariously liable for the damages which flowed from the accident. St Clair appealed against the dismissal of his claim against Timtalla and also appealed against the quantum of damages. ATA appealed the finding of liability against it and also challenged costs orders which had been made. St Clair submitted on appeal that Timtalla was liable on the following bases: (i) Choppercare carried out the November 1992 service as agent for Timtalla, which was therefore vicariously liable for the negligence of its servant. (ii) Timtalla itself owed a non-delegable duty to see that reasonable care was taken in the work done by Choppercare and was liable because it did not use reasonable care. (iii) There was a similar non-delegable duty to see that ATA exercised reasonable care in the service of the helicopter in July 1993 and Timtalla was liable for the mechanic’s failure to use reasonable care. The judgment contains an interesting discussion of the authorities and principles relating to agency and non-delegable duties. At para [58]– [59], the court considered the question of control in proving agency: “[58] The judgments appear to show that it is not sufficient to make A vicariously liable for the tortious negligence of B by designating B as A’s agent. There must be something in the relationship between A and B, in the interaction between them, to

show that the designation is appropriate and apposite. It will not be enough to show that B acted at A’s request and that the actions conferred a benefit on A. If A’s control over B is to be the ingredient which establishes agency the evidence must show what degree of control was, or could have been, exerted; the manner in which control was or could have been exerted; and the matters with respect to which control was or could have been exerted. Without some such analysis the term ‘control’ is devoid of meaning. [59] In this case the evidence showed only that: • Timtalla and Choppercare were separate companies; • Choppercare had its own employees; • Timtalla was a customer of Choppercare; • Choppercare was asked to replace the clutch assembly on Timtalla’s helicopter, and did so; and • Choppercare was not paid for the work in the past. This amounts to no more than proof that the work was done by Choppercare at the request of Timtalla for the latter’s benefit. This is insufficient to establish agency. There is a complete absence of evidence on the topic of ‘control’.” The court concluded that the trial judge had been correct in refusing to find that there was an agency between the companies. The court dismissed St Clair’s appeal against Timtalla. The Court of Appeal also increased the damages awarded to St Clair for past economic loss; see the discussion at ¶16-180. Also see the discussion on non-delegable duty at ¶50-960. His Lordship’s comment that the law of agency has only marginal relevance in vicarious liability points to the distinction between the employer/employee relationship, where vicarious liability is generally attributed to the employer, and the agency relationship, where liability is attributed to the principal in certain circumstances only.

In Langley & Anor v Glandore Pty Ltd & Anor (1997) Aust Torts Reports ¶81-448 the Queensland Court of Appeal held that the hospital and two surgeons were liable to pay a plaintiff damages after a surgical sponge was left in the plaintiff’s abdomen during a hysterectomy operation. At first instance a jury had found the surgeons liable but exonerated the hospital. The appellant surgeons sought a contribution from the hospital pursuant to s 6(c) of the Law Reform Act 1995 (Qld). The appellants argued that there was no basis on which a reasonable jury could have failed to find negligence against the hospital. In allowing the appeal, the Court of Appeal (Qld) held that the hospital was vicariously liable for the theatre nurses’ torts. The nurses, following established procedures, had primary responsibility for making an accurate count of all instruments and surgical packs, to ensure that all the sponges had been recovered from the plaintiff’s abdomen. There was evidence to establish that the nurses, and hence the hospital, had been negligent. A principal is held vicariously liable for the torts of his agent if the agent has acted within the scope of his actual authority, either express or implied, or the principal has later ratified the act, which must have been done for the “purposes” or “benefit” of the principal. In Lysaght Bros & Co Ltd v Falk (1905) 2 CLR 421, Griffith CJ, at pp 430–431, quoted Lord Esher in The British Mutual Banking Co Ltd v Charnwood Forest Railway Co (1887) 18 QB 714: “The rule has often been expressed in the terms that to bind the principal the agent must be acting ‘for the benefit’ of the principal. This, in my opinion, is equivalent to saying that he must be acting ‘for’ the principal, since if there is authority to do the act it does not matter if the principal is benefited by it. I know of no case where the employer has been held liable when his servant has made statements not for his employer, but in his own interest.” A principal is liable for the acts of his agent within the latter’s ostensible authority if a third party would assume that the agent had that authority and unless his lack of authority was not drawn to the attention of the third party. A principal is generally not liable for the intentional wrongdoing of his agent unless the act was authorised:

Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd (1931) 46 CLR 41, per Dixon J at p 49. Vicarious liability also applies in partnership. At common law, every partner of a firm was liable jointly and severally for any tort, fraud or misapplication of money or property received in the custody of the firm. The codification of the common law by the Partnership Acts enacted in all Australian jurisdictions places the joint and several liability of one partner for the wrongs of all the others on a statutory basis (¶3-340.03). Concepts equivalent to those in agency law regulate the liability of a partnership for the wrongdoing of a partner. For instance, the Acts state that a partnership is liable where a partner acting within the scope of his authority misapplies money he has received: see Mann v Hulme (1962) ACR 75. A partner’s intentional torts are the liability of the partnership only where committed doing the business of the firm. Liability for an action for malicious prosecution brought against a partner was only shifted to the partnership if all the partners had agreed to the actions which prompted the proceeding or if they were aware of them. Partnership legislation is held to cover situations where a partner or agent negligently causes an accident while driving a vehicle owned by the partnership. In Rice v Bartlett & Ors (1953) QWN 9, a stationwagon, shown as a partnership asset and the insurance premium being paid by the firm, was engaged in a collision while being driven by a partner during a Christmas holiday period. The firm’s defence was that, as the driver had been travelling to visit a sick relative, he was not driving in the course of his duties as a partner, or as an authorised agent or in the course of the business of the firm, even though he had visited a client on the way. In holding the firm liable for the partner’s negligence, Macrossan CJ took into account the fact that the firm, in paying four-fifths of the costs of running the vehicle, must have seen the visit to the client as a benefit to it. The length of the visit, for over an hour and a half, was considered. The driver was found to be driving “in the course of the business of the

defendant firm QR Bartlett and on behalf of the firm”. An action not wrongful in itself may render a partnership liable if it is carried out wrongfully. In Hamlyn v Houston & Co (1903) 1 KB 81, Houston, a partner in the defendant firm, bribed a clerk in a competing firm to give him confidential business information. The Court of Appeal held that, although there was nothing wrong with finding out about a competitor’s contracts, it was unlawful to do so by bribery. The firm was liable for the partner’s act. The vicarious liability of companies for the wrongful acts of their officers is governed by the national corporations legislation: this legislation extends liability at common law. The issue is discussed in CCH Australian Corporations & Securities Law Reporter. .01 Legislation. Cth Judiciary Act 1903: s 64 NSW Crown Proceedings Act 1989: s 5, 6 Vic Crown Proceedings Act 1958: s 23, 25 Qld Crown Proceedings Act 1980: s 8 SA Crown Proceedings Act 1992: s 5 WA Crown Suits Act 1947: s 5 Tas Crown Proceedings Act 1993: s 5 NT Crown Proceedings Act 1993: s 5 ACT Crown Proceedings Act 1992: s 5. .02 Legislation. NSW Law Reform (Vicarious Liability) Act 1983: s 10. .03 Legislation. NSW Partnership Act, 1892: s 10, 11, 12 Vic Partnership Act 1958: s 14, 15, 16 Qld The Partnership Act of 1891: s 13, 14, 15 SA Partnership Act, 1891: s 10, 11, 12 WA The Partnership Act 1895: s 17, 18, 19 Tas Partnership Act 1891: s 15, 16, 17

NT Partnership Act 1997: s 13, 14, 16 ACT Partnership Act 1963: s 14, 15, 16. .40 Fraud by solicitor. The plaintiff client, acting on the advice of the defendant solicitor, entered into three transactions. Two of the transactions involved investments in companies, the third involved a guarantee by the client of the bank overdraft of a company of which the defendant was a director. Each of the companies was, to the defendant’s knowledge, financially unsound when the advice was given. The plaintiff lost the sums invested and was obliged to make payments under the guarantee and sought to recover damages from the firm of solicitors of which the defendant was a partner. In regard to the investments, the High Court found that the defendant owed a duty, in the ordinary course of business, to inform the plaintiff of steps that should be taken to investigate the financial stability of the companies and to disclose the facts within his knowledge. The defendant had failed to do so and the co- partners were found to be liable for this breach. In regard to the guarantee, this transaction was found not to be within the defendant’s authority as a partner or within the ordinary course of business as a solicitor and therefore the co-partners were not liable: Polkinghorne v Holland & Anor (1934) 51 CLR 143. .41 Principal liable for slander. The plaintiff company, in an action for slander, claimed damages for defamatory statements made by an agent of the defendant company in the course of attempting to gain insurance business. A majority of the High Court held that the defamatory statements were made by the agent while acting within the scope of his authority. It was immaterial that the particular act was unauthorised; it was enough that the agent had been put in the position to do the class of acts complained of. Accordingly, the defendant was held to be vicariously liable: Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd (1931) 46 CLR 41. .42 Director procuring company’s tort. The defendant company infringed the plaintiff’s copyright. The plaintiff sued the company and the second defendant, the company’s director and managing executive, alleging that the second defendant had authorised, directed

and procured the infringement by the company. The second defendant sought to have the action against him struck out but this was refused. An appeal was dismissed by the English Court of Appeal. If the plaintiff established the second defendant’s personal involvement in relation to the wrongful conduct, it was not necessary to establish that he had knowledge that the company was acting wrongfully or that he had acted recklessly without caring whether the conduct was wrongful or not. But the court also said that a company director was not automatically liable for torts committed by the company, even where the company was very small or the director’s control over the company’s affairs was very powerful: C Evans & Sons Ltd v Spritebrand Ltd (1985) 2 All ER 415. .43 Partner not liable for fraud. Davis and Batty were partners in an accounting firm. Davis was the director of a company which had made loans to other companies. Davis received cheques, made payable to the company of which he was a director, to repay these loans from the companies and they were deposited in the firm’s trust account. Davis subsequently fraudulently used the proceeds of these cheques for his own purposes. Batty was unaware of the fraud and, upon subsequently discovering it, the partnership was dissolved. The companies sued the bank in conversion and the bank cross-claimed against Davis (who later died) and Batty. The trial Judge found for the companies against the bank and for Batty, and an appeal was dismissed. The bank appealed to the High Court arguing that Batty was liable for Davis’ fraud by virtue of s 10 of the Partnership Act 1892 (NSW). The High Court dismissed the appeal. By majority, Deane J dissenting, it was held that Batty was not liable for the fraud because Davis’ actions were not within his actual or apparent authority and were not within the ordinary course of the firm’s business. Deane J considered that the conduct was not so unusual, in the conduct of a modern accountancy practice, as to take it outside the flow of the ordinary banking business of the partnership: National Commercial Banking Corporation of Australia Ltd v Batty (1986) Aust Torts Reports ¶80-013; 160 CLR 251. .44 Estate agent’s negligent misrepresentation. The plaintiff purchased property from the second defendant. The first defendant

was the second defendant’s land agent in the sale, and negligently misrepresented the lettable area of the property. In the plaintiff’s action for damages, judgment in default of defence was entered against the first defendant and the second defendant denied liability. In the SA Supreme Court Matheson J held the second defendant vicariously liable for the first defendant’s misrepresentation and apportioned liability at two-thirds against the first defendant and onethird against the second defendant. Referring to Colonial Mutual Life Assurance Society Ltd v Producers & Citizens Co -operative Assurance Co of Australia Ltd (1931) 46 CLR 41 at pp 48–49, Matheson J held, at p 441, that although the second defendant had himself not misrepresented the lettable area of the property, the first defendant had not been acting independently but had acted as the second defendant’s representative: Thompson v Henderson & Partners Pty Ltd (1989) 51 SASR 431. .45 Partners liable for fraud. A partner in an accounting firm was appointed receiver and manager of a corporation. He acted fraudulently in relation to the corporation’s funds, causing it to suffer loss. The misappropriated funds were never paid into the firm’s bank account. The corporation sued the remaining partners of the firm. The trial judge found that in committing the wrongful acts the fraudulent partner was acting in the ordinary course of the business of the firm. The firm carried on the business, inter alia, of conducting liquidations and of conducting receiverships. His Honour held that, by virtue of s 10 of the Partnership Act 1892 (NSW) the remaining partners were liable for the corporation’s loss. An appeal was dismissed by the NSW Court of Appeal, which rejected the argument that the remaining partners could not be liable because there was no relevant agency; they could not, by law, have conducted the receivership. The fraudulent partner was nonetheless acting in the ordinary course of the firm’s business: Walker v European Electronics Pty Ltd (in liquidation) (14 May 1990, NSW Court of Appeal, No CA 247 of 1988). .46 Horse bolting. The first defendant, aged 15, was given a horse by her father, and they had been told by the vendor that the horse was quiet and would have to get used to traffic. The first defendant had a friend whose father, W, agreed to get the horse used to traffic. In

furtherance of this agreement the second defendant rode the horse, although the first defendant had been led to believe that another man would ride it. The second defendant was drinking beer while riding. He made a stop at a hotel and had some more beers, and then continued the ride. The second defendant became a bit wobbly and at some stage the horse bolted and collided with the plaintiffs’ car, and they sued the defendants for damages. Judgment in default was entered against the second defendant and the plaintiffs sought to recover against the first defendant. In the Tasmanian Supreme Court Cox J held that no negligence had been established on the part of the first defendant, and further held that she was not vicariously liable for the negligence of the second defendant: “She was 15 years old at the time, and even now is of quite quiet and rather submissive demeanour ... She did not authorise [the second defendant] to ride her horse, although it appears she resigned herself to the fact that he had determined to ride the horse. She tried on several occasions to have her wishes that they should turn back and that the horse should be led carried out only to have them brushed aside by a man 20 years her senior bent on pursuing his interests and pleasures. It is abundantly clear ... that she had no effective control over the manner, direction or duration of [the second defendant’s] use of the horse. He and [another man] made their own decisions about where they would go. She was powerless to do anything but watch what they themselves chose to do ... [W]here there is clear evidence that the person in actual possession and/or control of the vehicle or thing causing damage is acting in a way inconsistent with a delegation or relinquishment to him of control by the owner or inconsistent with there being any real measure of control by the owner as was the case here, vicarious liability does not attach”: Perpetual Trustees & National Executors of Tasmania Ltd v Graham (17 August 1990, Tas Supreme Court, Cox J, Serial No B48/1990; List “B”; File No 390/1988). .47 Football assault. The plaintiff was an accomplished professional rugby league player whose jaw was broken when the defendant, a player on an opposing team, lept into the air to strike him with a closed fist. In the NSW Supreme Court Lee CJ at CL found the defendant liable in assault. The club for which the defendant played was held to have been vicariously liable for the assault. Although the assault was

not expressly or impliedly authorised by the club, it was so connected with what the defendant was authorised to do that it was properly to be regarded as a mode, albeit an improper mode, of doing what he was authorised to do. What the defendant was authorised to do was to use force to stop the forward progress of the plaintiff. Such actions as those of the defendant, but unintentional, occurred not infrequently in rugby league. The Court of Appeal subsequently dismissed an appeal as to liability, but made some small adjustments as to damages. Rogers v Bugden (14 December 1990, NSW Supreme Court, Lee CJ at CL, No 12022 of 1985); Canterbury-Bankstown Rugby League Football Club Ltd v Rogers; Bugden v Rogers (1993) Aust Torts Reports ¶81-246. .48 Eating an orange at work can be risky. On 16 September 2011, Mr Boon and Mr Summerfeldt were working at a construction site. Mr Summerfeldt was taking a lunch break on a grass verge adjacent to the site. He was crouching down on the grass eating an orange and using his Leatherman knife to cut and peel the orange. Mr Boon walked past and at the same time Mr Summerfeldt stood up from his crouching position holding the knife in his hands and, without intending to do so, stabbed Mr Boon in his left hand. As a result, Mr Boon’s hand was lacerated, and he sustained significant injuries to two arteries, two tendons and four nerves in his left hand. He underwent surgery on three occasions. Mr Boon commenced proceedings in the Supreme Court of Queensland against Mr Summerfeldt’s employer Big Bill’s, in negligence and claimed damages. Mr Boon conceded that the stabbing was unintentional but argued that Mr Summerfeldt failed to keep a proper lookout; the blade of the knife was sharp and there was a risk of harm which was great if it came into contact with another person. He also argued that Mr Summerfeldt did not look before he stood up with the blade exposed, and that the injury was foreseeable and significant. Mr Boon alleged that Mr Summerfeldt was negligent in standing up with the knife in his hand and that Big Bill’s was therefore vicariously liable for the actions of its employee. He alleged that Big Bill’s owed a duty of care and breached its duty to take reasonable care not to expose him to a foreseeable risk of injury and/or is

vicariously liable for the negligent act of its employee, Mr Summerfeldt. He also argued that Big Bill’s owed him a duty of care in any event and independent of its vicarious duty, and was negligent in permitting Mr Summerfeldt to use the knife during the course of his employment. Big Bill’s denied any negligence and argued that Mr Summerfeldt was taking adequate care in the use of his knife, and that the risk of harm was insignificant, was not foreseeable and was obvious to a reasonable person in Mr Boon’s position. Her Honour, Lyons J, noted that in fact Mr Boon was in a better position to see Mr Summerfeldt than vice versa; Mr Summerfeldt did not see Mr Boon but Mr Boon saw Mr Summerfeldt before he stood up with the knife in his hands. Her Honour also noted that the accident did not simply happen because Mr Summerfeldt had a knife in his hands, but rather the accident happened because Mr Boon moved very close to Mr Summerfeldt who was using the knife. Lyons J found that the risk of injury of a person coming into contact with the knife as Mr Summerfeldt was using it to peel an orange was insignificant and not foreseeable. On that basis, Mr Summerfeldt was not negligent and the claim of vicarious liability also failed. As to any liability of Big Bill’s independent of its vicarious duty, Lyons J found that the use of the knife during a lunch break posed a risk of injury which was insignificant. It was not reasonable for Big Bill’s to ban knives and sharp items on site, nor was it reasonable or necessary for Big Bill’s to warn its workers that knives are sharp and that they should not walk near anyone who has a knife. Mr Boon appealed the primary judge’s findings and argued that her Honour erred in finding that the risk of injury was insignificant and not foreseeable, and that her Honour also erred in various factual findings which led to a misidentification of the factual reference for the assessment of foreseeability. He argued that the primary judge erred in finding that the framework for the risk of injury was the peeling of the orange. His Honour, Gotterson JA (with whom Holmes CJ and Applegarth J agreed), identified the relevant risk of injury as the conduct of Mr

Summerfeldt in rising from a crouched position with a knife in his hand and that the risk of injury arose because, as he was moving to an upright stance, the blade might have struck a passer-by such as Mr Boon. In other words, it was not the mere action of peeling the orange that exposed the risk, but rather the act of Mr Summerfeldt getting up with a sharp knife in his hand. On the basis of such a risk, it was foreseeable that a passer-by might have been struck by the knife. Gotterson JA also found that a reasonable person in Mr Summerfeldt’s position would have taken the simple precaution of looking before he began to rise with a knife in his hand. Accordingly, the court upheld Mr Boon’s appeal and awarded damages in the total sum of $215,286.11: Boon v Summs of Qld Pty Ltd (2016) Aust Torts Reports ¶82-261; [2016] QCA 38. .49 It’s all in the tone. From June 2007 until March 2010, Robyn Eaton was employed by TriCare (Country) Pty Ltd as a full-time administrative assistant at a nursing home run by TriCare at Hervey Bay in Queensland. Ms Jane Harrison was employed by TriCare as the manager of the nursing home from April 2009, and was Ms Eaton’s supervisor. During that time, Ms Eaton had been given an excessive workload and also experienced harassing, belittling and aggressive behaviour from Ms Harrison. Ms Eaton resigned from her employment on 12 March 2010 and has not worked since. She was diagnosed as suffering from anxiety and depression. Ms Eaton sued TriCare in the District Court at Brisbane in negligence and claimed damages. She alleged that her psychiatric illness had been caused by TriCare’s negligence, that it was vicariously liable for the conduct of Ms Harrison. She alleged that Ms Harrison acted towards her in a bullying manner and who failed to address her excessive workload. She also alleged that TriCare had failed to put in place measures which would have prevented Ms Harrison from behaving towards Ms Eaton as she did. TriCare denied any negligence. His Honour Deveraux DCJ found that although Ms Eaton’s psychiatric illness was caused by her experience in the workplace, the risk of

psychiatric illness was not reasonably foreseeable and there was no relevant duty of care. Further, had there been a duty as alleged by Ms Eaton, that duty had not been breached. His Honour also found that Ms Eaton had failed to plead what tort Ms Harrison committed that TriCare was vicariously liable for. Deveraux DCJ dismissed Ms Eaton’s claim with costs. Ms Eaton appealed the primary judge’s findings and argued that his Honour erred in finding no relevant duty of care. The court noted that TriCare as an employer owed a non-delegable duty of care to its employees to take reasonable care to avoid exposing them to unnecessary risks of injury. The relevant question was one of the content of the duty of care, that is whether TriCare came under a duty to take reasonable care to avoid a psychiatric illness to Ms Eaton from her employment. The court found that the risk of injury was more than a far-fetched or fanciful risk and the risk was reasonably foreseeable. The primary judge erred in failing to find a duty of care. As to breach, the court found that the harmful nature of Ms Harrison’s conduct was exacerbated by the excessive workload. TriCare, through Ms Harrison, breached its duty and that the conduct, in the context of an excessive workload, caused the psychiatric injury. Accordingly, the court upheld Ms Eaton’s appeal and awarded damages in the total sum of $435,583: Eaton v TriCare (Country) Pty Ltd (2016) Aust Torts Reports ¶82-276; [2016] QCA 139. .50 Whether vicarious liability transferred from employer to third party. Mr Stephen Kelly, was employed by TSS Recruitment Pty Ltd (TSS), which conducted a labour hire business with the Bluestone Global Ltd (Bluestone). In November 2009, Mr Kelly was allocated to work for Ngarda Mining and Civil Pty Ltd (Ngarda), the operator of the BHP Billiton-owned Yarrie mine. In the course of that employment, Mr Kelly drove a dump truck to the west pit at the Cattle Gorge section of the Yarrie mine site in readiness for loading by an excavator (who was also an employee at the mine). Mr Kelly reversed the dump truck to an area directly underneath the fully loaded excavator bucket. The excavator then dropped the fully loaded bucket onto the tray of Mr Kelly’s dump truck causing it to shake violently thereby causing him injury to his neck and back.

Mr Kelly commenced proceedings against Bluestone and TSS, in negligence and claimed damages. Mr Kelly argued that Bluestone and TSS were liable to him for their own negligence (direct liability) and for the negligence of the excavator (vicarious liability). On that question, his Honour Stavrianou DCJ accepted that the excavator owed Mr Kelly a duty of care. However, his Honour found, on the evidence, that that duty had not been breached. Stavrianou DCJ also held that the principle of res ipsa loquitur had no application in the circumstances. Further, even if the duty had been breached, TSS could not be vicariously liable because it had transferred any such liability to Ngarda. His Honour Stavrianou DCJ dismissed Mr Kelly’s claim. Mr Kelly appealed the primary judge’s findings, restricted to the dismissal of the vicarious liability claim. The court found that it was open to the primary judge to conclude that Mr Kelly had not discharged the burden of establishing the circumstances of the incident. As a result of his failure to prove the circumstances of the incident, it was well open to the primary judge to fail to hold that the excavator had breached his duty owed to Mr Kelly. The negligent act in issue in this case was the excavator’s operation of the excavator supplied by Ngarda in the course of loading ore into a dump truck at the Ngarda operated Yarrie mine. Ngarda had exclusive authority and control of the allocation of this task to the excavator and the manner in which he performed that task. On the unchallenged findings made by the primary judge, the only reasonable conclusion open was that vicarious liability for the excavator’s negligent act was transferred from the TSS to Ngarda. In those circumstances, the finding that TSS was not vicariously liable was to be upheld: Kelly v Bluestone Global Ltd (in liq) (2016) Aust Torts Reports ¶82-278; [2016] WASCA 90. .51 High Court upholds school’s appeal relating to sexual abuse of student in 1962. In 1962, the plaintiff (who was not named in the proceedings) was 12 years of age and was enrolled as a boarder at Prince Alfred College (PAC) in South Australia. In that same year, a teacher at PAC, Mr Dean Bain was appointed as housemaster of the boarding house. Commencing in April 1962, Bain sexually assaulted the plaintiff on a number of occasions both at the school and elsewhere. The abuse continued for some months. Mr Bain was

dismissed by the school later that year. For many years after the abuse, the plaintiff experienced a range of difficulties. In 1996, he was diagnosed with post-traumatic stress disorder. In February 1997, the plaintiff instructed a solicitor to commence civil proceedings against Mr Bain. The plaintiff decided at that time not to sue PAC as he considered PAC had done the right thing by dismissing Mr Bain. The plaintiff attended various meetings with Mr Bain and PAC and eventually negotiated a settlement with both Mr Bain and PAC. By late 2002, the plaintiff’s difficulties intensified and he sought to challenge the settlement reached with Mr Bain and also to seek additional financial support from PAC. He was admitted to a psychiatric facility on several occasions for attempted suicide and alcoholism. During 2005, the plaintiff perceived a lack of support from PAC. He was also suffering from increasing levels of debt and his marriage ultimately failed. By October 2005, the plaintiff wanted to commence court proceedings against PAC. Mr Bain was convicted in 2007 for two counts of indecent assault committed upon the plaintiff, as well as for offences against two other PAC boys. The plaintiff was present in court when Mr Bain was convicted and sentenced. It was during those criminal proceedings that the plaintiff first became aware that Mr Bain had a 1954 conviction for gross indecency. The plaintiff then instructed his solicitors to commence proceedings against PAC. In December 2008, the plaintiff commenced proceedings in the Supreme Court of South Australia against PAC in negligence and claimed damages, for failing to adequately look into Mr Bain’s suitability as a housemaster prior to engaging him at PAC. Her Honour Vanstone J found that the abuse by Mr Bain was the substantial cause of the plaintiff’s psychological injuries, that the plaintiff suffered symptoms as early as 1962 and they continued and intensified in 1996. The cause of action was found to have arisen well before 1996 (and in all likelihood it arose in 1962) and that the claim was out of time. The court found that the systems in place in the boarding house, or the level of supervision of the behaviour of housemasters and Mr Bain in particular, were not so deficient as to amount to a breach of duty of care. Further, even if Mr Bain’s role involved responsibility for and overall supervision of the boarding house, his conduct of abuse of the plaintiff was totally unauthorised and far removed from Mr Bain’s

authorised and proper role. PAC did not create or enhance the risk of Mr Bain sexually abusing the plaintiff. On that basis, PAC was not liable for Mr Bain’s abusive conduct. The plaintiff appealed the primary judge’s findings. The Full Court of the Supreme Court of South Australia unanimously agreed that PAC was vicariously liable for the damage suffered by the plaintiff as a consequence of Mr Bain’s sexual abuse. However, the majority found that the causes of action alleging that PAC was negligent for employing Mr Bain, in failing to adequately supervise the boarding house and its housemasters, and in its inadequate response to the abuse, were not established, with Gray J dissenting. Having found that the primary judge erred in failing to find PAC vicariously liable, it was necessary to reconsider the evidence of the discretion to extend the time in which to bring the action. The receipt of a medical report in the 12 months before bringing the claim, and the opinion it contained about his bleak prognosis, was a finding that enlivened the discretion to extend the time (pursuant to s 48, Limitation of Actions Act 1936 (SA)). The court found that PAC was vicariously liable for damage suffered as a consequence of the sexual abuse, and that the time for the plaintiff/appellant to bring proceedings should be extended. The matter was remitted for an assessment of damages. PAC appealed to the High Court. The High Court unanimously allowed the appeal, and found that the plaintiff/respondent should not have been granted an extension of time under s 48(3) of the Limitation of Actions Act 1936 (SA) to bring his proceeding. The court found that the primary judge was correct not to have granted an extension of time, and that the length of the delay prejudiced PAC and its ability to properly defend the claim. Accordingly, the High Court upheld PAC’s appeal: Prince Alfred College Incorporated v ADC (2016) Aust Torts Reports ¶82-304; [2016] HCA 37.

¶26-938 Business affairs of a partnership: s 53AC A person may be examined under Pt 5.9 Div 1 on the “business affairs of a partnership”: see s 9 definitions of “examinable affairs” (¶21-854) and “connected entity” (¶21-432) and s 64B (¶27-132).

“Business affairs of a partnership” is defined in s 53AC to include, but is not limited to: • the partnership’s promotion, formation, membership, control, “examinable operations” (¶21-860), “examinable assets and liabilities” (¶21-856), management and proceedings • any act done by or on behalf of, to or in relation to the partnershp at a time when it is being wound up • matters concerned with determining the corporations with which the partnership is or has been connected (see s 64B(3), ¶27-132).

¶3-005 Promoters and pre-registration contracts Who is a promoter? A promoter is a person who undertakes to form a company and who takes the necessary steps to accomplish that purpose. But not everyone who takes part in the registration process is a promoter. Those who consent to the constitution and take shares are not necessarily promoters. The term promoter (or promoters) is a convenient way of describing the person (or persons) who arranges the many activities necessary for getting the company started. A general statement illustrating the wide meaning attributed to the term “promoter” was made by the High Court in these terms: “it is not only persons who take an active part in the formation of a company and the raising of the necessary share capital to enable it to carry on business who are promoters. It is apparent from the passage cited that persons who leave it to others to get up the company upon the understanding that they also will profit from the operation may become promoters.”: Tracy v Mandalay Pty Ltd (1953) 88 CLR 215. Promoter’s duties A promoter has a fiduciary relationship with the company and must act in the principal’s best interest and put the principal’s interest ahead

of that of his/her own. The promoter must not make secret profits, ie sell assets to the company at an inflated price. If the promoters breach their fiduciary duty, then the company has the right to rescind (cancel) the contract. The main obligation of the promoter is that he or she must not obtain any secret profit at the company's expense. Promoters may sell their property to the new company but they are under a fiduciary obligation to disclose to the new company that they are doing so and under a duty to place it in a proper position to decide whether to accept the offer or not, by appointing an independent board and fully disclosing the whole position to that board: Tracy v Mandalay Pty Ltd (1953) 88 CLR 215. It is incumbent on promoters who are proposed vendors to the company to take care that in forming the company they ensure the board of directors shall be aware that the property which they are asked to buy is the property of the promoters and who shall be competent and impartial judges as to whether the purchase ought or ought not to be made: Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218. A sale by promoters to the new company where there has been insufficient disclosure by the vendors may be rescinded by the court (Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218) or such a contract may be made voidable at the option of the company: Tracy v Mandalay Pty Ltd (1953) 88 CLR 215. A secret profit made at the expense of the company by promoters may be recovered by the company: Gluckstein v Barnes (1900) AC 240; Wheal Ellen Gold Mining Co NL v Read (1908) 7 CLR 34. Accordingly, any promoter involved in selling his or her property to a new company should ensure that: • the company has a competent and independent board, and • he/she makes full disclosure. The obligation is on the promoter to show that he or she has not used the position for benefit. When it is unlikely a fully independent board

will be appointed, the person selling his or her business to that company must make sure there is full disclosure to all the shareholders or, if applicable, in the disclosure document. In practice, the issues relating to pre-incorporation contracts are not as common today as promoters can use a shelf company (already registered) to sign the contract. Promoter's expenses A promoter is in every situation working on behalf of a legal person which does not exist at the time most of the work is done. As a means of protecting promoters from being unrewarded and indeed out of pocket, the constitution of many companies will include a specific power to the directors to recompense the promoter for all expenses incurred. Such a provision does not give the promoter a right against the company but it does enable the board to exercise its discretion in his or her favour. Promoter's liability If the company is not registered within the agreed time or a reasonable time of the contract (see s 131(1)), or fails to ratify within the agreed time or a reasonable time of registration, the promoter is liable to pay damages to the other party. The amount of damages is equivalent to the amount which the other party could have recovered if the company had been formed and had ratified the contract but had then failed to perform it at all: s 131(2). The promoter does not cease to be entirely at risk just because the company ratifies. If the company ratified the contract but failed to perform it, and becomes liable to pay damages for the breach, the court may also order the promoter to pay the whole or part of the damages: s 131(4). After all, the promoter may be primarily responsible for the company’s failure to meet its obligations. No doubt in assessing whether the promoter should be held liable the court will have regard to the extent to which the promoter controls the company, and to the question of whether the company is an insolvent or $2 company. The court may be more inclined to exercise its discretion in favour of the passive promoter who allows others to set

up the company (see Tracy v Mandalay Pty Ltd (1953) 88 CLR 215), even though a party to the contract himself. The promoter escapes liability if the other party has in writing released him “from any liability in relation to the contract”: s 132(1). The rights and liabilities of a person under s 131–132 in relation to a contract are in substitution for any rights and liabilities apart from the section in relation to that contract: s 133. This would seem to prevent an action against the promoter for breach of warranty of authority. It would also appear to bar a suit for specific performance or damages for breach of a contract on which the promoter would, at general law, be personally liable. What is more doubtful, however, is whether the subsection affects the right of the other party to recover goods or payment where there is no legally binding contract: in such circumstances the company or promoter is clearly liable in tort for conversion or in quasi-contract for money had and received, but is this a liability “in relation to the contract”? For further information, see: Ratifying pre-registration contracts

¶3-010

Contracts and the prospectus

¶3-015

¶3-010 Ratifying pre-registration contracts Until a company is registered it has no legal existence and, as such, cannot enter into any sort of binding contract. However, at the stage when a company is being planned certain arrangements often have to be made for the company to step into when registration is finally effected. Part 2B.3 of the Corporations Act 2001 (Cth) provides: • the machinery for ratification by the company of pre-registration contracts, and • protection for those dealing with pre-registration companies by the

imposition of personal liability on the person who entered into the contract at the pre-registration stage. These provisions do not provide the machinery to allow the contracts of sole proprietors and partnerships to be ratified by a company if the persons managing the business decide to incorporate the business. That is, if a business has been managed under a partnership structure for many years, and the proprietors incorporate (say on the advice of their accountant), the newly formed company cannot simply ratify such things as pre-existing employment contracts, supplier contracts, service agreements and the like. These agreements and contracts must be assigned or novated to the company. In relation to employees, additional requirements may be necessary under the relevant industrial relations legislation. Subject to the above qualification, there is no restriction on the type of contract which may be ratified by the company on its registration — the key is that the contract entered into was done so in contemplation of the company’s future existence. Where a person enters into a contract: • on behalf of a company to be formed, or • for the benefit of a company to be formed then the company, or a company reasonably identifiable with the company contemplated in the contract, becomes bound by the contract if: • the company is registered, and • the company ratifies the contract within the time period agreed by the parties to the contract, or if no time is agreed, within a reasonable time after the contract is entered into. If a company ratifies a pre-registration contract it is bound by that contract and entitled to all the benefits of it as if it had been a party to it. It appears that when a company ratifies a contract entered into on its

behalf or for its benefit prior to its incorporation, the date of formation of the contract is the date on which it is ratified. The contract is not retrospective to the time of the ratified act: Kevroy Pty Ltd v Keswick Developments Pty Ltd; Keswick Developments Pty Ltd v Kevroy Pty Ltd (2009) 27 ACLC 120. Failure to ratify The person who enters the contract on behalf of, or for the benefit of, a company to be formed is liable for damages to each other party to the contract in the event that either: • the company is not registered, or • the company is registered but it does not ratify the contract or enter a substitute for it, within the time period agreed by the parties to the contract; or if no time is agreed — within a reasonable time after the contract is entered into (s 131(2)). The amount of damages is equivalent to the amount which the other party could have recovered if the company had been formed and had ratified the contract. If proceedings are brought to recover damages because a company is registered but fails to ratify the contract or enter into a substitute for it then the court may do anything it considers appropriate in the circumstances, including making orders that the company do one or more of the following: • pay all or part of the damages that the person who entered into the contract is liable to pay • transfer property that the company received because of the contract to a party to that contract, or • pay an amount to a party to a contract (s 131(3)). Where a company is formed after the pre-registration contract and it ratifies the contract but fails to perform it in part or in full, the court may order that the person who entered into the contract pay all or part of the damages that the company is ordered to pay for the breach (s

131(4)).

How to ratify Ratification will normally be effected by a board resolution followed by entry into the contract at the first board meeting. The board’s resolution might take the following form:

EXAMPLE The company ratifies the agreement dated .................. between .................. as vendor of the one part and .................. on behalf of the company or for the benefit of the company, as purchaser.

Avoidance of promoter’s liability A person who negotiates and executes the pre-registration contract on behalf of a yet-to-be-formed company may avoid liability if the other party to the contract consents to that person being released from liability in relation to the contract (s 132(1)). The promoter may be in a better position if, instead of ratifying the preregistration contract, the company enters into a new contract in substitution for the old one. This is because the making of the new contract has the effect of discharging the promoter’s statutory liability. A person who enters into a pre-registration contract does not have any right of indemnity against the person’s liability under Pt 2B.3 of the Corporations Act. This is so even if the person was acting in the capacity of trustee for the company when he/she entered into the contract (s 132(2)). Signing of a contract Where a person executes a contract in a company’s name and the company has yet to be formed the intention of the person signing should be clearly noted:

EXAMPLE Signed for and on behalf of XYZ Limited a company to be registered by John Smith in the presence of .................. John Smith .................. Signature of witness .................. Name of witness

¶4-010 Procedure — Setting up a proprietary company To register a proprietary company, the following steps must be taken: • The persons who will become the first members must determine whether they wish the company to be governed by the replaceable rules (or in the case of a single director/single shareholder company, the provisions of s 198E) or whether they should adopt a constitution. • If a constitution is required, the members must sign an agreement as to the terms of the constitution. Such a statement could read: EXAMPLE “We, the persons who will be the initial members of XYZ Pty Limited, agree to the following constitution: The replaceable rules will not apply to the company*, or

The replaceable rules will apply to the company except as otherwise modified herein*.” (*one to be deleted.) The agreement should set out the terms of the constitution and be dated and signed by each person who will be a member of the company on registration. • Each of the persons who are to become members sign a consent to become a member of the company; to take shares in the company; and pay the amount required to be paid on the shares on registration. • Each director and secretary signs a consent to act in that capacity on registration of the company. • The applicant obtains the consents and agreements referred to above and signs the application for registration which includes details of the first directors and the secretary. The applicant for registration does not need to be one of the first members or one of the first directors or the first secretary. • The applicant lodges Form 201 and pays the application fee. The constitution (if any) does not need to be lodged. • ASIC issues the certificate of registration.

Background to procedure The operators of small businesses can either buy “shelf” companies or set up new companies themselves. To set up a new proprietary company themselves, the operator must apply to ASIC for registration of the company. One or more persons may form a proprietary company by lodging an application with ASIC using Form 201. Registration requires only the single application Form 201, stating the following: • the type of company • the proposed name • the name and address of each person who consents to be a member • personal details of directors

• personal details of secretary • officers’ addresses • registered office address • for a public company, the proposed opening hours of the registered office • address of principal place of business (if different from the registered office) • details of the company’s share structure, including the number and class of shares each member agrees to take up, the amount to be paid for each share, whether the shares will be fully paid up, the amount each member agrees to be unpaid on each share, and whether the shares will be beneficially owned by the member • for a public company limited by shares or an unlimited company, if shares are to be issued for non-cash consideration — the prescribed particulars about the issue of shares, or a copy of the contract if the shares are issued under a written contract • for a company limited by guarantee — the proposed amount of the guarantee agreed to by each member • whether or not the company will have an ultimate holding company on registration, and if so its name and ABN, ACN or ARBN, or the place in which it was incorporated if it is not registered in Australia • the state or territory in which the company is to be taken to be registered (s 117). If a company is to be registered as a proprietary company it must: • be limited by shares or be an unlimited company with a share capital • have no more than 50 shareholders (counting joint shareholders

as one and not counting employees or ex-employees of the company or a subsidiary). A proprietary company limited by shares must have at least one shareholder. A proprietary company must not engage in any activity that would require disclosure to investors under Ch 6D of the Corporations Act 2001 (Cth) or any corresponding law (except in limited circumstances where there are issue offers and sale offers that are exempt from the disclosure requirements of Ch 6D). An act or transaction is not invalid merely because a company contravenes this prohibition (s 113(3) and 113(4)). If a proprietary company contravenes the requirements of s 113, ASIC may direct the company to change to a public company within two months and if it fails to do so change the registration details of the company itself (s 165). The company comes into existence when ASIC registers it. Small/large distinction A proprietary company may be further classified as a small or large proprietary company. A company is a small proprietary company for a financial year if it satisfies at least two of the following criteria: • the consolidated revenue for the financial year of the company and the entities it controls (if any) is less than $25 million • the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is less than $12.5 million • the company and the entities it controls (if any) have fewer than 50 employees at the end of the financial year (s 45A(2)). In future, these thresholds will be able to be amended by regulation. A proprietary company will be a large proprietary company for the

financial year if it satisfies at least two of the following criteria: • the consolidated revenue for the financial year of the company and the entities it controls (if any) is $25 million or more • the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is $12.5 million or more • the company and the entities it controls (if any) have 50 or more employees at the end of the financial year (s 45A(3)). In future, these thresholds will be able to be amended by regulation. In each case the control of an entity by a proprietary company is determined in accordance with the accounting standards made for the purposes of s 295(2)(b), ie the accounting standards which require a company to prepare financial statements in relation to a consolidated entity (even if those standards would not otherwise apply to the company) (s 45A(4)). ACN and name When a company is registered, ASIC allocates to it a unique 9 digit number called the Australian Company Number (ACN). In practice, a new company must have a name that is different from the name of a company that is already registered. A proprietary company limited by shares must have the words “Proprietary Limited” as part of its name. Those words can be abbreviated to “Pty Ltd”. A proprietary company may adopt its ACN as its name. If it does so, its name must also contain the words “Australian Company Number” (which can be abbreviated to “ACN”). For example, the company’s name might be “ACN 123 456 789 Pty Ltd”. Contracts entered into before the company is registered A company can ratify a contract entered into by someone on its behalf or for its benefit before it was registered. If the company does not ratify the contract, the person who entered into the contract may be personally liable.

First shareholders, directors and company secretary A person listed with their consent as a shareholder, director or company secretary in the application for registration of the company becomes a shareholder, director or company secretary of the company on its registration. The same person may be both a director of the company and the company secretary. Issuing shares It is a replaceable rule (see 1.6) that, before issuing new shares, a company must first offer them to the existing shareholders in the proportions that the shareholders already hold. A company may issue shares at a price it determines. Registered office A company must have a registered office in Australia and must inform ASIC of the location of the office. A post office box cannot be the registered office of a company. The purpose of the registered office is to have a place where all communications and notices to the company may be sent. If the company does not occupy the premises where its registered office is located, the occupier of the premises must agree in writing to having the company’s registered office located there. A proprietary company is not required to open its registered office to the public but this does not affect its obligation to make documents available for inspection. The company must notify ASIC of any change of address of its registered office. Principal place of business If a company has a principal place of business that is different from its registered office, it must notify ASIC of the address of its principal place of business and of any changes to that address. Registers kept by the company

A company must keep registers, including a register of shareholders. A company must keep its registers at: • the company’s registered office • the company’s principal place of business • a place (whether on premises of the company or of someone else) where the work in maintaining the register is done, or • another place approved by ASIC. A register may be kept either in a bound or looseleaf book or on computer. If a register is kept on computer, its contents must be capable of being printed out in hard copy. Register of shareholders A company must keep in its register of shareholders such information as: • the names and addresses of its shareholders, and • details of shares held by individual shareholders.

¶4-015 Procedure — Setting up a public company To incorporate a public company the following steps must occur: • The persons who will become the first members must determine whether they wish the company to be governed by the replaceable rules or whether they should adopt a constitution. In the case of a no-liability company or a company limited by guarantee which is seeking to omit the word “Limited” from its name, a constitution is required. • If a constitution is required the members must sign an agreement as to the terms of the constitution. Such a statement could read for a company limited by shares:

EXAMPLE “We, the persons who will be the initial members of XYZ Limited, agree to the following constitution. The replaceable rules will not apply to the company*, or The replaceable rules will apply to the company except as otherwise modified herein.”

The agreement should set out the terms of the constitution, be dated and signed by each person who will be a member of the company on registration. In the case of a no-liability company, the company’s constitution must state that the company is only established for mining purposes. • Each of the persons who are to become members sign a consent to become a member of the company and in the case of: – a public company limited by shares or an unlimited company: – to take shares in the company – pay the amount required to be paid on the shares on registration, or – a company limited by guarantee — the proposed amount of the guarantee that each member agrees to. • Each director and secretary signs a consent to act in the capacity on registration of the company. • The applicant obtains the consents and agreements referred to above and signs the application for registration which includes details of the first directors and the secretary. The applicant for registration does not need to be one of the first members or one of the first directors or the secretary. • The applicant lodges Form 201 accompanied by any constitution adopted and pays the application fees (s 117). • ASIC issues the certificate of registration (s 118).

Background to procedure • One or more persons may form a public company (s 114). • A public company is a company other than a proprietary company (s 9). It can raise funds under Ch 6D of the Corporations Act 2001 (Cth) and have more than 50 members. • In accordance s 201A(2), there must be at least three for a public company. However, at least two directors in a public company must ordinarily reside in Australia.

¶4-020 Applying to register a company: s 117 What type of companies can be formed? There are four types of companies that may be formed under Australian law: • company limited by shares (public or proprietary) • company limited by guarantee (public only) • unlimited company with share capital (public or proprietary) • no liability company (public only): s 112(1). To register or incorporate a company, a person must lodge an application (ASIC Form 201) with ASIC: s 117(1). Foreign companies and registrable Australian bodies that wish to apply for registration as an Australian company must apply using ASIC Form 202. The application amalgamates the various separate documents which were formerly required for incorporation. For example, it is no longer necessary to make a separate application for reservation of a name for the company (although a separate application may be made using ASIC Form 410). For more information see:

Procedure — Setting up a proprietary company

¶4-010

Procedure — Setting up a public company

¶4-015

Name of company The requirements as to the naming of companies are dealt with in Pt 2B.6. A name is available unless it is: • “Identical” to an existing company or business name (s 147(1)(a) (b)) • “Unacceptable” for registration under the regulations (s 147(1)(c)). The name of the company may be identical to a registered business name under the respective state legislation, provided that the application for registration is made on behalf of, and with the authority of, the owner of the registered business name. A company may use its ACN as its name. The Corporations Act also requires specific words to be included in the name to indicate the class of company: (a) where the company is a limited company the word “Limited” or “Ltd” must appear at the end of the name (b) where the company is a no liability company “No Liability” or “N.L.” must appear at the end of the name (c) where the company is a limited proprietary company “Proprietary” or “Pty” before Limited, if applicable, or if the company is an unlimited proprietary company, as the final word: s 148, 149. In the case of a company incorporated to pursue charitable purposes which holds a licence under s 150, the company will be exempt from the obligation to use the word “Limited” or the abbreviation “Ltd” as part of its name.

Members Persons specified as members in the application automatically become members and their shares recorded on the register of members. Directors and secretary Although separate consents to appointment are not required to be lodged with the application for registration, s 117(2)(d) and (e) implies that the applicant for registration must obtain written consents from proposed officers before the application is lodged, which will then be kept as part of the company records: s 117(5). Persons named as officers in the application are automatically appointed upon registration. Registered office, opening hours and principal place of business All companies must have a registered office. Only public companies have an obligation to have their registered offices open, and either may: • adopt “standard opening hours”, defined in s 9 to mean 10 am to 12 noon and 2 pm to 4 pm each business day, or • nominate specific opening hours in the application (which must be at least three hours between 9 am and 5 pm each business day). Share capital For unlimited companies and companies with a share capital, the application must state the number, class and amounts paid and unpaid on the shares that each member agrees to take up. The beneficial or non-beneficial status of shareholdings must be included for each member. ASIC uses standard class codes eg “ordinary” (ORD), “preference” (PRF), “redeemable preference” (REDP) etc, to identify share classes. Where shares are jointly owned, the application must clearly indicate the share class and with whom the shares are jointly owned. Public companies are subject to additional information requirements in

relation to their share capital. If shares will be issued for a non-cash consideration, public companies must lodge ASIC Form 208 (details of shares issued other than for cash). If some or all of those shares will be issued under a written contract, public companies must also lodge ASIC Form 207Z (certification of compliance with stamp duty law) and either ASIC Form 208 or a copy of the contract. There is no requirement for companies to have an authorised capital. If the company requires a limit on the share capital which can be issued, this ought to be addressed in the company’s constitution. The concept of “par” value no longer exists. Guarantee The amount of the guarantee must be stated as a dollar value. Ultimate holding company The applicant must nominate whether or not, on registration, the company will have an ultimate holding company and, if so, details of the ultimate holding company: s 117(2)(ma) and (mb). “Ultimate holding company” is defined in s 9 as a holding company of another company, with that holding company itself not being a subsidiary of another company. A company may not necessarily have an ultimate holding company. By the same token, it is possible (and common in the case of large corporate groups) for two or more companies to have the same ultimate holding company. Registration in a state or territory Some state legislation relies on companies being incorporated or registered in a particular state or territory — for example, stamp duty is imposed on certain share transfers on the basis of the jurisdiction in which the company that issued the shares is incorporated or registered. In order to facilitate the continued operation of the state legislation under the Corporations Act 2001, s 117(2)(n) provides for companies to be taken to be registered in the referring state or territory specified in the application lodged with ASIC to incorporate the company. Companies may, however, change the jurisdiction in which they are

taken to be registered, with the approval of the relevant Minister of the state or territory in which the company is taken to be registered, provided the procedures specified in the Corporations Regulations have been satisfied: s 119A(3). Constitution A company does not need to have a constitution for registration; it may rely solely on the replaceable rules. Companies that choose to displace some of the replaceable rules by a constitution and to be governed by a combination of the replaceable rules and that constitution, must nominate in the application that the company has a constitution. If a public company is to have a constitution, then it is required to be lodged with the application for registration: s 117(3). For example, if a company is to be a no liability company, then it must have a constitution stating that its sole object is mining purposes: s 112(2). Consents The applicant for registration has the obligation to obtain consents for proposed members and proposed officers. Section 117(2)(d) and (e) require that the written consent of the proposed officers be obtained. Section 117(2)(c) requires that the consents of members be obtained. The consents do not have to be lodged with ASIC, but the applicant is required to give the consents to the company upon its registration. The company is required to keep the consents as part of its records: s 117(5). Contravention of s 117(5) is an offence of strict liability.

¶4-045 Selecting, reserving and registering the company name The application for registration must state the company’s name or that upon registration the company’s name will be its registration number. A company name may be registered provided the name: • is not “identical” to the name of an existing body registered under the Corporations Act 2001 (Cth)

• is not “identical” to a business name listed on the national business names register in respect of another individual or body, or • is not a name otherwise unacceptable for registration under the Corporations Regulations 2001 (s 147). The tests as to what are “identical” names are set out in the Corporations Regulations. Every company with limited liability must have “Limited” or “Ltd.”, as part of and at the end of its name, unless exempted by ASIC (see ¶4075). Every no-liability company must have “No-liability” or “N.L.” as part of and at the end of its name. Every proprietary company must have “Proprietary” or “Pty.” as part of its name immediately before “Limited” (or in the case of an unlimited company at the end of its name). No description is inadequate or incorrect because of the abbreviation “Co.” or “Coy.” for “company”, “Pty.” for “Proprietary”, “Ltd.” for “Limited”, “&” for “and”, “N.L.” for “No-liability”. While not a part of a company’s name (except if it is the name) the Australian Company Number often appears after the company name and is able to be abbreviated to “ACN”. Where a company’s name is to be its ACN its name will appear as “Australian Company Number 123 456 789 Pty. Limited”. When the words “Australian Company Number” are a part of the name they can be abbreviated. Change of name is discussed at ¶14-045. Application may be made to reserve a specified name (s 152(1)). The form prescribed for this purpose is Form 410 (see ¶10-410). If the name is available, ASIC will reserve it for two months from the date the application is lodged (s 152(2)). This period may be extended by ASIC. However, an application for an extension must be made

during the time the name is reserved (s 152(2)). Only one extension may be sought. Reservation of a name does not, of itself, entitle a company to be registered by that name. Existing business name If a company wishes to use an existing registered business name or is changing its name to that of a business name, it must first lodge a notice of cessation of that business name. The registration of a company under a name which was previously a business name is a different matter from the use by a company of a business name. When a company carries on any business under a name that is not the company name, without any additions, the company as proprietor must register that business name with ASIC under the Business Names Registration Act 2011 (Cth). See further ¶110. Prohibited names The Corporations Regulations 2001 have declared certain names to be unacceptable for registration: 1. Names that are (in the opinion of ASIC) undesirable, or likely to be offensive to members of the public or members of any section of the public. Whether a name is offensive is not determined by reference to a general community standard but by whether a particular section of the community would be offended: Little v Australian Securities Commission (1996) 14 ACLC 1,730. 2. Names containing the following words or phrases (or any abbreviation of): “Aboriginal Corporation”, “Aboriginal Council”, “Chamber of Commerce”, “Chamber of Manufactures”, “Chartered”, “Consumer”, “Co-operative”, “Executor”, “Friendly Society” (other than in relation to the conduct of a financial business), “GST”, “G.S.T.”, “Guarantee”, “Incorporated”, “Made in Australia”, “R.S.L.”, “RSL”, “Starr Bowkett”, “Stock Exchange”, “Torres Strait Islander Corporation”, “Trust”, “Trustee”.

3. Names which include the words “Commonwealth” or “Federal” (unless ASIC is satisfied that they are used in a geographical context). 4. Names which, in the context in which they are proposed to be used, are capable of suggesting a connection with the Crown, the Government of the Commonwealth or of a State or Territory or any other part of the Queen’s dominions, possessions or territories, a municipal or local authority, a government department, or the government of a foreign country. 5. Names which, in the context in which they are proposed to be used, are capable of suggesting a connection (which does not exist) with a member of the royal family, or the receipt of royal patronage, or connection with an ex-servicemen’s organisation, Sir Donald Bradman or Mary MacKillop. 6. Names which, in the context in which they are proposed to be used, suggest that the members of an organisation are totally or partially incapacitated, when in fact they are not (s 147, reg 6203– 6205 Pt 2 of Sch 6 of the Corporations Regulations 2001). Other Commonwealth and State legislation restricts the use of some names within those jurisdictions.

¶37-300 Omission of “Limited” from name: s 150, 151 Companies which pursue charitable purposes only can gain an exemption from the obligation to include the word “Limited” in their company name: s 150. Such companies are colloquially referred to as “licence companies”. If a company has the word “Limited” in its name but qualifies for the exemption under this section, it need not use the word in any circumstance in which it would normally be required to use it, even on its common seal: s 150(5). In order to obtain this exemption: • the company must be registered under the Australian Charities and Not-for-profits Commission Act 2012 (Cth) (ACNC Act) as a

charity, ie an entity with a purpose that is the relief of poverty, sickness or the needs of the aged, and • the company’s constitution must prohibit the company paying fees to its directors and must require the directors to approve all other payments the company makes to directors: s 150(1). These rules apply with effect from 3 December 2012. Prior to that date, a company which wished to omit the word “Limited” from its name was required to apply to ASIC for the exemption, and had to satisfy ASIC as to its charitable purposes, and that its constitution prohibited the company making distributions to its members and paying fees to its directors, and required the directors to approve all other payments the company made to directors. The advantages of obtaining the exemption under the section have been explained in Palmer’s Company Precedents (17th ed) at p 297 in these words: “The Association avoids what may be called the taint of commercialism. It becomes a permanent legal entity, and thereby gains stability, credit and dignity; the property can be vested in and held by the association in its own name and corporate capacity, and thereby dealings with such property are much facilitated, and expense as to trustees avoided; the association can contract, sue and be sued in its own name; while the officers can act without incurring any personal liability.” The company has an obligation to notify ASIC as soon as practicable if it ceases to be registered as a charity under the ACNC Act, or these restrictions are not complied with, or if it modifies its constitution to remove any of these restrictions: s 150(2). The penalty for noncompliance is 5 penalty units. An offence based on s 150(2) is an offence of strict liability within the meaning of s 6.1 of the Criminal Code: s 150(3). For an explanation of what this means see ¶301-050. The requirement in s 157(1)(a) that a company must pass a special resolution to change its name does not apply to a change of the name of a company to omit the word “Limited” in accordance with s 150: s 150(4).

Pre-existing companies For companies that already had the licence before 1 July 1998, s 151 confirms that it continues. However, these licences were issued subject to conditions set out in ASIC RG 50 Omission of “Limited” from company names (¶37-300.30): • the company must remain a company limited by guarantee • the company’s activities must be confined to attaining the purposes set out in its objects and there must be no breach or amendment of any provision in the memorandum or articles that is required by the Law or ASIC • ASIC must be notified of any breach of the licence conditions • the company’s level of commercial activity must not be significant (unless the company uses a combination of commercial activities and public donations to finance its charitable activities) • the company and those associated with it must not indicate that ASIC has endorsed or warranted its activities • the company must indicate its limited liability status on all documents that require display of its ACN, except documents that canvass the public for donations. The obligation to inform ASIC of any breaches of the licence conditions or modification to its constitution which may allow it to breach the licence conditions is set out in s 151(2). The penalty for non-compliance is 5 penalty units. An offence based on s 151(2) is an offence of strict liability within the meaning of s 6.1 of the Criminal Code: s 151(2A). For an explanation of what this means see ¶301050. Certain companies hold licences which have required approval of the Minister responsible for corporate law, or another Minister of the Commonwealth, a State or a Territory, or an officer, instrumentality or agency of the Commonwealth, a State or a Territory for any changes to the constitutions of these companies. With effect from 1 July 2007,

that requirement has been replaced by a simple requirement to notify ASIC of any changes to their constitutions: s 151(2AA). Failure to do so is not, however, an offence, although it may lead to revocation of the licence (see below). Revocation of licence ASIC has the power to revoke a licence if the company fails to comply with the provisions of s 151(2) or 151(2AA): s 151(3). Accounts and audit relief There is no special accounting relief available to licence companies (as there was under the companies code). Accounting relief for nonprofit companies generally is available under s 340–342. Act: Section 150, 151. .30 RG 50. This guide is reproduced within Australian Securities & Investments Commission Releases at ¶10-050.

¶35-000 Introduction — Internal management of companies: s 134 A company’s internal management is governed either by: • the replaceable rules, or • a constitution, or • a combination of both: s 134. “Constitution” is defined according to s 136: s 9. “Internal management” is not defined by the Corporations Act 2001. However, what is encompassed within the phrase “internal management” appears from the content of the replaceable rules which apply in the absence of the adoption of a contrary constitutional rule. Section 134 of the Act does not by implication limit the way in which a company’s internal management “may” be governed to the replaceable rules of the Act and a company’s constitution. As a matter

of common law, the rights and obligations of the company and its members may be affected by contract and the terms of a deed. It cannot be the effect of s 134 that a company and its shareholders are precluded from binding themselves in any other way which is effective at law. The purpose of s 134 is to bind companies and their shareholders to the rights and obligations conferred by replaceable rules and the constitution of the company precisely because it is not always practicable to do so contractually: Elders Forestry Ltd v BOSI Security Services Ltd (2010) 28 ACLC ¶10-049. One advantage for companies of the replaceable rules is that the rules apply according to their current format in the Corporations Act, ie companies do not have to update their records. This is unlike companies which may have a constitution as opposed to relying on replaceable rules, which can present practical difficulties in keeping the constitution up-to-date. See ¶35-300. One of the practical problems with Table A articles was (and for some companies, continues to be) that the articles applied to the company as adopted. Accordingly, any legislative amendment to Table A did not automatically apply to companies that had already adopted Table A as its articles. Although this difficulty no longer exists for companies which rely on the replaceable rules in their entirety, it is an issue that needs to be revisited for companies that rely on the replaceable rules as modified. Companies, as discussed below and in ¶35-200 and ¶35250, are able to modify the replaceable rules: s 135(2), 136(2). If a company adopts such a constitution, the question arises as to whether the replaceable rules are expressed to be “as at the date of the adoption of this Constitution” or “as amended in the Corporations Act from time to time”. If the former, then modified replaceable rule constitutions leave companies in the same position as under Table A, and defeat the simplicity of the replaceable rule regime. For companies registered after the Company Law Review Act (ie 1 July 1998), the constitution will be either: • No specific constitution: the application for registration requires disclosure of all of the relevant information: see s 117(2). The replaceable rules will govern aspects of internal management.

• A specific constitution: a company may adopt a constitution either upon registration (if each member agrees in writing to its terms); or subsequently by passing a special resolution: s 136. • A specific constitution based on the replaceable rules: a company may wish to only partly adopt the replaceable rules. Section 136(2) acknowledges this option by permitting a company to “repeal its constitution or a provision of its constitution”. If a public company is to have a constitution, then it must be lodged together with the application for registration: s 117(3). For companies existing before the Company Law Review Act, the constitutions will be either: • the existing memorandum and articles: former s 1415 • the existing memorandum and articles as altered from time to time: the replaceable rules will not apply to existing companies unless and until the company actually repeals the memorandum and articles • no specific constitution: existing memorandum and articles may be repealed, relying only on the replaceable rules: s 136(2), 135(1) (a)(ii), or • a specific constitution: existing memorandum and articles may be repealed, and replaced with a constitution which alters or supplements the replaceable rules: s 136(1)(b). When a constitution is required A company does not need to have a constitution for registration. If a public company does have a constitution from the time of its inception, then it is required to be lodged with the application for registration: s 117(3). There are two situations in which a constitution will be required under the Corporations Act: 1. a no liability company must have its sole objects as mining: s

112(2), and 2. a company limited by guarantee which wishes to omit “Limited” from its name must be restricted to charitable purposes and have other stated restrictions as required by s 150. In any other case, a company only requires a constitution if the company intends to adopt a set of internal rules to replace or modify the replaceable rules. Generally, a company will need to have a constitution to modify or supplement the replaceable rules in circumstances where the replaceable rules are not appropriate or do not address all issues required by the company for its operations. For example, if shares of different classes are issued, then the company will need to adopt a constitution to specify the rights attaching to the various classes. For more detailed information on internal management of companies, please see: • the replaceable rules: s 135 (¶35-200) • adoption, repeal or modification of a constitution: s 136, 137 (¶35250) • publishing and availability of the constitution: s 138, 139 (¶35-300) • effect of the constitution and replaceable rules: s 140(1) (¶35-350) • effect of alteration to constitution on members: s 140(2) (¶35-400) • table of replaceable rules: s 141 (¶35-500) • companies with Table A articles and not replaceable rules (¶35600) • companies with articles and not replaceable rules (¶35-650) • construing articles (¶35-700) • alteration of constitutions: general principles (¶35-750)

• alterations and strangers (¶35-800).

¶9000-020 What is “corporate governance”? Corporate governance is about having the right people in the company making the right decisions. On a practical level, corporate governance looks at the systems, processes, principles and practices adopted by a company to ensure the right people are making the right decisions. Clearly, strong governance cannot be achieved by a “tick-the-box” approach and the individual circumstances of each company must be given due consideration. Each company needs its own governance structure, as the issues facing that company will vary depending on the country it operates within, the internal operations of the business, its size and the industry the business is in. Strong governance is an ongoing process. Various stakeholders need to play a part in ensuring the governance regime remains vibrant and vital including: • shareholders, who have elected a board of directors to be responsible for governance and manage the affairs of the business, are responsible for ensuring the board has effective involvement in strategic policy, risk management and performance assessment • directors, who are accountable to the shareholders for their actions, are responsible for determining the right governance practices that are suited for that particular company, and put in place the necessary procedures to ensure the governance objectives are met. In formulating and maintaining the governance practices, the company leans on the knowledge and experience of the directors to establish: – responsibilities — who should do what – accountabilities — to whom those with responsibilities must account and how, and – checks and balances — the system of supervision,

relationships, control procedures and communication flows.

¶32-010 What is the role of the board of directors? A company is formed when shareholders come together and pool their resources in a common endeavour. They elect some of their number to a board of directors and delegate almost all of their powers of ownership to the board, either by way of the company’s constitution or by accepting the replaceable rules in the Corporations Act 2001 (Cth). (It should be noted that some companies retain Memoranda and Articles of Association instead of adopting a constitution.) In “The Rights of Shareholders”, Annotations to the OECD Principles of Corporate Governance (1999), it is observed: “As a practical matter … the corporation cannot be managed by shareholder referendum … In the light of these realities and the complexity of managing the corporation’s affairs in fast moving and ever changing markets, shareholders are not expected to assume responsibility for managing corporate activities.” The directors remain accountable to the shareholders who have the legal right to remove them and to set the remuneration they receive in their capacity as directors. The Corporations Act (s 198A(1)) makes clear the responsibility of directors: “The business of the company is to be managed by or under the direction of the directors.” Therefore, the board of directors is responsible for corporate governance and managing the affairs of the business, which will include involvement in strategic policy, risk management and performance assessment. The directors should determine the appropriate corporate governance practices, and put in place the necessary procedures to ensure the governance objectives are met. According to the Report of the Committee on the Financial Aspects of Corporate Governance (1992) (the Cadbury Committee):

“the responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting.” This process involves use of the knowledge and experience of the directors to establish: • responsibilities — who should do what • accountabilities — to whom those with responsibilities must account and how, and • checks and balances — the system of supervision, control procedures and communication flows. It is clear that the corporate governance practices adopted by different companies will vary depending on the issues facing the board of directors, which will relate to the operations of the business. Therefore, it is neither possible nor appropriate to regulate corporate governance in a prescriptive, “tick-the-box” manner. However, some governance matters will be an issue for all companies, and these form the basis of the following discussion. The role of the board in public companies In a public company, it is not practical for the majority of shareholders to actively participate in the company’s management, and the board of directors assumes almost all of those powers. The shareholders delegate their powers to the board collectively, not to individual directors. Therefore, the board can act only when it meets. The typical Australian board schedules regular monthly meetings, and the average board meeting lasts about five hours, so the typical board arranges to be in formal session about 60 hours per year. In addition, there will be ad hoc or emergency meetings from time to time to deal with special situations as they crop up. As management is a continuing process, with frequent demands for

rapid decisions, it is not possible for boards to meet frequently enough to manage the company. To properly discharge their duties, they must employ management to carry out the day-to-day business of the company. It follows that they must delegate to the Chief Executive Officer (CEO) a sufficient proportion of the powers that they have received from the shareholders to allow management to carry out its duties. As a consequence, management must be accountable to the board for the discharge of these powers. Delegation by the board The board has more flexibility than shareholders in exercising its power of delegation and it is usual for very considerable powers to be delegated to individuals. Most are delegated to the CEO, but considerable authority is usually delegated to the chairperson and the company secretary, as well as to committees of the board. Section 198D of the Corporations Act contains a replaceable rule specifically recognising the power of the board to delegate any of its powers to: • a committee • an individual director • an employee, or • any other person. If the company chooses to adopt a constitution, it will normally contain a similar provision in relation to delegation. Case law, including Daniels v Anderson (1995) 13 ACLC 614, has established the principle that directors are entitled to rely on information given to them provided that reliance is reasonable. This guidance is legislated in s 189 of the Corporations Act, which states that a director’s reliance on information or advice is taken to be reasonable (unless the contrary is proven) if it was made: • in good faith, and

• after making an independent assessment of the information or advice (having regard to the director’s knowledge of the corporation and the complexity of its structure and operations). It is therefore essential for a director to make inquiries regarding the information or advice received, and to remain informed about the company’s business activities and financial position. Leading and overseeing delegations to management The board may delegate to management whatever functions and authority it wishes, but it cannot delegate its responsibility to the shareholders or its responsibilities under the law. The board remains responsible for management’s actions, or inactions, and it must therefore see to it that management is managing properly. One of the board’s most important tasks is to select and appoint a CEO who is as capable as possible of meeting the shareholder’s aspirations for the company. The board must monitor the CEO’s performance and, if it proves inadequate, replace him/her. How will the board know what “managing properly” means? How will it decide whether the CEO is as capable as possible? There must be a clear yardstick for measuring performance that is understood and agreed to by the board and management. This starts with the objectives of the company that must be set clearly so that all concerned will know whether they have been achieved or not. There must then be a plan for reaching the objectives which will set out the principal steps to be taken in achieving the objectives and which will deal with such issues as priorities, the allocation of resources and managing the risks which may be encountered. So that the board will know whether or not the plan is being implemented properly, there must be performance indicators which provide an adequate insight into what is happening as well as a monitoring system which allows both board and management to know what progress has been achieved and what obstacles have been encountered. This function of the board was described by the chairperson of General Motors, John Smale, in a speech at the Council of Institutional Investors (Washington DC, 15th April 1994, at pp 6–7)

following the revolution in the boardroom and the development of the very influential General Motors board guidelines: “The board has the responsibility of representing the owners’ interest in the successful perpetuation of the corporation. This is an active as opposed to a passive responsibility. It is incumbent on the board to ensure, in good times as well as bad, that the management is capable of fully executing its responsibilities.” “As I see it, the board’s role is to act as an independent auditor of management — asking the tough questions that management might not ask itself … The board’s independent members are uniquely capable of performing this function because they are not saddled with the burden of the company’s past success and culture.” Both the board and management must be involved in the process of establishing objectives, plans, performance indicators and monitoring procedures. The shareholders elect the board in order to preserve and enhance the investment entrusted to their care and this goal will be achieved more effectively if the board not only hires good management and sees to it that it is managing properly, but also if it proactively helps management to manage better. A good board can make a significant contribution to good management, and in particular strengthening the CEO, in seven different ways: 1. Providing structure and focus The day-to-day management of a company, particularly in a competitive environment, involves continuing short-term pressures of many different types and there is a constant temptation to give the urgent problems priority over the less urgent but more important ones. A formal structure of board meetings, combined with disciplined reporting, causes management to allocate a significant part of its attention to the long-term objectives. If the board is focused on the owners’ interests and the enhancement of the shareholders’ investment in perpetuity, management will be led to see the immediate issues in a longer-term perspective. If the board concentrates a large

part of its effort on the plan and on monitoring performance against the agreed indicators; and if it is disciplined in the way it conducts itself, it will make a real contribution to making management more effective. In 1995, a prominent entrepreneur, John Smale, who had built up a very successful business, established a board for the first time. He appointed two independent directors and began regular meetings. After one year’s experience he commented that it was the best decision he had ever made. He said: “There are too many emotions in a family business and having a board with outsiders introduces objectivity into the processes and reduces the danger of hasty decisions …” “Managers, particularly successful entrepreneurs, have faith in themselves and think that they know all the answers instinctively, the independent directors don’t accept that and call for cost benefit analysis, SWOT analysis and written plans. Their presence gives perspective.” Of course, in larger and more sophisticated companies management would employ such simple mechanisms of its own accord, but there is always the risk of being caught up in the immediate crises or of pursuing the latest opportunity while neglecting other important matters. An effective board acts like a flywheel stabilising the organisation. 2. Thinking outside the square There is always a danger of tunnel vision in a hierarchical management system. If the CEO or the top management team has an instinctive feeling that a particular course is right, or comes to a firm conclusion after their initial consideration, it is more likely that junior managers will wish to conform, will find the logic of their superiors compelling and to discover persuasive reasons to support the growing consensus. It is important that the board contains independent thinkers who see the world from different perspectives, and who challenge management’s assumptions and conclusions by asking incisive

questions such as “What if?” or “Have you considered …?” or “What were the rejected alternatives?”. If the board insist on understanding each important proposition and being convinced of the logic behind each proposal, they will help management avoid serious mistakes and will make a real contribution to the company’s long-term welfare. John Smale’s comments (quoted above) about the board “asking the tough questions that management might not ask itself” reflect this thinking. 3. Avoiding hubris and sloth There is a similar danger in hierarchies that the leader will be surrounded by subordinates who look to their chief for tenure, promotion, remuneration and all the good things of life, and who will be reluctant to challenge the judgments and the preferences of their superior. In such situations agreement and praise are common, sycophancy is not unknown, and challenge and scepticism are rare. CEOs in that position may become over-confident, perhaps even arrogant, and they may begin to believe that they are infallible. A good board will redress these tendencies and restore a sense of proportion by its questions and its challenges. The Roman practice of causing a slave to ride in the chariot of a victorious general during his/her triumph for the sole purpose of whispering “remember you are mortal” had real merits. It has been argued that the greatest monopoly profit is the quiet life and there is always a danger that CEOs who have reached the summit of their ambition will be tempted by luxurious surroundings and lavish entertainment to drive themselves less rigorously than was necessary on their climb to the top. While many would devote themselves conscientiously whatever the circumstances, the presence of a board which ensures that there is sufficient stretch in the targets, and which monitors performance against them, will reduce the danger of complacency and sloth. 4. Setting effective remuneration and incentives The board is responsible for setting the remuneration of the CEO and for approving proposals for the rest of the management team, whether this involves considering individual situations or ratifying general principles and guidelines. If the remuneration scales are considered

competitive, fair and appropriate, good managers will be retained and the management team stabilised. If effective incentives are laid down, the CEO and his/her colleagues will be motivated to strive more energetically and their energies will be channelled more directly in the shareholders’ interests. 5. A sympathetic sounding board and source of advice A good board will also act as a sympathetic sounding board for management’s ideas and will provide a variety of views and perspectives so that board meetings will be a constructive experience for the CEO and those executives who attend. Particularly in the early stages of preparing the annual plan, but at whatever other times it is thought appropriate, management should be able to bring proposals and options to the board for discussion, and should be able to count on receiving wise counsel and objective and experienced advice. All of this can be of great assistance in the running of the company. Similarly, the feedback provided by an experienced and well-informed board on operational developments, and on management’s achievements and difficulties, can be of considerable value. 6. Coaching and training Few humans are perfect or equally strong in all respects; few CEOs do not have areas of relative weakness, and a good board can contribute much by identifying aspects of performance that can be strengthened by training or the provision of relevant experience. Perhaps even more importantly, a strong and understanding chairperson can help a CEO to improve his/her performance by judicious confidential coaching. Additional specialist advice from directors with special experience or expertise can also be of value. 7. Allowing management to get on with the job The board will make a further important contribution to good management if it concentrates on doing those things it has reserved for itself and refrains from meddling in matters that have been delegated to management. Intermittent interference in operational detail reduces management’s confidence and effectiveness because no one performs well when they are in danger of being second-

guessed on a random basis. Not only that, it also reduces the ability of the board to hold management accountable for results. If a board disagrees with an operational decision that the CEO has made, or is about to make, it can and should discuss the matter with the CEO and attempt to persuade him/her to its way of thinking. If necessary, the board can issue a firm warning. However, if the matter is one that has been delegated to management, it is important that the CEO should make the final decision. If the board overrules management in a delegated area and unfortunate consequences later occur, the board’s decision will be blamed. What is more, it will not be possible for the board to hold the CEO accountable on that matter and the accountability of management for the results of the company will have been undermined. If a board does all these things consistently, it will make a major contribution to the good management of the company. Principle 1 of the principles and recommendations issued by the ASX Corporate Governance Council requires companies to recognise and publish the respective roles and responsibilities of the board and management. Recommendation 1.1 states: “Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions.” The guidance provided in relation to this recommendation suggests that: • there should be a clear statement of the respective roles and responsibilities of the board and management, balancing responsibilities between the chairperson and the CEO • the board should have a formal statement of matters, or charter detailing its functions and responsibilities • all directors should receive a formal letter of appointment setting out the key terms and conditions of their appointment

• the CEO (or equivalent) and the Chief Financial Officer (CFO) should have a formal job description and letter of appointment describing their duties, rights and responsibilities, and entitlements on termination. In Principle 5, the ASX corporate governance principles recommend that companies should put in place mechanisms designed to ensure compliance with the ASX Listing Rule requirements such that all investors have equal and timely access to material information concerning the company — including its financial position, performance, ownership and governance. Other entities Wholly-owned subsidiaries Where there is only a single shareholder (for instance, in a large multitiered group) it is possible, and indeed common, for far greater powers to be reserved for exercise by the shareholder, and for much less to be delegated to the board, than in public companies. It is common for the parent company to appoint the board chairperson, who may be given far greater powers than is usual for a public company chairperson. It is also common for parent companies to require that major policy matters be referred up the hierarchy for decision or guidance. Joint ventures In the case of joint ventures, it is quite usual for the joint venture agreement to restrict the matters delegated to the board and for considerable powers to be reserved for decision in meetings of the joint venturers. In practice, the extent and shape of delegation varies widely. Proprietary companies Since 1995, proprietary companies have not been required to have more than one director and there are now a very large number of single-director companies. Many of these have only a single shareholder who is often the chief (and only) manager as well. In such cases the notion of accountability is blurred and, where the same

person is simultaneously the shareholder, director and operator, it becomes irrelevant. Government boards It is usual for there to be special legislation covering government boards and for considerable powers to be reserved for the relevant Minister or department. It is also common for the Minister to appoint the chairperson, and sometimes the CEO, directly and for special authority and responsibility to be delegated to either or both of them. In such cases the authority of the board is diminished, and serious governance problems often arise. No single model applies in the public sector and it is necessary to study the specific legislation, and any Ministerial Directives, in order to understand the position of any individual board. Member organisations There are many organisations, such as trade associations, professional bodies and charities in which presidents, and other officers, are elected individually by the members and are given specific powers by the constitution. In such cases they are accountable personally, and the accountability of the board (or council) is diluted. It is not uncommon for special difficulties to arise in the governance of such organisations as a result.

¶32-810 Board of directors delegating to committees and management Directors’ ability to delegate their powers It is common for the company constitution to permit wide powers of delegation of tasks to a committee of directors and/or management. Directors are able to delegate their powers to a committee of directors (s 198D). Directors who delegate powers are nevertheless “responsible for the exercise of the power by the delegate” as if the directors had exercised the power themselves (s 190). The delegate (along with the director) is obliged to exercise due skill and care. The only situation where directors will not be held accountable for the

actions taken by the delegate is if the director can prove: • they believed on reasonable grounds at all times that the delegate would exercise the power in accordance with the duties imposed on directors by the Act and the company’s constitution (if any), and • they believed that the delegate was reliable and competent to carry out the duties delegated to that person and formed that belief on the basis of three criteria: – on reasonable grounds – in good faith, and – after making proper inquiry, if the circumstances indicated that there was a need for such an inquiry (s 190). Courts will assess the way in which the directors have delegated their duties and how they oversaw that delegation. Recent cases, including ASIC v Healey & Ors (2011) 29 ACLC ¶11-067; [2011] FCA 717 and ASIC v Hellicar (2012) 30 ACLC ¶12-013; [2012] HCA 17, suggest that there are limitations on what can be delegated and still be afforded protection from liability. Directors cannot delegate away their “core, irreducible” responsibilities. The details of what makes up “core, irreducible” responsibilities is likely to be defined in upcoming cases over the next few years. Recent high profile corporate collapses have put board committees, and particularly the audit committee, under intense scrutiny. It is not enough to simply establish various committees, or to pay lip service to their recommendations. Committees need to be comprised of appropriate directors, have a clearly defined charter and have the power to effectively discharge their duties and responsibilities. The relationship between committees and the board of directors One of the most effective tools available to the board of directors in discharging its stewardship is the use of subcommittees. Specialist committees are able to focus on a particular responsibility and provide

informed feedback to the board. The boards of large corporations will often operate through board committees. What type of committees does the board delegate to? The three most common types of board committees used in practice are: • audit committees • nomination committees, and • remuneration committees. The board committee itself is not recognised at law as a separate legal concept. Board committees report to the main board. Members of board committees are invariably drawn from members of the main board. The use of board committees should not be seen as implying a fragmentation or diminution of the responsibilities of the board as a whole: see the Corporate Governance Principles and Recommendations with 2010 Amendments. Audit committee The main responsibilities of the audit committee are to: • review the integrity of the company’s financial reporting framework, including the internal audit function, and • determine the terms of engagement of the external auditor, regularly review the independence of the external auditor, agree to the annual audit plan and oversee the process of the statutory audit. All listed companies that comprise the Standard & Poor’s Index of the Top 500 listed entities must have an audit committee and must comply with the Corporate Governance Principles and Recommendations with 2010 Amendments in relation to the composition, operation and responsibility of the audit committee: LR 12.7. Nomination committee

The main responsibilities of the nomination committee are to: • assess the necessary and desirable competencies of board members and board committee members • review board succession plans • evaluate the board’s performance • make recommendations for the appointment and removal of directors. Remuneration committee The main responsibility of the remuneration committee is to establish the company’s policy or policies with respect to executive and nonexecutive director remuneration. The Listing Rules also require that each committee has a formal written charter, and that each committee be comprised solely of independent directors. ASX requirements The Australian Securities Exchange (ASX) requires an entity that is in the top 500 listed companies (those making up the S&P All Ordinaries Index) at the beginning of its financial year to have an audit committee during that financial year. If the entity is in the top 300 in that index at the beginning of its financial year, the composition, operation and responsibility of the audit committee during that financial year must comply with the principles and recommendations of the ASX Corporate Governance Council. The ASX Corporate Governance Council’s Principles and Recommendations also suggest that listed companies establish a nomination committee and a remuneration committee, although these are not currently mandated by the Listing Rules. The Toronto Stock Exchange requires listed companies to have an audit committee, which must be comprised of “independent directors” and recommends that companies have a nomination committee.

Best practice It is generally regarded worldwide as “best practice” for boards to delegate various functions to a subcommittee of the board. Subcommittees are typically comprised of fewer members, allowing them to function more efficiently than the full board, which can be cumbersome. Each committee should be comprised of directors with the requisite skills to enable them to utilise those skills in the optimum way, and assist the board in its overall objective of guiding and monitoring the business. The relationship between the board and management The board may delegate to management whatever functions and authority it wishes, but it cannot delegate its responsibility to the shareholders or its responsibilities under the law. The board remains responsible for management’s actions, or inactions, and it must therefore see to it that management is managing properly. One of the board’s most important tasks is to select and appoint a CEO who is as capable as possible of meeting the shareholder’s aspirations for the company. The board must monitor the CEO’s performance and, if it proves inadequate, replace him/her. How will the board know what “managing properly” means? How will it decide whether the CEO is as capable as possible? There must be a clear yardstick for measuring performance that is understood and agreed to by the board and management. This starts with the objectives of the company that must be set clearly so that all concerned will know whether they have been achieved or not. There must then be a plan for reaching the objectives which will set out the principal steps to be taken in achieving the objectives and which will deal with such issues as priorities, the allocation of resources and managing the risks which may be encountered. So that the board will know whether or not the plan is being implemented properly, there must be performance indicators which provide an adequate insight into what is happening as well as a monitoring system which allows both board and management to know what progress has been achieved and what obstacles have been encountered.

This function of the board was described by the chairperson of General Motors, John Smale, in a speech at the Council of Institutional Investors (Washington DC, 15th April 1994, at pp 6–7) following the revolution in the boardroom and the development of the very influential General Motors board guidelines: “The board has the responsibility of representing the owners’ interest in the successful perpetuation of the corporation. This is an active as opposed to a passive responsibility. It is incumbent on the board to ensure, in good times as well as bad, that the management is capable of fully executing its responsibilities.” “As I see it, the board’s role is to act as an independent auditor of management — asking the tough questions that management might not ask itself … The board’s independent members are uniquely capable of performing this function because they are not saddled with the burden of the company’s past success and culture.” Both the board and management must be involved in the process of establishing objectives, plans, performance indicators and monitoring procedures. The shareholders elect the board in order to preserve and enhance the investment entrusted to their care and this goal will be achieved more effectively if the board not only hires good management and sees to it that it is managing properly, but also if it proactively helps management to manage better. A good board can make a significant contribution to good management, and in particular strengthening the CEO, in seven different ways: 1. Providing structure and focus The day-to-day management of a company, particularly in a competitive environment, involves continuing short-term pressures of many different types and there is a constant temptation to give the urgent problems priority over the less urgent but more important ones. A formal structure of board meetings, combined with disciplined reporting, causes management to allocate a significant part of its attention to the long-term objectives. If the board is focused on the

owners’ interests and the enhancement of the shareholders’ investment in perpetuity, management will be led to see the immediate issues in a longer-term perspective. If the board concentrates a large part of its effort on the plan and on monitoring performance against the agreed indicators; and if it is disciplined in the way it conducts itself, it will make a real contribution to making management more effective. In 1995, a prominent entrepreneur, John Smale, who had built up a very successful business, established a board for the first time. He appointed two independent directors and began regular meetings. After one year’s experience, he commented that it was the best decision he had ever made. He said: “There are too many emotions in a family business and having a board with outsiders introduces objectivity into the processes and reduces the danger of hasty decisions …” “Managers, particularly successful entrepreneurs, have faith in themselves and think that they know all the answers instinctively, the independent directors don’t accept that and call for cost benefit analysis, SWOT analysis and written plans. Their presence gives perspective.” Of course, in larger and more sophisticated companies, management would employ such simple mechanisms of its own accord, but there is always the risk of being caught up in the immediate crises or of pursuing the latest opportunity while neglecting other important matters. An effective board acts like a flywheel stabilising the organisation. 2. Thinking outside the square There is always a danger of tunnel vision in a hierarchical management system. If the CEO or the top management team has an instinctive feeling that a particular course is right, or comes to a firm conclusion after their initial consideration, it is more likely that junior managers will wish to conform, will find the logic of their superiors compelling and to discover persuasive reasons to support the growing consensus.

If the board contains independent thinkers who see the world from different perspectives, and who challenge management’s assumptions and conclusions by asking incisive questions such as “What if?” or “Have you considered …?” or “What were the rejected alternatives?”. If they insist on understanding each important proposition and being convinced of the logic behind each proposal, they will help management avoid serious mistakes and will make a real contribution to the company’s long-term welfare. John Smale’s comments (quoted above) about the board “asking the tough questions that management might not ask itself” reflect this thinking. 3. Avoiding hubris and sloth There is a similar danger in hierarchies that the leader will be surrounded by subordinates who look to their chief for tenure, promotion, remuneration and all the good things of life, and who will be reluctant to challenge the judgments and the preferences of their superior. In such situations agreement and praise are common, sycophancy is not unknown, and challenge and scepticism are rare. CEOs in that position may become over-confident, perhaps even arrogant, and they may begin to believe that they are infallible. A good board will redress these tendencies and restore a sense of proportion by its questions and its challenges. The Roman practice of causing a slave to ride in the chariot of a victorious general during his/her triumph for the sole purpose of whispering “remember you are mortal” had real merits. It has been argued that the greatest monopoly profit is the quiet life and there is always a danger that CEOs who have reached the summit of their ambition will be tempted by luxurious surroundings and lavish entertainment to drive themselves less rigorously than was necessary on their climb to the top. While many would devote themselves conscientiously whatever the circumstances, the presence of a board which ensures that there is sufficient stretch in the targets, and which monitors performance against them, will reduce the danger of complacency and sloth. 4. Setting effective remuneration and incentives The board is responsible for setting the remuneration of the CEO and

for approving proposals for the rest of the management team, whether this involves considering individual situations or ratifying general principles and guidelines. If the remuneration scales are considered competitive, fair and appropriate, good managers will be retained and the management team stabilised. If effective incentives are laid down, the CEO and his/her colleagues will be motivated to strive more energetically and their energies will be channelled more directly in the shareholders’ interests. 5. A sympathetic sounding board and source of advice A good board will also act as a sympathetic sounding board for management’s ideas and will provide a variety of views and perspectives so that board meetings will be a constructive experience for the CEO and those executives who attend. Particularly in the early stages of preparing the annual plan, but at whatever other times it is thought appropriate, management should be able to bring proposals and options to the board for discussion, and should be able to count on receiving wise counsel, and objective and experienced advice. All of this can be of great assistance in the running of the company. Similarly, the feedback provided by an experienced and well-informed board on operational developments, and on management’s achievements and difficulties, can be of considerable value. 6. Coaching and training Few humans are perfect or equally strong in all respects; few CEOs do not have areas of relative weakness, and a good board can contribute much by identifying aspects of performance that can be strengthened by training or the provision of relevant experience. Perhaps even more importantly, a strong and understanding chairperson can help a CEO to improve his/her performance by judicious confidential coaching. Additional specialist advice from directors with special experience or expertise can also be of value. 7. Allowing management to get on with the job The board will make a further important contribution to good management if it concentrates on doing those things it has reserved for itself and refrains from meddling in matters that have been

delegated to management. Intermittent interference in operational detail reduces management’s confidence and effectiveness because no one performs well when they are in danger of being secondguessed on a random basis. Not only that, it also reduces the ability of the board to hold management accountable for results. If a board disagrees with an operational decision that the CEO has made, or is about to make, it can and should discuss the matter with the CEO and attempt to persuade him/her to its way of thinking. If necessary, the board can issue a firm warning. However, if the matter is one that has been delegated to management, it is important that the CEO should make the final decision. If the board overrules management in a delegated area and unfortunate consequences later occur, the board’s decision will be blamed. What is more, it will not be possible for the board to hold the CEO accountable on that matter and the accountability of management for the results of the company will have been undermined. If a board does all these things consistently, it will make a major contribution to the good management of the company.

¶42-020 Introduction — Directors’ & officers’ duties, responsibilities and obligations Obligations and duties are imposed on directors and company officers from a number of sources, including the common law, equity, statute, the company’s constitution, and contract (for eg employment contracts). In equity, directors owe fiduciary duties to their company. Under both common law and equity (general law), directors owe a duty to exercise care and diligence in the performance of their functions. These duties are supplemented by statute, principally Pt 2D.1 of the Corporations Act 2001. Both types of duties are owed to the company. However, the general law duties imposed on directors are not strictly identical to the duties imposed by the Corporations Act, although they will usually, in practice, be not merely analogous but practically indistinguishable. Most acts done by a director in relation to their company can be

characterised as involving the exercise of the powers of a director or the discharge of the duties of a director. The capacity in which a director acts is usually obvious on the face of the conduct. But this is not always the case, eg the voting of proxy votes by a director who occupies the chair at the company’s AGM does not necessarily amount to acting in the person’s capacity as director: Whitlam v ASIC (2003) 21 ACLC 1,259 (see ¶64-150). The office of director is a personal responsibility and can be discharged only by the person who holds that office. If there is an exception, it must be found in the constitution of the company and in some authorisation to act by an alternate or other substitute or delegate. The office of director is not a property right capable of being exercised by an attorney or other substitute or delegate of the person holding office. A power of attorney is not available for the performance of a duty of a director’s office which is his or her own personal responsibility as a director: Mancini v Mancini (1999) 17 ACLC 1,570; Saad v Doumeny Holdings Pty Limited [2005] NSWSC 893, Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56, Cheerine Group (International) Pty Ltd v Yeung [2006] NSWSC 1047. The duties of a director are not concerned with a general obligation to conduct the affairs of the company in accordance with the general law or the Corporations Act: ASIC v Warrenmang Ltd (2007) 25 ACLC 1,589. What are the fiduciary and statutory duties owed? Directors are in a fiduciary relationship with their company and owe fiduciary duties to it: Aberdeen Railway Co v Blaikie Bros (1854) 1 Marcq 461; [1843–60] All ER 249. This means that directors cannot use the power conferred upon them to obtain some private advantage: Mills v Mills (1938) 60 CLR 150. As fiduciaries, directors will also be liable to account to the company for profits earned through their special knowledge as directors. This is the case even where the company is unable to take advantage of the opportunity in question: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134. In England, courts have resisted the idea that there is a special

standard of care for fiduciaries, to which a special equitable measure is attached. In Australia, after acknowledging the coexistence of contractual and fiduciary rights in Hospital Products Ltd v US Surgical Corporation (1984) 156 CLR 41, the High Court decided to confine the fiduciary component of the overall relationship to a number of specific duties: Breen v Williams (1986) CLR 71. The fiduciary duties of directors include: • The duty to act in good faith. • The duty to exercise powers for a proper purpose. • The duty to avoid conflicts of interest. • The duty to retain discretions. Obligations to act in the interests of another, or to act prudently, are not fiduciary obligations. What the law extracts from a fiduciary relationship is loyalty, often of an uncompromising kind, but no more than that. A fiduciary is obliged not to obtain any unauthorised benefit from the relationship and not be in a position of conflict (the traditional “proscriptive” fiduciary duties), but the law does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed: Hospital Products. Fiduciary obligations often arise in cases where one person is under an obligation to act in the interests of another, but that does not mean that the obligation to act in the interests of another is a fiduciary obligation: Aequitas v AEFC (2001) 19 ACLC 1,006. The fiduciary duties owed by a director to the company are similar to the duties owed by a trustee to the beneficiaries of the trust. However, there are important differences between directors and trustees. One fundamental difference is that directors’ obligations arise in the commercial context of “responsible risk taking”. Whilst trustees are required to exercise restraint and conservatism, directors are supposed to “display entrepreneurial flair and accept commercial risks”: Daniels v Anderson (1995) 13 ACLC 614 at 657. As a result, directors are subject to only some of the duties and obligations to

which they would be subject if they were trustees: see Mulkana Corporation NL (in liq) v Bank of New South Wales (1983) 1 ACLC 1,143. For a comprehensive modern exposition of the law of fiduciary relationships see the decision of the West Australian Court of Appeal in Streeter v Western Areas Exploration Pty Ltd [No 2] (2011) 29 ACLC ¶11-012. See also EC Dawson Investments Pty Ltd v Crystal Finance Pty Ltd (No 3) [2013] WASC 183. These fiduciary duties are supplemented by provisions in the Corporations Act, in particular by s 181 (which requires directors and other officers to exercise their duties in good faith and for a proper purpose) and s 182 and 183 (which requires directors not to misuse their position or company information). In order to further guard against officers obtaining benefits at the expense of the company, the Act contains provisions regulating disclosure and voting by “interested” directors (Pt 2D.1 Div 2), termination payments (Pt 2D.2 Div 2) and related party transactions (Ch 2E). For an extensive discussion of the parallels between the statutory and general law duties of directors see In the matter of Auzhair Supplies Pty Ltd (in liq) (2013) 31 ACLC ¶13-001 (appeal allowed in Gerace v Auzhair Supplies Pty Ltd (2014) 32 ACLC ¶14-031, but without disturbing the analysis at first instance of this topic). The rule in Barnes v Addy (1874) LR 9 Ch App 244, holds that third parties who knowingly participate in the default of a fiduciary may themselves be liable in equity to the principal. For discussion of this rule, as explained by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 and by the Court of Appeal of New South Wales in Hasler v Singtel Optus Pty Ltd; Curtis v Singtel Optus Pty Ltd; Singtel Optus Pty Ltd v Almad Pty Ltd (2014) 32 ACLC ¶14-066, and the application of the rule to directors and officers of a company, see ¶79-800. For the implications of the close connection between statutory and general law duties for the limitation period in s 1317K, see ¶311-128. To whom do the statutory duties apply?

An important difference between the general law duties and the statutory duties is that the statutory duties also apply to other officers (and in certain circumstances, employees), whereas the general law duties apply only to directors (although officers and employees may be under analogous duties). The s 9 definition of an officer of a corporation includes: (a) a director or secretary (b) a “de facto” officer — namely, a person who participates in making decisions that affect a substantial part of the corporation’s business or who has significant influence within the corporation, but who may not have been formally appointed to a management position (c) a receiver, receiver manager, administrator, liquidator or trustee or other person administering a compromise or arrangement made between the corporation and someone else (see ¶23-670). In the commentary that follows, the emphasis has been placed on the duties of directors. This is because cases dealing with the statutory duties have tended to concern directors and because the general law aspects of directors’ duties and those duties imposed by the Corporations Act form a continuum, rather than two distinct categories. To whom do directors owe their duties? Generally, directors’ duties are owed to the company and not to individual shareholders or classes of shareholders. There are very limited exceptions to this rule. Directors do not owe duties to creditors, though there may be certain circumstances in which directors must consider the interests of creditors in exercising their powers. However, directors are under a statutory duty to prevent insolvent trading. As to directors and officers generally, it has been said that the statutory duty set out in s 232(4) of the Corporations Law (see now s 180(1)) is a duty owed to the corporation, although it may be that

further development of the law will identify a duty owed to creditors or shareholders or employees. The statutory duty imposed by this section is based on the common law duty. Other statutory duties are based on the fiduciary relationship of directors to the corporation: Vines v ASIC (2007) 25 ACLC 448, per Spigelman CJ and Ipp JA. In the same case, Santow JA would have taken the matter further. His Honour said that the statutory duty, while owed to the company, must be accommodated to the overarching-related duty to act honestly and in the interests of the company as a whole, meaning for the benefit of shareholders present and future. In so doing, it provides a perspective to judge the conduct in question in the context of a hostile takeover where shareholders seek to be informed as to the choice they make whether or not to accept that takeover offer and do not want to be forced to sell on the cheap. There are cases in which it will be a contravention of their duties, owed to the company, for directors to authorise or permit the company to commit contraventions of provisions of the Corporations Act. Relevant jeopardy to the interests of the company may be found in the actual or potential exposure of the company to civil penalties or other liability under the Act, and it may no doubt be a breach of a relevant duty for a director to embark on or authorise a course which attracts the risk of that exposure, at least if the risk is clear and the countervailing potential benefits insignificant. But it is a mistake to think that s 180, 181 and 182 are concerned with any general obligation owed by directors at large to conduct the affairs of the company in accordance with the law generally or the Corporations Act in particular; they are not. They are concerned with duties owed to the company: ASIC v Maxwell (2006) 24 ACLC 1,308. In ASIC v Elm Financial Services Pty Ltd (2005) 55 ACSR 411, Barrett J, in acceding to an application to make orders agreed to by the parties in the context of contraventions not dissimilar to those involved here, accepted that by failing to prevent contraventions by the relevant company, two directors failed in the duties owed by them as officers. And in subsequent proceedings in the same matter, ASIC v Elm Financial Services Pty Ltd [2005] NSWSC 1065, his Honour accepted that failures by other directors to take reasonable steps to prevent

contraventions by the relevant company were contraventions of s 180(1) and 181(1). In Maxwell, however, Brereton J pointed out that this reasoning should not be taken so far as to suggest that the relevant duty of the directors is to persons invited to invest money by way of loan, instead of to the company. If a contravention of s 180(1) is to be established, it must be founded on jeopardy to the interests of the corporation, and not to protection of the interests of potential investors (though the interests of investors may be relevant to the interests of the corporation, as potential creditors). This general rule also causes difficulties in the context of corporate groups and nominee directors. Director’s duty of care and diligence Section 180(1) requires directors and officers to exercise their powers and discharge their duties with care and diligence. Whilst an objective standard of care is required, s 180(1) allows certain subjective elements to be taken into consideration, namely (a) the corporation’s circumstances; and (b) the director or officer’s position within the corporation and their responsibilities. Directors also owe their company a duty of care under the law of negligence: see AWA Ltd v Daniels (1992) 10 ACLC 933 (as confirmed on appeal; Daniels & Ors v Anderson & Ors (1995) 13 ACLC 614). Where the director or officer is employed by the company under a contract of service, he or she will also have duties to the company under that contract. This includes a duty of care in the performance of the contract: Lister v Romford Ice and Cold Storage Co [1957] AC 555. The duty of care and diligence at general law and under the statute operates against a “statutory business judgment” rule. This rule provides that a director who makes a business judgment is taken to meet these duties of care and diligence if they: (a) make the judgment in good faith for a proper purpose (b) do not have a material personal interest in the subject matter of

the judgment (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate, and (d) rationally believe that the judgment is in the best interests of the corporation. Who enforces the duties? Fiduciary duties owed by a director to the company are enforced by the company: Foss v Harbottle (1843) 2 Hare 461 (the “proper plaintiff” rule). The statutory duties are nominated as civil penalty provisions under Pt 9.4B of the Act and, accordingly, are enforced by ASIC and, where breach of those statutory duties give rise to criminal consequences, by the Commonwealth Director of Public Prosecutions (DPP). However, there are two potential gateways through which persons other than ASIC can enforce the statutory duties imposed on directors under Pt 2D.1: s 1324 and 1317H. Section 1324 empowers the Court to grant both an injunction (and an order for damages) where there has been or will be a contravention of the Act. This includes a breach of a director’s statutory duties, though the matter is not free from doubt: cf Airpeak Pty Ltd & Ors v Jetstream Aircraft Ltd & Anor (1997) 15 ACLC 715 and Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 14 ACLC 519 (see ¶313-000). Section 1317H is another potential gateway through which the statutory duties may be enforced. Compensation orders under s 1317H may be sought by the wronged company (s 1317J(2)) without the need for ASIC to have sought and obtained a civil penalty declaration. Liability and relief from liability Breach of fiduciary duty will give rise to a number of possible remedies including: (a) a constructive trust over or order for return of any property or

benefit derived in breach of fiduciary duty, to the extent that the property or benefit remains extant or can be traced in the fiduciary’s hands (b) an in personam (personal) liability to account for profits made that are attributable to the breach of fiduciary duty (c) liability on the part of the fiduciary to pay equitable compensation to a beneficiary who has suffered loss: EC Dawson Investments Pty Ltd v Crystal Finance Pty Ltd (No 3) (above). The consequences of breaching duties imposed by the Corporations Act include liability to pay compensation to the company, liability to pay a fine, disqualification from holding office or being engaged in a management capacity, and where the breach is dishonest, a criminal conviction. The court has the power to grant officers relief from civil liability under s 1317S and 1318. Shareholders can ratify breaches of fiduciary duty, but doubt remains as to whether shareholders can ratify breaches of statutory duty: cf Pascoe Ltd (in liq) v Lucas (1998) 16 ACLC 1,247, “Developments in Relation to Corporate Groups and the Responsibilities of Directors — Some Insights and New Directions”, R Baxt and T Lane, (1998) 16 C&SLJ 628, and “Corporate Groups”, Final Report (May 2000), Companies & Securities Advisory Committee (CASAC). The Court in Pascoe expressed the view that because the duties imposed by the statute reflected the duties at common law and equity, it would be inconsistent to enable shareholders to ratify breaches of fiduciary duties but not breaches of statutory duties (at 1,278). CASAC has said that “[a] possible contrary view is that shareholders do not have the power to override statutory duties, though the court could take this into account in determining whether to relieve a director from liability pursuant to its discretionary powers in sec 1318”: CASAC Report, para 2.3, fn 140. The availability of directors’ and officers’ (D&O) liability insurance is another means by which the liability of directors may be minimised. The Act restricts the extent to which the company can pay D&O insurance premiums in relation to certain types of liability (see ¶43-

120). Extraterritorial operation of statutory and fiduciary duties Sections 180, 181, 182 and 183 of the Corporations Act have extraterritorial operation by virtue of s 5 of the Act, which means that an Australian court would have jurisdiction in respect of acts or omissions in breach of those statutory duties which occur outside Australia. Further, the court will have jurisdiction in respect of claims founded on breach of ordinary fiduciary duties and, in appropriate circumstances, breach of an employment contract, by reason of the accrued jurisdiction which would attach to the primary jurisdiction which arises under the Act: PCH Offshore Pty Ltd v Dunn (2009) 27 ACLC 752. In that case, the alleged breaches were said to have been committed by a manager of an Australian company’s branch offices in two foreign countries. The Federal Court found that it had jurisdiction in the matter, and granted leave to the company to serve its application and statement of claim on the former manager, who was by then resident in the United Kingdom. Guidance for directors Most directors of corporations are not lawyers. Yet the duties and responsibilities imposed on directors by the law are complex, wideranging and onerous. Given that this is so, where can a director find guidance to ensure that he or she can learn and clearly understand his or her roles and responsibilities? Guidance is, in fact, available from a wide range of sources. A report by the Corporations and Markets Advisory Committee (CAMAC) entitled Guidance for directors (April 2010) lists the following sources of guidance in Australia (para 3.1.2): • legislative direction: in a sense, the relevant legal framework, including the Corporations Act, and other legislation, is a source of guidance to directors and others engaged in corporate activity • decisions by the courts: these illuminate the application of the law in particular cases • regulators: ASIC and other regulators by their activities and

policies and other statements can inform understanding of aspects of regulation for which they have responsibility • ASX: the ASX Corporate Governance Council has issued Corporate Governance Principles and Recommendations for listed entities • inquiries and other reports: these focus on particular corporate governance episodes or issues • private sector initiatives and services: these include guidance from companies themselves, professional and industry bodies, peer groups and mentoring programs, as well as from legal, accounting and corporate advisory firms and tertiary education institutions. The report also surveys overseas sources of guidance for directors. CAMAC does not see a need for the development of a new code of conduct or best practice guidance by a regulator. The committee considers, however, that it would be timely for the ASX Corporate Governance Council to review its principles and recommendations in the light of international developments. The report draws attention to emerging themes in corporate governance reviews carried out in the United Kingdom and by the OECD and other international bodies, having regard to the global financial crisis and other developments. For more information, please see: • Roadmap — Directors’ & officers’ duties, responsibilities and obligations (¶42-040) • Fiduciary duties and their statutory equivalents (¶42-060) • Duties of nominee director (¶42-100) • Duties of directors of trustee companies (¶42-110) • Director’s duty to act in good faith and for proper purpose: s 181 (¶42-200)

• Director’s duty to act in good faith and in the interests of the company (¶42-220) • Directors’ duty to exercise powers for a proper purpose (¶42-240) • Directors’ duties to creditors (¶42-280) • Directors’ duties within corporate groups (¶42-290) • Duty to retain discretion (¶42-350).

¶42-240 Directors’ duty to exercise powers for a proper purpose A director’s previous duty to act honestly has now been replaced with an obligation to act in good faith in the best interests of the company and for a proper purpose: s 181(1). The duty of directors and other officers to exercise powers for a proper purpose is a duty to exercise the powers for the purpose for which they were conferred. Directors must exercise the powers conferred by the company’s constitution or the Corporations Act 2001 for a proper purpose. The breadth of those powers will not change their nature or the prohibition against a director exercising them for a capricious or ulterior purpose (Hannes & Ors v MJH Pty Ltd (1992) 10 ACLC 400) or for manipulating voting power (Kokotovich Constructions v Wallington (1995) 13 ACLC 1,113). Under s 181(1), the proper purpose requirement is coupled with a requirement to exercise powers in good faith in the best interests of the corporation. The obligation to act in good faith requires directors to: • exercise their powers in the interests of the company and not misuse or abuse their power • avoid conflicts between their personal interests and those of the

company • not take advantage of their position to make secret profits, and • not misappropriate the company’s assets for themselves: Chew v R (1991) 5 ACSR 473. Whether a director has exercised his/her powers for a proper purpose is partly a subjective test, since it involves an examination of the directors’ motives, and partly objective, since it involves an examination by the court of the nature of the power in question and the limits for which it may be exercised: Advance Bank Australia Ltd & Ors v FAI Insurances Ltd & Anor (1987) 5 ACLC 725. While the failure to act in good faith in the interests of the company is merely an example of failure to act for proper purposes (see, for example, Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199 at 217), the distinction between the two is important. It appears that a breach of the duty to act in good faith in the interests of the company is characterised as being of a fraudulent character (using the term in a broad sense), which cannot be ratified in general meeting and which can be the subject of a statutory derivative action; whereas a failure to act for a proper purpose involving no dishonesty may be ratified. Proper purpose considerations could potentially arise in respect of any of the powers conferred and duties imposed on company directors. However, the meaning of proper purposes often arises in the context of share issues or placements, takeovers and board elections, all of which may overlap depending on the circumstances. Self-interest, the directors acting so as to support their own interests ahead of those of the company, is the most common instance vitiating proper purpose. Power to issue shares Proper purpose considerations often arise in the context of the powers of directors to issue shares: Howard Smith v Ampol (1974) CLC ¶40101; Teck Corporation Ltd v Millar (1973) 33 D.L.R. 3rd. 288;

Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Company No Liability (1968–1969) 121 CLR 483; Punt v Symons (1903) 2 Ch. 506; Ngurli Limited v McCann (1953) 90 CLR 425; Hannes & Ors v MJH Pty Ltd & Ors (1992) 10 ACLC 400 (¶42240.40). The power to issue shares, being a fiduciary power, must be exercised for the purpose or purposes for which it is conferred: Howard Smith v Ampol (1974) CLC ¶40-101. There, the Privy Council rejected the argument that the only valid purpose of the power to issue shares was for the purpose of raising capital. Their Lordships said at p 27,715: “[It] is … too narrow an approach to say that the only valid purpose for which shares may be issued is to raise capital for the Company. The discretion is not in terms limited in this way: the law should not impose such a limitation on directors’ powers. To define in advance exact limits beyond which directors must not pass is, in their Lordships’ view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated.” The High Court in Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Company No Liability (1968–1969) 121 CLR 483 expressed the principle in this way at p 493: “The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fairly and properly issue shares for other reasons, so long as those reasons relate to a purpose of benefiting the company as a whole, as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors … An inquiry as to whether additional capital was presently required is often most relevant to the ultimate question upon which the validity or invalidity of the issue depends; but that ultimate question must always be whether in truth the issue was made honestly in the interests of the company.”

The placement of shares that has the effect of diluting the holdings of a majority shareholder may or may not constitute an improper purpose. Where the purpose of the directors’ issue of shares is to obtain the best agreement for the company while still in control, that purpose is not an improper one: Teck Corporation Ltd v Millar (1973) 33 D.L.R. 3rd. 288. Here, Teck Corporation had acquired a majority shareholding in Afton Mines Ltd. Teck wished to replace Afton’s board with its own nominees with the intention of causing Afton to enter into an exploitation agreement concerning valuable mineral rights with Teck. In order to prevent this, the incumbent directors of Afton entered into an exploitation agreement with another company, which provided for the placement of a large number of shares with that other company, having the effect of displacing Teck’s majority shareholding. Berger J held that, although the directors’ purpose was to defeat Teck, it was only in the sense of foreclosing on Teck’s opportunity of obtaining for itself the benefit of the deal. Consequently, there was no improper purpose. However, where the issue of shares does not involve any considerations of management within the proper sphere of the directors eg, where shares are issued solely for the purpose of manipulating voting power, then the exercise of the power will be improper: Howard Smith v Ampol (1974) CLC ¶40-101; Mills v Mills (1937–1938) 60 CLR 150. The Privy Council in Howard Smith said at p 27,717: “Just as it is established that directors, within their management powers, may take decisions against the wishes of the majority of shareholders and indeed that the majority of shareholders cannot control them in the exercise of these powers while they remain in office (Automatic Self Cleansing Filter Syndicate Co Ltd v Cunninghame (1906) 2 Ch. 34), so it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist.” An issue of shares by the directors (exercising the powers of the

company) to one of them, as required by a deed of company arrangement, will not be improper even where the effect of the deed is to wrest control from an existing majority shareholder and to perpetuate the director’s control of the company. At trial, Austin J had found that the issue of shares had occurred for an improper purpose. On appeal, the Court of Appeal recognised the company’s desperate need for additional funds. The issue of additional shares to a director, the only person willing to inject additional funds into the company, although it would have vested control of the company in the director, was not done for an improper purpose: Kirwan v Cresvale Far East Ltd (in liq) (2003) 21 ACLC 371. Elections The election of company directors is one area in which the powers of company directors and their proper exercise are unclear. In Advance Bank Australia Ltd & Ors v FAI Insurances Ltd & Anor (1987) 5 ACLC 725, there was detailed consideration of the propriety of directors’ actions in the course of an election. From that case, the following points emerge (paraphrased from the judgment of Kirby P): 1. There is no absolute prohibition on the use of company funds by the directors in a board election. However, the directors’ exercise of those powers must be bona fide in the interests of the company as a whole and for corporate purposes. 2. In determining the corporate purpose for which the powers of the directors have been exercised, the court will look at the real purpose behind the directors’ actions. This purpose will not be determined solely by the directors’ own statements about their subjective intentions. 3. Even where it is determined that the directors have acted bona fide and for the purposes of the company, their conduct may still exceed their authority if, in the performance of those purposes, they exceed or abuse their powers. In the case of elections and solicitation of proxies, there may be such an excess or abuse of powers where the directors have: • expended an unreasonable amount of company money;

• expended company money on material relevant only to a question of personality and not relevant to corporate policy; or • otherwise acted in a manner which was excessive or unfair in the circumstances. What is not bona fide and in the interests of the company is illustrated by this statement by Kirby P (at 744): “[T]o the extent that directors, in a situation of potential conflict of personal interest and corporate duty, stray into exaggeration, halftruth, emotional language and misleading statements, the risk they run is that their activity will later be characterised by a court as not bona fide for a purpose of the company but rather for the primary purpose of their own re-election. To the extent that their actions are none the less clarified as being for the purposes of the company, such conduct may still convince a court … that the directors have exceeded their authority and abused their powers.” In Advance Bank Australia Ltd v FAI Insurances Ltd, it was held that the primary purpose of the directors had been to secure their own reelection. Therefore, even though they had acted honestly, they had misused their authority to conduct elections and were ordered to reimburse the money spent on the election. Takeovers The question whether directors can take action to defeat a takeover bid was addressed by the NSW Court of Appeal in Darvall v North Sydney Brick & Tile Co Ltd & Ors (No 2) (1989) 7 ACLC 659. When a shareholder made a takeover offer for the company, the directors caused the company to enter into a joint venture with a third party to develop a valuable piece of real estate owned by the company; this was part of an attempt to secure an alternative takeover offer at a higher price — although development of the land had been under consideration for some time. The shareholder/bidder alleged that the joint venture had been entered into for purposes other than the legitimate interests of the company (in other words, to defeat the takeover bid). The majority (Mahoney and Clarke JJA) dismissed this claim.

Mahoney JA addressed the question of whether directors can take action to defeat a takeover bid. His Honour held that, in certain circumstances, they could: “It is not correct that … a company has no legitimate interest in who are its shareholders or the price paid for its shares. In some circumstances, it will be proper for a company to concern itself with those who take its shares on transfer. Thus, a company may lose a government licence or a customer may refuse to do business with a company if a particular person takes a transfer of shares. It may then be ‘in the interest of the company as a whole’ for action to be taken. What a company may do in the circumstances will depend upon the circumstances …. … it does not, of course, follow … that a company’s legitimate concerns extend to its shareholding in all respects. Thus, a company may not, and its directors may not cause it to, take action to ensure that its shareholders comprise those who will retain the directors in control of it: … … I see no objection in principle to a company taking steps to achieve an alternative offer of this kind.” (at 704) A board’s decision to reject a takeover offer was also unsuccessfully challenged in Quancorp Pty Ltd v MacDonald (1997) 15 ACLC 1,415. In Quancorp, it was alleged that the main purpose of the directors of Cudgen Pty Ltd in rejecting the bid was to secure a tax benefit for another company, RGC. The court found that on the evidence, despite the fact that Cudgen and RGC had several directors in common, the directors of Cudgen had discharged their duties. Sometimes, it is the decision of directors to make a takeover offer that is allegedly motivated by improper purposes. For an example of a case where the directors’ decision to make a takeover offer was challenged by a minority shareholder on the basis that the bid was made so as to destroy the shareholder’s position or so as to entrench the directors’ control, see Emlen Pty Ltd v St Barbara Mines Ltd (1997) 15 ACLC 1,107 (discussed below).

Mixed purposes Where there are mixed purposes of the directors’ actions, the courts have adopted a “but for” test in order to test for an improper purpose: Whitehouse & Anor v Carlton Hotel Pty Ltd (1987) 5 ACLC 421 (High Court). Under this test, an action by directors will be impugned if there was present in that action an improper purpose which, although just one of a number of actuating purposes (both permissible and impermissible), was causative in the sense that, but for the presence of the improper purpose, the action would not have been taken. The High Court expressed the principle as follows at pp 426–427: “In such cases of competing purposes, practical considerations have prevented the law from treating the mere existence of the impermissible purpose as sufficient to render voidable the exercise of the fiduciary power to allot shares … As a matter of logic and principle the preferable view would seem to be that regardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the allotment will be invalidated if the impermissible purpose was causative in the sense that, but for its presence, ‘the power would not have been exercised’” (CCH emphasis). Although the High Court’s views in Whitehouse were obiter, the test has been followed on a number of occasions: see Darvall v North Sydney Brick & Tile Co Ltd & Ors (No 2) (1989) 7 ACLC 659; Residues Treatment and Trading Co Ltd & Anor v Southern Resources Ltd & Ors (No 2) (1989) 7 ACLC 1,130; Emlen Pty Ltd v St Barbara Mines Ltd (1997) 15 ACLC 1,107; Woonda Nominees Pty Ltd & Ors v Chng & Ors (2000) 18 ACLC 627. The nature of the principle has been expressed in a variety of ways. In Darvall, Mahoney and Clarke JJA held that, although the takeover had prompted the joint venture, it had merely hastened the inevitable: “There is a distinction in principle between a transaction for the purpose of defeating a take-over offer and one prompted by the take-over offer but, in the end, entered into because the directors

believe it to be in the interests of the company as a whole.” (per Mahoney JA at 708) “No doubt the directors would have regarded the failure of the take-over offer as very satisfactory. But that fact, whether regarded in isolation or in conjunction with the fact that the takeover offer provoked the directors into acting much more quickly than they otherwise would have does not seem to me to lead to the determination that they acted for an improper purpose.” (per Clarke JA at 716) In Woonda Nominees, after requisitions had been made to convene a meeting to remove the majority directors from office, the directors authorised a share placement ostensibly for the purpose of raising capital for mineral exploration. If the share placement were to have taken effect, if would have significantly diluted the voting power of the requisitioning shareholders. Owen J of the WA Supreme Court said at p 631: “… I do wish to record the principle that if retention of control in the hands of the directors exercising the power is merely a side effect of the issue, which the directors may find congenial but which did not cause them to act, the placement will not be improper.” In Emlen, the directors of St Barbara had made a scrip for scrip takeover offer for T company. The terms of the offer were 32 St Barbara shares for every 10 shares held by members in T company. A shareholder (who held a significant parcel of shares in St Barbara) sought an injunction to prevent the bid proceeding on the basis that the directors had acted for an improper purpose in making the takeover offer. It was alleged that the decision to make the offer was motivated by the existing directors’ desire to diminish the minority shareholder’s position in the company or to retain the existing board’s control of St Barbara. The court concluded that on its face, the takeover appeared to have commercial advantages for St Barbara so that any improper purpose would exist alongside a legitimate commercial one.

There is some difference of judicial opinion as to whether a contravention of s 181 requires the officer to engage deliberately in conduct, knowing that it is not in the interests of the company, or whether the section may be contravened even when the officer has acted in what he/she believes are the company’s best interests. For example, contrast the decision in Williams v ASIC (2003) 21 ACLC 1,810, where it was said that the assessment as to whether an officer has complied with s 181(1) is objective, with ASIC v Maxwell (2006) 24 ACLC 1308, where it was held that the section is only contravened where the officer deliberately engages in conduct knowing that it is not in the interests of the company. Even if the latter view proves to be the correct approach, consciousness in this sense means knowledge of the facts that make the conduct not in the best interests of the company; it is not necessary to establish that the director knew the conduct constituted a breach of the law or was improper: ASIC v Macdonald (No 11) (2009) 27 ACLC 522 (the James Hardie case). Even if the officer’s conduct is to be measured against objective standards, it is likely that the courts will allow limited subjective factors to be taken into account; namely, the officer’s position and responsibilities, and the company’s circumstances. As to the duty to act for a proper purpose, the Court of Appeal of Western Australia set out the following principles in Permanent Building Society v Wheeler (1994) 12 ACLC 674: (a) Fiduciary powers and duties of directors may be exercised only for the purposes for which they were conferred and not for any collateral or improper purpose. (b) To establish a contravention, it must be shown that the substantial purpose of the directors was improper or collateral to their duties as directors of the company. The issue is not whether a management decision was good or bad; it is whether the directors acted in breach of their fiduciary duties. (c) Honest or altruistic behaviour by directors will not prevent a finding of improper conduct on their part if that conduct was carried out for an improper or collateral purpose. Whether acts

were performed in good faith and in the interest of the company is to be objectively determined, although statements by directors about their subjective intentions or beliefs will be relevant to that inquiry. (d) The court must determine whether, but for the improper or collateral purpose, the directors would have performed the act impugned. .40 Improper purposes. Under the constitution of a family company the governing director (H) was granted the whole management, government and control of the company. Furthermore H’s governor’s shares gave him control over any necessary majority of votes at shareholders’ meetings. Other family members held the remainder of the shares. H and the other director of the company passed resolutions to allot ordinary shares in the company to H at par value, enter into a service agreement between H and the company, and establish a superannuation fund of which H would be the only member. The other shareholders were not given notice of the resolutions nor was approval given in general meeting. The other shareholders challenged the allotment of shares and the service agreement, alleging that H had breached his fiduciary duty to the company. H argued that the broad powers granted to him by the articles freed him from legal constraints on the exercise of directors’ powers. H also contended that the allotment and service agreement were justified by his contribution to the prosperity of the company, and were an inducement for him to remain at the company and increase its capital value. The Court of Appeal rejected H’s claims and found him to be in breach of his fiduciary duty. The Court of Appeal agreed that H’s substantial object was self interest. H had put his desire to derive additional benefits before his duty to act in the best interests of the company. There was no legitimate rationale for H’s actions, even if they were intra vires. Furthermore, the wide powers conferred on H did not change the nature of those powers or the prohibition against

exercising those powers for an ulterior purpose. Hannes & Ors v MJH Pty Ltd & Ors (1992) 10 ACLC 400. .45 Resolution for proper purpose. The directors of Hancock Prospecting Pty Ltd resolved to make a call on shares. It was alleged that this call was made for an improper purpose and that the directors knew that the shareholders on whom the call was made, were unable to pay. The court held that the “purpose” of the resolution was the important consideration — reprehensible motives were not enough to invalidate a resolution which had a proper purpose. The resolution in question was to realise assets in the form of capital from shareholders and this was a proper purpose. Hancock Prospecting Pty Ltd v Estate of Hancock (1999) 17 ACLC 681.

¶42-530 Director’s duty to disclose material personal interests: s 191 The practice of disclosing any material personal interests that directors may have is very important. If directors have a material personal interest in a matter that relates to the affairs of the company, s 191 generally requires directors to give the other directors notice of that interest. Section 191(1) sets out a code of conduct for directors who have a “material personal interest in a matter that relates to the affairs of the company”. It must be remembered that directors are subject to affirmative obligations, and a director’s duties may not be satisfied merely by disclosing a material personal interest and abstaining from voting at a board meeting. There may, in given circumstances, be a positive duty on the director’s part to take positive steps to protect the company’s interests, especially where the director is a director of more than one company, and those companies may be in competition with one another. The circumstances may require the director to take some positive action to identify clearly the perceived conflict and to suggest a course of action to limit any possible damage: Duncan v Independent Commission Against Corruption [2016] NSWCA 143.

What are the possible exceptions to the rule? Directors must disclose such interests to the other directors, unless excused from doing so by s 191(2). Section 191(2) contains a number of exemptions to the requirement to disclose a material personal interest. These include interests: • that arise mainly because the director is the member of the company and that interest is common to other members of the company • relating to the director’s remuneration as a director of the company • relating to a contract that is to be approved by shareholders, when the contract does not take effect until that approval is obtained. There are other exempt interests listed in s 191(2). Logically, s 191(1) does not apply to single director proprietary companies: s 191(5). What amounts to material personal interests? The interests which must be disclosed are material personal interests. The concept of a material interest has not been defined with complete clarity. A leading commentator has suggested that the word “material” requires: “an assessment of the relationship between the advantage which the director personally expects, and the matter being considered. If the director’s interests will be substantially affected by the outcome of the board’s deliberation, it clearly must be disclosed. The more difficult question is whether disclosure must be made where the impact on the director’s position is clear but relatively slight, or where the outcome of the deliberation might or might not affect a director’s position depending upon other circumstances.” (HAJ Ford, RP Austin and IM Ramsay, Ford’s Principles of Corporations Law, [9.130]) The Corporations Act uses the expression “material personal interest” but provides no definition of that term. Likewise, there is relatively little

guidance in case law. One court has said that the threshold for determining whether an interest is a material personal interest is “quite low”, while another has said that an interest would be material in this context if it has the capacity to influence the vote of the particular director upon the decision to be made, bearing in mind that the conflict of interest must be of a real or substantial kind. For example, a director would clearly have a material personal interest in respect of a meeting called to consider a resolution to remove him/her as director. It has been held that the threshold for determining whether an interest is a material personal interest is “quite low”: State of South Australia v Marcus Clark (1996) 14 ACLC 1,019 (per Perry J in relation to a similar provision in banking legislation). On the other hand, in McGellin v Mount King Mining NL [1998] WASC 96, the Supreme Court of Western Australia stated that the nature of the interest “should have the capacity to influence the vote of the particular director upon the decision to be made, bearing in mind that the conflict of interest must be of a real or substantial kind”. This formulation of principle was cited with approval by Barrett J in Drillsearch Energy Ltd v McKerlie [2009] NSWSC 517. In that case, a meeting had been called to consider motions for the removal of three of five directors. Barrett J was in no doubt that the three directors each had a material personal interest, for purposes of s 195(1), in the question of the creation of a forum for debate and decision on the question of his removal, or the avoidance of the creation of such a forum. That interest, of its nature, was amply capable of shaping each relevant director’s conduct. The word “material” appears to convey the idea that the interest must be of some substance or value, rather than merely a slight interest; that is, an interest of small value can be taken without further inquiry, and does not cross the materiality threshold: Grand Enterprises Pty Ltd v Aurium Resources Ltd (2009) 27 ACLC 733. The concept of a material personal interest also rather suggests that, on the face of it, the section does not apply to a conflict of duty and duty, where the director has a conflict of duties but the interest at stake is an interest of someone else, such as a beneficiary of a trust of which the director is trustee, or a company of which the director is also a director. While equity may assist to prevent this conflict, it may not

be because a “personal” interest is being preferred. However, in both of those situations additional facts no doubt can lead to the conclusion that the director has a personal interest, eg where the trust operates to support the director’s family and therefore reduces his or her obligation to provide support from other funds; or where a director’s position as a director of another company involves substantial executive remuneration for performance-related remuneration: per Barker J in Grand Enterprises Pty Ltd v Aurium Resources Ltd (above), referring to RP Austin, HAJ Ford and IM Ramsay, Company Directors, Principles of Law and Corporate Governance (LexisNexis Butterworths Australia, 2005). In Regulatory Guide 76, ASIC notes that an interest may not be personal if it affects a director as a member of a wide group or class, such as ordinary customers of a bank or shop, in the same manner and to the same degree that it affects the other members of the group or class (RG 76.33). Given the courts’ strict approach to conflicts of interest, directors may consider it prudent to err on the side of caution regarding disclosure. However, the disclosure of a personal interest in a contract between the company and a third party to other board members does not always mean, or ensure, that the director has not breached other responsibilities to the company. In ASIC; Re QLS Superannuation v Parker (2003) 21 ACLC 888, a director disclosed his interest in a loan agreement the company was negotiating with a third party. Yet, the director was found to have breached his duty of care and diligence, and his duty not to use his position for an improper purpose by failing to investigate the borrower’s repayment history. The following are examples of areas in which directors may have a “material personal interest”: • interests in contracts with the company • conflicts of interest • interests in shares, debentures and prescribed interests • interests in shares sought in a takeover

• remuneration and other benefits. What is the form of the notice and when must it be given? If directors have a material personal interest in a matter, they may give the other directors standing notice of it under s 192. The notice required by s 191(1) must give details of the nature and extent of the interest and the relation of the interest to the affairs of the company: s 191(3). It must be given at a directors’ meeting as soon as practicable after the director becomes aware of his or her interest and the details must be recorded in the minutes of the meeting. The fact that s 191(3) does not require the notice to be given at the next directors’ meeting allows for flexibility; for instance, where the director needs to obtain further details in order to give the notice or where the director is unable to attend the next meeting (due to illness etc). Voting A director of a public company who has a personal interest in a matter must not be present when the matter is discussed at a directors’ meeting and, of course, is not allowed to vote on the matter (s 195). There are some exceptions to this rule. Firstly, directors who do not have a material personal interest in the matter may pass a resolution allowing the “conflicted” director to participate. Secondly, ASIC may make a declaration under s 196 to allow the director to be present and to vote. Are there any exceptions to the disclosure requirement? Section 191(2) specifies when notice is not required under s 191(1). The grounds in s 191(2) relate to certain types of interest and situations where notice has already effectively been given. Section 191(2)(b) provides that a director does not need to give notice of an interest under s 191(1) if the company is a proprietary company and the other directors are aware of the nature and extent of the interest and its relation to the affairs of the company. This is in recognition of the closely held, often family, nature of many proprietary companies (Explanatory Memorandum to the Corporate Law

Economic Reform Program Bill 1998, para 6.117). A director is not required to give notice of an interest under s 191(1) if he or she has already given notice of that interest and: • any person who was not a director at the time the notice was given has been given notice, and • the nature and extent of the interest have not materially increased above that disclosed in the notice: s 191(2)(c). A director is also not required to give notice where he or she has already given standing notice of the interest under s 192 and the notice is still effective: s 191(2)(d). Section 191(2)(a) provides that directors do not need to give notice of certain types of interest, namely an interest that: (i) arises because the director is a member of the company and is held in common with the other members of the company, or (ii) arises in relation to the director’s remuneration as a director of the company, or (iii) relates to a contract the company is proposing to enter into that is subject to approval by the members and will not impose any obligation on the company if it is not approved by the members, or (iv) arises merely because the director is a guarantor or has given an indemnity or security for all or part of a loan (or proposed loan) to the company, or (v) arises merely because the director has a right of subrogation in relation to a guarantee or indemnity referred to in subparagraph (iv), or (vi) relates to a contract that insures, or would insure, the director against liabilities the director incurs as an officer of the company (but only if the contract does not make the company or a related

body corporate the insurer), or (vii) relates to any payment by the company or a related body corporate in respect of an indemnity permitted under section 199A or any contract relating to such an indemnity, or (viii) is in a contract, or proposed contract, with, or for the benefit of, or on behalf of, a related body corporate and arises merely because the director is a director of the related body corporate. In Regulatory Guide 76, ASIC notes that the exception in s 191(2)(a)(i) is probably only available where the interest is in common with all members of the company as members of the company (RG 76.35). What are the consequences of contravention of this duty? A director’s contravention of s 191 does not affect the validity of any act, transaction, agreement, instrument resolution or other thing: s 191(4). However, contravention is an offence and the director may be liable for a fine of up to 10 penalty units and/or three months imprisonment: s 1311, Sch 3. For purposes of an offence against s 191(1), whether a director has a material personal interest in a matter that relates to the affairs of the company is a “circumstance” within the meaning of the Criminal Code; it is therefore one of the “physical elements” of the offence which the prosecution must prove. Section 191(1A) provides that strict liability applies to that circumstance. This is because the question whether the director has a material personal interest is a matter peculiarly within the knowledge of the director. It therefore warrants the application of strict liability. History Former law Section 191 was introduced by the Corporate Law Economic Reform Program Act 1999 and replaced former s 231. There are two major differences between these provisions: • former s 231 only applied to proprietary companies, whereas s 191

applies to public and proprietary companies (although not proprietary companies with a single director) • former s 231 only required directors to disclose interests in contracts or offices held or possession of property that could create a conflict. Section 191 is not restricted to these types of interests and uses much broader language to describe the interests that must be disclosed.

¶197-100 Introduction — Continuous disclosure What is continuous disclosure? Continuous disclosure is provided for in Ch 6CA of the Corporations Act and, in the case of listed companies, by Chapter 3 of the ASX Listing Rules. The Corporations Act 2001 imposes strict continuous reporting obligations on disclosing entities. Disclosing entities carry continuous reporting obligations, which arise when certain material events occur in relation to the company’s operation or financial position. The information that must be disclosed is that which is likely to affect the price or value of the entity’s securities. Continuous disclosure obligations differ for listed and unlisted disclosing entities Only “disclosing entities” are subject to the continuous disclosure provisions of Ch 6CA: s 111AP. The nature and scope of these obligations depend on whether the entities are listed or unlisted disclosing entities. As a general rule, listed disclosing entities must disclose price sensitive information “immediately” the entity becomes aware of it, whereas unlisted disclosing entities must disclose the information “as soon as practicable”. Exceptions apply to the requirement to make continuous disclosure of price sensitive information. The rationale underlying these exceptions

is to prevent the disclosure of information that is insufficiently definite or otherwise confidential. What must listed disclosing entities disclose? Section 674(1) of the Corporations Act requires listed disclosing entities to notify the market operator about specified events in accordance with the provisions of the ASX Listing Rules. The continuous disclosure obligation in s 674(2) is premised on there being “provisions of the listing rules of a listing market in relation to that entity [that] require the entity to notify the market operator of information … for the purpose of the operator making that information available to participants in the market”: s 674(1). Essentially, this means that the source of the continuous disclosure obligation for listed entities to make continuous disclosure is the ASX Listing Rules; not Ch 6CA itself. The Act gives statutory backing to the provisions of the Listing Rules. For this reason, Ch 6CA, at least in its application to listed disclosing entities, ought to be viewed not as a statutory continuous disclosure regime, but rather as a regime that gives statutory backing to the continuous disclosure provisions of the listing rules of a market operator. By way of history, s 674 replaced the former s 1001A. There are significant differences between the drafting of the present section and that of the former section which it replaced. In particular, it is no longer a requirement that failure to disclose relevant information to the market be intentional, reckless or negligent. However, the structure and overall thrust of the present provision remains the same as before; that is, there must in the first place be a listing rule or rules requiring disclosure of information by market participants before liability under s 674 can arise. In Jubilee Mines NL v Riley (2009) 27 ACLC 164, the Court of Appeal of Western Australia made some general observations about the continuous disclosure provisions of the Corporations Law, and the relevant listing rule, as they stood in 1996. Those general observations remain relevant to the interpretation of s 674. They are as follows: 1. The evident purpose of each of the listing rule and the relevant

statutory provisions is to ensure an informed market in listed securities. Put another way, the legislative objective is to ensure that all participants in the market for listed securities have equal access to all information which is relevant to, or more accurately, likely to, influence decisions to buy or sell those securities. It would be entirely contrary to that evident purpose to construe either the listing rule or the statutory provisions as countenancing the disclosure of incomplete or misleading information. 2. The obligations imposed by the listing rules and the relevant statutory provisions are limited to the disclosure of information. The obligations do not extend to include, for example, making business decisions which might or even should be made as a result of the receipt of the information. The High Court refused an application for special leave to appeal from this decision: Riley v Jubilee Mines NL [2009] HCATrans 168. The continuous disclosure obligations apply even where the securities or interests of the entity are suspended from trading or where the entity is listed but before the securities are actually quoted by the market operator. Furthermore, the continuous disclosure provisions, in their application to listed entities, apply only to entities that are included in the official list of a “prescribed financial market” (s 111AE(1), 111AE(1A)). A “prescribed financial market” is a financial market or financial market operator listed in the Corporations Regulations 2001, for purposes of the definition of the expression in s 9; see ¶24-030. (As the sizes of the operations of the other market operators listed in the regulations are relatively small compared to the operations of ASX, the commentary that follows is written against the backdrop of the requirements of ASX. For present purposes, it is sufficient to note that the listing rules of the other exchanges also contain provisions mandating the continuous disclosure of price or value sensitive information.) The continuous disclosure rules apply to both listed companies and listed managed investment schemes, the latter of which are

predominantly structured in Australia as unit trusts. In the case of listed schemes, the continuous disclosure obligation rests on the responsible entity that operates the scheme: s 674(3). This requirement is also reflected in LR 19.11B, which provides that the ASX Listing Rules apply to the responsible entity of a trust so that the responsible entity has an obligation to ensure that the scheme complies with the Listing Rules. Furthermore, note that as ASX Foreign Exempt Entities (which are predominantly foreign companies registered under Div 2 of Pt 5B.2 of the Corporations Act) admitted to the official list under LR 1.11 are not required to comply with the continuous disclosure provisions of the ASX Listing Rules, they are not subject to s 674. The ASX Listing Rules The principal source of the continuous disclosure regime for listed disclosing entities is the ASX Listing Rules, particularly LR 3.1, LR 3.1A and LR 3.1B. Under the primary disclosure obligation — LR 3.1, once a listed entity is or becomes aware of any information concerning it, that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell the ASX that information. The question of when a company is or becomes “aware” of information becomes very important. “Aware” in defined in LR 19.12, which states that an entity becomes aware of information if a director or executive officer has, or ought reasonably to have, come into possession of the information in the course of the performance of their duties as a director or executive officer of that entity. The listed entity becomes “aware” of information if a director or executive officer of the company (or in the case of a trust, a director or executive officer of the responsible entity) has, or ought reasonably to have, come into possession of the information in the course of the performance of their duties: LR 19.12. That an entity may become aware of information if the board or senior management “ought reasonably to have” come into possession of it has the practical effect of imposing a due diligence requirement on the information and reporting structures of the entity. Appropriate systems ought to be

established in order to fulfil this requirement (see below). Essentially, s 674(2) imposes an obligation on the listed company or responsible entity of the listed scheme to notify the exchange of information required to be disclosed under LR 3.1 where that information: • is not generally available, and • is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of the listed securities or interests of the entity. In ASIC v Fortescue Metals Group Ltd (2011) 29 ACLC ¶11-015 (allowing an appeal from ASIC v Fortescue Metals Group Ltd [No 5] (2009) 27 ACLC 1,983), the Full Court of the Federal Court held that the disclosure obligation under s 674(2) extends to making corrective statements to the market where the corporation has previously made statements to the market which prove to be misleading, in contravention of s 1041H. On further appeal, however, the High Court decided that the impugned statements at the heart of that case did not contravene s 1041H. The premise for ASIC’s argument about the application of the continuous disclosure requirements, and for the Full Court’s conclusions about those issues, was not established. Once it was decided that Fortescue’s statements that it had made binding contracts were not misleading or deceptive or likely to mislead or deceive, it was not to be supposed that, despite Fortescue lawfully making those statements, the continuous disclosure requirements nonetheless required Fortescue to tell the market that the agreements were not binding contracts: Forrest v ASIC; Fortescue Metals Group Ltd v ASIC (2012) 30 ACLC ¶12-034, per French CJ, Gummow, Hayne and Kiefel JJ at [62]. In the High Court in Forrest, ASIC argued an alternative case to the effect that, even if Fortescue’s statements were not misleading or deceptive within s 1041H, Fortescue had nevertheless contravened s 674 because, if the impugned statements were expressions of Fortescue’s opinion about the effect of the agreements, Fortescue was bound to disclose the terms of the agreements themselves, not

just issue statements about what it thought to be the effect of the agreements. The High Court dismissed this argument, holding that the impugned statements accurately conveyed to their intended audience what the agreements provided. Fortescue’s statements having described accurately what the framework agreements provided, it was not to be supposed that s 674 nonetheless required Fortescue to publish the very text of those agreements: per French CJ, Gummow, Hayne and Kiefel JJ at [65]; Heydon J at [114]. In summary, the High Court in Forrest held that, on the evidence, the impugned statements were not misleading or deceptive, and s 674 was therefore not invoked. The High Court thus did not concern itself with the correctness or otherwise of the underlying proposition expressed by the Full Court of the Federal Court, namely, that where statements have been made to the market which prove to have been misleading or deceptive within s 1041H, the disclosure obligation under s 674(2) requires corrective statements to be made to the market. It is therefore at least arguable that that proposition stands as a correct statement of law, being a statement of the Full Court of the Federal Court. What if a listed disclosing entity possesses information the full significance of which is not appreciated by the entity’s officers but which might, if disclosed to the market, have greater significance for informed investors, and might, as a result, have a material effect on the price or value of the entity’s securities? What are the entity’s obligations (if any) under s 674 in these circumstances? This question arose in the course of argument in the High Court on the hearing of the application for special leave to appeal from the decision of the Court of Appeal of Western Australia in Jubilee Mines NL v Riley (above). The High Court refused special leave to appeal on the basis that the case turned largely on its own facts, but did observe that “the question of whether a company must disclose information even if it does not appreciate its significance might be said to be a question of general public importance”. The question therefore remains open. It does, however, indicate that in these circumstances an entity should err on the side of caution, and consider releasing the information to the market.

The most notable difference between the operation of LR 3.1 and s 674(2) relates to whether the information is “generally available”. (The term “generally available” is defined in s 676, and discussed below). Under LR 3.1, there is no requirement that the information not be generally available in order to compel disclosure. Quite to the contrary, as ASX notes in Guidance Note 8: “Continuous Disclosure: Listing Rules 3.1–3.1B”: “If a listed entity becomes aware that market sensitive information which has not been given to ASX under Listing Rule 3.1 has been released to a section of the market (eg, at an investor or analyst briefing or at a meeting of security holders) or to a section of the public (eg, at a media briefing or through its publication on a website or in social media), the entity should immediately give the information to ASX under Listing Rule 3.1 in a form suitable for release to the market. The fact that information released through other outlets may be, or eventually become, ‘generally available’ for the purposes of sections 674 is not an excuse for failing to disclose it to ASX under Listing Rule 3.1.” (footnotes omitted) Therefore, all price or value sensitive information must be disclosed regardless of whether the market might already have the information from other sources. ASX’s approach ensures that all price or market sensitive information must be provided through the companies announcements office of ASX: see LR 15.2.1 and ASX Guidance Note 14: ASX Market Announcements Platform. The principal rationale for s 674(2) imposing a requirement that the information not be “generally available” stems from the fact that contravention of s 674 can lead to both civil and criminal consequences: see “Report on an Enhanced Statutory Disclosure System” (September 1991), Companies and Securities Advisory Committee (CASAC), para 3.29– 3.30. In contrast, there are no civil and criminal consequences stemming from breach of the ASX Listing Rules per se. However, failure to comply with the Listing Rules, including LR 3.1, may lead to the entity’s securities being suspended from quotation under LR 17.3.1 or the entity itself being removed

under LR 17.12 from the official list of ASX: see s 674(4). The market operator is obliged to ensure that its listing rules are made available, on reasonable terms, to the listed entity: s 674(5). For ASX purposes, the Listing Rules are provided to listed entities as part of their annual listing fees. Furthermore, the latest version of the ASX Listing Rules can be viewed or downloaded free of charge from ASX’s website at www.asx.com.au. The CLERP (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9) introduced changes to the continuous disclosure regime by subjecting individuals, or more precisely “a person”, involved in contraventions of the continuous disclosure regime to civil liability: s 674(2A). The extension of civil liability to individuals took effect on 1 July 2004. The word “involved” is as defined in s 79 and includes aiding and abetting, counselling, or procuring the contravention of the continuous disclosure regime. A due diligence defence operates with respect to s 674(2A) contraventions (discussed below under defences). Exception or “carve outs” LR 3.1A contains an exception to the disclosure requirement in relation to particular information which is very important given the commercial sensitivity of company information. This continuous disclosure rule is subject to what are known as “carve outs” in LR 3.1A. Under these “carve outs”, the rule is not applicable if: • a reasonable person would not expect the information to be disclosed, and • the information is confidential and ASX has not formed the view that the information has ceased to be confidential, and • one or more of the following applies: – a law would be breached if the information were to be disclosed – the information concerns an incomplete proposal or negotiation

– the information comprises matters of supposition or is insufficiently definite to warrant disclosure – the information is generated for internal management purposes of the entity – the information is a trade secret. To rely on the exception, an entity must satisfy all of the three requirements set out above. The exception only operates while all of the three requirements are satisfied. If one or more of the requirements ceases to be satisfied, the exception no longer applies and the entity must disclose the information immediately. Given the “carve-outs” that are available under LR 3.1A, ASIC has indicated that it is unlikely to grant relief under s 111AT from s 674 if ASX has refused to grant a waiver from LR 3.1: ASIC RG 95.49. While the “carve-outs” do provide an entity the opportunity to delay disclosure of certain information, bringing oneself within the “carveouts”, ie being exceptions to the requirement to continuously disclose price-sensitive information, does not necessarily protect the entity from civil liability on other grounds. An entity may choose to not disclose information that is preliminary and qualified, but does so at the risk of being held liable for misleading or deceptive conduct: see GPG (Australia) Trading Pty Ltd v GIO Australia Holdings Ltd (2002) 20 ACLC 178. In GPG v GIO, the directors of GIO had made a series of announcements throughout May–August 1999 to the market concerning its reinsurance losses. Those announcements were repeatedly revised as more information came to the knowledge of the directors. The directors continued to receive updated reports from actuaries, which indicated that the reinsurance losses might be larger than anticipated. These actuarial reports were expressed by the authors to be “preliminary” and subject to a number of qualifications and contingencies. On this basis, GIO did not disclose the contents of these preliminary reports to the market, presumably relying on the continuous disclosure “carve-outs”. The court found that existing and potential investors would have assumed that, by GIO’s failure to

disclose this new information, there was no relevant adverse change from the position as previously announced, and held that by failing to disclose this preliminary information, GIO had engaged in misleading and deceptive conduct. According to the court, GIO should have disclosed the contents of the preliminary actuarial reports, qualified to reflect the preliminary nature of the information. While the court’s decision in GPG v GIO should not be taken as rendering ineffective one of the continuous disclosure “carve-outs”, it demonstrates that the “carve-out” exceptions must be considered in light of other legal obligations. This is particularly important in circumstances where the company has made previous announcements and this new, albeit “insufficiently definite”, information relates to those previous announcements. To this extent, the case represents an application of the principle that silence (even where justified under the continuous disclosure “carve-outs”) may, in certain circumstances, constitute misleading conduct: see Warners v Elders Rural Finance Ltd (1993) 41 FCR 399; NRMA Ltd & Ors v Morgan (1999) 17 ACLC 1,029. “Incomplete proposal or negotiation”; “matters of supposition” The concepts of “incomplete proposal or negotiation” and “matters of supposition” were in issue in a pair of cases concerning Atrum Coal NL, an ASX listed company. Two directors who held significant shareholdings in Atrum had entered into loans secured by their shares. The loans were due to expire and, if refinancing could not be arranged and the directors defaulted on the loans, the lenders could exercise rights to sell the shares. If a significant proportion of the shares were sold at once, it would significantly deflate Atrum’s share price. The directors were negotiating to refinance the loans and had provided Atrum information about the loans in circumstances they claimed gave rise to confidentiality. Atrum wished to make an announcement to ASX about the loans, including details beyond those in the public domain. The directors sought an injunction restraining the disclosure of the information. In Moran v Atrum Coal NL [No 2] (2015) 33 ACLC ¶15-021, the court

granted an injunction, on the following basis. • Although information about the expiry of the loans and the exercise of the relevant security did not of itself constitute an “incomplete proposal”, it did concern an “incomplete negotiation”, namely the refinancing negotiations that were underway. • The information which was to be released “comprised matters of supposition” in the inferences which arose from it and was “insufficiently definite to warrant disclosure”. Disclosure would not seem to be warranted at the relevant point in time, when there was uncertainty as to whether there would be default on one of the loans, or whether refinancing would occur. • A reasonable person would not expect information about the possible failure of the refinancing negotiations to be disclosed at the relevant point in time, particularly where disclosure suggested the likelihood of something which was in fact merely speculative at that stage. That would have a significant detrimental impact on the value of the shares, and could create a false market. • The disclosure proposed by Atrum was not required by LR 3.1 at the relevant point in time, and the obligation to disclose was unlikely to arise until the expiry of the loans or until Atrum had information that there was clearly going to be a default on the loans and consequent realisation of the security over the shares. • Section 674 did not preclude the issue of an injunction restraining the apprehended disclosure of the information. Subsequently, the directors entered into agreements with their lenders extending the terms of their loans by a month on the basis that they would sell shares, or partially sell down shares in combination with refinancing, sufficient to pay all amounts owing. A failure to diligently pursue the sell down and refinancing entitled the lenders to immediately exercise their rights to enforce their security. In Moran v Atrum Coal NL [No 4] (2015) 33 ACLC ¶15-022, the directors sought an extension of the injunction. The court, however,

refused to extend the injunction, on the following grounds: • The fact that directors of Atrum, who held a significant proportion of the shares of Atrum, had entered into the agreements was information of significance to the market, given the amounts of the loans. • The agreements were not in the course of negotiation. They were completed agreements. Disclosure of the relevant features of those agreements did not concern an incomplete proposal or negotiation. Given the manner in which the agreements contemplated sale of shares held by the directors, it could no longer be said that the possible sale of those shares was a matter of supposition or insufficiently definite to warrant disclosure. That took the information, the disclosure of which was restrained by the injunction, out of the exceptions to LR 3.1 relied on in the earlier decision. • The point had been reached where LR 3.1, read with LR 3.1A, required Atrum to immediately notify ASX of that information. An obligation to notify the market operator of information arose under s 674. • Because the injunction prevented Atrum from disclosing information that it was required by s 674 to give to ASX, it was inappropriate to extend the term of the injunction. • It was not necessary to form any view about whether the exception in LR 3.1A relating to information that concerned an incomplete proposal or negotiation was confined to a proposal made by or to, or a negotiation with, the company bound by the disclosure obligation. The matter proceeded on the assumption (favourable to the directors) that the exception was not confined in that manner. Information Section 674(2) requires it to be established that the company has “information” which the Listing Rules require the company to notify to

the market operator. “Information” is not defined for the purposes of s 674. In Grant-Taylor v Babcock & Brown Limited (in liq) (2016) 34 ACLC ¶16-016 (dismissing an appeal from Grant-Taylor v Babcock & Brown Limited (in liq) (2015) 33 ACLC ¶15-058), the Full Court of the Federal Court made some observations about the meaning of “information” in the context of s 674, but declined to reach any express concluded views, deciding that it was neither necessary nor appropriate to do so in the circumstances of the case: at [94]. Matters of opinion In the view of Perram J in Grant-Taylor v Babcock & Brown Limited (in liq) (2015) 33 ACLC ¶15-058, it would be surprising if “information” in LR 3.1 does not include opinions. It is more likely that LR 3.1 should be construed as requiring the disclosure, all other requirements being satisfied, of opinions actually held or possessed. Further, it is difficult to see that “information” does not bear the same meaning in LR 19.12. If directors hold opinions about market sensitive matters which are not generally available then, subject to the other requirements and exceptions in the Listing Rules, those are to be disclosed to the market. Perram J concluded that LR 3.1 was not apt to require directors to form an opinion. The language of coming into possession (LR 19.12) of information was apt to apply to the coming into possession of the opinions of others (if that were relevant), but not to requiring the board to form an opinion when it in fact did not. In dismissing an appeal from this decision, the Full Court of the Federal Court did not disagree with the remarks of Perram J summarised above: Grant-Taylor v Babcock & Brown Limited (in liq) (2016) 34 ACLC ¶16-016. “False market” Listing Rule 3.1B confers on the ASX the power to request a company to disclose information. It states that if the ASX considers that there is or is likely to be a false market in an entity’s securities, and asks the entity to give it information to correct or prevent a false market, the entity must give the ASX the information needed to correct or prevent the false market.

The continuous disclosure obligation is interpreted and applied by the ASX in accordance with ASX Guidance Note 8. Importantly the Guidance Note explains what the ASX considers to be “market sensitive information”, what is meant by “immediately”, how the carveouts from the disclosure obligation contained in LR 3.1A work, and what amounts to a “false market”. Annexure A provides a number of worked examples of situations requiring disclosure to the market, and in Annexure C it sets out its guidance on compliance policies. Disclosure is made to the ASX by sending the information in a form suitable for release to the ASX’s Company Announcement Platform by electronic means. When is continuous disclosure required for other disclosing entities? The provisions of s 675 apply to unlisted disclosing entities and, in some circumstances, to certain listed entities. The section applies to listed entities if they are listed on markets whose listing rules do not provide for continuous disclosure. These disclosing entities to which this section applies must lodge a document (ASIC Form 1003) with ASIC, as soon as practicable, if the entity becomes aware of information: (a) that is not generally available, and (b) that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of securities of the entity, and (c) is not required to be included in a supplementary or a replacement disclosure document (in the case of securities that are not managed investment products) or not included in a product disclosure statement (PDS) or supplementary or replacement PDS (in the case of securities that are managed investment products) in relation to the entity, and (d) regulations do not provide that disclosure under this section is not required in the circumstances: s 675(2).

With reference to s 675(2)(d), the regulations provide that disclosure is not required provided a number of conditions are satisfied: reg 6CA.1.01. These conditions mirror the “carve-outs” that apply to LR 3.1. Section 1200K modifies the operation of para (c) of s 675(2) as it applies to recognised offers under Ch 8 (mutual recognition of securities offers), ie, offers of securities in Australia by offerors in a recognised (foreign) jurisdiction. The effect of the modification is that a disclosing entity to which s 675 applies, and which has been the offeror of a recognised offer, must lodge a document with ASIC, as soon as practicable, if the entity becomes aware of information: (a) that is not generally available, and (b) that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the entity, and (c) that is not required, by the law of the recognised jurisdiction to which the offer relates, to be included in a supplementary or replacement offer document, and (d) regulations do not provide that disclosure under this section is not required in the circumstances. To the extent that s 675 applies to disclosing entities that are registered schemes, the disclosing entity is aware of the price sensitive information if, and only if, the responsible entity that operates the scheme is aware of the information: s 675(3)(a). Similarly the obligation to lodge Form 1003 with ASIC rests with the responsible entity: s 675(3)(b). As with listed entities, with the implementation of the CLERP 9 reforms, “a person” involved in an unlisted disclosing entity’s contravention of the continuous disclosure laws can be found liable for a breach of the civil penalty laws: s 675(2A). A due diligence defence has also been introduced and is discussed below under defences. In practice, s 675 operates subject to ASIC RG 198: Unlisted

disclosing entities: continuous disclosure obligations, which allows the company to disclose the information on its website as an alternative to lodging the notice with ASIC. ASIC has recognised that for many unlisted disclosing entities, the most effective and efficient way to communicate with their investors is to disclose material information on their website. The guide includes good practice guidance for website disclosure. ASIC will administer the continuous disclosure provisions so that an unlisted disclosing entity can publish material information on its website in accordance with the good practice guidance set out in its guide, rather than having to lodge the information with ASIC. If an unlisted disclosing entity does not follow ASIC’s good practice guidance, it will need to comply with its continuous disclosure obligations by lodging all material information with ASIC. Drilling down into the central concepts more closely When is information “generally available”? Companies are not required to disclose information that is generally available. The concept of “generally available” information is central to the continuous disclosure obligations of both listed and other disclosing entities. However as noted above, for the purposes of s 674, the notion of information being “generally available” is relevant to the question of whether the listed disclosing entity has satisfied the requirements of the section: it is not relevant to the question of whether the entity has satisfied the continuous disclosure requirements of the ASX Listing Rules. Information is generally available if: (a) it consists of readily observable matter, or (b) both of the following apply: (i) it has been made known in a manner that would, or would likely to, bring it to the attention of persons who commonly invest in securities of a kind whose price or value might be affected by the information, and

(ii) since it was made known, a reasonable period for it to be disseminated among such persons has elapsed: s 676(2). Information that consists of deductions, conclusions or inferences drawn from either or both of the two paragraphs above is also information that is “generally available”: s 676(3). The test whether material is readily observable is not whether the particular matter was actually observed but whether it could have been observed readily, meaning easily or without difficulty: GrantTaylor v Babcock & Brown Limited (in liq) (2016) 34 ACLC ¶16-016 (dismissing an appeal from Grant-Taylor v Babcock & Brown Limited (in liq) (2015) 33 ACLC ¶15-058). This section is in the same terms as s 1042C which defines “generally available” for the purposes of the insider trading offences. The case of R v Firns (2001) 19 ACLC 1,495 is the leading authority in Australia. There, two competing views emerged as to the meaning of “readily observable matter”. The majority (Mason P, Hidden J agreeing) held that information may be “readily observable” even if no-one observed it. Consequently, the number of persons who actually observe the relevant information is not relevant: Firns at 1,507. Therefore, it is impermissible to read into the phrase a limitation that the ready perceptibility must be by those in Australia. The dissenting judgment of Carruthers AJ adopted a purposive view of the phrase “readily observable matter” and held that the phrase cannot be allowed to exist in a vacuum. The relevant question to be asked was: to what class of persons must the information consist of “readily observable matter”? The answer: the matter must be readily observable by members of the Australian public. Consequently, the minority view is that it is permissible to read into the legislation words that are descriptive of a class of persons to whom the information is or is not readily observable. The practical effect of the divergence of judicial opinion on the meaning of “readily observable matter” is that the statutory obligation under s 674(2) to disclose information to a market operator will, depending on the circumstances and the nature of the information, be more likely to arise on the minority view than on the majority view (see

¶278-400). The courts in the United States have also had cause to consider the issues relevant to whether information is “generally available”. The leading United States authority on insider trading is SEC v Texas Gulf Sulphur Co 401 F 2d 833 (1968). This case considered the issue of the length of time required before information can be said to have disseminated or assimilated (ie similar to s 676(2)(b)(ii)). Merely announcing information was said to be insufficient. A “reasonable period” of time must be allowed before it could be said to have been disclosed. This is to allow the bulk of market participants to absorb the information. The court suggested that this period was difficult to define and depended on the particular circumstances existing at the time. It is submitted that the period of time which must be allowed under the continuous disclosure regime is likewise hard to define in any absolute way. However, several factors may be stated with some certainty. The largest factor affecting whether information is generally available will be the liquidity of the market and the sophistication of its participants. Therefore, listed disclosing entities subject to s 674 are more likely to be able to rely on the fact that information is “generally available” (but note that this will not relieve the listed disclosing entity from disclosure under the ASX Listing Rules). In contrast, the generally much less liquid markets involving unlisted disclosing entities (subject to s 675) will require more time before it could be said that “a reasonable period for [the price-sensitive information] to be disseminated” has elapsed. In a liquid market it is sometimes said that the price of securities quickly adjusts to reflect new information (the so-called weak form of the Efficient Market Hypothesis). This can also provide a “signal” to market participants alerting them to new information more quickly than would otherwise be the case. This further strengthens the view that, in general, a distinction exists between s 674 and 675 as far as the time period is concerned. What is a material effect on price or value? Companies are only required to disclose information that a “reasonable person would expect … to have a material effect on the

price or value” of the company’s listed securities. The definition of material effect on price or value in s 677 is again a duplicate of the relevant insider trading provision (s 1042D). A reasonable person is taken to expect information to have a material effect on the price or value of securities if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the securities: s 677. Listing Rule 3.1 prima facie requires disclosure only if “a reasonable person would expect [it] to have a material effect on the price or value” of the shares. This looked at the question through an ex ante lens. The Listing Rule does not elaborate further on this concept. In contrast, the Act does. Section 674(2)(c)(ii) provides that it be shown (in order for the statutory disclosure obligation to apply) that the information is such that “a reasonable person would expect, if it were generally available, to have a material effect on the price or value …”. This mirrors the Listing Rule requirement in terms of a positive element required to be satisfied in order for disclosure to be required. Section 677 elaborates on this concept. Section 677 provides that “a reasonable person would be taken to expect information to have a material effect … if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of” the shares. The question arises as to the relationship between the Listing Rule and s 677. Section 677 does not narrow the ordinary meaning of the concept in the Listing Rule. It is not expressed as “if and only if”. Moreover, it does not appear to change the ordinary meaning of the concept. Moreover, reading the LR 3.1 concept to implicitly embrace the elaboration in s 677 avoids difficulties of discordance between the two. The LR 3.1 concept should be taken to implicitly embrace the s 677 concept: Grant-Taylor v Babcock & Brown Limited (in liq) (2016) 34 ACLC ¶16016, at [95] (dismissing an appeal from Grant-Taylor v Babcock & Brown Limited (in liq) (2015) 33 ACLC ¶15-058). As to the meaning of “material effect”, the Full Court in Grant-Taylor v Babcock & Brown Limited (above), at [96], noted that s 677 illuminates

this concept and also identifies the genus of the class of “persons who commonly invest in securities”. It refers to the concept of whether “the information would, or would be likely to, influence [such] persons … in deciding whether to acquire or dispose of” the relevant shares. The concept of “materiality” in terms of its capacity to influence a person whether to acquire or dispose of shares must refer to information which is non-trivial at least. It is insufficient that the information “may” or “might” influence a decision: it is “would” or “would be likely” that is required to be shown: TSC Industries Inc v Northway Inc 426 US 438 (1976). Materiality may also then depend upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event on the company’s affairs (Basic Inc v Levinson 485 US 224 (1988) at 238 and 239; see also TSC v Northway). Finally, the accounting treatment of “materiality” may not be irrelevant if the information is of a financial nature that ought to be disclosed in the company’s accounts. But accounting materiality does have a different, albeit not completely unrelated, focus. The effect and operation of the predecessor provision of s 677, namely, former s 1001D, was explained by the Court of Appeal of Western Australia in Jubilee Mines NL v Riley (2009) 27 ACLC 164. Section 677 is drafted in substantially similar terms to those of its predecessor, so the court’s observations in this case remain relevant. Martin CJ (Le Miere AJA concurring) said that the section is somewhat analogous to a deeming provision. It provides that the question whether a reasonable person would be taken to expect information to have a material effect on the price or value of securities, is to be taken to be affirmatively answered if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to acquire or dispose of those securities. So, if the information has the characteristic referred to in s 677, it is to be taken to be information which falls within the scope of s 674 and s 675. However, s 677 does not provide that it is only information which has the defined characteristic that can fall within the scope of s 674 and s 675. If the legislature had intended that result, the word “if” in s 677 would no doubt have been followed by the words “and only if”. It

follows that information can fall within the scope of the legislative regime either: • if it has the characteristic referred to in s 677, or • if it is for some other reason information which a reasonable person would be taken to expect to have a material effect on the price or value of securities. However, in practical terms, it is very difficult to envisage a circumstance in which a reasonable person would expect information to have a material effect on the price or value of securities if the information would not be likely to influence persons who commonly invest in those securities in deciding whether or not to acquire or dispose of them. The price of securities quoted on a securities exchange is essentially a function of the interplay of the forces of supply and demand. It is therefore difficult to see how a reasonable person could expect information to have a material effect on price, if it was not likely to influence either supply or demand. Rather, on the face of it, the scope of information which would, or would be likely, to influence persons who commonly invest in securities in deciding whether or not to acquire or dispose of those securities is potentially wider than information which a reasonable person would expect to have a material effect on price or value, because there is no specific requirement of materiality in the former requirement. That the information must only influence or be likely to influence investment decisions has the effect of raising the materiality threshold; to “influence” a person’s decision is an easier matter to satisfy than a decision that, for example, alters or determines a person’s decision. That the “influence” must be measured by reference to persons who “commonly invest in securities” tends to lower the materiality threshold since those that commonly invest in securities would be likely to be better informed than those who do not or rarely do so. It is doubtful whether the phrase “person who commonly invests in securities” is intended to be equated to professional or sophisticated investors in the context in which those terms are understood for the purposes of the fundraising exceptions in s 708. In ASIC v Fortescue Metals Group

Ltd (2011) 29 ACLC ¶11-015, Keane CJ, with whom Emmett and Finkelstein JJ agreed, said that the terms of s 677 do not invite an inquiry as to whether any change in the price of securities has occurred, much less do they require that one be 95% certain that a price change has been caused by an announcement. The “likely influence” test provided by s 677 of the Act is not a high threshold. However, what has happened in the market, in terms of movements in share price, may assist the court in applying the “likely influence” test. Although the High Court allowed an appeal from the decision of the Full Court of the Federal Court in this case, the High Court did not expressly agree or disagree with this proposition: Forrest v ASIC; Fortescue Metals Group Ltd v ASIC (2012) 30 ACLC ¶12-034. There is a great deal of American authority on the meaning of materiality. A particularly relevant case is the decision of the US Supreme Court in TSC Industries Inc v Northway Inc 426 US 438 (1976). In that case referring to a judicial test similar to that in s 677, the court said: “Put another way, there must be a substantial likelihood that the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” (at 449) Whether a reasonable person would expect the information to have a material effect on the price or value of the securities will depend on the identity of the particular entity in the circumstances prevailing at the time — “what one company should advise the Stock Exchange might not have to be advised by a second company; what should be advised by a company at one stage of its career might not have to be advised at another stage of its career because of changed circumstances”: Flavel v Roget (1990) 8 ACLC 237 at 243–244 per O’Loughlin J. It is suggested that (particularly in the case of future events) materiality is essentially a function of magnitude (the size of the effect on the company caused by the event to which the information relates) and probability (the likelihood of the event occurring). For example, if a

contingent claim against the disclosing entity will have the effect of halving the entity’s profit figure (and is therefore of large magnitude) but it has been determined to be very unlikely to occur, it may be material. If the effect on the entity will be minimal and not greatly affect the profit figure and the event is unlikely to occur, it may not be material: see Koeck (¶197-100.90). See also SEC v MacDonald 699 F 2d 47 (1st Circuit 1983) for a more detailed discussion of this form of “expected value materiality”. Who are “persons who commonly invest in securities”? Section 676 refers to “persons who commonly invest in securities of a kind whose price or value might be affected by the information”, while s 677 refers simply to “persons who commonly invest in securities”. The Full Court of the Federal Court, in a joint judgment, dealt with the meaning of the expression “persons who commonly invest in securities” in s 677 in Grant-Taylor v Babcock & Brown Limited (in liq) (2016) 34 ACLC ¶16-016, at [97] and following (dismissing an appeal from Grant-Taylor v Babcock & Brown Limited (in liq) (2015) 33 ACLC ¶15-058). The Full Court made the following observations. 1. The expression is not defined. Moreover, it does not use the language of small or large, sophisticated or unsophisticated, or retail or wholesale investor. 2. The expression “in securities” is broader than “ED securities”. As a matter of text and context, there is no reason to give “securities” in that phrase any narrower meaning than its definition in s 92(3), which is expressed to specifically apply to Ch 6CA. One appreciates from s 92(3) that “securities” can embrace listed and unlisted shares, debentures, options, interests in managed investment schemes and the like. But what is apparent is that it is not confined to listed securities, securities of the same type or class of the ED securities or of the same sector as the entity that has issued the ED securities. 3. The phrase “commonly invest in securities” in s 677 may be contrasted with the phrase “commonly invest in securities of a kind whose price or value might be affected by the information” in

s 676. The limiting words “of a kind …” in s 676 do not appear in s 677. Textually then, the contrasting language between s 676 and 677 demonstrates that the phrase in s 677 is broader than persons who commonly invest in securities of a kind whose price or value might be affected by the information. 4. The extrinsic materials and history to the continuous disclosure provisions demonstrate the following: (a) Each of s 676 and 677 was based upon the superseded s 1001C and 1001D respectively of the Corporations Law, which were in turn based upon the prior insider trading provisions; those prior insider trading provisions are now to be found in s 1042A, 1042C and 1042D of the Act. (b) In s 677, a distinction was intended to be made between the particular ED securities and the generality of the reference to “securities” in the phrase “commonly invest in securities”. (c) By contrast with s 676, the phrase “commonly invest in securities” in s 677 is broader than the cognate phrase in s 676. 5. A purposive approach might suggest giving a broader reading to s 677, given its protective purpose, and a narrower reading to s 676 which in a sense is part of an “exclusion” (using that term informally). 6. What is meant by “commonly invest”? What work does the adverb perform? It does not appear to be an appropriate way to distinguish between the sophisticated and the unsophisticated investor. Further, it also does not use the division of large or small investor. 7. The expression “persons who commonly invest in securities” is a class description. First, the plural “persons” is used in contradistinction to the singular “a reasonable person” in s 677. Secondly, to treat this as a class description avoids distinctions

dealing with large or small, frequent or infrequent, sophisticated or unsophisticated individual investors. Such idiosyncratic distinctions are made irrelevant if one is looking at a class of investors. There is no reason to confine “likely to influence persons …” to the sophisticated. The unsophisticated also need protection. Likewise the small investor and likewise the infrequent investor. But not the irrational investor. Thirdly, in the context of s 676, the question is whether the information has been made known to the relevant class, albeit that the class may be narrower than for s 677. It is true that the phrase does not use the express language of “class”, but in using the plural “persons”, the legislature appears to be generalising to a group description. 8. The word “commonly” in s 677 has been employed to underline that the objective question of materiality posed by s 674 and 675 by reference to the hypothetical reasonable person in turn has regard to what information would or would be likely to influence a hypothetical class of persons namely “persons who commonly invest in securities”. What are the consequences of breaching the continuous disclosure provisions? Both civil and criminal consequences can result from contraventions of the continuous disclosure provisions. There are no defences available for criminal prosecutions, however, a court may excuse civil contraventions in certain circumstances. Individuals who are “involved” in a contravention of the continuous disclosure laws may also be subject to civil liability. Contraventions Offences An entity that fails to comply with s 674(2) or 675(2) is guilty of an offence: s 1311(1), 1312 and Sch 3. The Criminal Code applies to offences based on s 674(2) and 675(2): s 678.

Chapter 2 of the Criminal Code sets out the general principles of criminal responsibility, with Pt 2.5 dealing with attributing criminal responsibility to corporations (see ¶301-050). The provisions of Pt 2.5 of the Code have particular relevance for the purposes of the continuous disclosure provisions as they apply to listed entities. As s 674(2) does not specify any fault elements for any physical elements of the offence, the “default fault elements” apply in accordance with s 5.6 of the Criminal Code. The physical element of the offence would appear to be “conduct”, ie failing to notify the market operator (such as ASX) of the price sensitive information. Now, because the physical element is “conduct”, the accompanying “default fault element” is “intention”: s 5.6(1) of the Code. Consequently, in order for the prosecution to prove the fault element, it must show that the entity meant to engage in the conduct. Under the common law, proving that the body corporate had the requisite intention was a problematic task. The common law developed principles, most famously embodied in Tesco Supermarkets Ltd v Nattrass [1972] AC 153 and HL Bolton Engineering Co Ltd v TJ Graham & Sons Ltd [1953] 3 All ER 624, under which it was held that the directing mind and will of the company was represented by the board of directors, the managing director or senior executive officers (the Criminal Code describes these persons as “high managerial agents”), but not their subordinates. Under the Criminal Code, the fault elements of an offence can be attributed to the company if the “company expressly, tacitly or impliedly authorised or permitted the commission of the offence”: s 12.3(1) of the Code. The means by which this authorisation or permission may be established include: • proving that a corporate culture existed within the body corporate that directed, encouraged, tolerated or led to noncompliance with the relevant provision (s 12.3(2)(c)), or • proving that the body corporate failed to create and maintain a corporate culture that required compliance with the relevant

provision (s 12.3(2)(d)). Corporate culture refers to an attitude, policy, rule, course of conduct in which the relevant activities take place. (The other means by which such authorisation or permission may be established are set out in s 12.3(2)(a) and (b) of the Code, and effectively replicate the existing common law principles espoused in Tesco and Bolton Engineering.) By supplementing the common law principles for attributing criminal responsibility to bodies corporate through these “corporate culture rules”, effective continuous disclosure policies aimed at the prevention of selective disclosure, and managing risks associated with market speculation and analyst briefings (see ¶197-100.30) assume even greater importance given that criminal consequences may ensue. (Although the Criminal Code commenced operation on 15 December 2001, the Code only applies to offences based on s 674(2) and 675(2) where the underlying physical elements of the offences occurred on or after 11 March 2002. Offences against the continuous disclosure provisions before this date are governed by former s 1001A and s 1001B, which were not subject to the Criminal Code.) Civil contravention Section 674(2) and 675(2) (and s 674(2A) and 675(2A) — which deal with individuals “involved” in the entity’s contravention) are financial services civil penalty provisions: s 1317E. A declaration by the court that a person has contravened the section may lead to a pecuniary penalty order and/or a compensation order (see ¶311-120ff). The frequency of enforcement of the continuous disclosure laws by ASIC through the civil penalty provisions has been limited to date. The enforcement proceedings in ASIC v Southcorp Limited (No 2) (2004) 22 ACLC 1 were uncontested; all parties agreed that the selective information briefing of analysts by a senior employee of the company was a serious contravention of the continuous disclosure laws, albeit in circumstances not involving dishonesty or with any intent to benefit. Similarly, in ASIC re Chemeq Ltd v Chemeq Ltd (2006) 24 ACLC 806, the company admitted two contraventions of the continuous disclosure

provisions. These were: • failure to inform the market of cost overruns in the construction of a manufacturing facility. The company had initially informed the market that the facility would cost $25m; over a period of more than a year the cost increased to more than twice that amount without further disclosure to the market • failure to inform the market that a patent obtained in the United States relating to a process for formulating a certain product had no commercial significance. ASIC and the company agreed on appropriate penalties and submitted proposed orders to the court. In the circumstances of the case, and having regard to relevant sentencing principles (see further below), the court was content to make the orders as proposed. Factors relevant to the imposition of penalty The factors relevant to the level of civil penalties for contravention of the continuing disclosure provisions may be identified in part by reference to the elements of the contravention set out in the Act where those elements accommodate a spectrum of possibilities affecting its seriousness. The greater the seriousness of the contravention when measured by reference to those elements, the greater the harm that will be done if like re-offending should occur and the higher the penalty that should be imposed to minimise that risk. Issues of deliberation, recklessness and negligence are also relevant to the risk of recurrence and what is necessary to deter such conduct by the particular company and others in the future: ASIC re Chemeq Ltd v Chemeq Ltd (2006) 24 ACLC 806. The following factors were identified by the Federal Court in the Chemeq case as relevant to the level of penalty for contravention of the continuous disclosure provisions. The list is non-exhaustive: 1. The extent to which the information not disclosed would have been expected to and (if applicable) did affect the price of the contravening company’s shares (s 674(2)(c)).

2. The extent to which the information, if not generally available, would have been discoverable upon inquiry by a third party (s 676(2)). 3. The extent (if any) to which acquirers or disposers of the company’s shares were materially prejudiced by the nondisclosure (s 1317G(1A)). 4. The extent to which (if at all) the contravention was the result of deliberate or reckless conduct by the corporation. 5. The extent to which the contravention was the result of negligent conduct by the corporation. 6. The period of time over which the contravention occurred. 7. The existence, within the corporation, of compliance systems in relation to its disclosure obligations including provisions for and evidence of education and internal enforcement of such systems. 8. Remedial and disciplinary steps taken after the contravention and directed to putting in place a compliance system or improving existing systems, and disciplining officers responsible for the contravention. 9. The seniority of officers responsible for the nondisclosure and whether they included directors of the company. 10. Whether the directors of the corporation were aware of the facts which ought to have been disclosed and, if not, what processes were in place at the time, or put in place after the contravention to ensure their awareness of such facts in the future. 11. Any change in the composition of the board or senior managers since the contravention. 12. The degree of the corporation’s cooperation with the regulator including any admission of contravention.

13. The prevalence of the particular class of nondisclosure in the wider corporate community. Infringement notices If ASIC has reasonable grounds to believe that a disclosing entity has contravened s 674(2) or 675(2), ASIC may issue an infringement notice to the disclosing entity: s 1317DAC. The infringement notice procedure is discussed in detail at ¶311-040. Application to disclosing entities that are schemes In the case of a scheme that is a disclosing entity, as the continuous disclosure obligation rests on the responsible entity that operates the scheme (see s 674(3) and 675(3)), it would seem that the contravention (whether that takes the form of an offence or a civil penalty contravention) is not attributed to the scheme itself. This means that any fines, pecuniary penalty orders or compensation orders cannot be taken out of scheme property. Furthermore, it would seem that the responsible entity would not be entitled to be indemnified for these liabilities under s 601GA(2) as such rights “must be available only in relation to the proper performance of [its] duties”. Defences There are no statutory defences in the Corporations Act 2001 to a contravention of s 674(2) and 675(2). However, a due diligence defence is available under the Criminal Code to a company for acts committed by “high managerial agents”: s 12.3(3). Commentators have suggested that the absence of a “business judgment” defence or a general “due diligence” defence is a shortcoming of the regime: Koeck (¶197-100.90). It is submitted that a due diligence defence would seem particularly appropriate given that much emphasis is placed on entities having the appropriate systems in place in order to identify price or value sensitive information and procedures for ensuring that it is released to the market in a timely manner. However, note that where civil penalty proceedings are brought under Pt 9.4B for a contravention of either s 674(2) or 675(2), the court may

relieve the entity either wholly or partly from liability by excusing them from that contravention: s 1317S (see ¶311-176). The court has no power to excuse successful prosecutions of criminal offences. With the CLERP 9 changes, s 674(2B) was introduced to provide for a due diligence defence to “a person” charged with being “involved” in a contravention by the entity of the continuous disclosure laws. A person does not contravene s 674(2A), if the person can prove that they took all reasonable steps to ensure that the disclosing entity complied with its obligations, and on reasonable grounds believed that the disclosing entity was complying with its obligations. Sections 675(2A) and 675(2B) apply to unlisted disclosing entities, and are to the same effect. Recovery of loss or damage suffered as result of contravention of continuous disclosure rules In P Dawson Nominees Pty Ltd v Multiplex Ltd (2007) 25 ACLC 1,192, the plaintiffs claimed to have suffered loss as a result of alleged failure to comply with the disclosure requirements and allegedly misleading or deceptive conduct. The statement of claim asserted that the securities were acquired in a regulated market in which misleading or deceptive statements had been made, as a result of which the market price for the securities was substantially greater than their true value and in any event greater than the market price that would have prevailed but for the contraventions. Finkelstein J observed that, where alleged failures to comply with the continuous disclosure rules have led to losses to investors through the diminution of the value of securities, it may be hypothesised that, had the Corporations Act and ASX Listing Rules been complied with, the market in the relevant securities would have been open and efficient and the price of the securities would be determined on the basis that all material information regarding the company was publicly available. The consequence of this hypothesis is the premise that the market price of the securities would have been negatively affected if there had been proper and not misleading disclosure. It may also be argued that there is a rebuttable presumption of reliance (if it is necessary to establish reliance) on the existence of an

open and efficient market for the securities. In the United States, this is referred to as the “fraud-on-the-market” theory. In Basic Inc v Levinson 485 US 224 (1988), the Supreme Court of the United States held that securities class action plaintiffs are entitled to a presumption of reliance that the market for the securities in question was efficient and that the plaintiffs traded in reliance on the integrity of the market price for those securities. The fraud-on-the-market presumption is rebuttable. The defendant bears the burden of establishing that the presumption should not apply. There are usually three ways a defendant can rebut the presumption. They are: (1) that the nondisclosures did not affect the market price; (2) that the plaintiffs would have purchased a stock at the same price had they known the information that was not disclosed; and (3) that the plaintiffs actually knew the information that was not disclosed to the market: Fine v American Solar King Corporation 919 F 2d 290, 299 (5th cir, 1990). In Camping Warehouse Australia Pty Limited v Downer EDI Limited (2014) 32 ACLC ¶14-051, which was a decision on an application to strike out a statement of claim, the court held that the plaintiff was entitled to the benefit of the sufficient uncertainty that exists in relation to whether reliance is necessary or is required to be pleaded in a case of this kind. Causation, which had been pleaded, would need to be established. In the court’s opinion a brief review of the legislation and authorities established, for the purposes of a strike out application, that the matter was far from clear and the plaintiff’s case was not plainly hopeless. Representative proceedings alleging failure to comply Some of the issues likely to be raised by representative actions seeking to recover loses allegedly caused by failure to comply with the continuous disclosure rules are extensively discussed in Kirby v Centro Properties Ltd [2008] FCA 1505. The judgment also deals with the question whether multiple actions raising the same issues should be permitted to proceed, and discusses factors to be considered in deciding whether to stay, consolidate or hold a joint trial. Some practical considerations for facilitating continuous disclosure

Effective continuous disclosure policies and practices now assumes heightened importance given that an inadequate “corporate compliance culture” provides a means by which criminal liability can be attributed to the company. ASIC and the ASX have released guidelines — ASIC RG 62: Better Disclosure for Investors — on practical measures that ought to be taken to assist entities in meeting their continuous disclosure obligations. These guidelines deal with the prevention of selective disclosure, the development of disclosure procedures and managing risks associated with market speculation and analyst briefings. Under the Listing Rules, the listed entity must appoint a person or persons to be responsible for communication with ASX in relation to compliance with the Listing Rules, including the continuous disclosure requirements: see LR 1.1 (condition 12) and LR 12.6. Such a person is expected to have appropriate seniority and authority within the organisation, high degree of familiarity with the entity’s operations and have ready access to members of senior management. It is envisioned that such a role would ordinarily be performed by the company secretary, though this is a matter for the listed entity, taking into account the entity’s structure. Furthermore, it will sometimes be appropriate for listed entities to request ASX to impose a trading halt under LR 17.1, particularly where a significant announcement is pending. The trading halt may be up to two trading days. ASX endorses the trading halt mechanism as a “tool of good disclosure policy” and an appropriate way of managing unexplained price and/or volume changes until an announcement can be made: see ASX Guidance Note 8: Continuous Disclosure: Listing Rule 3.1; ASIC Media Releases 00/163 and 00/268.

History By way of background, the purpose of the continuous disclosure provisions was to: • overcome the inability of general market forces to guarantee adequate and timely disclosure of price sensitive information • encourage greater securities research by investors and advisers, which ensures that securities more closely, and quickly, reflect underlying economic values • ensure that equity and loan resources in the Australian market are more effectively channelled into appropriate investments, and that funds are withheld or withdrawn from poorly performing disclosing entities (ie to promote capital market efficiency) • assist investors in deciding whether to buy, sell or hold securities, including the prospect of a switch to alternative securities • lessen the possible distorting effects of rumour on securities prices • minimise the opportunities for insider trading or similar market abuses • improve managerial performance and accountability by giving the market more timely indicators of performance • reduce the time and costs when preparing prospectuses, and • encourage the growth of information systems within disclosing entities: RG 95: Disclosing Entity Provisions Relief, para 19. .30 RG 62: Better disclosure for investors. “These guidance principles suggest practical steps that a listed company can take to ensure that it meets both the letter and the spirit of the continuous disclosure requirements in the Corporations [Act] and the stock exchange listing rules. The principles are intended to assist company directors and executives to manage their disclosure obligations and

minimise the risk of breaching the law. The principles also aim to ensure that the widest audience of investors have access to company information released under the continuous disclosure rules. The objective of these principles is to outline what ASIC considers to be good disclosure practice, not to impose regulatory requirements. ASIC encourages companies to adopt the measures suggested below, but they should be implemented flexibly and sensibly to fit the situation of individual companies. Each listed company needs to exercise its own judgment and develop a disclosure regime that meets legal requirements and its own needs and circumstances. Preventing selective disclosure Establishing policies and procedures for better disclosure 1. Establish written policies and procedures on information disclosure. Focus on continuous disclosure and improving access to information for all investors. Using current technology 2. Use current technology to give investors better access to your information. In particular, post price sensitive information on your company’s web site as soon as it is disclosed to the market. Developing disclosure procedures Overseeing and coordinating disclosure 3. Nominate a senior officer to have responsibility for: • making sure that your company complies with continuous disclosure requirements, • overseeing and coordinating disclosure of information to the stock exchange, analysts, brokers, shareholders, the media and the public, and • educating directors and staff on the company’s disclosure policies and procedures and raising awareness of the principles underlying continuous disclosure. In smaller companies, this person is likely to be the company

secretary. Authorising company spokespersons 4. Keep to a minimum the number of directors and staff authorised to speak on your company’s behalf. Make sure that these persons know they can clarify information that the company has released publicly through the stock exchange, but they should avoid commenting on other price sensitive matters. The senior officer responsible for disclosure should outline the company’s disclosure history to these persons before they brief anyone outside the company. This will safeguard against inadvertent disclosure of price sensitive information. Monitoring disclosures 5. The senior officer responsible for disclosure should be aware of information disclosures in advance, including information to be presented at private briefings. This will minimise the risk of breaching the continuous disclosure requirements. Releasing company information 6. Price sensitive information must be publicly released through the stock exchange before disclosing it to analysts or others outside the company. Further dissemination to investors is desirable following release through the stock exchange. Posting information on your company’s web site immediately after the stock exchange confirms an announcement has been made is one method of making it accessible to the widest audience. Investor information should be posted in a separate area of your web site from promotional material about the company or its products. Handling rumours, leaks and inadvertent disclosures 7. Develop procedures for responding to market rumours, leaks and inadvertent disclosures. Even if leaked or inadvertently disclosed information is not considered price sensitive, give investors equal access by posting it on the company web site. Briefing analysts Reviewing discussions

8. Have a procedure for reviewing briefings and discussions with analysts afterwards to check whether any price sensitive information has been inadvertently disclosed. If so, give investors access to it by announcing it immediately through the stock exchange, then posting it on the company web site. Slides and presentations used in briefings should be given to the stock exchange for immediate release to the market and posted on the company web site. Handling unanticipated questions 9. Be particularly careful when dealing with analysts’ questions that raise issues outside the intended scope of discussion. Some useful ground rules are: • only discuss information that has been publicly released through the stock exchange, • if a question can only be answered by disclosing price sensitive information, decline to answer or take it on notice. Then announce the information through the stock exchange before responding. Responding on financial projections and reports 10. Confine your comments on market analysts’ financial projections to errors in factual information and underlying assumptions. Seek to avoid any response which may suggest that the company’s, or the market’s, current projections are incorrect. The way to manage earnings expectations is by using the continuous disclosure regime to establish a range within which earnings are likely to fall. Publicly announce any change in expectations before commenting to anyone outside the company. *In this Guidance, references to listed companies are to be read as including other listed entities.” .90 Further references. ASIC, “Heard it on the grapevine” — Disclosure of Information to Investors and Compliance with Continuous Disclosure and Insider Trading Provisions, Draft ASIC guidance and discussion paper (November 1999).

ASX Listing Rules Guidance Note 8: “Continuous Disclosure: Listing Rule 3.1” (June 2005). Blair M, “The Debate Over Mandatory Corporate Disclosure Rules” (1992) 15 UNSW Law Journal 177. CASAC, “Report on an Enhanced Statutory Disclosure System” (September 1991). CCH Annotated Listing Rules, commentary on LR 3.1 and LR 3.1A. Koeck W, “Continuous Disclosure” (1995) 13 C&SLJ 485. “The Continuing Saga of Continuous Disclosure — The Corporate Law Reform Bill (No 2) 1992” (1992) 27 BCLB 478. Hambleton D, “Continuous Disclosure for Listed Entities CASAC Report — It Works” (1997) 15 Company and Securities Law Journal 55. Reichel D, “Continuous disclosure in volatile times” (2010) 28 C&SLJ 84.

¶50-100 Roadmap — Rights and remedies of members of a company and registered schemes Chapter 2F has five Parts which deal with the rights and remedies of members of a company and, in some cases, the rights and remedies of members of a registered scheme: • The oppression remedy — Pt 2F.1 (¶51-100) • The statutory derivative action — Pt 2F.1A (¶54-100) • Class rights — Pt 2F.2 (¶57-000) • Inspection of books by members — Pt 2F.3 (¶58-050), and • Proceedings against a company by members and others — Pt 2F.4 (¶58-600). Parts 2F.1 (oppression), 2F.1A (statutory derivative action), 2F.2

(class rights) and 2F.4 are relevant only in the context of companies; there are no rights and remedies provided to members of a registered scheme under these Parts. Part 2F.3 (inspection of books) is relevant both to companies and registered schemes. “Membership of a company” is not dealt with in these four Parts, but stands by itself in s 231, being the cornerstone of the balance of the Chapter that deals with the right and remedies of members of a company (¶50-125). “Member” in relation to a managed investment scheme is defined in s 9 to mean a person who holds an interest in the scheme. For more detailed information on members’ rights, please see: • membership of a company: s 231 (¶50-125) • agreeing to become a member (¶50-150) • appearing on the company register (¶50-175) • minors (¶50-200) • restrictions on members’ rights to sue (¶50-225) • register of members (¶50-250) • other registers (¶50-275) • how information on the register may be used (¶50-300) • ownership of shares (¶50-325) • members’ rights, defined by the constitution (¶50-500) • members’ rights generally (¶50-525) • minority shareholders (¶50-550) • directors and shareholders (¶50-560)

• capacity of minority shareholders to apply for relief (¶50-580) • minority shareholders and takeovers (¶50-600) • compulsory acquisition of shares (¶50-625) • standing of minority shareholders to prevent a takeover (¶50-650) • members’ protected rights (¶50-675) • statutory remedies generally (¶50-700).

¶50-525 Examples of members’ rights Members’ rights per se are not defined in the legislation, although many of the previous common law decisions have been extensively codified in the Act. Some specific examples of “members’ rights” are as follows: • Right to remove directors from office — proprietary companies (s 203C) (¶41-690) • Right to remove directors from office — public companies (s 203D) (¶41-650) • Right to approve and veto related party benefits (s 208) (¶45-500) • Right to requisition directors to convene general meetings (s 249D) (¶63-180) • Right to convene general meetings of their own motion (s 249F) (¶63-260) • Right to vote at general meetings (s 250E) (¶64-600) • Right to obtain access to minutes of general meetings (s 251B) (¶65-500). There is, however, no specific duty on members to behave in a certain

way either to each other, to the directors, or to the company, unlike the duties imposed on directors. Part 2D.1 specifically outlines the obligation on directors and officers of a company to act in good faith and to use care and diligence in the carrying out of their functions. More realistically, there is a tension between the members and the board of directors which is commonly played out at general meetings. The directors are not the agents of the members, although they may act as delegates at times, particularly in managing the business of the company. Although the extent of the directors’ powers may be determined by the company’s constitution and its choice and modification of the replaceable rules, in general terms, directors are empowered to manage the company without interference from individual shareholders. Ultimately, if the members are dissatisfied with the direction taken by the directors, the solution is to remove the directors, or seek even more drastic measures, such as the winding up of the company. For more information on members’ rights, please see ¶50-100.

¶50-700 Statutory remedies open to members Besides the remedies available under not only the current legislation, but also the previous similarly worded provisions, there has developed a collection of statutory remedies that was described by the 1991 Lavarch Report as a “bewildering array” of remedies: Corporate practices and the rights of shareholders Report of the House of Representatives Standing Committee on Legal and Constitutional Affairs, November 1991, pp 188–189. The Lavarch Report identified 15 different statutory remedies (other than the specifically mentioned remedies nominated in s 233) to a disgruntled shareholder (current sections have been substituted for the sections that were operable at the time of the Lavarch Report): • application under s 461 for an order for the winding up of the company (¶141-800) • application under s 793C for an order to enforce the operating

rules of a market licensee (such as the ASX Listing Rules) (¶271250) • application under s 1324 for an injunction, or other order in respect of conduct in contravention of the legislation (¶313-000, ¶53-380) • application under s 598 for an order against persons concerned with the corporation (¶168-450,¶168-480) • application under s 597 for an order to examine persons concerned with the corporation (¶168-320,¶168-340,¶168-360) • application under s 247A to obtain court approval to inspect company records (¶58-100) • application under s 249D and s 249F to respectively requisition a general meeting of the company and to convene a general meeting on members’ own motion (¶63-180, ¶63-260) • complaint under s 536 about the conduct of a liquidator (¶161-590) • application under s 1041I seeking the general remedy for misleading or deceptive conduct and other market misconduct (¶278-220) • application under s 175 to seek rectification of the share register (¶38-940) • application under s 246D to object to infringements of class rights (¶57-500), and • applications to seek damages or other relief where the takeovers provisions of the legislation have been breached. In addition, ASIC has the power to begin an action for damages in the name of a person (which can include a member): ASIC Act s 50. For more information on members’ rights, please see ¶51-100.

¶53-120 Actions based on oppressive conduct or unfair prejudice: s 232 & 233 Section 232 refers to a number of grounds to be satisfied before a Court may make any order under s 233. Section 232 provides that orders may be made by the Court provided it is satisfied that: • the conduct of a company’s affairs • an actual or proposed act or omission by or on behalf of a company, or • a resolution, or a proposed resolution, of members or a class of members of a company is either • contrary to the interests of the members as a whole, or • oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity. The wording of s 232 is clear that the oppressive act, omission or conduct may not yet have occurred or may have ceased. It has been said that s 232 is concerned with conduct contrary to accepted standards of corporate behaviour, by being “burdensome harsh and wrongful, productive of unfair prejudice or ‘contrary to the interests of the members as a whole’”: Goozee v Graphic World Group Holdings Pty Ltd (2002) 20 ACLC 1,502 at 1,511. Section 232 prescribes “statutory norms of conduct non-adherence to which vests a cause of action”. What type of orders may the court grant? Section 233 sets out a non-exhaustive range of orders. If the court is satisfied that these grounds exist, it may make any order it sees fit, including one or more of the following orders for: • the company be wound up (the court is prohibited from making a

winding up order if doing so would unfairly prejudice the oppressed members) • regulating the conduct of affairs of the company in the future • the purchase of the shares of any member by other members • the purchase of the shares of any member by the company (and for the reduction accordingly of the company’s capital) • directing the company (or authorising a member or members) to institute, prosecute, defend or discontinue any proceeding on behalf of the company • appointing a receiver (or a receiver and manager) of property of the company (see McMillan v Toledo Enterprises International Pty Ltd (1995) 18 ACSR 603, where this occurred even though a contract to which the company was a party could have been, almost without doubt, profitable in the future) • restraining a person from engaging in certain conduct • requiring a person to do a specified act. What does the court consider when assessing claims by members? The terminology in s 232 relies a good deal on earlier concepts of “oppression” and it is worthwhile looking at how the courts have interpreted this concept in earlier cases. The categories of oppressive or prejudicial conduct are in substantially the same terms as existed under the former s 246AA(2) and reference to extensive examples in case law can be found on “oppressive and unfair conduct”. In examining the authorities it appears that “oppression” in the traditional sense constitutes a particular form of unfairness. “Oppression” is not the only type of conduct which fits into the broad “unfairness” remedy envisaged by s 232: see Turnbull & Ors v NRMA

(2004) 22 ACLC 1,094. The ground of being “contrary to the interests of the members as a whole” in s 232 was intended to be an independent one to the ground of being “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” a member. The deliberate change in the law by enacting s 232 was so clear that the Part heading could not be used to limit the meaning of s 232(d): Turnbull & Ors v NRMA (2004) 22 ACLC 1,094. In Shelton v NRMA (2004) 51 ACSR 278, Tamberlin J agreed with this approach, and went on to say that the pleading should spell out the respects in which it is said that the conduct is contrary to interests of members as a whole pursuant to s 232(d), and should also precisely delineate the basis on which s 232(e) is relied on. There has been much talk in the cases about the concept of “commercial unfairness” as a touchstone for finding oppression. However, in determining whether conduct is contrary to the interests of members as a whole under s 232(d) the court is not confined to a consideration only of conduct that can be characterised as “commercially unfair”. An action is capable of being “contrary to the interests of the members as a whole” in other ways. Being pointlessly wasteful is one example: Turnbull (above); KGD Investments Pty Ltd v Placard Holdings Pty Ltd (2015) 33 ACLC ¶15-048. The courts have established a number of principles when dealing with oppression claims. They include: • Typically, the oppression can be ended and the oppressed properly compensated by the oppressor being ordered to acquire the oppressed’s shares at a fair value. • Generally, the order should seek to put the company back on the rails and avoid the causes of conflict and oppression. • Winding up is a remedy of last resort. Winding up a profitable and operating company is an extreme step and requires a strong case to be made. • In choosing a remedy under s 233 the court is exercising a discretion. In exercising that discretion, the court should keep in

mind the above principles. • Bearing in mind those principles, circumstances may dictate that the most appropriate remedy to bring an end to oppression and to fairly compensate the person oppressed is a winding up. • It is possible for there to be oppression even if no breach of contract is involved and even if there is no departure from a position to which a party is bound by an estoppel. • It is possible for there to be the type of commercial unfairness that generates a remedy under s 233 even if part of the reason for its existence is the conduct of the party asserting oppression. • Breakdown in personal relations can be one of several factors that together lead to a conclusion that oppression is made out. • Ordinarily it is difficult to say that there has been oppression in a 50/50 company between two persons of equal strength of character. • Conduct that is carried out in good faith can still constitute, or be part of, conduct that amounts to oppression. • The making of a reasonable offer to buy out the minority shareholding is merely one factor that, in some but not all types of situations in which oppression is alleged, can be relevant to whether oppression is made out. The existence of a reasonable offer does not necessitate a conclusion that there was no oppression. • The use of company funds to defend oppression proceedings may, in certain circumstances, constitute oppression: The Food Improvers Pty Ltd v BGR Corporation Pty Ltd (No 4) (2007) 25 ACLC 177. While these general guidelines may be a useful starting point, the question of whether or not affairs of a company are oppressive will

depend upon the facts of each case: CAC v Orlit Holdings Ltd (1983) 1 ACLC 1,038. Where a defendant complains that a plaintiff has used a “rolled up” format and has failed to specify whether the conduct complained of offends s 232(d) or 232(e), the outcome of a complaint of this type will depend upon the particular characteristics of each case, including the nature of the pleading and the manner in which the trial is conducted. It may also depend on the timing of the complaint, whether it was made pre-trial or otherwise, and the impact, if any, it is alleged to have, or have had, on the defendants’ capacity to meet the allegations: Backoffice Investments v Campbell (2007) 25 ACLC 302. Although an appeal from this decision was allowed by the New South Wales Court of Appeal (Campbell v Backoffice Investments Pty Ltd (2008) 26 ACLC 537), and a subsequent appeal to the High Court was allowed (Campbell v Backoffice Investments Pty Ltd (2009) 27 ACLC 1,944), the judgments in the Court of Appeal and in the High Court did not cast doubt upon the correctness of this proposition. Tension is evident in the cases between the well-established approach of judicial non-interference in bona fide management decisions (for instance, Wayde v New South Wales Rugby League Ltd (1985) 3 ACLC 799, per Mason ACJ, Wilson, Deane and Dawson JJ at 804), and the view that once a case for relief has been made out the legislation does not justify a non-interventionist approach to such matters. Where interference is necessary or desirable, the courts appear to be accepting that s 233 imposes on them a duty to find a scheme, preferably falling short of winding up, which will “put the company back on the rails” and avoid the cause of conflict and oppression. This was the approach taken by the Western Australian Full Court in Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136. The Full Court overruled the first instance decision of Murray J and appointed a receiver and manager to remedy the company’s inability to deal with conflicts of interest at board level rejecting the view taken by Murray J that questions of relief should be approached “conservatively”. (See also John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A’Asia) Pty Ltd & Ors (1991) 9 ACLC 1,372 at 1,381.) The approach of the

Courts to relief for unfair conduct is discussed in detail at ¶51-180. The question whether or not a sole shareholder could be a victim of oppressive or unfairly prejudicial conduct within s 232 arose for consideration by Barrett J in Goozee v Graphic World Group Holdings Pty Ltd (2002) 20 ACLC 1,502 at 1,511. To begin with, His Honour admitted that the “unfairly discriminatory” criterion did not apply given that discrimination required differentiation or different treatment, and this could not occur where there was only one shareholder. Barrett J then went on to express the opinion that an air of unreality existed with the notion that a sole shareholder could become subject to oppression or unfair prejudice. However, his Honour declined to go so far as to conclude that a sole shareholder could never be a complainant under s 232. While the court has the power to order the winding up of a company under s 233(1)(a), the section provides that the order should be made as if s 461 applied. Under that section, the court may order a company to be wound up, among other things, because it is just and equitable to do so. The “just and equitable” ground remains most frequently used as the basis for a winding up application and there has been a great deal of law in this area. Situations where a “just and equitable” application has been granted include: • where the company is fraudulent from inception • where the company is unable to carry on profitably • where there is a deadlock in the internal management of the company • where there is fraud, misconduct or oppression in management, or • where the company is a quasi-partnership and members are unable to cooperate. However, there are limits to the court’s willingness to order a company to be wound up on this ground. In circumstances where the court may be otherwise minded to wind up the company on just and equitable

grounds, but the company is not deadlocked and is otherwise profitably functioning, there is a custom to postpone the dissolution order until the parties have had an opportunity to negotiate a buy-out. Likewise, in the absence of a strong case and a clear need for the relief, the court would not take the extreme step of winding up a solvent company. An order for the purchase of shares can give rise to difficult questions of share valuation — when and how to value the shares that are ordered to be purchased; the key rule in arriving at this valuation is that the court will take account of, and compensate for, any negative effect that the oppression has had on the value of the shares; clearly, the final valuation will depend on the facts in the individual case. If a share is being valued on the basis that a company is to be liquidated, all expenses which the company would need to pay in the course of being liquidated should be taken into account. Thus it would be necessary to take into account expenses which would be incurred in selling the company’s assets, and the income tax it would be obliged to pay once the assets had been sold. Where, however, the company continues to be profitable and to trade, there is no reason to value the shares on the basis that the company is being notionally liquidated. Marketing and other selling expenses and income tax expenses (relating to the realisation of assets owned by the company) are not to be treated as a notional liability of the company. In the absence of evidence of a valuation of the shares, as opposed to assets of the company such as real property, the court will take great care when imposing upon a party an obligation to acquire another’s shares at a particular price: Sino International Development Pty Ltd v Mainland Projects (Oakleigh) Pty Ltd (2012) 30 ACLC ¶12025. Areas in which oppression tends to be alleged include matters involving the use of voting power, parent-subsidiary relations, takeovers and questions of management. In the latter case, mere matters of business management will not constitute grounds for relief under s 233: Re Eastern Copper Mines NL (1975–1976) CLC ¶40-205. However, the use of the words “unfairly prejudiced” is intended to make it clear that it is not necessary to show “actual

illegality or invasion of legal rights”: Gower’s Principles of Modern Company Law (4th ed) p 668; and as to the construction of the term “contrary to the interests of members as a whole”, the conduct must contain “an element of lack of probity or fair dealing to a member in the matter of his proprietary right as a shareholder”: Re Tivoli Freeholds Ltd (1971–1973) CLC ¶40-027. In the case of a corporate trustee, action taken to maintain and protect the trust and its assets will not constitute oppression: Mauromatis & Ors v Hazpaz Pty Ltd & Ors (1993) 11 ACLC 574. Even if oppression is found to have occurred, the court may refer the issue back to the members to vote on whether to waive the breaches of fiduciary duty: Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452. Allegations of oppressive conduct frequently arise in “quasipartnerships” companies which are, in effect, incorporated partnerships. In this situation, two or more persons jointly venture their capital and/or expertise in equal or close to equal shares. In such a case, the court might take into account not only the rights of members under the company’s constitution, but also their legitimate expectations to management rights arising from the agreements or understandings of the members. Case law shows that it is usual, rather than exceptional, for equitable considerations to arise in such a case, on the basis that it would usually be considered unjust, inequitable or unfair for a majority to use their voting power to exclude a member from participation in the management without giving him or her the opportunity to remove his or her capital upon reasonable terms, or in other words that the aggrieved member had a “legitimate expectation” that he or she would be able to participate in the management or withdraw from the company: Mopeke Pty Ltd v Airport Fine Foods Pty Ltd (2007) 25 ACLC 254. The circumstances in which, and the degree to which, equity may intervene to provide remedies where the parties have deliberately chosen a corporate structure must now, however, be regarded as limited at best, following the decision of the High Court in Friend v Brooker (2009) 27 ACLC 781. Where parties have deliberately chosen to order or to regularise their relations with one another by means of the corporate structure, the equitable doctrine of contribution should

not be extended to outflank the consequences of the selection by the parties of that corporate structure. That selection brings with it the fundamental legal doctrines of corporate personality and limited personal liability. Further, the Corporations Act itself provides for the breakdown of relations between the controllers of closely held companies by such provisions as those for winding up on the just and equitable ground, and for oppression suits. Can derivative and oppression claims be brought together in the same proceedings? In an appropriate case, there is no absolute bar to combining a derivative claim under Pt 2F.1A (which sets out the circumstances in which a person, other than the company, can bring (or intervene in) an action in the name of the company for a wrong done against the company in circumstances where the company is unable or unwilling to do so) and an oppression claim under Pt 2F.1 in the same proceedings. The issue is to be assessed as a matter of practicalities, having regard to the overall requirement in the legislation governing civil procedure, which is to facilitate the just, quick and cheap resolution of the real issues in the proceedings. Case law indicates that it is possible to bring derivative and oppression claims together in the same proceedings, and appropriate to do so if that is the best practical way to resolve the real dispute between the parties. This topic is discussed in more detail at ¶53-100. Background information regarding the former and current legislation Sections 232 and 233 replace the former s 246AA. The earlier s 246AA provided the conditions to be satisfied and alternative orders which could be made by the court to remedy oppression or injustice. Minor changes that have been made to previous oppression remedy provisions by the CLERP Act 1999 include: • the court may make an order even if the act, omission, or conduct complained of has yet to occur or has ceased

• where the court orders the company to be wound up as a result of finding oppressive conduct, the provisions of s 461 apply, and • the court is no longer prohibited from making a winding up order where it would unfairly prejudice the oppressed member or members. Act: Sections 232, 233.

¶54-275 Criteria for granting leave to bring, or intervene in proceedings on behalf of company: s 237 Having met the criteria under s 236(1), such a person must then apply under s 237(1) for leave of the court to bring, or intervene in proceedings on behalf of the company. In such a case, the court is required to satisfy itself of a number of matters before it grants leave, namely: (a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them (b) the applicant is acting in good faith (c) it is in the best interests of the company that the applicant be granted leave (d) where the application is for leave to bring proceedings, not an application to intervene, there is a serious question to be tried by the court (e) at least 14 days before making the application, the applicant gave notice to the subject company of the intention to apply for leave and the reasons for so doing: s 237(2). In relation to s 237(2)(e), the court may, if appropriate, dispense with the notice requirement: s 237(2)(e)(ii). The Explanatory Memorandum to the Corporate Law Economic

Reform Program Bill 1998, which introduced Pt 2F.1A, expressly contemplates that an applicant does not need to meet the requirement of giving 14 days’ notice to the company of its reasons for applying for leave in circumstances where it is not practical or expedient. Instead, an ex parte hearing is allowed where urgency is required. It seems, therefore, that the reason for the notice period is to allow the company time to address the applicant’s concerns prior to the hearing date, and failure to do so may support a conclusion by the court that it is improbable that the company would itself take proceedings: South Johnstone Mill Ltd v Dennis and Scales (2007) 25 ACLC 1,443. More generally, in a case in which substantive proceedings have been commenced before the necessary leave under s 237 has been obtained, the court has discretion to grant leave nunc pro tunc: South Johnstone Mill (above). In Swansson v Pratt (2002) 20 ACLC 1,594, it was said that the intent of Pt 2F.1A is that leave to bring a statutory derivative action must not be given lightly. Leave sought under s 237(2) is final; it is not interlocutory in character, and the applicant bears the onus of establishing, on the balance of probabilities, all of the requirements of s 237(2) to the court’s satisfaction. In Huang v Wang (2016) 34 ACLC ¶16-022 at [84]–[87], however, Barrett AJA pointed out that in some circumstances it is correct to say that an order granting leave under s 237 would not have finally disposed of the rights of the parties and that the order would therefore have been interlocutory; see, for example, Transmetro Corp Ltd v Kol Tov Pty Ltd [2009] NSWSC 350 (appeal dismissed: McEvoy v Caplan [2010] NSWCA 115). In some other cases, however, the position may be different and the order might properly be viewed as a final order. Each of the five criteria in s 237(2) must be satisfied: Goozee & Anor v Graphic World Group Holdings Pty Ltd & Ors (2002) 20 ACLC 1,502. The criteria for leave set out in s 237(2) provide that a court must grant leave if it is satisfied of each of the stated criteria: Carpenter v Pioneer Park Pty Ltd (2005) 23 ACLC 93, at para 31; Fiduciary Ltd v Morning Star Research Pty Ltd (2005) 23 ACLC 1,100; Chahwan v Euphoric Pty Ltd (2008) 26 ACLC 262; In the matter of CGH

Engineering Pty Ltd (2014) 32 ACLC ¶14-064. As a result, a decision whether to grant leave under s 237 is not “discretionary”, and appellate review of the decision is not governed by the principles for appellate review of discretionary decisions set out in House v R (1936) 55 CLR 499. The determination of whether leave should be granted is dependent upon the judge hearing the application being satisfied as to the matters in s 237(2). That is not a discretionary decision in the House v R sense: Huang v Wang (2016) 34 ACLC ¶16-022 at [61], per Bathurst CJ (McColl JA and Barrett AJA agreeing), citing Dwyer v Calco Timbers Pty Ltd [2008] HCA 13; 234 CLR 124 at [38]–[45]. In Huang v Wang Barrett AJA further observed, at [81], that if the Court of Appeal of Western Australia in Blakeney v Blakeney [2016] WASCA 76 intended to suggest that House v R governs an appeal from a decision to grant or refuse leave under s 237, the suggestion should not be accepted. Rather, appellate review must proceed in accordance with Warren v Coombes [1979] HCA 9; 142 CLR 531 rather than House v R. The section is, however, silent as to whether a residual discretion remains with the court to grant leave if not all of the stated criteria are satisfied. The better view is that there is no such residual discretion: Chapman v E-Sports Club Worldwide Limited (2001) 19 ACLC 213; Goozee v Graphic World Group Holdings Pty Ltd (above); Charlton v Baber (2003) 21 ACLC 1,671; Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859. (a) Inaction by the company This criterion requires a judgment to be made of the probabilities based on the presenting circumstances at the time of the hearing of the s 237 application. It does not permit the effective deferral of that judgment on the basis that the state of the company’s affairs might change in the future. While a judgment as to whether it is probable (now) that the company will not itself bring (or take responsibility for) proceedings requires some prognostication of what may transpire in the future, those possible future eventualities form part of the factual matrix upon which a judgment of the present probabilities is to be based. It would be contrary to the purpose of s 237 in facilitating the bringing of appropriate derivative actions to construe it as requiring

that disputes between shareholders affecting control be first resolved before that judgment is made. The onus which the applicant for leave admittedly bears, does not require the applicant to show that a hypothetical future liquidator (a fortiori one the appointment of which the applicant opposes in the substantive proceedings) would not bring the proposed proceedings, nor that once a dispute between shareholders is eventually resolved, the victorious faction would not cause the company to bring them: Maher v Honeysett & Maher Electrical Contractors (above). This criterion is concerned with the commencement of a proceeding or the company taking responsibility for a proceeding or for steps in a proceeding. The second and third possibilities are concerned with an actual proceeding and not merely with the management of a potential cause of action. Thus, a decision by directors to commence an investigation, to be conducted by an accounting firm, instead of commencing proceedings did not amount to taking responsibility for proceedings: True Value Solar Holdings Pty Ltd v Fernandez [2013] VSCA 27. Where the proposed defendant to the contemplated derivative action is in control of the company or supported by the majority shareholder or the board (the traditional scenario underpinning the “fraud on the minority” cases under the general law), inaction may be able to be readily inferred. Equivocation (as to action or inaction) on the part of the company represents a less clear-cut scenario, but in any case the applicant bears the onus of establishing that, in all the relevant circumstances, actual refusal or, at the very least probable refusal, ought to be inferred. Impecuniosity on the part of the company, even where it is willing to commence the action, may also justify an inference of probable refusal: Swansson at 1,600–1,601; Ragless v IPA Holdings Pty Ltd (in liq) (2008) 26 ACLC 404. The Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 notes that where an applicant has given the required notice to the company for permission to bring a derivative action and it has either failed to respond, or responded negatively, this may provide evidence relevant to this criterion: para 6.34.

(b) Applicant’s good faith The court must consider whether the action is being brought to further the private purposes of the applicant rather than to benefit the company for whom the proposed derivative proceedings are to be brought. There are at least two interrelated factors relevant in determining whether the applicant is acting in good faith. The first is whether the applicant honestly and reasonably believes that a good cause of action exists and has a reasonable prospect of success. The second factor is whether the applicant is seeking to bring the derivative action for a collateral purpose as would amount to an abuse of the court’s process: Swansson v Pratt (2002) 20 ACLC 1,594; applied in Goozee & Anor v Graphic World Group Holdings Pty Ltd & Ors (2002) 20 ACLC 1,502, Carpenter v Pioneer Park Pty Ltd (2005) 23 ACLC 93 and Re Gladstone Pacific Nickel Ltd (2011) 29 ACLC ¶11-086. On most occasions, these two factors will be inextricably linked, amounting to consideration of essentially the same issue. However, this will not always be the case. An applicant may honestly and reasonably believe that the company (for whom the proposed derivative action is to be brought) has a good cause of action with a reasonable prospect of success but may be intent on bringing the derivative action “not to prosecute it to a conclusion, but to use it as a means for obtaining some advantage for which the action is not designed or for some collateral advantage beyond what the law offers”: Swansson per Palmer J at 1,601, adopting the abuse of process test expounded in Williams v Spautz (1992) 174 CLR 509 at 526. For example, an applicant will not be acting in good faith where the person’s motive is to put pressure on the directors and the company to either extricate the person from their investment in the company (Chapman at 215) or to pay dividends (Goozee at 1,515). See also Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763. The court in Swansson (at 1,602) also expressed the view that the status of the applicant (current shareholder, former shareholder, current director, former director) may impact on the court’s approach to the issue of good faith. The court suggested that, where the

application is made by a current shareholder of the company and the derivative action seeks the recovery of property so that the value of the applicant’s shares are increased, good faith will be relatively easy to establish to the court’s satisfaction. Conversely, where the applicant is a former director or shareholder (noting that standing is conferred on these persons under s 236(1)(a)) with nothing obvious to gain by the success of the derivative action, the court will more closely scrutinise the purpose for which the derivative action is said to be brought. The court also read into the requirement of good faith in s 237(2)(b) an implicit requirement that the applicant would suffer a “real and substantive injury” if leave were not granted; per Palmer J at 1,602: “If a wrong appears to have been done to a company and those in control refuse to take proceedings to redress it, the Court should permit a derivative action to be instituted only by those within the categories allowed by s. 236(1) who would suffer a real and substantive injury if the action were not permitted. The injury must be necessarily dependent upon or connected with the applicant’s status as a current or former shareholder or director and the remedy afforded by the derivative action must be reasonably capable of redressing the injury.” The court went further by importing notions of equity into the requirement of good faith: “[If] an applicant for leave under s. 237 seeks by the derivative action to receive a benefit which, in good conscience, he or she should not receive, then the application will not be made in good faith even though the company itself stands to benefit if the derivative action is successful. Such a benefit would include, for example, a double recovery by the applicant for a wrong suffered or recompense for a wrongful act inflicted upon the company in which the applicant was a direct and knowing participant with the proposed defendant in the derivative action. In such a case the law would not permit the applicant to derive a benefit from his or her own wrongdoing.” It has been argued that an applicant who at the same time seeks

leave to bring proceedings on behalf of a company and seeks orders for the winding up of the company cannot be acting for a proper purpose in good faith. In Power v Ekstein [2010] NSWSC 137 Austin J disagreed with that submission. His Honour said that bringing simultaneous proceedings to assert derivative claims and to wind the company up may or may not be indicative of bad faith and abuse of process, depending on the circumstances. In that case, Austin J decided to allow the alternative forms of the claim to go forward to trial so that the trial judge could select the remedial course best reflecting the court’s findings of fact on a final basis. A similar conclusion was reached in Re Vicad Pty Ltd; Pottie v Dunkley (2011) 29 ACLC ¶11017. In Ragless v IPA Holdings Pty Ltd (above), the Full Court of the Supreme Court of South Australia observed that the exception to the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 was intended to assist in the resolution of disputes between those holding a minority interest in the company, and those holding a majority and controlling interest. In Metyor Inc v Queensland Electronic Switching Pty Ltd (2002) 20 ACLC 1,517, McPherson JA, with whom Williams JA and Wilson J agreed, applied that principle when granting leave to enable two minority interests in a joint venture company to bring proceedings on behalf of the company notwithstanding that some of the claims were personal claims of the plaintiff. In granting leave, McPherson JA pointed out at [18] that this was a useful means of resolving a dispute between two groups of warring shareholders and that the joining of the majority shareholders as defendants would ensure that all assets are restored to the company. He said: “It is not always possible to say at once whether a particular asset, advantage or opportunity belongs to the company rather than to one or other of two groups of warring shareholders. If a particular asset is in law corporate property, the company ought to recover it; if it is not, one or other of the shareholders may perhaps be entitled to do so. Resolving such questions is the principal purpose that the proceedings are designed to serve.” In the view of the Court in Ragless v IPA Holdings Pty Ltd, the principle applies with equal force when control of the company is

divided between the only two shareholders in the company and those two shareholders are locked in a dispute which has reached a stalemate because neither will agree to any proposal of the other (nor, in this case, would they agree a proposal of the liquidator) to resolve the dispute. The onus lies upon the applicant to satisfy the Court that, in applying for leave to bring the relevant proceedings, he/she is acting in good faith. If such an applicant is in reality seeking to further his/her own personal interests other than as a current or former shareholder of the company, rather than the interests of the company as a whole, then that onus will not have been discharged: Chahwan v Euphoric Pty Ltd (2008) 26 ACLC 262. A person who is a present or former member of the company, or is entitled to be registered as a member, but who is in fact seeking to vindicate his/her interest only as a creditor of the company, would not be acting in good faith for purposes of s 237(2)(b): Lykouressis v Lykouressis [2009] NSWSC 80. R was a former officer of a company which was a joint venture vehicle, and although as one of the venturers, R potentially stood to indirectly gain by the success of the derivative action, the court held that in the circumstances there was no evidence of improper conduct or abuse of process in his seeking to invoke the company’s rights: Fiduciary v Morningstar Research [2005] NSWSC 442. In Fiduciary, the former director wished to proceed in the company’s name to ensure that an available avenue of indirect recovery was not excluded. In the NSW Supreme Court, Austin J considered that in these circumstances the “double recovery” problem did not exist as a practical issue. Austin J cited Harris v Milfull (2002) 43 ACSR 542 at [40] with approval, and considered that where multiple causes of action are said to arise, vested in various claimants, out of the same complex commercial facts, it would normally be inappropriate to make a determination prior to the final hearing that double recovery is sufficiently in prospect to question the applicant’s good faith. In Austin J’s opinion, there was a sufficient prospect that the remedial outcome would depend upon whether the action was framed as a

derivative action rather than simply an action to assert the plaintiff’s individual rights, as the degree of overlapping between the company’s proposed claims and the claims of the plaintiffs were not so complete that the court should conclude that the application was not made in good faith or in the best interests of the company. In Fiduciary, Austin J noted that “mere bald assertion” was not sufficient to establish the honest belief, and determined the good faith issue by inference from objective facts, rather than upon bald assertion. On the other hand, in Chapman v E-Sports Club Worldwide Limited (above) Mandie J, in declining to be satisfied that the applicant was acting in good faith, gave significance to the circumstance that he had not gone on affidavit, and had not even sought the opportunity to do so when substantial material had been filed giving a completely different version of what took place. While in some cases the presence or absence of a sworn assertion of the relevant state of mind might be very important, generally speaking such statements — which by necessity will almost always be unqualified opinion founded on hearsay, since a lay applicant will rarely know whether or not a good cause of action exists, nor its prospects of success, and will be dependent upon the advice of lawyers for forming the relevant belief — must be of little weight or utility, and the objective facts and circumstances will speak louder than the applicant’s words: Maher v Honeysett & Maher Electrical Contractors (above). (c) Best interests of the company The Explanatory Memorandum to the CLERP Bill 1998 states that this criterion “allows the Court to focus on the true nature and purpose of the proceedings”: para 6.38. For example, a company may have made a decision, based on business reasons, as to why the company will not act against a director because the cost to the company might outweigh any benefit to be gained. The court might take this factor into account, in deciding whether to grant an applicant leave. As a general rule, courts have shown reluctance to pass judgment on the merits of business decisions made by the board of directors in good faith: Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance)

Oil Co E-Sports Club Worldwide Limited (1968) 121 CLR 483. The criterion in s 237(2)(c) is that “it is in the best interests of the company that the applicant be granted leave”. The threshold for the criterion is therefore higher than a threshold that the proposed derivative action “may be, appears to be or is likely to be, in the best interests of the company”: Swansson v Pratt (2002) 20 ACLC 1,594, distinguishing the cases that have considered the equivalent Canadian and New Zealand provisions (both of which adopt the lower thresholds). The phrase “best interests” directs attention to the company’s separate and independent welfare: Charlton v Baber; Fiduciary; Maher. This imports the familiar concept of the interests of the company as a whole, as to which, see for example, Peters’ American Delicacy Co Limited v Heath (1939) 61 CLR 457; Russell Kinsella Pty Limited (in liq) v Kinsella [1983] 2 NSWLR 452; Richard Brady Franks Limited v Price (1937) 58 CLR 112; Charlton v Baber. Whether the “best interests” of the company as a whole reflect those of the shareholders taken together in light of the corporate objects, or those of the creditors which will prevail in the context of insolvency, will be influenced by the status of the company: Walker v Wimborne (1976) 137 CLR 1; (1975–1976) CLC ¶40-251; Spies v The Queen (2000) 201 CLR 603; (2000) 18 ACLC 727; Charlton v Baber. In considering what is in the best interests of the company, it is necessary to consider the prospects of success of the action, the likely costs and likely recovery if the action is successful and likely consequences if it is not. One relevant matter in considering these issues is the nature of any indemnity the applicant has offered to the company if the action is brought and the likelihood that the company will recover under that indemnity. The grant of leave has often been made conditional upon the applicant for leave indemnifying the company for its costs of the proceeding and any adverse costs order against the company arising out of the proceeding. The cases emphasise the importance of such an indemnity as a means of addressing the risk of prejudice to the company from the commencement of the proceedings: see Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480 at [29]–[32], and the cases cited therein.

It is also necessary to consider the resources the company will be required to devote to the action and the resources it has available, together with the effect that the action may have on other aspects of its business. Finally, it is necessary to consider whether some other remedy is available to the applicant so as to make the proposed action unnecessary from its point of view: Swansson at [56] and following; Re Gladstone Pacific Nickel Ltd (2011) 29 ACLC ¶11-086 at [57]. A derivative proceeding to recover assets to pay an insolvent company’s only creditor would be a proceeding which is in the best interests of the company. This is because the interests of the company are, in substance, the interests of its one and only creditor: per Palmer J (obiter) in Lykouressis v Lykouressis. Moreover, the existence in an applicant of a personal interest in the outcome of a proposed derivative action, or even of a personal animus against the company, or other members of it, cannot be significant, let alone decisive; they are usual concomitants of the types of disputes which lead to derivative actions, and few if any such actions would be brought but for personal interest on the part of the relevant applicant and in the absence of animus against the company or other shareholders. Part 2F.1A was intended to facilitate the bringing of derivative actions where appropriate, and not to impose restrictions which did not previously exist: Maher; Ehsman v Nutectime International Pty Ltd [2006] NSWSC 887; (2006) 58 ACSR 705; Re Vicad Pty Ltd; Pottie v Dunkley (above). The personal qualities or fitness of the applicant are not a relevant consideration under s 237(2)(c). Its terms are to be construed, in the light of its objects and context (including s 237(3), as to which, see further below), as requiring only that the court be satisfied that the granting of leave is in the best interests of the company: Maher. It does not, however, follow that the characteristics of the applicant must always be ignored. If and to the extent that those characteristics (which may include an “interest” of the applicant) are relevant to an assessment of where the best interests of the company lie, they must be taken into account. It is to be remembered that the inquiry is not confined to whether it is in the best interests of the company that the

particular proceeding should be brought on behalf of the company. Integral to the inquiry is the question whether it is in the best interests of the company that the proceedings should be brought on behalf of the company by the particular person who seeks leave: Transmetro Corp Ltd v Kol Tov Pty Ltd [2009] NSWSC 350. In Chahwan v Euphoric Pty Ltd (2008) 26 ACLC 262, there was a finding that a particular interest on the part of the applicant for leave under s 237 meant that it was not in the best interests of the company that leave be granted to that applicant to bring proceedings on the company’s behalf. In Transmetro Corp Ltd, the applicant’s position as director of both the defendant company on whose behalf he was seeking leave to bring a cross-claim in existing proceedings and the companies which were plaintiffs in those proceedings produced a conflict so stark that it was not in the best interests of the company that the applicant should have leave. To grant the leave sought by the applicant would be to give complete control and decision-making in relation to the crossclaim to a person who was, in equity, forbidden to espouse the cause that the cross-claim sought to promote and duty bound to strive for the failure of that cause. (An application for leave to appeal from the decision in Transmetro Corp Ltd to the Court of Appeal of New South Wales was refused: McEvoy v Caplan [2010] NSWCA 115.) To establish that the proposed statutory derivative action is in the best interests of the company, the applicant would normally be required to adduce evidence of the following matters: (a) Evidence as to the character of the company (different considerations would apply depending upon whether the company is a closely-held family company, a public listed company or a joint venture company in which the joint venturers are deadlocked). (b) Evidence of the business, if any, of the company, so that the effects of the proposed litigation on the proper conduct of the business could be appreciated. (c) Evidence enabling the court to determine whether the substance of the redress which the applicant sought to achieve in the

proposed derivative action could be achieved by another means which did not require the company being brought into litigation against its will, so that if the applicant can achieve the desired result in proceedings in his/her own name, it is not in the best interests of the company to be involved in litigation at all: Talisman Technologies Inc v Queensland Electronic Switching Pty Limited [2001] QSC 324; Maher. (d) Evidence as to the ability of the defendant to meet at least a substantial part of any judgment in favour of the company in the proposed derivative action, so that the court could ascertain whether the action would have any practical benefit for the company: Swansson at 1,604–1,605. To determine whether granting leave is in the best interests of the company, it is not necessary to undertake a cost/benefit analysis of possible outcomes of the prospective litigation: Metyor Inc v Queensland Electronic Switching Pty Ltd (2002) 20 ACLC 1,517. However, it has been pointed out that one considerable factor to be weighed against its being in the best interests of a company that leave be granted under s 237 is that, if the derivative action were ultimately to fail, the result would be a substantial costs liability for the company: Fiduciary; Maher. In Fiduciary, Austin J referred to the need to strike a balance between the prejudice that the company would suffer if claims were pressed unsuccessfully on its behalf and it was called upon to meet an adverse costs order, and the advantage that it would gain indirectly for the benefit of its shareholders if the claims were successful; see also McLean v Lake Como Venture Pty Limited [2003] QSC 562. As Austin J said, where the assertion of claims on behalf of a company is simply a manifestation of aspects of the overall dispute between the parties, it will often be appropriate for the court to address the question of costs in the event that the claims fail, and that a suitable way of doing so is to grant leave on terms that the applicant is responsible for the costs ordered against the company and undertakes not to seek contribution or indemnity from the company. The “best interests” of the company does not mean that the result of the prospective litigation is likely to favour (in the sense of conferring a

positive benefit on) the company. It may be in the best interests of the company that it be joined as a co-defendant to an action where the minority members are unable to set the company in motion to vindicate its rights because the majority members (the alleged wrongdoers) oppose the company from doing so — the traditional “fraud on the minority” scenario that applied under the common law. This is because it has the advantage of producing a judgment (whether that result is in favour of or against the company) that is binding on it, thus avoiding multiplicity of actions: Spokes v Grosvenor Hotel Co Ltd [1897] 2 QB 124; Keyrate Pty Ltd v Hamarc Pty Ltd (2001) 38 ACSR 396; Metyor. On the other hand, where there is evidence that success in the proposed litigation will substantially increase the company’s assets and substantially decrease its liabilities, the court would be justified in concluding that the company’s best interests would be served by granting leave to commence the derivative proceedings: Cassegrain v Gerard Cassegrain & Co Pty Ltd [2008] NSWSC 976. The best interests of the “company” directs attention to the particular company on whose behalf the proposed derivative action is to be brought, not those of the corporate group of which the particular group company forms a part: Goozee & Anor v Graphic World Group Holdings Pty Ltd & Ors (2002) 20 ACLC 1,502 at 1,516. However, this approach does not negate consideration or recognition that the interests of a particular group company may be shaped by the wider interests of the corporate group: see Maronis Holding Ltd v Nippon Credit Australia Ltd (2001) 38 ACSR 404; Walker v Wimborne (1975– 1976) CLC ¶40-251 (see ¶42-290 for an analogous discussion of directors’ duties in the context of corporate groups). In recognition that management decisions to bring, intervene or discontinue “true” third party actions are less likely to raise conflict of interest issues, the legislation sets out a number of circumstances in which a rebuttable presumption will operate to deem that a grant of leave is not in the best interests of the company. The presumption operates in the context of the statutory derivative action being pursued when the company is trading as a going concern. The reference in s 237(3)(c) to decision-making by directors implies that the presumption

does not operate where the company is being wound up (or otherwise subject to other types of external administration in which the powers of the board to act for and on behalf of the company are suspended): Charlton v Baber (2003) 21 ACLC 1,671; Brightwell v RFB Holdings (2003) 21 ACLC 355; Roach v Winnote Pty Ltd [2001] NSWSC 822; Carpenter v Pioneer Park Pty Ltd (2005) 23 ACLC 93. The presumption operates in relation to “third party actions”, meaning actions against persons or entities not being “related parties” within the meaning of s 228 (see ¶45-110). The rebuttable presumption therefore would not operate in relation to contemplated proceedings between on the one hand, the company, and on the other hand, the directors, a “controlling” company or a “controlled” company. The presumption operates only in circumstances where all of the directors who participated in the relevant decision: (i) acted in good faith for a proper purpose (ii) did not have a material personal interest in the decision (iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate (iv) rationally believed that the decision was in the best interests of the company: s 237(3)(c). In relation to (iv), a belief that the decision was in the best interests of the company will be taken to be a rationale one unless the belief is one that no reasonable person in their position would hold. These four circumstances are a restatement of the preconditions that underlie the business judgment rule in s 180(2) (see ¶42-720). Prima facie, the prosecution of an action by or on behalf of a company against an officer for recovery of compensation for damage done to the company by that officer’s breach of duty is in the interests of the company: Maher. (d) A serious question to be tried It is settled law that the “serious question to be tried” test is the test

referred to by the High Court in Australian Broadcasting Corporation v O’Neill [2006] HCA 46; (2006) 227 CLR 57 when seeking a grant of an interlocutory injunction — that is, the applicant must demonstrate a prima facie case, which “did not mean that the [applicant] must show that it is more probable than not that at trial the [applicant] will succeed; it is sufficient that the [applicant] show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial”: at [65] per Gummow and Hayne JJ and at [19] per Gleeson CJ and Crennan J, referring to the principles enunciated by the High Court in Beecham Group Limited v Bristol Laboratories Pty Limited (1968) 118 CLR 618 at 622–623; Swansson (above) at [25]; South Johnstone (above) at [78]–[79]. See also Cooper v Myrtace Consulting Pty Ltd (above) at [35]. This criterion is designed to prevent frivolous claims, but it is not necessary that the applicant be required to prove the substantive issue. A person only needs to show that the proceedings should be commenced. The court will usually neither enter into the merits of the proposed derivative action to any significant degree nor permit crossexamination on the merits of the proposed derivative action. But cross-examination may be permitted in very limited circumstances and only where it is relevant to the criteria stated in s 237(2): Swansson per Palmer J at 1,600: “However, because of the possibly serious consequences to the company if the application is allowed and the company is thereby compelled to engage in litigation as a plaintiff against its will, all facts and circumstances relevant to the consideration of the requirements of s. 237(2)(a), (b), (d) and (e) must be considered and the applicant bears the onus of satisfying the Court that, on the balance of probabilities, those requirements have been fulfilled. There is no reason in principle for restricting the parties’ rights of cross examination if any matter relevant to those requirements is in contest.” The court does not make factual determinations concerning the case that the plaintiff seeks leave to assert on behalf of the company, but considers only whether there is a serious question to be tried. The limited nature of that question will often enable the court to avoid

making determinations on contested questions of fact. In some cases, it is appropriate for the court to determine such questions as whether the applicant is acting in good faith (s 237(2)(a)), and whether it is in the best interests of the company that the applicant be granted leave (s 237(2)(c)), after having regard to: • the pleadings or proposed pleadings • facts that are common ground, and • a review of the disputed questions of fact and the contentions of the parties, without resolving disputed questions of fact for the purposes of the leave application. In such circumstances it will be appropriate to proceed without cross-examination: Ehsman v Nutectime International [2006] NSWSC 887. Whether the court should attempt to resolve a disputed question of law will depend on the particular circumstances of the case, including whether the question is novel or difficult and whether it is susceptible of resolution on the present state of the evidence: Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535 per McLelland J; Re Gladstone Pacific Nickel Ltd at [56] per Ball J. In answering the question whether there is a serious question to be tried, the court must obviously have regard to the material before it; and the material that is available may affect the result: Aboriginal Development Commission v Ralkon Agricultural Co Pty Ltd (1987) 15 FCR 159; 74 ALR 505; Re Gladstone Pacific Nickel Ltd. As noted above, this “serious question to be tried” test is similar to that already invariably used in the context of interlocutory injunctions: American Cyanamid Co v Ethicon Ltd [1975] AC 396; Australian Coarse Grain Pool Pty Ltd v Barley Marketing Board of Queensland (1982) 57 ALJR 425; Aboriginal Development Commission v Ralkon Agricultural Co Pty Ltd (1987) 74 ALR 505; Swansson v Pratt (2002) 20 ACLC 1,594; Carpenter v Pioneer Park Pty Ltd (2005) 23 ACLC 93; Oates v Consolidated Capital Services Ltd (2008) 26 ACLC 392 (Barrett J); Oates v Consolidated Capital Services Ltd (2009) 27

ACLC 1,166 (NSW Court of Appeal); Re Gladstone Pacific Nickel Ltd. The “serious question to be tried” criterion does not apply where leave is sought for the purposes of either intervening in or discontinuing proceedings. Where, in a given case, it is conceded that there is a serious question to be tried, the court will take that concession into account. However, s 237 requires that the court be satisfied as to each criterion and a concession does not entirely relieve the court from examination of the matter, although it reduces the extent of the court’s inquiry: Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859, and cf Harris v Caladine (1991) 172 CLR 84 at 96 (per Mason and Deane JJ), 103 (per Brennan J), 133 (per Toohey J). (e) Notice of proceedings to company This is a procedural requirement designed to ensure that the company is given notice of an intention to apply to the court for leave to bring a statutory derivative action, in anticipation that the dispute can be resolved without resort to the court. The requirement in s 237(2)(e)(i) also acts as form of litmus test for gauging whether it is probable that the company will not itself bring proceedings or properly take responsibility for them. This provision also facilitates the expedient hearing of an application ex parte where there is a need for urgent litigation, although it is expected that courts would exercise this power of dispensation sparingly and, presumably, to meet a situation where action needs to be taken swiftly. Joinder of parties Where the application is for leave to bring a proceeding on behalf of a company against a third party, the third party should not be a party to the application for leave: Carpenter v Pioneer Park (2005) 23 ACLC 93; Roach v Winnote Pty Ltd [2006] NSWSC 231. Where, however, the company is, in effect, deadlocked, with equal shareholders in opposition to one another, if one of the combatants were to succeed in an application under s 237, the effect would be to give the applicant shareholder control of the derivative action to the exclusion of the

opposing shareholder. The opposing shareholder is the person with an interest in opposing the application for leave. The company, though joined as a party to the application for leave, is inert because it is paralysed by the dispute between the opposing camps. In such circumstances, as a matter of common sense, the opposing shareholder should be joined as a defendant to the application for leave: Peters v Coastace (2006) 24 ACLC 443. In that case, Austin J said that the practice is for the opposing shareholder to be joined as a party to an application for leave under s 237, in a case where the company is deadlocked at board and shareholder levels and leave is sought by one combatant to use the company’s name to bring a derivative proceeding against the other combatant.

¶74-050 Notice of share issue: s 254X A company must lodge with ASIC a notice (using ASIC Form 484 (Section C)) within 28 days after issuing any shares: s 254X(1). For this purpose, shares issued to a person on the registration of a company are disregarded, as are shares issued on the company changing to a company limited by shares from a company limited by guarantee: s 254X(3). In these latter situations, ASIC is required to be notified pursuant to either s 5H(2), s 117(2), 163(3) or 601BC(2). The notice must set out the number of shares issued, the amount (if any) paid or agreed to be considered as paid for each share and the amount unpaid (if any). In addition, in the case of a public company which issues shares for consideration other than cash, a copy of the relevant contract or particulars about the issue must be lodged with ASIC (using ASIC Form 208): s 254X(1)(e). Where shares are issued other than wholly for cash, the company must also lodge a certificate stating that the contract has been duly stamped as required by any applicable law (using ASIC Form 207Z). This form must be lodged either: • with the notice • within a further period permitted by the regulations, or

• within an additional period authorised by ASIC: s 254X(2). Failure to comply with either s 254X(1) or (2) is an offence punishable by a fine of 60 penalty units in respect of contraventions on or after 11 December 2012, or five penalty units in respect of contraventions before that date. It is an offence of strict liability (see ¶301-050). The Explanatory Memo (para 11.52) to the Company Law Review Bill 1997 notes that it is not necessary for a company to lodge a separate notice for every issue in order to comply with s 254X; more than one issue of shares may be included provided that the period covered by the notice does not exceed one month. Where the rights attached to shares (including unissued shares) change or where shares are divided or converted into new classes, ASIC is to be notified within 14 days: s 246F. The obligation to maintain a register of members requires details to be entered upon allotment, not upon issue (see s 169(3)); the distinction between “issue” and “allotment” is discussed at ¶71-100. For more information on notice requirements, please see: • notifying ASIC of share cancellation (including share buy-backs): s 254Y (¶74-100) • payment other than in cash: s 254X (¶74-200).

¶42-367 Breach of duty to maintain share capital Capital maintenance Where a limited liability corporation is concerned, care must be taken that share capital is not reduced to the prejudice of creditors. While creditors must accept the risk that the company may lose money in the ordinary course of its business, they are entitled to protection against reduction of the company’s net assets in other ways, eg a return of paid up capital to shareholders by redemption of shares before a winding up, or by the company dealing in its own shares or by the company improperly giving financial assistance to someone to purchase its shares (Re Exchange Banking Co (Flitcrofts case) (1882)

21 Ch D 519). This subject is now dealt with by Ch 2J (transactions affecting share capital) of the Corporations Act. The buy-back provisions allow a company to acquire its own shares if the statutory procedures are followed and the buy back does not materially prejudice the company’s ability to pay its creditors (s 257A). The subdivision is extraordinarily complex. Paying dividends out of profits Section 254T of the Corporations Act provides that dividends are not to be payable to shareholders unless the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend, and the payment of the dividend is fair and reasonable to the company’s shareholders as a whole, and the payment of the dividend does not materially prejudice the company’s ability to pay its creditors. The section gives an example, that the payment of a dividend would materially prejudice the company’s ability to pay its creditors if the company would become insolvent as a result of the payment. This is another instance of the capital maintenance rule to protect creditors. If dividends were paid from a source other than profit, they would be disguised returns of capital. For a director’s duty to prevent insolvent trading and payment of dividends, refer to s 588G(1A).

¶76-025 Rationale and motivations underlying share buybacks An appreciation of the possible reasons why companies undertake share buy-backs is necessary in order to fully understand the rationale underlying their regulation. Lamba and Ramsay offer a number of possible reasons why companies undertake share buy-backs: • Leverage: Companies may buy-back their own shares so as to

increase the financial leverage (debt/equity ratio) of the company. • Information signalling: Management may possess favourable information about the future cash flows of the company, and share buy-backs are a means of signalling to the market that the company's shares are undervalued. • Defensive takeover strategy: In a hostile takeover bid situation, buying back one's own shares is a means of increasing the leverage of the target (thus making the target less attractive to the bidder) and reducing the number of shares available to the hostile bidder (thus making it more difficult for the bidder to obtain control of the target). • Free cash flow: Companies may have substantial ``free cash flow'', funds that cannot be efficiently invested on behalf of shareholders because of a lack of profitable investment opportunities, and wish to return those funds to shareholders who may be able to make better use of the funds than the company (see ``Agency Costs of Free Cash Flow, Corporate Finance and Takeovers'', MC Jensen, (1986) 76 American Economic Review 323) • Earnings per share: Companies may buy back their own shares in order to increase their reported earnings per share. (Source: ``Share Buy-Backs: An Empirical Investigation'' (2000), Research Report, Centre for Corporate Law and Securities Regulation, A Lamba and I Ramsay). Often, there are more than one reason for undertaking a share buyback at a particular point in time. In October 2000, the Commonwealth Bank announced its intention to buy-back $200 million of its shares by way of on-market buy-back (see ¶76-380). The stated intention of the buy-back was to: ``... offset the dilution effect of shares issued under the Dividend Reinvestment Plan in respect of the final dividend for 1999/00, which was paid on 9 October 2000... The buy-back benefits shareholders by enabling the Bank to maintain a more efficient

capital structure by returning excess capital to shareholders. As a result, the Bank's earnings per share and return on equity are expected to be higher than if the Buy-Back did not take place'' : CBA Release, ``Buy-back Questions and Answers'', 24 October 2000, www.commbank.com.au. Two particular aspects of share buy-backs were examined by the Research Report; share buy-backs undertaken as a defensive tactic in hostile takeovers and share buy-backs undertaken for the purposes of information signalling. Defensive takeover strategy A number of empirical studies quoted in the abovementioned Research Report examined whether share buy-backs undertaken as part of a takeover defence strategy were in the interests of the target's shareholders. These studies usually evaluate two hypotheses — a ``management entrenchment hypothesis'' and a ``shareholders' interest hypothesis''. The ``management entrenchment hypothesis'' postulates that when directors undertake share buy-backs, they are acting in their own interests (by retaining their positions on the board) at the expense of the target's shareholders who are deprived of the control premium invariably associated with takeovers. By way of contrast, the ``shareholders' interest hypothesis'' postulates that when directors undertake share buy-backs as a takeover defence, they are acting in the interests of shareholders because share buybacks decrease the threat of a hostile takeover and allow directors to make long term investment decisions. Overall, the empirical studies examined in the Research Report produced mixed results. Information signalling By buying back its own shares, the directors of the company are providing a signal to both the company's shareholders and the market. The signal may however be ambiguous: on the one hand, it may indicate that the company has no profitable use for the funds and

therefore undertakes to return these funds to shareholders (the ``free cash flow'' theory postulated by Jensen). Alternatively, the directors of the company may believe that the company's shares are undervalued, and a buy-back is a means by which management can signal that information to the market. The authors of the Research Report raise the question as to why the directors would seek to signal favourable information concerning the company's future cash flows by way of share buy-back rather than just publicly release the information. They offer several possible answers to the question. First, the authors assert that the liability provisions of the Corporations Act may deter directors from making public announcements concerning profit forecasts or projections. For example, sec 76C provides that a representation with respect to a future matter will be taken to be misleading if the person who made the statement does not have reasonable grounds for making it. Civil liability under sec 1041H could attach to the statement if it relates to dealings in the company's securities. Share buy-backs are a means by which information concerning expectations can be imparted to the market without the need for making a statement that could carry civil liability consequences. Secondly, information signalling through share buy-backs has the advantage of visibility and simplicity. Lastly, signals conveyed by way of a share buy-back have the ability to convey information without the need to release sensitive commercial information to the company's competitors.

¶45-010 Roadmap — Related party transactions Chapter 2E of the Corporations Act places strict controls on public companies, and entities controlled by public companies, giving financial benefits to entities or persons related to or associated with the public companies. There is no prohibition, as such, on financial benefits flowing to related parties. Rather, Ch 2E regulates the circumstances in which benefits may flow (it being clear that these are

the only circumstances in which such transactions may occur) and provides penalties for breach of the rules laid down in the Chapter. In practice, when a company gives a financial benefit to a related party it is almost invariably at the behest of a director or directors of the company. The rules in Ch 2E should therefore be read in the broader context of the legal relationship between directors and their companies. Indeed, Ch 2E makes it clear that the rules contained in it are subject to the duties imposed on directors by other provisions of the Corporations Act and the general rules of common law and equity. The fact that a contravention of Ch 2E incurs a penalty under a specific provision of that Chapter does not prevent a director, or other officer of the company, involved in the contravention being exposed to sanctions under other provisions of the Act (such as the civil penalty provisions in Pt 9.4B), or court action for damages or equitable remedies. The directors of a company stand in a fiduciary relationship to their company. There is a considerable body of case law dealing with fiduciary relationships generally, and with the relationship between directors and their companies in particular, especially in the context of company officers causing their companies to confer benefits on, or using their position to elicit benefits for, themselves or parties associated with them. To a large extent, the incidents of that relationship, what they mean in legal terms to the director and to the company, have been codified in various provisions of the Act: cf the statutory duties in Pt 2D.1. For present purposes, it is enough to emphasise that the enforcement rules in Ch 2E do not stand alone, but may be supplemented or reinforced in appropriate cases by other available sanctions. The purpose of Ch 2E is “to protect the interests of a public company’s members as a whole, by requiring member approval for giving financial benefits to related parties that could endanger those interests”: sec 207. The rules are designed to protect “the interests of a public company’s members as a whole”. This must mean as opposed to the interests of any member, or group or category of members, where their interests are not the same as the interests of the entire body of members considered as a whole.

“Purpose” or “object” clauses are relatively rare in the Corporations Act. Where present, such a clause functions as “an overt statement of the legislative intention”: Bennion, Statutory Interpretation (Butterworths, London, 1984 at 580). In Re Credit Tribunal; ex parte General Motors Acceptance Corp, Australia (1977) 137 CLR 545 Barwick CJ said that such a statement of legislative intent: “... will not, of course, be definitive. But the Courts can resort to it in case of uncertainty or ambiguity when the operation of the Act of the Parliament, according to its other terms, has been ascertained and applied. Thus, the statutory expression of Parliament is not invalid nor inoperative. Without being definitive, it may assist in the determination of the operative effect of the Act.” A purpose clause is unlikely to be held to override the clear words of a detailed provision: see Bennion at 580, citing the English Court of Appeal in Page (Inspector of Taxes) v Lowther (1983) The Times, 27 October. In that sense, s 207 is to be read subject to the operative provisions of Ch 2E. The primary rule of Ch 2E is that a public company, or an entity controlled by the public company, may give a financial benefit to a related party of the public company only if: (a) the benefit is in one of seven specified categories of financial benefit (see Div 2 of Pt 2E.1), or (b) if the benefit is of any other kind, the company has obtained the approval of the members to give the benefit, or to enter into a contract to give the benefit (see s 208). Listed companies contemplating related party transactions must consider the operation of both Ch 2E of the Corporations Act and Ch 10 of the ASX Listing Rules. Chapter 10 of the ASX LRs governs “transactions with persons in a position of influence” and contains provisions which supplement the operation of Ch 2E of the Act (see CCH’s Annotated Listing Rules). There are three important points of distinction between Ch 10 of the

ASX LRs and Ch 2E of the Act. First, the ASXLR rules which regulate related party transactions are confined to “substantial assets” (effectively transactions carrying a value of 5% or more of the equity interests of the listed entity): see LR 10.2. The Ch 2E provisions are not so limited. Secondly, the exceptions to the need for member approval are different: compare Pt 2E.1 Div 2 of the Act and LR 10.3. Thirdly, notices of meeting under the ASXLRs (seeking member approval to give benefits to related parties) must be accompanied by an independent expert’s report on the proposed transaction and a voting exclusion statement: see LR 10.10. The corresponding rules for “explanatory statements” under Ch 2E contain no directly equivalent requirements: see s 219–222. For more detailed information on related party transactions, please see: • Defined terms (¶45-100) • What is a related party?: s 228 (¶45-110) • Giving a financial benefit: s 229 (¶45-120) • “Entity”: s 9 (¶45-130) • “Control”: s 50AA (¶45-140) • When benefits may be given to related parties: s 208 (¶45-500) • Consequences of breach of basic rule: s 209 (¶45-550) • Benefits not requiring member approval (¶45-700) • Arm’s length terms: s 210 (¶45-710) • Reasonable remuneration and reimbursement: s 211 (¶45-720) • Indemnities, insurance premiums, legal costs etc: s 212 (¶45-730) • Small advances to related party: s 213 (¶45-740)

• Benefits to or by closely-held subsidiary: s 214 (¶45-750) • Benefits that do not discriminate unfairly: s 215 (¶45-760) • Benefits under court order: s 216 (¶45-770) • Overview (¶45-800) • Resolution may specify matters by class or kind: s 217 (¶45-805) • Lodgment of documents: s 218 (¶45-810) • Explanatory statement: s 219 (¶45-820) • ASIC may comment on proposed resolution: s 220 (¶45-830) • Requirements for notice of meeting: s 221 (¶45-840) • Other material given before or at meeting: s 222 (¶45-850) • No variation to proposed resolution: s 223 (¶45-860) • Voting by or on behalf of related party: s 224 (¶45-870) • Voting on and outcome of resolution: s 225, 226 (¶45-880) • Substantial compliance with Div 3: s 227 (¶45-890) • Directors’ duties continue to apply: s 230 (¶45-900). .90 History. Chapter 2E of the Corporations Act (formerly the Corporations Law) was enacted by the Corporate Law Economic Reform Program Act 1999 (CLERP Act), which commenced operation on 13 March 2000. .92 Further references. The following journal articles are provided by way of further reference: • Baxt R, “Company law — duties of care, honesty, good faith — related party transactions legislation — a strong statement from

the Federal Court” (1993) 67 Australian Law Journal 694 • Baxt R, “Getting the Balance in the Law Right — Is There a Need to Review the Related Parties Legislation?” (1996) 24 Australian Business Law Review 317 • Forster R, “Financial Benefits to Related Parties of Public Companies”, paper presented to IIR Conference, Sydney, 17 November 1992 • Forum on Related Party Transactions (1992) BCLB No 21 • Hanrahan P, “Transactions with Related Parties by Public Companies and their ‘Child Entities’ Under Part 3.2A of the Corporations Law” (1994) 12 Company and Securities Law Journal 138 • Keay A, “Related Party Transactions in Public Companies” (1993) 1 Current Commercial Law 85 • Koeck B, “Changes Dealing with Directors’ and Officers’ duties and Related Party Transactions” (1993) 7 Commercial Law Quarterly 15.

¶152-040 Circumstances in which company may be wound up voluntarily: s 491 Subject to s 490, a company may, by special resolution, resolve that it be wound up voluntarily: s 491(1). The usual rules that apply to members’ meetings also apply to a meeting convened and held for the purpose of passing a special resolution to voluntarily wind up the company. 1. Except in relation to Australian publicly listed companies, at least 21 days written notice must be given of a meeting of the company’s members: s 249H(1). Australian publicly listed companies must give at least 28 days written notice of a meeting of its members: s 249HA(1).

Except in relation to Australian publicly listed companies, the notice period may be shortened if members with at least 95% of the votes agree to the shorter notice period: s 249H(2)(b). However, if the motion for the special resolution is to be moved at the annual general meeting of the company, shorter notice is only permissible if all members entitle to vote agree beforehand: s 249H(2)(a). Australian publicly listed companies may not shorten the mandatory 28 day notice period under any circumstances: s 249HA(1). The notice must set out an intention to propose a special resolution to voluntarily wind up the company and must state the resolution: s 249L(1)(c). 2. The resolution must be assented to members holding at least 75% of the votes. However, lack of notice of the meeting of members does not invalidate resolutions passed by all the members if the resolutions, despite technical difficulties, are within the powers of the members in a properly constituted meeting: In re Express Engineering Works Ltd [1920] 1 Ch 466; Re Compaction Systems Pty Ltd (1977-1978) CLC ¶40-313; EH Dey Pty Ltd v Dey [1966] VR 464; Interpool Ltd v Kapal Pacifico (KP) Pty Ltd (1982) 1 ACLC 429. In any event, the lack of notice is an irregularity which may be “cured” by the Court under s 1322. Where the winding up is undertaken with the ultimate view of transferring or selling to another company the whole or part of the property of the company, it is advisable to circulate particulars of such proposed arrangement among the members and to include in the notice any special resolutions necessary to confer authority upon the liquidator to act in this regard (also see s 507). After the passing of the special resolution for voluntary winding up, the company must: (a) within seven days after the passing of the resolution, lodge a printed copy of the resolution with ASIC, and (b) within the period prescribed by the regulations (21 days after the passing of the resolution: reg 5.5.01(3)), cause a notice setting

out the prescribed information about the resolution to be published in the prescribed manner: s 491(2). Publication in the prescribed manner in practice means lodging the notice electronically with ASIC for publication on ASIC’s publication website. (For the meaning of publication in the “prescribed manner” see ¶317-150.) The rule requiring publication in the prescribed manner applies with effect from 1 July 2012. Prior to that date, notice of the resolution was required to be published in the Gazette. The minimum information about the resolution that the notice must contain is as follows (reg 5.5.01(2)): (a) the name of the company (b) any trading name of the company (c) the ACN of the company (d) the section of the Act under which the notice is being given (e) the name and contact details of the liquidator, and (f) the date on which the resolution was passed. The Corporations Regulations applicable to the convening of a meeting under Pt 5.5 of the Act are discussed at ¶154-340 below. Once the resolution has been passed, it cannot be rescinded and the winding up of the company must proceed. In Ross v PJ Heeringa Ltd [1970] NZLR 170, the company with only two shareholders passed a resolution that because of its liabilities it should be wound up. Mr Ross called a meeting of creditors but before the date that the meeting was to be held the two shareholders passed a further resolution rescinding the winding up resolution. Mr Ross sought directions clarifying his status with the company. Haslam J said at p 173 that: “… the scope and purpose of the relevant sections of the Act is (inter alia) to ensure protection as far as possible to creditors and other interested parties having dealings with the company.

Consistency to such provisions can be given only by treating a resolution for voluntary winding up, properly passed, as an irrevocable step. The consequences of the contentions for the defendant would endanger the very parties whom the Legislature has endeavoured to protect, as the persons originally in control could be able to create confusion and uncertainty at any time about the status of the company itself by halting and reversing the process of liquidation.” Where a resolution is passed for the company to be voluntarily wound up in order to further or give effect to a scheme of amalgamation, the fact that the scheme is found to be ultra vires will not of itself invalidate the winding up resolution: Cleve v Financial Corporation Ltd (1873) LR 16 Eq 363. However, in Re Teede and Bishop Ltd (1901) 70 LJ Ch 409 resolutions winding up the company and the appointment of the liquidator were invalid because the meeting of members was also obliged to consider a scheme of reconstruction in the notice forwarded to members. Act: Section 491.

¶132-520 Overview — privately appointed receiver A privately appointed receiver does not fill the same position as a court appointed receiver. “There is some contrast to be borne in mind between the function of a privately appointed receiver and the function of a Court appointed receiver, and I use the work ‘receiver’ as a compendious word encompassing a receiver and manager. To some extent the privately appointed receiver, particularly in current commercial practice, makes an effort to restore the financial prosperity of the company whose affairs he has been appointed to administer by a debenture holder. A Court appointed receiver does not fill the same position. He is not so much what might be described as a company doctor, but rather his function is that of company caretaker.”

(per Street J in Duffy v Super Centre Development Corp Ltd [1967] 1 NSWR 382.) Another insight into the role of the privately appointed receiver is this extract from Mocatta J’s judgment in George Barker (Transport) Ltd v Eynon [1974] 1 All ER 900: “The appointment of a receiver by the debenture holders does not end the life of the company: the company is so to speak anaesthetised, but the receiver may carry on business on its behalf. The legal persona of the company will continue to subsist until liquidation and the company in the case of the most successful receiverships may be restored in full conscious activity when the anaesthetic is no longer applied after the debts owing the debenture holders have been paid.” Why appointed The appointment of a receiver in most cases comes about in the following way. A company which enters into a debenture deed or other form of security agreement secures its assets in respect of moneys advanced by the security holder to the company. The deed usually empowers the security holder, in the event of failure by the company to abide by the provisions of the deed (eg payment of interest on due dates, repayment of principal), to appoint a receiver or a receiver and manager. Generally the form of the security holder’s security is a floating charge (or what is now known as a security interest that has attached to a circulating asset) over the property and undertaking of the company. Such a security interest is ambulatory and hovers over the property until some event occurs which causes it to settle and crystallise into a specific charge. A default in its obligations by the borrowing company may therefore result in the lender (ie the security holder) exercising its power in that regard and appointing a receiver. The consequences of that appointment are that the security interest crystallises and the incomplete assignment, which is usually created by the deed, is converted into a completed assignment of the assets charged under the deed and of the company’s rights in relation to it.

Function The function of the privately appointed receiver is to receive the income of the company for the benefit of the security holder; the function of the privately appointed receiver and manager is to do the same thing but because of his appointment as manager also, he is enabled to carry on the business for the purpose of repaying the security holder. The primary duty of the receiver is to the debenture holder — not to the company, or to the other creditors. Agent of company? It is important for creditors and others doing business with the company to realise that the receiver (or receiver/manager) privately appointed by a security holder under the terms of a deed is not an agent of the company unless the document under which he is appointed so provides (as it almost always will). Even if no specific provision to this effect is included, it may be that it will be inferred; this is a matter of construction of the deed: Cully v Parsons [1923] 2 Ch 512. On the other hand, a receiver appointed by the Court is not the agent of the company, of the Court or of anyone else. Conclusion In any introduction to the topic of privately appointed receivers it is well to remember that: “Lending money on security to business enterprises is what we are here concerned with. This and the risk inherent in it are matters of free enterprise on both sides. The tool of receivership as a matter of security protection and enforcement has proved a most effective method of handling corporate financial problems and has been increasingly used over the last thirty years. It is flexible and works probably fewer inequities than most methods of enforcing rights of secured creditors.” (From a paper “Receivers” by WRD Stevenson, 47 ALJ 438.) For more detailed information on the privately appointed receiver, please see: • general introduction

• commencing a private receivership (¶132-540) • making a final demand (¶132-560) • private appointments (¶132-580) • Joint and several private appointments (¶132-600) • The receiver as agent for the company (¶132-620) • Effect of liquidation on receivership: s 420C (¶132-640) • Inspection of records held by receiver (¶132-660) • Effect of appointment on staff and directors (¶132-700) • Effect of appointment on contracts (¶132-720) • Effect on property of the corporation (¶132-740) • Introduction (¶132-800) • General powers (¶132-820) • General duties (¶132-840) • Liability: s 419, 419A (¶132-900) • Liability in tort (¶132-920) • Receiver’s indemnity (¶132-940) • Relief from civil liability where improperly appointed: c 419(3) (¶132-960) • Removal of receiver (¶132-970) • Ceasing to act: c 427(4), 432(1) (¶132-980) • Charge still fixed? (¶132-990)

• Liquidation and receivership (¶132-995). For more information on the court appointed receiver, please see ¶133-200.

¶136-220 Object of administration: s 435A The objects of Pt 5.3A are spelt out in s 435A: • to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence at the conclusion of the administration period • if that is not possible, to provide for the administration of the company, its business and affairs in such a way as will result in a better return for the company’s creditors and members than would have resulted from an immediate winding up of the company (see Dallinger v Halcha Holdings Pty Ltd & Anor (1996) 14 ACLC 263). Voluntary administration is envisaged as a procedure to be used by “basically sound” companies that face insolvency difficulties, suggesting that the procedure ought to be used by companies that are not economic failures (in the sense of being unable to generate a profit on a sustained basis) but merely legal failures (in the sense of a company being insolvent or likely to become insolvent according to s 95A (see ¶141-010) and the case law thereon). Although s 435A expressly refers to action being taken in relation to an insolvent company, the administration procedures apply not only to insolvent companies but also to companies that are experiencing financial difficulties. An administrator may be appointed to a company that “is likely to become insolvent at some future time” (see ¶136-300). Conversely, s 435A does not require that there be a prospect of saving a company from liquidation when an administrator is appointed: Dallinger v Halcha Holdings Pty Ltd (In Admin) & Anor (1996) 14

ACLC 263. There, a creditor of a company not immediately able to pay its debts sought an order under s 447A(1) that the company be wound up. Soon afterward, an administrator was appointed. The creditor objected to the appointment of the administrator. He argued that the appointment was an abuse of Pt 5.3A because the Part was not intended to be used where it was known, before the administrator conducted his preliminary review of the company’s affairs, that the company could not be saved from liquidation. Sundberg J dismissed the application, saying (at 268): “Section 435A does not in my view require Part 5.3A to be limited to the case where, at the date of the administrator’s appointment, there is some prospect of saving a company from liquidation … The provisions of the Part should be given a beneficial construction. The machinery provided by the Part should be available in a case where, although it is not possible for the company to continue in existence, an administration is likely to result in a better return for creditors than a winding up.” Part 5.3A contains both a rehabilitation objective, namely the saving of some or all of the business of the company in financial distress, and an efficiency objective, namely to maximise the return to the general body of unsecured creditors. Furthermore, it could be argued that rehabilitation is the primary objective, with the efficiency objective being a secondary consideration in the event that the first objective cannot be achieved. The Harmer Report at para 52 stated that: “[T]here is very little emphasis upon or the encouragement of a constructive approach to corporate insolvency by, for example, focusing on the possibility of saving a business … and preserving employment prospects.” The promotion of a rehabilitation goal in itself has been the subject of criticism in both academic and practitioner circles. Lightman holds the view that a rehabilitation objective is “idealistic and ill-considered” and that the promotion of rehabilitation as a goal in itself, untempered by efficiency considerations, is not valid: “Voluntary

Administration: The New Wave or the New Waif in Insolvency Law?”, K Lightman, (1994) 2 Insolv LJ 59 at 69. Similar sentiments have been expressed from insolvency practitioners. Hodson argues that voluntary administration should only be used where the circumstances are appropriate, namely: • where the company’s financial difficulty is due to non-recurring problems, poorly performing divisions or being overburdened with debt as a result of strategic errors in relation to the appropriate capital structure, but the underlying business of the company has core profitability • where the company has proprietary rights to assets or undertakings that may be attractive to a competitor or new entrant, or • where the appointment of a receiver or liquidator (“triggering events”) could threaten contracts or licences that are essential to the underlying value of the business: “Voluntary Administrations: Abuse of a Good Idea?”, Hodson G, Australian Accountant, March 1996, p 34–36. Why and how are voluntary administrations being used in practice? In 1998, the Companies & Securities Advisory Committee (CASAC) noted the degree of commercial acceptance of voluntary administrations under Pt 5.3A: “The corporate voluntary administration procedure has been very successful. It is now the most commonly used form of insolvency administration in Australia” : Corporate Voluntary Administration, Final Report (June 1998), p 2. The Commission offered one explanation for the commercial acceptance of Pt 5.3A: “[T]he popularity of the voluntary administration provisions is not

surprising as there exists many incentives for directors of insolvent companies to take the path, not the least the ramifications of the insolvent trading provisions, and the personal liability notices that can be issued by the Australian Taxation Office” : A Study of Voluntary Administrations in New South Wales, ASC Research Paper 98/01, Appendix II, p 4. The reference to the “insolvent trading provisions” is a reference to s 588H(5) and (6), which contain one of the statutory defences to an insolvent trading action. In particular, in determining whether the director took all reasonable steps to prevent the company from incurring the debt, a Court is required to take into account any action taken by the director with a view to appointing an administrator under Pt 5.3A (see ¶166-540). The “personal liability notices” is a reference to s 269-25 in Sch 1 to the Taxation Administration Act 1953 (Cth) under which directors are personally liable for unpaid group tax unless they pursue one of four options, one of which is to place the company into voluntary administration. The ASC Research Paper identified a number of reasons why companies had entered voluntary administration: • Restructuring (33%) — this usually involved the sale of the company’s business, or trading on with the expectation of future profits to repay creditors • Automatic route to liquidation (20%) — this involves a situation where the voluntary administration process is being used in circumstances where the company ought to be immediately wound up in insolvency. The study found that there was no alternative other than liquidation, a conclusion that was known by both the directors and the administrator at the time of the administrator’s appointment (see the comments of Sundberg J in Dallinger v Halcha Holdings Pty Ltd (In Admin) & Anor (1996) 14 ACLC 263 at 268) • Avoid personal liability consequences (7%) — here, the voluntary administration provisions were invoked where there was an

outstanding ATO notice for unpaid group tax • Avoid a winding up application or avoid consequences of liquidation (40%) — deeds of company arrangement (typically taking the form of pure composition deeds (see ¶137-640)) were being entered into for the purposes of “cleaning up the corporate shell”. This finding was consistent with a Coopers & Lybrand study which found that over 80% of voluntary administrations in Australia concluded with the liquidation of the company’s assets, with over 55% of deeds of company arrangement constituting a realisation of the company’s assets — a “pseudo-liquidation” (“Voluntary Administrations: Are They Really Working?”, Coopers & Lybrand — Business Imperatives Series No 1, 1995, p 17). By avoiding formal winding up, and thus the full liquidation examination process, directors were to a large extent shielded from prosecution for offences because, given the relatively short time frames imposed by Pt 5.3A, an administrator was not required to investigate matters as thoroughly as a liquidator (see Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 14 ACLC 659). Effect of deed of company arrangement on third parties Part 5.3A is concerned with the rights of creditors against the company in administration. Part 5.3A does not authorise interference with the rights of creditors against third parties. Thus a deed of company arrangement which purported to extinguish creditors’ rights to sue other companies related to the company which was subject to the deed was held to be invalid: Lehman Brothers Holdings Inc v City of Swan; Lehman Brothers Asia Holdings Ltd (in liq) v City of Swan (2010) 28 ACLC ¶10-011 (High Court), dismissing appeals from City of Swan v Lehman Brothers Australia Ltd (2009) 27 ACLC 1,481 (Federal Court). Act: Section 435A.

Tax Institute CommLaw2 Module 2 — Commentary ¶8-530 Trust The main species of trust relevant for business purchases are fixed trusts or discretionary trusts. In the case of any trust the trustee should become the purchaser and legal owner of the business and conduct it on behalf of the beneficiaries. A fixed trust may be a simple trust in which the trustee acts on behalf of a single or few beneficiaries. It may be a unit trust in which investors can pool unequal amounts as investment in a common fund which can be managed by the trustee or by an independent manager. Unit trusts are more suitable for property or share investment than for conducting other businesses. The more important trust vehicle for business purchases is a discretionary trust which is constituted as a trading trust. The trustee can be one or more individuals, but usually is a corporation which may be incorporated specially for that purpose. That incorporates within a trust the benefits of a corporate structure, such as perpetual succession, limited liability and a very flexible legal vehicle. A discretionary trading trust with a corporate trustee has become a very viable alternative to a corporation as the vehicle for conducting businesses. The use of a trust can have substantial taxation benefits. However, when the trustee is a corporation, in cost and complexity it is equal to that of a corporation with the trust rendering it a slightly more sophisticated and complex entity. Whether a business should be purchased through a trading trust depends on careful evaluation of the intended venture, keeping in mind the matters listed in ¶8-480. The ultimate decision frequently depends on whether the taxation advantages and the nature and size of the venture warrant imposing the more sophisticated complex and expensive trust structure in preference to more simple vehicles.

¶21-340 Common intention and other constructive trusts The courts found in some property disputes involving matrimonial and de facto relationships that the parties did not give adequate consideration to the terms of their impending property transaction (usually a purchase) so as to create an express trust. Nevertheless, the parties frequently assume that the beneficial ownership is shared, and each made some contribution to the acquisition of the property, which may not have been a financial contribution to the purchase price. The courts have been able to confer title in suitable circumstances (which are considered in this paragraph) through the imposition of a constructive trust. ▪ In Pettitt v Pettitt (1970) AC 777, the wife purchased a house from the proceeds of the sale of a previous house owned by her. Title was conveyed to the wife. The husband carried out some improvements to and redecoration of the property, enhancing its value by about £1,000. The husband claimed some proprietary interest in the property. The House of Lords held that since there was no agreement reached between the parties that the husband had acquired some beneficial interest, and no other legal basis for holding that he had an interest, he held no beneficial interest in the property. Lord Diplock, after stating that frequently spouses give no thought to their proprietary rights until their personal relationship has broken down, pointed out (at p 822): ``When a `family asset' is first acquired from a third party the title to it must vest in one or other of the spouses, or be shared between them, and where an existing family asset is improved this, too, must have some legal consequence even if it is only that the improvement is an accretion to the property of the spouse who was entitled to the asset before it was improved. Where the acquisition or improvement is made as a result of contributions in money or money's worth by both spouses acting in concert the proprietary interest in the family asset resulting from their respective contributions depend upon their common intention as to what those interests should be... How, then, does the court ascertain the `common intention' of

spouses as to their respective proprietary interests in a family asset when at the time that it was acquired or improved as a result of contributions in money or money's worth by each of them they failed to formulate it themselves? It may be possible to infer from their conduct that they did in fact form an actual common intention as to their respective proprietary interests and where this is possible the courts should give effect to it. But in the case of transactions between husband and wife relating to family assets their actual common contemplation at the time of its acquisition or improvement probably goes no further than its common use and enjoyment by themselves and their children, and while that use continues their respective proprietary interests in it are of no practical importance to them. They only become of importance if the asset ceases to be used and enjoyed by them in common and they do not think of the possibility of this happening. In many cases, and most of those which come before the courts, the true inference from the evidence is that at the time of its acquisition or improvement the spouses formed no common intention as to their proprietary rights in the family asset. They gave no thought to the subject of proprietary rights at all.'' ▪ In Gissing v Gissing (1971) AC 886, in 1951 the husband purchased a house in his name, where he lived with his wife until 1961, when he left. The wife's financial contribution was to the furnishings and to the cost of laying a lawn. It was held that the wife made no contribution to the acquisition of title to the matrimonial home, from which it could be inferred that the parties intended her to have any beneficial interest in it. It was pointed out that it is not possible to overcome the absence of either an actual agreement between the parties, or the existence of a common intention, at the time of the acquisition of the property, by the court endeavouring to reach some conclusion about what they would have done if they had thought about that matter at the relevant time (per Viscount Dilhorne at p 900). Lord Diplock said (at pp 908-909): ``I take it to be clear that if the court is satisfied that it was the common intention of both spouses that the contributing wife should have a share in the beneficial interest and that her contributions were made upon this understanding, the court in the

exercise of its equitable jurisdiction would not permit the husband in whom the legal estate was vested and who had accepted the benefit of the contributions to take the whole beneficial interest merely because at the time the wife made her contributions there had been no express agreement as to how her share in it was to be quantified. In such a case the court must first do its best to discover from the conduct of the spouses whether any inference can reasonably be drawn as to the probable common understanding about the amount of the share of the contributing spouse upon which each must have acted in doing what each did, even though that understanding was never expressly stated by one spouse to the other or even consciously formulated in words by either of them independently... Difficult as they are to solve, however, these problems as to the amount of the share of a spouse in the beneficial interest in a matrimonial home where the legal estate is vested solely in the other spouse, only arise in cases where the court is satisfied by the words or conduct of the parties that it was their common intention that the beneficial interest was not to belong solely to the spouse in whom the legal estate was vested but was to be shared between them in some proportion or other. Where the wife has made no initial contribution to the cash deposit and legal charges and no direct contribution to the mortgage instalments nor any adjustment to her contribution to other expenses of the household which it can be inferred was referable to the acquisition of the house, there is in the absence of evidence of an express agreement between the parties no material to justify the court in inferring that it was the common intention of the parties that she should have any beneficial interest in a matrimonial home conveyed into the sole name of the husband, merely because she continued to contribute out of her own earnings or private income to other expenses of the household. For such conduct is no less consistent with a common intention to share the day-to-day expenses of the household, while each spouse retains a separate interest in capital assets

acquired with their own moneys or obtained by inheritance or gift.'' Summary of principles ▪ Several judicial and academic attempts have been made to distil the principles formulated in these two decisions of the House of Lords and to amplify them. In Allen v Snyder (1977) 2 NSWLR 685, Glass JA extracted the main principles in a passage which has been approved in several subsequent decisions (but see Baumgartner v Baumgartner (1987) 76 ALR 75 at p 80 where it is indicated by the High Court that this approach has limitations because it does not accept the proposition that an individual judge has jurisdiction to determine the proprietary interests of the parties according to notions of fairness). Allen v Snyder had been applied in McMahon v McMahon [1979] VR 239; but cf South Yarra Project Pty Ltd v Gentsis (1985) V ConvR ¶54170 where it was held that a constructive trust will arise in circumstances where it would be a fraud for the legal owner to assert a beneficial interest, and will be imposed without reference to the intention of the parties (in order that the demands of justice and good conscience may be satisfied) (see pp 63,369-371). The following is a summary utilising Glass JA's analysis (at pp 690691): 1. In the absence of writing to prove an express trust, courts will give effect to oral agreements as to the manner in which the parties' beneficial interest is to be held. 2. The common intention to which the court gives effect may be expressed in the oral agreement, or it may be inferred from the parties' conduct. 3. The court enforces the parties' actual intention, inferred as a fact, and not an imputed intention which they never had but would have had if they had applied their minds to it. 4. The courts give effect to trusts created by agreement or by common intention that the beneficial interest will be held in accordance with it.

5. Spouses may have different forms of financial arrangements, involving payments, loans, gifts or services; relating to the deposit, balance purchase price, mortgage payments, furniture, household expenditure. 6. Whether a particular arrangement discloses an agreement or common intention referable to beneficial ownership is a problem of evidence and not of law. 7. Proof of expenditure or services for the benefit of the household, or the provision of furniture, standing alone, is insufficient to show a common intention as to the ownership of property. 8. By appropriate evidence it may be proved that an agreement or common intention arose after the home had been acquired. 9. The common intention may be inferred by conduct, even if it had not been the subject of express communication between the parties. In Allen v Snyder (1977) 2 NSWLR 685, the parties commenced to live in a de facto relationship in 1955. From 1966 to 1974 they lived in a house owned by the man, from 1974 to 1977 the woman lived there on her own. The woman did not contribute directly to the purchase and there was no agreement that she would have a beneficial interest. Her claim for beneficial interest failed because (per Glass JA at p 696): ``It is no doubt true that the defendant proved a common intention that she should have a beneficial half interest in the whole property on marriage, and a beneficial interest in the whole property upon the death of the plaintiff. However, what she had to prove was an intention on the part of the plaintiff that she should also have a beneficial half interest while they lived together outside marriage.'' Although in Allen v Snyder a trust imposed through the existence of a common intention was characterised as an express trust, the better view, endorsed by judges and text writers, is that it is a species of

constructive trust (Ford and Lee at [2235]). In McMahon v McMahon (1979) VR 239, Marks J endeavoured to accommodate both express trusts and constructive trusts in some of the situations in which a spouse will succeed in the recognition and enforcement of some beneficial proprietary interest: ``(a) A constructive trust will arise if it would be a fraud for the husband to assert exclusive beneficial interest. Such a trust will be imposed, without regard to the intention of the parties, in order to satisfy the demands of justice and good conscience. (b) A trust (in circumstances incapable of giving rise to a constructive trust) will arise to give effect to a common intention of the parties. That common intention may be inferred from the conduct of the parties.'' ▪ In Hohol v Hohol (1981) VR 221, O'Bryan J stated the following as the essential elements of a constructive trust based on common intention (at p 225): ``First, that the parties formed a common intention as to the ownership of the beneficial interest. This will usually be formed at the time of the transaction and may be inferred as a matter of fact from the words or conduct of the parties. Secondly, that the party claiming a beneficial interest must show that he, or she, has acted to his, or her, detriment. Thirdly, that it would be a fraud on the claimant for the other party to assert that the claimant had no beneficial interest in the property.'' The onus of proving that the parties had a common intention lies on the party alleging the existence of a beneficial interest. In Hohol v Hohol (1981) VR 221 the parties lived in a de facto relationship for 25 years and had four children, living in various properties purchased in the man's name. It was held that he held the legal interest in the property on trust for himself and his de facto wife as tenants in common in equal shares, because their common understanding and intention was that they should own the property and any improvements on it equally.

▪ There were similar factual and legal issues in Boccalatte v Bushelle (1980) QdR 180 and in Hayward v Giordani (1983) NZLR 140. In the latter decision, the New Zealand Court of Appeal strongly suggested, without finally deciding it, that there may be some further relaxation of the requirements when a constructive trust may be imputed in matrimonial or de facto property disputes, even without the existence of a common intention in accordance with the principles already mentioned. Cooke J said (at p 148): ``... I would have been disposed to hold that a constructive trust arose here, flowing from the joint efforts of the parties and reasonable expectations, even if they had not applied their minds to the precise question.'' Richardson J said (at p 149): ``There is considerable force in the argument that given the realities of contemporary family life the property interests of parties who have been cohabiting together outside of marriage should not turn on an elusive and often vain search for indications of a common intention in relation to the property; and that there should be room in the evolution of equitable principles for the imposition of a constructive trust to reflect the direct and indirect contributions of the parties to the property which they have when they cease to live together. But that is not an issue which needs to be resolved today.'' ▪ In Calverley v Green (1985) 59 ALJR 111 at p 119; V ConvR ¶54168 at p 63,336 Mason and Brennan JJ also adverted to possible future developments: ``In Canada and in some cases in England, the device of the constructive trust has been invoked `to give relief to a wife who cannot prove a common intention or to a wife whose contribution to the acquisition of property is physical labour rather than purchase money' (per Laskin J (as he then was) in Murdoch v Murdoch (1973) 41 DLR (3d) 367, at p 388; and see Rathwell v Rathwell (1978) 83 DLR (3d) 289 and Pettkus v Becker (1980) 117 DLR (3d) 257). It is unnecessary to consider whether in some future case the device of a constructive trust might be relied on

where property beneficially owned in particular proportions is maintained or enhanced by work done or contributions made in different proportions.'' ▪ In Muschinski v Dodds (1985) 160 CLR 583; (1985) V ConvR ¶54183 despite the fact that the appellant, Mrs Muschinski, was unable to show that a resulting trust or a constructive trust based on common intention had arisen in her favour the High Court nevertheless found in her favour. The circumstances in which equity would intervene to impose a constructive trust as a remedy against an unconscionable conduct were considered by Deane J (at pp 63,471-63,472): ``Thus it is that there is no place in the law of this country for the notion of `a constructive trust of a new model' which, `[b]y whatever name it is described,... is... imposed by law whenever justice and good conscience' (in the sense of `fairness' or what `was fair') `requires it' (per Lord Denning MR, Eves v Eves (1975) 1 WLR 1338 at pp 1341, 1342; (1975) 3 All ER 768 at pp 771, 772, and Hussey v Palmer (1972) 1 WLR 1286 at pp 1289-1290; (1972) 3 All ER 744 at p 747). Under the law of the country — as, I venture to think, under the present law of England (cf Burns v Burns (1984) Ch 317) — proprietary rights fall to be governed by principles of law and not by some mix of judicial discretion (cf Wirth v Wirth at pp 232, 247), subjective views about which party `ought to win' (cf Maudsley, `Constructive Trusts', Northern Ireland Legal Quarterly, vol 28 (1977), 123 esp at pp 123, 137, 139-140) and `the formless void of individual moral opinion' (cf Carly v Farrelly (1975) 1 NZLR 356 at p 367; Avondale Printers & Stationers Ltd v Haggie (1979) 2 NZLR 124 at p 154). Long before Selden's anachronism identifying the Chancellor's foot as the measure of Chancery relief, undefined notions of `justice' and what was `fair' had given way in the law of equity to the rule of ordered principle which is of the essence of any coherent system of rational law. The mere fact that it would be unjust or unfair in a situation of discord for the owner of a legal estate to assert his ownership against another provides, of itself, no mandate for a judicial declaration that the ownership in whole or in part lies, in equity, in that other (cf Hepworth v Hepworth (1963) 110 CLR 309

at pp 317-318). Such equitable relief by way of constructive trust will only properly be available if applicable principles of the law of equity require that the person in whom the ownership of property is vested should hold it to the use or for the benefit of another. That is not to say that general notions of fairness and justice have become irrelevant to the content and application of equity. They remain relevant to the traditional equitable notion of unconscionable conduct which persists as an operative component of some fundamental rules or principles of modern equity (cf, eg, Legione v Hateley (1983) 152 CLR 406 at p 444; Commercial Bank of Australia Ltd. v Amadio (1983) 151 CLR 447 at pp 461-464, 474-475). The principal operation of the constructive trust in the law of this country has been in the area of breach of fiduciary duty. Some text writers have expressed the view that the constructive trust is confined to cases where some pre-existing fiduciary relationships can be identified (see, eg, Lewin on Trusts, 16th ed (1964: Mowbray), p 141). Neither principle nor authority requires however that it be confined to that or any other category or categories of case (cf, generally, Professor RP Austin's essay on `Constructive Trusts' in Essays in Equity (ed Dr Paul Finn) (1985) esp at pp 196-201; Waters [The Constructive Trust (1964)], pp 28ff). Once its predominantly remedial character is accepted, there is no reason to deny the availability of the constructive trust in any case where some principle of the law of equity calls for the imposition upon the legal owner of property, regardless of actual or presumed agreement or intention, of the obligation to hold or apply the property for the benefit of another (cf Hanbury and Maudsley [Modern Equity 12th ed (1985)], p 301; Pettit [Equity and the Law of Trusts, 5th ed (1984)], p 55). In the United States of America, a general doctrine of unjust enrichment has long been recognised as providing an acceptable basis in principle for the imposition of a constructive trust (see, eg, Scott, [The Law of Trusts 3rd ed (1967)], vol V, para 461). It may well be that the development of the law of this country on a case by case basis will eventually lead to the identification of some overall concept of unjust enrichment as an established principle constituting the

basis of decision of past and future cases. Whatever may be the position in relation to the law of other common law countries (cf, as to Canada, Pettkus v Becker (1980) 117 DLR (3d) 257 and, as to New Zealand, Hayward v Giordani (1983) NZLR 140 at p 148), however, no such general principle is as yet established, as a basis of decision as distinct from an informative generic label for purposes of classification, in Australian law. The most that can be said at the present time is that `unjust enrichment' is a term commonly used to identify the notion underlying a variety of distinct categories of case in which the law has recognised an obligation on the part of a defendant to account for a benefit derived at the expense of a plaintiff (cf Goff & Jones [The Law of Restitution, 2nd ed (1978)], p 11).'' ▪ The High Court again considered the question in Baumgartner v Baumgartner (1987) 164 CLR 137; 76 ALR 75. Reference was made by Mason CJ, Wilson and Deane JJ to earlier decisions, particularly Allen v Snyder. Their Honours said (at 76 ALR 80): ``We should mention that the approaches taken by the members of the Court of Appeal were influenced by that Court's earlier decision in Allen v Snyder [1977] 2 NSWLR 685 where it rejected the proposition, suggested by some English decisions, that there was vested in the individual judge a jurisdiction to determine what were the proprietary interests of the parties according to notions of fairness. Likewise, in that case, the Court of Appeal held that a declaration of trust must be based upon actual subjective intention and not a common intention ascribed to the parties by operation of law (at 694, 701, 702). In the present case the Court of Appeal considered that it should continue to follow Allen v Snyder. In so deciding it did not have the advantage of this court's decision in Muschinski v Dodds (1985) 160 CLR 583; 62 ALR 429, which was delivered subsequently.'' Referring to Muschinski v Dodds their Honours said (at 76 ALR 83): ``In Muschinski v Dodds a man and woman who had lived together for three years decided to buy a property on which to erect a prefabricated house and to restore a cottage. The woman

was to provide $20,000 from the sale of her house and the man was to pay the cost of construction and improvement from $9,000 he would receive on the finalisation of his divorce and from loans. The property was conveyed to them as tenants-in-common. Although some improvements were made by the man, the erection of the house did not proceed and the parties separated. The woman contributed $25,259.45 and the man $2549.77 to the purchase and improvement of the property. This court declared that the parties held their respective legal interests upon trust to repay to each his or her respective contribution and as to the residue for them both in equal shares. Deane J (with whom Mason J agreed) reached this result by applying the general equitable principle which restores to a party contributions which he or she has made to a joint endeavour which fails when the contributions have been made in circumstances in which it was not intended that the other party should enjoy them. His Honour said (CLR at 620; ALR at 455): `... the principle operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that that other party should so enjoy it. The content of the principle is that, in such a case, equity will not permit that other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him to do so: cf Atwood v Maude (1868) LR 3 Ch App 369 at 3745 and per Jessel MR, Lyon v Tweddell (1881) 17 Ch D 529 at 531.' His Honour pointed out (CLR at 614) that the constructive trust serves as a remedy which equity imposes regardless of actual or presumed agreement or intention `to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle': see also at 617. In rejecting the notion that a

constructive trust will be imposed in accordance with idiosyncratic notions of what is just and fair his Honour acknowledged (CLR at 616) that general notions of fairness and justice are relevant to the traditional concept of unconscionable conduct, this being a concept which underlies fundamental equitable concepts and doctrines, including the constructive trust.'' Baumgartner v Baumgartner was also a case in which the parties had pooled their earnings for the purposes of the joint relationship and, particularly, to secure accommodation for themselves and their child. It was said (see 76 ALR at 84) that assertion by the appellant that the relevant property was his sole property after the relationship had failed at the exclusion of any interest on the part of the respondent amounted to unconscionable conduct which would attract the intervention of equity and thereby the imposition of a constructive trust. For a useful discussion of the development of an application of the equity principle in Muschinski v Dodds and Baumgartner v Baumgartner, see Marcia Neave, ``The New Unconscionability Principle — Property Disputes between Defacto Partners'' (1991) 5 AJFL 185. ▪ There can be no resulting trust and it would follow that there could be no constructive trust contrary to legislative provisions (see Orr v Ford (1989) 84 ALR 146 at 150). Although intention may not now be necessary to found a constructive trust it would follow that any express declaration as to any beneficial interest or interests would not leave any room for the court to apply any resulting or implied trusts or to impose a constructive trust (see Goodman v Gallant [1986] 1 All ER 311; and see Turton v Turton [1987] 2 All ER 641). Reference might also be made to the decisions of the Supreme Court of Victoria in McMahon v McMahon [1979] VR 239; Couch v The Public Trustee of Victoria (1983) V ConvR ¶54-072; Thwaites v Ryan (1983) V ConvR ¶54-103; Kovacevic v Matiyas (1985) V ConvR ¶54172; Butler v Craine (1985) V ConvR ¶54-181; Riley v Osborne (1985) V ConvR ¶54-182; Cooke v Cooke (1986) V ConvR ¶54-191; and Higgins v Wingfield & Anor (1987) V ConvR ¶54-200. Generally, see

Consul Development Pty Ltd v DPC Estates Pty Ltd (1974-75) 132 CLR 373. The law governing disputes between de facto partners over real property was simplified and modernised by amendments to the Property Law Act in 1987. Under the Act a de facto partner may apply to a court for an order adjusting an interest with respect to real property. The court may make an order adjusting the interests of the de facto partners in the real property if it is just and equitable having regard to the financial and non-financial contribution (whether directly or indirectly) made by or on behalf of the partner to the acquisition, conservation or improvement of the property. Under the Act a court has power to order the transfer and sale of real property as well as order the execution of documents of title. In addition the court can make orders and grant injunctions for the protection of real property and make any other order to do justice (see ¶21-370 and following).

¶65-300 The nature of the member’s interest Section 9 of the Corporations Act 2001 provides that scheme membership consists of a right to benefits produced by the scheme. However that membership interest can take different forms, depending on the legal form of scheme. For example, where the managed investment scheme is a partnership, the membership interest will be a partnership interest. Where the scheme is a unit trust, the interest may be characterised a beneficial interest in the trust property, combined with a right to due execution of the trust (although this characterisation is somewhat controversial — see below). Where the scheme is contractual in nature, the scheme interest may be a chose in action. In other cases the interest may consist of an option or other future or derivative interest. Therefore it is difficult to generalise about the nature of the membership interest in managed investment schemes. However the fact of scheme membership confers upon members certain rights, derived from: • the general law as it applies to the particular legal form of the

scheme (for example, from the law of trusts or partnership law), and • the provisions of Ch 5C and other applicable parts of the Corporations Act. It is helpful to consider the nature and incidents of membership in this light. The Corporations Act confers certain rights on members of a managed investment scheme, including voting rights and rights to enforce the obligations owed to them through the courts. Those statutory rights supplement the members’ general law rights arising out of its relationship with the responsible entity and (perhaps) the other members of the scheme.1 In particular, in the case of schemes structured as trusts, a member may have contractual rights (arising out of the contract for subscription for interests) and rights as a beneficiary of a trust. The nature of the members’ interest in a managed investment scheme has been the subject of extensive doctrinal analysis and is a matter of some complexity.2 The Corporations Act confers certain statutory rights on members of a registered scheme, regardless of its legal form. It is important to understand that additional rights conferred under the scheme’s constitution, and rights existing at general law, may also be relevant. In addition, one author has recognised a significant cross-pollination from company law to the law of public unit trusts, based on their common antecedents in the deed of settlement company. It has been noted that, in the Australian cases over the last decade dealing with issues such as the majority unitholders’ power to bind minority unitholders and the right of the trustee to disregard as requisition for a meeting: “courts utilized principles developed in company law cases. Their direct application to the unit trust context was justified on the ground that both the unit trust and the registered company are siblings with a common parent, the deed of settlement company.

Thus, instead of trust principles providing solutions to company problems, company law now provides answers to the trust when it is used as a means of collective investment. There has been a reverse cultivation of principles.” See Kam Fan Sin The Legal Nature of the Unit Trust (OUP 1997) pp 44–6. The extent to which the position of members is equated to that of shareholders in a company may come to expand the range of rights available under the general law to those members. However, as the Full Federal Court noted in Australian Securities and Investments Commission v Wellington Capital Ltd [2013] FCAFC 52 at [84], “[s]hares in a company are an entirely different species of property from units in a managed investment scheme: Macaura v Northern Assurance Co Ltd [1925] AC 619 at 626–627”. The nature of members’ interest in a unit trust The general nature of unit holding was explained by Mason CJ, Deane and Gaudron JJ in Read v Commonwealth (1988) 167 CLR 57, at 61– 62: “A unit holder has a beneficial interest in the assets of the Trust, a right to have the Trust executed in accordance with the Deed, and a right to proportionate distribution of the proceeds representing the assets of the Trust Fund upon termination of the Trust. The extent of the unit holder’s beneficial interest at any given time is that proportion which his or her units bear to the total number of units issued.” The High Court’s decision in Charles v Federal Commission of Taxation (1954) 90 CLR 598 is often cited as the definitive statement of the nature the members’ interest in a unit trust: “A unit held under this trust deed is fundamentally different from a share in a company. A share confers upon the holder no legal or equitable interest in the assets of the company; it is a separate piece of property, and if a portion of the company’s assets is distributed among the shareholders the question whether it comes to them as income or capital depends upon whether the

corpus of their property (their shares) remains intact despite the distribution. But a unit under the trust deed before us confers a proprietary interest in all the property which for the time being is subject to the trust of the deed, so that the question whether moneys distributed to unit holders under the trust form part of their income or their capital must be answered by considering the character of those moneys in the hands of the trustees before the distribution is made.” Robert Hughes says of this passage at p 188 of The Law of Public Unit Trusts that: “The essence of the distinction concerns the nature of the proprietary interest held. Put simplistically, the shareholder has an interest in the company, while the unit holder has an interest in the property vested in the trustee … [T]he unit holder acquires an interest in the trust property itself. On the other hand, the shareholder obtains a distinct form of legal property or a chose-inaction, which is the shares themselves.” In The Legal Nature of the Unit Trust (OUP, 1997) Kam Fan Sin spends some time analysing the nature of the unit holder’s interest in a unit trust. He contends at p 261 that “units in today’s unit trusts are far more complicated than mere entitlement of beneficial interests” and concludes at p 263 that units “are bundles of such rights as the manager and the trustee [now the responsible entity] may incorporate at the time of the drafting of the trust deed”. He goes on to argue at p 264 that: “The common perception is that units are a kind of property analogous to shares. And it is the submission of this work that this perception is justified. This position is best understood from their legal attributes, which [are] examined … in terms of the following three propositions: (1) Unless the trust instrument provides specific interests in the underlying assets, a unit does not confer any interest in individual assets. It only confers a proportion of the net value of the trust fund, measured as the difference between its assets and liabilities, calculated and realizable in [the]

manner provided by the trust instrument. It is a kind of personal property. (2) A unit is a chose in action comprising (a) an interest in the net value of the trust fund as aforesaid, (b) rights of due administration by the trustee and the manager of the trust of the underlying assets and contractual rights amongst or between the trustee, the manager, and unitholders, (c) benefits of contractual promises by third parties, and (d) statutory rights for enforcing the instrument constituting the unit trust. (3) It is an indivisible choses in action that is redeemable and transferable in the manner provided in the trust instrument.” Sin’s characterisation of the nature of units is controversial. However it may be true that the High Court’s statement in Charles should be treated with some caution as a statement of the nature of the interest of every member in every type of scheme constituted as a unit trust. The decision of the High Court of Australia in CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 221 ALR 196 concerned the nature of the interest held by a unit holder in a unit trust. The case concerned the application of the taxing provisions of the Victorian land tax legislation to parcels of land held in various unit trusts. The registered proprietors of the relevant land were trustees under deeds constituting those trusts. Unitholders in the trusts had been assessed for land tax as “owners” of the land. Therefore the question before the High Court was whether a unitholder was an “owner” of the land for the purposes of that Act. In construing the land tax legislation, the High Court said that two steps were required. “The first step was to ascertain the terms of the trusts upon which the relevant lands were held. The second was to construe the statutory definition to ascertain whether the rights of the taxpayers [that is, the unitholders] under those trusts fell within that definition”. Importantly, the High Court held that the nature of the unit holders’

interests depends entirely upon the terms of the particular trust (at para 15–17), suggesting that generalised assumptions about what it means to be a unit holder are unhelpful: “In taking those steps, a priori assumptions as to the nature of unit trusts under the general law and principles of equity would not assist and would be apt to mislead. All depends … upon the terms of the particular trust. [The term] ‘unit trust’, like ‘discretionary trust’, in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning which can dictate the application to particular facts of the definition [of ‘owner’ in the land tax] Act. To approach the case … by asking first whether, as was said to be indicated by Costa & Duppe Properties Pty Ltd v Duppe [1986] VR 90, the holder of a unit ‘in a unit trust’ has ‘a proprietary interest in each of the assets which comprise the entirety of the trust fund’, and answering it in the affirmative, did not immediately assist in construing the definition of ‘owner’ in the Act. That definition does not speak of ownership of proprietary interests at large, but of entitlement to any estate of freehold in possession. In Schmidt v Rosewood Trust Ltd [2003] 2 AC 709 at 729 the Privy Council recently stressed that the right to seek the intervention of a court of equity to exercise its inherent authority to supervise and, if necessary, to intervene in the administration of trusts, ‘does not depend on entitlement to a fixed and transmissible beneficial interest’ …. No doubt, unit holders accurately may be said to have had rights protected by a court of equity, but that does not require the conclusion that in the statutory sense they were ‘owners’ of the land held on the trusts in question.” The High Court goes on to reject what it describes as a “dogma” that, where ownership is vested in a trustee, equitable ownership must necessarily be vested in someone else because it is an essential attribute of a trust that it confers upon individuals a complex of beneficial legal relations which may be called ownership. Later it describes this approach as a “dogma respecting concurrent and

exhaustive legal and beneficial interests … which was decisively discounted by the Privy Council in Livingston”. In applying Charles v FCT, discussed above, the Court emphasised that the conclusion in that case that a unit conferred a proprietary interest in the trust property depended on the precise terms of the trust deed then before the Court. It goes on to note that “Karingal and CPT rightly stress that the deeds with which this litigation is concerned were differently cast and in terms which do not support any direct and simple conclusion respecting proprietary interests of unit holders such as that reached in Charles”. The nature of members’ interest in a contract-based scheme Not all registered schemes are structured as trusts, as is pointed out in the CAMAC Discussion Paper on Managed Investment Schemes (June 2011) at 12–13: “The legislation does not mandate a particular legal structure. However, a distinction can be drawn between trust-based MISs, where the contributions of members are typically pooled, and contract-based MISs, where the contributions of members are typically used in a common enterprise. MISs that hold assets such as financial assets or real estate for investment purposes are generally structured as trusts, largely for tax reasons. In the listed property and infrastructure sectors, interests in trust-based MISs are often stapled to shares in an operating company. In these trust-based ‘investment’ type MISs, the contributions of scheme members are generally pooled and their interest is in the nature of a beneficial interest in the whole of the property of the trust. In contrast, ‘enterprise’ type MISs are often structured as a series of bilateral executory contracts between the member, the scheme operator and various other entities. The ‘scheme’ in that case is not a pool of assets under management, but rather the common enterprise carried out over time in accordance with those contracts. For instance, some agribusiness MISs, for taxation or other reasons, were structured to give members (‘growers’)

various forms of proprietary or contractual interests related to the operations of the scheme on allocated parcels of land, which may be owned by a third party.” A similar distinction was drawn by Professor Ford in the Companies and Securities Law Review Committee’s Discussion Paper No 6 — Prescribed Interests (1987), Ch 4: see ¶2-200. The nature of a member’s interest in a contract-based enterprise scheme depends on the nature of the contractual and other arrangements making up the scheme. In BOSI Security Services Ltd v Australia and New Zealand Banking Group Ltd & Ors [2011] VSC 255, Davies J analysed the nature of the members’ interest (often, in agribusiness schemes, referred to as “growers”) in several contractbased schemes promoted by the Timbercorp group. The schemes were all related to the cultivation of almonds. Following the collapse of the Timbercorp group, the “almond assets” (including the land, trees and water rights) had been sold to a third party, Olan. Under a procedure laid down by Robson J in Re Timbercorp Securities Ltd (In liq) (No 3) [2009] VSC 510, the growers asserted a right to a share in the proceeds of sale of those assets. Her Honour found at [29]–[30] that the growers would be entitled to such a share only if they had rights of a proprietary nature in those assets: “Robson J could not create any interest for the growers in the net proceeds that they did not possess in law or equity. Order 7 explicitly reserved to the Rights Proceeding the determination of the question as to whether the growers had rights of a nature that entitled them to a share of the net proceeds … It was therefore incumbent upon the growers in this proceeding to found their entitlement to a share of the net proceeds. In order to do so they needed to establish that they held rights of a proprietary nature in and with respect to the Almond Assets that were converted into the fund constituted by the net proceeds from the sale of the Almond Assets. It was not sufficient for the growers merely to establish that the rights that were extinguished to enable the SPD to be completed were rights that had value.” Davies J considered the particular structure and features of each of

the relevant schemes. The different schemes were differently structured. Her Honour concluded at [79] that: “the growers in the 2002 projects have no legal entitlement to a share of the net proceeds because they held no proprietary interest in the assets that Olam purchased. Although they owned the almonds grown on the trees, there were no almonds on the trees at the time of sale. The growers in the 2005, 2006 and 2007 projects are in a different position because they held leasehold interests in the land, almond trees and capital works (but not the water licences) that were ‘given up’ so that the SPD could be completed unencumbered by those interests. Those leasehold interests entitled the growers to make a claim on the sale proceeds to be measured by the value of those leasehold interests pre-extinguishment.” In Korda v Australian Executor Trustees (SA) Limited (2015) 317 ALR 225; [2015] HCA 6, the High Court was asked to consider whether investors in a contract-based forestry scheme established under the 1961 legislation had a beneficial interest in assets related to the arrangement, even though the documents constituting the arrangement did not contain the formal words declaring that the assets are held on trust for their benefit. The arrangements in question provided for the planting, cultivation, harvesting and sale of radiata pine in the “green triangle” around Portland in south western Victoria. They involved a number of steps between the acquisition of the investors’ interests in designated projects, and the sale of the timber produced by those projects. Under the investment arrangement created by the relevant documents, the respondent, Australian Executor Trustees (SA) Limited (AET), was appointed as trustee for investors and was to receive the net proceeds of sale of timber at the second-to-last step in the project, and hold them on express trust pending distribution to investors. But the collapse of the arrangement resulted in the land and standing timber being sold before this step was reached, and a dispute arose as to whether an express trust also existed over those assets, and therefore the proceeds of their sale, at this earlier stage of the projects’ life.

At first instance, Sifris J in the Supreme Court of Victoria held that the assets (and therefore proceeds) were held on an express trust for the investors at the time the legal owners of those assets were placed into liquidation: Australian Executor Trustees (SA) Ltd v Korda (2013) 8 ASTLR 454; [2013] VSC 7. The Court of Appeal (Maxwell P and Osborn JA, Robson AJA dissenting) also found in favour of the investors: Korda v Australian Executor Trustees (SA) Ltd (2014) 11 ASTLR 304; [2014] VSCA 65. However, the High Court concluded otherwise, with all five justices deciding that the contractual interests held by the investors did not confer on them a beneficial interest in the assets at the time the legal owners of those assets went into liquidation. This was despite the fact that the proceeds of the sale of those assets would, had the scheme been carried through to its commercial conclusion, have certainly been held by AET on trust for the investors under the documents constituting the arrangement. At all stages of the litigation, it was common ground between the parties that if the investors had any beneficial interest in the scheme assets, it was because an express trust of those assets was extant at the relevant time. Everyone agreed that, for there to be an express trust, the “three certainties” must be present. Those certainties are: certainty of subject matter, certainty of object and certainty of intention.3 At issue in Korda was whether a certain intention to create a trust before the second-to-last stage of the projects could be found in the documents and dealings giving rise to the scheme. As always and appropriately, the specific dealings between the parties determined the outcome. But the High Court emphasises three important propositions. First, there is a clear conceptual distinction between express trusts and constructive trusts, and that distinction continues to matter. Secondly, for an express trust to arise, the parties must have intended it, and that intention must be ascertainable in the relevant documents or oral dealings “in their context”. Commercial necessity — in particular, a perceived necessity to quarantine the investors’ interest in the particular projects from the overall operating risk of the companies — was not enough. Thirdly, where there is doubt as to the intention of the parties, the correct approach (at least

in a commercial context) is to conclude that a trust is not present. .01 Law: Corporations Act 2001, s 9. Footnotes 1

The question of whether scheme members can be said to be in a relationship with each other is discussed below. See also Kam Fan Sin “Enforcing the Unit Trust Deed Amongst Unitholders” (1997) 15 CSLJ 108.

2

See, among others, Kam Fan Sin The Legal Nature of the Unit Trust (OUP 1997); Robert Hughes The Law of Public Unit Trusts (Longman, 1992). The nature of the scheme members’ interest in scheme property is discussed in Kriewaldt and Hemmings “A Unitholder’s Interest (and Relevant Interest) in Trust Property” (1994) 12 CSLJ 451.

3

[2015] HCA 6 at [7].

¶162-730 Use of trust assets The law is not entirely clear on the extent to which a liquidator may have recourse to trust assets to pay the company’s debts, including the costs and expenses of the winding up and the liquidator’s remuneration. Liquidators commonly apply for directions under s 479(3) of the Act in relation to the extent to which they may have recourse to trust assets. The answer to this question depends upon the circumstances and the court in which the question is posed. The trust assets are not the assets of the company, so that the company has no proprietary claim over them. However, the company has, as the trustee, a right to indemnify itself out of trust assets (for liabilities incurred in discharging its duties as a trustee) and that right passes to the liquidator when the company is being wound up. Furthermore, a distinction may need to

be drawn between circumstances in which, on the one hand, a company which is the trustee of a trading trust goes into liquidation and, on the other hand, a company which is both a bare trustee, and also an entity which carries on business in its own right, goes into liquidation. The ranking of priority payments in s 556 does not apply to the rights of trust creditors in respect of trust property; it is concerned only with the distribution of assets beneficially owned by a company and available for division between its general creditors. Section 556 is concerned only with the distribution of assets beneficially owned by a company and available for division among its general creditors. Trust creditors share pari passu in the trust assets once provision is made for the costs of administration (including the remuneration and expenses of the liquidator): In the matter of Independent Contractor Services (Aust) Pty Limited ACN 119 186 971 (in liquidation) (No 2) (2016) 34 ACLC ¶16-004. If the liquidator exercises the right, on behalf of the company, to indemnify itself out of trust assets, how are the resulting proceeds to be applied? On one view, the proceeds (to the extent of the trust liabilities) are property of the company and therefore available for division among all of the company’s creditors (including the liquidator), not merely the “trust” creditors: Re Enhill Pty Ltd (1982) 1 ACLC 415 (Vic Full Sup Ct); see also Octavo Investments Pty Ltd v Knight (1980) CLC ¶40602; (1979) 144 CLR 360 (High Ct), Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd (1983) 1 ACLC 739 (NSW Sup Ct) and Coates v McInerney & Anor (1992) 10 ACLC 616 (WA Sup Ct). This view proceeds on the basis that the right of a trustee to be indemnified out of trust assets, or the realisation of those assets, is an asset of the trustee in a winding up. A more conservative view is that the availability of the proceeds depends upon the time at which the company/liquidator exercised the right of indemnity. If the company/liquidator has already incurred and paid debts in the performance of its trustee duties, any money subsequently recouped out of trust assets can be distributed among

all of the company’s creditors. However, if the debts have been incurred — but not paid — the company/liquidator can only apply any subsequent proceeds of its right of indemnity to payment of those “trust” debts. However, because the company’s duty as a trustee cannot be performed unless the liquidation proceeds, the expenses of the liquidation are a trust debt, and so can be recovered by the liquidator from the trust assets: Re Suco Gold Pty Ltd (1983) 1 ACLC 895 (SA Full Sup Ct); followed in Re ADM Franchise Pty Ltd (1983) 1 ACLC 987 (NSW Sup Ct), Rinbar Pty Ltd (in liq) v Nichevich & Ors (1987) 5 ACLC 957 (WA Sup Ct) and Re French Caledonia Travel Service Pty Ltd (in liq) (2002) 20 ACLC 1,486 (NSW Sup Ct). The most conservative view is that trust assets are never available to the company’s non-trust creditors: Re Byrne Australia Pty Ltd (1981) CLC ¶40-717 (NSW Sup Ct). A liquidator appointed to wind up an insolvent company, whose only business was that which it carried on as trustee for beneficiaries under a discretionary trust, could not be characterised as a trust creditor and therefore is not entitled to deduct the liquidator’s costs or expenses (including remuneration) out of the trust assets: Re Byrne Australia Pty Ltd (1982) 1 ACLC 28 (NSW Sup Ct); see also Jim Jaggard Pty Ltd v Regional Commercial and Industrial Pty Ltd (1982) 7 ACLR 1. Discounting Byrne Australia, it is clear that Enhill and Suco produce the same result for a liquidator: it is only the reasoning that differs (see the comments of McLelland J in ADM Franchise at 989). However, in Re GB Nathan & Co Pty Ltd (in liq) (1991) 9 ACLC 1,291, a distinction was drawn between trading trust companies (as found in Suco and Enhill) from companies that were bare trustees. Suco and the decisions that have followed Suco were distinguished on the basis that those cases involved companies which were trustees of trading trusts and, in pursuance of the relevant trusts, the companies carried on business as trustees, in the course or for the purposes of which they incurred debts. In GB Nathan, the company was a licensed money market dealer and invested funds on behalf of clients who had deposited money with the company for that purpose. The liquidator of GB Nathan sought directions from the court whether any of the moneys were held on

trust and whether he was entitled to deduct from such moneys his costs, charges and expenses of the winding up. After determining that some of the investments were held on what were virtually bare trusts, McLelland J distinguished between the work that a liquidator would have to do in winding up the company and work that the liquidator would have to do in discharge of the trustee’s duties. The task of identifying trust assets and transferring them to the beneficial owners was, in his Honour’s view, more correctly characterised as part of the process of winding up the company than as a discharge of the trustee’s duties. Remuneration and expenses related to that work should, he said, be paid out of non-trust property. Where there was insufficient non-trust property, the court might allow the shortfall to be made up from trust assets. The judge in GB Nathan ultimately found that the property of the company was sufficient to meet the costs and expenses of the winding up (including the liquidator’s remuneration), therefore it was unnecessary for the shortfall to be made up from trust property. But these principles have been applied in subsequent cases, in circumstances where there was such a need to have recourse to trust assets: see Re French Caledonia Travel Service Pty Ltd (in liq) (2002) 20 ACLC 1,486 and ASIC v Rowena Nominees Pty Ltd (2003) 21 ACLC 1,447. Suco, Enhill, GB Nathan and other cases (including In re Berkeley Applegate Ltd (No 2) [1989] 1 Ch 32, Octavo Investments Pty Ltd v Knight (1980) CLC ¶40-601; (1979) 144 CLR 360, Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319, and Re Crest Realty Pty Ltd (No 2) (in liq) (1977–1978) CLC ¶40-349; [1977] 1 NSWLR 664), were surveyed by Finkelstein J in 13 Coromandel Place v CL Custodians Pty Ltd (1999) 17 ACLC 500, (followed in ASIC v Primelife Corporation Ltd (2007) 25 ACLC 1,700) where his Honour said at 509: “These cases establish … that provided a liquidator is acting reasonably he is entitled to be indemnified out of trust assets for his costs and expenses in carrying out the following activities: identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to the persons beneficially entitled

to them. The position is a little more involved as regards work done and expenses incurred in what may be described as general liquidation matters. If that work is unrelated to the beneficiaries and their claims it is difficult to see how the cost could be charged against their assets. In the case of a company that has carried on the business of trustee it might be that much of the work involved in the liquidation is chargeable against trust assets if it can be shown that the liquidation is necessary for the proper administration of the trust. But it is unlikely that this will be so where the company did not act solely as trustee or at least did not act in that capacity to a significant extent. In that event, the liquidator will be required to estimate those of his costs that are attributable to the administration of trust property and only those costs will be charged against the trust assets.” In Glazier Holdings Pty Ltd v Australian Men’s Health Pty Ltd [2006] NSWSC 1240, White J noted that the authorities make it clear that the liquidator is entitled to recover remuneration from trust assets only where the work done was in administration of the trust; citing Grime Carter & Co, Berkeley Applegate, Re Eastern Capital Futures Ltd [1989] BCLC 371, GB Nathan, 13 Coromandel Place Pty Ltd and French Caledonia Travel Service Pty Ltd. It followed, in the view of White J, that the only claim which the liquidator had for which the company was liable, and against which the company was entitled to be exonerated from the funds in court, was for remuneration and expenses in connection with the administration of the trust. See also In the matter of North Food Catering Pty Limited (2014) 32 ACLC ¶14-049. Further, the liquidator is not entitled to charge the beneficiaries of one trust with the costs and expenses incurred in relation to another trust. Accordingly, in such a case it will be necessary for the liquidator to estimate the costs and expenses incurred insofar as they relate to each trust and only charge those costs to the trust on whose behalf the work was performed. If that estimate is not possible then a pari passu distribution of the costs and expenses will be in order as was

envisaged by King CJ in Re Suco Gold Pty Ltd (1983) 1 ACLC 895. Finally, if the liquidator has performed work on behalf of persons such as investors for whom no property is held on trust, the liquidator could not look to the existing trust assets for the costs and expenses of that work unless, in accordance with the foregoing principles, the liquidator is entitled to charge those assets with a proportionate share of the costs. That would be so if the costs and expenses are not divisible. The accounts that the liquidator prepares should deal with these issues: 13 Coromandel Place at 509, and see Re French Caledonia Travel (2004) 22 ACLC 498 at 549. The basis upon which a court will allow remuneration to either a liquidator in a creditor’s voluntary winding or an administrator who has administered trust funds in the course of the winding up or administration is derived from the court’s inherent jurisdiction in relation to trust funds. That inherent jurisdiction can be applied not just to a trustee, but to someone who is for practical purposes controlling a trustee. Because it is an inherent equitable jurisdiction which is being exercised in such a case, a procedure needs to be crafted which can give effect to it. The circumstances in which a liquidator appointed by the court is allowed remuneration by the court provide a precedent which can be readily adapted to these circumstances. However, one needs to bear in mind that the power being exercised is the inherent power concerning administration of trusts: Application of Sutherland (2004) 22 ACLC 1,326. In that case, the court decided that it was appropriate that a procedure be adopted that allowed those with the largest interests in the trust fund to contest the detail of the liquidator’s allocation of work relevant to the administration of the trusts or the reasonableness of the remuneration claimed. Further, it was appropriate that the liquidator’s claim be examined by a Registrar of the Court. See also Alphena Pty Limited (in liq) v PS Securities Pty Ltd as Trustee of the Joseph Family Trust (2013) 31 ACLC ¶13-018; In the matter of AAA Financial Intelligence Ltd (in liquidation) (No 2) (2014) 32 ACLC ¶14-052. For a full discussion of the position of a corporate trustee in liquidation, where the trustee has been removed from its position by a self-executing clause in the trust deed, see ¶146-740.

The authorities in this area were examined by Davies J in Thackray v Gunns Plantations Ltd [2011] VSC 380. At [54]–[55], Davies J said that, whereas the right to recoupment under the “salvage” principle (as to which see ¶146-520) arises by implication of law, an entitlement to an equitable allowance out of trust assets requires an exercise of discretion by the court and, as the cases indicate, it is a discretion that the court will exercise sparingly and only in exceptional circumstances. Matters which may be relevant to the exercise of discretion include: (a) that if the work claimed for had not been done by the claimant, it would have had to be done either by the person who claimed the assets or by a court appointed receiver whose fees would have been borne by the trust property (b) the complexity and difficulty of the work done (c) that the work has been of “substantial benefit to the trust property” and to the persons interested in it in equity. Where money is held by a company in liquidation on a constructive trust arising because the money was paid to the company by mistake, the liquidator may be held liable under the first limb of the rule in Barnes v Addy (1874) LR 9 Ch App 244 to account for the money he is taken to have received, after he had knowledge that the payment was made by mistake. In such a case, the constructive trust is taken to have arisen when the company (and the liquidator, as the mind of the company) becomes aware that it is not entitled to receive the money: Wambo Coal Pty Ltd v Ariff (2007) 25 ACLC 809. In that case, the liquidator had in fact caused most of the money paid by mistake to be transferred to a company which he controlled, to reimburse it for disbursements it had paid, on his direction, in the liquidation. The court found that the liquidator had wilfully and recklessly failed to make enquiries for fear of learning that the company was not entitled to retain the money. The company in liquidation was bound by a constructive trust to account to the payer for the moneys which it had retained and which it knew had been paid to it by mistake. It was a breach of that trust for the moneys to be paid to third parties on the

liquidator’s direction. For commentary on the rule in Barnes v Addy, see ¶79-800. Act: Section 556(1)(a). .40 Whether liquidator entitled to costs and expenses. Australvic Pty Ltd held a property as trustee. The property was sold by mortgagee auction. An order was made for the winding up of Australvic and a liquidator was appointed to the company. After discharging the money owed to the first mortgagee, the residue from the mortgagee auction was paid into court. A number of parties, including JGM Nominees Pty Ltd, made claims against the funds in court. JGM Nominees issued proceedings to pursue their claims. Following unsuccessful mediation and vigorous opposition by the liquidator, who had asserted JGM Nominees’ case was weak and unlikely to be successful, the court found in favour of JGM Nominees in JGM Nominees Pty Ltd v Australvic [2009] VSC 545. The liquidator sought to be paid his costs and expenses, and the costs of the proceedings, from the funds in court. Held: liquidator entitled to some costs and expenses, liquidator personally liable for plaintiffs’ costs. 1. The liquidator had no automatic right of indemnity for his remuneration and legal costs out of the funds in court. The liquidator had not had to undertake any work to realise or protect the assets: the funds had been safely held in court since before he commenced his duties as liquidator. He had not expended any effort in returning the assets to their true owner; on one view, he had taken active steps to prevent the return of the funds to the true owner. 2. While in the early stage of the proceeding it might have been reasonable for the liquidator’s role to have been considered analogous to that of an executor of a deceased estate, defending the fund against claims by competing beneficiaries, at least by the time that the mediation was concluded, it was apparent that the liquidator was an active protagonist in the litigation. In those

circumstances, it was difficult to see why the liquidator should have received the costs and expenses of adopting what ultimately proved to be an unsuccessful position. The liquidator was awarded his costs and expenses, including his legal costs, up to and including the mediation date. 3. While a court should be cautious to order costs against a liquidator personally when the liquidator was unsuccessful in litigation, such caution could not be allowed to fetter a court’s discretion with respect to costs in the case before it. It was just and appropriate that the first and third plaintiffs were indemnified against their costs. The liquidator was ordered personally liable for all costs incurred by the first and third plaintiffs (including costs incurred by them prior to the mediation) on a party-party basis. JGM Nominees Pty Ltd v Australvic Pty Ltd (in liq) (No 2) (2010) 28 ACLC ¶10-021. .90 Article. “Re Enhill Pty Ltd: Trust and Non-Trust Creditors”, J W De Wijn (1983) 12 AT Rev 24.

¶8-590 Joint ventures Two or more persons or entities can form a joint venture. Joint ventures occur frequently in mining, petroleum and real estate development and less frequently in other businesses such as share farming, manufacturing, the entertainment industry and industrial research. Usually joint ventures are distinguished from partnerships and have some perceived advantages for the venturers: • more flexibility than a partnership; • each venturer is not an agent for or responsible for the conduct of other venturers (subject of the provisions of their agreement); • the income and expenditure of each venturer is treated separately for tax purposes; • the share of each venturer can be disposed of separately (subject

to their agreement); • each can make its separate financing arrangements. However, there are practical difficulties with the suitability of a joint venture to conduct a business such as a retail, wholesale, agency, export/import business, which is engaged in selling goods or providing services and receives regular income. First, a joint venture should not receive income jointly, to avoid being treated as a partnership for taxation purposes. That is difficult when the venture effectively conducts a business that sells goods or markets products jointly and receives joint income. Secondly, several features of a joint venture, including the lack of joint responsibility, are not suitable for most permanent business ventures. Accordingly, the formation of a joint venture for the purchase of a business by that venture cannot be recommended as a viable alternative for most purchases of business. If it is intended that a business should be an asset within the joint venture, it may be acquired by one of the venturers which might conduct the business and provide it as its contribution to the joint venture. Two or more corporations can acquire a business either in partnership or create a new corporate vehicle in which each holds shares for the business acquisition, but without creating a joint venture for that business.

¶2-830 Operation of Cartels Act joint venture exception Sections 44ZZRO and 44ZZRP of the CCA provide that criminal and civil prohibitions against cartel conduct in Div 1 of Pt IV will not apply to joint ventures that satisfy certain conditions set out in the relevant sections. In essence, these conditions may be described as follows: • the cartel provision is contained in a contract • the cartel provision is for the purposes of a joint venture • the cartel provision is for the production and/or supply of goods or

services, and • the joint venture is carried on jointly by the parties to the contract, or by means of joint ownership or control of a body corporate formed by the parties to carry on the activity of the joint venture. Diagram 3: Elements of joint venture exception

The treatment of joint ventures has been criticised as not reflecting a full understanding of the broad scope of joint venture activity in Australia. Joint ventures can often involve two or more firms pooling their resources to pursue some form of commercial opportunity together. In many cases joint ventures will not be anti-competitive; for example, where a joint venture is created to pursue an activity that the joint venturers would not be able to pursue individually. According to the Supplementary Explanatory Memorandum to the Bill which became the Cartels Act: “Joint ventures have an important role to play in Australia’s economy, and can be pro-competitive, particularly when they are employed as a means of developing new products or services or producing existing products or services more efficiently.” As noted earlier, a joint venture defence was first introduced into the (then) TPA in 1977. When the TPA was amended following the Dawson Committee report, s 76D of the TPA (repealed by the Cartels Act) was introduced. But even this provision was regarded as less than satisfactory because it imposed an obligation on the joint venturers to establish that the relevant joint venture activity did not substantially lessen competition. This is in stark contrast to the approach in the USA in particular where, in effect, a rule of reason applies. The USA approach imposes an obligation on the prosecution (the Department of Justice or a civil plaintiff) to establish that a joint venture amounts to a breach of s 1 of the Sherman Act 1890 (which in effect prohibits contracts which might be generally described as cartels in a broader Australian context). Most recently, the Supreme Court of the USA in Texaco Inc v Dagher 547 US 1 (2006) confirmed the approach relying on rule of reason and dealing with what, on the surface, may have appeared to be a price fixing or a market sharing arrangement. The Canadian legislature also adopts a softer approach in dealing with joint ventures than the approach taken under the CCA and in particular the Cartels Act. .01 Law: Sections 44ZZRO; 44ZZRP.

.90 Other references. Supplementary Explanatory Memorandum and Correction to the Explanatory Memorandum, Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (Cth).

Tax Institute CommLaw2 Module 3 — Commentary ¶35-050 Superannuation There are many similarities between the scheme for the regulation of financial services licensees and their activities under the Corporations Act 2001 and the regulation of superannuation trustees and their activities under the Superannuation Industry (Supervision) Act 1993 (the SIS Act). In 2004, the SIS Act was extensively amended by the Superannuation Safety Amendment Act 2004. Like the FSRA amendments to the Corporations Act, one of the main aims of the 2004 amendments is to raise industry standards. In addition to the SIS Act, there are a substantial number of prudential standards, prudential practice guides, circulars, guidance notes and other publications issued by the Australian Prudential Regulation Authority (APRA) which apply to registrable superannuation entity (RSE) licensees and others involved in the superannuation industry. Although only prudential standards have the force of law, these documents reveal APRA’s interpretation of relevant legislation or good practice, and all of their requirements should be incorporated into compliance systems. These publications can be downloaded from the APRA website. They are also included in the APRA Superannuation Digest. The Digest contains the superannuation legislation and information released by APRA relating to the legislation, and is a good reference guide for superannuation trustees and their advisors. In common with the MIA provisions of the Corporations Act, there is a two-step licensing and registration process for superannuation. The SIS Act requires superannuation trustees to obtain a licence and RSEs to be registered. Under s 10, a “registrable superannuation entity” is defined as: • a regulated superannuation fund (which includes employer,

industry and retail funds), or • an approved deposit fund, or • a pooled superannuation trust but does not include public sector superannuation funds or self managed superannuation funds. A prospective trustee or trustees must obtain a registrable superannuation entity licence (RSE licence) issued by APRA before they can register an RSE. An RSE licensee can be a corporation or a group of individual trustees. An RSE licensee may apply to APRA for the registration of an RSE. The requirements for applications are set out in s 29L of the SIS Act. The RSE licence In s 29E, there is a list of conditions that are imposed on all RSE licenses. Some of these conditions include an obligation to: • comply with the RSE licensee law • ensure that each RSE of which it is the RSE licensee is registered or is the subject of an application for registration • notify APRA of any change in the composition of the RSE licensee within 14 days after the change takes place, and • comply with any other conditions prescribed by the regulations. If the RSE licensee is a body corporate, a change in composition means a person becoming, or ceasing to be, a director of the body corporate. If the licensee is a group of individual trustees, it means an individual becoming, or ceasing to be, a member of the group. Breaching a licence condition may lead to a direction from APRA to comply with the condition or may even lead to the cancellation of the licence (s 29G). Like the holders of an AFSL who are required to report to ASIC, RSE

licensees are required to notify APRA of a breach of a licence condition. Section 29JA provides that if an RSE licensee becomes aware that it has breached, or will breach, a condition of its RSE licence, and the breach is or will be significant, it must give APRA a written report about the breach as soon as practicable, and in any case not later than 10 business days after becoming aware of the breach. Failure to do so is an offence. The section includes a list of factors that a licensee should have regard to in deciding whether or not a breach is significant. These factors are the same factors as s 912D of the Corporations Act requires a financial services licensee to have regard to in deciding whether or not to make a breach report to ASIC. Section 912D is discussed at ¶35-043. Fitness and propriety of RSE licensees Regulation 4.14 of the SIS Regulations deals with the fitness and propriety of RSE licensees. To meet this “fit and proper” standard, a licensee must possess the relevant attributes to properly discharge the duties and responsibilities of an RSE licensee in a prudent manner. These attributes include, but are not limited to: • character, competence, diligence, experience, honesty, integrity and judgment, and • educational or technical qualifications, knowledge and skills relevant to the duties and responsibilities of an RSE licensee (reg 4.14(4)). The fit and proper standard is not met if: • when the RSE licensee is a body corporate, that body corporate is a disqualified person • a director of a body corporate is a disqualified person, and within 14 days after becoming aware of this, the body corporate does not notify APRA of that fact and remove the director • the RSE licensee is a group of individual trustees, one of those trustees is a disqualified person, and within 14 days after becoming aware of this, the group does not notify APRA of that

fact and remove the trustee from the group (reg 4.14(5) and (6)). APRA’s Prudential Standard SPS 520 — Fit and Proper states that an RSE licensee must have a documented policy relating to the fitness and propriety of its responsible persons that meets the requirements of the standard. Some of the requirements of SPS 520 or matters that must be covered by the policy include: • an RSE licensee must clearly define and document the competencies required for each responsible person position • the fit and proper policy must include the processes to be undertaken in assessing whether a person is fit and proper for a responsible person position (the fit and proper assessment) • the fit and proper policy must require a fit and proper assessment be completed before a person becomes the holder of a responsible person position (unless the appointment is an interim appointment) • the fit and proper policy must specify the action to be taken where a person is assessed as being not fit and proper • the fit and proper policy must require that there be annual fit and proper assessments for each responsible person position • the fit and proper policy must include adequate provisions to allow whistleblowing if a person has information that a responsible person does not meet the RSE licensee’s fit and proper criteria, and • an RSE licensee must notify APRA within 14 days if it assesses that a responsible person is not fit and proper. Paragraph 11 of the standard defines who is a “responsible person” of an RSE licensee. A responsible person includes a director, secretary or senior manager of the RSE licensee. Paragraph 18 sets out the criteria that must be used to determine

whether or not a person is fit and proper to hold a responsible person position. The criteria are whether: (a) it would be prudent for an RSE licensee to conclude that the person possesses the competence, character, diligence, experience, honesty, integrity and judgment to perform properly the duties of the responsible person position (b) it would be prudent for an RSE licensee to conclude that the person possesses the education or technical qualifications, knowledge and skills relevant to the duties and responsibilities of an RSE licensee (c) the person is not disqualified under the SIS Act from holding the position, and (d) the person either: (i) has no conflict in performing the duties of the responsible person position, or (ii) if the person has a conflict, it would be prudent for an RSE licensee to conclude that the conflict will not create a material risk that the person will fail to perform properly the duties of the position. An RSE licensee must continue to meet the fit and proper standard for as long as the RSE licence continues in force. Governance SPS 510 — Governance sets out the minimum requirements for good governance of an RSE licensee. Its objective is to ensure that an RSE licensee’s business operations are managed soundly and prudently by a competent board (or the group of individual trustees of an RSE licensee), which can make reasonable and impartial business judgements in the best interests of beneficiaries and which considers the impact of its decisions on beneficiaries. Some of the key requirements of the standard include:

• the board must have a formal charter that sets out its roles and responsibilities (paragraph 9) • the board must have in place a formal policy on board renewal which sets out details of how the board intends to renew itself in order to ensure it remains open to new ideas and independent thinking, while retaining adequate expertise (20) • an RSE licensee must establish and maintain a documented remuneration policy which outlines the remuneration objectives and the structure of the remuneration arrangements, including, but not limited to, performance-based remuneration components (21) • an RSE licensee must, unless APRA approves otherwise, have a Board Remuneration Committee, and it must have a written charter and terms of reference that outline the Committee’s roles, responsibilities and terms of operation (35 and 38) • an RSE licensee must have a Board Audit Committee, which assists the board by providing an objective non-executive review of the effectiveness of the RSE licensee’s financial reporting and risk management framework unless, with respect to risk management, there is another board committee which carries out this function (43), and • unless granted an exemption by APRA, an RSE licensee must have an independent and adequately resourced internal audit function, the objectives of which include the evaluation of the adequacy and effectiveness of the financial and risk management framework of the RSE licensee (56 and 57). As has been noted elsewhere in this publication, since the Global Financial Crisis, there has been an increased emphasis by APRA on the importance of good governance. In December 2015, APRA announced a number of amendments to SPS 510 intended to support sound governance practices by the boards of RSE licensees. These amendments include:

• including a requirement that an RSE licensee must have a governance framework which sets out policies and procedures that the licensee is required to have in place to support effective governance practices • including a requirement that RSE licensees have documented policies and procedures relating to the nomination, appointment, and removal of directors, and • including a requirement that boards are expected to consider a director’s tenure at the end of each term served, and stating that APRA expects that there would be limited circumstances in which the maximum period of tenure for a director would exceed 12 years. The amended standard was released on 3 November 2016. It comes into operation on 1 July 2017, but APRA has stated that it expects RSE licensees to give immediate consideration to the amendments: www.apra.gov.au/MediaReleases/Pages/16_42.aspx. Risk management Prudential Standard SPS 220 — Risk management requires that an RSE licensee must at all times have a risk management framework to appropriately manage the risks to its business operations. SPS 220 defines the risk management framework as the totality of systems, structures, policies, processes and people within an RSE licensee’s business operations that identify, assess, manage, mitigate and monitor all internal and external sources of inherent risk that could have a material impact on the RSE licensee’s business operations or the interests of beneficiaries (material risks). Paragraph 12 of SPS 220 provides that, at a minimum, an RSE licensee’s risk management framework must cover the following risks: • governance risk • investment governance risk • liquidity risk, including the liquidity characteristics of investment

options offered or proposed to be offered • operational risk • insurance risk • strategic and tactical risks that arise out of the RSE licensee’s strategic and business plans, and • other risks that may have a material impact on the RSE licensee’s business operations. Of course, it is the board of the RSE licensee that is ultimately responsible for the risk management framework. SPS 220 provides that an RSE licensee’s risk management framework must, at a minimum, include: • a risk appetite statement (the minimum requirements for a risk appetite statement are set out in para 21 of SPS 220) • a risk management strategy (RMS) (the minimum requirements are set out in para 23) • a designated risk management function that meets the requirements of para 25 • risk management policies, procedures and controls to identify, assess, monitor, report on, mitigate and manage each material risk • clearly defined and documented roles, responsibilities and formal reporting structures for the management of material risks throughout the RSE licensee’s business operations, and • a review process to ensure that the risk management framework remains effective (the risk management framework must be reviewed at least every three years: para 28). Each year, the board of an RSE licensee must provide APRA with a

declaration that it is complying with APRA’s risk management requirements. An RSE licensee must notify APRA within 10 business days if it becomes aware of a significant breach of, or material deviation from, the risk management framework or if it discovers that the risk management framework does not adequately address a material risk. On a number of occasions, particularly since the GFC, APRA has made it clear that it is significantly lifting its expectations for industry practice in areas such as governance and risk management. Conflicts of interest The requirements of Prudential Standard SPS 521 — Conflicts of Interest reflect APRA’s concern about the possible adverse effects of conflicts of interest on superannuation beneficiaries. Paragraph 7 of SPS 521 defines a conflict of interest as a conflict between: • the duties owed by an RSE licensee, or a responsible person of an RSE licensee, to beneficiaries and the duties owed by them to any other person, or • the interests of beneficiaries and the duties owed by an RSE licensee, or a responsible person of the RSE licensee, to any other person, or • an interest of an RSE licensee, an associate of an RSE licensee or a responsible person or an employee of an RSE licensee, and the RSE licensee’s duties to beneficiaries, and • an interest of an RSE licensee, an associate of an RSE licensee or a responsible person or an employee of an RSE licensee and the interests of beneficiaries. An RSE licensee must have a conflicts management framework, approved by the board of the RSE licensee, in order to ensure that the RSE licensee identifies all potential and actual conflicts in the RSE licensee’s business operations and takes all reasonably practicable

actions to ensure that they are avoided or prudently managed (para 8). A licensee’s conflicts management framework must, at a minimum, include: • a conflicts management policy, approved by the board, that meets the requirements of SPS 521 • clearly defined roles, responsibilities and resources for the oversight of conflicts management within the RSE licensee’s business operations • an up to date register of relevant duties, and • an up to date register of relevant interests. A relevant duty or a relevant interest is one that might reasonably be considered to have the potential to have a significant impact on the capacity of the RSE licensee, the associate of the RSE licensee or the responsible person with the relevant duty or holding the relevant interest, to act in a manner that is consistent with the best interests of beneficiaries (para 16). At a minimum, a RSE licensee’s conflicts management policy must include controls and processes applying to all responsible persons and all employees of the RSE licensee for: • identifying and monitoring all potential and actual conflicts • avoiding conflicts where required to do so by the general law • where there is a conflict, managing that conflict, or ensuring that the conflict is managed in accordance with the requirement to give priority to the duties to, and interests of, beneficiaries in s 52(2)(d) and 52A(2)(d) of the SIS Act • ensuring that appropriate action is taken in the event of a conflict arising, including ongoing evaluation of management of the conflict and provision for escalation or alternative action if

required • recording in the minutes of board, board committee and other relevant meetings details of each conflict identified and the action taken to avoid or manage this conflict, and • processes for the development and maintenance of the register of relevant duties and the register of relevant interests. The appropriateness, effectiveness and adequacy of an RSE licensee’s conflicts management framework must be reviewed by operationally independent, appropriately trained and competent persons at least every three years (para 20). Trustees’ and directors’ duties Two other provisions in the SIS Act should also be included in the compliance system. The first is the duties of the trustees or the directors of a trustee to the beneficiaries of the superannuation entity, and the second is to ensure that the complex regulations are observed. The duties have similarities to those under Pt 4 of the Life Insurance Act 1995, and the comments made at ¶35-051 about compliance structure generally apply here. The trustees’ duties are also rather similar to the duties of a responsible entity under the MIA (see ¶35-049), but trustees do not have the benefit of the guidance given by the compliance provisions of the MIA. Establishing that due diligence has been exercised in relation to subjective or discretionary management matters can be more difficult than with purely factual matters. It should also be remembered that trustees’ indemnities under s 56 and 57 are far from absolute. Section 52(2) sets out the following general covenants by trustees which are taken to be included in the governing rules of registrable superannuation entities, if the rules of an entity do not already contain covenants to this effect: “(a) to act honestly in all matters concerning the entity; (b) to exercise, in relation to all matters affecting the entity, the

same degree of care, skill and diligence as a prudent superannuation trustee would exercise in relation to an entity of which it is trustee and on behalf of the beneficiaries of which it makes investments; (c) to perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries; (d) where there is a conflict between the duties of the trustee to the beneficiaries, or the interests of the beneficiaries, and the duties of the trustee to any other person or the interests of the trustee or an associate of the trustee: (i) to give priority to the duties to and interests of the beneficiaries over the duties to and interests of other persons; and (ii) to ensure that the duties to the beneficiaries are met despite the conflict; and (iii) to ensure that the interests of the beneficiaries are not adversely affected by the conflict; and (iv) to comply with the prudential standards in relation to conflicts; (e) to act fairly in dealing with classes of beneficiaries within the entity; (f) to act fairly in dealing with beneficiaries within a class; (g) to keep the money and other assets of the entity separate from any money and assets, respectively: (i) that are held by the trustee personally; or (ii) that are money or assets, as the case may be, of a standard employer-sponsor, or an associate of a standard employer-sponsor, of the entity;

(h) not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee’s functions and powers; (i) if there are any reserves of the entity — to formulate, review regularly and give effect to a strategy for their prudential management, consistent with the entity’s investment strategies and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due; [and] (j) to allow a beneficiary of the entity access to any prescribed information or any prescribed documents.” Subsections 52(6), (7) and (8) set out covenants dealing respectively with investment, insurance and risk. In respect of risk, s 52(8) states that each trustee of an entity must: (a) formulate, review regularly and give effect to a risk management strategy that relates to: (i) the activities, or proposed activities, of the trustee, to the extent that they are relevant to the exercise of the trustee’s powers, or the performance of the trustee’s duties and functions, as trustee of the entity, and (ii) the risks that arise in operating the entity (b) maintain and manage in accordance with the prudential standards financial resources (whether capital of the trustee, a reserve of the entity or both) to cover the operational risk that relates to the entity. In addition to s 52, s 29VN imposes further obligations on each trustee of a regulated superannuation fund that offers a MySuper product. Where the trustee of a RSE is a body corporate, s 52A sets out the covenants that apply to each director of the corporate trustee. These covenants are:

(a) to act honestly in all matters concerning the entity (b) to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation entity director would exercise in relation to an entity where he or she is a director of the trustee of the entity and that trustee makes investments on behalf of the entity’s beneficiaries (c) to perform the director’s duties and exercise the director’s powers as director of the corporate trustee in the best interests of the beneficiaries (d) where there is a conflict between the duties of the director to the beneficiaries, or the interests of the beneficiaries, and the duties of the director to any other person or the interests of the director, the corporate trustee or an associate of the director or corporate trustee: (i) to give priority to the duties to and interests of the beneficiaries over the duties to and interests of other persons, and (ii) to ensure that the duties to the beneficiaries are met despite the conflict, and (iii) to ensure that the interests of the beneficiaries are not adversely affected by the conflict, and (iv) to comply with the prudential standards in relation to conflicts (e) not to enter into any contract, or do anything else, that would: (i) prevent the director from, or hinder the director in, properly performing or exercising the director’s functions and powers as director of the corporate trustee, or (ii) prevent the corporate trustee from, or hinder the corporate

trustee in, properly performing or exercising the corporate trustee’s functions and powers as trustee of the entity (f) to exercise a reasonable degree of care and diligence for the purposes of ensuring that the corporate trustee carries out the covenants referred to in s 52. The obligations of a director under s 52A(2)(d) override any conflicting obligations imposed on the director by the directors’ duties provisions in Pt 2D.1 of the Corporations Act. In addition to s 52A, s 29VO imposes further obligations on each director of a corporate trustee of a regulated superannuation fund that offers a MySuper product. Section 55 provides that a person must not contravene a covenant contained, or taken to be contained, in the governing rules of a superannuation entity. A contravention is not an offence and does not result in the invalidity of a transaction, but a person who suffers loss as a result of a contravention can recover the amount of that loss by taking action against the contravener (s 55(3)). Leave of the court is required to bring an action if the contravener is or was a director of a corporate trustee of an RSE and the contravention is of a covenant that is contained, or taken to be contained, in the governing rules of the entity, and is a covenant of the kind mentioned in s 52A(2). In deciding an application for leave, the court must take into account whether: • the applicant is acting in good faith, and • there is a serious question to be tried. It is a defence to an action for loss as a result of the making of an investment, or the management of any reserves, by a trustee of a superannuation entity if the defendant establishes that they have complied with all of the covenants referred to in s 52 to 53, and all of the obligations referred to in s 29VN and 29VO, that apply in relation to the investment.

How does one show that due diligence has been exercised in relation to these matters? As always, you must be able to provide evidence of the necessary commitment, education and training. The starting point is to be able to show that a trustee or a director of a trustee understands his or her legal obligations. The duty to act honestly is an all-embracing one. As there is no qualification of the duty, even minor acts of dishonesty will be a breach of the covenant. While, on the face of it, the concept of acting honestly seems a simple one, the courts have taken differing views of the scope of the duty. Obviously though, if it can be proved that the trustee or director knew his or her actions were dishonest, then there has been a breach of the covenant. The duty to use the stipulated degree of care, skill and diligence applies to all aspects of operations. Therefore, a proper system is needed to ensure that all parts of the SIS Act and Regulations are complied with. The majority of these requirements can be embedded into the operating systems to a large extent, as discussed in the “Procedures and manuals” chapter. However, some systems need to go further than this. The board of a corporate trustee has real responsibilities to select suitable senior staff and ensure that they do not exceed their powers or prudent limits, particularly in relation to: • exercising in all matters the degree of care, skill and diligence a prudent superannuation trustee would exercise in relation to an entity of which it is trustee and on behalf of the beneficiaries of which it makes investments, and • keeping the trust assets separate from any money or assets of the trustee or of an employer-sponsor of the fund. This implies a sound understanding of what “prudent” means, and the board will have to demonstrate that it has actively supervised these matters. The trustees of a superannuation entity must carefully consider how the duty to exercise the degree of care, skill and diligence that a

prudent superannuation trustee would exercise applies to the entity. Legal or other advice may need to be obtained. The trustee’s view together with mandatory operating procedures, must then be communicated to management. As always, proper certification and monitoring are desirable. There are significant dangers in relying just on the views of investment personnel (however competent) as to the investment profile that is appropriate. The nature of the duty needs careful thought. In the context of s 52(2)(b) and 52A(2)(b), we suggest “prudent” means cautious (but without going to extremes). It is different from how one might elect to act in respect of one’s own money. Any tendency to “bullishness” or speculation in investment aims or advice, or similar matters, needs very careful consideration. It may not accord with this duty. It is not intended to imply here that trustees should confine themselves in the type of investment. They are directed to consider risk, return and diversity of investments, but reasonable prudence is still a factor. Similar considerations arise regarding acting in the best interests of beneficiaries. Factors such as marketing issues, or a desire to rate well in performance charts, are irrelevant, indeed, improper. Similarly, how an associated company might like to see things handled is generally irrelevant. Good advice, clear operating procedures, monitoring and appropriate certifications are all important. This is an area where any tendency to “opinion-shop” for a “convenient” opinion should be avoided. It could smack of lack of good faith and a degree of caution is inherent in s 52 and s 52A, even when the beneficiary selects the “risk profile” of investments. Section 52(2)(g) requires setting appropriate operating rules and checking periodically that they have been carried out, while certificates will also be useful. However, experience under the Life Insurance Act 1995 demonstrates that difficulties can arise in observing this requirement, such as in relationships with brokers and others, and concerning interests in real estate. These areas need to be carefully watched. Section 52(6) sets out the investment covenants of trustees and

includes the requirement that each trustee exercise due diligence in developing, offering and reviewing regularly each investment option. From a court’s point of view, this is likely to include that: • the trustee is dealing with money upon which people will have to rely when they can no longer work, and • beneficiaries may include people close to retirement who can suffer badly from a severe market downturn. This points again towards the need for reasonable (though not unrealistic) caution, rather than chasing after the maximum investment return in all cases. As always, there will have to be appropriate guidelines, checks and certifications to ensure that this requirement is being carried out. Derivatives are not an inappropriate investment as such, but the possible losses if things go wrong always need to be borne in mind and tightly controlled. Other duties of trustees and investment managers of superannuation entities are found in Pt 12 of the SIS Act. They include a duty to: • establish arrangements for dealing with inquiries or complaints by beneficiaries or others • keep, for at least 10 years, the minutes of meetings of the trustees, or the directors of the trustee, or, in the case of an individual trustee, a record of the decisions made by the trustee, and • give the regulator particulars of an event having a significant adverse effect on the financial position of the entity. A superannuation trustee’s general law right to be indemnified out of the assets of an entity in respect of any liability incurred while acting as trustee of the entity is preserved by s 56(1). With regard to corporate trustees, the governing rules of a superannuation entity may provide for a director of the trustee to be indemnified out of the assets of the entity in respect of a liability incurred while acting as a director of the trustee (s 57(1)).

The governing rules of an entity cannot indemnify a trustee or director from liability for a monetary penalty under a civil penalty order. Also, the rules cannot indemnify a trustee against liability for a breach of trust if the trustee: • fails to act honesty in a matter concerning the entity, or • intentionally or recklessly fails to exercise the degree of care and diligence that the trustee was required to exercise (s 56(2)). Similarly, s 57(2) provides that the rules cannot indemnify a director against liability arising in such circumstances. In November 2013, the federal government released a discussion paper, Better regulation and governance, enhanced transparency and improved competition in superannuation, which supported the appointment of independent directors to superannuation trustee boards. The government believes that having independent directors is a vital step in strengthening the current governance framework. The paper also discusses a number of implementation issues, such as the definition of “independent” and the proportion of independent directors. A copy of the discussion paper can be downloaded from www.treasury.gov.au/ConsultationsandReviews/Consultations/2013/Betterregulation-and-governance. Submissions closed on 12 February 2014. The final report of the Financial System Inquiry supports the appointment of independent directors. Recommendation 13 is to introduce a requirement that the board of corporate trustees of public offer superannuation funds have a majority of independent directors, including an independent chair; to make directors who breach their duty to act in the best interests of members subject to criminal or civil penalties; and to strengthen the conflict of interest requirements. The Superannuation Legislation Amendment (Trustee Governance) Bill provided that the board of an RSE must have a minimum of onethird independent directors and an independent chair, but the Bill lapsed on the prorogation of federal parliament prior to the calling of the 2016 election. Due diligence defences

Section 13A(3) of the SIS Act provides a due diligence defence for a person who is a member of a group of individual trustees that is an RSE licensee if he/she proves they: • made all inquiries (if any) that were reasonable in the circumstances, and • after doing so, believed on reasonable grounds that the obligations of the RSE licensee were being complied with. This defence is available for any breach of the strict liability or civil penalty provisions of the SIS Act or the Regulations. The Explanatory Memorandum for the Superannuation Safety Amendment Act 2004 notes that this provision is modelled on s 731 of the Corporations Act. Section 338A further widens the circumstances in which the due diligence defence is available to individual trustees. It states that a person is not liable for a failure to ensure that a particular thing occurs if the person has exercised due diligence. The conditions required to be satisfied to establish the defence are the same as those set out in s 13A(3). Section 323 sets out a number of defences that are available to a person subject to: • proceedings for a contravention of a civil penalty provision of the SIS Act, or • proceedings under s 29VN, 29VO or 55(3). A person has a defence to such proceedings if they can establish: • that the contravention was due to reasonable mistake, or • that the contravention was due to reasonable reliance on information supplied by another person, or • that the contravention was due to: – the act or default of another person, or

– an accident, or – some other cause beyond the defendant’s control, and the defendant took reasonable precautions and exercised due diligence to avoid the contravention. For the purposes of the section, “another person” does not include: • a servant or agent of the defendant, or • if the defendant is a body corporate — a director, servant or agent of the defendant. Section 338 deals with the liability of a body corporate and individuals for the conduct of their directors, servants or agents. Any conduct engaged in on behalf of a body corporate by a director, servant or agent of the body corporate within the scope of his/her actual or apparent authority is taken, for the purposes of prosecution for an offence against the SIS Act, to have been engaged in also by the body corporate (s 338(2)). Under s 338(3), a body corporate has a defence to such a prosecution if it proves it took reasonable precautions and exercised due diligence to avoid the conduct. Section 338(5) is identical to s 338(2), except that it applies to conduct engaged in on behalf of an individual, by a servant or agent of the individual. Under s 338(6), an individual has a defence to such a prosecution if the individual proves they took reasonable precautions and exercised due diligence to avoid the conduct. Of course, as we have already noted, a high level of compliance is required if a body corporate or an individual wishes to be able to rely on a due diligence defence. Whistleblower protection Sections 336A to 336E of the SIS Act provide protection for whistleblowers. These sections are very similar to the whistleblower provisions (Pt 9.4AAA) of the Corporations Act, which are discussed in ¶20-165. To be protected under the SIS Act, a whistleblower must be:

(1) a trustee of the superannuation entity, or (2) an officer of a body corporate that is a trustee, custodian or investment manager of the superannuation entity (3) an employee of the trustee of the superannuation entity or the body corporate referred to above, or (4) a contractor, or an employee of a contractor, who has a contract for the supply of services or goods to the trustee of the superannuation entity or the body corporate referred to above. And the disclosure must be made to: • ASIC or APRA, or • the actuary or auditor of the superannuation entity, or • an individual who is a trustee of the superannuation entity, or • a director of a body corporate that is the trustee of the superannuation entity, or • a person authorised by the trustee or trustees to receive disclosures of that kind. We suggest the compliance manager is the obvious person, should a company wish to authorise someone to receive disclosures. In addition: • the whistleblower must inform the person to whom the disclosure is made of the whistleblower’s name before making the disclosure, and • the disclosure must not only concern misconduct, or an improper state of affairs, in relation to the superannuation entity or trustee, but the whistleblower must consider that the disclosure may assist a person referred to in items (1) to (4) above, to perform that person’s functions in relation to the entity or trustee, and

• the whistleblower must make the disclosure in good faith. If the disclosure meets these requirements, the whistleblower is protected from civil or criminal liability (eg for defamation) and from any contractual or other remedy arising from the disclosure (eg an action for breaching a confidentiality clause in a contract of employment). If a whistleblower’s employment is terminated as a result of a disclosure, a court may order the whistleblower’s reinstatement. Victimisation, or threatened victimisation, of a whistleblower is an offence and if the whistleblower suffers damage, then the person responsible for the victimisation is liable for the payment of compensation to the whistleblower. Passing on the disclosure or the whistleblower’s identity (or information that is likely to lead to the identification of the whistleblower) is an offence, except that it may be passed on to: • APRA or the Australian Federal Police, or • another person, but only with the consent of the whistleblower. A superannuation entity should have a whistleblower protection policy, enforced by the entity’s compliance system which, at a minimum, meets the requirements of these sections of the SIS Act. The regulators — ASIC and APRA Many RSE licensees will have two regulators. The first is APRA in relation to prudential matters, and the other is ASIC in relation to the matters covered by the FSRA provisions of the Corporations Act (such as marketing and advertising brochures). Although ASIC and APRA try to avoid “regulatory overlap”, in some circumstances licensees may have to comply with similar provisions in both the Corporations Act and the SIS Act. For example, under s 912A(2)(b) of the Corporations Act, an RSE licensee may have to be a member of an external dispute resolution scheme as well as being subject to the jurisdiction of the Superannuation Complaints Tribunal. This will only be necessary if the nature of the financial services provided by the RSE licensee are such that the Superannuation

Complaints Tribunal cannot deal with complaints about all the financial services provided. APRA has wide surveillance, investigatory and enforcement powers and has a record of using them. Various returns must be made to APRA to assist in its monitoring of performance. Clearly, these matters need to be covered by an effective compliance management system. Among the compliance requirements is the obligation to inform the appropriate regulator (APRA or ASIC) of any event having a “significant adverse effect” on the financial position of a superannuation entity (SIS Act, s 106). Superannuation entities must also have in place satisfactory arrangements for dealing with complaints from members and beneficiaries within a 90-day time frame. Superannuation Industry (Supervision) Regulations 1994 The SIS Regulations are very detailed and must be strictly observed. In ensuring this, information technology will be essential to handle the amount of detail efficiently, as will sound checklists. However, they will not be sufficient in themselves. The scope of the Regulations is indicated by the main headings, namely: • Annuities and pensions • Information for certain parties • Matters prescribed or specified in relation to public offer entities • Matters prescribed or specified in relation to licensing of trustees and of groups of individual trustees • Management and trusteeship of superannuation entities • Benefit protections standards • Payment standards

• Contribution and benefit accrual standards • Superannuation interests subject to payment split • Financial reporting • Financial management of funds • Eligible rollover funds • Information to be given to the Regulator and related matters • Register to be kept by APRA • Pre-1 July 1988 funding credits and debits • Miscellaneous matters. A reliable compliance system should have the following elements: • a summary of each regulation (whether in checklist form or otherwise) • operating rules • management supervision (very important) • monitoring arrangements, with responsibilities designated, and • facilities for constant updating, as regulations change frequently. Operating procedures are needed because the requirements of the Regulations are not always immediately clear. Management supervision must include checking regularly that the staff understand the mandatory operating rules and are implementing them. Most of the monitoring can be done on a periodic basis using samples. It is important to clearly designate the responsibility for monitoring. Reasonable monitoring is needed even where functions are computerised. It is unwise to assume that the computer’s output is

automatically correct. There should be regular checks to ensure that input is accurate, and occasional checks to see that the system itself is running reliably. These checks are primarily a management responsibility, but should be backed by periodic monitoring. Superannuation (Resolution of Complaints) Act 1993 The Superannuation (Resolution of Complaints) Act 1993 (Cth) (the Act) set up the Superannuation Complaints Tribunal (the SCT or the tribunal) in order to give superannuation fund members and their dependants recourse to an inexpensive form of appeal against adverse decisions by superannuation fund decision-makers, especially superannuation fund trustees and life insurers. Complaints can also be made by a spouse who has an interest in a superannuation fund by virtue of “superannuation splitting” as a result of a marriage breakdown. Before the tribunal was established, it was difficult for members to challenge adverse decisions, due to the cost of litigation. Section 11 of the Act sets out the objectives of the tribunal. The section requires the tribunal to provide mechanisms that are fair, economical, informal and quick for: • the conciliation of complaints, and • if a complaint cannot be resolved by conciliation; the review of the decision or conduct to which the complaint relates. The tribunal deals with complaints in relation to: • regulated superannuation funds (a “regulated superannuation fund” is also an RSE: see the definition of an RSE in s 10(1) of the SIS Act), • annuities and deferred annuities, and • retirement savings accounts (RSAs). The tribunal cannot deal with a complaint unless the complainant has first attempted to have the matter resolved through the internal complaints handling procedure of the superannuation provider, life

company, or RSA provider (s 19). Recent SCT annual reports reveal that a significant number of complainants had not satisfied this requirement before complaining to the Tribunal. Copies of the SCT’s annual reports can be downloaded from the Tribunal’s website www.sct.gov.au. A complaint cannot be dealt with by the tribunal if there is a proceeding before a court about the subject matter of the complaint (s 20). Complaints must be lodged within the time limits in the Act, and different time limits apply to different decisions, but if the decision (other than a decision to pay a disability benefit because of total and permanent disability) complained about is more than one year old, the tribunal has the discretion not to deal with the complaint (s 22). SCT processes There are a number of steps that the SCT may take in relation to a complaint — receipt of the complaint, inquiry and conciliation by the SCT and review and determination. When the SCT receives a complaint, the complaint is examined to ensure it is within the tribunal’s jurisdiction. Under s 17, if the complaint is within jurisdiction, the SCT must provide the complainant with a written acknowledgment of receipt and must write to the superannuation fund trustee, life company, or RSA provider to: • tell them that a complaint has been made and to identify the complainant, and • give details of the complaint, and • tell them of their obligation under s 24. Section 24 obliges the superannuation fund trustee, life company, or RSA provider to give the SCT a copy of all documents that are in their possession, or under their control and which they consider to be relevant to the complaint. When the SCT has received the documents from the parties, it must

inquire into the complaint and try to settle it by conciliation (s 27). The SCT has the power to require the parties to the dispute and any other relevant person to attend a conciliation conference (s 28). The conference is conducted by a conciliator who is an officer of the SCT. A conference is held in relation to most complaints, and the conference is convened by the SCT sending a notice advising the parties of the time and date for the conference. The parties are provided with an agenda for the conference and there may be an exchange of relevant information held on the Tribunal’s file. The conference may be conducted in person and s 29 provides that it may also be conducted by videoconference or by teleconference. Nearly all conciliations are conducted by teleconference. Conciliation proceedings are confidential. If the complaint is not settled by conciliation, unless the parties otherwise agree, evidence must not be given and statements must not be made at a review meeting about any word spoken or act done at a conciliation conference, if the word or act related to a question to be determined by the SCT (s 30). Conference proceedings are informal and the SCT is not bound by the rules of evidence. As the title of “conciliator” suggests, a conciliator’s function is to help the parties to resolve their dispute — the conciliator cannot impose a solution upon them. If, as a result of conciliation, the dispute is settled and the terms of the agreement are put in writing, signed by or for the parties, and lodged with the tribunal, then the complaint is treated as withdrawn (s 31). If the complaint has not been settled by conciliation, the outcome of the complaint is determined by a review meeting (s 32). The steps in the review process (set out on the SCT website) are: • The parties receive a “Notice of Review Meeting” together with a copy of documents obtained by the SCT. • They then have an opportunity to provide a written submission for consideration by the review meeting of the tribunal. • The parties receive a copy of any submissions provided to the

tribunal by the other parties to the complaint and are invited to comment on those submissions. • The tribunal meets to determine the complaint. Normally, the parties do not attend the review meeting and the Tribunal makes its decision based on the written material before it. • In due course, the parties receive a copy of the tribunal’s decision. The review meeting must decide whether or not the decision under review is fair and reasonable in its application to the complainant. The tribunal must affirm a decision if it is satisfied that the decision, in its operation in relation to the complainant, was fair and reasonable in all the circumstances. As a result of a review meeting, the SCT issues a determination: • affirming the original decision made by the superannuation fund trustee, life company or RSA provider, or • remitting the matter to the superannuation fund trustee, life company or RSA provider for reconsideration of its decision in accordance with the directions of the Tribunal, or • varying the decision, or • setting aside the decision and substituting its own decision. The tribunal must give written reasons for its determination (s 40) and determinations are published on the SCT’s website. A decision of a trustee, insurer or RSA provider as varied by the tribunal, or a decision made by the tribunal in substitution for a decision of a trustee, insurer or RSA provider is taken to be the decision of the trustee, insurer or RSA provider (s 41). A party to a complaint must implement the decision of the tribunal, and if they fail to do so, ASIC can use its powers to enforce the Tribunal’s decision (s 65). A party may only appeal to the Federal Court from a determination of

the tribunal on a question of law (s 46). In Queensland, the effect of s 8 of the Trusts Act 1973 is that a complainant whose complaint to the SCT is unsuccessful is able to apply to the Supreme Court for a review of the original decision by the superannuation trustee: Edington v Board of Trustees of the State Public Sector Superannuation Scheme [2012] QSC 211 (discussed in Australian Legal Compliance News, Issue 37). Section 20 contemplates that a complainant may choose to go to court, rather than lodging a complaint with the SCT, by providing that a complaint cannot be dealt with by the tribunal if there is a proceeding before a court about the subject matter of the complaint. A ground on which an application for review of a superannuation trustee’s decision may be made to a court is that the trustee has failed to give “properly informed consideration” to the matter they are required to decide (see Finch v Telstra Super Pty Ltd [2010] HCA 36 at [66]). In Finch, the High Court held that the duty to give “properly informed consideration” required the trustee to take into account relevant information, evidence and advice and to seek relevant information in order to resolve conflicting matters. As the annual reports of the SCT reveal, the majority of complaints that are resolved by the tribunal are resolved by conciliation. For those complaints that go to review, the proportion of decisions that are set aside is quite high, indicating that there is some room for improvement in the decision making processes of superannuation fund trustees, life companies and RSA providers. Jurisdiction of the SCT A person may make a complaint to the tribunal that a decision made by a trustee was unfair or unreasonable if the decision is in relation to “a particular member” of a regulated superannuation fund (s 14(1)(a)) and the compliant does not “relate to the management of a fund as a whole” (s 14(6)). In Vision Super Pty Ltd v Poulter [2006] FCA 849, one of the issues the court had to decide was whether or not the tribunal had jurisdiction to hear complaints by individual members of a fund who objected to a

decision by the trustee of the fund to debit the accounts of all members who held deferred benefit accounts. The trustee wished to do this because there had been a negative return on the fund’s investments. Before the court, the trustee argued that the decision in question was a decision to set a negative crediting rate for all deferred benefit members. As such, it was not a decision “in relation to a particular member” within the meaning of s 14(1). In addition, the trustee submitted the decision did relate to the management of the fund as a whole, and as a result, s 14(6) deprived the tribunal of jurisdiction. The court rejected these arguments and held that the tribunal did have jurisdiction to hear the complaints. Although the trustee made a decision to set a negative crediting rate for deferred benefit members, the debiting of a specific amount to the members’ accounts required a separate decision in relation to each member. This separate decision was a decision “in relation to a particular member” as required by s 14(1). With respect to s 14(6), the court rejected the trustee’s contention that the complaints were indistinguishable from a complaint concerning the investment policy being adopted by the trustee of a superannuation fund. Each complaint related only to debits made to that particular member’s deferred benefit account. None of the complaints mentioned the management of the fund as a whole. Alternatively, even if it was assumed that the complaints related to the treatment of a particular class of members, they did not relate to the management of the fund as a whole. As deferred benefit members did not comprise the whole of the members of the fund, it did not follow that a decision that adversely affected their particular entitlements necessarily related to the management of the fund as a whole. The result of this judgment is that there will be relatively few circumstances in which a trustee will be able to argue that s 14(1) and 14(6) deny a member of a fund the right to have a decision by the trustee reviewed by the tribunal. Review of SCT and external dispute resolution and complaints schemes

As part of its response to the report of the ASIC capability review, the Federal government announced the establishment of a panel to review the role, powers and governance of the financial system’s external dispute resolution and complaints schemes. The review is considering whether changes to current dispute resolution and complaints bodies in the financial sector, the Financial Ombudsman Service, the SCT and the Credit and Investments Ombudsman, are necessary to deliver effective outcomes for users in a rapidly changing and dynamic financial system. The review’s interim report was released on 6 December 2016. One of the report’s draft recommendations is that the SCT should transition into an industry ombudsman scheme for superannuation disputes. The final report of the review is to be provided to the government by the end of March 2017. The review and the ASIC capability review are discussed in Issues 57 and 55 of Australian Legal Compliance News.

¶277-320 Information for existing holders of superannuation products and RSA products: s 1017C Superannuation entities or RSA providers in relation to a superannuation product or an RSA product have an obligation to make additional information available, on request, to fund members (including non-member spouses) and RSA account holders, and to employer-sponsors. Section 1017C embodies requirements previously set out in former Div 2.6 of the SIS Regulations. The need to make these additional disclosures is only triggered on the request by either the fund member (or a non-member spouse who has acquired a superannuation interest by way of a payment split) or the RSA account holder (such persons being ``concerned persons'') or an employer-sponsor whose employees are members of the relevant superannuation fund. The information which must be disclosed on request differs slightly

depending on the person making the request. If the request is by a fund member (or non-member spouse) or RSA account holder, the superannuation entity or RSA provider must disclose information that the person making the request reasonably requires for the purposes of: (a) understanding any benefit entitlement which the person may have or may have had under the superannuation or RSA product, or (b) understanding the main features of the superannuation fund (or any relevant sub-plan) or the RSA product, or (c) making an informed judgment about the management and financial condition of the superannuation entity and any relevant sub-plan, or (d) making an informed judgment about the investment performance of the superannuation entity and any relevant sub-plan, or (e) understanding particular investments of the superannuation entity and any relevant sub-plan: s 1017C(2), 1017C(2A). If the request is by an employer-sponsor, the superannuation entity or RSA provider must disclose information that the employer-sponsor reasonably requires for the purposes of: (a) understanding the kinds of benefits to which the employersponsor's employees are entitled or may be entitled, and the main features of the superannuation entity (or any relevant sub-plan) or of the RSA product, or (b) making an informed judgment about the management and financial condition or the investment performance of the superannuation entity and any relevant sub-plan, or (c) any matter related to the Superannuation Guarantee (Administration) Act 1992: s 1017C(3), 1017C(3A).

In response to a request for the additional information, the issuer must provide a copy of any prescribed document or information specified in the request, to the extent to which the issuer has access to the document or information: s 1017C(5). A request for such a document or information must be in writing, in contrast with requests for information under s 1017C(1) and (2), which may be in writing or oral. Trustees of self-managed superannuation funds are exempt from having to comply with requests under s 1017C(5): s 1017C(6). Certain documents and information are exempted from the requirement to make disclosure under this section. These are the superannuation entity's or the RSA provider's internal working documents, personal information about another person if, in the circumstances, disclosure would be unreasonable, trade secrets or other information of commercial value that would be reduced or destroyed by disclosure, and information or documents in respect of which the issuer is under a duty of non-disclosure: s 1017C(4). Sub-plan Regulation 7.9.02 makes general provision for sub-plans of regulated superannuation funds. If the trustee of a fund proposes to make a determination as to whether a sub-plan should be made, the trustee must have regard to all relevant matters, including each of the following: (a) whether there is a common factor in a segment of the fund (for example, whether a group of members of the fund have the same employer) (b) whether the governing rules of the fund provide for a particular segment to be a sub-plan. This will be a relevant sub-plan for the purposes of s 1017C. Manner and time of making disclosure A superannuation entity or RSA provider who has received a request for information under this section may comply with the request by making a document, or a copy of a document, containing the

information available for inspection during normal business hours at a suitable place which has adequate facilities for inspection and photocopying, or as otherwise agreed between it and the person making the request: s 1017C(7). If a concerned person requests information in relation to a facility, under the concerned person's existing holding of a superannuation product, to modify an investment strategy or a contribution level or insurance coverage, and the information has not already been given in a periodic statement or in accordance with other periodic reporting requirements under Div 3, the superannuation entity or RSA provider may provide an up to date PDS that includes information on the ability to make, and the effect of making, the modification: s 1017C(7A) as inserted by Pt 9 of Sch 10A to the regulations. In any event, the information must be provided as soon as practicable. The superannuation entity or RSA provider must make reasonable efforts to provide the information within one month of receiving the request: s 1017C(8). Costs and charges Part 11 of Sch 10A to the regulations modify s 1017C by inserting subsections (8A)-(8D), to permit a superannuation entity or RSA provider to charge for information requested under s 1017C. This is consistent with the ability to charge for information under s 1017A and an existing ability to charge for information on request in relation to superannuation products under the SIS Regulations. The superannuation entity or RSA provider is obliged under this section to give information on request by a person only if the person pays the amount specified by the entity or provider as the charge for giving the information: s 1017C(8A). The amount of the charge must not exceed the reasonable cost to the entity or provider of giving the information (including all reasonably related costs, for example, costs of searching for, obtaining and collating the information): s 1017C(8B). A member who acts as a representative for or on behalf of a policy committee is not liable to any charge for information given to the

member in that capacity: s 1017C(8C). A policy committee of a regulated superannuation fund is a body established under the governing rules of the fund, which advises the trustee about prescribed matters: see s 10 of the SIS Act. In the case of information to be supplied to a concerned person under Subdiv 5.9 of Pt 7.9 of the regulations, a charge may be made only if the person to whom the information is to be given has requested the information, and the person had been given the same information during the period of 12 months immediately preceding the date on which the request is made: s 1017D(8D). If the superannuation entity or RSA provider has an address for a concerned person but is reasonably satisfied that the address is incorrect, or has no address at all for the concerned person, and has failed to locate the person despite having taken reasonable steps to do so, the responsible person need not comply with s 1017C: s 1017C(8A) as inserted by Pt 14 of Sch 10A to the regulations. If an address or location subsequently becomes available, the entity or provider must give the information to the concerned person, but need do so only to the extent of the information that is required as at the time when the address becomes available: s 1017C(8B), (8C) as inserted by Pt 14 of Sch 10A. Act: Section 1017C.

¶277-360 Trustees of superannuation entities — regulations may specify additional obligations to provide information: s 1017DA The regulations may impose additional disclosure requirements on trustees of superannuation entities and on RSA providers: s 1017DA(1) and 1017DA(2). Special statement content rules apply in relation to superannuation splitting arrangements under Pt VIIIB of the Family Law Act 1975 (Cth). Payment splits relate to the power of spouses to enter into a binding agreement under the Family Law Act which provides how the superannuation of one (or both) of the spouses is to be divided

between them on separation. On receipt of a superannuation splitting agreement, a superannuation trustee is required to give the nonmember spouse a payment split notice within 28 days of being served with the superannuation agreement. At the same time that that payment split notice is given, the superannuation trustee is obligated to provide a statement to the non-member spouse, which must contain the information specified in reg 7.9.88(1). The content differs depending on the nature of the interest (percentage-only interest, base amount payment split or percentage payment split): see CCH’s Super Splitting on Marriage Breakdown. Similar statement content rules apply to RSA products issued under a payment split: reg 7.9.89(1). Failure to comply with any relevant requirements in the regulations is an offence, punishable by a fine of 50 penalty units: s 1311 and Sch 3. If a trustee has an address for a holder or former holder but is reasonably satisfied that the address is incorrect, or has no address at all for the person, and has failed to locate the person despite having taken reasonable steps to do so, the trustee need not comply with s 1017DA: s 1017DA(3) as inserted by Pt 14 of Sch 10A to the regulations. If an address or location subsequently becomes available, the trustee must give the information to the person, but need do so only to the extent of the information that is required as at the time when the address becomes available: s 1017DA(3). Long-term superannuation returns disclosed in periodic statements Regulation 7.9.20AA, as modified by ASIC Class Order 10/630, provides a set of specific requirements for the disclosure of the longterm return for each periodic member statement that is issued during the periods from 1 July 2009 to 30 June 2011 and from 1 July 2011. The modifications to 7.9.20AA made by CO 10/630 were expressed to apply until 31 December 2015, but, following an amendment to the class order, will now apply indefinitely, until equivalent amendments are made to the regulation. Regulation 7.9.20AA does not apply where:

(a) the superannuation product is a non-investment or accumulation life insurance policy that is offered through the regulated superannuation fund (b) the superannuation product has no investment component (also known as a risk-only superannuation product) (c) the statement is a periodic statement to be given to a member of the regulated superannuation fund for a reporting period mentioned in s 1017D(2)(d) (ie where the holder ceases to hold the product). Periodic statements from 1 July 2011 For each periodic member statement that is issued from 1 July 2011, the long-term return statement is to be provided in the periodic member statement. The trustee must provide a long-term return statement for the investment option/s that the member has invested in at the end of the reporting period. The trustee is able to provide a long-term return statement only at the sub-plan or whole of fund level, if the member is not invested in any investment options at the end of reporting period. The long-term return statement required under reg 7.9.20AA is not considered “relevant to the product” under s 1017D(5) of the Corporations Act where the disclosure is provided in an exit statement provided on the death of the member. Where a member exits his, her or its superannuation fund before the declaration of the final crediting rate, resulting in the trustee utilising an interim rate for the previous financial year, and a separate interim rate used for the financial year to the date of the return, the trustee is considered to be required to use the interim crediting rate for the previous financial year for the purpose of calculating and reporting the effective net earning of the previous five- and ten-year period. For each periodic member statement that is issued from 1 July 2011, the long term returns are required to be calculated for a five-year period in the same manner as previously calculated for inclusion in the annual report, as specified under former para (j)(ii) of reg 7.9.37(1).

For each periodic member statement that is issued from 1 July 2011, the trustee must include a statement close to the statement of long term returns that informs the member that the member’s personal long term returns are not the same as the returns shown in the long-term return statement. This provision requires that the trustee disclose that the long-term return is not necessarily reflective of the member’s return over the same period. As an example, this could be due to the member moving into the investment option, sub-plan or fund at a time prior to the five-year or ten-year period, or due to the member splitting their superannuation across more than one investment option. Where the fund, sub-plan or investment option have not been in operation for either the required five- or ten-year period to be reported on, the average return since inception must be included along with the date of inception. If the long-term returns were provided within the periodic statement, they are required to be positioned close to the annual return, to facilitate comparison of the returns by the member. Disclosure of the long-term returns must be clear, concise and effective. The disclosure is considered to be clear, concise and effective where it is accurate, clearly stated and presented in a manner that attracts the member’s attention. The long-term returns are expected to be given equal prominence to the information about the member’s 12 monthly returns. The specific meaning of “clear, concise and effective” varies according to how the information is provided. If the long-term returns are provided with, but not in, a periodic statement that is provided electronically, instructions on where the long-term returns are located or how they can be accessed are expected to be provided and marked, positioned or presented in a way that draws the member’s attention. Act: Section 1017DA.

¶274-750 Providing personal advice to retail clients: reasonable basis for advice requirement: repealed s

945A The former s 945A applied to AFSL holders who provided personal advice to retail clients, and required licensees to have a reasonable basis for that advice. Section 945A, along with s 945B, was repealed by the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012, with effect from 1 July 2012. The functions of these sections (which together comprised Subdiv B of Div 3 of Pt 7.7) have been assumed by provisions in Div 2 of Pt 7.7A which require AFSL holders and their representatives who provide personal advice to retail clients to act in the best interests of those clients. See, in particular, s 961G. The following commentary describes and discusses the former s 945A as it applied prior to its repeal. The commentary should be read with that repeal in mind. The requirement in former s 945A to have a reasonable basis for personal advice which is provided to a retail client, is known by many different names: “needs analysis”, “know your client” rule, “know your product” rule or “suitability” rule, being the most common names. The rule formed the basis of the provision of a Statement of Advice (SoA) and was reinforced by the obligation to include in an SoA “information about the basis on which the advice is or was given”: s 947B(2)(b) and 947C(2)(b). That the basis for the advice must be set out in the SoA could have the unintended consequence of increasing the length (and perhaps the complexity) of the SoA from the perspective of the retail client. Balancing this requirement with the “comprehensibility” requirement in s 947B(6) and 947C(6) may prove a challenge. Regulation 7.7.09B therefore allows providing entities to incorporate information (that would ordinarily be contained within the SoA) by reference to a statement or information that has been previously provided to the client. (This facility replaces, and makes redundant, the Statement of Additional Advice (SoAA) formerly available under CO 04/1556, which was revoked by CO 09/38.) See further ¶274-900. The financial adviser could only give advice if:

(a) the adviser determined the retail client’s “objectives, financial situation and needs as would reasonably be considered to be relevant to the advice” (personal circumstances) and made reasonable enquiries in relation to those matters (the “know your client” rule), and (b) taking those matters into account, the adviser considered and investigated the subject matter of the advice (the “know your product” rule), and (c) the advice was appropriate to the client, having regard to that consideration and investigation (thus providing the necessary link between the “know your client” rule and the “know your product” rule). The obligation to have a reasonable basis for the advice was to be read together with the obligation in s 945B to warn the retail client where the advice was given in circumstances where the advice was based on incomplete or inaccurate information in relation to the client’s “objectives, financial situation and needs”. “Objectives” is a forward-looking concept: What return (if any) is the client looking for? (Some financial products do not carry an investment component (eg certain types of insurance).) Over what time horizon? In what financial position does the client want to be in five years, 10 years, retirement age? What level of risk are they willing to tolerate? What level of fees are they willing to tolerate? “Financial situation”: What is the current financial position of the client? Assets? Do they generate income? Are they realisable? Liabilities? How are their debts being serviced? Do they have other sources of income? Are they financially dependent on others? Are others financially dependent on them? What age is the client? It is not uncommon for clients to be unwilling to fully disclose their financial situation for privacy-related reasons. This is the principal reason for the requirement in s 945B to warn clients where the advice given is based on incomplete information. “Needs”: The determination of the retail client’s needs is derived from

the client’s express statements as to their needs and the financial adviser’s understanding of their needs. The risks associated with a particular investment or investments assume prominence in this context. The level of inquiries that would be necessary to meet the s 945A(1) (a)(ii) test would obviously differ depending on whether the client was an existing client or a new client. ASIC suggested that the requirement in s 945A(1)(a)(ii) would be satisfied with respect to an existing client if the adviser confirmed that the information on file remained up-to-date and complete: see RG 175: Licensing: Financial product advisers — conduct and disclosure at RG 175.128. The Revised Explanatory Memorandum to the Financial Services Reform Bill 2001 states that “the level of inquiry and analysis required … will depend on the advice requested by the client … [and that] … a comprehensive analysis of the client’s full financial position may not be necessary where the client has sought personal advice on a specific product” (at para 12.34). To this extent, the “know your client” rule imports an element requiring the financial adviser to “listen to your client”. The financial adviser was under an obligation to consider and investigate the subject matter of the advice as is reasonable in the circumstances: s 945A(1)(b). The subject matter of the advice would often involve a recommendation in relation to one or more financial products. ASIC viewed this requirement as “scalable”. “Scalable” means that the requirement varies depending on the circumstances, including whether the adviser has previously provided advice to the client, the potential impact of inappropriate advice on the client, the complexity of the advice and the financial literacy of the client. For example, where personal advice is provided for a relatively simple purpose, such as the purchase of car insurance or the opening of a deposit account, less extensive consideration and investigation of the subject matter of the advice is likely to be required than for advice about complex financial products, classes of financial products or strategies (such as tax-related strategies or higher risk strategies such as the use of margin lending in connection with the purchase of a financial product): RG 175.133. Financial products vary in complexity, eg a term deposit with a bank is

of a lesser complexity than a derivatives strategy to hedge risk or for entered into for speculative purposes. ASIC’s comment concerning financial literacy reflects the fact that retail clients are not a homogenous group. The Act draws a distinction between wholesale clients and retail clients, the underlying policy of the legislation being that the latter need the protections afforded by requirements such as the “know your client” rule but the former not requiring such protections. Nevertheless, for the purpose of the “suitability” rule, it is appropriate to recognise that there are different classes or types of retail clients: cf (a) a middle-aged retail client, a “bush financial planner”, with a small share and managed fund portfolio, who is contemplating drawing down on his or her superannuation to expand that portfolio; or (b) a retail client in his or her mid-20s, tertiary qualified and working within the financial services industry, who has inherited a large amount of money and has approached the financial adviser for a second opinion; (c) a retail client, elderly gentleman, who is nearing retirement and has just accepted a redundancy package. In the course of investigating the subject matter of the advice, a financial adviser may have cause to rely on the opinions, recommendations and ratings of external research houses (such as Van Eyk Research, ASSIRT, Morningstar, 5Di). This is acceptable, but does not limit the primary obligation which is imposed on the financial adviser to investigate the subject matter of the advice. Section 945A(1)(c) required that the advice be “appropriate”, having regard to the client’s objectives, financial circumstances and needs, and after having considered and investigated the subject matter of the advice. This requirement of “appropriateness” should not be understood as being elevated to a requirement that the advice is the best advice. ASIC said that the personal advice “does not need to be ideal, perfect or best”: RG 175.117. Comparisons may be drawn with the common law test applicable to the provision of advice by or opinions of professional advisers — they do not warrant the correctness of the opinion, only that they have exercised a reasonable degree of care and skill in giving the advice: see Heydon v NRMA (2001) 19 ACLC 1; Boland v Yates Property Corporation Pty Ltd (2000) Aust Torts Reports ¶81-538. This indicates that the “know your

client” requirement is a form of statutory duty to exercise reasonable care and skill in the provision of personal financial advice to a retail client. The requirement must also be understood in the context of the fiduciary relationship that exists between a financial adviser and client. Such a relationship carries the hallmarks of the ascendancy/vulnerability relationship imbalance which gives rise to fiduciary duties: clearly, a financial adviser is in a position of ascendancy with respect to a retail client who is vulnerable to abuse by the financial adviser: see Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 370; Hospital Products Ltd v US Surgical Corporation (1984) 156 CLR 41 at 97. It is clear that conduct which amounts to a breach of the statutory duty to have a reasonable basis for financial advice provided to a retail client may also contravene the adviser’s contractual duty to exercise reasonable care and skill in the provision of financial advice: see Dennis v Chambers Investment Planners Pty Ltd (Administrators Appointed) (No 3) [2014] FCA 648 (in which, however, the claims against the adviser were rejected). ASIC may conduct surveillance activities in relation to the provision of financial advice: s 912E. The requirement in s 945A was a key risk area which was identified by ASIC, and therefore is likely to be subject to ongoing scrutiny. The keeping of adequate records concerning the provision of financial advice, including records of personal advice, will enable an entity to establish that it has discharged it obligations under Ch 7 of the Act. ASIC holds the view that the duties imposed on a financial services licensee carry an implicit record-keeping requirement in relation to, among other things, the requirement in s 945A of the Act: see RG 175. Act: Section 945A.

¶2-950 Superannuation policies and other policies held under trust Life insurance policies are routinely held pursuant to a trust relationship. This relationship involves the following structure:

• A trustee is the legal owner of the life insurance policy. • The trustee holds the policy for the benefit of other parties. • These parties have a beneficial interest in the particular policies. One of the most prevalent examples of a trust structure can be seen in the operation of a superannuation fund which invests in life insurance policies. In this situation, the trustee receives the contributions payable in respect of a member of the fund. It then applies those contributions to investment and/or insurance policies issued by a life insurance company. The above structure will of course be very familiar in the context of public offer superannuation funds operated by life insurance companies. These funds are the vehicle for investment and purchase of insurance policies issued by a life insurance company. Often, but not always, the policies form the total assets of the superannuation fund. While the members are lives insured under the insurance policy, they do not obtain a direct interest in that policy. They are beneficiaries under the trust structure created by the superannuation fund. The rights, therefore, are primarily rights derived as a beneficiary of a trust. These rights operate by virtue of the laws of equity and by the provisions of the relevant trust deed as well as relevant legislation. One of the issues that is often asked in this context is whether the members of the superannuation fund have a contractual relationship with the trustee of the life insurance company. Usually the members would have no contractual relationship with the life insurance company. They do make application to join the fund. In the normal situation, this is not a contract between the trustee and the member for the provision of benefits. Rather, it is merely an application form which is contemplated in the trust deed as the means of members joining the fund. As the members of the fund do not ordinarily derive their interest through a contract, there is a strong argument that they are not party to any contract of insurance for the purposes of relevant legislation.

Under the Insurance Contracts Act 1984, various requirements flow where a contract of insurance is brought into effect. One such requirement is the requirement for the duty of disclosure. Similarly, the issue of rights in the fund by the trustee on this basis should not be seen as a contract for the purposes of the definition of “policy” contained in the Act (see ¶2-100 above). However, an application form is not the only means of making a person a member of the fund. In strict terms under general law, a person can become a beneficiary of a trust without any need to apply to become a beneficiary in the trust. Of course, this situation is modified under relevant legislation; for example, under the Corporations Act 2001, a superannuation product or an investment life insurance product can be issued or sold only in response to an application form included in or accompanying a Product Disclosure Statement (PDS) or copied or derived from such a form (s 1016A). Where the fund invests wholly in policies issued by a life company, an issue will arise as to whether it can be said that the benefits provided by the fund are wholly determined by reference to policies of life assurance. This is relevant as under the Superannuation Industry (Supervision) Regulations (reg 8.01) certain exceptions to the reporting requirements are allowed for where the benefits of the members are wholly determined by policies of life assurance. The regulator (APRA), in the past, has taken a strict interpretation of this provision. It is suggested that where the fund invests wholly in policies of life insurance this exception should be satisfied. Practically speaking it is unrealistic for the totality of members benefits to be prescribed and described by the life insurance policy. As a matter of practice and of law, the trust deed will circumscribe to a large extent the benefits of members. There will be other situations of course where a trust arrangement is created. Notably, the law will imply trusts in certain circumstances. Even though the first party has not declared a trust in favour of another person, the law can often impute a trust arrangement to exist on the basis that the party presumably intended for the person to hold the policy on trust. This situation can apply where a person takes out a policy in the name of someone else and pays the premiums under that

policy. It would be presumed that the policy owner holds it in trust for the party paying the premiums. It needs to be recognised, however, that between the life company and the owner of the policy, such trust arrangement would be of no effect unless it is expressly notified in writing to the life insurance company (as described below at ¶4-300).

Tax Institute CommLaw2 Module 4 — Commentary ¶1-100 Insolvency “Insolvency” has two common meanings: • asset/liability or “balance sheet” insolvency, where total assets fall short of total liabilities, or • illiquidity or “cash flow” insolvency where a debtor is presently unable to pay his debts as they fall due. Either or both of the above conditions may be present for a debtor, and either or both may give rise to potential failure. Legislation dealing with corporate failure (companies or winding-up legislation) and individual and partnership failure (bankruptcy or insolvency legislation) often uses the words “inability to pay debts” rather than the term “insolvent”. Under the Corporations Act 2001, a company is defined to be insolvent if and only if the company is unable to pay all its debts as and when they become due and payable. The growth of commerce and of loan and credit transactions created debtor/creditor relationships. Long before the existence of corporations, remedies, however primitive, were available to individual creditors or to the community to seek redress against debtors unable, or for that matter unwilling, to repay their debts. Receivership is an early example of individual creditors seeking redress. The old common law, stretching back to mediaeval times, was stark and uncompromising, making the position of the debtor extremely unenviable. A sharp distinction was drawn between the two principal remedies which were open to creditors: a creditor could either seize

the body of his debtor or he could seize the effects of his debtor, but he could not pursue both remedies at the same time; moreover, if the body of the debtor was taken in execution, it was not possible thereafter to resort to his effects. Seizure of the debtor’s assets was initiated by each creditor separately; there was no machinery for any collective form of execution or for sharing the expenses amongst a number of creditors; furthermore, there was no machinery for inquiring as to the nature of the debtor’s assets. The result of the system was to give the race for assets to the swift, the rule being “first come, first served”. The alternative remedy was that the debtor should be summarily arrested and thrown into prison, there to be detained at the pleasure of the creditor. In this sense, insolvency was regarded as an offence, very little, if at all, less criminal than a felony, and the right to subject his debtor to a prolonged imprisonment seems to have been regarded as one of the natural rights of the creditor. See the Cork Report, op cit, para 31. However, it was not until about the 16th century that a procedure for common creditors, known as “bankruptcy”, was established by legislation in England, to provide for the distribution of a debtor’s property, in circumstances where a debtor was unable to pay his debts. On the establishment of large associations of persons for the purposes of carrying on business, which led to the development of corporations in the 19th century, it became necessary to provide for the “bankruptcy” of those associations. This process became known as “winding up” or “liquidation”, and the most common reason for winding-up was, and is, the inability of corporations to repay their debts. Bankruptcy (for individuals) and liquidation (for corporations) share the common purposes of: • providing for an equitable distribution of debtor assets to all creditors, and • permitting an investigation to take place of the conduct of the debtor that led to his insolvency.

An associated purpose of bankruptcy legislation alone has been to provide relief to the debtor by enabling him to be released of his debts so that he may start afresh. The similarities between bankruptcy and liquidation are sufficient to permit their common coverage by identical legislation in certain countries, eg in Canada and in the United States of America, where federal bankruptcy legislation governs terminal insolvency for both corporations and individuals. Australia has followed the English pattern of separate legislation for corporations and individuals, but the historical and functional connection between bankruptcy and liquidation is perpetuated in the similarity of many features of both bankruptcy legislation and corporations (including winding-up) legislation, and by remnants of the direct applicability of bankruptcy legislation to winding-up. An example of the latter is the direct application of bankruptcy laws on debts provable to the winding-up of insolvent corporations (s 553E, Corporations Act 2001). The law of liquidation is sometimes conceptually regarded as the application to companies of bankruptcy concepts relevant to individuals and partnerships. However, this analogy can be pressed too far. Winding-up is not confined to insolvent corporations — for instance, in this Reporter we deal with members’ voluntary winding-up of a solvent corporation, whereas bankruptcy is based wholly on insolvency. Even more importantly, the concept of limited liability in the corporate sphere provides in most cases a recovery barrier between creditors and the proprietors, directors and other officers of corporations. This barrier prohibits creditors from recovering from those individuals, in the absence of special agreement, or in the absence of certain offences by such individuals. Complementary to the development of orderly realisation and distribution of insolvent debtor estates has been the development of legislation permitting investigations to be carried out, and where relevant examinations undertaken, of the debtor and his affairs, and of parties connected with or contributing to the debtor’s insolvency.

Historically, the social justifications for such insolvency legislation are alluded to by the Cork Report, op cit, para 23-25: “Society facilitates the creation of credit, and thereby multiplies the risk of insolvency. We consider that it is incumbent upon society to provide machinery which, in the event of insolvency, is adequate to ensure a fair distribution of the insolvent’s assets amongst his creditors. While it will always remain essential to punish the dishonest or reckless insolvent, it is also important to devise a system of law to deal compassionately with the honest though unfortunate debtor who is often no more than a bewildered, ill-informed and overstretched consumer. The system must enable the insolvent to extricate himself from a situation of hopeless debt as quickly and as cheaply and with as little fuss as possible. In the complex world of credit, the legislature and, through the legislature, society has always striven hard to maintain a just balance between the creditor on the one hand and the debtor on the other. Over the centuries this balance has shifted first one way and then the other. In considering where it should be today, it must be remembered that it is the creditor who possesses the capital — which, in the aggregate, is the capital of society as a whole — to which the debtor seeks access for purposes beneficial first to himself, secondly to the creditor in providing him with a market for his capital and, thirdly, to society as a whole. The economic and social implications of these relationships require a legal framework which gives the creditor confidence to extend credit, while at the same time does not encourage the potential debtor to act recklessly or irresponsibly.” Further on, the Cork Report states (para 191-194): “It is a basic objective of the law to support the maintenance of commercial morality and encourage the fulfilment of financial obligations. Insolvency must not be an easy solution for those who can bear with equanimity the stigma of their own failure or their responsibility for the failure of a company under their management.

The law of insolvency takes the form of a contract to which there are three parties: the debtor, his creditors and society. Society is concerned to relieve and protect the individual insolvent from the harassment of his creditors, and to enable him to regain financial stability and to make a fresh start. It accords him this relief in return for: (a) such contribution, not only from the realisation of his assets but also from his future earnings, as can reasonably be made by him without reducing him and his family to undue and socially unacceptable poverty and without depriving him of the incentive to succeed in his fresh start (b) the obligation to give an account of the reasons for his failure and, if required, to submit the conduct of his affairs to impartial investigation, and (c) subjection to such disabilities as may be appropriate in all the circumstances. In the case of an insolvent company, society has no interest in the preservation or rehabilitation of the company as such, though it may have a legitimate concern in the preservation of the commercial enterprise. None of the directors or shareholders is normally liable for the debts of the company, but their freedom from liability is granted in return for: (a) an obligation on the part of those responsible for the management of the company’s affairs to give an account of the reasons for the company’s failure, and, if required, to submit their conduct of the company’s affairs to impartial investigation, and (b) subjection to such personal liability for the company’s debts and such personal disabilities as may be appropriate in all the circumstances. If the basic objectives of the law are to be achieved, it is essential that proper investigation will be made in every case in which it is

warranted. Justice and fairness to those whose conduct is liable to be investigated, and the proper constraints on public expenditure, alike require that no investigation will be undertaken unless it is warranted.” For a comparison with the Committee’s views on the desirable objectives of modern insolvency law, see ¶1-165. It is sometimes argued that the function of insolvency law is simply the distribution of the proceeds of the insolvent’s assets amongst his creditors, giving him, where appropriate, personal relief from their claims. This has never been the English [nor Australian] approach. The policy of our insolvency laws has always been far more complex; at least two other major objectives will be found to have existed: (a) the insolvency laws are treated by the trading community as an important instrument in the process of debt recovery; the threat or imminence of insolvency proceedings as a weapon in persuading a defaulting debtor to pay or make proposals for the settlement of a debt cannot be underestimated as it constitutes, in the majority of cases, the sanction of last resort for the enforcement of obligations (b) the insolvency laws, through their investigative processes, are the means by which the demands of commercial morality can be met; any disciplinary measures against the debtor which may appear necessary in the light of this investigatory process can be imposed either inside the insolvency proceedings themselves or outside, for example, by the machinery of the criminal law or by professional disciplinary bodies. These two aims are, of course, closely inter-related. The risk of an investigation into his conduct is one of a host of factors which may induce a debtor to come to terms with a creditor rather than face insolvency proceedings. The other factors are legion and to seek to enumerate them is quite impossible, but of some importance must be the desire of a debtor genuinely to pay a debt properly due, to keep his business alive without any undue disruption to its activities and to maintain lines of credit.

¶1-140 Australian bankruptcy legislation Colonial “bankruptcy” and “insolvency” jurisdictions were established in the Australian states during the 19th century. At the turn of the century the Commonwealth Constitution gave the Commonwealth powers to legislate with respect to “bankruptcy and insolvency” (s 51(xvii)). The first Commonwealth Bankruptcy Act was enacted in 1924 and commenced in 1928. State legislation was based on earlier United Kingdom legislation, and differed somewhat from state to state according to its date of enactment and the consequent United Kingdom legislation on which the state legislation was based. The Bankruptcy Act 1924 was an amalgam of British and colonial legislation. Following a report made under the chairmanship of the then Federal Judge in Bankruptcy, Sir Thomas Clyne, in 1962 (commonly called the Clyne Report), the Bankruptcy Act 1924 was repealed and replaced by a new Bankruptcy Act 1966, which commenced operation in March 1968. The Bankruptcy Act of 1966 introduced a new consolidated procedure for private arrangements avoiding bankruptcy, and deviated from many of the English and Australian precedents. Bankruptcy administration in Australia is governed not only by the Bankruptcy Act 1966, but also by Bankruptcy Regulations made under the Act. These regulations prescribe certain detailed procedures for bankruptcy and Pt X administrations and for other proceedings, and include certain prescribed forms. The old Bankruptcy Rules were abolished in 1996 and rules concerning court procedures are now to be found in the Federal Court Rules and the Federal Circuit Court Rules. The Bankruptcy Act 1966 applies throughout Australia and, being a federal law, its provisions prevail over any state legislation, if that state legislation is in conflict (Commonwealth Constitution s 109). Section 9 of the Bankruptcy Act says that state laws relating to matters not dealt

with expressly or by necessary implication in the Act are not affected by the Act. So, for example, it remains permissible for the states to restrict the activities of “bankrupts” or “insolvents under administration”. The Australian bankruptcy legislation provides for control of private arrangements avoiding bankruptcy (Pt X agreements) to be carried out under the supervision of private trustees. The Bankruptcy Act 1966 has been regularly amended in recent times. The Bankruptcy Amendment Act 1991 (Cth), most of which operated from 1 July 1992, introduced wide-ranging amendments which included provisions that sought to allow tightened control over bankrupts and gave trustees in bankruptcy greater investigative and recovery powers. The Act was perceived by many as being aimed at the “high flyers” who appeared to be abusing the process of bankruptcy after what were seen to be the corporate excesses of the 1980s. The Bankruptcy Act 1966 was amended again by the Bankruptcy Legislation Amendment Act 1996 (Cth), which commenced operation on 16 December 1996. This legislation introduced important changes. Most notably it significantly changed aspects of bankruptcy administration in that it: • abolished the old office of Registrar of Bankruptcy • provided for what is known as the “One Stop Service” whereby petitions are to be presented by debtors to the Official Receiver in Bankruptcy • gave the Federal Court the exclusive jurisdiction to hear bankruptcy matters. Subsequently, the Federal Magistrates Court, established under the Federal Magistrates Act 1999 (Cth), has had jurisdiction to hear bankruptcy matters since 2000 • significantly amended the voidable transaction provisions in the Act (s 120 to 122) • introduced a new form of administration for dealing with the affairs

of debtors, namely debt agreements under Pt IX of the Act • improved the regime which applies for the compulsory contribution of income by bankrupts, and • improved the investigative powers of trustees. Significant changes to the Bankruptcy Act 1966 were introduced by the Bankruptcy Legislation Amendment Act 2002 (Cth), most of which commenced operation on 5 May 2003. In the words of the explanatory memorandum to the Bill (para 2), the changes made: “ ... address concerns that the bankruptcy system is biased toward the debtor and that debtors are not encouraged to think seriously about the decision to declare themselves bankrupt. The changes also address unfairness and anomalies, particularly in relation to the operation of the early discharge arrangements and the lack of effective sanctions on uncooperative bankrupts. Finally, the changes will streamline the administration of bankruptcies by trustees.” The main changes introduced were as follows. • New power to reject debtor’s petitions. The Official Receiver could reject a debtor’s petition on various bases, including where it is apparent that the presentation of the petition is, in effect, an abuse of the bankruptcy system (s 55(3AA)). The court was also given stronger powers to annul a bankruptcy entered into for an improper purpose. • Removal of early discharge. Part VII Div 3 of the Act, whereby certain low income and low assets bankrupts were able to be discharged within six months, was abolished. All bankruptcies now last for three years, unless extended or earlier annulled. • Objections to discharge easier to uphold. Objections to discharge lodged by trustees under Pt VII Div 2 Subdiv B were made easier to lodge and more difficult for bankrupts to challenge. • Increase the income cut-off for Pt IX debt agreements.

• Streamlining. Various other changes were introduced aimed at streamlining many administrative processes required by the Act. For example, meetings can be held by post so those creditors who find attendance at a meeting would be too costly or time consuming can still have their say (s 64ZBA). Trustees have to provide more detail of fees charged and the impact fees have on the bottom line dividend payable. Voting on a number of matters is on the numbers of creditors in favour, not the value of debts, which gives smaller creditors more say in the administration of the estate. Further changes were those introduced by the Bankruptcy Legislation Amendment Act 2004, which commenced for most purposes on 1 December 2004. It was mainly concerned with revising Pt X of the Bankruptcy Act and introducing the “personal insolvency agreement”. The Amending Act also introduced performance standards for controlling trustees and registered trustees who conduct administrations under the Bankruptcy Act 1966. Comparable changes to those made in respect of Pt X agreements were made to post bankruptcy compositions and schemes of arrangements made under s 73 of the Bankruptcy Act 1966. The Bankruptcy and Family Law Legislation Amendment Act 2005 dealt with the significant interaction that occurs between bankruptcy and family law. It enabled concurrent bankruptcy and family law proceedings to be brought and heard together to ensure that all the relevant issues were dealt with at the same time and to clarify the competing rights and interests of the creditors and non-bankrupt spouse where bankruptcy and family law issues coexist. In particular, it allows a trustee in bankruptcy to apply to become a party to the family law proceedings and the non-bankrupt spouse will have the right to continue the property proceedings against the trustee of the bankrupt spouse. This significantly changed the law in this area. Also in the family law area, the protection given under the Bankruptcy Act from claims by trustees to property transferred under financial agreements made under Pt VIIIA of the Family Law Act (binding agreements between parties to a marriage dealing with the distribution

of property in the event of the marriage breaking down) was removed. There was created a new act of bankruptcy that arises where a person is rendered insolvent as a result of assets being transferred pursuant to a financial agreement under Pt VIIIA of the Family Law Act. Thus the person’s bankruptcy will be taken to have commenced at the time of that transfer, which extends the “relation back” period and allows the trustee to claim property transferred under the agreement as divisible property in the bankrupt’s estate. Finally, in respect of the income contributions regime under the Bankruptcy Act, powers are given to the Official Receiver to issue a notice to the bankrupt’s employer in effect garnisheeing the bankrupt’s wages to collect the amount assessed. The Official Receiver is also able to issue a garnishee notice to a bank or other financial institution to collect contributions. The Bankruptcy Legislation Amendment (Anti-avoidance) Act 2006 (Cth) strengthened the ability of bankruptcy trustees to recover property, including property acquired by a third party prior to bankruptcy using the bankrupt’s resources and from which the bankrupt had derived a benefit. The Bankruptcy Legislation Amendment (Debt Agreements) Act 2007 (Cth) introduced enhanced regulation of debt agreement administrators, providing better means for dealing with default by the debtor; and generally sought to simplify, streamline and clarify a range of provisions to improve the operation of the debt agreement regime. The Bankruptcy Legislation Amendment (Superannuation Contributions) Act 2006 (Cth) allowed trustees to recover superannuation contributions made prior to bankruptcy with the intention to defeat creditors. These are applicable to contributions made on or after 28 July 2006. A notice may be issued to freeze a contributor’s interest in a superannuation fund or to recover void contributions. This responded to the High Court’s decision against the trustee’s right of recovery in Cook v Benson (2003) 114 CLR 370. The Family Law Amendment (De facto Financial Matters and Other Measures) Act 2008 (Cth) amended the Family Law Act 1975 (Cth) to provide for opposite sex and same sex de facto couples to access the

federal family law courts on property and maintenance matters, and to provide for amendments relating to financial agreements between married couples and superannuation splitting. The Act made consequential amendments to the Bankruptcy Act (and other related legislation) to ensure that references to matrimonial property settlements under the Family Law Act 1975 extend also, where appropriate, to financial proceedings under the Act between parties to a de facto relationship. The Cross-Border Insolvency Act 2008 (Cth) applies the UNCITRAL Model Law to personal, and corporate, insolvency administrations. The Bankruptcy Legislation Amendment Act 2010 (Cth) increased the minimum amounts claimable in creditor petitions and bankruptcy notices from $2,000 to $5,000; provided for an increase in the stay period for a declaration of intent to file a debtor’s petition from seven days to 21 days; provided a more streamlined process for fixing and reviewing trustee remuneration; and created and increased penalties for offences committed by the bankrupt and others, including offences by trustees. The Personal Property Securities (Consequential Amendments) Act 2009 (Cth) amended the Bankruptcy Act as from January 2012 to align the terminology between it and the Personal Property Securities Act 2009 (Cth). Thus, the definition of “secured creditor” in the Bankruptcy Act is aligned with the definition of secured party in the Personal Property Securities Act. The effect of this is that secured parties under the Personal Property Securities Act 2009 (Cth) are also secured for the purposes of the Bankruptcy Act. Provided the secured party has perfected its security interest under the Personal Property Securities Act 2009, its security is protected in any bankruptcy.

¶2-040 Briefing and advisory functions: is bankruptcy the best administration? Part X of the Bankruptcy Act 1966 provides for personal insolvency agreements to be made between a debtor and his or her creditors which avoid bankruptcy. From the debtor's point of view, a Pt X

agreement will avoid the stigma of a bankruptcy. The creditor need not be disadvantaged as he or she may get all that is available under bankruptcy and, in some cases, even more if funds are made available which would not be available under bankruptcy. These arrangements and their relative merits are explained in the ``Personal insolvency agreements (Part X)'' tab at ¶24-000. Part IX of the Bankruptcy Act 1966 provides for debt agreement proposals to be put to creditors as an alternative for bankruptcy for persons with low levels of debt, few assets and low income. See ¶19500. At the pre-bankruptcy stage the debtor, an adviser to the debtor, or to a creditor who seeks to be repaid by the debtor, may in some cases have the opportunity of assessing the comparative benefits of alternative administrations and the extent to which all or any are likely to be available. The means available to initiate a bankruptcy (or alternative administration) should be considered, together with what the initiator expects to achieve by doing so. A registered trustee is the ideal person with whom to discuss potential bankruptcy action. However, in the case of creditor petitions, a trustee has often no pre-knowledge of the debtor's affairs prior to the date of bankruptcy. It is possible to obtain the consent of a registered trustee to act in the event of a bankruptcy (see ¶5-120ff). To the extent that the potential trustee consults, or is consulted by, the debtor or the debtor's creditors prior to bankruptcy, there should be more opportunity to evaluate alternative courses of action, including a possible Pt X agreement. If a debtor approaches the Official Receiver to effect a voluntary bankruptcy he or she will be advised of the procedures under the Act for dealing with the debtor's financial affairs, and the availability and sources of advice and guidance about how the debtor can deal with his or her financial difficulties. See ¶2-712. The advice to the debtor will depend upon the degree of insolvency, the possible administrations available, the aspirations of the debtor (eg whether he or she wants to continue in business), commercial

expediency, the aspirations of the creditor (eg whether it wants to ensure that a particular disposition is recovered), the degree of urgency required and the level of trust between the debtor and the creditors. Where urgency is required, it is possible with the debtor's agreement to appoint a ``controlling trustee'' under Pt X. The alternative is to present a petition and seek the appointment of an ``interim trustee'' until a petition can be heard. Both courses of action will provide ``breathing space'' for further gathering of information (see ¶24-150 to ¶24-160, ¶24-200ff and ¶4-500ff).

¶2-070 Bankruptcy by debtor's petition (voluntary bankruptcy) A debtor may become bankrupt voluntarily by filing his or her own petition. A debtor's petition is one ``presented by a debtor against himself or herself and includes a petition presented against a partnership … and presented by joint debtors against themselves …'' (s 5(1)). The debtor becomes bankrupt if and when the petition is accepted and endorsed by the Official Receiver. The debtor must have a residence or business connection with Australia, as is the case for a sequestration order. There is no monetary limit specified for a self-petition. Nor is there any particular requirement that the debtor be unable to pay his or her debts — the Act providing for the repayment of a surplus to the bankrupt — but in practice it would be unlikely for a debtor to pursue bankruptcy in such circumstances. Part IV Div 2A enables a debtor to enter into an optional prebankruptcy moratorium of seven days duration by presenting a declaration of intention to present a debtor's petition. During this limited stay period, the debtor is provided with an opportunity to consider possible alternatives to bankruptcy, such as an agreement under Pt X. See ¶2-712. A debtor's petition may be presented against a partnership by a majority of partners resident in Australia at the time of presentation.

Where there are joint debtors who are not in partnership with each other, any two or more of such debtors may present a petition jointly against themselves. A debtor can, as an alternative, appoint a controlling trustee under Pt X of the Act to assist in making a proposal to his creditors to avoid bankruptcy (see ¶24-200ff). The Official Receiver will automatically accept an individual debtor's petition provided it is in acceptable form; some discretion is held to reject petitions in certain circumstances. The same comments apply to joint debtors. But in the case of a partnership, unless all of the partners have petitioned, the Official Receiver may refer the petition to the court to enable the court to exercise discretion as to the acceptance, amendment or rejection of the petition. For full details of the procedure to obtain voluntary bankruptcy, see ¶2-700ff. Where the petition is accepted, the debtor becomes bankrupt and remains so until: • discharged automatically at the end of three years, or • the bankruptcy is annulled.

¶2-330 The Official Trustee in Bankruptcy The “Official Trustee in Bankruptcy” is an institutional name for a body corporate that has trustee estate administration functions under the Bankruptcy Act 1966. Section 18 defines the nature and capacity of the Official Trustee. It is a body corporate, formerly known as “The Official Receiver in Bankruptcy”, continuing after April 1980 as “the Official Trustee in Bankruptcy”. Any “reference in a law of the Commonwealth to the Official Receiver” of a bankrupt estate, should “in relation to the vesting, holding or disposal of property, be read as including a reference to the Official Trustee” (s 18(11)). This body corporate has perpetual succession, the right to deal in property and capacity to act in its own name.

The Official Receiver exercises the powers and performs the functions of the Official Trustee. The Inspector-General may exercise powers, and perform any functions of the Official Trustee (s 18(8) to 18(8D)). The trustee of the estate of the bankrupt may be either the Official Trustee or a registered trustee. The Official Trustee performs trustee functions when no registered trustee has been appointed or is acting, in particular, when a registered trustee has not consented to act prior to the date of bankruptcy. The practice within the legislation and within this Practice is to refer to a trustee generally, making clear the exclusion of the Official Trustee where that is required. (See ¶2-310 for powers and functions of a trustee in bankruptcy). The Official Trustee has the same powers and obligations as a registered trustee: • to ascertain the bankrupt’s assets and liabilities • to take and enforce possession of assets and records • to be vested with the bankrupt’s property and to deal with property • to conduct the administration of a bankruptcy in the interests of creditors • to convene meetings of creditors and secure appointment of a committee of inspection • to use the official name “Trustee of the Property of (insert name of bankrupt), a Bankrupt” (see s 161) • to seek public examination of the bankrupt • to keep proper books and records, and • to pay timely dividends without needlessly protracting the trusteeship. The Official Trustee may be replaced by a registered trustee if creditors elect to do so at the first or subsequent meeting of creditors

(s 157). The Official Receiver will issue a certificate of appointment (s 157(3)). Whenever there is no registered trustee of the estate of the bankrupt, the Official Trustee is the trustee of the estate (s 160). The Official Trustee is subject to the same personal liability, in respect of an act done or omitted to be done as trustee of a bankrupt, as is a registered trustee (s 18A), and is similarly not personally liable for goods mistakenly seized from the bankrupt or his or her premises unless negligent. Where the Official Trustee acts as the trustee of a bankrupt estate, remuneration is to be paid according to the regulations (s 163) and is calculated on both a commission and a time basis. Divisions 2 and 3 of Pt 16 of the Regulations formerly provided for the fees in relation to the Act (including remuneration of the Official Trustee). The remuneration of the Official Trustee and fees under the Act are set out in the Bankruptcy (Fees and Remuneration) Determination 2014. Regulation 16.11 allows an application for remission of fees to be made, subject to review by the Administrative Appeals Tribunal: reg 16.12. Unlike a private trustee (s 183), the Official Trustee cannot apply to the court to be released from a bankrupt estate (s 183(7)). The Official Trustee becomes trustee of an estate upon the release of a registered trustee under s 183 and 184, but he or she does not become personally liable by reason of assuming that position for a prior trustee liability (s 184A).

¶1-400 Functions common to bankruptcy and liquidation There is a set of core functions common to both bankruptcy and liquidation, most of which are relevant to other insolvency administrations, even if in modified form. These functions are: • briefing and advisory functions — deciding whether an administration is required, and selecting the relevant type • putting the required administration into effect and securing the

appointment of an administrator; notifications required upon appointing that administrator • discovering, securing and inspecting the assets and records of the debtor over which the appointed administrator has control • assessing the financial position, securing a statement of assets and liabilities, determining priorities to be afforded to creditors and determining the debtor's future prospects • carrying on business and/or disposing of or realising assets, which will entail a strategy for the repayment of creditors. It may also give rise to litigation to enforce claims (most commonly against debtors) • reporting to creditors and other interested parties; and where desirable appointing a committee of inspection • examination of the debtor's books and records, investigation of the circumstances leading to the debtor's demise, and investigation of possible offences and potential recoveries; as a result of this, perhaps examination of the debtor (or its officers) and litigation to recover potential assets or to seek restitution for damages sustained by the debtor • accounting to the Commissioner of Taxation for pre-administration tax and, where relevant, post-administration tax • where assets permit, calling for and adjudicating on creditor claims so that a list of dividend recipients may be established; listing and ranking those claims in priority, paying dividends and, where relevant, returning a surplus to the debtor • maintenance of administrative records, and compliance with the statutory laws regarding conduct of the administration and formally bringing it to a close. The functions above are arranged in a rough chronological order. But

in any administration, the securing of assets and the devising of a repayment strategy requires and should receive the highest priority. The table below summarises the relevance of some of the above core bankruptcy and liquidation functions to other insolvency administrations. We have not included formal court approved schemes of arrangement, as they are rare.

¶10-600 The “relation back doctrine” The retrospective period between the occurrence of bankruptcy and the date bankruptcy is deemed to commence is known as the “relation back period” (¶10-080). The bankruptcy is deemed to commence at the time of the earliest act of bankruptcy committed by the debtor within a period of six months immediately preceding the date a relevant petition was presented (s 115). Property owned by the bankrupt at any time within this period, even though it is not owned by him/her at the date of bankruptcy, is made available by the so-called “doctrine of relation back” and actually vests in the trustee (s 115; 116). This doctrine permits the trustee possible access to property of the debtor that would otherwise be unavailable at the date of bankruptcy. The word “possible” is used because of the many protections available in respect of transactions which might otherwise give rise to availability of property under this doctrine, especially when the person receiving property has no notice of an act of bankruptcy by the debtor. For possible recovery procedure, see ¶11-470. Other Bankruptcy Act sections assist this doctrine by voiding certain provisions in contracts, bills of sale, mortgages, liens and Personal Property Security Act (PPSA) security agreements that would otherwise have the effect of restricting the debtor’s rights in the event of the commission of an act of bankruptcy and hence the commencement of bankruptcy (see s 115; 301; 302). It must be said, however, that the doctrine is little used because of the many defences available to it. Although the doctrine is fundamental to bankruptcy law, the need for its continued existence is therefore

questionable. Bankruptcy law relied upon acts of bankruptcy historically as some indicator to the world of the danger of dealing with someone who is in effect a prospective bankrupt. It was retained in the Bankruptcy Act 1924 despite opposition to it and it has been removed as a concept in English law. The 1988 Harmer Report recommended that relation back be abolished in the legislation, saying that it was a “fictitious, artificial and abstract concept … rarely understood” (at [679]). The concept has been partly removed in corporate insolvency law although retained in a limited respect.

¶13-320 Specific examples of creditor control and rights to receive information There are numerous examples of creditor/committee of inspection control over aspects of the administration and activities of the trustee. The most important of these specific controls have been dealt with elsewhere in this Reporter, being control over: • the appointment or replacement of a trustee and the remuneration due to him (¶5-250 to ¶5-470); • the realisation of assets and the conduct of business by the trustee (¶7-740; ¶7-760 and ¶9-240); and • any variation of creditor rights to rank for repayment (¶9-220). The trustee of a person who becomes bankrupt must, within 28 days after the day on which the trustee receives the bankrupt's statement of affairs give to each creditor of the bankrupt: (a) a notice stating the fact and date of the bankruptcy; and (b) a summary of the statement of affairs of the bankrupt. If the trustee does not receive the statement of affairs within 60 days after the date of bankruptcy, he/she must give notice in writing to each creditor of the bankrupt of whom the trustee is aware: (a) stating that the trustee has not received the statement of affairs;

and (b) setting out what the trustee knows of the bankrupt's affairs (reg 4.14). To assist both creditors and trustees a checklist of creditor powers and rights has been prepared (¶91-232) which shows specific and general means by which creditors receive information or exercise control, and at the same time which of the trustee's actions require creditor permission. Specific requirements regarding creditors and committee meetings are dealt with at ¶13-490 and ¶13-860. Form: Checklist of trustee powers requiring permission (¶91-232).

¶10-900 The administrative regime for recovery of income contributions Property acquired by the bankrupt after the date of bankruptcy is available to the trustee by means of Div 3 of Pt VI, and in particular s 115 and 116. After acquired income is treated separately. A bankrupt who derives income after the date of bankruptcy may be required to make a contribution to the bankrupt estate if his or her income exceeds a certain threshold amount. The income contribution provisions (Div 4B) came into operation on 1 July 1992. They operate administratively. Prior to their existence the former s 131 provided that a bankrupt in receipt of income was entitled to retain it for his or her own benefit. That right however was subject to any contrary order of the court. The reason for the change to the administrative procedure is signposted by the Explanatory Memorandum of the amending Act (No 9 of 1992) (cl 24): “There are a number of significant problems confronting trustees in bankruptcy in obtaining contributions from bankrupts under sec 131 of the Act. The section provides that the bankrupt is entitled to retain the benefit of his or her income, without imposing any

limit having regard to capacity to make some payment to the estate. The trustee can apply to the court for an order requiring the bankrupt to make contributions, but this is an expensive process. Frequently, the trustee would have no money available to enable him or her to commence court action. There are no statutory criteria to guide the exercise of the discretion of the court in determining an appropriate level of contributions. Even if a court orders that the bankrupt make contributions from his or her income, frequently the bankrupt will not comply with this order. The only penalty for non-compliance with a court order is committal of the bankrupt to prison for contempt of court. Besides being a severe sanction, committal of the bankrupt to prison is completely ineffective in terms of securing income contributions from the bankrupt — an imprisoned bankrupt cannot earn income to contribute. … Under the Act as amended … it will be compulsory for bankrupts whose income exceeds a specified threshold amount to contribute to their estate. Collection of contributions will be by inexpensive and administrative means, rather than by way of application to a court. The proposed new regime will ensure that bankrupts who have the capacity to make the payments to creditors in fact do so, something which does not often occur under the existing system.” The objectives of Div 4B are: (a) to require a bankrupt who derives income during the bankruptcy to pay contributions towards the bankrupt’s estate, and (b) to enable the recovery of certain money and property for the benefit of the bankrupt’s estate (s 139J). In Re Gillies; Ex Parte Official Trustee in Bankruptcy (1993) 42 FCR 571; 115 ALR 631, the Federal Court concluded that the scheme of Div 4B rested upon the continuing assumption that the income of the bankrupt does not vest in the trustee. But French J indicated that he was inclined to the view that assets purchased by a bankrupt with after-acquired income will, if not within any of the excluded categories in s 116(2), constitute property divisible among the creditors and vest

in the trustee. See ¶10-800 and Rodway v White [2009] WASC 201. The Official Trustee’s Practice Statement — OTPS 1 Income Contributions sets out details of the assessment process including rights of review, identification of contributors, determining the bankrupt’s assessable income, issues of hardship, and collection and enforcement. See www.afsa.gov.au. In Re Sharpe; Ex parte Donnelly (1998) 80 FCR 536; [1998] FCA 6, there were outstanding fees due to a bankrupt barrister for work for which he had rendered fees. The bankrupt normally completed income tax returns on a cash receipts basis. The trustee treated the fees he collected as property of the bankrupt. The ATO argued that the fees collected by the bankruptcy trustee represented income earned by the bankrupt after bankruptcy, that they were assessable to income tax in the bankrupt’s hands and that the net income after tax was subject to the bankruptcy contribution assessment regime. The trustee applied for directions. The court found that the fees collected post-bankruptcy by the trustee were income and not property. Income “derived” by the bankrupt extended to “income so derived in respect of work done or services performed by the bankrupt before” the assessable bankruptcy period. This means that fees invoiced and collected before bankruptcy are available to creditors, but not so if invoiced and uncollected, except via the bankruptcy contribution regime. This would have ramifications for any self-employed person facing bankruptcy, not just barristers. While one must have sympathy for the ATO and its tax collection role, it was an unusual result that an apparent chose in action existing at the date of bankruptcy was held not to be property vesting in the trustee. This decision was followed in Michell (Trustee), in the matter of Lee (deceased) [2012] FCA 1046; the fact that the bankrupt died during the bankruptcy did not change this. In Nicholls v Sheaffe [2003] FMCA 387, Raphael FM concluded that certain payments akin to income due and payable to the bankrupts were not after-acquired income but rather after-acquired property within the meaning of s 58(1)(b) (¶10-800).

¶18-000 Meaning of “termination of bankruptcy” The phrase “termination of bankruptcy” might mean: • to creditors, the payment of a final dividend • to the trustee, winding up the estate and securing release, and • to the bankrupt, discharge or annulment. The Act now defines (s 5), the end of bankruptcy to be the discharge of the bankrupt from the bankruptcy, or the annulment of the bankruptcy. However, in some cases, a bankruptcy can be set aside under the court rules, for example on a successful appeal from a sequestration order. In this Reporter, “termination of bankruptcy” refers to discharge or annulment or setting aside; the trustee’s release is also considered at ¶18-800ff. It is not necessary to have paid a final dividend or to have fully realised an estate before the bankruptcy is terminated. Conclusion of the administration of the bankrupt’s estate by the trustee is conceptually distinct from termination of legal restraints on the debtor, ie the status of being a bankrupt. In Official Receiver v Todd (1987) 14 FCR 177, in allowing a s 81 examination to proceed after the bankrupt was discharged, the Federal Court recognised this distinction. Fisher J as a member of the court said that the discharge terminates the status of being a bankrupt and its various disabilities, but does not terminate the administration of the estate. Lockhart J said that the machinery of the law continues to be available to the trustee and creditors to assist the trustee in collecting, realising and distributing the assets of the estate. A discharged bankrupt must, even though discharged, give such assistance as the trustee reasonably requires in the realisation and distribution of such of his or her property as is vested in the trustee. The penalty is imprisonment for six months (s 152). The most common way in which a person’s bankruptcy is terminated

is by discharge of the bankrupt. This is reflected in the common use of the term “undischarged bankrupt” to refer to a “bankrupt”. Another method of termination is “annulment”. That method is only available under special circumstances, namely that the debtor ought not to have been bankrupt or if the trustee is satisfied that the bankrupt has paid all his or her debts (see ¶18-400).

¶18-040 General effect of discharge A discharge, by whatever means, releases the debtor from all debts that were provable in the bankruptcy (s 153). This applies whether those debts were in fact proved or not. Where a debtor was a partner in a firm, on discharge he or she is released from both the joint and separate debts. A bankrupt when discharged is not released from: • by definition, non-provable debts, eg those incapable of estimation, penalties or fines or unliquidated damages arising other than from breach of contract or breach of promise (see ¶16000) • any liability to pay an amount to the trustee by way of assessed income contributions under s 139ZG(1), (s 153(2)(aa)) • a debt on a recognisance or chargeable to the bankrupt under a bail bond (s 153(2)(a)) • a debt incurred by means of fraud or fraudulent breach of trust to which the debtor was a party or a debt of which the debtor has obtained forbearance by fraud (s 153(2)(b)). For a debt to be excluded from discharge on the basis of fraud, the test is whether the bankrupt, in incurring the debt, had acted with some “deliberate dishonesty to the prejudice of another person’s proprietary right”: Civitareale v Secretary, Department of Family and Community Services (1999) 57 ALD 451; R v Sinclair [1968] 3 All ER 241, 246. In the former case, the AAT found that the recipients of benefits under the Social Security Act 1991, to which

they were not entitled, had not incurred a debt by fraud. There was no “deliberate dishonesty in failing to notify the Department of the (relevant) payments”. The tribunal was also satisfied that they “did not act recklessly without any regard for whether their answers to the Department in relation to their income were true or false”: at 471. See also Re Bosun Pty Ltd (in liq) [2000] SASC 180; Secretary, Department of Social Security v Prelaj Malaj (1993) 31 ALD 391; and Geddes and Secretary, Department of Employment and Workplace Relations [2006] AATA 126. It should, however, be noted that if a debt incurred by fraud is then the subject of a civil judgment, the fraud merges into the judgment and the debt thereupon ceases to be incurred by fraud: Power v Kenny (1977) WAR 87. If a person goes bankrupt after judgment is obtained by the creditor, in respect of a debt incurred by fraud, the debt is discharged by bankruptcy. Breaches of statutory duties as company directors and breaches of duties under common law and equity as directors and fiduciaries involving moral turpitude may be “fraud, or a fraudulent breach of trust” within s 153(2)(b): Re: Peter Lyle Sharp; Ex Parte: Tietyens Investments Pty Ltd (in liq) & Anor [1998] 1367 FCA. Any property, which vested in the trustee during bankruptcy, remains vested in the trustee after discharge: Daemar v Industrial Commission of NSW (No 2) (1990) 99 ALR 789; Foyster v ANZ Banking Group [1999] NSWSC 300. Nevertheless a bankrupt who has been discharged is entitled to bring proceedings in relation to rights relating to property which vested in the trustee. For example, if a bankrupt was successful in legal action against another, the damages or other benefit might come to the trustee but the right to recover any award of costs remains with the discharged bankrupt and he or she can enforce it: Kison v Papasian (1994) 61 SASR 567. • any liability to pay arrears under a maintenance agreement or a maintenance order. Child support debts come within this exclusion. It is necessarily limited to such debts provable as at the

date of the bankruptcy: Segler v Child Support Registrar [2009] FMCA 41. See also Re Stewart; Ex parte Stewart (1995) 60 FCR 68. However, the court may order specific release from a bankrupt’s liability to pay such arrears: s 153(2A). In exercising that discretion, the court has to assess the interests of the custodial parent and the children as well as the public interest; and it must also have regard to the debtor’s financial position during and after bankruptcy, as well as before bankruptcy, when the child support debts in question accrued: Segler v Child Support Registrar. The bankrupt is also released from secured debts (s 153), but the rights of a secured creditor to realise or deal with his security are unaffected by the discharge to the extent that he has not proved at all in the bankruptcy or to the extent that he has not proved for part of his debt (s 153(3)). The secured debt (or the part) claimed against the security shall be deemed to have not been released by discharge of the bankrupt, but only for the purpose of enabling the secured creditor to deal with his security and not otherwise. If the secured creditor had surrendered his security for the benefit of creditors, then his whole debt is released by the discharge. The discharge does not automatically release from liability a person who: • was partner or co-trustee with the bankrupt or jointly bound • had made a joint contract with the bankrupt, or • was surety for the bankrupt, though one must look to the terms of the original contract to see if that person is otherwise released by operation of the terms of the contract. While a discharge operates so as to release the debtor from all his or her provable debts, it does not release the bankrupt’s estate from such debts (by s 116 that estate has vested in the trustee to be divisible among creditors; see also ¶18-060).

Debts incurred by the bankrupt after the date of bankruptcy, as distinct from those incurred before the bankruptcy or arising from an obligation incurred before the bankruptcy (see s 82), are of course not released, being non-provable in the bankruptcy. Debts which, though released by discharge, are the subject of a promise to pay for new and valuable consideration are again actionable (Watson v McFadden (1892) 13 LR (NSW) 128.

¶19-500 Introduction to debt agreements Debt agreements are an alternative form of administration for low income debtors introduced into the Bankruptcy Act in December 1996. They allow debtors to compromise their debts with their creditors without the debtors having to go through the formal processes of bankruptcy. Although relatively successful, the regime was substantially refined in July 2007 by the Bankruptcy Legislation Amendment (Debt Agreements) Act 2007. The amendments introduced by that Act generally apply in relation to a debt agreement proposal given on or after 1 July 2007. Reasons for entering into a debt agreement Debt agreements are negotiated compromises that may be negotiated for a variety of reasons including: • payment of less than the full amount of all or any of the debtor’s debts • a moratorium on payment of debts • a transfer of property from the debtor to one or more creditors in full or part payment, and • periodic payments of amounts out of the debtor’s income to creditors either collectively or individually. Eligibility to propose a debt agreement Debtors with income/assets and debts not exceeding the following

thresholds may propose debt agreement: • after tax income of less than about $81,000 in 2016 (indexed) • unsecured debts of less than about $108,000 in 2016 (indexed), or • property not exempt under bankruptcy valued at less than about $108,000 in 2016 (indexed). In addition, the debtor must not have been bankrupt, nor used a debt agreement, nor given an authority under Pt X of the Bankruptcy Act in the previous 10 years. The proposal process Debtors wishing to enter into a debt agreement must submit a completed Statement of Affairs (Form 17) (see ¶92-002) to AFSA, which processes the proposal (directly or refers it to the registered debt administrator). The debtor must pay a debt agreement proposal lodgement fee of $200. AFSA administers the voting process. Creditors receive a summary of the Statement of Affairs and an explanation of the proposal. Creditors are then invited to vote to accept or reject the proposal in writing. Acceptance of the proposal by creditors representing the majority of the value of debts binds all creditors to the terms of the agreement. A debt agreement can be varied by the same process. If accepted: • creditors cannot enforce remedies to recover debts • the bailiff/sheriff must not take action • any garnishees must cease, and • the debtor is released from most debts. Although a person (usually a debt agreement administrator) is nominated to administer the property or funds and distribute them to creditors, the property does not actually vest in that person (as it

would in the trustee in bankruptcy). A debt agreement ends when all the obligations that it created have been discharged, or it is terminated or declared void by the court or otherwise lapses. Debt agreements are accepted as more cost-effective than bankruptcy as well as avoiding its stigma, although if a debt agreement is terminated the debtor may be bankrupted. Debt agreements have proven to be popular with about 12,000 proposals made each year. It was originally intended that debt agreements could be administered by anyone including the debtor personally or a friend or family member. However, in practice, most debt agreements are administered by a commercial administrator who charges a fee for the service. Debt agreements now represent in the order of 30% of new personal insolvency administrations each year. Debt Agreement Practice Directions and Practice Guidelines AFSA has issued a number of guidelines for debt agreements. This is a list of them and they are referred to throughout this part of the Practice as relevant. IGPD 2 — Collection of realisations and interest charges IGPD 3 — What constitutes an expense recoverable in a debt agreement by an administrator IGPD 10 — Treatment of secured creditors in a Part IX debt agreement IGPD 13 — RDAAs’ guidelines to certification requirements IGPD 15 — RDAAs’ guidelines relating to keeping proper accounts IGPD 16 — Guidelines relating to administrators’ duty to notify the Official Receiver of 6-month arrears default IGPD 17 — Guidelines relating to administrators’ duty to notify creditors of 3-month arrears default

IGPD 20 — Guidelines for the payment of monies to the Commonwealth pursuant to section 254 of the Bankruptcy Act 1966 IGPD 22 — Effective practitioner communication.

¶24-025 Effect of entering into controlling trusteeship The debtor relinquishes control of his or her property to the controlling trustee and commences irrevocably a process leading up to a proposal being put forward to a meeting of creditors. But the debtor’s other disabilities are few. Legal actions commenced may continue. The property does not vest in the controlling trustee. The debtor’s salary will be retained by the debtor. There are no automatic restrictions on the debtor obtaining credit. The debtor is required to cooperate with and disclose information to the controlling trustee, and has committed an act of bankruptcy rendering him or her retrospectively incapable of disposing of property in the event of a subsequent bankruptcy or personal insolvency agreement. A debtor who goes into a Pt X agreement while being a director of a company is disqualified from further managing companies during the period of the agreement; s 206B(4) Corporations Act. See ¶2-125 for the consequence of this, in the context of bankruptcy, on the company itself. Section 189(2) provides that the debtor: (a) shall not remove, dispose of or deal with any of his or her property except with the consent of the controlling trustee (b) shall furnish to the controlling trustee such information with respect to any of the debtor’s examinable affairs as the controlling trustee requires (c) shall comply with any direction given to him or her by the controlling trustee with respect to his or her property or affairs. Penalty: Imprisonment for 12 months. Under s 189AB the debtor’s property is charged with:

(a) the debtor’s unsecured debts at the time the debtor signed the authority under s 188 (b) any amount by which the debtor’s secured debts exceeded the value of the property secured for payment of the debts at the time the debtor signed the authority under s 188, for the benefit of the controlling trustee. See ¶24-235. Court orders can be made during a controlling trusteeship that: (a) discharge an order made at any time against the person or property of the debtor under a law relating to the imprisonment of fraudulent debtors, or (b) stay a civil or criminal legal process begun at any time against the person or property of the debtor for the debtor’s failure: (i) to pay a debt that would be provable if the debtor were bankrupt, or (ii) to pay a pecuniary penalty payable as a result of the failure to pay a debt that would be provable if the debtor were bankrupt, or (iii) to obey an order of a court to pay a debt that would be provable if the debtor were bankrupt, or (c) if the debtor has been imprisoned under a law described in para (a) or for a failure described in para (b) — release the debtor from custody. Paragraph (b) (above) does not allow the court to stay any proceedings under the Proceeds of Crime Act 1987 or a corresponding law (s 189AA). Once a controlling trustee is appointed there is a stay of proceedings relating to creditor petitions for bankruptcy of the debtor until the proposal meeting has been concluded, or adjourned, whichever is earlier (s 189AAA). This applies both to a creditor’s petition presented

before the controlling trusteeship and to one presented after but before the first meeting. See also court power to adjourn a petition once creditors have passed the special resolution requiring the debtor to execute a personal insolvency agreement (s 206). A consequence of the stay of the creditor’s petition is that while the stay remains in force, the court may not make any order concerning the petition, for example, extending the period of its operation if the initial 12-month period is about to expire. If the petition does expire, the creditors will lose the benefit of the petition and any relation back period applicable: DC of T v Johns [2005] FCA 1143. There is a stay of execution against any of the debtor’s property in the hands of a sheriff, court or other officer levying execution if notice is given to such a person. (See further ¶24-230, ¶24-235.) As a matter of practice, a controlling trustee will refuse to repay preadministration creditors except to safeguard property — to do otherwise would be to dispose of property in circumstances of insolvency, effectively preferring those creditors repaid.

¶54-002 Purpose of administration The procedure known as “administration” under Corporations Act 2001 Pt 5.3A exists (s 435A): “to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence — results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.” The Explanatory Memorandum accompanying the new Pt 5.3A stated: “The new Part is … intended to provide for

• speed, and ease of commencement, of administrations; • minimisation of expensive and time-consuming court involvement and formal meeting procedures; • flexibility of action at key stages in the administration process; and • ease of transition to other insolvency solutions where an administration does not by itself offer all of the answers. [It is recognised that] no matter how efficiently the new administration procedure operates, there will be cases where it is not possible to save a company or its business. In this situation, the object of the new provisions will be to provide for a fair and efficient winding up, and in particular one that results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.” Comments from the caselaw below since 1993 show the views taken about how Part 5.3A was to be broadly applied, but with some limitations. In Re Vanfox Pty Ltd [1995] 2 Qd R 445; (1994) 12 ACLC 357 at p 361, Thomas J said: “The present procedure of administration with a view to executing a deed of company arrangement (Part 5.3A) reveals a significant departure from former practices under which companies in difficulty had little chance of resisting an intransigent creditor. The scheme enables directors to appoint an administrator who will have the benefit of a moratorium on actions against the company while formulating a plan of action for consideration by the creditors. The emphasis is on informality, flexibility, speed of action, and protection of the creditor’s interests. The Second Reading Speech reveals an intention to provide a capacity for companies that face solvency problems, but which are otherwise sound, to obtain some respite. The creditors are given the power to make the necessary decision, and they may choose to accept

a compromise which avoids the delays, expenses and losses that would be thought to attend a winding up, and to take instead what the scheme offers. (See Explanatory Memorandum to Corporate Law Reform Bill 1992 p. 93 paras. 449 et seq; and Second reading speech: Australia: House of Representatives: Parliamentary Debates: 3 November 1992: 2400–2404.)” Referring to the stated statutory objectives of Pt 5.3A, Barrett J said in Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; 47 ACSR 391 at 19: “Examination of Part 5.3A as a whole shows that there are several purposes which together contribute to the widely stated object. The provisions imposing the various moratoriums show that there is a purpose of allowing time for unpressured but reasonably prompt consideration of possible reconstruction possibilities. The provisions as to creditors’ meetings and creditor decision making, including those concerning deeds of company arrangement, show that there is a purpose of allowing reconstruction possibilities to be pursued in such a way that, if creditors so desire, a legacy of debt may be left behind and winding up, which would normally be the product of an intolerable debt burden, may be avoided. Implicit in that, of course, is the proposition that the company will thereby be permitted to return to the mainstream of commercial life. Another purpose is that, if the company is not capable of returning to the mainstream of commercial life, there will be some better outcome for creditors than that available in an immediate winding up.” The process Administration originates when an administrator, who must be a registered liquidator, is appointed. The appointment of an administrator may take place on the initiative of the company itself. Directors must be of the opinion that the company is insolvent or likely to become insolvent. Administration may also take place at the initiative of a chargeholder who has a presently enforceable charge on the whole, or substantially the whole, of the company’s property. If a company is in liquidation or provisional

liquidation, the liquidator or provisional liquidator may initiate an administration. Part 5.3A allows the administrator of the company to report to creditors of the company with a possible view to recommending a rescue or compromise proposal for the company in the form of a “deed of company arrangement”. Alternatively, the administrator will recommend the company’s liquidation, or simply the termination of voluntary administration. In the meantime, a moratorium (with certain exceptions) is imposed upon creditors of the company, and on those persons who own property which the company is using, in order to facilitate a proposal leading to a deed of company arrangement. This moratorium enables the company’s affairs to remain intact while a proposal is prepared and considered, permitting a debtor company on its own initiative (or a chargeholder or liquidator on its behalf), without going to the court, to focus the attention of creditors on its financial problems. If the proposal fails, or if there is no workable proposal, there is a simple springboard into liquidation. Harmer Report The Harmer Report (Australian Law Reform Commission Report 1988) recognised the need for integration: “Apart from the more specific disadvantages associated with the existing forms of voluntary administration taken individually, they are not integrated. If, for example, an insolvent company promotes a scheme of arrangement and it is rejected by the creditors, there is the additional expense of implementing an entirely different procedure to bring about a winding up. In addition to endeavouring to provide either less cumbersome or more flexible procedures, there should be an attempt to provide these alternatives (that is, the choice of an arrangement or a winding up) under a single procedure.” The report also sought to do away with conservative legislation and promote creative alternatives:

“The Commission is also concerned that … the legislative approach to corporate insolvency in Australia is most conservative. There is very little emphasis upon or encouragement of a constructive approach to corporate insolvency by, for example, focussing on the possibility of saving a business (as distinct from the company itself) and preserving employment prospects. Constructive or creative insolvency is not a myth. However, it requires suitable procedures that encourage and offer a reasonable prospect of achieving that result. A constructive approach to corporate insolvency requires the preservation, if practical and possible, of the property and business of the company in the brief period before creditors are in a position to make an informed decision. This assists in an orderly and beneficial administration whether creditors decide to wind up the company or to accept a compromise. An ordered form of administration of the affairs of an insolvent person is at the centre of insolvency law — whether, in the case of an insolvent company, that law offers the prospect of winding up or continuation of the corporate business.” It must be emphasised that the impetus was to create a voluntary form of administration. Legislation was required to encourage directors to take early and orderly steps to deal with an existing or impending state of insolvency. The Commission’s recommendations in respect of potential director liability for the debts of an insolvent company may provide such encouragement. The report approach was not blue sky: the Commission does not suggest that its approach will result in the salvation of failed companies or even companies which show signs of failing. Nonetheless, the aim is to encourage early positive action to deal with insolvency. It will be worthwhile and a considerable advantage over present procedures if it saves or provides better opportunities to salvage even a small percentage of the companies which, under the present procedures, have no alternative but to be wound up. Creditors’ decision

The scheme of Pt 5.3A is to let creditors decide the fate of the company, and to that end creditors are given the power to choose. Liquidation is not always the consequence of terminating a voluntary administration, or of terminating a deed of company arrangement. Creditors may decide upon another administration or another deed (McVeigh & McDonald v Linen House Pty Ltd & Rugs Galore Australia Ltd (2000) 18 ACLC 311). In Dallinger v Halcha Holdings Pty Ltd (in admin) & Anor (1996) 60 FCR 594; (1996) 14 ACLC 263, the voluntary administration of a company was challenged by D, a shareholder and creditor, on grounds which included a contention that Pt 5.3A was not intended to be used where it is known, before the administrator conducts his preliminary review of the company’s affairs, that it cannot be saved from liquidation. Sundberg J rejected that contention. He referred to the Explanatory Memorandum accompanying the enactment of the new Part, which said: “[The proposed objectives section] will also recognise that, no matter how efficiently the new administration procedure operates, there will be cases where it is not possible to save a company or its business. In this situation, the object of the new provisions will be to provide for a fair and efficient winding up, and in particular one that results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.” Section 435A(b), since enacted, sets out as an objective “a better return … than would result from an immediate winding up …”. While the Memorandum paragraph above indicated a limitation to sec 435A(b), the sub-paragraph itself was not so limited. So its natural meaning was to be relevant. Furthermore the machinery of Pt 5.3A should be available where it is likely to result in a better return for creditors than would be the case with an immediate winding up. In Young v Sherman (2002) 20 ACLC 149 the plaintiff creditors argued that a deed of arrangement approved by creditors was not a valid deed of arrangement for the purposes of Pt 5.3A. The deed in question provided a framework for the deed administrator to obtain

funding for, commence and conduct, proposed litigation against the plaintiff creditors; and provided for a premium dividend of $1.10 per $1 of creditors’ claims if successful. The plaintiff creditors argued that deed was objectionable but the Court disagreed and upheld the deed. On appeal, however, in Young v Sherman (2002) 20 ACLC 1,559, the deed was terminated primarily because the Court of Appeal viewed the premium distribution as a practice contrary to the policy of the Act and the public interest. While all the judges accepted that the administrator did not perceive any impropriety in the inclusion of the premium in the framework of the DCA, it was said that the premium was a gratuity to which none of the creditors was otherwise entitled in law whether or not the company was wound up. … It must be noted that if a deed of company arrangement (rather than liquidation) is to ensue, this will eliminate the possibility of recoveries by the liquidator for insolvent trading or unfair preferences, etc (provided the deed succeeds). However, Santow J said in DFC of T: Re First Netcom Pty Ltd (2001) 19 ACLC 324 at 327–328: “The whole frame of the legislation is that, in a rather rough and ready fashion, creditors are invited, if they adopt a Deed of Company Arrangement, to trade that kind of recovery for the usually relatively greater certainty of what is offered under the DCA ...” Deed of Company Arrangement If the debtor’s proposal is accepted and it enters into a deed of company arrangement, creditors will appoint an administrator of the deed to act on their behalf to realise assets, collect moneys and pay dividends. That person must also be a registered liquidator and will normally be the existing company administrator. The procedure of administration exists to allow interim control over the affairs of a corporation until the creditors can decide on the future of the company. There will be no general distribution of corporate property to creditors during the course of administration. This must await a decision on the company’s future.

The administrator has power to control the company’s affairs. The administrator’s powers replace existing management control of corporate property for the period of his or her appointment. The powers of corporate officers are suspended, except with his or her approval. A deed of company arrangement, if agreed to, can be used by insolvent corporations: • to modify or adjust the normal rights of creditors • to bind all creditors should the requisite majority approve the proposed adjustment of rights, and • to produce an ultimate financial benefit to the parties concerned. In some cases, the effect of the deed of company arrangement will be to permit the company to avoid an impending liquidation, or even to set aside an existing liquidation or other insolvency administration. However, the major purpose is for the company to reach an arrangement with its creditors having the effect, or the intended effect, of producing a more beneficial situation for those creditors, and usually for the company, than would otherwise exist. The type of deed of company arrangement that a company may negotiate with its creditors is wide ranging. It may be a simple moratorium, or a reorganisation of creditors and loan capital modifying the rights of both ordinary unsecured creditors and secured creditors. The general reason for a proposed deed is the expectation of financial benefit to the parties compromising or modifying their rights. This expected benefit may be generated from one or more of the following sources (the list is not meant to be exhaustive): • the freezing, barring, or reduction of creditors’ claims, releasing liquidity to the company to permit it to conduct its business, to complete work-in-progress or to conclude negotiations for the sale of its business • continued trading, resulting in an expected generation of profit,

both for the company itself and for existing creditors who might continue to supply it with goods and services • merger or reorganisation, resulting in economies to the new company; • take-over of the company or its business by a purchaser capable of introducing expertise, capital, or some other benefit • taxation advantages by continuing to use the corporate structure and being able to carry forward past losses as deductions against future profits. The impetus to a proposal may be internal or external. The internal reason might be the desire of shareholders, directors or management to continue the company’s business despite an inability to immediately fund repayment of past debts. An external reason might be that an outside party seeks to acquire the company’s business and at the same time wishes to continue to carry on business under the existing corporate structure for tax purposes. This is because deferred tax benefits often await recoupment, eg the company has incurred losses in the past and these losses are perhaps available as taxable deductions against future profits. Unless there is some reason to preserve the corporate structure, such as the utilisation of former tax losses or Stock Exchange listing for the corporation, an intending purchaser of company assets may not be interested in a deed of company arrangement for the company — it may simply wish to purchase part or all of the assets of the company free of the company’s liabilities. If, however, the intending purchaser wishes to keep the corporate structure, a deed of company arrangement has the advantage of being able to facilitate the acquisition of the corporate structure without at the same time forcing the purchaser to acquire all of the company’s obligations to its existing creditors. Like liquidation, and other common creditor insolvency administrations, a deed of company arrangement for an insolvent

company will facilitate a fair and equitable distribution of the company’s property among its common creditors, through the medium of creditor approval to the proposal. The deed of company arrangement will be recommended by the administrator, if it is in the creditor’s interests. In practice, however, the company and/or its major secured creditor may be cooperatively involved in the proposal. The registered liquidator advising the company (perhaps in conjunction with a major secured creditor), is likely to be the architect of such a proposal, whether before or after his or her appointment as administrator. Timing Administration can be initiated quickly. It requires neither the scrutiny of the ASIC nor of the court. The administrator must: • convene an immediate meeting of creditors to be held within eight business days • investigate the company’s affairs and form an opinion about its future, in particular whether a deed of company arrangement will be in the creditors’ interests, and • report to a proposal meeting held within about 25–30 business days at which creditors will decide the company’s future.

¶1-220 Receivership Receivership is an administrative form which developed from case law in connection with the law of contracts. In England, the Court of Chancery developed the practice of appointing receivers in the middle of the 15th century in response to the inadequate remedies provided by statute and common law for persons who wished to safeguard their equitable interests in property. The concept of privately-appointed receivers evolved not from equity, but rather from the contract of loan between debtors and creditors.

One of the standard clauses in real property mortgages enabled the mortgagee to appoint a receiver out of court if at any time the principal sum was not paid. Unlike other insolvency administrations, the structure and purpose of receivership is not laid down by a statute. Also, it applies to both corporate and non-corporate debtors, though most commonly applied to corporate debtors. Receivership is concerned with the realisation of “charged” assets for “secured” creditors. It is to be contrasted in this regard with bankruptcy, liquidation and other administrations which are more concerned with the realisation of “uncharged” assets for the benefit of unsecured creditors. In contrast, receivership is concerned with the realisation of the assets of a company which are subject to a charge, and the payment of the proceeds to the holder of the charge towards discharge of its security. Secured creditors normally resort to their security, which they are usually free to realise outside and independently of the bankruptcy or winding up, and without regard to the effect upon the unsecured creditors. If the security is deficient, they are entitled to be treated as unsecured creditors to the extent of the deficiency, and to that extent participate in the bankruptcy or winding up. During the 1860s the English Court of Chancery developed the concept of the “floating charge” as a form of security over debtor assets. Most modern receivership appointments arise from powers given to creditors secured by, inter alia, a charge over a borrower’s assets. Reforms introduced into the Australian Corporations Law in 1993 were made to ease regulatory frustration with the lack of disclosure required from mortgagees in possession when dealing with corporate property, as distinct from receiverships flowing from mortgagee appointments. The reforms imposed duties on categories of persons known as “controllers”. That term includes not only receivers and receivers and managers but also anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a charge.

In addition, new duties, powers and liabilities which are now imposed upon both receivers and controllers are: • a court may declare whether a controller is validly acting • reliability of a controller under a pre-existing agreement about property used by the corporation • the controller’s duty of care in exercising a power of sale • a court may remove a controller for misconduct, and • a court may remove a redundant controller. Managing controllers must file a report on the company’s affairs with ASIC. Voluntary administrations (see ¶1-205) have taken the place of receiverships in many cases.

¶32-300 Parties to liquidation and corporate insolvency The following paragraphs (¶32-307 to ¶32-320) summarise the appointment, powers and functions of the various administrative organs and institutions involved in winding up. They are: • external administrations (¶32-307) • liquidators (¶32-310) • registered liquidators (¶32-320) • official liquidators (¶32-330) • provisional liquidators (¶32-350) • voluntary administrators (or administrators) (¶32-352) • deed administrators (¶32-354)

• controllers and receivers (¶32-356) • Australian Restructuring Insolvency & Turnaround Association (ARITA) (¶32-360) • Australian Securities & Investments Commission (ASIC) (¶32-390) • Companies Auditors and Liquidators Disciplinary Board (CALDB) (¶32-400) • the court (¶32-410) • creditors (¶32-450) • the creditors’ meeting (¶32-460) • members and contributories (¶32-470) • the meeting of contributories (¶32-480) • the general meeting of the company (¶32-490) • committee of inspection or committee of creditors (¶32-500) • companies, foreign companies and corporations (¶32-550) • directors, officers, promoters and executive officers (¶32-560).

¶32-310 Liquidators A “liquidator” is the administrator controlling and responsible for the winding up of a company’s affairs. Except in special circumstances in certain voluntary windings up, the liquidator of a company must be a “registered liquidator”. To be appointed in a court winding up, the liquidator must be both a “registered liquidator” and an “official liquidator” (see ¶82-220). A liquidator is generally a natural person. Persons who are official liquidators may act in the voluntary winding

up of a company, but it is not mandatory to use the services of an official liquidator in voluntary liquidation. A court-appointed liquidator is both an agent of the company and an officer of the court. A liquidator in a voluntary winding up is an agent of the company. A liquidator will generally use the description: Voluntary winding up

Court winding up

John Smith

John Smith

Liquidator

Official Liquidator

ABC Pty Ltd

ABC Pty Ltd

or

or

ABC Pty Ltd (in liquidation)

ABC Pty Ltd (in liquidation)

John Smith — Liquidator

John Smith — Official Liquidator

In a court liquidation, the liquidator is appointed by the court (s 472). In a voluntary liquidation, a liquidator is appointed by a resolution of the company, but where the company is or becomes insolvent, creditors may choose a liquidator to replace the one nominated by the company (Corporations Act 2001: s 496–497). When the appointment of an administrator leads to a resolution at the proposal meeting for the company to be wound up, the administrator becomes the liquidator in a voluntary liquidation, and no resolution of the company is required. In all liquidations, a consent in writing to act as liquidator must have been given prior to appointment (s 532). A liquidator may be removed by the court and a new liquidator appointed (s 502, 503, 536). A person’s registration as liquidator may be cancelled or suspended by the Company Auditors and Liquidators Disciplinary Board (CALDB) on application brought by ASIC under s 1292 of the Corporations Act. The Board is established under Pt 11 of the Australian Securities and

Investments Commission Act 2001. In a creditors voluntary liquidation where the creditors’ choice of liquidator is different from that of the members, any director or member may within seven days after the creditors nomination apply to the court seeking review of that nomination (s 499). A liquidator vacates office by resignation, death, removal or cessation of qualification as a registered liquidator and can be replaced by a general meeting of the company (members voluntary: s 495), a meeting of creditors (creditors voluntary: s 499) or by the court (court liquidation: s 473). A voluntary liquidator ceases to hold office on the deregistration of the company (pursuant to s 509). A court liquidator may apply to the court for a release if he/she has resigned or been removed from office or if the company is to be deregistered by ASIC (s 480). Such an application is not mandatory. The liquidator’s major function is to get in, administer and realise the assets of a company being wound up. To do this, the liquidator must ascertain what the company’s assets and liabilities are. The liquidator is required to take possession of company property including all deeds and documents of importance and he/she can enforce possession through the court. Liquidators are given wide powers, exercisable usually at their own discretion, but sometimes with the permission of other parties, to deal with and realise the property, assets, debts, claims and business of the company. A liquidator will administer a company in the interests of creditors and, where assets permit, of members and contributories. he/she may apply to the court for directions at any time. The liquidator has the power, and in some cases is required, to convene meetings of financially interested parties and to secure the appointment of a committee of inspection to assist and advise. A liquidator is generally accountable to creditors, members and contributories and must have regard to any direction given by a resolution of the creditors or contributories at any general meeting or by a committee of inspection. A liquidator must convene meetings of

creditors or contributories when directed in writing to do so by 10% in value of creditors or contributories (s 479). A creditor, contributory or any other person may appeal to the court against any act, omission or decision of a liquidator about which they are “aggrieved” (s 1321). The court or ASIC may also enquire into the conduct of a liquidator in relation to a particular liquidation; a liquidator may be removed by court order following such an enquiry (s 536). A liquidator may be required by court order to make good any loss that a company estate has suffered by reason of the misfeasance, neglect or omission of a liquidator (s 536). The company’s property does not vest in the liquidator; a liquidator is not a trustee but a “quasi-trustee” bound by statutory duties toward creditors and contributories. A voluntary liquidator is an agent/officer of the company and must exercise both the common law duties of care and the obligations imposed on an officer by the Corporations Act. A court appointed “official liquidator” is not generally an officer of the company (s 9), but as an officer of the court would be expected to exercise at least the same degree of responsibility. Any “liquidator” is an “officer” of a corporation (s 9). An officer has certain duties and liabilities of officers to act in good faith and exercise care and diligence. A liquidator’s statutory powers stem mainly from s 477, which provides not only specific powers, but also the residual power to “do all such other things as are necessary for winding up the affairs of the company and distributing its property”: s 477(2)(m). Certain of a liquidator’s powers, eg the power to compromise with debtors in excess of $100,000 (s 477(2A), and to enter into agreements of over three months duration (s 477(2B)), require the permission of the court, a meeting of creditors or the committee of inspection. If a company’s business continues after liquidation, it is only permitted to do so under the control of the liquidator. A liquidator is to keep proper books in which is recorded minutes of proceedings at meetings, which may be inspected by a creditor or

contributory (s 531). Those books must record what is necessary and proper to give a complete and correct record of the liquidator’s administration (reg 5.6.01). A liquidator must also lodge with ASIC each six months an account of receipts and payments together with a statement of the estimated position in the winding up (s 539). In the case of voluntary winding up, a liquidator may convene annual meetings of creditors and lay before the meeting an account of the conduct of the winding up, or lodge a report with ASIC (s 508) and must convene a final meeting for similar purposes (s 509). A liquidator is required to give ASIC access to their and the company’s records (Australian Securities and Investments Commission Act 2001). The liquidator’s accounts may be subjected to an audit if requested by ASIC (s 539). A liquidator is required to declare and distribute dividends among creditors as soon as practicable (reg 5.6.67). he/she is to distribute all moneys in hand subject to the retention of amounts necessary for the costs of administration or necessary to give effect to statutory provisions. No action can be taken against a liquidator in relation to a dividend payment, but an aggrieved person may apply to the court (s 1321), which might order costs and interest to be awarded, perhaps against the liquidator personally. A liquidator should ensure that the words “in liquidation” appear after the name of the company being wound up in every business letter, website notice, cheque, etc (s 541). Unlike a bankruptcy trustee, a liquidator is an agent of the company and is not personally liable for debts incurred as liquidator. However, as a matter of professionalism, a liquidator will seek to ensure that liabilities incurred as liquidator have the backing of company assets. Persons dealing with the liquidator do have some form of protection by reason of the priority in repayment given to costs and expenses of winding up. A liquidator is not liable to incur any expense in relation to a winding up unless there is insufficient available property (s 545). This does not

relieve a liquidator from the obligation to investigate and report on the company’s affairs, though the extent of that investigation will be limited by funds available. In the case of an insolvent company or where it is otherwise desirable to do so, the liquidator must investigate company records, the dealings and transactions of the company, the conduct of its officers and the causes of liquidation and lodge a report with ASIC (s 476 (court liquidation only), 533). The liquidator will also report to creditors on his or her investigations and, generally, as to conduct of the liquidation. The liquidator’s investigation extends to the promotion, formation, administration, management and winding up of the company. A liquidator’s powers stem from statute, from being an agent of the company and, in the case of court liquidation, from being an officer of the court. A liquidator displaces the directors and, with the possible exception of voluntary winding up assumes their functions in addition to the functions of winding up (s 495(2), 499(4)). A liquidator is entitled to reasonable remuneration. A fixed scale is not set by legislation. The practice is to use a time remuneration basis and, less commonly, a fixed fee or commission basis. The remuneration amount must be approved by the committee of inspection, a meeting of creditors or, in the case of members’ voluntary winding up, a meeting of the company — the procedures differ according to the mode of winding up. The Code of Professional Practice of the Australian Restructuring Insolvency & Turnaround Association (ARITA) contains guidance on recording and claiming remuneration and expenses. A liquidator must advise ASIC of their appointment and address (ASIC Form 505), of any change of address (ASIC Form 506) and of their resignation or removal from office (ASIC Form 505).

¶32-660 Comparing court liquidation with other corporate insolvency administrations Type of

Intrinsic

Initiated By

Major Merits

Administration

Function

Court Liquidation (¶32-000)

Realisation Company, creditor, and member, ASIC collection of assets and distribution to financial participants; investigation of company, officers and prior transactions, particularly in the case of insolvency.

Liquidator has full powers of realisation and distribution and full investigatory powers, eg recovery of preferences.

Limited pow to carry on business; cumbersome reporting requirement initiation can be slow process, particularly i contested.

Voluntary Winding Up (¶60-000); (¶63-000)

Realisation and collection of assets and distribution to financial participants; investigation of company, officers and prior transactions, particularly in the case of insolvency.

Avoids application to court; full powers realisation and distribution; full investigatory powers.

Limited pow to carry on business; initiation by members ma be timeconsuming, particularly i lengthy notic required for extraordinar general meeting.

Provisional Liquidation

Caretaking Company, director, Can be done safeguard of creditor, member, at short

Company itself, although creditors choose liquidator in insolvent corporation. Alternatively, by creditors, at “proposal” meeting during Administration. Administrator becomes liquidator.

Usually no powers of sa

(¶50-000)

assets ASIC pending hearing of liquidation application; interim investigation possible.

Corporate Receivership (¶65-000)

Recoup moneys to repay a particular party, usually a secured creditor.

notice; creates effective paralysis of creditor claims while affairs of company are investigated; provides breathing space while proposal for continuation is assembled; provides “relation-back” date for winding up in case it is subsequently necessary to wind up to seek recovery of preliquidation transactions.

Secured creditor or Appointment court. can be simple and speedy, especially when appointed by contractual powers; powers of receiver can be widely drawn.

outside the ordinary course of business; administrato has limited powers to se assets or restructure corporation, though he or she may contemplate ultimate approval of court to such schemes.

Only availab to particular creditors in particular circumstanc less investigatory power; no relation-back period for recoverable transactions

drawn. Administration can be easily terminated when debtor repays.

transactions in conflict wi interests of unsecured creditors, receiver mus look after interests of secured creditors.

Agent for the mortgagee in possession (¶71-750)

Recoup moneys to repay a particular party, being a secured creditor.

Secured creditor.

Appointment can be simple and speedy, especially when appointed by contractual powers; if documents permit, powers can be widely drawn (though probably not as wide as those of a receiver). Administration can be easily terminated when debtor repays.

Only availab to particular creditors in particular circumstanc less investigatory power; no relation-back period for recoverable transactions Agent only looks after interests of secured creditor. Secured creditor personally liable for deb and other liabilities incurred or sustained by agent.

Administration

Interim

Company itself; or

Appointment

Practically c

(¶54-000)

protection of company’s assets and affairs until proposal meeting of creditors can consider company’s future. Incorporates a freeze on unsecured and secured creditors, and on owners of property in company usage.

provisional liquidator/liquidator; or a person entitled to enforce a charge on the whole or substantially the whole of a company’s property.

can be simple and speedy; provides strong powers to independent administrator; triggers relation back period for winding up if required; facilitates flexible proposals for company’s future; company may transit into deed of company arrangement or other terminal administration.

only work if major secure creditor(s) concurs; suc a person ma prefer receivership Secured creditors ma be wary of “freeze”.

Deed of company arrangement (¶54-000ff)

Compromise or restructure between company and its creditors.

Creditors, by resolution after considering proposal put to them by a company Administrator.

Extremely flexible, and avoids application to court. Can vary from mere moratorium to major reorganisation or outright compromise;

Need to separately bind, or specially cat for, creditors who are not merely unsecured.

compromise; creditors’ requirements can be written into deed, and/or drafters can rely upon standard deed provisions. Easy to vary or terminate. Court-approved scheme of arrangement (¶75-000)

Compromise Company member or or creditor (or restructure liquidator). between company and its members or creditors.

Extremely flexible: can vary from mere moratorium to major reorganisation or outright compromise; creditors’ requirements can be written into scheme documents.

Timeconsuming and expensive; requires sanction of creditors, co and ASIC

The flight of the phoenix, 13 August 1996 Australians could be “ripped off” by as much as $1.3 billion a year by so-called “phoenix” companies. Phoenix company trading involves the use of a succession of companies to carry on the same business, with each company running up unpayable debts. As alarming as the $1.3 billion figure sounds, an ASC research report has found small businesses are generally unwilling to take action against phoenix companies. The ASC’s report highlights some further disturbing information about

phoenix activities, including: • 80% of businesses who have experienced such activities have not reported it • only 53% of survey respondents believed insolvent trading was illegal and 58% believed that insolvent trading was immoral • each year 9,000 individual businesses are affected by phoenix activities • phoenix activities tend to be conducted by small companies usually with no more than two directors • 45% of phoenix activity occurs in the building/construction industry • 36% of small businesses have been financially affected by another business trading while insolvent. Now, however, things may be about to change. The ASC is set to embark on a community awareness campaign to raise the community’s understanding about phoenix activity and insolvent trading by encouraging businesses to consider issues such as: (a) how to find out if the company they might be about to deal with is in financial trouble, and (b) how they can avoid dealing with such a company before money is lost. The first step in the community awareness campaign will be a series of advertisements urging members of the community to contact the ASC’s Infoline so they can receive free educational material about how the ASC may be used to find out about a company before trusting it with their money. The ASC’s Infoline number is 1300 300 630. (Source: ASC Media Release ASC 96/163 and “Phoenix companies and insolvent trading” — an ASC research report, 4 August 1996. To be reported in CCH Australian Securities Commission Releases.)

Tax Institute CommLaw2 Module 1 — Cases HIH Casualty & General Insurance Ltd v Building Insurers’ Guarantee Corporation (2004) 13 ANZ Insurance Cases ¶61-597 Court citation: [2003] NSWSC 1083 Supreme Court of New South Wales Judgment delivered 26 November 2003 Insurance — Reinsurance — Winding up — Subrogation — Application of proceeds of reinsurance — Statutory regulation of insurers — Application of property and priority of claims — Territorial quality of winding up process under Commonwealth law — Whether State insurance legislation invalid — Whether third party compelled by law to meet insured loss upon reinsured risk is subrogated to insurer's right under reinsurance — Whether equitable right to subrogation displaced by statutory right — Corporations Act 2001 — Insurance Act 1973 — Insurance Protection Act 2001 (NSW) — Insurance (Policyholders Protection) Legislation Amendment Act 2001 (NSW). HIH Casualty & General Insurance Ltd and 32 related companies (the HIH companies) entered into contracts of reinsurance under which other parties agreed to protect them against portions of their liabilities to their own policyholders in respect of certain risks. Orders had previously been made for the winding up of the HIH companies. The risks covered by the relevant insurance written by the HIH companies related to risks for which State and Territory legislation made insurance compulsory. There were three classes of this insurance: motor vehicle third party insurance; workers' compensation insurance; and builders' warranty insurance.

Generally, in the absence of statutory intervention, an insured party had no right to the proceeds of reinsurance contracts held by the insurer in respect of the relevant risk. With respect to the insurance made compulsory by applicable State and Territory legislation, however, the general aim of the legislative provisions was to cause the authority holding or administering a statutory fund from which is met a claim that would in the normal course have been met by an insurer to obtain the benefit of reinsurance held by the insurer in respect of the claim. The provisions created a link between the statutory authority and the reinsurance (referred to as ``cut-through'' provisions). The liquidators of the HIH companies applied, pursuant to sec 479(3) of the Corporations Act 2001, for directions concerning the correct treatment of the proceeds of the reinsurance contracts. The application raised the issue as to whether the proceeds of the reinsurance contracts represented assets that were to be available for the purposes of each winding up or whether rights in respect of the proceeds were for the benefit of the various statutory authorities in order to meet claims not met by the insolvent HIH companies, such that the proceeds would not be available for the general purposes of the windings up. The liquidators sought guidance regarding the effect of the following statutes: • sec 116 of the Insurance Act 1973, now repealed, which was in force when the winding up of each HIH company began; • sec 116 of the General Insurance Reform Act 2001; and • the Corporations Act 2001. It was necessary to determine whether the cut-through provisions of the State and Territory legislation operated despite the operation of certain Corporations Act provisions relating to the winding up of each HIH company. Held: application stood over for formulation of directions.

Insurance Act 1973, sec 116 The contractual right of each HIH company under the reinsurance arrangement, being a chose in action, was an ``asset'', although, of its nature, not one capable of being ``applied'' in any sense relevant to sec 116(3). Only the proceeds, in the form of money representing satisfaction of the right, were ``assets'' capable of being so ``applied'' in the active sense with which sec 116(3) was concerned. General Insurance Reform Act 2001, sec 116 None of the HIH companies ever held an authority under sec 12 of the General Insurance Reform Act. It followed that sec 116 had no application in the winding up of any of the HIH companies and that the matters dealt with by the State and Territory legislation were not affected by sec 116. Corporations Act 2001 1. The State and Territory cut-through provisions were not compatible with sec 555, 556 and 562A of the Corporations Act in two ways. First, some of the provisions dealt with and made contrary provision with respect to the part of the property of the company that the Corporations Act required to be applied in meeting the debts and claims pursuant to those sections. Secondly, other cut-through provisions created a requirement with respect to the application of the proceeds of reinsurance, once received by the liquidator, not in accordance with those sections. There was a direct inconsistency for the purposes of Part 1.1A of the Corporations Act with respect to the State and Territory legislative provisions, and sec 5E (concurrent operation) of the Act did not apply. 2. Section 5F of the Corporations Act did not apply because sec 555, 556 and 562A had no distinct and separate territorial application of the kind that would allow the provisions to be displaced in the manner contemplated by the section. 3. Each State and Territory cut-through provision had been enacted and was in force immediately before the commencement of the Corporations Act. The provisions satisfied the definition of ``precommencement (commenced) provision'' in sec 5G(12), provided that

they were not ``materially amended'' after commencement. Although two of the provisions had been amended subsequent to commencement, they had not been materially amended. Each of the State and Territory cut-through provisions was, for the purposes of sec 5G, a ``pre- commencement (commenced) provision''. 4. Section 5G of the Corporations Act applied to the interaction between the State and Territory legislation and the Corporations Act by virtue of sec 5G(3). 5. Sections 555, 556, and 562A of the Corporations Act did not prohibit the doing of an act, or impose a liability for doing any act, where one of the cut-through provisions specifically authorised or required the doing of that act: sec 5G(4). 6. Chapter 5 of the Corporations Act did not apply to the winding up of any of the HIH companies to the extent that the windings up were carried on pursuant to any of the cut- through provisions. Subrogation 1. The question whether statutory rights and remedies coexist with general law rights and remedies or supplant them is, in every case, to be answered by construing the statute. It will sometimes be clear that the statute aims merely to supplement a general law right or to assist the vindication of that right. On other occasions, the statute will evidence an intention of creating a substituted right or remedy. 2. The several cut-through provisions of State and Territory law, as they operated with the assistance of sec 5G of the Corporations Act, were of a substitutional kind. In the first place, there was no doubt as to the territorial reach and effect of the cut-through provisions. They were all effective to change the course of events that would otherwise flow from sec 555, 556 and 562A of the Corporations Act. Second, each cut-through provision dealt comprehensively with the nature and extent of the statutory authority's recourse in respect of reinsurance referable to claims met by it in accordance with its statutory duties. There did not seem to be any gap that needed to be filled by reference to general equitable principle. Third, the position to which the statutory authorities sought to succeed by subrogation was, in the present

statutory context, a position under sec 562A of the Corporations Act. 3. The effect of the cut-through provisions was to create either a new and special right in respect of the reinsurance that was inconsistent with the effectuation of sec 562A in relation to the particular payment or a new and special right to participate in the winding up that was superior to the sec 562A right. Section 562A of the Corporations Act operated only if an amount was received by the company or its liquidator under a contract of reinsurance. [Headnote by the CCH CORPORATE LAW EDITORS] BAJ Coles QC with G Scarcella (instructed by Blake Dawson Waldron) for the plaintiffs. SW Gibb SC with CL Lonergan (instructed by IV Knight, Crown Solicitor) for the first defendant. AJL Ogborne (instructed by Bain Gasteen by their city agents Hicksons) for the second defendant. A Robertson SC with GB Carolan for ACT, NT, Vic and NSW WorkCover. MB Oakes SC with MJ Dawson as amicus curiae. Before: Barrett J. Barrett J: Background 1. The second plaintiffs, Mr McGrath and Mr Macintosh, are the liquidators of the first plaintiffs, being 33 companies in respect of which orders for winding up have been made by this court. It is convenient to refer to the second plaintiffs as ``the liquidators'' and to the first plaintiffs as ``the HIH companies''. The liquidators make application to the court under s. 479(3) of the Corporations Act 2001 (Cth) for directions in relation to certain matters arising under the windings up. In general terms, the matters concern the correct treatment of proceeds of certain contracts of reinsurance. 2. The HIH companies carried on business as insurers. In the course of doing so, they effected contracts of reinsurance under which other

parties agreed to protect them against portions of their liabilities to their own policyholders in respect of certain risks. The liquidators' application raises, in relation to certain kinds of insurance made compulsory by statute, the question whether the proceeds of related reinsurance represent, in each winding up, assets available for the general purposes of the winding up (and therefore ultimately available for the benefit of the body of creditors generally) or whether rights in respect of those proceeds accrue to statutory authorities by which claims not met by the insolvent HIH companies are paid, so that those authorities have an entitlement to or interest in the reinsurance proceeds which prevents their being assets available for the general purposes of the winding up. 3. The risks covered by the relevant insurances written by the HIH companies are risks in respect of which legislation of States and Territories makes insurance compulsory. At a functional level, there are three classes of such insurance: motor vehicle third party insurance, workers' compensation insurance and builders' warranty insurance. Legislation requires certain persons to effect and hold insurances of these kinds, the social objective being to ensure that others who suffer loss for which such persons are liable are not confined to recovery from the assets of an individual vehicle owner, employer or builder. As will be seen, provisions of the State and Territory laws imposing the requirement to insure have a bearing on the question of entitlement to recoveries under reinsurance contracts entered into by insurers who write policies of the kinds required by the statutory schemes. 4. Several of the State and Territory statutory authorities by which these schemes are administered made submissions upon the hearing of the liquidators' application for directions. Some were parties, others were not but I do not think anything really turns on that. Submissions were also made on behalf of the liquidators and by Mr Oakes SC who, with Mr Dawson of counsel, appeared as amicus curiae to meet the concern of the court that there be an appropriate means of ensuring that arguments which might favour the position of the general body of creditors should be placed before the court. 5. The general background I have stated is dealt with in greater detail

in the statement of facts agreed for the purposes of the proceedings. It is convenient to quote from it, although with nomenclature altered to accord with that used in these reasons (and with footnotes omitted): ``State statutory insurance schemes 11. The business of the HIH companies included insurance underwriting pursuant to state regulated insurance schemes under the following legislative provisions: (a) Motor Accidents Compensation Act 1999 (NSW) (the CTP NSW Scheme); (b) Motor Accident Compensation Act 1994 (Qld) (the CTP QLD Scheme); (c) Workers Compensation Act 1951 (ACT) (the Workers' Compensation ACT Scheme); (d) Workers' Compensation Act 1926 (NSW) and the Workers Compensation Act 1987 (NSW) (the Workers' Compensation NSW Scheme); (e) Work Health Act 1986 (Northern Territory) (the Workers' Compensation NT Scheme); (f) Workers Rehabilitation and Compensation Act 1988 (Tasmania) (the Workers' Compensation Tas Scheme); (g) Workers' Compensation Act 1958 (Victoria) (the Workers' Compensation Vic Scheme); (h) Workers' Compensation and Rehabilitation Act 1981 (Western Australia) (the Workers' Compensation WA Scheme); (i) Home Building Act 1989 (NSW) (the Builders' Warranty NSW Scheme); (together the State Schemes).

12. Several of the HIH companies wrote insurance policies as required by the State Schemes (the State Schemes Policies). The State Schemes Policies were written out of the offices of several of the HIH companies located in Australia and related to events that would happen in Australia. Payments in respect of claims made under the State Schemes Policies were to be made out of funds of several of the HIH companies located in Australia. Reinsurance 13. Reinsurance can be described as the insurance entered into by an insurer (the cedant or reinsured) in respect of its contractual liabilities to pay claims incurred under its contracts of direct insurance. It is entered into to limit the exposure of the reinsured to losses on the insurance business written. 14. A reinsurance contract constitutes a separate contract of insurance between the reinsurer and the reinsured. It is not an assignment of all or any part of the rights and liabilities already existing under a contract of direct insurance and the original insured does not acquire any rights or liabilities thereunder. 15. Particular terminology is used within the reinsurance industry to describe the features of a reinsurance contract: (a) There are various methods of placing reinsurance including on a facultative basis and on a treaty basis; (b) Reinsurance arranged on a facultative basis covers specific risks. Terms and conditions are negotiated for each risk; (c) Reinsurance arranged on a treaty basis covers an aggregate class or `block' of business. This includes reinsurance that corresponds to any event or loss within the defined class of risk and reinsurance of the whole or part of the reinsured's account; (d) Facultative and treaty reinsurance may be arranged on a proportional basis (also referred to as pro rata reinsurance) or a non-proportional reinsurance basis (also described as

excess of loss reinsurance); (e) Pursuant to proportional reinsurance, the reinsurer accepts a fixed or variable share of the claims liabilities assumed by the primary insurer under the original contract(s) of reinsurance. The losses of the reinsurer will follow that of the reinsured and therefore the reinsurer will receive a corresponding proportional share of the premium. Often a ceding commission is paid to the reinsured as the reward for sourcing the business; (f) A quota share arrangement is a type of proportional reinsurance contract under which the whole of the risk under the policy or policies is shared in the same fixed proportion; (g) A surplus contract is a type of proportional reinsurance contract under which the ceding company reinsures only the balance of those risks which are beyond the amount it wishes to retain for its own account. The balance of the risks so reinsured may be shared on a fixed or varying basis depending on the type of risk; (h) Pursuant to non-proportional reinsurance, the reinsurer indemnifies the reinsured against all or a portion of the amount of loss in excess of the reinsured's specified loss retention. Accordingly, losses are shared dependant on the quantum of loss incurred in respect of the specific risk or event, rather than by reference to a specific proportion; and (i) Types of non-proportional reinsurance include: (i) Risk excess of loss reinsurance which covers individual risks. (ii) Catastrophe excess of loss reinsurance arranged on an occurrence basis which covers losses flowing from a single event and is written on a treaty basis; and (iii) Stop loss reinsurance which provides cover against the

aggregate net loss experience on a particular account. Reinsurance arrangements in respect of the State Schemes 16. The HIH companies (and other entities within the HIH Group) are parties to many reinsurance contracts which give rise to existing and potential future claims for payments by reinsurers to the HIH companies. The contracts provide for various different types of reinsurance cover, including both facultative reinsurance and treaty reinsurance. 17. The liquidators of the HIH companies have made application herein for directions under s 479(3) of the Corporations Act in relation to particular contracts and arrangements of reinsurance entered into by one or more of the HIH companies (the State Schemes Reinsurance Contracts) and which are referable to State Schemes Policies underwritten by one or more of the HIH companies. 18. The reinsurance program established by the State Schemes Reinsurance Contracts was arranged by class of business. Accordingly, the reinsurance contracts or arrangements were referrable to loss occurrences within the following classes: (a) the States Schemes referred to in paragraphs 0-0 (the CTP Schemes); (b) the State Schemes referred to in paragraphs 0-0 (the Workers Compensation Schemes); and (c) the State Schemes referred to in paragraph 0 (the Builders' Warranty NSW Scheme). 19. The State Schemes Reinsurance Contracts identified by the liquidators of the HIH companies are listed in Schedule B hereto. Part 1 of Schedule B lists the contracts referrable to the Workers Compensation Schemes. Part 2 of Schedule B lists the contracts referrable to the CTP Schemes. Part 3 of Schedule B lists the contract referrable to the Builders' Warranty NSW Scheme. There may be other State Schemes Reinsurance Contracts which are

subsequently identified. 20. The reinsurance program the subject of the State Schemes Reinsurance Contracts, with the exception of the part of the reinsurance program for the Builders' Warranty NSW Scheme described in paragraph 23 below, is comprised of various cumulative layers of non-proportional contracts in respect of particular classes of loss. The total amount of reinsurance cover for particular classes of loss is comprised of separate contracts with similar or identical terms but separate excess levels and limits. 21. By way of illustration, the identified reinsurance program in relation to the Workers' Compensation Schemes for a particular policy year is comprised of four layers of contracts. (a) The first layer provides for a limit of cover in the sum of $2,500,000 for each and every loss and/or series of losses arising out of one event in excess of $2,500,000 for each and every loss and/ or series of losses arising out of one event. (b) The second layer provides for a limit of cover in the sum of $5,000,000 for each and every loss and/or series of losses arising out of one event in excess of $5,000,000 for each and every loss and/or series of losses arising out of one event. (c) The third layer provides for a limit of $10,000,000 for each and every loss and/ or series of losses arising out of one event in excess of $10,000,000 for each and every loss and/or series of losses arising out of one event. (d) The fourth layer provides for a limit of $80,000,000 for each and every loss and/or series of losses arising out of one event in excess of $20,000,000 for each and every loss and/or series of losses arising out of one event. 22. The identified reinsurance program in relation to the CTP Schemes and, except as set out in paragraph 23 below, the Builders' Warranty NSW Scheme operate in a similar way.

23. Part of the reinsurance program in respect of the Builder's Warranty NSW Scheme is comprised of one or more concurrent quota share reinsurance contracts for particular policy periods. Reinsurance recoveries 24. The liquidators of the HIH companies have commenced recovery of the entitlements of the HIH companies pursuant to the HIH reinsurance program including in respect of the State Schemes Reinsurance Contracts. This is an ongoing process which is likely to take a considerable period of time. The figures stated below are based on the preliminary analysis conducted by the liquidators and are subject to review. 25. It is currently estimated that there will be total reinsurance recoveries for the HIH companies in the amount of approximately $1,847 million. This amount includes recoveries in respect of the State Schemes Reinsurance Contracts. 26. In respect of the CTP Schemes, it is currently estimated that reinsurance recoveries will be in the range of approximately 5 — 20% of the existing and future acknowledged creditor claims. It is estimated by the liquidators that reinsurance recoveries in relation to the CTP Schemes will be a minimum of $10 million. It is estimated by the Motor Accidents Authority of NSW that total past and future liability of the reinsurers in relation to CTP Schemes will be a minimum of $25 million. 27. In respect of the Workers' Compensation Schemes, it is currently estimated that reinsurance recoveries will be in the range of approximately 5 — 20% of the existing and expected future acknowledged creditor claims. It is estimated that reinsurance recoveries in relation to the Workers' Compensation Schemes will be a minimum of $10 million. 28. In respect of the Builders' Warranty NSW Scheme, it is estimated that reinsurance recoveries will be approximately $15 – $20 million.'' The windings up 6. Immediately before the Corporations Act 2001 (Cth) came into

operation on 15 July 2001, each of the HIH companies was in existence and registered as a company under the Corporations Law of one of the States and Territories. The orders of this court for the winding up of the HIH companies were made on various days between 27 August 2001 and 7 May 2003. Some of the companies had previously been the subject of orders for the appointment of provisional liquidators made before the Corporations Act 2001 (Cth) commenced. 7. Despite the earlier provisional liquidation that applied in some cases, it is clear that the winding up of each HIH company derives solely from the provisions of the Corporations Act of the Commonwealth and that no question of the operation of transitional provisions in relation to windings up produced by orders made under provisions of the Corporations Laws of the States and Territories needs to be addressed. For the purposes of the Corporations Act itself, each winding up commenced on the day on which the winding up order was made: s. 513A(e). 8. These matters of timing must be borne in mind particularly in relation to those aspects of the matters on which the liquidators seek guidance that relate to the interaction of specific provisions of State and Territory laws concerning the various compulsory insurance schemes with provisions of the Corporations Act dealing with winding up generally and reinsurance contracts held by insurance companies in the course of being wound up. Reinsurance and privity of contract 9. The general nature of reinsurance was described by Dixon J in Tariff Reinsurances Ltd v Commissioner of Taxes (Victoria) (1938) 59 CLR 194: ``Though, unlike facultative reinsurance, a treaty does not insure an existing risk in which the reassured has an insurable interest as the original insurer, it is nevertheless a contract of reinsurance, an antecedent contract for the reinsurance for a defined portion of risks of a specified kind to be undertaken in the future by the reassured. The original insured is a stranger to the reinsurer. He is unaffected by the reinsurance and obtains no legal advantage

from it. It establishes no relations except with the reassured, and it does not authorise the reassured to bring about any relations between third persons and the reinsurer.'' 10. Reinsurance exists to see an insurer protected against the risk of having to pay out on policies issued by it. Summaries of relevant reinsurance contracts held by the HIH companies are in evidence. They provide cover in respect of ultimate net loss and loss occurrences defined, in general terms, as sums actually paid in the settlement of losses or liabilities under various classes and subclasses of insurance business written by the HIH companies. 11. In the absence of statutory intervention, a person insured by an insurer has no right to the proceeds of reinsurance held by the insurer in respect of the relevant risk, at least where that insured is not named in the contract of reinsurance as a third party beneficiary in such a way as to activate principles discussed in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 5 ANZ Insurance Cases ¶ 60873; (1988) 165 CLR 107 (see also Omaha Indemnity Co v Carpenter and Australian Transport Insurance Pty Ltd (1988) 5 ANZ Insurance Cases ¶60-831). There is no suggestion that any such principles apply in the present case or would ordinarily have sensible application to reinsurance. In general, principles of privity of contract operate in the way I have stated to exclude an individual insured from access to proceeds of reinsurance received by his or her insurer, whether before or after the onset of insolvency: see generally Nepean v Martin (1895) 11 TLR 256, In re Law Guarantee Trust and Accident Society [1915] 1 Ch 341 and In re Harrington Motor Co Ltd; ex parte Chaplin [1928] 1 Ch 105. 12. Various social considerations have from time to time prompted legislation creating a link between a person having a claim upon another and rights under insurance held by the second person in respect of the risk of claims of the kind made by the first person. An early example was the Third Party's (Rights Against Insurer) Act 1930 (Eng). In New South Wales, s. 6 of the Law Reform (Miscellaneous Provisions) Act 1946 owes its existence to considerations of this kind, as discussed by Mahoney JA in New South Wales Medical Defence Union Ltd v Crawford (1993) 31 NSWLR 469 at 501.

13. The particular case of insurance held by an insolvent company was dealt with by s. 297(5) of the Companies Act 1936 (NSW), counterparts of which were included in all subsequent companies legislation. The applicability of the 1961 provision (s. 292(5) of the uniform Companies Acts 1961-2) to contracts of reinsurance, in the case of the insolvent winding up of an insurance company, was confirmed by Needham J in Re Dominion Insurance Co of Australia Ltd [1980] 1 NSWLR 271 and by Crockett J in Re Palmdale Insurance Ltd (No 3) [1986] VR 439, a case which, for other reasons, will be considered in some detail in due course. A provision dealing expressly with the treatment of reinsurance proceeds in the winding up of an insurance company was introduced into the Corporations Law with effect from 23 June 1993 as a result of a recommendation in the Harmer Report. This provision became s. 562A of the Corporations Law. It now exists as s. 562A of the Corporations Act 2001 (Cth) and plays a part in the present proceeding. Its background and effect were examined by Young J in Butterell v Douglas Group Pty Ltd (2000) 35 ACSR 398 and by Dr Donald E Charrett in ``Insured's access to insolvent insurer's reinsurance'' (2003) 14 ILJ 221. Difficulties in applying and giving effect to it are noted in the judgment of Windeyer J in New Cap Reinsurance Corporation Ltd v Faraday Underwriting Ltd (2003) 12 ANZ Insurance Cases ¶61-581; [2003] NSWSC 842 (12 September 2003) and by Robert Cameron, ``Reinsurance and the Australian context'' (2001) 12 ILJ 199 and John Martin, ``Distribution complexities in the winding up of an insurance company in Australia'' (2002) 10 Insolv LJ 80. 14. Of immediate relevance, however are provisions of State and Territory law dealing specifically with reinsurance in relation to the particular classes of insurance made compulsory by statute. The specific State and Territory legislation 15. Central to the questions upon which the liquidators seek guidance are provisions of the various State and Territory statutes that establish and regulate compulsory insurance schemes. The statutes address and deal with the possibility that an insurer by which the forms of compulsory insurance are written will become insolvent or otherwise fail to honour its engagements. They do not, however, deal with the

matter in any fully uniform way and it is appropriate to set out and comment on the relevant provisions. Generally speaking, they share two themes: first, a requirement that a statutory authority apply a statutory fund in making good deficiencies resulting from the failure of an insurer to meet claims under policies of the kind with which the legislation is concerned; and, second, the notion that the statutory authority should then have rights in relation to reinsurance held by the insurer in connection with risks of the relevant kind. 16. The submissions made to the court concentrated on the State and Territory provisions as they stood at 15 July 2001, being the date on which the Corporations Act 2001 (Cth) commenced. The reasons lie in Part 1.1A of that Act which will be considered in due course. For the moment, therefore, I shall concentrate on the provisions in force on 15 July 2001, referring to them, for convenience, in the present tense. Subsequent amendments of relevance will then be identified. 17. As will be seen, the general aim of the State and Territory provisions is to cause the authority holding or administering a statutory fund from which is met a claim that would in the normal course have been met by an insurer to obtain the benefit of reinsurance held by the insurer in respect of the claim. The provisions create, in one way or another, a link between the statutory authority and the reinsurance. For that reason (and in accordance with United States terminology) they have been referred to in submissions as ``cut-through'' provisions. I shall adopt that label here. Workers Compensation Act 1987 (NSW) (as at 15 July 2001) 18. Division 7 of Part 7 of the Workers Compensation Act 1987 makes provision for the establishment and regulation of the Insurers' Guarantee Fund managed by the WorkCover Authority. For present purposes, there is no need to consider the elements that go to make up this fund. It is sufficient to refer first to the provisions concerning application of the fund in relation to an ``insolvent insurer''. Section 225(1) defines ``insolvent insurer'' for the purposes of Division 7 of Part 7 as an insurer to which an order of the Minister in force under s. 226 of the Act relates. I proceed on the footing reflected in the statement of facts that such an order is in force in relation to each of

the HIH companies and that each is accordingly an ``insolvent insurer''. 19. Section 234 is as follows: ``(1) Out of the Guarantee Fund, the Authority as manager of that Fund: (a) shall pay the amount of any claim, judgment or award arising from or relating to any policy of insurance issued by an insolvent insurer, being a claim, judgment or award that it proposes to satisfy as agent and attorney of an employer, and any other amounts required by this Division to be paid from that Fund, and (b) is entitled: (i) to be paid the costs of administration of the Guarantee Fund (including any legal or other costs connected with the declaration of an insurer as an insolvent insurer), and (ii) to be indemnified against all payments made by it and all costs and expenses that it may incur in or in connection with the exercise of its functions under this Division. (2) Where a payment is made by the Authority as agent and attorney of an employer, being a payment authorised by this Division, the Authority shall not be entitled to recover the amount of that payment from the employer.'' 20. The consequences of a payment out of the Guarantee Fund by the Authority are specified in s. 235: ``To the extent that any amounts are paid out of the Guarantee Fund in respect of a claim, judgment or award pursuant to section 234 (including the costs of the Authority), the Authority shall, where an insolvent insurer (if it had provided indemnity to that extent under a policy of insurance) would have been entitled to recover any sum under a contract or arrangement for

reinsurance, be entitled to the benefit of and may exercise the rights and powers of the insolvent insurer under that contract or arrangement so as to enable the Authority to recover from the reinsurer and pay into the Guarantee Fund the amount due under that contract or arrangement.'' Motor Accidents Compensation Act 1999 (NSW) (as at 15 July 2001) 21. Part 7.3 of this Act deals with ``insolvent insurers''. For the purposes of that part, ``insolvent insurer'' means an insurer in relation to which an order of the Treasurer under s. 16A of the Insurance Protection Tax Act 2001 or an order of the Minister under s. 185 of the Motor Accidents Compensation Act itself is in force. The hearing before me provided on the agreed basis that each of the HIH companies is within this definition. Section 190 deals with application of the Nominal Defendant's Fund (a fund established and maintained pursuant to s. 40 and held by the Motor Accidents Authority) in relation to certain matters concerning insolvent insurers. Section 190 is as follows: ``(1) Out of the Nominal Defendant's Fund, the Nominal Defendant: (a) is to pay the amount of any claim or judgment arising from or relating to any third-party policy issued by an insolvent insurer, being a claim or judgment that it proposes to satisfy as agent and attorney of a person, and any other amounts required by this Part to be paid from that Fund, and (b) is entitled to be indemnified against all payments made by it and all costs and expenses that it may incur in or in connection with the exercise of its functions under this Part. (2) Where a payment is made by the Nominal Defendant as agent and attorney of a person, being a payment authorised by this Part, the Nominal Defendant is not entitled to recover the amount of that payment from the person.'' 22. Section 191 then provides:

``To the extent that any amounts are paid out of the Nominal Defendant's Fund in respect of a claim or judgment pursuant to section 190 the Nominal Defendant is, where an insolvent insurer (if it had provided indemnity to that extent under a third-party policy) would have been entitled to recover any sum under a contract or arrangement for re-insurance, entitled to the benefit of and may exercise the rights and powers of the insolvent insurer under that contract or arrangement so as to enable the Nominal Defendant to recover from the re-insurer and pay into the Nominal Defendant's Fund the amount due under that contract or arrangement.'' Home Building Act 1989 (NSW) (as at 15 July 2001) 23. Part 6A of this Act deals with ``insolvent insurers''. For the purposes of Part 6A, ``insolvent insurer'' means an insurer in relation to which an order of the Treasurer under s. 16A of the Insurance Protection Tax Act 2001 or an order of the Minister under s. 103G of the Home Building Act itself is in force. According to the statement of facts, each of the HIH companies is such an ``insolvent insurer''. 24. Section 103P provides for the creation and regulation of the Building Insurers' Guarantee Fund vested in the Building Insurers' Guarantee Corporation. Section 103I (which appears in Division 2 of Part 6A) provides in part: ``Subject to this Part, the State must indemnify any person: (a) who is entitled to recover an amount under a contract of insurance entered into under Part 6 in connection with any matter, and (b) who is covered by an insolvent insurer's policy, to the extent of the amount that the person is entitled to recover under that policy in connection with that matter.'' 25. Sections 103J, 103K and 103L (also in Division 2) have the effect that the s. 103I indemnity may only be enforced in such a way as to result in a payment out of the Building Insurers' Guarantee Fund. Section 103V provides:

``To the extent that any amounts are paid out of the Building Insurers' Guarantee Fund in respect of an indemnity under Division 2, the Guarantee Corporation is, where an insolvent insurer (if it had provided indemnity to that extent under a contract of insurance) would have been entitled to recover any sum under a contract or arrangement for re-insurance or co- insurance, entitled to the benefit of and may exercise the rights and powers of the insolvent insurer under that contract or arrangement so as to enable the Guarantee Corporation to recover from the reinsurer or co-insurer and pay into the Building Insurers' Guarantee Fund the amount due under that contract or arrangement.'' Workers Compensation Act 1958 (Vic) (as at 15 July 2001) 26. Part IVA applies to and in relation to awards of workers compensation referred to in s. 85(1): ``This section applies to and in relation to any award of compensation made— (a) under this Act (whether before, on or after the appointed day) or any corresponding previous enactment; (b) in respect of the death incapacity and disablement of a worker or the costs of medical hospital nursing or ambulance services or of cremation or burial; and (c) against an employer whose liability in respect of that death incapacity or disablement or those costs is not or may not be covered or is not fully covered— (i) by a policy of insurance or indemnity in accordance with this Act as in force before the appointed day; or (ii) by the terms of a scheme in respect of which a certificate was before the appointed day in force under this Act.'' 27. There is provision in s. 85 for the County Court to order that

compensation awarded as referred to in s. 85(1) be paid out of the Tribunal Fund constituted under and regulated by the Act 28. Section 98 provides: ``(1) There shall be paid out of the Fund— (a) the amount of any claim award or judgment to which this Part applies in respect of which indemnity is not provided as required by the relevant policy of accident insurance or indemnity; (b) the amounts of any legal or other costs and expenses incurred by the Authority in respect of any claim award or judgment to which this Part applies; (c) the amounts of any premiums payable in respect of any contracts of indemnity entered into by the Authority under section 104; (d) the amounts of any costs and expenses incurred in the administration of this Part and the exercise of any power under section 100C; (e) the amount of any refund due under this Part; and (f) any other moneys which this Part or section 2B or 2C authorizes to be paid out of the Fund. (1A) Nothing in this Part shall be taken to require or authorize payment out of the Fund of the amount of any claim award or judgment under paragraph (a) of sub-section (1) where an injury is incurred more than 28 days from the date of a winding-up order in relation to the relevant insurer made by the Supreme Court. (2) Nothing in this Part shall be taken to require or authorize payment out of the Fund of the amount of any claim award or judgment to which this Part applies if any proceeding or step required to enforce payment of that amount by the relevant insurer can no longer be taken because of any failure on the part

of the employer or any other person to take it within the time allowed by law. (3) To the extent of amounts paid out of the Fund in respect of any claim award or judgment to which this Part applies (including costs incurred by the Authority), the Authority shall— (a) in any case where, if the indemnity to be provided under the relevant policy of accident insurance or indemnity had been provided by the relevant insurer or any other person, the relevant insurer or that person would have been entitled to recover any sum under any contract or arrangement for reinsurance — be entitled to the benefit of and may exercise the rights and powers of the relevant insurer or that person under that contract or arrangement so as to enable the Authority to recover from the re- insurer and retain the amount due under that contract or arrangement; and (b) to the extent that recovery is not made from a re-insurer pursuant to paragraph (a) — be a creditor of and have the same rights against the relevant insurer or any other person as the employer concerned would have had if the indemnity required to be provided by the policy of accident insurance or indemnity was not provided.'' Workers Rehabilitation and Compensation Act 1988 (Tas) (as at 15 July 2001) 29. Section 97 requires an employer who is not a self-insurer to maintain in force with a licensed insurer a policy of insurance that indemnifies the employer in respect of the full amount of the employer's liability to pay compensation under the Act, as well as certain other matters. 30. The Act also establishes a body known as the Nominal Insurer. Section 126(1) provides: ``(1) Where — (a) an employer —

(i) has not obtained from a licensed insurer such a policy of insurance as is referred to in section 97(1) or has failed to maintain in force any such policy so obtained by him; (ii) has applied to take, or takes, advantage of any law relating to bankruptcy, or has compounded, or entered into an arrangement, with his creditors; or (iii) has left the State and his whereabouts are unknown; (b) an employer, or the licensed insurer from whom or from which an employer obtained such a policy, is a body corporate and — (i) the winding-up of the body corporate has commenced; or (ii) a receiver or manager of the property of the body corporate has been appointed, or the body corporate has been placed under administration, under the provisions of the Corporations Act or any corresponding previous enactment; or (c) for any other reason there are reasonable grounds for believing that an employer or a licensed insurer from whom or from which he has obtained such a policy is, or is likely to be, unable to discharge in full any liability in respect of which such a policy is required under section 97(1) to be maintained by the employer — the same claims, whether by way of legal proceedings or not, may be made against the Nominal Insurer in respect of any liability in respect of which such a policy is required under section 97(1) to be maintained by the employer, and the same judgment may be obtained against the Nominal Insurer, as could, apart from subsection (3), have been made or obtained against the person by whom the liability was incurred.'' 31. Section 129 then provides:

``Where a licensed insurer is insured under a contract of reinsurance against liability in respect of a policy of insurance or indemnity issued by the insurer under section 97 and any such liability is incurred by the licensed insurer, then, if that insurer, being a company, is wound up — (a) the Nominal Insurer shall be entitled to the benefit of, and may exercise, the rights and powers of the licensed insurer under that contract of reinsurance so as to enable the Nominal Insurer to recover from the reinsurer and retain the amount due under that contract of reinsurance; and (b) to the extent that recovery is not made from a reinsurer pursuant to paragraph (a), the Nominal Insurer shall be a creditor of, and have the same rights against, the licensed insurer as the employer concerned would have had if the indemnity provided by the policy of insurance had not been met.'' Workers Compensation Supplementation Fund Act 1980 (ACT) (as at 15 July 2001) 32. This Act establishes and regulates the Workers Compensation Supplementation Fund. Provisions with respect to claims upon the fund appear in ss. 26, 27, 28 and 29: ``26. (1) Where, before or after the commencement of this Act — (a) a final judgment has been given, or an order or award has been made, against an employer in respect of the employer's liability under the Compensation Act, or in respect of the employer's liability independently of that Act, for an injury to, or the death of, a worker employed by the employer; (b) the liability of the employer under the judgment, order or award is covered by an employer's policy; and (c) the insurer who issued that policy is dissolved under a law of the Territory or of a State or another Territory or is unable to provide the indemnity required by the policy to be

provided, the person in whose favour the judgment was given or the order or award was made may make a claim — (d) where the insurer is dissolved—against the Fund; or (e) in any other case—against the insurer, for payment of the amount of the judgment, order or award. (2) Where, before or after the commencement of this Act — (a) a person is entitled to make a claim against an employer, not being a claim relating to a judgment, order or award referred to in subsection (1), that the employer is liable to pay compensation in accordance with the Compensation Act for an injury to, or the death of, a worker employed by the employer; (b) the liability of the employer to pay the compensation is covered by an employer's policy; and (c) the insurer is dissolved under a law of the Territory or of a State or another Territory or is unable to provide the indemnity required by the policy to be provided, the person may make a claim — (d) where the insurer is dissolved—against the Fund; or (e) in any other case—against the insurer, for payment of the amount of the compensation. (3) A claim made against an insurer under subsection (1) or (2) — (a) shall be in writing; and (b) shall be lodged with the liquidator of the insurer, together with a copy of any judgment, order or award to which the

claim relates. (4) A claim made against the Fund under subsection (1) or (2) — (a) shall be in writing; and (b) shall be lodged with the Manager, together with a copy of any judgment, order or award to which the claim relates. (5) For the purpose of this section — `compensation' includes an amount in settlement of a claim for compensation. 27. Where a claim against an insurer is lodged with the liquidator of an insurer under subsection 26(3), the liquidator shall forthwith — (a) forward a copy of the claim to the Manager; and (b) furnish the Manager with such information and documents (including any judgment, order or award) relating to the claim and to the employer's policy as are in the possession of the liquidator. 28. (1) Subject to this section, where the Manager receives from the liquidator of an insurer a claim made against the insurer under subsection 26 (1), the Manager shall — (a) pay to the liquidator out of the Fund — (i) such amount as is necessary to enable the liquidator to satisfy the claim; and (ii) such further amount as is agreed between the Manager and the liquidator for payment of the costs of the liquidator in satisfying the claim; and (b) furnish to the liquidator all documents in the possession of the Manager relating to the claim. (2) On receipt of an amount paid by the Manager under

subparagraph (1)(a) (i), the liquidator shall pay the amount to the claimant in satisfaction of the claim. (3) Where the Manager receives from the liquidator of an insurer a claim referred to in subsection (1) and the insurer is dissolved under the law of the Territory or of a State or another Territory before the Manager makes a payment to the liquidator in accordance with that subsection, the Manager shall pay to the claimant out of the Fund such amount as is necessary to satisfy the claim. 29. Where a claim made against the Fund is lodged with the Manager under subsection 26(4), the Manager shall pay to the claimant out of the Fund such amount as is necessary to satisfy the claim.'' 33. The concept of dissolution with which these provisions are concerned is not explained. The expression ``liquidator'' is defined as follows: ```liquidator', in relation to an insurer, includes official manager, receiver or receiver and manager.'' 34. Section 40 provides: ``(1) Where— (a) an insurer is, under a contract of reinsurance, insured against liability in respect of employer's policies issued by the insurer and such liability is incurred by the insurer; and (b) any part of the liability of the insurer is met by moneys paid out of the fund in pursuance of this Act; and (c) an amount in respect of that part of the liability of the insurer is received by the liquidator of the insurer from the reinsurer; the amount so received from the reinsurer shall, after the deduction of any expenses of or incidental to getting in that amount, be paid by the liquidator to the manager, in priority to all payments in respect of the debts referred to in section 556 of the

Corporations Law, for payment into the fund. (2) Where the liquidator of an insurer recovers any amount due to the insurer as a consequence of the payment, with moneys paid out of the fund, of any part of any claim, judgment, order or award arising out of or in relation to any employer's policy issued by the insurer, the amount so recovered shall, after the deduction of any expenses of or incidental to the recovering of that amount, be paid by the liquidator to the manager in priority to all payments in respect of debts referred to in section 556 of the Corporations Law, for payment into the fund. (3) This section shall have effect notwithstanding any agreement to the contrary whether made before or after the commencement of this Act.'' Work Health Act (NT) (as at 15 July 2001) 35. The relevant provision of this Act is s. 137: ``(1) Where — (a) a claim has been made against an employer that he or she is liable to pay compensation under this Act, or damages otherwise than under this Act, in respect of an injury, incapacity or death; (b) in relation to the claim, the employer has agreed to pay compensation or damages, as the case may be, or the liability of the employer to pay compensation or damages has or has not been established or has been declined; (c) the employer is entitled to be indemnified against his or her liability to pay the compensation, or all or part of the damages under a policy of insurance or indemnity obtained in accordance with this Act; and (d) in the case — (i) of an amount of compensation or damages agreed to be paid or in respect of which the employer's liability to pay

has been established — an amount payable under the policy of insurance or indemnity referred to in paragraph (c) is not paid and has remained unpaid for a period of one month; (ii) where the liability of an employer to pay compensation or damages claimed has not been established within one month after notice of a worker's claim has been lodged with the relative approved insurer; or (iii) where the liability of an employer to pay compensation or all or any damages claimed has been declined, the Nominal Insurer shall, subject to subsection (3), have the same rights, powers, duties and liabilities in respect of the claim as the approved insurer would have had if the approved insurer had provided the indemnity referred to in paragraph (c). (2) Where an approved insurer is unable to make a payment required to be made under a policy of insurance or indemnity issued in accordance with this Act in respect of a claim to which subsection (1) applies, the approved insurer or a person holding in relation to the approved insurer the office of liquidator, receiver, receiver and manager or official manager shall — (a) forthwith notify the Nominal Insurer of the claim; and (b) make available to the Nominal Insurer any books or papers relevant to the claim, including all agreements, contracts, treaties or other documents relating to reinsurance arrangements in effect at the time of the injury, incapacity or death giving rise to the claim. (3) Where an approved insurer is unable to make any or complete payment required to be made under a policy of insurance or indemnity issued in accordance with this Act in respect of a claim to which subsection (1) applies and the Nominal Insurer has made a payment in respect of that claim —

(a) the Nominal Insurer has the right to subrogation in respect of all rights that the employer may have against any person in relation to the occurrence that gave rise to the claim for compensation or damages, as the case may be; (b) the right to subrogation shall vest in the Nominal Insurer to the exclusion of all other rights to subrogation that would otherwise exist in favour of the approved insurer or the person, if any, holding in relation to the approved insurer the office of liquidator, receiver, receiver and manager or official manager, whether arising under a law in force in the Territory or the policy of insurance or indemnity under this Act; and (c) all rights which the approved insurer has to receive payments under an agreement, contract, treaty or other document relating to reinsurance in respect of a claim referred to in subsection (1) shall be deemed to be assigned to the Nominal Insurer from the date that the Nominal Insurer first makes a payment in respect of that claim, to the exclusion of any person holding in relation to the approved insurer the office of liquidator, receiver, receiver and manager or official manager, notwithstanding any rule of law or statutory provision to the contrary.'' Employers' Indemnity Supplementation Fund Act 1980 (WA) (as at 15 July 2001) 36. The relevant provisions of this Act closely resemble those of the Workers Compensation Supplementation Fund Act 1980 (ACT). Claims upon the fund created by the Act are regulated by s. 19: ``(1) If, on or after 1 January 1979 — (a) a final judgment has been given, or an order or award has been made, against an employer in respect of his liability under the Workers' Compensation and Rehabilitation Act 1981 or at common law, for an injury to, or the death of, a worker employed by the employer;

(b) the liability of the employer under the judgment, order or award referred to in paragraph (a) is covered by an employer's policy; and (c) the insurer who issued the employer's policy referred to in paragraph (b) is dissolved under a law of — (i) the State; or (ii) another State, or a Territory, of the Commonwealth, or is unable to provide the indemnity required by that employer's policy to be provided, the person in whose favour the judgment, order or award referred to in paragraph (a) was given or made, as the case requires, or, if the employer against whom that judgment, order or award has been given or made has paid the amount of that judgment, order or award, that employer may make a claim against the Insurance Commission for payment or reimbursement, as the case requires, of the amount of that judgment, order or award. (2) If, on or after 1 January 1979 — (a) a person is entitled to make a claim against an employer, not being a claim relating to a judgment, order or award referred to in subsection (1), that the employer is liable to pay compensation under the Workers' Compensation and Rehabilitation Act 1981, or damages at common law, for an injury to, or the death of, a worker employed by the employer; (b) the liability of the employer referred to in paragraph (a) to pay the compensation or damages referred to in that paragraph is covered by an employer's policy; and (c) the insurer who issued the employer's policy referred to in paragraph (b) is dissolved under a law of — (i) the State; or

(ii) another State, or a Territory, of the Commonwealth, or is unable to provide the indemnity required by that employer's policy to be provided, the person referred to in paragraph (a) or, if the employer against whom that person is entitled to make the claim referred to in that paragraph has paid the amount of compensation or damages sought by that claim, that employer may make a claim against the Insurance Commission for payment or reimbursement, as the case requires, of the amount of compensation or damages referred to in paragraph (a). (3) A person or employer making a claim under subsection (1) or (2) shall — (a) do so in writing; and (b) lodge the claim with the Insurance Commission, together with a copy of any judgment, order or award to which the claim relates. [(4) repealed] (5) In subsection (2) — compensation includes — (a) an amount in settlement of a claim for compensation; and (b) all amounts payable under Schedule 1 to the Workers' Compensation and Rehabilitation Act 1981; damages includes an amount in settlement of a claim for damages.'' 37. Section 36 of the Act is as follows: ``(1) If — (a) an insurer is, under a contract of reinsurance, insured

against liability in respect of employers' policies issued by the insurer and that liability is incurred by the insurer (b) any part of the liability of the insurer referred to in paragraph (a) is met by moneys paid by the Insurance Commission under this Act; and (c) an amount in respect of that part of the liability of the insurer referred to in paragraph (b) is received by the liquidator of that insurer from the reinsurer concerned, the liquidator of the insurer referred to in paragraph (a) shall pay the amount so received from the reinsurer, after the deduction of any expenses of or incidental to getting in that amount, to the Commission, in priority to all payments in respect of the debts referred to in the section 441 of the Companies (Western Australia) Code, to the credit of the Fund. (2) If the liquidator of an insurer recovers any amount due to the insurer as a consequence of the payment, with moneys charged to the Fund, of any part of a claim, judgment, order or award arising out of or in relation to an employer's policy issued by the insurer, that liquidator shall pay the amount so recovered, after the deduction of any expenses of or incidental to the recovery of that amount, to the Commission, in priority to all payments in respect of debts referred to in section 441 of the Companies (Western Australia) Code, to the credit of the Fund. (3) Subject to section 38A, this section has effect notwithstanding any agreement to the contrary, whenever made.'' Motor Accident Insurance Act 1994 (Qld) (as at 15 July 2001) 38. Relevant provisions of this Act operate by reference to the following definition of ``CTP insurance policy'': ```CTP insurance policy' means — (a) a policy of insurance under this Act for a motor vehicle insuring against liability for personal injury caused by, through or in connection with the motor vehicle; or

(b) a policy of insurance, or a statutory indemnification, for a motor vehicle registered under the law of another State or a Territory, providing insurance, or indemnifying against liability, for personal injury caused by, through or in connection with the vehicle anywhere in Australia.'' 39. Section 33(2) provides: ``If the insurer under a CTP insurance policy becomes insolvent, the Nominal Defendant becomes the insurer under CTP policies in force under this Act for which the insolvent insurer was formerly the insurer unless the policies are transferred to some other licensed insurer.'' 40. Section 61 provides: ``(1) If an insurer becomes insolvent, any costs reasonably incurred by the Nominal Defendant on claims under CTP insurance policies for which the insolvent insurer was the insurer become debts of the insolvent insurer to the Nominal Defendant and provable in the insolvency. (2) The debts of the insolvent insurer that arise under subsection (1) have the same order of priority in the winding-up of the insolvent insurer as if the Nominal Defendant were the insured person under policies of insurance issued by the insolvent insurer. (3) If the claim for which costs were incurred by the Nominal Defendant is covered by a contract of reinsurance, the Nominal Defendant succeeds to the rights of the insolvent insurer under the contract of reinsurance.'' 41. There does not appear to be any provision giving guidance on the question when an insurer is to be regarded as insolvent. The question is therefore to be approached according to general law principles. I assume, for present purposes, that each HIH company is ``insolvent'' in that sense. Amendments to State and Territory legislation since 15 July 2001 42. Two of the relevant Acts have been amended since 15 July 2001

in ways affecting the provisions set out above. They are the Workers Compensation Supplementation Fund Act 1980 (ACT) and the Employers' Indemnity Supplementation Fund Act 1980 (WA). 43. The amendments to the Australian Capital Territory Act, so far as presently relevant, affect s. 40. The references in ss. 40(1) and 40(2) to ``section 556 of the Corporations Law'' have been replaced by references to ``the Corporations Act, section 556''. In addition and by virtue of the Workers Compensation (Acts of Terrorism) Amendment Act 2002 (ACT), references in s. 40 to ``employer's policies'' and ``employer's policy'' have been replaced by references to ``compulsory insurance policies'' and ``compulsory insurance policy'' and the words ``whether made before or after the commencement of this Act'' have been omitted from s. 40(3). 44. In the case of the Western Australia Act, the amendments that are material affect s. 36 and are most easily appreciated by setting out the section in full in the amended form in which it now exists: ``36. Payment into Fund of moneys recovered by liquidators (1) If — (a) an insurer is, under a contract of reinsurance, insured against liability in respect of employers' policies issued by the insurer and that liability is incurred by the insurer; (b) any part of the liability of the insurer referred to in paragraph (a) is met by moneys paid by the Insurance Commission under this Act; and (c) an amount in respect of that part of the liability of the insurer referred to in paragraph (b) is received by the liquidator of that insurer from the reinsurer concerned, the liquidator of the insurer referred to in paragraph (a) shall pay the amount so received from the reinsurer, after the deduction of any expenses of or incidental to getting in that amount, to the Commission, in priority to all payments in respect of the debts referred to in section 556 of the Corporations Act, to the credit of

the Fund. (2) If the liquidator of an insurer recovers any amount due to the insurer as a consequence of the payment, with moneys charged to the Fund, of any part of a claim, judgment, order or award arising out of or in relation to an employer's policy issued by the insurer, that liquidator shall pay the amount so recovered, after the deduction of any expenses of or incidental to the recovery of that amount, to the Commission, in priority to all payments in respect of debts referred to in section 556 of the Corporations Act, to the credit of the Fund. (3) Subject to section 38A, this section has effect notwithstanding any agreement to the contrary, whenever made. (4) The payment of an amount referred to in subsection (1) or (2) is declared to be an excluded matter for the purposes of section 5F of the Corporations Act in relation to that Act to the extent to which the payment of the amount is governed by subsection (1) or (2).'' 45. Section 36 of the Western Australian Act assumed this form by virtue of the Corporations (Consequential Amendments) Act (No 2) 2003 of that State. That Act did three relevant things: first, it substituted references to s. 556 of the Corporations Act for references to s. 441 of the Companies (Western Australia) Code in s. 36(1) and s. 36(2); second, it inserted a new s. 36(4); and, third, it stated, in s. 2(1), that the amending provision making those changes ``is deemed to have come into operation immediately after the Corporations Act 2001 of the Commonwealth came into operation''. So far as the law of Western Australia is concerned, therefore, s. 36 is to be regarded as having been in the form set out above continuously since 15 July 2001 even though, before the Corporations (Consequential Amendments) Act (No 2) 2003 came into operation on 23 April 2003, the law of Western Australia did not regard s. 36 as being in that form. Grouping the State and Territory cut-through provisions 46. The statutory provisions may, for present purposes, be considered in groups. The first group (which I shall call ``Class A'') consists of the

Workers Compensation Act 1987 (NSW), the Motor Accidents Compensation Act 1999 (NSW), the Home Building Act 1989 (NSW), the Workers Rehabilitation and Compensation Act 1988 (Tas) and the Workers Compensation Act 1958 (Vic). Under each of these Acts, provision is made for resort to a statutory fund or statutory authority to satisfy a liability or claim recoverable under insurance which is, in one way or another, unavailable or deficient. In some cases, the circumstance of unavailability or deficiency is expressly linked to the insurer's insolvency; in others it is not. Each statute then deals expressly with a case where a payment is made out of the fund or by the authority in circumstances where the provider of the unavailable or deficient insurance would have been entitled to recover as against another person under a contract or arrangement for reinsurance. 47. The wording applicable in each such Class A case is to the effect that the particular authority (or the authority by which the fund is administered) is ``entitled to the benefit of and may exercise the rights and powers of'' the relevant insurer ``under that contract or arrangement so as to enable'' the relevant authority ``to recover from the reinsurer... the amount due under that contract or arrangement'' and, in effect, to apply that recovery in replenishing the statutory fund depleted by payments to insured persons. There are some minor differences in the wording of the provisions creating or conferring the entitlement and ability of the statutory authority to enjoy and take advantage of the insurer's rights under a relevant reinsurance contract or arrangement. There are also differences (sometimes more than minor) in the statutory description of the events giving rise to the entitlement and ability. They need not be discussed here since the liquidator's concern is to obtain guidance as to the consequences of the triggering of the statutory entitlement and ability rather than with identification of the events giving rise to the entitlement and ability. 48. The second class (``Class B'') consists of the Motor Accidents Insurance Act 1994 (Qld). In that case, a claim met by the statutory authority in lieu of an insolvent insurer represents a debt of that insurer to the statutory authority having the same priority in the winding up as if the statutory authority were the insured person. In addition, if the claim met by the statutory authority in lieu of the insurer

is covered by a contract of reinsurance, the statutory authority ``succeeds to the rights of the insolvent insurer under the contract of reinsurance''. 49. The third class (``Class C'') consist of the Work Health Act (NT) alone. That Act proceeds on the footing that if an insurer is, to any extent, unable to make a payment required by a policy issued to it and the deficiency is made good by a payment by the statutory authority, two consequences follow. First, that statutory authority is entitled by subrogation to rights of the employer against any person in relation to the occurrence underlying the claim under the policy. Second, all rights the insurer has to receive payments under any reinsurance contract in respect of the claim is, by the Act itself, deemed to be assigned to the statutory authority at the time it meets the claim, such assignment being ``to the exclusion of'' any liquidator or like officer. 50. A fourth group of provisions (``Class D'') consists of those which work on the initial premise that the proceeds of recovery under any reinsurance contract existing for the benefit of an insurer liabilities of which are met out of the particular statutory fund come home to that insurer (or its liquidator) in the ordinary way. The statutory provision then deals with the amount received from the reinsurer by requiring it to be paid by the liquidator to the authority administering the statutory fund, with such payment being in priority to all other payments in the order of priority provided for in the corporations legislation. The provisions in Class D are those of the Workers Compensation Supplementation Fund Act 1980 (ACT) and the Employers Indemnity Supplementation Fund Act 1980 (WA). General effect of the State and Territory cut- through provisions 51. The Class A provisions purport to confer on the relevant authority an entitlement to the benefit of contractual rights and powers of the relevant insurer and an ability to exercise those contractual rights and powers. The person against whom the contractual rights and powers are enforceable and exercisable is, of course, the reinsurer under the reinsurance contract or arrangement, that contract or arrangement being the source of the rights and powers. The statutory provision thus purports to operate in such a way that, upon the happening of the

event upon which accrual of the entitlement to the authority is predicated, the reinsurer must recognise the relevant authority, apparently to the exclusion of the insurer with which the reinsurer has actually contracted, as in a position to demand contractual performance towards the authority itself (in lieu of the insurer) in the same way as if the authority were the insurer. Before that event happens, there can be no more than an expectancy on the part of the statutory authority, given the inherent uncertainty at any given time about whether a triggering event will ever occur. The regime which, upon each occasion on which such an event happens, is thus produced by the statute in place of (or, perhaps more accurately, as an adjunct to) the contractual regime voluntarily brought into existence between insurer and reinsurer is thus entirely the creation of an enactment of a particular State legislature — in three cases the legislature of New South Wales, in one case the legislature of Tasmania and in the fifth case the legislature of Victoria. 52. I should amplify what has just been said by referring to the terms of the particular sections. The three New South Wales provisions (s. 237 of the Workers Compensation Act 1987, s. 191 of the Motor Accidents Compensation Act 1999 and s. 103V of the Home Building Act 1989) are in substantially identical terms. Each says: ``To the extent that any amounts are paid out of [the relevant fund] in respect of [a relevant matter], the [statutory authority] is [ or shall be], where an insolvent insurer (if it had provided indemnity...) would have been entitled to recover any sum under a contract or arrangement for reinsurance, entitled...'' 53. No entitlement accrues to the statutory authority under these provisions unless and until two things have happened. First, there must have been a payment out of the statutory fund (so that some relevant ``extent'' is established) and, second, all conditions must have been satisfied which would have entitled the insurer to recover under the reinsurance. Upon the happening of those events the statute causes the statutory rights of the authority to intrude into the contractual relationship between insurer and reinsurer so that contractual rights of the insurer become exercisable by the authority to the exclusion of the insurer. Under s. 98(3)(a) of the Workers

Compensation Act 1958 (Vic), the position is the same, the words being indistinguishable in any material sense. In the case of s. 129 of the Workers Rehabilitation and Compensation Act 1988 (Tas), the position is even clearer. The section starts with the word ``Where'' and, by reference to that word, states conditions that must be met before ``the Nominal Insurer shall be entitled...''. 54. In the case of Class B, the meeting of a claim by the authority in place of the insurer is an event by virtue of which the authority ``succeeds to'' the insurer's rights under the contract of reinsurance, with the insurer thereby ceasing to enjoy those rights. The whole of s. 61 of the Motor Accident Insurance Act 1994 (Qld) is predicated upon an insurer's becoming insolvent. That is made clear by the opening words of s. 61(1). Unless and until that event happens and the authority meets a claim in place of the insurer, the section is not a source of rights on the part of the Nominal Defendant and the succession provided for in s. 61(3) does not occur. 55. The approach in Class C is to cause the relevant authority to be subrogated to rights of the insurer and to be the assignee, by operation of law, of rights the insurer has to receive payments from a reinsurer. There is thus a similarity with Class A in that the statutory provision purports to inject the authority into the contractual relationship between the insurer and reinsurer in such a way that the reinsurer is bound to perform in favour of the authority rather than the insurer and, by clear implication, the insurer is deprived of the right to receive performance by the reinsurer. And as with Class A, the happening of specified events (being those stated at the beginning of s. 137(3), brings about the authority's entitlement and the insurer's deprivation. 56. Provisions of the Class D kind do not attempt to intrude into the contractual relationship between insurer and reinsurer. Their effect is only to create a liability upon the liquidator of the insurer, being a liability to pay to the relevant authority. The terminology makes it clear, in each case, that the statutory payment liability thus created is in the nature of a debt and that there is no attempt to cause moneys received by the liquidator from the reinsurer to be subject to some form of statutory trust in the liquidator's hands in favour of the

authority. This follows from the direction that payment by the liquidator to the manager be ``in priority to all payments in respect of the debts'' referred to in provisions of corporations legislation dealing with priority of payments in a winding up. Class D, thus leaves the contractual position between insurer and reinsurer untouched, but creates a right of the authority as against the insurer's liquidator. The matters to be addressed in the light of the State and Territory legislation 57. The guidance the liquidators of the HIH companies seek centres upon the effect of three Commonwealth statutes. The first relevant provision is s. 116 of the Insurance Act 1973 (Cth) which, although now repealed, was in force when the winding up of each HIH company began and, for that reason, is seen by the liquidators as having potential relevance. The second provision is s. 116 of the General Insurance Reform Act 2001 (Cth). Third, the liquidators seek guidance in relation to certain provisions of the Corporations Act 2001 (Cth). 58. The submissions address the relevance and impact, in respect of these provisions of Commonwealth law, of not only the particular State and Territory statutory provisions but also general equitable principles of subrogation. It is convenient to deal first with the purely statutory matters as they affect the operation and application of the three Commonwealth statutes. Insurance Act 1973 (Cth), s. 116 59. This provision is no longer in force, having been repealed by Item 60 of Schedule 1 to the General Insurance Reform Act 2001 (Cth). It was, however, in force when the winding of each HIH company began and, for that reason, may have some application in relation to the winding up: see generally the discussion by Windeyer J in New Cap Reinsurance Corporation Ltd v Faraday Underwriting Ltd (above). 60. Section 116 of the Insurance Act 1973 (Cth) was in the following terms: ``(1) If a body corporate that is authorised under this Act to carry on insurance business is begun to be wound up: (a) the body must not carry on insurance business after the

date of commencement of the winding up; and (b) APRA must cause to be published in the Gazette a notice stating that, because of the commencement of the winding up, the body is no longer permitted to carry on insurance business. (2) A body corporate is not guilty of a contravention of subsection (1) by reason only that it is carrying on business for the purpose of discharging liabilities assumed by it before the date of commencement of the winding up. (3) In the winding up of a body corporate authorized under this Act to carry on insurance business, or in the winding up of a supervised body corporate, the assets in Australia of the body corporate shall not be applied in the discharge of its liabilities other than its liabilities in Australia unless it has no liabilities in Australia. (4) Section 31 has effect for the purposes of this section. (5) Nothing in this section affects the validity of a contract entered into by a body corporate after it is commenced to be wound up. (6) This section has effect and shall be complied with notwithstanding anything in any law of a State or Territory.'' 61. The central question posed by s. 116 in the present context arises under s. 116(3), namely, whether sums paid by reinsurers under arrangements relevant to insurances effected with an HIH company for the purposes of the various statutory schemes are properly regarded as ``assets'' of the relevant HIH company. The contractual right of each HIH company under the reinsurance arrangement, being a chose in action, is no doubt an ``asset'', although, of its nature, not one capable of being ``applied'' in any sense relevant to s. 116(3). Only the proceeds, in the form of money representing satisfaction of the right, are ``assets'' capable of being so ``applied'' in the active sense with which s. 116(3) is obviously concerned. 62. I am satisfied that, in cases within what I have designated Class A, Class B and Class C, proceeds produced by relevant reinsurance

arrangements were not (or will not be) ``assets'' of the relevant HIH company, at least if the State and Territory cut-through provisions take effect in the windings up according to their terms and despite any contrary provisions in the Corporations Act. Those State and Territory provisions are such that, upon payment by the reinsurer, proceeds pass direct into the ownership of the relevant statutory authority. While the chose in action as against the reinsurer may still reside with the HIH company as insurer, the sum payable upon fruition of the chose in action never comes within the dominion of the HIH company and is never an ``asset'' of that company. 63. In the case of Class D, however, this analysis does not hold good. In that case, as I have said, the proceeds of recovery under the reinsurance are recognised by the relevant State or Territory legislation as coming home to the insurer (HIH company) or, more precisely, its liquidator. There is thus an acceptance of the pre-existing contractual position. At that point the proceeds must be regarded as ``assets'' of the relevant HIH company, there being no indication, as I see it, that the liquidator should be regarded as receiving such proceeds otherwise than as an agent of the company. Even so, obedience by the liquidator to the statutory requirement to pay the proceeds (net of expenses) to the statutory authority would not be contrary to s. 116 if that section applied. This is because the effect of the Class D State or Territory statutory provision is to create a liability which, in terms of s. 116(3), is part of the HIH company's ``liabilities in Australia'', so that the payment to the statutory authority would be by way of discharge of ``liabilities in Australia'' as referred to in s. 116(3). This conclusion requires a little explanation. Section 31 of the Insurance Act 1973 says that ``liabilities'' includes certain things, unless a contrary intention appears. Section 31 also refers to circumstances which bring certain liabilities within the concept of ``liability in Australia''. But the section does not purport or attempt to define exhaustively either ``liabilities'' or ``liability in Australia''. Each expression is left to enjoy, in addition to the meaning to which the section refers, its ordinary and natural meaning. An obligation to pay money imposed by statute must be within the ordinary and natural meaning of ``liability''; and, given its source in State or Territory legislation and the Australian locus of the paying liquidator, the

company subject to winding up and the receiving statutory authority, the liability must be regarded as having such a connection with Australia as to make it part of the ``liabilities in Australia''. Effectuation of the State or Territory statutory scheme is therefore consistent with the prescription under s. 116(3) that assets in Australia of an insurer in the course of being wound up are not to be applied in discharge of liabilities other than ``liabilities in Australia''. 64. If, contrary to what I have just said, the true effect of the Class D provisions is to cause reinsurance proceeds to come into the hands of a liquidator in some independent and separate right that is not and cannot be equated with the right of the company (cf N A Kratzmann Pty Ltd v Tucker (No 2) (1968) 123 CLR 295), s. 116(3) will not apply because those proceeds are not ``assets'' of the company. 65. Whatever view may be taken of the capacity in which the liquidator receives relevant proceeds, the conclusion is that effectuation of the statutory scheme concerning reinsurance proceeds will, in the case of Classes A, B and C, be irrelevant to the operation of s. 116(3) and, in the case of Class D, will not be inconsistent with the provisions of that section. But this conclusion, as I have said, depends on a finding that the State and Territory cut- through provisions have effect despite Corporations Act provisions concerning application of assets in a winding up with which they may be inconsistent. That is a matter to be considered presently. General Insurance Reform Act 2001 (Cth), s. 116 66. The General Insurance Reform Act 2001 (Cth) came into operation on 1 July 2002. The provisions of its s. 116 are, in relevant respects, generally similar to those of s. 116 of the Insurance Act 1973 (Cth). A major difference, however, is that the provisions of the 2001 Act apply only in relation to the winding up of a ``general insurer'', as defined. The expression ``general insurer'' is defined by s. 11 as ``a body corporate that is authorised under s. 12 to carry on insurance business in Australia''. 67. None of the HIH companies has ever held an authority under s. 12 of the General Insurance Reform Act. It follows that s. 116 of the General Insurance Reform Act has no application in the winding up of

any of the HIH companies and that the matters dealt with by the State and Territory legislation are in no way affected by s. 116 of that Act. Corporations Act 2001 (Cth) 68. The core question here is whether the cut- through provisions of the State and Territory legislation operate despite provisions of the Corporations Act applicable to the winding up of each HIH company. That Act, unlike both the Insurance Act 1973 (Cth) and the General Insurance Reform Act 2001 (Cth), contains provisions which cannot, on their face, operate in harmony with the cut-through provisions. Furthermore, the Corporations Act applies directly in the winding up of each HIH company, given that the winding up order was in each case made under that Act. The Corporations Act sections requiring attention are ss. 555, 556 and 562A. Sections 555 and 556(1) are as follows: ``555. Debts and claims proved to rank equally except as otherwise provided Except as otherwise provided by this Act, all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately. 556. Priority payments (1) Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims: (a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company's business; (b) if the Court ordered the winding up — next, the costs in respect of the application for the order (including the applicant's taxed costs payable under section 466); (c) next, the debts for which paragraph 443D(a) entitles an

administrator of the company to be indemnified (even if the administration ended before the relevant date), except expenses covered by paragraph (a) of this subsection and deferred expenses; (d) if the winding up began within 2 months after the end of a period of official management of the company — next, debts of the company properly incurred by an official manager in carrying on the company's business during the period of official management, except expenses covered by paragraph (a) of this subsection and deferred expenses; (da) if the Court ordered the winding up — next, costs and expenses that are payable under subsection 475(8) out of the company's property; (db) next, costs that form part of the expenses of the winding up because of subsection 539(6); (dc) if the winding up began within 2 months after the end of a period of official management of the company — next, the remuneration, in respect of the period of official management, of any auditor appointed in accordance with Part 2M.4; (dd) next, any other expenses (except deferred expenses) properly incurred by a relevant authority; (de) next, the deferred expenses; (df) if a committee of inspection has been appointed for the purposes of the winding up — next, expenses incurred by a person as a member of the committee; (e) subject to subsection (1A) — next, wages and superannuation contributions payable by the company in respect of services rendered to the company by employees before the relevant date;

(f) next, amounts due in respect of injury compensation, being compensation the liability for which arose before the relevant date; (g) subject to subsection (1B) — next, all amounts due: (i) on or before the relevant date; and (ii) because of an industrial instrument; and (iii) to, or in respect of, employees of the company; and (iv) in respect of leave of absence; (h) subject to subsection (1C) — next, retrenchment payments payable to employees of the company.'' (I omit the other subsections of s. 556 which deal in detail with matters of interpretation of sub-s. (1) the intent and effect of which can be sufficiently gathered for present purposes without elaboration.) 69. Section 562A of the Corporations Act is as follows: ``562A. Application of proceeds of contracts of reinsurance (1) This section applies where: (a) a company is insured, under a contract of reinsurance entered into before the relevant date, against liability to pay amounts in respect of a relevant contract of insurance or relevant contracts of insurance; and (b) an amount in respect of that liability has been or is received by the company or the liquidator under the contract of reinsurance. (2) Subject to subsection (4), if the amount received, after deducting expenses of or incidental to getting in that amount, equals or exceeds the total of all the amounts that are payable by the company under relevant contracts of insurance, the liquidator must, out of the amount received and in priority to all payments in

respect of the debts mentioned in section 556, pay the amounts that are so payable under those contracts of insurance. (3) Subject to subsection (4), if subsection (2) does not apply, the liquidator must, out of the amount received and in priority to all payments in respect of the debts mentioned in section 556, pay to each person to whom an amount is payable by the company under a relevant contract of insurance an amount calculated in accordance with the formula: Particular amount owed ---------------------- x Reinsurance payment Total amount owed

where: particular amount owed means the amount payable to the person under the relevant contract of insurance. reinsurance payment means the amount received under the contract of reinsurance, less any expenses of or incidental to getting in that amount. total amount owed means the total of all the amounts payable by the company under relevant contracts of insurance. (4) The Court may, on application by a person to whom an amount is payable under a relevant contract of insurance, make an order to the effect that subsections (2) and (3) do not apply to the amount received under the contract of reinsurance and that that amount must, instead, be applied by the liquidator in the manner specified in the order, being a manner that the Court considers just and equitable in the circumstances. (5) The matters that the Court may take into account in considering whether to make an order under subsection (4) include, but are not limited to: (a) whether it is possible to identify particular relevant contracts of insurance as being the contracts in respect of which the contract of reinsurance was entered into; and (b) whether it is possible to identify persons who can be said to

have paid extra in order to have particular relevant contracts of insurance protected by reinsurance; and (c) whether particular relevant contracts of insurance include statements to the effect that the contracts are to be protected by reinsurance; and (d) whether a person to whom an amount is payable under a relevant contract of insurance would be severely prejudiced if subsections (2) and (3) applied to the amount received under the contract of reinsurance. (6) If receipt of a payment under this section only partially discharges a liability of the company to a person, nothing in this section affects the rights of the person in respect of the balance of the liability. (7) This section has effect despite any agreement to the contrary. (8) In this section: `relevant contract of insurance' means a contract of insurance entered into by the company, as insurer, before the relevant date.'' 70. The combined effect of ss. 555 and 556 is that, in a winding up governed by the Corporations Act, unsecured debts and claims identified in s. 556 are to be paid, in the order stated, in priority to all other unsecured debts and claims and, subject to that priority (and to the effect of any other provisions of the Corporations Act), debts and claims proved in a winding up are to rank equally and, if the property of the company is insufficient to meet all debts and claims, they are to be paid proportionately. Section 562A, dealing specifically with contracts of reinsurance held by a company in the course of winding up in respect of insurances written by that company, requires the liquidator to make certain payments to certain persons out of the proceeds of the reinsurance and to do so in priority to all payments in respect of debts mentioned in s. 556. 71. The State and Territory cut-through provisions are at odds with

these Corporations Act approaches in two ways. First, some of them deal with and make contrary provision with respect to part of the property of the company that the Corporations Act requires to be applied in meeting the debts and claims regulated by ss. 555, 556 and 562A. This is so in the case of cut-through provisions within Classes A, B and C. They affect the asset of an HIH company represented by its contractual right against a reinsurer in such a way as to cause that chose in action (and, in due course, any proceeds produced by it) to be made unavailable for application in accordance with ss. 555, 556 and 562A. The second relevant effect of the cut-through provisions is seen in the case of Class D which creates a requirement with respect to the application of proceeds of reinsurance, once received by the liquidator, which does not accord with ss. 555, 556 and 562A, for reasons including that the application is declared to rank in priority to all other payments in the order of priority provided for in the corporations legislation. Corporations Act provisions dealing with inconsistency 72. The Corporations Act, being an enactment of the Commonwealth Parliament, is a law of the Commonwealth for the purposes of s. 109 of the Commonwealth Constitution. It follows that, if any of the cutthrough provisions contained in State legislation is inconsistent with a provision of the Corporations Act, the latter will prevail and the former will, to the extent of the inconsistency, be invalid. However, Part 1.1A of the Corporations Act shows a general intention of forestalling or minimising conflict of this kind. 73. Section 109 of the Constitution does not deal with inconsistency between a law of the Australian Capital Territory or the Northern Territory and a law of the Commonwealth. In the former case, however, s. 28 of the Australian Capital Territory (Self-Government) Act 1988 (Cth) produces a result that may be regarded, for present purposes, as the equivalent of that arising under s. 109. In the case of inconsistency between a law of the Northern Territory and a law of the Commonwealth, the resolution is again to the same general effect as under s. 109 although, as in the case of the Australian Capital Territory, that result is a product of the application of ordinary principles of statutory interpretation to relevant Commonwealth

statutes, including those under which the territory operates as distinct a distinct polity: see generally Northern Territory v GPAO (1999) 196 CLR 553. The provisions in Part 1.1A of the Corporations Act aim to avoid or minimise this kind of conflict also. 74. By virtue of s. 5D of the Corporations Act, Part 1.1A applies to ``laws of a State or Territory that is in this jurisdiction''. Having regard to the s. 9 definition of ``this jurisdiction'', all of the laws containing the cut- through provisions, being laws of States and Territories of Australia, are within the s. 5D description. The effect of Part 1.1A in relation to those laws must therefore be examined. Part 1.1A of the Corporations Act 75. The operative provisions of Part 1.1A relevant for present purposes are ss. 5E, 5F and 5G. It is appropriate to set them out in full: ``5E. Concurrent operation intended (1) The Corporations legislation is not intended to exclude or limit the concurrent operation of any law of a State or Territory. (2) Without limiting subsection (1), the Corporations legislation is not intended to exclude or limit the concurrent operation of a law of a State or Territory that: (a) imposes additional obligations or liabilities (whether criminal or civil) on: (i) a director or other officer of a company or other corporation; or (ii) a company or other body; or (b) confers additional powers on: (i) a director or other officer of a company or other corporation; or (ii) a company or other body; or (c) provides for the formation of a body corporate; or

(d) imposes additional limits on the interests a person may hold or acquire in a company or other body; or (e) prevents a person from: (i) being a director of; or (ii) being involved in the management or control of; a company or other body; or (f) requires a company: (i) to have a constitution; or (ii) to have particular rules in its constitution. Note: Paragraph (a) — this includes imposing additional reporting obligations on a company or other body. (3) Without limiting subsection (2), a reference in that subsection to a law of a State or Territory imposing obligations or liabilities, or conferring powers, includes a reference to a law of a State or Territory imposing obligations or liabilities, or conferring powers, by reference to the State or Territory in which a company is taken to be registered. (4) This section does not apply to the law of the State or Territory if there is a direct inconsistency between the Corporations legislation and that law. Note: Section 5G prevents direct inconsistencies arising in some cases by limiting the operation of the Corporations legislation. (5) If: (a) an act or omission of a person is both an offence against the Corporations legislation and an offence under the law of a State or Territory; and (b) the person is convicted of either of those offences; the person is not liable to be convicted of the other of those offences.

5F. Corporations legislation does not apply to matters declared by State or Territory law to be an excluded matter (1) Subsection (2) applies if a provision of a law of a State or Territory declares a matter to be an excluded matter for the purposes of this section in relation to: (a) the whole of the Corporations legislation; or (b) a specified provision of the Corporations legislation; or (c) the Corporations legislation other than a specified provision; or (d) the Corporations legislation otherwise than to a specified extent. (2) By force of this subsection: (a) none of the provisions of the Corporations legislation (other than this section) applies in the State or Territory in relation to the matter if the declaration is one to which paragraph (1) (a) applies; and (b) the specified provision of the Corporations legislation does not apply in the State or Territory in relation to the matter if the declaration is one to which paragraph (1)(b) applies; and (c) the provisions of the Corporations legislation (other than this section and the specified provisions) do not apply in the State or Territory in relation to the matter if the declaration is one to which paragraph (1)(c) applies; and (d) the provisions of the Corporations legislation (other than this section and otherwise than to the specified extent) do not apply in the State or Territory in relation to the matter if the declaration is one to which paragraph (1)(d) applies. (3) Subsection (2) does not apply to the declaration to the extent to which the regulations provide that that subsection does not

apply to that declaration. (4) By force of this subsection, if: (a) the Corporations Law, ASC Law or ASIC Law of a State or Territory; or (b) a provision of that Law; did not apply to a matter immediately before this Act commenced because a provision of a law of the State or Territory provided that that Law, or that provision, did not apply to the matter, the Corporations legislation, or the provision of the Corporations legislation that corresponds to that provision of that Law, does not apply in the State or Territory to the matter until that law of the State or Territory is omitted or repealed. (5) Subsection (4) does not apply to the application of the provisions of the Corporations legislation to the matter to the extent to which the regulations provide that that subsection does not apply to the matter. (6) In this section: `matter' includes act, omission, body, person or thing. 5G. Avoiding direct inconsistency arising between the Corporations legislation and State and Territory laws (1) Section overrides other provisions of the Corporations legislation This section has effect despite anything else in the Corporations legislation. (2) Section does not deal with provisions capable of concurrent operation This section does not apply to a provision of a law of a State or Territory that is capable of concurrent operation with the Corporations legislation. Note: This kind of provision is dealt with by section 5E. (3) When this section applies to a provision of a State or

Territory law This section applies to the interaction between: (a) a provision of a law of a State or Territory (the State provision); and (b) a provision of the Corporations legislation (the Commonwealth provision); only if the State provision meets the conditions set out in the following table: Conditions to be met before section applies Kind of Item provision

[operative] Conditions to be met

1

a precommencement (commenced) provision

(a) the State provision operated, immediately before this Act commenced, despite the provision of: (i) the Corporations Law of the State or Territory (as in force at that time); or (ii) the ASC or ASIC Law of the State or Territory (as in force at that time); that corresponds to the Commonwealth provision; and (b) the State provision is not declared to be one that this section does not apply to (either generally or specifically in relation to the Commonwealth provision) by: (i) regulations made under this Act; or (ii) a law of the State or Territory.

2

a precommencement (enacted)

(a) the State provision would have operated, immediately before this Act commenced, despite the provision of:

provision

(i) the Corporations Law of the State or Territory (as in force at that time); or (ii) the ASC or ASIC Law of the State or Territory (as in force at that time); that corresponds to the Commonwealth provision if the State provision had commenced before the commencement of this Act; and (b) the State provision is not declared to be one that this section does not apply to (either generally or specifically in relation to the Commonwealth provision) by: (i) regulations made under this Act; or (ii) a law of the State or Territory.

3

a postcommencement provision

the State provision is declared by a law of the State or Territory to be a Corporations legislation displacement provision for the purposes of this section (either generally or specifically in relation to the Commonwealth provision)

4

a provision that is materially amended on or after this Act commenced if the amendment was enacted before this Act commenced

(a) the State provision as amended would have operated, immediately before this Act commenced, despite the provision of: (i) the Corporations Law of the State or Territory (as in force at that time); or (ii) the ASC or ASIC Law of the State or Territory (as in force at that time); that corresponds to the Commonwealth provision if the amendment had commenced before the commencement of this Act; and (b) the State provision is not declared to be one that this section does not

apply to (either generally or specifically in relation to the Commonwealth provision) by: (i) regulations made under this Act; or (ii) a law of the State or Territory. 5

a provision that is materially amended on or after this Act commenced if the amendment is enacted on or after this Act commenced

the State provision as amended is declared by a law of the State or Territory to be a Corporations legislation displacement provision for the purposes of this section (either generally or specifically in relation to the Commonwealth provision)

Note 1: Item 1 — subsection (12) tells you when a provision is a pre-commencement (commenced) provision. Note 2: Item 1 paragraph (a) — For example, a State or Territory provision enacted after the commencement of the Corporations Law might not have operated despite the Corporations Law if it was not expressly provided that the provision was to operate despite a specified provision, or despite any provision, of the Corporations Law (see, for example, section 5 of the Corporations (New South Wales) Act 1990). Note 3: Item 2 — subsection (13) tells you when a provision is a pre-commencement (enacted) provision. Note 4: Item 3 — subsection (14) tells you when a provision is a post-commencement provision. Note 5: Subsections (15) to (17) tell you when a provision is materially amended after commencement. (4) State and Territory laws specifically authorising or requiring act or thing to be done A provision of the Corporations legislation does not: (a) prohibit the doing of an act; or

(b) impose a liability (whether civil or criminal) for doing an act; if a provision of a law of a State or Territory specifically authorises or requires the doing of that act. (5) Instructions given to directors under State and Territory laws If a provision of a law of a State or Territory specifically: (a) authorises a person to give instructions to the directors or other officers of a company or body; or (b) requires the directors of a company or body to: (i) comply with instructions given by a person; or (ii) have regard to matters communicated to the company or body by a person; or (c) provides that a company or body is subject to the control or direction of a person; a provision of the Corporations legislation does not: (d) prevent the person from giving an instruction to the directors or exercising control or direction over the company or body; or (e) without limiting subsection (4): (i) prohibit a director from complying with the instruction or direction; or (ii) impose a liability (whether civil or criminal) on a director for complying with the instruction or direction. The person is not taken to be a director of a company or body for the purposes of the Corporations legislation merely because the directors of the company or body are accustomed to act in accordance with the person's instructions.

(6) Use of names authorised by State and Territory laws The provisions of Part 2B.6 and Part 5B.3 of this Act do not: (a) prohibit a company or other body from using a name if the use of the name is expressly provided for, or authorised by, a provision of a law of a State or Territory; or (b) require a company or other body to use a word as part of its name if the company or body is expressly authorised not to use that word by a provision of a law of a State or Territory. (7) Meetings held in accordance with requirements of State and Territory laws The provisions of Chapter 2G of this Act do not apply to the calling or conduct of a meeting of a company to the extent to which the meeting is called or conducted in accordance with a provision of a law of a State or Territory. Any resolutions passed at the meeting are as valid as if the meeting had been called and conducted in accordance with this Act. (8) External administration under State and Territory laws The provisions of Chapter 5 of this Act do not apply to a scheme of arrangement, receivership, winding up or other external administration of a company to the extent to which the scheme, receivership, winding up or administration is carried out in accordance with a provision of a law of a State or Territory. (9) State and Territory laws dealing with company constitutions If a provision of a law of a State or Territory provides that a provision is included, or taken to be included, in a company's constitution, the provision is included in the company's constitution even though the procedures and other requirements of this Act are not complied with in relation to the provision. (10) If a provision of a law of a State or Territory provides that additional requirements must be met for an alteration of a company's constitution to take effect, the alteration does not take

effect unless those requirements are met. (11) Other cases A provision of the Corporations legislation does not operate in a State or Territory to the extent necessary to ensure that no inconsistency arises between: (a) the provision of the Corporations legislation; and (b) a provision of a law of the State or Territory that would, but for this subsection, be inconsistent with the provision of the Corporations legislation. Note 1: A provision of the State or Territory law is not covered by this subsection if one of the earlier subsections in this section applies to the provision: if one of those subsections applies there would be no potential inconsistency to be dealt with by this subsection. Note 2: The operation of the provision of the State or Territory law will be supported by section 5E to the extent to which it can operate concurrently with the provision of the Corporations legislation. (12) Pre-commencement (commenced) provision A provision of a law of a State or Territory is a `pre-commencement (commenced) provision' if it: (a) is enacted, and comes into force, before the commencement of this Act; and (b) is not a provision that has been materially amended after commencement (see subsections (15) to (17)). (13) Pre-commencement (enacted) provision A provision of a law of a State or Territory is a `precommencement (enacted) provision' if it: (a) is enacted before, but comes into force on or after, the commencement of this Act; and

(b) is not a provision that has been materially amended after commencement (see subsections (15) to (17)). (14) Post-commencement provision A provision of a law of a State or Territory is a `postcommencement provision' if it: (a) is enacted, and comes into force, on or after the commencement of this Act; and (b) is not a provision that has been materially amended after commencement (see subsections (15) to (17)). (15) Provision materially amended after commencement A provision of a law of a State or Territory is `materially amended after commencement' if: (a) an amendment of the provision commences on or after the commencement of this Act; and (b) neither subsection (16) nor subsection (17) applies to the amendment. (16) A provision of a law of a State or Territory is not `materially amended after commencement' under subsection (15) if the amendment merely: (a) changes: (i) a reference to the Corporations Law or the ASC or ASIC Law, or the Corporations Law or the ASC or ASIC Law of a State or Territory, to a reference to the Corporations Act or the ASIC Act; or (ii) a reference to a provision of the Corporations Law or the ASC or ASIC Law, or the Corporations Law or ASC or ASIC Law of a State or Territory, to a reference to a provision of the Corporations Act or the ASIC Act; or

(iii) a penalty for a contravention of a provision of a law of a State or Territory; or (iv) a reference to a particular person or body to a reference to another person or body; or (b) adds a condition that must be met before a right is conferred, an obligation imposed or a power conferred; or (c) adds criteria to be taken into account before a power is exercised; or (d) amends the provision in way declared by the regulations to not constitute a material amendment for the purposes of this subsection. (17) A provision of a law of a State or Territory is not `materially amended after commencement' under subsection (15) if: (a) the provision as amended would be inconsistent with a provision of the Corporations legislation but for this section; and (b) the amendment would not materially reduce the range of persons, acts and circumstances to which the provision of the Corporations legislation applies if this section applied to the provision of the State or Territory law as amended.'' Part 1.1A — the general formula under s. 5E 76. The judgment of Ashley J in Director of Public Prosecutions v Loo (2002) 42 ACSR 459 contains an analysis of some of the workings of Part 1.1A. As that analysis shows, the first step in applying the Part 1.1A provisions to a particular conflict between a State or Territory law and a Corporations Act provision is to determine the nature of the conflict. That task is assisted by resort to established principles of constitutional law concerning the interaction of State and Commonwealth laws. 77. In Telstra Corporation Limited v Worthing (1999) 197 CLR 61, the

High Court emphasised that only one of the two tests enunciated by Dixon J in Victoria v Commonwealth (1937) 58 CLR 618 needs to be satisfied to cause s. 109 of the Constitution to make a State law invalid to the extent of its inconsistency with Commonwealth law. The first test (in the nature of a direct collision test) involves the question whether the State law, if valid, ``would alter, impair or detract from the operation of a law of the Commonwealth Parliament''. The second test (the ``cover the field test'') turns upon the question whether it appears from the terms, nature or subject matter of the Commonwealth law that it was intended to operate as ``a complete statement of the law governing a particular matter or set of rights and duties''. If the answer to that question is ``yes'', any attempt by a State law to ``regulate or apply to the same matter or relation is regarded as a detraction from the full operation of the Commonwealth law and so as inconsistent''. 78. Section 5E is the leading provision in Part 1.1A of the Corporations Act. It says that the Commonwealth Corporations legislation (which, by virtue of s. 5D(2), includes the Corporations Act) is not intended to exclude or limit the concurrent operation of any State or Territory law — unless ``there is a direct inconsistency between the Corporations legislation and that law'' as referred to in s. 5E(4). The Commonwealth law thus contains its own explicit statement that it is not intended to be, according to Dixon J's formulation, a ``complete statement of the law governing a particular matter or set of rights and duties''. On the contrary, it is clear, at least so far as s. 5E is concerned, that State and Territory laws may also regulate matters, rights and duties with which the Commonwealth law is concerned, provided that they do not do so in a way which involves ``direct inconsistency''. As Mason J pointed out in R v Credit Tribunal; ex parte General Motors Acceptance Corporation Australia (1977) 137 CLR 545, a legislative statement that a Commonwealth law is not intended to be an exhaustive and exclusive law makes the ``cover the field'' test irrelevant to the application of s. 109, so that it operates only upon ``direct inconsistency or collision, of the kind which arises, for example, when Commonwealth and State laws make contradictory provision upon the same topic, making it impossible for both laws to be obeyed''. The term ``direct inconsistency'', as used in the concurrent operation provisions of s. 5E, should be understood

accordingly. 79. For State and Territory excepting provisions to survive under the Corporations Act, it is necessary for a law of the Commonwealth to accommodate them expressly by saying, in effect, that the sections of the Corporations Act with which particular State and Territory excepting provisions are otherwise inconsistent are to have effect subject to those State and Territory excepting provisions. Provided that a head of Commonwealth legislative power supports the accommodating provision itself, the result will be that that accommodating provision removes the inconsistency between the Commonwealth law's substantive provisions and the State and Territory excepting provisions. This will happen because the accommodating provision causes the Commonwealth law's substantive provisions to have the curtailed operation produced by the stipulation that they have effect subject to the State and Territory excepting provisions. There is then no occasion for the intervention of s. 109. Part 1.1A — the particular formula under s. 5F 80. The general message in s. 5E is reinforced by s. 5F which, in subss. (1) and (2), deals with the case where a provision of State or Territory law declares a matter to be an excluded matter for the purposes of s. 5E in relation to the whole or some specified portion of the Corporations Act. In such a case, the Corporations Act itself causes direct conflict to be avoided by curtailing its own operation in a particular way designed to allow the relevant State or Territory law to operate without impinging upon the operation of the Commonwealth law. A Commonwealth law cannot cut across the Constitution by attempting to declare valid that which s. 109 makes invalid: University of Wollongong v Metwally (1984) 158 CLR 447. But it can so define and mould its own operation as to forestall inconsistency of the kind with which s. 109 is concerned. Section 5F of the Corporations Act is a defining and moulding provision of this kind. 81. The approach reflected in s. 5F involves an express statement in the Corporations Act that certain of its provisions are not to apply ``in'' a particular State or Territory ``to'' or ``in relation to'' a particular

``matter''(which, by virtue of s. 5F(6), includes ``act, omission, body, person or thing''). The classes of such matters are defined in two ways. The first class, already noticed, covers matters declared by a State or Territory law to be, in effect, excepted from the operation of one or more provisions of the Corporations Act (s. 5F(1)). The second class covers matters, which a pre-existing provision of State or Territory law declares to be excepted from the operation of the preexisting Corporations Law, that is, a former National Scheme Law (s. 5F(4)). By force of s. 5F(2), the provisions of the Commonwealth Corporations legislation identified in the relevant State or Territory law do not apply in that State or Territory in relation to a matter in the first class. By force of s. 5F(4), provisions of the Corporations Act ``corresponding'' with those the subject of the exception in the preexisting State or Territory law do not apply in the State or Territory in relation to matters in the second class. In each case, however, the non-application thus effected by the Commonwealth Corporations legislation may be denied or reversed by regulation made under that Corporations Law (s. 5F(3) and (5)). 82. State and Territory provisions of the kind at issue in this proceeding may, in theory at least, be accommodated by s. 5F of the Corporations Act in one of two circumstances: first, where the State or Territory legislation itself contains a declaration of the kind contemplated by s. 5F(1) and (2); and, second, if, immediately before 15 July 2001, the State or Territory provision had the effect that the Corporations Law of that State or Territory (or some part or provision of it) did not apply to a matter identified in the cut-through provision. The second case is dealt with by s. 5F(4). 83. One aspect of the s. 5F(4) case must, however, be emphasised. For that section to cause a particular Corporations Act provision not to apply in a particular State or Territory to a particular matter, the position prevailing before 15 July 2001 must be found to have been such that not only a provision of the Corporations Law to which the Corporations Act provision corresponds did not apply to the matter by force of an excluding provision of the law of the State or Territory, but also the Corporations Law whose provision was made inapplicable by that excluding provision was the Corporations Law of the State or

Territory of whose law the excluding or provision formed part. In light of this (and in anticipation of some issues arising in relation to s. 5G), it is necessary to examine briefly, by way of digression, the general nature of provisions dealing with winding up of companies and administration of assets in winding up. 84. Immediately before 15 July 2001, the jurisdiction to make a winding up order under the Corporations Law was exercisable in respect of a ``company'': see, for example, ss. 459A and 461. The Corporations Law of a particular State or Territory defined ``company'' for these purposes in such a way as to refer to a company registered under that particular Corporations Law. This was the effect of the s. 9 definition of ``company''— I leave to one side the winding up jurisdiction under Part 5.7 on the basis that exclusion of a ``recognised company'' from the definition of ``registrable Australian body''(and hence, successively, from the definition of ``registrable body'' and the definition of ``Part 5.7 body'') meant that a winding up order could not be made under Part 5.7 of the Corporations Law of one State or Territory in respect of a ``company'' as defined by s. 9 of the Corporations Law of another. It follows that when, before 15 July 2001, a court made a winding up order in respect of a company registered as such under the Corporations Law, it exercised jurisdiction under the particular Corporations Law from which the registration as a company derived. If the particular company was registered under the Corporations Law of New South Wales, then the winding up order was made under that Corporations Law, if the company was registered under the Corporations Law of the Australian Capital Territory, then the order was made under that Corporations Law and so forth. By virtue of s. 588A and s. 588B of the Corporations Law of each other State and Territory, the winding up order had effect and was recognised in that other jurisdiction and the liquidator's powers and functions were exercisable there for the purpose of winding up the company's affairs in the other jurisdiction. But these ancillary measures did not alter the fact that the winding up as such derived solely from and was governed solely by the Corporations Law of the State or Territory of the company's registration. 85. Where a winding up order was made under the Corporations Law

of a particular State or Territory in relation to a company registered under that Corporations Law, it was s. 555 of that Corporations Law and no other that laid down the general rule of proportionality in the application of the company's property in meeting debts and claims and it was likewise s. 556 of that Corporations Law and no other that identified debts and claims to be afforded priority over other unsecured debts and claims and prescribed the order of their priority. It followed that, at the level of State and Territory legislation, a statutory provision purporting to modify these rules in relation to winding up would have been effective only if it was an enactment of the legislature by which the Corporations Law creating the rules had been enacted. 86. But what was the effect of a provision of, say, a Victorian workers compensation statute purporting to confer on a particular instrumentality created by that statute a right to enjoy and enforce a chose in action forming part of the property of a company to which the directive as to application of property in s. 555 of, say, the Corporations Law of New South Wales applied? And what was the effect of a provision of Australian Capital Territory law purporting to both create and afford paramountcy to a right for an instrumentality created by Australian Capital Territory law to be paid a particular sum by the liquidator administering ss. 555, 556 and 562A of the Corporations Law of Queensland in the winding up of a company registered under that Corporations Law? I see no basis upon which such a provision of Victorian or Australian Capital Territory Law would have been effective to bind the liquidator in question or to affect the property in question. This observation applies also to each other case in which the winding up generally was governed by the Corporations Law of one State or Territory and the special provision purporting to alter the incidence of ss. 555, 556 and 562A of that Corporations Law was the creation of the legislature of another State or Territory. 87. The particular way in which each of s. 5F(2) and 5F(4) operates in relation to provisions of the Corporations Act must now be noted. In each case, the subsection says that the Corporations Act (or the relevant provision or part of it) does not apply in the particular State or Territory to the particular matter. The wording differs slightly between

ss. 5F(2) and 5F(4). In the former, each paragraph says that the Corporations Act (or the relevant portion or provision of it) ``does not apply in the State or Territory in relation to the matter'', being the matter the subject of the declaration in a provision of State or Territory law referred to in s. 5F(1). In s. 5F(4), it is said that the Corporations Act (or the relevant portion or provision of it) ``does not apply in the State or Territory to the matter...''. 88. The concept is thus a dual concept of restriction of territorial application and restriction of application to subject matter. The effect of both s. 5F(2) and s. 5F(4) is to single out a particular ``matter'', being the ``matter'' identified by the State or Territory enactment, and to cause the territorial operation of the Corporations Act to be modified and restricted so that such application as it would otherwise have had ``in'' the relevant State or Territory ``to''(or ``in relation to'') the particular ``matter'' is negated. As a corollary, such application as the Corporations Act has to or in relation to the particular matter that cannot be classified as application ``in'' the State or Territory is not negated. 89. Such a concept is no doubt meaningful in relation to Corporations Act provisions dealing with matters having clear territorial attributes. Section 911A, for example, says that a person who carries on a financial services business ``in this jurisdiction'' must hold a licence. Section 5F would undoubtedly accommodate a provision of, say, New South Wales law enabling a particular resident of New South Wales to carry on a financial services business in New South Wales even though unlicensed. 90. But the circumstances currently under discussion involve no such activity having or capable of having a territorial quality linked to a State or Territory. The question at issue concerns the operation of Corporations Act provisions directing the manner of application of the property of a company in the course of insolvent winding up and the order in which debts and claims are to be paid in such a winding up. By virtue of s. 1378, the registration of the particular company under Part 2A.2 of the Corporations Law of a State or Territory existing immediately before commencement of the Corporations Act on 15 July 2001 became, on that day, the equivalent of registration under Part

2A.2 of the Corporations Act, with the result that the company was, at that point, taken to be ``incorporated in this jurisdiction''(see s. 119A(1)), although ``registered'', in the s. 119A(2) sense, in the State or Territory under whose Corporations Law it was registered immediately before 15 July 2001 (see s. 1378(4)). The concept of incorporation in ``this jurisdiction''(being, according to the s. 9 definition, the geographical area consisting of all the States, the Australian Capital Territory and the Northern Territory) can only mean that the company came to have on and after 15 July 2001, by force of the Commonwealth Act (which has the territorial coverage specified in its s. 5 and is binding, by clause V of the covering clauses of the Constitution, on the courts, judges and people of every part of the Commonwealth), one indivisible existence as a body corporate throughout ``this jurisdiction'' without reference to any political or geographical subdivision of it. The concept is similar to the concept of intangible property created by Commonwealth law which is seen as locally situated in Australia at large and cannot be recognised as locally situated in any particular State or Territory: In re Usines de Melle and Firmin Boinot's Patent (1954) 91 CLR 42 at 49. The subsidiary notion of ``registration'' in s. 119A(2) of the Corporations Act does not detract from this. Its purpose seems to be to supply a secondary territorial attribute by reference to which particular State or Territory legislation may operate by specific reference (see Note 3 to s. 119A). 91. The directions in ss. 555, 556 and 562A of the Corporations Act as to the application of assets and payment of claims in the winding up of a company that that Act itself causes to be incorporated ``in this jurisdiction'' and therefore to be a body corporate cannot be regarded as applying ``in'' any particular State or Territory ``to'' (or ``in relation to'') the ``matter'' of such application and payment. The directions apply ``in'' the whole of the area to which the Commonwealth Act's territorial operation extends. And they do so in a way that is geographically indiscriminate, so that, unless there is some clear provision to the contrary, a particular thing that must be done in obedience to them cannot be regarded as something to be done ``in'' one particular State or Territory rather than any other and an act of statutory compliance or implementation does not in any sense belong

to one State or Territory rather than any other. The fact that a particular liquidator has his office in Sydney or Hobart, or that the bulk of the work in relation to a particular winding up is done in Adelaide or Perth does not mean that compliance with and implementation of ss. 555, 556 and 562A take on some character identifiable with the particular State. Wherever relevant acts may be performed, effectuation of s. 555, s. 556 or s. 562A occurs under and by virtue of the Corporations Act as it applies throughout the whole of its territorial reach. 92. Sections 5F(2) and 5F(4) can therefore produce no meaningful result so far as operation of State and Territory cut-through provisions in relation to due administration of ss. 555, 556 and 562A of the Corporations Act is concerned. Even if s. 5F(2) or s. 5F(4) purported or appeared to produce the result that ss. 555, 556 or 562A did not apply ``in'' a particular State or Territory ``to'' (or ``in relation to'') some ``matter'' identified in the cut-through provision, the section would in reality lead nowhere because application and administration of ss. 555, 556 and 562A are not things in relation to which any Corporations Act provision applies in a territorially defined or territorially ascertainable way. Part 1.1A — the particular formula under s. 5G 93. Section 5G, like s. 5F, deals with cases of direct conflict between a State or Territory law and a provision of the Corporations Act — or, more precisely, with provisions of State and Territory law that are not capable of concurrent operation with the Corporations Act. For s. 5G to apply in relation to a particular State or Territory provision, however, that State or Territory provision (designated, in s. 5G(3), merely a ``State provision'') must meet the conditions set out in the table in s. 5G(3). The conditions applicable to a particular State provision depend on the classification of the provision according to the items in the first column of the table in s. 5G(3). Before these s. 5G(3) matters are examined in relation to the State and Territory cut-through provisions, it is appropriate to consider whether any provision of s. 5G will, in any event, be able to secure their operation despite their incompatibility with the Corporations Act.

94. If it is found, via s. 5G(3), that s. 5G applies to the interaction between a provision of State or Territory law and a provision of the Corporations Act, it becomes necessary to determine whether and, if so, how the specific conflict resolution measures in s. 5G apply. Several of those conflict resolution measures are concerned with particular subjects and, in the present context, may, for that reason alone, be at once discarded. They are s. 5G(5) (instructions to directors), s. 5G(6) (use of names), s. 5G(7) (holding of meetings) and ss. 5G(9) and 5G(10) (company constitutions). It is also necessary, in the present context, to discard s. 5G(11)(dealing with ``Other cases'') since it adopts the s. 5F approach of declaring that the Corporations Act ``does not operate in a State or Territory''. For reasons already discussed in relation to s. 5F, non-application of the Corporations Act in a political and geographical subdivision of ``this jurisdiction'' can have no effect on the operation of ss. 555, 556 and 562A of the Commonwealth Act and their requirements as to particular applications of company property and the affording of precedence to particular debts and claims in a particular winding up. 95. Remaining for consideration, therefore, are ss. 5G(4) and 5G(8). Section 5G(4) deals with a case where a provision of a law of a State or Territory (necessarily, of course, a provision made relevant by s. 5G(3)) ``specifically authorises or requires'' the doing of an act. In such a case, a provision of the Corporations legislation (including the Corporations Act) does not prohibit the doing of the act or impose a liability (whether civil or criminal) for doing it. The specific authority or requirement of State or Territory law is thus accommodated to the extent of removal of any prohibition or liability that would otherwise apply or arise under the Corporations legislation. It is not said, in any explicit way, that the State or Territory provision may be obeyed and given effect to despite a provision of the Corporations legislation that would otherwise stand in the way. But that, it seems to me, must be the effect of s. 5G(4). 96. Section 5G(4) displaces the prohibition or liability that would arise from the Corporations Act to such an extent as to enable the authority conferred by State or Territory law to be exercised or the requirement imposed by State or Territory Law to be met. There is no geographical

or territorial quality to the way in which Commonwealth law yields. If the State or Territory provision creates an authority or imposes a requirement, the prohibitions and liabilities imposed by the Commonwealth law contract to accommodate whatever is to be done in accordance with the State or Territory provision. And they do so as to the Commonwealth law's operation generally, without regard to its application ``in'' the particular part of Australia with which the State or Territory provision is concerned. 97. Section 5G(8) operates in a conceptually similar way. As relevant to a situation of the kind under discussion, that section says that the provisions of Chapter 5 of the Corporations Act (in which ss. 555, 556 and 562A appear) ``do not apply to a... winding up... of a company to the extent to which the... winding up... is carried out in accordance with a provision of a law of a State or Territory''. The object upon which this part of s. 5G(8) fixes is the winding up of a company. It recognises that a State or Territory provision made applicable by s. 5G may affect the carrying out of such a winding up. Where such a State or Territory provision has such an effect, Chapter 5 of the Corporations Act has, in relation to the winding up, a modified operation. Its application to the winding up is denied or withdrawn so far as is necessary to allow the winding up to be carried out in accordance with the State or Territory provision. Use of the words ``carried out'' in relation to ``winding up'' recognise that winding up governed by the parts of Chapter 5 relevant to winding up is a process. The nature of the process was referred to by McPherson SPJ in Re Crust 'n' Crumbs Bakers (Wholesale) Pty Ltd [1992] 2 QdR 76 at 78: ``Winding up is a process that consists of collecting the assets, realising and reducing them to money, dealing with proofs of creditors by admitting or rejecting them, and distributing the net proceeds, after providing for costs and expenses, to the persons entitled. It is a process, comparable to an administration in equity, that begins or `starts' with and order of the court. However it is not the court order itself that `winds up' the company; the order does no more than direct that the company be wound up, which is then carried into effect by an officer of the court, the liquidator, who

does the things that I have identified in order to liquidate the company's assets and wind up its affairs. In referring to `winding up' or to the company being `wound up', and to the manner and the incidents of doing so, s. 601 therefore speaks not of proceedings aimed at obtaining an order of court to wind up the company but of the process that ensues from and follows such an order. Leaving aside the case of a successful appeal, winding up thus `starts' when, and not before, an order to wind up is made appointing a liquidator.'' The collection of activities thus generally described constitutes the ``winding up'' with which s. 5G(8) is concerned. As in the case of s. 5G(4), the effect of s. 5G(8) is to cause the Corporations Act provisions as to the carrying out of the winding up process to yield in a comprehensive way that has no territorial quality distinct from the overall reach of that Act. 98. I return now to the threshold issue whether s. 5G(3) causes s. 5G to apply to the interaction between the Corporations Act (or provisions of it) on the one hand and a particular State or Territory provision on the other. So far as concerns the possibility addressed by item 1 in the first column of the table in s. 5G(3), the first question is whether the State or Territory provision is, in terms of s. 5G(12), a ``precommencement (commenced) provision''. The answer depends on factors mentioned in s. 5G(12). These will be considered in relation to the several State and Territory cut-through provisions when the impact of Part 1.1A in relation to them is assessed. 99. Pending that assessment and in order to complete the consideration of item 1 in the table in s. 5G(3), I consider next the conditions in the third column of the table applicable to item 1. The first of those conditions (condition (a)) is that the State or Territory provision operated, immediately before commencement of the Corporations Act on 15 July 2001 ``despite the provisions of... the Corporations Law of the State or Territory (as in force at that time)''. Attention is thus directed to the nature of the interaction, immediately before that commencement, between the particular State or Territory provision and the provisions of the Corporations Law of the State or Territory in question. For condition (a) to be satisfied, the interaction

must be found to be such that the State or Territory provision operated ``despite'' the provisions of that Corporations Law. The ``despite'' formulation makes it necessary to look at the ways in which the several Corporations Laws were brought into effect and applied. 100. The Corporations Act of the Australian Capital Territory was a creation of the Commonwealth Parliament. Section 5 of the Corporations Act 1989 (Cth) stated that the Corporations Law set out in s. 82 of that Act ``applies as a law for the government of the Capital Territory'' and ``as so applying, may be referred to as the Corporations Law of the Capital Territory''. The provisions of that Corporations Law were thus provisions of a Commonwealth Act enacted for the government of the particular Territory of the Commonwealth. The relationship between that Corporations Law and laws of the Australian Capital Territory was dealt with in s. 10 of the Corporations Act 1989 (Cth). Section 10 was in the following terms: ``10. Relationship between the Corporations Law, and the Corporations Regulations, of the Capital Territory and the laws of the Capital Territory (1) In this section: `the Law' means the Corporations Law, and the Corporations Regulations, of the Capital Territory. (2) The object of this section is to avoid or resolve inconsistencies between the Law and the laws of the Capital Territory. (3) Subject to this section, the Law has effect despite anything in a law of the Capital Territory. (4) Regulations under section 73: (a) may provide that specified laws of the Capital Territory have effect despite the Law or specified provisions of the Law; and (b) may provide that the Law, or specified provisions of the Law, has or have effect with such modifications as the regulations prescribe.

(5) Regulations that are made under section 73 and take effect within 12 months after the commencement of this section may amend or repeal laws of the Capital Territory. (6) Regulations in force because of subsection (4) or (5) have effect accordingly. (7) Nothing in subsection (2) affects the validity of regulations purporting to be made under section 73.'' 101. Section 11 went on to deal with particular matters, one of which, as will be seen presently, is of relevance to this proceeding. The several provisions of s. 11 declared various provisions of the Corporations Law of the Australian Capital Territory to have effect ``as provided in'' or ``subject to'' specified provisions of Australian Capital Territory Law. 102. In the case of each State and the Northern Territory, the corresponding matters were dealt with by the jurisdiction's own corporations statute of 1990 (ie the Corporations (New South Wales) Act 1990 (NSW) and correspondingly named Acts of the other States and the Northern Territory). In relation to the matters now under discussion, these Acts were uniform. Each caused the Corporations Law set out in s. 82 of the Corporations Act1 1989 (Cth) to apply as a law of the State or Territory and stated that that Corporations Law, as so applying, might be referred to as the Corporations Law of the State or Territory. Each such Act contained a definition of ``applicable provision''. That term included, in relation to a jurisdiction, a provision of the Corporations Law of that jurisdiction. The provisions of the Corporations Law of the particular State or the Northern Territory were thus ``applicable provisions'' of that jurisdiction. Sections 5 and 6 of the Corporations (New South Wales) Act 1990 (NSW) — which I quote to illustrate the corresponding working of each other like Act — were as follows: ``This Act and applicable provisions of New South Wales not to be affected by later State laws 5. (1) An Act enacted, or an instrument made under an Act, after the commencement of this section is not to be interpreted as

amending or repealing, or otherwise altering the effect or operation of, this Act or the applicable provisions of New South Wales. (2) Subsection (1) does not affect the interpretation of an Act, or of an instrument made under an Act, so far as that Act provides expressly for that Act or instrument, as the case may be, to have effect despite a specified provision, or despite any provision, of this Act or the applicable provisions of New South Wales. Operation of other New South Wales laws 6. Except as otherwise provided in this Act, nothing in this Act or the applicable provisions of New South Wales affects the operation after the commencement of this section of an Act enacted before that commencement or of an instrument made under such an Act.'' 103. The ``despite'' specification in condition (a) in the third column against item 1 in the table in s. 5G(3) of the Corporations Act 2001 (Cth) must be understood against the background of this pre-existing legislative scheme. For each State and Territory, the provisions of the Corporations Law were, in general terms, to prevail over subsequent and inconsistent provisions of laws of the particular jurisdiction, unless expressly afforded precedence by legislation being, in the case of the Australian Capital Territory, a provision of the Corporations Act 1989 (Cth) itself or a regulation of the kind referred to in s. 10(4) and, in the case of a State or the Northern Territory, a provision satisfying s. 5(2) of the local corporations statute of 1990. Pre-existing and inconsistent local provisions were dealt with differently. For the Australian Capital Territory, s. 11 of the Corporations Act 1989 (Cth) gave specific provisions of other legislation precedence over the Corporations Law of the Australian Capital Territory. For the States and the Northern Territory, s. 6 of each corporations statute of 1990 ceded continuing operation to pre-existing provisions generally, unaffected by Corporations Law provisions. 104. Returning to the conditions in the third column against item 1 in the table in s. 5G(3) of the Corporations Act 2001 (Cth), it will be seen that the second condition (condition (b)) entails the absence of any

regulation made under the Act and any law of the particular State or Territory declaring the State or Territory provision in question to be one to which s. 5G does not apply, either generally or specifically in relation to the corresponding provision of the Corporations Act 2001 (Cth). 105. If a particular State or Territory provision is of the kind specified in the second column against item 1 in the s. 5G(3) table and satisfies the conditions in the second column, the consequence is that s. 5G applies to the interaction between the State or Territory provision and a provision of the Corporations Act itself. 106. Having examined the general workings of ss. 5E, 5F and 5G of the Corporations Act, I now proceed to consider their application in relation to the State and Territory cut-through provisions. Impact of ss. 5E and 5F on State and Territory cut-through provisions 107. For reasons outlined at paragraph 71 above, I do not consider that any of the State and Territory cut-through provisions is capable of concurrent operation with ss. 555, 556 and 562A of the Corporations Act 2001 (Cth). The State and Territory provisions are therefore not accommodated by s. 5E. Provisions within Classes A, B and C cause the chose in action against the relevant reinsurer that would otherwise be part of the property of the company for the purposes of s. 555 to be denied to the company and therefore to be unavailable for the purposes of implementing s. 562A. Class D provisions, by contrast, leave intact the matters dealt with by Class A, B and C provisions but cut across both the application of assets in accordance with s. 555 and the scheme of priorities laid down by s. 556. There is accordingly, in each case, a situation of ``direct inconsistency'' for the purposes of Part 1.1A, with the result that it is necessary to consider whether s. 5F or s. 5G allows the State and Territory provisions to operate. 108. Section 5F may be dealt with shortly. As discussed at paragraphs 87 to 92 of these reasons, that section can do no more than to cause a Corporations Act provision not to apply ``in'' a particular State or Territory ``to''(or ``in relation to'') a particular matter. Because the relevant sections of the Corporations Act (ss. 555, 556 and 562A) do

not have any distinct and separate territorial operation susceptible to that kind of displacement, s. 5F can play no role in reconciling those provisions and the State and Territory cut-through provisions. Impact of s. 5G on State and Territory cut- through provisions: ``pre-commencement (commenced) provision'' 109. It is therefore necessary to focus upon the applicability of s. 5G. The first question here is whether each State and Territory cutthrough provision is a ``pre-commencement (commenced) provision''. Because each had been enacted and was in force immediately before commencement of the Corporations Act 2001 (Cth) on 15 July 2001, it satisfies paragraph (a) of the definition of ``pre- commencement (commenced) provision'' in s. 5G(12). It will also satisfy paragraph (b) of the s. 5G(12) definition — and therefore be a ``pre- commencement (commenced) provision''— if it has not been ``materially amended'' after commencement, a matter to be determined by reference to ss. 5G(15), 5G(16) and 5G(17). Two of the provisions have been amended since commencement, as noted at paragraphs 42 to 45 above. It is therefore necessary to examine the amendments against the ss. 5G(15), 5G(16) and 5G(17) criteria. 110. In the case of s. 40 of the Workers Compensation Supplementation Fund Act 1980 (ACT), the amendments by which references to s. 556 of the Corporations Law were replaced by references to the corresponding provision of the Corporations Act are within s. 5G(16)(a) and therefore outside the ``materially amended'' concept. The amendments made by the Workers Compensation (Acts of Terrorism) Amendment Act 2002 (ACT) merely substituted new nomenclature. The references to ``insurer'' were replaced by references to ``approved insurer''; and the references to ``employer's policies'' were replaced by references to ``compulsory insurance policies''. These changes, while going beyond the limits contemplated by s. 5G(16) are within the limits referred to in s. 5G(17), as they do nothing to vary the range of persons, acts and circumstances to which any Corporations Act provision applies. Having regard to s. 5G(15), a conclusion that a provision is ``materially amended after commencement'' depends on a finding that neither s. 5G(16) nor s. 5G(17) applies to it. No such finding is warranted in relation to any of

the amendments made to s. 40 of the Workers Compensation Supplementation Fund Act 1980 (ACT) since 15 July 2001. 111. The amendments made to s. 36 of the Employers Indemnity Supplementation Fund Act 1980 (WA) after 15 July 2001 entailed substitution of references to s. 556 of the Corporations Act for references to s. 441 of the Companies (Western Australia) Code in s. 36(1) and s. 36(2) and insertion of the new sub- s. (4) purporting to declare payment of an amount under s. 36(1) or s. 36(2) to be an ``excluded matter'' for the purposes of s. 5F of the Corporations Act. I do not consider the added s. 36(4) to have any meaningful operation. It is a provision obviously designed to capture the benefit of s. 5F by embodying a declaration in terms of s. 5F(1). But for reasons I have stated at paragraphs 87 to 92 above, s. 5F cannot operate to give s. 36 of the Western Australia Act precedence over the winding up provisions of the Corporations Act of the Commonwealth. I therefore proceed on the basis that, although s. 36(4) was inserted into the text of the Western Australia Act, it really has no effective operation and therefore cannot, in any realistic sense, be regarded as having amended (in the sense of modifying the ongoing operation of) any provision in force immediately before 15 July 2001. For that reason — and because, in any event, each of s. 36(1) and s. 36(2) may itself be regarded as a distinct ``provision'' for the purposes of s. 5G of the Corporations Act (see the s. 9 definition of ``provision'' in relation to a ``law'', the general meaning of which is indicated, although not fixed, by the note to the s. 9 definition of ``law'') — the questions posed by ss. 5G(16) and 5G(17) in relation to the amendments since 15 July 2001 should be approached solely by reference to the amendments to s. 36(1) and s. 36(2) being, in each case, the substitution of the reference to s. 556 of the Corporations Act for the reference to s. 441 of the Companies (Western Australia) Code. 112. Taken at face value, that substitution is not within s. 5G(16)(a) because the reference replaced by a reference to a provision of the Corporations Act was not a reference to a provision of the Corporations Law. It was a reference to a provision of the Companies (Western Australia) Code. But closer analysis shows, I think, that the change is in reality within s. 5G(16)(a). Section 90(4) of the

Corporations (Western Australia) Act 1990 (WA) provided: ``Subject to subsection (4) and to any regulations in force under subsection (7), a reference in an instrument to a provision of a cooperative scheme law or of Code regulations is to be taken to include a reference to the corresponding provision of a national scheme law of this jurisdiction or of the Corporations Regulations, or ASIC Regulations, of Western Australia as the case may be.'' By virtue of ss. 80(1) and 13 of that Act, the reference to an ``instrument'' in s. 90(4) included a reference to a Western Australia Act. There being no relevant impact by s. 90(4) or regulations in force under s. 90(7), it follows, in light of the meanings given to ``national scheme law'', ``co-operative scheme law'' and ``corresponding provision'', that the effect of s. 90(4) of the Corporations (Western Australia) Act was to cause the references to s. 441 of the Companies (Western Australia) Code in s. 36 of the Employers Indemnity Supplementation Fund Act 1980 (WA) to be read as including references to s. 556 of the Corporations Law of Western Australia as from the commencement of the Corporations (Western Australia) Act 1990 (WA) on 1 January 1991. The substitution of reference to s. 556 of the Corporations Act by the amending Act of 2003 must therefore be taken to be within the limits contemplated by s. 5G(16)(a) of the Corporations Act. 113. In the end, therefore, the conclusion is that neither the Australian Capital Territory provision nor the Western Australia provision has been ``materially amended since commencement'' and that each of the nine State and Territory cut-through provisions is, for the purposes of s. 5G, a ``pre-commencement (commenced) provision''. The nature of the interaction between each such provision and a provision of the Corporations Act must therefore be determined by reference to item 1 in the table in s. 5G(3). Impact of s. 5G on State and Territory cut- through provisions — item 1, condition (a) 114. The next step is to consider each of the State and Territory cutthrough provisions in the light of the conditions in the third column against item 1 in the table in s. 5G(3). The question posed by

condition (a) is whether, immediately before commencement of the Corporations Act on 15 July 2001, it ``operated... despite'' the provision of the Corporations Law of the State or Territory in question corresponding to the provision of the Corporations Act interaction which is being considered. The several State and Territory provisions need to be considered separately for this purpose. 115. I begin with the Australian Capital Territory provision, being s. 40 of the Workers Compensation Supplementation Fund Act 1980. Immediately before commencement of the Corporations Act 2001 (Cth) on 15 July 2001, s. 40 operated ``despite'' Division 6 of Part 5.6 of the Corporations Law of the Australian Capital Territory. This is because of s. 11(2) of the Corporations Act 1989 (Cth): ``Division 6 of Part 5.6 of the Corporations Law of the Capital Territory has effect subject to section 40 of the Workmen's Compensation Supplementation Fund Act 1980 of that Territory.'' Condition (a) is therefore satisfied in relation to s. 40 of the Workers Compensation Supplementation Fund Act 1980 (ACT). 116. Dealing with the remainder of the provisions and having regard to s. 5 and s. 6 of the 1990 corporations statute of each State and the Northern Territory, it is first necessary to determine, for the purposes of condition (a), when each of the State and Territory cut- through provisions was enacted. This is because s. 5 and s. 6 of each of those statutes distinguish between Acts enacted before the commencement of the 1990 statute on 1 July 1991 and those enacted after that commencement. Acts amending existing Acts are clearly relevant to this. Five of the State and Territory cut-through provisions — s. 235 of the Workers Compensation Act 1987 (NSW), s. 98(3) of the Workers Compensation Act 1958 (Vic), s. 129 of the Workers Rehabilitation and Compensation Act 1988 (Tas), s. 137(3) of the Work Health Act (NT) and s. 36 of the Employers Indemnity Supplementation Fund Act 1980 (WA) — were enacted before 1 January 1991. By virtue of s. 6 of the 1990 corporations statute of the relevant State or the Northern Territory, therefore, the continued operation of each of those five provisions after 1 January 1991 without interference from the Corporations Law of the relevant jurisdiction was assured. That, in

turn, means that each such State or Territory provision, in the words of condition (a), ``operated, immediately before this Act commenced, despite'' the potentially conflicting provisions as to winding up in the Corporations Law of the relevant State or the Northern Territory. 117. The three remaining cut-through provisions — s. 191 of the Motor Accident Compensation Act 1999 (NSW), s. 103V of the Home Building Act 1989 (NSW) (inserted by the Insurance (Policyholders Protection) Legislation Amendment Act 2001 (NSW)) and s. 61 of the Motor Accident Insurance Act 1994 (Qld) — were all the product of Acts enacted after 1 January 1991. Immediately before 15 July 2001, therefore, the interaction of each such provision with the Corporations Law of the relevant State was as specified in s. 5 of the 1990 corporations statute of that State. According to s. 5(1) in each case, the Act by which the cut-through provision was introduced was ``not to be interpreted as... altering the effect or operation of'' the State's Corporation Law, except insofar as the Act introducing the cut-through provision ``provides expressly for that Act... to have effect despite a specified provision, or despite any provision'' of the State's Corporations Law. 118. It was not suggested in submissions that the relevant introducing Act (or, for that matter, any other Act) of the relevant State said in explicit terms, by means of references to enactments by name, that any of these three provisions was ``to have effect despite'' Corporations Law provisions. Rather, there was reliance in the submissions on general principles of statutory interpretation, in particular the principle that a later specific enactment must be taken to qualify the operation of an earlier general enactment. It is necessary to decide whether such matters of implication are sufficient to meet the ``provides expressly'' requirement of s. 5(2). 119. In general, one would be inclined to think that a formulation employing the words ``provides expressly'' was not satisfied by something that did not, in direct and explicit terms, make the specified provision by direct words. But, as authority binding on me shows, that is too simplistic a view. In Public Service Association of New South Wales v Industrial Commission of New South Wales (1985) 1 NSWLR 627, the Court of Appeal was called upon to interpret s. 8 of the Public

Service Act 1978: ``Unless otherwise expressly provided, nothing in this Act affects the Industrial Arbitration Act 1940.'' Having regard in particular to the approach taken by Kitto, Taylor and Owen JJ in Rose v Hvric (1963) 108 CLR 353, the members of the Court of Appeal held that, notwithstanding s. 8, the Public Service Act could effectively impinge upon the Industrial Arbitration Act by negative implication. Kirby P, speaking of the phrase ``otherwise expressly provided'' in s. 8 said: ``Clearly, if it means `expressly' by specific reference to the Industrial Arbitration Act 1940, the provisions in the Public Service Act do not so provide, for there is no reference, in terms, in the latter to the former. There is some authority that suggests the need to make an express and specific reference to the competing statute in order to derogate from it: see Maughan AJ in Watt v Geddes (1936) 36 SR (NSW) 447; 53 WN 161. However, there is a great deal of authority to the contrary. This suggests that it is not necessary to refer to the statute by name in order `expressly' to provide in respect of it: see Re Silver Brothers Ltd; AttorneyGeneral for Quebec v Attorney- General for Canada [1932] AC 514 at 522-523. In Rose v Hvric (1963) 108 CLR 353, the High Court of Australia suggested that the word `expressly' in provisions analogous to the present legislation, was satisfied if `the necessary result of the operation of one Act would be to affect the operation of the other'. A distinction was drawn between a `mere inference' from an enactment and the enactment itself (ibid at 358): `... The contrast is between, on the one hand, a conclusion from what has been enacted that a further provision is a logical next step, the legislature not having taken that next step for itself, and, on the other hand, a conclusion that a provision which has been made means more than it explicitly says... Explicit or implicit contradiction is efficacious; merely ``inferential contradiction''... is not.'''

120. Kirby P took the view that effect would be afforded to s. 8 ``by limiting the competition of the Public Service Act to explicit and implicit contradiction and excluding inferential contradiction''. Priestley JA likewise saw the relevant question as whether the meaning of the operative provisions said to affect the Industrial Arbitration Act ``is, by way of negative implication, that the functions and powers they create are to be exercised under that Act by the persons mentioned in them and no other persons''. Street CJ also regarded a negative implication as sufficient to satisfy the ``otherwise expressly provided'' condition. 121. The three provisions of State law with which I am currently concerned carry a clear negative implication. Each made specific provision concerning administration of the winding up of a company of a particular kind (that is, an insurer providing insurance for the purposes of the particular statutory scheme) that could only be meaningful if the otherwise applicable Corporations Law provisions were displaced and overridden. The negative implication against the continued operation of the Corporations Law provisions was central to each provision. In the words used in Rose v Hvric, ``the necessary result of the operation of one Act would be to affect the operation of the other''. In these circumstances, I consider the correct approach to be that which regards each of the three State provisions as one which, although made effective by an Act enacted by the Parliament of the State after the commencement of its 1990 corporations statute, ``provides expressly'' for the consequences the provision envisages ``despite'' the inconsistent Corporations Law provisions of general application. 122. Condition (a) in the third column of item 1 in the table in s. 5G(3) is accordingly satisfied in relation to each of the eight cut- through provisions of the States and the Northern Territory — in one case for the reasons stated at paragraph 115 above, in four cases for the reasons stated at paragraph 116 and in three cases for the reasons stated at paragraphs 117 to 121. 123. This conclusion, combined with the absence of any regulation or other provision relevant to condition (b), means that each of State and Territory cut-through provisions is a provision of the kind in the second column of item 1 in the s. 5G(3) table in respect of which both

conditions in column 3 are met. Each such provision is accordingly one to whose interaction with a provision of the Corporations Act s. 5G applies. Conclusions on the Corporations Act issues 124. I now record in summary form the conclusions reached with respect to the interaction between the State and Territory cut- through provisions and ss. 555, 556 and 562A of the Corporations Act 2001 (Cth). First, each of the cut-through provisions will be adversely affected by s. 109 of the Constitution unless one of s. 5E, s. 5F and s. 5G of the Corporations Act operates in relation to its interaction with the substantive Corporations Act provisions. Second, neither s. 5E nor s. 5F so operates. Third, however, the interaction is, in each case, one to which s. 5G of the Corporations Act applies by virtue of s. 5G(3). This is because the State or Territory provision is, in each case, both a provision of the kind referred to in the second column against item 1 in the table in s. 5G(3) and a provision that satisfies the conditions in the third column against that item 1. 125. The fourth and final conclusion is therefore that (a) none of s. 555, s. 556 and s. 562A of the Corporations Act prohibits the doing of an act or imposes a liability for doing an act where one of the State and Territory cut- through provisions specifically authorises or requires the doing of that act (s. 5G(4)); and (b) the provisions of Chapter 5 of the Corporations Act (including s. 555, s. 556 and s. 562A) do not apply to the winding up of any of the HIH companies to the extent to which the winding up is carried out in accordance with any of the State and Territory cutthrough provisions (s. 5G(8)). 126. There are no doubt questions to be addressed as to the precise implications of this fourth conclusion. Apart from anything else, there are likely to be questions about what is within the scope of the words ``specifically authorises or requires'' in s. 5G(4) and about the effect of ``to the extent to which'' and ``in accordance with'' in s. 5G(8). These, however, are not matters than can usefully be dealt with at this stage.

The subrogation issues 127. It was submitted on behalf of the liquidators that, apart altogether from the cut- through provisions of State and Territory legislation, the several statutory authorities which make substitute payments to persons holding policies issued by the HIH companies are, simply by virtue of the making of those payments, entitled by subrogation to certain rights of a preferred kind in the winding up of the HIH companies. The general principle upon which reliance is placed is, in effect, that a person (A) who discharges a liability of another (B), in circumstances where that other (B) has some right of reimbursement or recoupment in respect of the liability as against a third person (C), is regarded by equity as succeeding to that right. In cases where such a principle is asserted, ``... the quest always is to isolate that attribute of the relations between A, B and C... which makes A more than a stranger to the nexus between B and C and generates in his favour an equity satisfied only by requiring B to pursue his legal rights against C for the benefit of and at the direction of A.'' (Meagher, Gummow and Lehane's ``Equity Doctrines and Remedies'', 4th edition (2002), p. 352.) 128. In support of the contentions concerning subrogation, the liquidators rely heavily on the decision of Crockett J in Re Palmdale Insurance Ltd (No 3) (above). That case involved two insurance companies in the course of insolvent winding up. Certain claims under workers compensation policies issued by the companies had been met and paid by statutory authorities required by State and Territory legislation to meet the claims. That matter is described as follows in the judgment (at 442): ``In each State and Territory of the Commonwealth there was either prior to the making of orders for winding up in existence or subsequent thereto enacted with retrospective effect legislation that made provision for payment of workers compensation to claimants whose employers held policies of workers compensation with one or other of the companies. Pursuant to those enactments such payments have been made and have

been so made by the particular authority (`insurance Commissioner') prescribed by the particular statute or ordinance as being subject to the liability to meet the claim. Although the object of each enactment is the same the technique adopted for its implementation and the language in which it is expressed varies for the most part from one enactment to another. It was for this reason that (apart from the Insurance Commissioner of Western Australia — actually described as `The Workers' Assistance Commission of the State of Western Australia' — who was unrepresented) in the proceedings before me each Insurance Commissioner, other than those in Victoria and Tasmania, was separately represented. Thus, in the case of each claim in the windings up made pursuant to a workers compensation policy, as it has not been the employer but the relevant Insurance Commissioner who has discharged the liability created by the claim, the Insurance Commissioners maintain that they are accordingly subrogated to the rights of the employer and so have bestowed on them a right in law to be recouped in respect of the discharged liability out of the assets of the companies in liquidation.'' 129. The claim of each insurance commissioner extended beyond a claim ``to be recouped in respect of the discharged liability out of the assets of the companies in liquidation''. It was a claim to have recoupment in the way in which the insured employer would have been entitled to recoupment by reference to s. 292(5) of the Companies Act 1961 (Vic), the application of which was also in issue in the proceedings. Section 292(5)(the equivalent of which, in the Corporations Act 2001 (Cth), is s. 562) provided that, where the company in the course of winding up was insured against a liability to a third party, such a liability was incurred and an amount in respect of the liability was received by the company or the liquidator from the insurer, the amount received was, after deduction of expenses, to be paid by the liquidator to the third party to the extent necessary to discharge the liability to the third party, such payment being in priority to other payments in the winding up. The claims of the insurance commissioners were thus claims to be subrogated to the statutory rights in the winding up conferred by this section upon the insured

employers whose workers compensation liabilities the insurance commissioners had discharged in accordance with statutory requirements that they do so. 130. The claims by the insurance commissioners based on subrogation were successful. Crockett J dealt with the matter thus (at 446): ``The right to be so subrogated was said to arise from the application of general principles or alternatively from the express or implied right to be so subrogated conferred by Act of Parliament and to be found in the various statutory provisions of each of the States and Territories. Counsel for each of the represented Insurance Commissioners relied principally upon the general law to support their claim to a right of subrogation. This was because in the case of some of the statutory provisions no express right of subrogation was granted to the Insurance Commissioner and it might have been difficult to imply a statutory creation of the right. Then, even in the case of the statutory creation of the right it was thought that (save for the case of the Victorian legislation) in a winding up in Victoria the law to be applied, including Victorian private international law, might not include the statutory provisions of other jurisdictions. However, as I understood them, counsel for each of creditors other than the Insurance Commissioners did not contend that the Insurance Commissioners were not subrogated to the rights of the third parties (employers). Nor, in my opinion, could they realistically have done so. The present is a classic case of its being just and equitable that the Insurance Commissioner should have the benefit of the remedy of subrogation. Such a remedy will be granted where one unofficiously confers a benefit on another such as the payment of money and it is just in all the circumstances that the former should be allowed to have the benefit of the latter's rights in order to prevent his unjust enrichment: see Goff and Jones, The Law of Restitution, 2nd ed., p. 406. The right of subrogation is a remedy designed to transfer rights from one person to another by operation of law: Orakpo v Manson Investments Ltd [1978] AC 95, at p. 104, per Lord

Diplock.'' 131. Central to the conclusion reached by Crockett J was the notion that equitable principle may operate to supplement specific statutory provisions conferring a right of recoupment and recourse. In some cases, it seems, there was no such statutory right, while in others there was an apprehension that because the statutory right derived from legislation of a State or Territory other than Victoria (the law of which governed the winding up), it was ineffective to bind the company and the liquidator. 132. This notion should, I think, be approached with caution in the present case. The question whether statutory rights and remedies coexist with general law rights and remedies or supplant them is, in every case, to be answered by construing the statute. It will sometimes be clear that the statute aims merely to supplement a general law right or to assist the vindication of that right. On other occasions, the statute will evidence an intention of creating a substituted right or remedy. 133. On the whole, it seems to me that the several cut-through provisions of State and Territory law, as they operate with the assistance of s. 5G of the Corporations Act, are of a substitutional kind. In the first place, there is not here, as there was in the Palmdale case, doubt as to the territorial reach and effect of the cut-through provisions. According to the analysis I have made, they are all effective to change the course of events that would otherwise flow from ss. 555, 556 and 562A of the Corporations Act. Second, each cut-through provision now in issue deals comprehensively with the nature and extent of the statutory authority's recourse in respect of reinsurance referable to claims met by it in accordance with its statutory duties. There does not seem to me to be any gap that needs to be filled by reference to general equitable principle. An attempt by a body akin to the statutory authorities involved here to enhance or supplement a clear and comprehensive statutory scheme of recoupment by resort to general law principles was unsuccessful in Skandia America Reinsurance Corporation v Schenck 441 F Supp 715 (1977).

134. Third and, I think, most significantly, the position to which the statutory authorities would seek to succeed by subrogation is, in the present statutory context, a position under s. 562A of the Corporations Act, that being the provision that here plays the role of s. 292(5) of the Companies Act 1961 in the Palmdale case. The effect of the cutthrough provisions, however, is to create either a new and special right in respect of the reinsurance that is inconsistent with the effectuation of s. 562A in relation to the particular payment or a new and special right to participate in the winding up that is superior to the s. 562A right. Section 562A operates only if an amount is received by the company or its liquidator under a contract of reinsurance. This is the effect of s. 562A(1)(b). The section then addresses in s. 562A(2) and (3) two alternative possibilities, namely, that the amount received, after deducting expenses, equals or exceeds the amounts payable by the company under relevant insurance contracts; and that the net amount received is insufficient to cover all such amounts. In the first situation, persons covered by the relevant insurance contracts have a priority right to the net reinsurance recovery limited, however, to their entitlements under insurance contracts. In the second situation, there is a priority right to a proportion of the net recoveries pro rata according to entitlements under insurance contracts. Under a Class A cut-through provision, on the other hand, the statutory right is a right directed towards recovery from the reinsurer of ``the amount due under'' the reinsurance contract being, it appears, the whole of the amount (although limited by the ``extent'' of the payments out of the statutory fund) without regard for any margin by which the total recoverable under the reinsurance is less than the total involved in the insurances the subject of the reinsurance. This is one example of the way in which the specific statutory schemes are incompatible with the concept of mere succession by subrogation to independently existing s. 562A rights. The incompatibility exists, however, in relation to each statutory scheme. 135. In short, I do not see how an authority or body given by statute a special right or position in relation to reinsurance that differs from and is superior to that afforded to an insured holding a policy of the class to which the reinsurance relates can disregard that special right or position and somehow fall back on a derivative position claimed

through that insured. 136. Directions given to the liquidators in relation to the matters on which they seek guidance should therefore be formulated without reference to the operation of the principles of subrogation discussed in the Palmdale case. Framing the directions 137. It was agreed at the conclusion of the hearing of the liquidators' application for directions under s. 479(3) that formulation of the precise terms of any directions should await my conclusions on the matters of substance with which these reasons deal. Those terms will depend in part on those conclusions and in part on features of the actual wording of the State and Territory provisions. I have not attempted, at this point, to deal with the latter matter comprehensively. 138. The appropriate course now will be for the liquidators to give consideration to the form of the directions they will ask the court to make in light of the matters covered in these reasons. The liquidators' second further amended originating process will be stood over to allow further submissions to be assembled and made. 139. It remains only to emphasise the nature and effect of directions under s. 479(3). Despite the fact that State and Territory authorities became parties to the liquidators' application (or, in some cases, were heard without becoming parties), the jurisdiction invoked by the liquidators is the jurisdiction created by s. 479(3). It is a jurisdiction available only to liquidators. Directions eventually made by the court will accordingly have no operation inter partes. I respectfully adopt, in this connection, the following description of the jurisdiction and its implications in the judgment of Pullin J in Australian Securities and Investments Commission v Rowena Nominees Pty Ltd (2003) 45 ACSR 419 at 422-3: ``An application for directions under s 479(3) of the Corporations Act 2001 is an administrative non-adversary proceeding: Re Murphy & Allen; Re BPTC (in liq) (1996) 19 ACSR 569; at 570. Directions given under s 479 (3) will protect the liquidator against subsequent allegations of breach of duty if the liquidator has

made full disclosure of the facts, but no binding determination of substantive issues can be made under this provision: see Re G B Nathan, above [ (1991) 24 NWSLR 674], Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742; the authorities cited by Goldberg J in Re Ansett Australia Ltd (2001) 39 ACSR 355; at [59]; and Re Murphy & Allen, above, at 570. As a result, nothing that I have said about the background circumstances, and no directions I give, will have any binding effect in relation to proceedings between Rowena and the growers, and nor will it resolve any legal issues which may exist between Rowena and lenders (who might be identified).''

Woodgate v Davis (2002) 20 ACLC 1,314 Court citation: [2002] NSWSC 616 Supreme Court of New South Wales. Judgment handed down 12 July 2002 Corporations — External administration — Recovering property or compensation for benefit of creditors of insolvent company — Director liable to compensate company — Recovery of property for loss arising from insolvent trading — Recovery by liquidator — Companies carrying on business in partnership — Whether partnership debts recoverable — Corporations Act 2001, sec 9, 588G, 588M — Partnership Act 1892 (NSW), sec 9 — Bankruptcy Act 1966, sec 110. The liquidator of two companies which carried on business in partnership commenced proceedings against the former sole director of those companies under sec 588M of the Corporations Act 2001. It was alleged that the former director failed to prevent the companies from incurring debts at a time when the companies were insolvent, in contravention of sec 588G. A paragraph of the former director's defence pleaded that sec 588G and 588M were not available because the debts were incurred by the

partnership. These proceedings were concerned with the determination of a separate question as to whether that paragraph in the defence provided a complete defence to the statement of claim. In these proceedings, the former director argued that: • where a company was a member of a partnership and debts were incurred in such circumstances as to be ``debts and obligations of the firm'' for the purposes of sec 9 of the Partnership Act 1892 (NSW), sec 588G and related provisions were inapplicable to directors of that company in respect of those debts; • when a partner became subject to the joint liability referred to in sec 9 in respect of the partnership debt, it could not be said that the partner thereby ``incurs a debt'' within the meaning of sec 588G. The only ``incurring'' was an incurring by the partnership; • to allow the recovery against the former director would be a subversion of the natural order of things in insolvency. Section 553E of the Corporations Act applied the Bankruptcy Act 1966 to the winding up of an insolvent company, including sec 110 of that Act. Pursuant to sec 110, partnership creditors were only entitled to partake in a distribution of the assets of the separate estate of a partner (corporate or otherwise) after all the creditors of the separate estate had been satisfied. So that, partnership creditors only had an entitlement to the surplus, if any, in the separate estate; and it was the joint estate which was to be applied in the first instance to meet joint debts; and • sec 588G liability operated in the partnership context only in the cases contemplated by Pt 5.7, with the result that it did not apply independently to or in relation to a company which was a partner, at least so far as its liability for partnership debts was concerned. Held: separate question answered in the negative. 1(a). Whether a partner's liability for partnership debts be regarded as joint or several, each partner should be regarded as indebted for the

full amount of the partnership debt. 1(b). A partner which was a company ``incurs a debt'' when one of the partners, or someone else acting with the authority of the partners (or of a partner), acted within the scope of the partnership business in such a way as to give rise to a payment obligation which became one of the ``debts and obligations of the firm'' referred to in sec 9 of the Partnership Act. The submission that the only ``incurring'' was an incurring by the partnership could not be accepted. 2. Even if the recovery of property, by reference to sec 588G, was properly regarded, for bankruptcy purposes, as falling within the separate estate of the partner in liquidation, it could not be said that the consequences were so perverse and anomalous as to justify the conclusion that the Corporations Act could never have intended such recovery to be available. (Obiter) Money recovered from a director of a corporate partner by the liquidator of that corporate partner on account of the director's wrongful conduct in allowing a partnership debt to be incurred, bore a clear and close relationship to the partnership debt. It was quite conceivable that the compensation recovered would properly be regarded as received by the corporate partner (by its liquidator) ``on account of the firm'' and that such recovery acquired the character of joint estate. 3. Part 5.7 and the special meaning of ``company'' derived, for the purposes of Pt 5.7B (and thus sec 588G), from para (c) of the definition of ``company'' in sec 9 of the Corporations Act, were not intended to deal exhaustively with the position under sec 588G of companies which were members of partnerships. 4. Section 588G and related provisions served an important social purpose. They were intended to engender in directors of companies experiencing financial stress, a proper sense of attentiveness and responsible conduct directed towards the avoidance of any increase in the company's debt burden. The provisions were based on a concern for the welfare of creditors exposed to the operation of the principle of limited liability, at a time when the prospect of that principle resulting in loss to creditors had become real. Very clear words would be needed

to justify the conclusion that the underlying policy was displaced by the circumstance that the company operated not as a sole trader but in partnership; or that the directors of any company could exempt themselves from the need to be attentive and to act responsibly, on pain of personal liability to compensate, by the simple expedient of causing their company to carry on business in partnership. [Headnote by the CCH CORPORATE LAW EDITORS] MR Aldridge SC (instructed by PW Turk & Associates) for the plaintiffs. JT Svehla (instructed by Hugh & Associates) for the defendant. Before: Barrett J. Barrett J: Background 1. These proceedings concern the affairs of two companies, Chircan Holdings Pty Limited and Mahiya Holdings Pty Limited (respectively the second and third plaintiffs), which are in liquidation following earlier steps by their sole director, Mr Davis (the defendant), to place them in voluntary administration. The winding up is, in each case, of the kind deemed by s. 446A of the Corporations Act 2001 (Cth) to arise upon the passing of a resolution of creditors under s. 439C(c) and is accordingly a creditors voluntary winding up. Mr Woodgate (the first plaintiff) became liquidator of each company and remains in office. 2. The two companies carried on business in partnership. At the centre of the present litigation are claims that the defendant who, as I have said, was the sole director of each company, failed to prevent the company from incurring certain debts at a time when the company was insolvent and thereby contravened s. 588G of the Act in respect of each such debt. The plaintiffs seek, on this basis, to recover from the defendant pursuant to s. 588M a total of $3,373,038.58. 3. The defendant has filed a defence paragraph 17 of which is in the following terms: ``Further and in the alternative, in answer to all the matters

alleged in the Claim, the defendant says that the claims made by the first plaintiff or alternatively, the second plaintiff and the third plaintiff, or alternatively the first plaintiff, the second plaintiff and the third plaintiff, respectively are not maintainable as, on their proper construction, sections 588G and 588M of the Act are not available where the debts sued upon are those incurred by a partnership where all or one or more of the partners is a company.'' 4. On 13 May 2002, I made by consent an order that the following questions be determined as separate and preliminary questions pursuant to Part 31 Rule 2 of the Supreme Court Rules: ``1. Whether paragraph 17 of the Defence filed 14 February 2002 provides a complete defence to the Statement of Claim filed on 13 December 2001 (the `Claim'). 2. If the answer to question 1 is yes, whether the Claim should be dismissed or struck out.'' 5. In accordance with directions, written submissions in relation to these separate questions were filed by the parties. I heard supplementary oral argument on 1 July 2002 when Mr Svehla of counsel appeared for the defendant to argue that the questions should be answered in the affirmative and Mr Aldridge SC appeared for the plaintiffs to make submissions to the contrary. 6. The basic position Mr Svehla took by reference to a number of submissions to which I shall turn in due course is that, where a company is a member of a partnership and debts are incurred in such circumstances as to be ``debts and obligations of the firm'' as referred to in s. 9 of the Partnership Act 1892, s. 588G and related provisions of the Corporations Act can never apply to or in relation to directors of that company by reference to those debts. For that position to be sustainable, one of two propositions must be made good. It must be shown either that it is incorrect to regard the company as having incurred the debt (that being the act upon which s. 588G focuses) or that, for some other reason manifested on the face of the Corporations Act, s. 588G and related provisions are not concerned with the incurring of a debt by a company which is a partner in a partnership.

The ``incurring'' question 7. Section 9 of the Partnership Act is in the following terms: ``Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while the partner is a partner; and after the partner's death the partner's estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied, but subject to the prior payment of the partner's separate deeds.'' 8. When s. 9 speaks of ``debts and obligations of the firm'', it is referring to debts and liabilities of the collection of persons who make up the partnership, the ``firm'' being no more than those persons collectively: see s. 4. There are basically two ways in which the partners collectively may voluntarily undertake an obligation. They may act in concert or unison to bring about that result, for example, by all signing a loan agreement or some other engagement. Alternatively, they may acquiesce in arrangements of the usual kind under which, in the conduct of the partnership business, a particular partner or particular partners act for all (either personally or through agents such as employees) so that the actor or actors, both as principals and as agents for the remaining partners, enter into the relevant engagement. Partners are, after all, ``associated for... a common end and are agents for one another in its accomplishment'': Birtchnell v Equity Trustees Executors and Agency Co Ltd (1929) 42 CLR 384 per Dixon J. Each has ``prima facie actual authority to act as an agent of the firm and his other partners for the purposes of the business of the partnership'': Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1984) 155 CLR 541 per Mason, Wilson, Brennan, Deane and Dawson JJ. This is, in any event, the effect of s. 5 of the Act: ``Every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which the partner is a member, binds the firm and the other partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom the partner is dealing

either knows that the partner has no authority, or does not know or believe the partner to be a partner.'' 9. A central issue in this case is whether, when a partner becomes subject to the joint liability referred to in s. 9 of the Partnership Act in respect of a partnership debt, it is correct to say that, for the purposes of s. 588G of the Corporations Act, the partner thereby ``incurs a debt''. Mr Svehla submitted that the partner does not, and that the only ``incurring'' is an incurring by the partnership. 10. A pertinent factor is that the liability to which s. 9 refers is a joint liability, as distinct from a several liability or a liability that is both joint and several. That, at all events, is the position at law recognised by the statute, with the result that only one claim can be asserted in a common law action and, subject to the effect of s. 97 of the Supreme Court Act 1970 in the case of a judgment of this court, the single cause of action merges in the first judgment recovered. The rule historically applied in the Court of Chancery, however, was stated by Sir William Grant, Master of the Rolls, in Sumner v Powell (1816) 2 Mer 30 as follows: ``A partnership debt has been treated in equity as the several debt of each partner, though at law it is only the joint debt of all. But, there, all have had a benefit from the money advanced or the credit given, and the obligation to pay exists independently of any instrument by which the debt may have been secured.'' 11. Later elaboration is to the effect that the rule just stated is not of general application and that to say that a partnership debt is, in equity, always a several debt of each partner is to state too radical a proposition. As Lord Cairns LC explained in Kendall v Hamilton (1879) 4 App Cas 504, equity's approach was confined to administration of the assets of a partnership or of a deceased partner and did not mean ``... that a Court of Equity altered or changed a legal contract, but merely that the Court, in order, before distributing assets, to administer all the equities existing with regard to them, would go behind the legal doctrine that a partnership debt survived as a claim against the surviving partners only, and would give the creditor the benefit of the equity which the surviving partners

might have insisted on.'' (See also Re Hodgson; Beckett v Ramsdale (1885) 31 ChD 177.) 12. Whether a partner's liability for partnership debts be regarded as joint or several (or, as Dr Fletcher suggests at p 173 of the eighth edition (2001) of Higgins and Fletcher, ``The Law of Partnership in Australia and New Zealand'', is within ``a rule which falls between `joint' and `joint and several' liability''), the fact remains that the partner is exposed to action in respect of the whole amount of the debt and may suffer judgment accordingly, albeit in circumstances where contribution may be had from other partners. Each partner must accordingly be regarded as indebted for the full amount of a partnership debt. 13. The ``incurring'' concept must now be examined. That concept, as relevant to this context, has been considered in a number of cases. In Hawkins v Bank of China (1992) 10 ACLC 588; (1992) 26 NSWLR 562, Gleeson CJ regarded the word ``incurs'' in a predecessor provision of the companies legislation as ``apt to describe, in an appropriate case, the undertaking of an engagement to pay a sum of money at a future time...''. Kirby P said: ``The act of `incurring' happens when the corporation so acts as to expose itself contractually to an obligation to make a future payment of a sum of money as a debt.'' 14. The concept was further elucidated by Hodgson J in Standard Chartered Bank of Aust Ltd v Antico (1995) 13 ACLC 1,381; (1995) 38 NSWLR 290, particularly in the following passage: ``In my opinion, a company incurs a debt when, by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable. This formulation has three aspects which could cause difficulty in particular cases: first, as to whether the company has a choice whether to do (or omit) the Act or not; secondly, as to whether it is the act or omission, or something else, which renders the company liable for the debt; and thirdly, as to whether the company would otherwise (in any

event) have been liable for the debt.'' 15. These approaches, while they may present difficulties in particular cases, are clear. ``Incurring'' is the act or omission of the company through which exposure of it to a monetary obligation arises. 16. A company is, of course, incapable of performing an act except through human intermediation. The human actors may be persons such as corporators or directors whose collective actions amount to an act of the company itself. More commonly, the human actor is an agent acting with express or implied authority of the corporation. Employees fall into the latter category. Examination of the conduct of relevant agents of the company is thus necessary to decide, in a particular context, whether the company has acted in a particular way. 17. Acts arising in the course of carrying on the business of a partnership will generally be acts of an individual partner or acts of another person, such as an employee of the partners, having their authority. The effect of such an act, as among the partners, is stated in s. 6 of the Partnership Act: ``An act or instrument relating to the business of the firm, and done or executed in the firm-name, or in any other manner, showing an intention to bind the firm by any person thereto authorised, whether a partner or not, is binding on the firm and all the partners: Provided that this section shall not affect any general rule of law relating to the execution of deeds or negotiable instruments.'' 18. As is observed at p 164 of Higgins and Fletcher (above), this provision, in so far as it relates to acts done and instruments executed by a partner, does not add much to s. 5; and, in so far as it relates to the activities of a person who is not a partner, it is merely declaratory of the common law rules governing agency and the master and servant relationship. A corollary must be that, by becoming and remaining a partner, a person accepts that the legal consequences of acts of another partner and of employees and other agents engaged in the partnership business will, if performed within the scope of that business, be binding on the person by virtue of principles of agency. In the case of a partner which is a company, the consequences in terms

of liability for acts giving rise to a debt will be the same as where an employee of the company acts directly in that capacity to incur the debt for the company, save that the liability will be, at law, of the joint nature described in s. 9 of the Partnership Act. 19. On this basis, it seems to me impossible to conclude, by reference to principles of partnership law, that a partner which is a company never ``incurs a debt'' when a partner or someone else acting with the authority of the partners or of a partner acts within the scope of the partnership business in such a way as to give rise to a payment obligation which becomes one of the ``debts and obligations of the firm'' referred to in s. 9 of the Partnership Act. The partnership itself not being a person, I do not accept Mr Svehla's submission that the only ``incurring'' is an incurring by the partnership. Supposed anomalies 20. The main submission on behalf of the defendant under this general heading was that to allow recovery, by reference to s. 588G, from a director of a company which is a member of a partnership in respect of a debt which is a partnership debt involves, in effect, a subversion of the natural order of things in insolvency. This submission was advanced mainly by reference to the principle of bankruptcy law, enacted in s. 110 of the Bankruptcy Act 1966 (Cth) and imported by s. 553E of the Corporations Act, that partnership creditors can only partake in a distribution of the assets of the separate estate of a partner (corporate or otherwise) after all creditors of the separate estate have been satisfied — in other words, partnership creditors have an entitlement only to the surplus, if any, in the separate estate; and it is the joint estate which is to be applied in the first instance to meet the joint debts. 21. On this basis, it was said, it is wrong in principle to countenance accretion to the separate pool of assets in the hands of the liquidator of a corporate partner by order under a provision such as s. 588J(1), s. 588K(1) or s. 588M(2) — and even more wrong if the accretion is, under s. 588M(3), to the benefit of a single creditor to whom a partnership debt is due — out of the property of a director of the corporate partner. It is assumed here that the accretion, although

referable to the partnership or joint debt, is to the separate estate administered in the insolvency of one partner only, whereas the fund to which resort ought principally be had in respect of the debt is the joint estate. 22. The first part of that assumption should be briefly examined. Characterisation of property as joint estate or separate estate for the purposes of s. 110 of the Bankruptcy Act is a question of fact. In cases of partnership, joint estate is equated generally with partnership property and therefore includes property ``acquired, whether by purchase or otherwise, on account of the firm'': Partnership Act, s. 20(1). Money recovered from a director of a corporate partner by the liquidator of that corporate partner on account of the director's wrongful conduct in allowing a partnership debt to be incurred bears a clear and close relationship to that partnership debt. It is quite conceivable, therefore, that the compensation recovered would properly be regarded as received by the corporate partner, in the person of its liquidator, ``on account of the firm'', the ``firm'' being, as already noted, no more than the collection of the partners. This question was not debated before me and I do not wish or need to express any final view on it. It can, however, be said that the possibility that the recovery, although coming home to the liquidator of the particular partner, nevertheless acquires the character of joint estate is a plausible one. If this is correct, that part of the defendant's submissions falls away. 23. But even if the recovery is properly regarded, for bankruptcy purposes, as falling within the separate estate of the partner in liquidation, it cannot be said that the consequences are so perverse and anomalous as to justify the conclusion that the Corporations Act could never have intended such recovery to be available. The rule now found in s. 110 of the Bankruptcy Act began life as no more than a judge-made rule of convenience. It carries within itself elements of arbitrariness, to the extent that Professor Glanville Williams commented in ``Joint Obligations'' (1949): ``The rule under consideration has perhaps some quality of symmetry which gives it an aesthetic appeal; but here one's approbation must end.''

24. There is also the point that this apparent ``symmetry'' is compromised by at least three of the four exceptions which were identified in Re Budgett; Cooper v Adams [1894] 2 Ch 557 and referred to by Powell J in ANMI Pty Ltd v Williams (1981) 36 ALR 171 (the fourth, it has been held, does not apply under the Australian Act: Re Owen; Ex p G James Pty Ltd (1987) 15 FCR 150): ``The first exists where there is no joint estate; the second where the property of the firm has been fraudulently converted; the third where there has been a distinct separate trade, in respect of which a separate debt has been contracted; the fourth is in favour of the petitioning creditor himself.'' 25. The principles embodied in s. 110, as well as these exceptions, are concerned with the equities of the partners among themselves. They do not in any sense cause joint claims to be confined to joint estate and separate claims to be confined to separate estate. They deal with priority and sequencing of claims (including in cases where the partners are companies: Re Brisbane Meat Agencies Pty Ltd [1963] QdR 525): hence, on two occasions, the words ``in the first instance''. It cannot be said that there is some manifested legislative intention of insulating any part of a partner's separate estate and that it is in some way inconsistent with principle for the separate estate of one partner to be augmented by recovery from a director of that partner who has wrongfully permitted a joint debt to be incurred. It follows, in my view, that even if the proceeds of recovery from a director by reference to s. 588G are, in the hands of the liquidator of a corporate partner, part of the separate estate, there is still some cogent operation left to s. 110 of the Bankruptcy Act. 26. For the several reasons I have canvassed, the argument based on supposed departure from the natural order of things in the insolvency of joint debtors does not lead to any finding of a legislative intention that s. 588G is not to apply in circumstances such as the present. 27. Counsel for the defendant also pointed to a number of anomalies supposedly arising from provisions of the Partnership Act relating to dissolution, as well as principles concerning the appointment of a receiver to effect winding up: cf Tate v Barry (1928) 28 SR (NSW) 380

and ANMI Pty Ltd v Williams (above). In the latter case (said in Higgins and Fletcher (above) at p.267 to ``mingle partnership and company rules in an unjustified way''), it was recognised that winding up, as it relates to a partnership of which a company is a member, is distinguished from the company's winding up. But the coincidence of both processes, it was said, produced confusion between, on the one hand, the role of the company's liquidator and his powers and, on the other, his capacity to administer the winding up of the partnership. 28. I must say that I consider this suggested confusion to be more imagined than real. The concept of winding up under the Partnership Act is a concept of winding up ``the business and affairs of the firm'': s. 39. That process operates only among the partners. Their liabilities and duties to outsiders continue until all claims are duly met or, in case of insolvency, duly proved in the relevant bankruptcies or company liquidations. The process of company winding up does not affect the ability of a company which is a partner to participate, through its liquidator, in the winding up of the business and affairs of the firm in order to enforce such claims against other partners as may be maintainable in the particular context. 29. The fact that difficulties and anomalies may arise and call for resolution in particular insolvency cases (including various instances identified on behalf of the defendant, such as where the director of the corporate partner is himself a partner or a partnership creditor) does not represent a valid reason for concluding that there existed an overriding legislative intention that the provisions producing them should simply be inapplicable to the particular case. 30. In the end, I think all the matters considered under this heading resolve themselves by reference to the submission made by Mr Aldridge SC for the plaintiffs that an unpaid partnership creditor may sue all or any of the partners and that the creditor's rights of recovery and enforcement are not limited to partnership property or by the ways in which partners may be called upon to contribute and account among themselves. While the bankruptcy provisions are concerned to see that joint estate is not applied to separate debts (except in so far as it is surplus to the needs of joint creditors), partnership entails no form of limited liability for any partner. Difficulties in applying rules

applicable among the partners cannot be seen as imposing some implied limitation upon the operation of Corporations Act provisions which exist to provide a means of redress, in the interests of the general body of creditors, where directors engage in proscribed conduct.

The Part 5.7 argument 31. Mr Svehla's final argument was based on Part 5.7 of the Corporations Act which confers on the court a power to order the winding up of a ``Part 5.7 body''. The expression ``Part 5.7 body'' is defined by s. 9 as including ``a partnership, association or other body (whether a body corporation or not) that consists of more than 5 members and is not a registrable body''. 32. On any view, a partnership in the sense recognised by the Partnership Act is not a ``registrable body'', lacking, as it does, both the character of a body corporate and the characteristic that it may sue or be sued or hold property in the name of its secretary or another officer: see para (b) of the definitions of ``foreign company'' and ``registrable Australian body'' which supply the content of the definition of ``registrable body''. It follows that a partnership of more than five members is a ``Part 5.7 body'' and that the court has jurisdiction under s. 583 to order that the partnership itself be wound up. 33. Where such winding up is ordered, Chapter 5 applies accordingly to the Part 5.7 body with such adaptations as are necessary including those specifically directed by paras (a) to (d) of s. 583. Furthermore, paragraph (c) of the definition of ``company'' in s. 9 says that, in Parts 5.7B and 5.8 (except ss. 595 and 596), ``company'' includes a Part 5.7 body. It follows, on the argument advanced on behalf of the defendant, that the insolvent trading provisions in s. 588G and related sections (contained, as they are, in Part 5.7B) apply to a partnership having more than five members. That being so, it is said, one may gather a general legislative intention that s. 588G liability is to operate in the partnership context only in the cases contemplated by Part 5.7, with the result that it does not apply independently to or in relation to a company which is a partner, at least so far as its liability for partnership debts is concerned. 34. I do not consider these arguments advanced by reference to Part 5.7 to be sustainable. Part 5.7 and the special meaning of ``company'' derived, for the purposes of Part 5.7B (and thus s. 588G), from

paragraph (c) of the s. 9 definition of ``company'' are not intended to deal comprehensively and exhaustively with the position under s. 588G of companies which are members of partnerships. Part 5.7, like predecessor provisions concerned with what used to be known as ``unregistered companies'', is no more than a provision extending the Act's general mechanisms of winding up to a variety of bodies, both incorporated and unincorporated, in relation to which the court might think it appropriate to apply an appropriate winding up regime. This is made clear in the judgment of Sheppard A-JA (with whom Meagher and Sheller JJA agreed) in The Peninsular Group Ltd v Kintsu Ltd (1998) 16 ACLC 1,624; (1998) 28 ACSR 632: ``Section 583 deals with the winding up of Part 5.7 bodies. Because of the definitions to which reference has been made it includes the winding up of foreign companies. But it needs to be borne in mind that it applies to a great many other types of association, using that expression broadly, some incorporated and some not. A wide range of undertakings is involved yet the same provisions apply to all notwithstanding that there may be substantial differences in their character and the nature of their activities.'' 35. The creation by the Corporations Act of a jurisdiction to make a winding up order in respect of various kinds of bodies (including certain, but not all, partnerships) which are not ``companies'' for the general purposes of the Act and the extension to such bodies, if so wound up, of the insolvent trading provisions indicates nothing relevant to the issues raised by the separate questions in this case. That is particularly so where, as here, Part 5.7 cannot possibly operate, there being only two partners. Conclusion 36. Section 588G and related provisions serve an important social purpose. They are intended to engender in directors of companies experiencing financial stress a proper sense of attentiveness and responsible conduct directed towards the avoidance of any increase in the company's debt burden. The provisions are based on a concern for the welfare of creditors exposed to the operation of the principle of

limited liability at a time when the prospect of that principle resulting in loss to creditors has become real. Very clear words would be needed to justify the conclusion that the underlying policy was displaced by the circumstance that the company operated not as a sole trader but in partnership; or that the directors of any company could exempt themselves from the need to be attentive and to act responsibly, on pain of personal liability to compensate, by the simple expedient of causing their company to carry on business in partnership. The force of this last point is illustrated by the case where a single individual becomes the sole shareholder and sole director of each of two companies and causes those companies to trade as partners. 37. The questions the subject of the order for separate and preliminary determination are answered as follows: Question 1: No. Question 2: Does not arise.

Briggs v James Hardie & Co Pty Ltd & Ors (1989) 7 ACLC 841 New South Wales Court of Appeal. Judgment handed down 28 June 1989. Companies — Limitation of action — Application to sue out of time — Plaintiff employed by subsidiary — Whether evidence existed to establish cause of action against parent companies — Whether corporate veil lifted — Limitation Act 1969 (N.S.W.), sec. 58(2)(b). The plaintiff was at all relevant times ostensibly employed by a company, Asbestos. Asbestos was formed as a joint venture company and was owned equally by the Hardies companies (``Hardies'') and Seltsan Ltd. (``Wunderlich''). Later Wunderlich transferred its half interest to Hardies. The plaintiff claimed to have suffered from asbestosis which he alleged to have contracted whilst being employed by Asbestos. He

applied to the District Court for orders to sue Hardies, Asbestos and Wunderlich in negligence out of time under the Limitation Act 1969 (``the Act''). The Judge only allowed his application concerning Asbestos and the plaintiff now sought an order in the nature of certiorari to review the decision concerning Hardies and Wunderlich. The Act states that the Court may extend the limitation period if, inter alia, ``it appears to the court that there is evidence to establish the cause of action'' (sec. 58(2)(b)). The plaintiff sought to suggest a course of action against Hardies and Wunderlich by arguing that Asbestos was a mere cypher for Hardies and/or Wunderlich by the doctrine of agency or the lifting of the corporate veil. He pointed to materials which suggested that Asbestos was always under the control of the parent companies and the inference to be drawn was that there was no room left for a truly independent, separately functioning corporate entity. Held: (Hope J.A. and Rogers A.J.A., Meagher J.A. dissenting) orders of the Judge dismissing the motions against Hardies and Wunderlich be quashed and the matter be returned to him for determination according to law. Per totam curiam: Section 58(2)(b) can be satisfied if it is made to appear to the Court that the evidence exists and can be adduced. There is no need for the evidence to be actually adduced before the Court. Per Hope J.A. and Rogers A.J.A.: In actions in negligence where a plaintiff has sued multiple defendants, one or more of whom may be liable, and shows prima facie that at least one could be held responsible, the Court is bound to hear the whole of the evidence before dismissing any other defendant from the proceedings (Broken Hill Pty. Co. Ltd. v. Waugh (1988) 14 N.S.W.L.R. 360). Per Hope J.A.: Applying the principle in Broken Hill (supra), even if the plaintiff did not succeed in establishing the existence of evidence upon the basis of which it could be held that Asbestos was the agent of either of the

principal companies, that the corporate veil could be lifted to make either of those companies liable, or that those companies were otherwise liable in negligence, he did establish that there was a possibility that that evidence existed. Per Rogers A.J.A.: 1. There is no principled approach to be derived from the authorities concerning the lifting of the corporate veil. It is a matter of extreme difficulty to say whether the evidence adduced meets even the less than exacting requirements of sec. 58(2)(b). 2. The proposition that the corporate veil may be lifted where one company exercises complete dominion and control over another is entirely too simplistic. The law pays scant regard to the commercial reality that every holding company has the potential and, more often than not, in fact, does, exercise control over a subsidiary. 3. It should not have been held that the plaintiff had failed to prove the availability of evidence which might make out a cause of action against Hardies and Wunderlich, because: (i) The trial Judge erred in dealing with the question of existence of evidentiary material as though he was disposing of the issue finally at a trial rather than the much less demanding level of sec. 58(2)(b). In the present state of the law, it is not possible to say what evidence would ultimately suffice to make out a case. (ii) The trial Judge erred when he said that agency was not inferred in this case and that the doctrine of lifting the corporate veil had never been invoked in negligence cases. There were decisions in the United States where, in the context of claims in negligence, attempts were made to lift the corporate veil. There were also academic writings and dicta in cases which suggested that different considerations should apply in deciding whether to lift the corporate veil in actions in tort from the criteria applied in contract, revenue or compensation cases. (iii) The trial Judge failed to take into account the principles relating to multiple defendants in the Broken Hill case (supra).

Per Meagher J.A. dissenting: The plaintiff was unable to point to any evidence from which inference could be drawn that Asbestos was acting as the agent of its parent companies. Further, he could do no more than point to the existence of evidence that the parent companies had a capacity to exercise control over their subsidiary and had on occasions done so and that was not enough to lift the corporate veil. [Headnote by the CCH COMPANY LAW EDITORS] D.G. Letcher Q.C. with G.J. Scragg (instructed by I.M. McIntyre) appeared for the applicant (plaintiff). G.T. Miller Q.C. with G.E. Underwood (instructed by Diamond Peisah & Co.) appeared for the first and second respondents. J.B. Harrington (instructed by A.O. Ellisons) appeared for the third respondent. H.D. Sperling Q.C. with M. Skinner (instructed by Toomey Pegg & Drevikovsky) appeared for the fourth respondent. Before: Hope and Meagher JJ.A. and Rogers A.J.A. Hope J.A.: The facts in this proceeding are described and much of the relevant law is discussed in the reasons of Meagher J.A. and of Rogers A.J.A. which I have had the advantage of reading. The case concerns an application under sec. 58 of the Limitation Act for an extension of time within which to bring proceedings against a number of defendants on the ground of their negligence which resulted in the applicant suffering an asbestos-related disease. Section 58(2)(b) requires that it appear to the Court that there is evidence to establish the cause of action, apart from any limitation period. There have been many decisions upon what this provision, and identical or similar language in the legislation of other States, requires on the part of an applicant, but relevantly it is sufficient to refer to what Clarke J.A. (with whom Kirby P. and I agreed) said in Broken Hill Pty. Co. Ltd. & Anor v. Waugh (1988) 14 N.S.W.L.R. 360 at pp. 371-372: ``They do not lay down as a condition a requirement that there be evidence to establish conclusively, or even on the probabilities,

the cause of action. All the words of the subsection require is that there is evidence available to establish the cause of action.'' As it seems to me, this statement is in accord with views expressed by Gowans J. in Evans v. Repco Transmission Co. Pty. Ltd. (1975) V.R. 150 at p. 152: ``I do not accept the contention that the actual evidence must be adduced before the Court by the applicant. I think the language of the sub-section is satisfied, if it is made to appear to the Court that the evidence exists and can be adduced. ... Further I do not accept the contention that the test is whether the evidence would launch a case before a jury. It may be a useful touchstone, but the language to be satisfied is the language of the statute, and that must be considered in the light of the particular circumstances.'' In Cuthill v. State Electricity Commission of Victoria (1981) V.R. 908, Starke J., with whom Anderson J. agreed, adopted these views as correct. In an unreported decision of Gobbo J. in the Victorian Supreme Court, Ross v. C.S.R. Ltd. & Anor (24 August 1988), his Honour said that ``approach would mean that the applicant has to show that the available evidence is sufficient to make it fair and reasonable to allow an action to be brought''. With respect to Gobbo J., I do not agree. That might be a very proper condition for the statute to have provided, but it is not the one which the statute does provide, nor does it seem to me to reflect what Gowans J. said. Flannery D.C.J. held that the present applicant had satisfied the requirements of the subsection against two of the defendants but had not satisfied them against those defendants of which one of the two defendants was or had at some time been, a wholly or jointly owned subsidiary. If the application had been made against a sole defendant, as for example, James Hardie & Co. Pty. Ltd., whether for negligence as the applicant's true employer or on the basis of a proximity between that defendant and the applicant giving rise to a duty of care of the kind

discussed in the decision of Roland J. of the Supreme Court of Western Australia in Barrow & Hayes v. C.S.R. Ltd. & Anor (unreported; 4 August 1988) as well as byGobbo J. in Ross, I think that unless the wider approach of Rogers A.J.A. were adopted, the applicant might not be held to have satisfied the subsection because he had pointed to the possibility of there being evidence rather than to its existence. The question arises whether the position is different because the applicant, pursuant to sec. 2(c) of the Law Reform (Miscellaneous Provisions) Act, 1946, joined both his ostensible employer, the subsidiary company, and the principal companies, and satisfied the requirements of the provision as against the subsidiary. In Broken Hill Pty. Co. Ltd. v. Waugh, Clarke J.A. said at p. 372: ``According to well recognised principles where a plaintiff, who has sued multiple defendants one or more of whom may be liable, shows prima facie that at least one defendant may be responsible, the court is bound to hear the whole of the evidence before entertaining submissions by any other defendant that no case has been established against him. This is so even if the plaintiff has not called any evidence demonstrating the fault of the particular defendant.'' Later on his Honour said: ``The respondent has demonstrated the availability of evidence which shows, prima facie, that there is a probability that his illness was caused by exposure to asbestos in the employment of the appellants and even though the greater probability is that the relevant exposure is that which occurred while he worked for the first appellant he has nevertheless satisfied the test in s. 58(2)(b). Once there remained the possibility that this exposure while employed by the second appellant caused, or contributed, to his illness then, in the circumstances that his claim is pressed against multiple defendants, he established the availability of evidence to establish his cause of action against that appellant.'' With respect to his Honour, I think that the words ``in the employment of the appellants'' in this last passage should read ``in the employment of one or other or both of the appellants''.

The principle that at any rate in actions in negligence, where a plaintiff has sued multiple defendants, one or more of whom may be liable, and shows prima facie that at least one could be held responsible, the Court is bound to hear the whole of the evidence before dismissing any other defendant from the proceedings was affirmed and applied in Menzies v. Australian Iron & Steel Ltd. & Anor (1952) 52 S.R. (N.S.W.) 62. Street C.J., giving judgment for the Court, applied the decision of a Divisional Court in Hummerstone v. Leary (1921) 2 K.B. 664. That case, as did Menzies, concerned an action in respect of injuries received in a collision between two motor vehicles, brought against both drivers. The plaintiff's evidence appeared to make it probable that the driver of one of the cars was to blame, but it did not affirmatively or conclusively show that the driver of the other car was to blame. At the close of the plaintiff's case the action against that driver was dismissed. The case then proceeded against the other driver whose witnesses threw the blame on to the driver who had been dismissed from the action. On this evidence the driver still remaining in the action was held not to have been negligent, and judgment was entered against the plaintiff in respect of each defendant. Giving the judgment of the Divisional Court on appeal, Bray J., having said that a plaintiff can present his case against two defendants in the alternative and when he does he is just as much entitled to have the case tried out where he had made a prima facie case in support of his cause of action as is a plaintiff who proceeds against one defendant alone, went on to say at pp. 667-668: ``It must not be supposed from our judgment that if a plaintiff fails to make a prima facie case at all he is entitled to call on two defendants under such circumstances as these to give evidence and ask for judgment if no such evidence is given. He must of course prove facts from which in the absence of an explanation liability could properly be inferred. It might perhaps happen that a plaintiff suing two defendants in the alternative proved affirmatively that as regards one of them it is impossible to impute blame on him, and in that case, if such a case should occur, the judge would no doubt be entitled to dismiss him from action. But it is not enough to show that on the plaintiff's view of the matter from what he was able to see of the accident it seems probable

that one defendant was to blame. It seems probable here on the plaintiff's evidence that Forster's driver was to blame. As the ultimate result showed, they did not conclusively prove it.'' Hummerstone was discussed with approval in Nesterczuk v. Mortimore (1965) 115 C.L.R. 140 at pp. 147-148, and in James & Ors v. ANZ Banking Group Ltd. & Ors (1985-1986) 64 A.L.R. 347 at pp. 401-402. As I would understand this principle, it does not mean that in no circumstances can one of a number of defendants be dismissed from an action. Indeed such a course is often adopted. But where a plaintiff brings an action against two defendants alleging that one or both are liable, and there is some evidence to connect each defendant with the events the subjects of the action, then provided the plaintiff establishes a prima facie case against one of the defendants, the other defendant will not be dismissed from the action until the whole of the evidence has been heard. As it seems to me this means that a plaintiff is entitled to bring an action against two defendants if he has evidence to establish a prima facie case against one of the defendants, and also has evidence pointing to the possibility of the other defendant being liable. What bearing does this principle have upon the determination of the question whether an applicant has satisfied the requirements of sec. 58(2)(b). The section is a remedial provision, designed to give relief against what otherwise might be, and has been established in many cases to be, the harshness of the operation of the general limitation provisions. It calls for a liberal construction. In Broken Hill Pty. Co. Ltd. v. Waugh it was held by this Court that this principle is to be applied to applications under sec. 58. Leave to reargue this decision (which was brought to the attention of the parties after the hearing of the appeal) was neither sought nor given, although it was submitted that it was wrong. Applying this principle I am satisfied that even if the applicant did not succeed in establishing the existence of evidence upon the basis of which it could be held that the subsidiary was the agent of either of the principal companies, that the corporate veil could be lifted to make

either of those companies liable, or that those companies were otherwise liable in negligence, he did establish that there was a possibility that that evidence existed. I accordingly agree with the conclusion of Rogers A.J.A. that the judgment of Flannery D.C.J., who gave his decision before Broken Hill Pty. Co. Ltd. v. Waugh was decided, involved the errors of law to which he referred. I agree with the orders proposed by Rogers A.J.A. Meagher J.A.: The applicant, Mr Briggs, was at all relevant times ostensibly employed by a company which was then called Asbestos Mines Pty. Limited and is now called Marlew Mining Pty. Limited. That company was originally a ``joint venture company'', being owned as to one half by James Hardie & Co. Pty. Limited and James Hardie Industries Pty. Limited (``Hardies'') and as to one half by Seltsan Limited (``Wunderlich''); in 1953 Wunderlich transferred its half interest in the company to Hardies. The applicant claims to be suffering from asbestosis which he alleges he contracted whilst in the employ of Marlew Mining Pty. Limited many years ago. He succeeded in the District Court before his Honour Judge Flannery in an application under the Limitation Act 1969 to sue Marlew Mining Pty. Limited out of time. He also sought before his Honour leave to bring actions against Hardies and Wunderlich, on the apparent basis that they (i.e. both of them up until 1953, and thereafter Hardies alone) were his relevant employer, not Marlew Mining Pty. Limited his ostensible employer. His Honour rejected the applicant's claims in this regard and the applicant now seeks an order in the nature of certiorari to review that rejection. I have read in draft the reasons of Rogers A.J.A., which contains a most useful summary of much of the relevant case law. However, I regret that I am unable to reach the same ultimate conclusion as his Honour. The remedy which the applicant seeks is an order in the nature of certiorari. He must therefore demonstrate error (and in this respect even non-jurisdictional error will suffice) on the face of the record, and for present purposes it was agreed that the ``record'' consisted of the totality of the material which was before Judge Flannery. It is far from

clear to me that his Honour committed any error, jurisdictional or nonjurisdictional, but for the moment I shall proceed on the assumption that such error exists. The first question is what the applicant must prove. He seeks to make a case that his employer (whoever that was) was negligent in establishing and maintaining an unsafe system of work. He must therefore demonstrate that there existed evidence against Hardies and/or Wunderlich ``establishing the cause of action'' (Limitation Act, sec. 58(2)). At the stage where he applies for leave to sue he does not have to adduce that evidence in admissible form. He can discharge the obligation in a relatively informal manner. But he must be able to indicate that there does exist some evidence against the entity or entities which he wishes to sue. So much is demonstrated by the judgments in the cases cited by Rogers A.J.A. It being conceded that the applicant could point to the existence of evidence against Marlew Mining Pty. Limited, what evidence could he identify which would suggest a cause of action against Hardies or Wunderlich? His case was (we were told by his counsel) that Marlew Mining Pty. Limited was a mere cypher for Hardies and/or Wunderlich. But to make this submission good the applicant would have to point to evidence that Marlew Mining Pty. Limited, an apparently independent entity, was such a cypher; whether it was or not is a pure question of fact, but a fact which would be a necessary ingredient in any cause of action against them, and a fact evidence of which would require to be identified. The applicant was able to point to the memorandum and articles of association of all companies concerned and thereby demonstrate that Marlew Mining Pty. Limited was a subsidiary, first of both entities, and then of Hardies only. It was able to demonstrate from the same documents that Hardies and Wunderlich were given special voting rights, and their nominees special positions on the board of Marlew Mining Pty. Limited. The applicant then pointed to evidence that the parent companies had at all times the capacity to control their subsidiary, Marlew Mining Pty. Limited, and had on occasions exercised that control. The evidence may even have extended to permitting an inference that the subsidiary never acted contrary to the

wishes of its parent or parents and that its activities coincided precisely with the wishes of its parent or parents. But beyond that point the applicant could not go. Counsel for the applicant submitted that if he could point to the evidence which I have referred, he was ao ipso pointing to evidence from which either by the doctrine of agency or by the doctrine of ``lifting the corporate veil'' it could be inferred that Marlew Mining Pty. Limited was a mere cypher for its parent bodies. Although the two alleged bases for drawing this inference were somewhat elided in the submissions of counsel for the applicant, they are in law quite distinct (and even inconsistent) concepts. The notion of agency is a well-established legal concept, and in the present case would involve the proposition that all contracts entered into by the alleged agent (Marlew Mining Pty. Limited) were entered into not on its own behalf but on behalf of its parent or parents, and that any assets it acquired were in law the assets of its parent or parents. Not only was the applicant unable to point to any evidence which would require such an inference to be drawn, but many of the documents to which he referred effectively negatived such a conclusion. For example, there was evidence that in some years Marlew Mining Pty. Limited made a profit from its operations, i.e. the profit belonged to it and not its parents. Again, there was evidence that it sold from time to time its product to one or both of its parent or parents. These are hardly the activities of a mere agent. There is, therefore, in my view, no evidence at all of which the applicant could point which would justify a finding of agency. In this regard his Honour Judge Flannery was perfectly correct in holding that ``here there is no evidence which proves the existence of evidentiary material which could later be used for trial''. As for ``lifting the corporate veil'', the situation is not quite so clear. This is largely because, as Rogers A.J.A. has demonstrated, the existing case law does not clearly define the limits of that doctrine. For present purposes I am prepared to assume that there is scope for the operation of that doctrine in the law of tort, and specifically in the law of employer's negligence. In the United States of America it has been held that where an employee is in the employ of a subsidiary company

which is so dominated by its parent that it can be said to have no separate existence and is a mere conduit for its parent, or alternatively where the subsidiary company was incorporated by its parent for the purpose of perpetrating a fraud or injustice or otherwise to circumvent the law, then in either such case the employee can sue, the parent as its employer, on the basis that the courts will in such situations ``lift the corporate veil''. But, even in the United States of America, for a parent to incorporate a subsidiary company purely for the purpose of evading tortious liability will not suffice (see Craig v. Lake Asbestos of Quebec Ltd. and Charter Consolidated p.l.c. (1988) 843 F. 2d 145). It may well be that the law in New South Wales is to the same effect. None the less, in the present case the applicant could not point to any evidence which would even remotely satisfy either the mere conduit test or the improper purpose test. He could do no more than point to the existence of evidence, which one would suspect to be true of most subsidiary companies, that the parent company had a capacity to exercise control over its subsidiary and had on occasions exercised that capacity. That, on the authorities cited by Rogers A.J.A., is not enough. It therefore follows in my view that the conclusion which was reached by his Honour Judge Flannery was perfectly correct. This would be true even if his Honour had displayed error in searching that conclusion, but I repeat my view that I am not convinced that any such error has been demonstrated. Finally, there appear in the reasons of Rogers A.J.A. references to Salomon v. Salomon & Co. Ltd. (1987) A.C. 22, as if that case was the source of the doctrine that a company has a legal existence, independent of its corporators. This is not so. The doctrine was well established long before Salomon v. Salomon & Co., which is merely the best known illustration of that doctrine, see Mr Justice McPherson, writing extracurially, ``Duties of Directors to Shareholders and Creditors'' in (1989) Proceedings of the Legal Foundation (Auckland, New Zealand). In my view, therefore, the applications should be dismissed with costs. Rogers A.J.A.:

The course of the litigation Mr Briggs is 71 years old. He is a member of the Kumbaingeri tribe. He can sign his name but cannot read or write. In 1946 he moved to Baryulgil and obtained employment at the asbestos mine and mill. When he commenced this employment, he was healthy. He worked at the mine altogether for about six years, between 1946 and 1966. All the time he worked at the mine, he was in contact with asbestos dust and fibre. Since some time in the 1970s, he has been suffering from asbestosis. In 1985, Mr Briggs commenced an action in the District Court, claiming damages for the asbestosis which he claims he contracted whilst working at the mine at Baryulgil. Relevantly for present purposes, he sued James Hardie & Co. Pty. Ltd., James Hardie Industries Pty. Ltd. (to which I will collectively refer as ``Hardies''), Marlew Mining Pty. Ltd. and Seltsan Ltd. (which, for reasons that will become clear, I will refer to by its former name of ``Wunderlich''). Of course, the commencement of the action was well outside the period prescribed by the Limitation Act, 1969. The Act allows for a further limited period within which an extension of time for bringing of proceedings may be obtained. The plaintiff made an application for an extension of time. That application came before Judge Flannery in the District Court. The Judge granted the application as against Marlew Pty. Ltd., but refused to make an order extending the time for commencing the action against Hardies and Wunderlich. Thereupon, the plaintiff sought leave to appeal against the Judge's refusal to extend the time and, alternatively, sought an order in the nature of a writ of certiorari. The application for leave was made because an order on an application under sec. 58 of the Limitation Act is interlocutory (Dousi v. Colgate Palmolive Pty. Ltd. (1987) 9 N.S.W.L.R. 374). At the commencement of the hearing in this Court, counsel for the plaintiff announced that he would not press the application for leave to appeal. Presumably he took the view that the decision of this Court in Fraser Credits Pty. Ltd. v. Osterberg-Olsen (1978) 1 N.S.W.L.R. 121 precluded an appeal from a decision made on an application, under the Limitation Act, for extension of the time limit. Appeals from the District Court lie pursuant to the provisions of sec. 128 of the District

Court Act, 1973 which relevantly provides that: ``128(2A) An appeal shall, subject to sections 129 and 130, lie to the Supreme Court from any ruling, order, direction or decision of the Judge in an action commenced after the commencement of section 3(u) of the District Court (Amendment) Act 1975.'' Senior counsel for the plaintiff accepted that an order refusing an application for an extension of time under the Limitation Act is not an order ``in an action''. The jurisdiction of this Court to review the decision of the District Court in the context of an application for a writ of certiorari, is limited. The Supreme Court may, by way of certiorari, call up and quash an interlocutory order of the District Court even for non-jurisdictional error of law appearing on the face of the record (Glenvill Homes Pty. Ltd. v. Builders Licensing Board (1981) 2 N.S.W.L.R. 608 at p. 610; Adams v. Kennick Trading (International) Ltd. & Ors (1986) 4 N.S.W.L.R. 503 at p. 505; Commissioner for Motor Transport v. Kirkpatrick (1988) 13 N.S.W.L.R. 368). The applicant for certiorari is required to show that the District Court has erred in law in coming to the conclusion that it did and, furthermore, that in the exercise of its discretion, this Court should grant relief by way of a writ of certiorari. During the hearing, Mr Miller Q.C. for Hardies and Mr Sperling Q.C. for Wunderlich conceded, for the purposes of this application only, that in determining the application for a writ of certiorari, the Court should look at all the material, including the evidence, that was before the District Court. At least this concession avoided a sterile argument as to what constituted ``the record'' of the proceedings in the District Court. The evidence shows that the mine at Baryulgil, was, at the relevant time, owned and operated by Marlew Mining Pty. Ltd., then called Asbestos Mines Pty. Ltd. (``Asbestos''). Between 1946 and 1953, the shareholders in Asbestos were Hardies and Wunderlich, in equal shares. In 1953, Wunderlich transferred its 50% of the shareholding in Asbestos to Hardies. For reasons at which one can only guess, the plaintiff was not satisfied with the order that he have leave to proceed against Asbestos. He wished to press his claim that his employers

until 1953 were Hardies and Wunderlich and, thereafter, Hardies. This involved a claim by the plaintiff that, in employing him, Asbestos acted as agent for the other defendants or, alternatively, that, for the purposes of the proceedings, the plaintiff was entitled to look beyond the corporate veil of the limited liability of Asbestos and sue the shareholders and controllers of Asbestos. This undoubtedly afflicted 71-year-old man was therefore confronted with the barriers of the entrenched principles of limited liability, firmly enshrined in the law since the decision of the House of Lords in Salomon v. Salomon & Co. Ltd. (1897) A.C. 22. With all due humility, I am bound to say that there seems to me to be something wrong with the state of the law when, in order to recover compensation for his apparent asbestosis, a person in the position of this plaintiff has to mount a challenge to fundamental principles of company law. However, that is the task that, if successful on this application, will be thrust upon the plaintiff and which, according to the learned District Court Judge, he failed to discharge even to the limited extent required to obtain an extension of time for commencement of his action. Principles for granting extensions of time The application of the plaintiff was made pursuant to the provisions of sec. 58(2) of the Limitation Act, 1969. The section provides that: ``Where, on application to a court by a person claiming to have a cause of action to which this section applies, it appears to the court that — (a) any of the material facts of a decisive character relating to the cause of action was not within the means of knowledge of the applicant until a date after the commencement of the year preceding the expiration of the limitation period for the cause of action; and (b) there is evidence to establish the cause of action, apart from any defence founded on the expiration of a limitation period, the court may order that the limitation period for the cause of action be extended so that it expires at the end of one year after that date and thereupon, for the purposes of an action on that

cause of action brought by the applicant in that court, and for the purposes of paragraph (b) of subsection (1) of section 26, the limitation period is extended accordingly.'' Flannery D.C.J. held that the plaintiff had satisfied the requirements of para. (a). It was the barrier of para. (b) that he failed to surmount. What a plaintiff is required to show, for the purposes of sec. 58(2)(b), has been the subject of much judicial consideration, both in this State and elsewhere. As will be seen, the requirements of the subsection have been held in this State to be relatively modest and open to be discharged in a relatively informal manner. In Smith v. Browne & Ors (1974) V.R. 842 Kaye J. said (p. 847): ``To succeed in his application, it must appear to the Court that there is evidence to establish that the applicant has a cause of action. This does not require the Court to conduct a preliminary hearing to satisfy itself that evidence available to the applicant would enable him to prove his case. For these purposes it is sufficient that the applicant should adduce evidence from which the Court is able to form an opinion that he has a cause of action against a party for damages in respect of personal injuries suffered by him: compare Robinson v. Sunderland Corporation [1899] 1 Q.B. 751, at p. 757.'' A few days later, Gowans J. delivered judgment in Evans v. Repco Transmission Co. Pty. Ltd. (1975) V.R. 150. His Honour said (p. 152): ``I do not accept the contention that the actual evidence must be adduced before the Court by the applicant. I think the language of the sub-section is satisfied, if it is made to appear to the Court that the evidence exists and can be adduced. A somewhat similar view I believe has been taken recently by Kaye, J., in Smith v. Browne, not reported but delivered on 3 June 1974. Thus, for example, the defendant has put in evidence from its custody a notice of injury and claim for workers compensation dated 11 May 1970, and signed by the applicant, in which he stated that over eight years he had suffered deafness in both his ears, saying: `I have been working in the forge as a drop forge driver for a period of eight years, and the noise of drop forging has made me deaf'

— and giving in the notice, the names of the two doctors who attended to him on behalf of his employer. The applicant has said that he was told by his employer's doctor in May 1970 that he `would get him compensation', and he has put in evidence a notification to his former solicitor from the Workers Compensation Board dated 17 October 1972, advising that the Board considered an award based on 45 per cent binaural loss of hearing was appropriate. I think that this can, in the absence of further material from the respondent, be regarded as the basis for an inference that the claim was put before the Board by the respondent with material bearing upon, or evidence of the loss referred to, and I think that that inference goes so far as to carry the implication, in effect, that that material could be procured to provide evidence. Further I do not accept the contention that the test is whether the evidence would launch a case before a jury. It may be a useful touchstone, but the language to be satisfied is the language of the statute, and that must be considered in the light of the particular circumstances.'' In Ex parte Minoque (1980) Qd. R. 350 Kelly J. perceived some difference in the formulation of the test by the two Judges of the Victorian Supreme Court and expressed a preference for the statement by Gowans J. An appeal to the Full Court was dismissed, Minoque v. Bestobell Industries Pty. Ltd. (1981) Qd. R. 356. The correct approach to the provision was subjected to review by the Full Court of the Supreme Court of Victoria in Cuthill v. State Electricity Commission of Victoria (1981) V.R. 908. Starke J. accepted, as the correct test, that laid down by Gowans J. in Evans (supra). Anderson J. agreed with him. Mr Justice Brooking made a more elaborate examination of the question. The other two members of the Court held that the requirements of the subsection could be satisfied by reference to the facts found by Dunn J. in Grove v. Bestobell Industries Pty. Ltd. (1980) Qd. R. 12. It was submitted that reference to that judgment showed the existence and availability of evidence that specialist physicians had, for many years, considered the inhalation of asbestos dust to be dangerous. Brooking J. rejected that submission. In his Honour's view, whilst the subsection did not require that the actual

evidence be adduced on the hearing of the application and that it is sufficient if it is made to appear to the court that the evidence exists and can be adduced, went on to say (p. 915): ``But the existence and availability of the necessary evidence must be proved by admissible means; and, except where the evidence is receivable as an admission, there is no principle of law whereby evidence given in legal proceedings between different parties (assuming for the moment the giving of that evidence to be sufficiently proved by reference to a law report) can be used in other legal proceedings as evidence of the truth of what was asserted.'' In the same year, Hunt J. reviewed the interstate decisions in Martin v. Abbott Australasia Pty. Ltd. (1981) 2 N.S.W.L.R. 430. His Honour said (p. 443): ``It was conceded by the defendant in the present case that: (a) the plaintiff did not need to produce the actual evidence to be adduced at the trial, and (b) the material showing that there is evidence to establish the cause of action need not itself be in admissible form but could be adduced in this application by way of hearsay. In my opinion, these concessions were correctly made. What is left to be shown by the plaintiff in order to satisfy the requirements of s. 58 was, in my respectful view, correctly stated by Gowans J. ([1975] V.R. 619, at pp. 630, 631) and by Kelly J. ([1980] Qd. R. 350, at p. 352) the plaintiff must make it appear that the evidence to establish his cause of action exists and that it is available to be adduced at the trial. The test is thus somewhat less exact than that which is applied by a judge at the conclusion of the evidence at the trial itself in deciding whether there is a case to go to the jury. A certain amount of speculation as to the precise nature of the evidence which will be called at the trial necessarily must be permitted. It was also conceded by the defendant (in my view, correctly) that once one cause of action was so identified, the provisions of Pt 20, r. 4(5) in effect meant that a plaintiff could

plead any other cause or causes of action based upon the same or substantially the same facts; so that there was accordingly no need in an order pursuant to s. 58 to specify the precise cause of action in relation to which the limitation period was to be extended.'' That approach was followed by Yeldham J. in Baker v. Australian Asbestos Insulations Pty. Ltd. & Ors (1984) 3 N.S.W.L.R. 595. It was submitted by Mr Sperling that, in purporting to follow Hunt J., his Honour fell into error in some of the comments he made. Yeldham J. made a full review of the authorities, commencing with Smith v. Browne (supra), and went on to say (p. 604): ``It is the existence of `evidence to establish the cause of action' and not the truth of the facts constituting such evidence which must be proved. In these circumstances it seems to me that hearsay evidence, which would normally be rejected if tendered at the trail to establish the truth of the facts to which it relates, may be sufficient to prove the existence of evidentiary material. By way of example, if the plaintiff's solicitor had annexed to his affidavit a series of statements taken from persons who might be expected to be called at the hearing, deposing to matters which, if proved, would establish circumstances giving rise to the existence of a duty of care owed by some or all of the defendants, and breach of that duty, with injury and death as a consequence, that would plainly be sufficient, although the annexed statements would be hearsay.'' Having considered the available evidence, his Honour concluded (pp. 610-611); ``The position in the present case is complicated by the fact that the deceased was employed, during the years to which I have earlier referred, by a number of employers and that, assuming there to be a causal relation between his exposure to asbestos dust and the condition from which he died, the material presently before the court does not demonstrate a chain of causation leading to any particular employer. If the matter goes to trial the jury cannot, of course, be permitted to guess. So also in the case

of the fourth defendant, assuming evidence to be given that asbestos from other suppliers was used on occasions during the employment of the deceased. But I do think there is material which shows that evidence to establish a cause of action against each of the defendants in all other respects does exist and is available to be adduced at the trial. Notwithstanding the force of the submission concerning the distinction between ingestion and inhalation of asbestos dust, the critical factor is that evidence is available to establish that at the period in question it was foreseeable that the entry of such dust into the human body may cause injury. I consider that evidence exists that precautions, which I infer were likely to avoid or minimise the entry of such dust into the body, were available to be but were not taken by or on behalf of each of the defendants. In arriving at these conclusions I have taken into consideration that `a certain amount of speculation as to the precise nature of the evidence which will be called at the trial necessarily must be permitted' (per Hunt J. at 443); that the test is not whether the evidence would launch a case before a jury; that the actual evidence need not be adduced; that inferences may be drawn from the available material; and that the court is not required to conduct a preliminary hearing to satisfy itself that evidence available to the applicant would enable her to prove her case. In my opinion counsel for the plaintiff was correct in submitting, as he did, that the distinction between measures to prevent inhalation and those to prevent ingestion is really too fine to be of critical significance in an application such as the present, although it will no doubt assume considerable importance at the trial. I think that he was correct also in submitting that it is not necessary for the plaintiff to be able to point at this stage to the particular defendant or defendants whose failure to take precautions caused or contributed to the death of the deceased, it being sufficient to point to the possibility of each defendant having at least contributed to it. It is hardly necessary to observe that if no more than this is established at the trial the plaintiff will fail as against each defendant: see Nesterczuk v. Mortimore (at 158); Maher-Smith v. Gaw and TNT Management Pty. Ltd. v. Brooks

(especially at 269; 349). By the time the matter comes to be heard, and perhaps with the aid of interlocutory procedures such as discovery and interrogatories, the evidence may point to one or some of the defendants as being more probably responsible than the others. Cases such as those to which I have just referred were of course concerned with the situation at the trial.'' It is this last paragraph that Mr Sperling criticised as going beyond the permissible limit. In particular, he submitted that in so far as his Honour's words would allow an order to be made where there was no proof of any evidence being available to prove the involvement of a particular defendant, no order for extension of time should be made in the anticipation that by the time the matter comes on for hearing, and perhaps with the aid of discovery and interrogatories, the necessary evidence may have been procured. The passage in the judgment of Yeldham J. was explained and approved by Clarke J.A., who delivered the judgment of the Court, in Broken Hill Pty. Co. Ltd. v. Waugh (1988) 14 N.S.W.L.R. 360. His Honour said (p. 372): ``According to well recognised principles where a plaintiff, who has sued multiple defendants one or more of whom may be liable, shows prima facie that at least one defendant may be responsible, the court is bound to hear the whole of the evidence before entertaining submissions by any other defendant that no case has been established against him. This is so even if the plaintiff has not called any evidence demonstrating the fault of the particular defendant. The rationale of the rule, as explained in Menzies v. Australian Iron & Steel (1952) 52 S.R. (N.S.W.) 62; 69 W.N. (N.S.W.) 68, is that if the rule were otherwise the defendant against whom a prima facie case was shown might escape liability by addressing evidence to the effect that the defendant against whom the case had been dismissed was the party who was actually at fault. Indeed that is what occurred in Hummerstone v. Leary [1921] 2 K.B. 664, the case cited in Menzies. Obviously that result would be inimical to the interests of justice.

The respondent brought evidence, which was supplemented by Dr Lee's testimony, before Master Hogan which established, prima facie, the probability of a causal link between his exposure to asbestos while in the employ of the first appellant and his illness, and also showed the possibility of a similar link between his illness and his exposure while employed by the second appellant. If the same evidence was adduced in the trial between the respondent and the appellants then neither appellant could seek dismissal from the suit prior to the close of the evidence. Seen in this light the respondent established that there was `evidence to establish his cause of action' against both appellants.'' (emphasis added) His Honour then cited the passage criticised by Mr Sperling and went on: ``The respondent has demonstrated the availability of evidence which shows, prima facie, that there is a probability that his illness was caused by exposure to asbestos in the employment of the appellants and even though the greater probability is that the relevant exposure is that which occurred while he worked for the first appellant he has nevertheless satisfied the test in s. 58(2)(b). Once there remained the possibility that this exposure while employed by the second appellant caused, or contributed, to his illness then, in the circumstance that his claim is pressed against multiple defendants, he established the availability of evidence to establish his cause of action against that appellant.'' (emphasis added) A recent review of all the authorities has been carried out by the Full Court of the Supreme Court of Queensland in Dwan v. Farquhar & Ors (1987) Aust. Torts Reports ¶80-096. Matthews J. pointed out (p. 68,589) that: ``In an application under the section it is not necessary for the applicant to either set out the relevant evidence as it will be led at the trial or test it by reference to whether it is sufficient for the

case founded upon it to go to the jury.'' Thomas J. also took the same view when he said (p. 68,592): ``An applicant is not required fully to prove his case in order to obtain an extension of time, but he must make it appear to the Court that there is evidence to establish his right of action. The nature of the evidence needed to establish this has been expressed in different ways in a number of cases, and although the following views emphasise different aspects of the way in which material should be presented and considered upon such applications, they are in my view consistent. Firstly, it is not necessary that the evidence be the actual evidence adduced at the trial, or that it be in admissible form (Martin v. Abbott Australasia Pty. Limited (1981) 2 N.S.W.L.R. 430 at p. 443). Hearsay evidence may be used, although there may be cases where the Chamber Judge may decline to act upon it according to the circumstances in which it is produced. The following useful statements have been made: `... the language of the sub-section is satisfied, if it is made to appear to the Court that the evidence exists and can be adduced.' (Per Gowans J. in Evans v. Repco Transmission Co. Pty. Ltd. (1975) V.R. 150 at p. 152.) `... what must appear to the Court is that there is evidence which can be adduced from which the Court could form an opinion that the applicant has a right of action.' (Per Kelly J. in Ex parte Minoque (1980) Qd.R. 350 at p. 352; approved by the Full Court in Minoque v. Bestobel Industries Pty. Ltd. (1981) Qd.R. 356 at p. 358; cf. Martin v. Abbott (above) at p. 443 and Baker v. Australian Asbestos Insulations Pty. Ltd. (1984) 3 N.S.W.L.R. 595 at p. 603.) At the same time it is not right for the Court on such an application to imagine circumstances or put together a case which is not justified by evidence or apparent evidence. Guesses (as distinct from proper inferences) are no more permissible on these applications than they are upon a trial (cf. Jones v. Dunkel (1958)

101 C.L.R. 298 at p. 305).'' The guidance that may be derived from these authorities conforms to the self-evident purpose of the provision. The starting point is the general rule that, on the elapse of the general period of limitation, a person is safe from becoming embroiled in litigation. However, the general rule may occasion gross injustice, for example, in cases where the damage or injury may not become manifest for many years after the wrongful act. Asbestosis is a very good illustration. Therefore, there is a discretion to extend the time for commencement of actions. There are two barriers. First, the obligation to show that there was a good reason for not bringing the action within time. That reason has to be absence of knowledge and means of knowledge of a material fact of a decisive character. Second, is the obligation to show that if permitted to bring the action, evidence will be available to show a cause of action. This requirement is designed to ensure that there will be no harassment of a defendant by an action which, for example, due simply to effluxion of time, cannot be proved because the evidence is no longer available. The process the section calls for is one of screening. The application is not a preliminary trial of the issues. The standard to satisfy is not that required to allow a case to go to the jury. It is only proof of the availability of the evidence which is required rather than the evidence itself. It is for this reason that hearsay is permitted. Inferences are open to be drawn. That is by the very nature of the purpose of the process. What is excluded is guesswork. Most importantly for present purposes, a special rule applies in case of multiple defendants where it is sufficient to prove the existence of evidence showing the possibility of a case against a particular defendant being made out. I should, perhaps, mention that we were not referred to, or asked to consider, the relatively recent departure in Victoria from the interpretation earlier embraced by Kaye and Gowans JJ. In C.S.R. Ltd. v. Robenalt (unreported; 18 December 1987), a Full Court, which included Kaye J., took the view that an applicant was required to show the availability of evidence which would make out a prima facie case. In all the circumstances of this case, it is unfortunate that, although a simplified approach to applications for extension of time for

commencement of actions was recommended by the New South Wales Law Reform Commission, as long ago as October 1986, in its Report on Limitation of Actions for Personal Injury Claims (LRC 50), no parliamentary action has yet been taken. The evidence The evidence that was adduced before the District Court of available evidence pointing to a cause of action against Hardies and Wunderlich was wafer thin. The facilities of discovery and interrogatories, available in the District Court, by leave of the Court, were not sought to be utilised. In circumstances such as the present, where knowledge of the relevant material is confined to the defendants, the failure to use these interlocutory tools make a plaintiff's task very much more difficult than it ought to have been. The evidence discloses that Asbestos was incorporated on 28 November 1944. Subject to modifications, the articles of association incorporated Table A in the Second Schedule to the Companies Act, 1936. Article 4 provided that the company should adopt an agreement made between Wunderlich Ltd., of the first part, James Hardie & Co. Pty. Ltd., of the second part and Douglas Croudace and George Roger Sutton, on behalf of the company, of the third part and ``the directors shall carry the same into effect with full power nevertheless at any time and from time to time either before or after the adoption thereof to agree to any modification thereof''. Although the plaintiff endeavoured to subpoena the agreement or copies of it, both from Hardies and Wunderlich, no such agreement was ever produced. Article 8 provided that no shares shall be transferred to any person other than Hardies or Wunderlich except with their written consent. Article 21 provided that the numbers of directors shall be not less than three nor more than five unless the company in general meeting otherwise unanimously decided and the first directors were to be four persons, two of whom were to be nominated by Wunderlich and two by Hardies. By art. 22, no fees shall be paid to a director unless otherwise unanimously determined by the directors. Article 23 provided that: ``Where in these Articles of Association a resolution or

determination of the directors is required to be unanimous and where any resolution to determine the price or prices to be charged by the company to an original shareholder for asbestos fibre of any class whatsoever is proposed such resolution or determination must be passed or evidenced by a resolution in writing signed by at least four directors two of whom shall be directors nominated by Wunderlich Ltd. or their alternates and two of whom shall be directors nominated by James Hardie & Co. Pty. Ltd. or their alternates.'' By art. 31, Wunderlich and Hardies were each entitled at any time to revoke the appointment of any director nominated or appointed by them and to replace such director. By art. 35, Hardies and Wunderlich were entitled alternately to appoint the chairman of the board of directors. The memorandum of association of Asbestos was one appropriate for a mining company with no special features. The nominal share capital of the company was £50,000, divided into 50,000 shares of £1 each. On 12 October 1944, the delegate of the Treasurer consented to the issue of 10,000 shares of £1 each to Wunderlich and 10,000 shares of £1 each to Hardies, at a premium of not more than nine shillings per share for cash subscription. These shares were taken up and so held until 1953 when Hardies acquired the Wunderlich shareholding. The plaintiff tendered some minutes of meetings of directors of Wunderlich. On 8 November 1945, the directors of Wunderlich resolved that the secretary of Asbestos be asked to present a monthly report for the board of Wunderlich. It would seem that thereafter, that was done until the sale of the Wunderlich shares. On 11 April 1946, it was noted in relation to Asbestos that ``Minutes of Directors' Meeting of 27 March were submitted''. On 4 July 1946, the minutes of the board of directors of Wunderlich noted, in relation to Asbestos, that ``the Directors concur in the continuance of operations so long as it is shown that fibre is being produced at a cost not exceeding forty pounds per ton''. On 22 April 1948, the directors of Wunderlich noted a report from the secretary that the sum of £1,500 had been advanced to Asbestos as an interest free loan. On 22 January 1953, the directors of Wunderlich resolved that ``the Directors approve of the

proposal that Hardies take the whole output of the mine for the twelve months which commenced on 1 November 1952''. On 19 March 1953, the directors of Wunderlich resolved that that company's holding of 10,000 fully paid £1 shares in Asbestos be sold to Hardies for £2 5s. per share. In the chairman's address to shareholders of Hardies on 24 June 1954, he said, inter alia: ``For some years your manufacturing subsidiary (i.e. James Hardie & Co. Pty. Ltd.) was a joint partner in Asbestos Mines Pty. Ltd. a company mining asbestos at Baryulgil, New South Wales and during the financial year it was fortunate in acquiring the other partner's interest... For taxation purposes it was considered desirable to have the shares of the subsidiary transferred to James Hardies Asbestos Ltd. and this has been done.'' The shares were transferred from James Hardie & Co. Pty. Ltd. to James Hardie Asbestos Ltd. at a price of £1 per share, not the £2 5s. paid to Wunderlich. At an extraordinary general meeting in November 1955, the chairman said: ``Our Company through one of its subsidiaries Asbestos Mines Pty. Ltd. operates the only Mine in Australia which produces at an economical cost a grade of asbestos fibre suitable for use in our products.'' Apart from this material, the plaintiff relied on an affidavit from Mr Burke who had worked at the mine and mill complex from 1958 until 1979. He was promoted, over the years, from mill foreman to mine manager. As mine manager, he was entitled to the status of a staff member of the James Hardie Staff Association. Together with some other long-term employees at the mine, he was a contributor to the James Hardie Staff Superannuation Fund. Shortly after Mr Burke started work at the mine, a new mill was constructed. It was prefabricated to a design worked out between a consultant geologist, Mr Proud, and Mr Page, an employee of Hardies. From 1969, inhouse dust sampling was carried out by Mr Winters, a Hardies' in-

house health engineer. The plaintiff submitted that the material I have attempted to summarise proves the existence of evidence to show that, initially, the mining operation was conducted by a partnership of Wunderlich and Hardies which determined, inter alia, the destination of output, the price of the product, the decisions to be made by the board of directors of Asbestos and the identity of future shareholders. It was said that the inference may be drawn that there was no room left for a truly independent, separately functioning, corporate entity. It is, of course, clear that in these respects, the relationship between Asbestos, Hardies and Wunderlich was no different from the everyday situation of a holding company and its fully-owned subsidiary. In everything but name, the two are as one. The holding company customarily exercises complete dominion and control over the subsidiary. There is little difference in the situation when, instead of a holding company and a fully-owned subsidiary, there are two shareholders who utilise a third company as the joint venture vehicle. In essence, then, the submission for Hardies and Wunderlich was simple. If it were to be held that during the period of joint shareholding by Hardies and Wunderlich, and later by Hardies by itself, they were the principal, and Asbestos, the agent, then that conclusion could apply in relation to just about every holding company and fully-owned subsidiary and the principle of limited liability in relation to the activities of subsidiaries would be left in tatters. With great respect to him, in my view, the learned Judge was led into error, in a number of respects, in the approach that he adopted to the resolution of the plaintiff's application. In fairness to him, it should be said that a number of difficulties were not exposed by the arguments of the plaintiff. No settled principle for piercing the corporate veil The threshold problem arises from the fact there is no common, unifying principle, which underlies the occasional decision of courts to pierce the corporate veil. Although an ad hoc explanation may be offered by a court which so decides, there is no principled approach to be derived from the authorities (cf. Whincup ``Inequitable

Incorporation — The Abuse of Privilege'' (1981) 1 Company Lawyer 158). In the result, it is a matter of extreme difficulty to say whether the evidence adduced meets even the less than exacting requirements of the section. The rule in Salomon (supra) was laid down at a time when economic circumstances were vastly different. The principle of laissez faire ruled supreme and the fostering of business enterprise demanded that the principle of limited liability be rigidly maintained. To date, the effect of incorporation has remained the same, notwithstanding the proliferation of conglomerates, holding companies and subsidiaries. It was explained by Lord Sumner in Gas Lighting Improvement Co. Ltd. v. Inland Revenue Commissioners (1923) A.C. 723 in a way that has never been departed from. He said (p. 740): ``It is said that all this was `machinery', but that is true of all participations in limited liability companies. They and their operations are simply the machinery, in an economic sense, by which natural persons, who desire to limit their liability, participate in undertakings which they cannot manage to carry on themselves, either alone or in partnership, but, legally speaking, this machinery is not impersonal though it is inanimate. Between the investor, who participates as a shareholder, and the undertaking carried on, the law interposes another person, real though artificial, the company itself, and the business carried on is the business of that company, and the capital employed is its capital and not in either case the business or the capital of the shareholders. Assuming, of course, that the company is duly formed and is not a sham (of which there is no suggestion here), the idea that it is mere machinery for effecting the purposes of the shareholders is a layman's fallacy. It is a figure of speech, which cannot alter the legal aspect of the facts.'' In the light of the argument in this case, it is as well to look briefly at the decision in Salomon. The facts were that Mr Salomon had, for some years, carried on business as a leather merchant and food manufacturer. He decided to form a limited company to purchase his business but wished to retain control over the conduct of the business. He and six other members of his family subscribed, for one share

each, in the company and Mr Salomon and his two sons were appointed directors. The business did not prosper and it was wound up a year after incorporation. The liquidator contended that the company's business was, in reality, that of Mr Salomon and that the company was just a sham designed to limit Mr Salomon's liability for debts. The trial Judge, Vaughan Williams J., concluded that the subscribers of the memorandum held their shares as nominees for Mr Salomon and that the latter's whole purpose in forming the company was to use it as an agent to run his business for him. As the Judge said the decision is reported as Broderip v. Salomon (1895) 2 Ch. 323 at p. 330: ``I wish, if I can, to deal with this case exactly on the basis that I should do if the nominee, instead of being a company, had been some servant or agent of Mr Salomon to whom he had purported to sell his business.'' In the result, he found that the liquidator was entitled to hold Mr Salomon liable for the debts of the company. The Court of Appeal came to the same conclusion although for different reasons. The House of Lords unanimously reversed the trial Judge and the Court of Appeal. The Lord Chancellor rejected the trial Judge's view that the company was to be treated as Mr Salomon's agent, in the following words (1897) A.C. 22 at p. 31: ``Either the company was a legal entity or it was not. If it was, the business belonged to it and not Mr Salomon. If it was not, there was no person and no thing to be an agent at all.'' Lord Herschell said (p. 43): ``In a popular sense, the company may in every case be said to carry on business for and on behalf of its shareholders; but this certainly does not in point of law constitute the relation of principal and agent between them or render the shareholders liable to indemnify the company against the debts which it incurs.'' Similarly, Lord Macnaghten (p. 51): ``The company is at law a different person altogether from the subscribers to the memorandum; and, although it may be that

after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or a trustee for them.'' In the light of these very explicit statements, it was a task of extreme difficulty for courts to make an inroad, slight as it may have been, in the principle that a company had a separate legal personality, by holding, where fairness clearly so demanded, that a company was acting as an agent for its shareholders. There is a useful review of decisions up to 1986 in the judgment of Young J. in Pioneer Concrete Services Ltd. v. Yelnah Pty. Ltd. & Ors (1987) 5 ACLC 467 at p. 474 et seq.; (1986) 5 N.S.W.L.R. 254 at p. 264 et seq. Probably the outstanding instance where a court so held was Smith Stone & Knight Ltd. v. Birmingham Corporation (1939) 4 All E.R. 116. The plaintiff had a fully-owned subsidiary called Birmingham Waste Co. Ltd. The profits of the subsidiary were treated as profits of the holding company which appointed the persons who conducted the business and were in effectual and constant control. The defendant compulsorily acquired the premises upon which the business of the subsidiary was carried on and the claim for compensation was made by the holding company. The defendant contended that the proper claimant was the subsidiary, being a separate legal entity. The advantage to the defendant was that, by virtue of the Lands Clauses Consolidation Act, 1845 it would not have been liable to pay compensation to an occupant in the position of the subsidiary. That result would have been obviously unjust and it is quite evident that Atkinson J. thought so. The Judge said (pp. 120-121): ``It is also well settled that there may be such an arrangement between the shareholders and a company as will constitute the company the shareholders' agent for the purpose of carrying on the business and make the business the business of the shareholders. In Gramophone & Typewriter, Ltd. v. Stanley, [1908] 2 K.B. 89 Cozens-Hardy, M.R., said, at pp. 95, 96: `The fact that an individual by himself or his nominees holds practically all the shares in a company may give him the control of the company in the sense that it may enable him by

exercising his voting powers to turn out the directors and to enforce his own views as to policy, but it does not in any way diminish the rights or powers of the directors, or make the property or assets of the company his, as distinct from the corporation's. Nor does it make any difference if he acquires not practically the whole, but absolutely the whole, of the shares. The business of the company does not thereby become his business. He is still entitled to receive dividends on his shares, but no more. I do not doubt that a person in that position may cause such an arrangement to be entered into between himself and the company as will suffice to constitute the company his agent for the purpose of carrying on the business, and thereupon the business will become, for all taxing purposes, his business. Whether this consequence follows is in each case a matter of fact. In the present case I am unable to discover anything in addition to the holding of the shares which in any way supports this conclusions.' Then Fletcher Moulton, L.J., said the same thing on pp. 100 and 101. Then in Inland Revenue Commrs v. Sansom, [1921] 2 K.B. 492 Lord Sterndale said, at p. 503: `There may, as has been said by Lord Cozens-Hardy, M.R., be a position such that although there is a legal entity within the principle of Salomon v. Salomon & Co...., that legal entity may be acting as the agent of an individual and may really be doing his business and not its own at all. Apart from the technical question of agency it is difficult to see how that could be, but it is conceivable. Therefore the mere fact that the case is one which falls within Salomon v. Salomon & Co.... is not of itself conclusive.''' Atkinson J. pointed out that each of the instances where an agency was found was a revenue case. From the decisions he extracted six points which he deemed relevant for the determination of the question of who was really carrying on the business. These were: (1) Were the profits treated as the profits of the parent?

(2) Were the persons conducting the business appointed by the parent? (3) Was the parent the head and the brain of the trading venture? (4) Did the parent govern the adventure, decide what should be done and what capital should be embarked on the venture? (5) Did the parent make the profits by its skill and direction? (6) Was the parent in effectual and constant control? (For the attempts of U.S. courts to construct a check list see De Witt Truck Brokers v. W. Ray Flemming Fruit Co. 540 F. (2d) 681 (4th Cir. 1976); National Bond Finance Co. v. General Motors Corp. 238 F. Supp. 248 (1964).) The factual position which gave rise to the dispute was almost the reverse in D.H.N. Food Distributors Ltd. & Ors v. London Borough of Tower Hamlets (1976) 3 All E.R. 462. There it was the parent which conducted the business on land which it held on an insecure tenure from one of its subsidiaries. Another related business on the land was carried on by another subsidiary. Members of the Court of Appeal gave several grounds for the conclusion that compensation for disturbance of the business was payable to the parent. Lord Denning said (p. 467): ``Third, lifting the corporate veil. A further very interesting point was raised by counsel for the claimants on company law. We all know that in many respects a group of companies are treated together for the purpose of general accounts, balance sheet and profit and loss account. They are treated as one concern. Professor Gower in his book on company law (Principles of Modern Company Law (3rd ed, 1969) p. 216) says: `there is evidence of a general tendency to ignore the separate legal entities of various companies within a group, and to look instead at the economic entity of the whole group'. This is especially the case when a parent company owns all the shares of the subsidiaries, so much so that it can control every movement of

the subsidiaries. These subsidiaries are bound hand and foot to the parent company and must do just what the parent company says. A striking instance is the decision of the House of Lords in Harold Holdworth & Co. (Wakefield) Ltd. v. Caddies [1955] 1 All E.R. 725; [1955] 1 W.L.R. 352. So here. This group is virtually the same as a partnership in which all the three companies are partners. They should not be treated separately so as to be defeated on a technical point. They should not be deprived of the compensation which should justly be payable for disturbance. The three companies should, for present purposes, be treated as one, and the parent company, D.H.N., should be treated as that one. So that D.H.N. are entitled to claim compensation accordingly.'' Sir Reginald Goff L.J. was also prepared to pierce the corporate veil. He said (pp. 468-469): ``I would not at this juncture accept that in every case where one has a group of companies one is entitled to pierce the veil, but in this case the two subsidiaries were both wholly owned; further, they had no separate business operations whatsoever; thirdly, in my judgment, the nature of the question involved is highly relevant, namely whether the owners of this business have been disturbed in their possession and enjoyment of it. I find support for this view in a number of cases, from which I would make a few brief citations, first from Harold Holdworth & Co. (Wakefield) Ltd. v. Caddies [1955] 1 All E.R. 725 at 737, 738; [1955] 1 W.L.R. 352 at 367 where Lord Reid said: `It was argued that the subsidiary companies were separate legal entities, each under the control of its own board of directors, that in law the board of the appellant company could not assign any duties to anyone in relation to the management of the subsidiary companies, and that, therefore, the agreement cannot be construed as entitling them to assign any such duties to the respondent. My Lords, in my judgment, this is too technical an argument. This is an agreement in re mercatoria, and it must be construed in the light of the facts and realities of the situation. The appellant company owned the whole share capital of British Textile

Manufacturing Co., and, under the agreement of 1947, the directors of this company were to be the nominees of the appellant company. So, in fact, the appellant company could control the internal management of their subsidiary companies, and, in the unlikely event of there being any difficulty, it was only necessary to go through formal procedure in order to make the decision of the appellant company's board fully effective.' That particular passage is, I think, especially cogent having regard to the fact that counsel for the local authority was constrained to admit that in this case, if they had thought of it soon enough, D.H.N. could, as it were, by moving the pieces on their chess board, have put themselves in a position in which the question would have been wholly unarguable. I also refer to Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All E.R. 66; [1959] A.C. 324. That was a case under s. 210 of the Companies Act 1948, and Viscount Simonds said: `I do not think that my own vies could be stated better than in the late Lord President Cooper's words on the first hearing of this case. He said: `In my view, the section warrants the court in looking at the business realities of a situation and does not confine them to a narrow legalistic view'.' My third citation is from the judgment of Danckwerts L.J. in Merchandise Transport Ltd. v. British Transport Commission [1961] 32 All E.R. 495 at 518; [1962] 2 Q.B. 173 at 206, 207 where he said that the cases — `show that where the character of a company, or the nature of the persons who control it, is a relevant feature the court will go behind the mere status of the company as a legal entity, and will consider who are the persons as shareholders or even as agents who direct and control the activities of a company which is incapable of doing anything without human assistance.'''

(emphasis added) Shaw L.J. said (pp. 473-474): ``Why then should this relationship be ignored in a situation in which to do so does not prevent abuse but would on the contrary result in what appears to be a denial of justice? If the strict legal differentiation between the two entities of parent and subsidiary must, even on the special facts of this case, be observed, the common factors in their identities must at the lowest demonstrate that the occupation of D.H.N. would and could never be determined without the consent of D.H.N. itself.'' If I may say so, there appeared to be no special circumstances in the facts of the case which differentiated it from the ordinary relationship of parent and fully-owned and controlled subsidiary. Rare indeed is the subsidiary that is allowed to run its own race. The actual decision was considered doubtful by Lord Keith of Kinkel who delivered the judgment of the House of Lords in Woolfson v. Strathclyde Regional Council (1978) 38 P. & C.R. 521. In Dennis Willcox Pty. Ltd. v. F.C. of T. 88 ATC 4292; (1988) 79 A.L.R. 267 the judgment of the Full Court of the Federal Court was delivered by Jenkinson J. His Honour considered all the relevant authorities and concluded (ATC p. 4298; A.L.R. p. 274): ``Neither the circumstance that a company is completely subject to the ownership and the direction of another person nor the circumstance that that other person exercises directorial control of the activities of the company in ways which minimise the manifestations of the company's separate legal identity will justify, in my opinion, a conclusion that acts in the law formally done by the company are to be regarded, for purposes of the kind here in question in relation to Australian income tax law, as acts in the law done by that other person.'' It may be argued that his Honour distinguished decisions, such as that of Atkinson J., by reference to principles of Australian income tax law. A most exhaustive and thorough examination of the consequences of incorporation was recently carried out by the English Court of Appeal,

in a decision we were not referred to, Maclaine Watson & Co. Ltd. v. Department of Trade and Industry (1988) 3 W.L.R. 1033. The dispute arose from the collapse of the International Tin Council. It was an international organisation, established by treaty in 1956, made between a number of States, including the United Kingdom. It was held that the ITC was a legal entity, distinct from its members, in the same way as a body corporate. In his judgment, Kerr L.J. confronted precisely the problem that I find so difficult to understand, how the proposition that a company is merely the agent for the incorporators can withstand the statements of the Law Lords in Salomon. His Lordship said (p. 1098): ``In submitting that when entering into contracts the ITC nevertheless contracted as agent for its own members, the plaintiffs are therefore faced with the fundamental jurisprudence enshrined in the decision of the House of Lords in Salomon v. A. Salomon & Co. Ltd. [1897] A.C. 22. The crucial point on which the House of Lords overruled the Court of Appeal in that landmark case was precisely the rejection of the doctrine that agency between a corporation and its members in relation to the corporation's contracts can be inferred from the control exercisable by the members over the corporation or from the fact that the sole objective of the corporation's contracts was to benefit the members. That rejection of the doctrine of agency to impugn the non-liability of the members for the acts of the corporation is the foundation of our modern company law. The fallacy of the existence of any such agency relationship is particularly clearly exposed in the speech of Lord Herschell, at pp. 42-43, but there is no need to cite from it. Mr Sumption put forward two answers. First, he said that the structure of the ITC is quite different from that of a company with shareholders, because the business and objects of the ITC are exclusively those of its members and the ITC acts directly on the instructions of the members. In this connection he referred to many provisions of ITA 6 in addition to article 4, such as articles 7, 13, 21 and 28. In particular, he relied on the fact that the ITC has no board of directors like an ordinary company, but that the

shareholders are in effect themselves the board of directors. But Mr Pollack and Mr Grabiner were quite right in submitting that this is no basis for distinguishing the analysis of Salomon v. A. Salomon & Co. Ltd. The existence of a board of directors in that case played no part in the decision. Whether a corporation acts directly on the instructions of the members as directors, or merely indirectly by reason of the overriding control which the members can exercise in general meeting, makes no difference in principle. And the fact that the business objectives of the body corporate were those of its members was precisely the point which was held in Salomon v. A. Salomon & Co. Ltd. to make no difference. Furthermore, the defendants disagreed with Mr Sumption's analysis of ITA 6. They pointed out that the everyday management of the ITC's activities and contracts was not controlled by the delegates of the members, meeting in council sessions from time to time, but by the executive chairman and buffer stock manager. They also disputed Mr Sumption's assertion that the council owed no obligations to the ITC of the same kind as a board of directors owes to its company. On the contrary, being divided into producers and consumers, the members had opposing interests. In relation to these it was the function of the council to hold the balance, in order to achieve the overall objectives of the ITC. Finally, the defendants pointed out that neither the council nor any of the officers had authority to pledge the credit of the members as opposed to the limits of the assets of the ITC itself, and that article 21 showed that for borrowings, government guarantees or undertakings might be provided. In my view, although they do not affect the result, these comments are justified. Finally, Mr Sumption relied on two cases by way of analogy in order to show that there was an agent/principal relationship between the ITC and its members. These were Gramophone & Typewriter, Ltd. v. Stanley [1908] 2 K.B. 89 and the decision of Atkinson J. in Smith, Stone and Knight Ltd. v. Birmingham Corporation [1939] 4 All E.R. 116. But neither of these cases is of any assistance to the plaintiffs. In the first it was held that there

was no principal/agent relationship between a parent company and its wholly-owned subsidiary even though the business of the subsidiary was wholly under the control of the parent. Buckley L.J. pointed out expressly, at p. 106, that `obviously' only the German company, and not its English shareholders, would be liable on the German company's contracts. If anything, the decision runs counter to Mr Sumption's submission. In the second case the facts were so unusual that they cannot form any basis of principle. A company acquired a partnership concern, registered it as a subsidiary company but carried on its business as part of the parent company's own business exactly as if the subsidiary were still a partnership. The profits of the subsidiary were treated as the profits of the parent company. When the premises of the subsidiary were compulsorily acquired it was held that the parent — and not merely the subsidiary — was entitled to claim compensation, on the ground that the subsidiary had in fact been operating on behalf of the parent. In my view no conclusion of principle can be derived from that case. It follows that the relationship between the member states and the ITC under the provisions of ITA 6 is not that of principals and agent but in the nature of a contract of association or membership similar to that which arises upon the formation of a company between the shareholders inter se and the legal entity which they have created by their contract of association. The correct analysis of ITA 6 is in line with the decision of the House of Lords in Salomon v. A. Salomon & Co. Ltd. [1897] A.C. 22 and not with any contract of agency between the members as principals and the council as the members' agent.'' Nourse L.J., although he dissented on some aspects of the argument, on this point agreed with the other two members of the Court (see p. 1129). The third member of the Court, Ralph Gibson L.J., dealt with this argument more fully. Apparently, Mr Sumption Q.C. for the brokers had structured his submissions by reference to the six questions stated by Atkinson J. In the result, he submitted that: (1) The enterprise was run for the benefit of the members rather than the ITC itself.

(2) The individuals who ran the business of the ITC were appointed by the members. (3) The members were the head and brain of the venture of the ITC. (4) The members governed that venture, deciding what the ITC should do and what resources should be committed to it. (5) The benefits of the venture of the ITC were achieved by the skill and direction of the members. (6) The members were in constant and effectual control. His Lordship rejected the analogy sought to be based on Smith Stone & Knight Ltd. (supra) (p. 1155). He said (p. 1157): ``I agree with Kerr L.J. that the real relationship between the ITC and its members is that of a contract of association or membership similar to that between shareholders and a company under our law. It is markedly different from the relationship between the parent and subsidiary company in Smith, Stone and Knight Ltd. v. Birmingham Corporation [1939] 4 All E.R. 116. In that case the parent company had acquired the premises and the business in question before formation of the subsidiary company. Neither the business nor the premises were vested in the subsidiary company which, in the view of Atkinson J., could properly be regarded as managing the business on behalf of and on the instructions of the one controlling member, the parent company.'' There is an appeal pending to the House of Lords. However, the judgments of the Lords Justices seem to me to spell the death knell of the usual arguments by which the effects of incorporation are sought to be displaced by application of agency principles by creditors of the subsidiary. Professor Ford in Principles of Company Law (4th ed.) p. 135, was correct when quoting Lord Wedderburn he said: ``The common law is still so uncertain and undeveloped that it is

impossible to state a principle which will assist citizens to predict when the veil of the corporate entity will be lifted (Wedderburn [1958] C.L.J. 152 at 155). Some see virtue in the law's unsettled state as giving courts more power to counter fraud, oppression or sharp practice in general or to condone some informality in the affairs of small companies.'' There are some propositions that may safely be accepted. Thus, the potential only to exercise control over the subsidiary is insufficient. The exercise in fact of some control over the subsidiary is insufficient. Thereafter one enters the uncertain. As was said in the United States in 1905 in United States v. Milwaukee Refrigerator Transit Co. 142 F. 247, 255: ``If any general rule can be laid down,... it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.'' This amorphous test has not been clarified in the years since for, as is pointed out by Pennington (supra, p. 59): ``It is impossible in the present state of the law to determine when the court will imply such an agency or trusteeship. It is noteworthy, however, that the court is more ready to do so when the strict application of the principle of separate personality would result in an anomaly or an injustice, but it is far from true to say that an anomaly or injustice will always induce the court to depart from the strict rule, as the examples given earlier in this chapter show.'' If exercise of dominance be at least part of the test, what degree of domination is required? (Cf. Craig v. Lake Asbestos of Quebec Ltd. 843 F. (2d) 145 [3rd Circ. (1988)].) If so, what is the extent of reliance on the parent that is required to be shown? Is under-capitalisation a relevant factor? The law in Australia has not yet fully worked out answers to these and like questions.

Unity of enterprise theory The proposition that a company has a separate legal personality from its corporators survived the coming into existence of the large numbers of fully-owned subsidiaries of companies and their complete domination by their holding company (Pennington's Company Law (5th ed.) p. 806). There was continued adherence to the principle recognised by Salomon, notwithstanding that for a number of purposes, legislation recognised the existence of a group of companies as a single entity. Adolf A. Berle Jnr pointed out in ``The Theory of Enterprise Entity'' (1947) 47 Col. L.R. 343 that the conglomerate is a long way from the original concept of a corporation. In his view (p. 344): ``The so-called `artificial personality' was designed to be the enterpriser of a project. Multiplicity of artificial personalities within an enterprise unit would probably have been impossible under most early corporation laws.'' He continued (p. 345): ``The corporation is emerging as an enterprise bounded by economics, rather than as an artificial mystic personality bounded by forms of words in a charter, minute books, and books of account.'' The consequence of the theory, in circumstances such as the present, are summarised by him (p. 348): ``This category of cases stands still more squarely on the foundation of economic enterprise-fact. The courts disregard the corporate fiction specifically because it has parted company with the enterprise-fact, for whose furtherance the corporation was created; and, having got that far, they then take the further step of ascertaining what is the actual enterprise-fact and attach the consequences of the acts of the component individuals or corporations to that enterprise entity, to the extent that the economic outlines of the situation warrant or require.'' Such an approach finds a reflection in the passage from Professor Gower quoted by Lord Denning in D.H.N. (supra, p. 467). Whilst this

approach would solve many problems which are increasingly troubling the courts, its adoption may be foreclosed to Australian courts, below the High Court, as a result of the decision in Industrial Equity Ltd. & Ors v. Blackburn & Ors (1977) 137 C.L.R. 567. Although the Companies Act called for the bringing into existence of consolidated or group accounts and although for income tax purposes it was possible to look to some degree of recognition of the existence of a group of companies, absent legislation, the Court maintained the strict separation between a subsidiary and a holding company. Thus, although the holding company had full and effective control over the funds of the subsidiary and the way that they could be dealt with, none the less, the High Court held that the profits to which it could look for the purposes of declaration of dividends were confined to those already within the holding company. Similarly, in Walker v. Wimborne & Ors (1975-1976) CLC ¶40-251 at pp. 28,536-28,537; (1975-1976) 137 C.L.R. 1 at pp. 6-7, Mason J. said: ``To speak of the companies as being members of a group is something of a misnomer which may well have led his Honour into error. The word `group' is generally applied to a number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control. In such a case, the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder in company B if that company is enabled to trade profitably or realise its assets to advantage. Even so, the transaction is one which must be viewed from the standpoint of company A and judged according to the criterion of the interests of that company. ... Indeed, the emphasis given by the primary judge to the circumstance that the group derived a benefit from the transaction, Tended to obscure the fundamental principles that each of the companies was a separate and independent legal entity, and that it was the duty of the directors of Asiatic to consult

its interests and its interests alone in deciding whether payments should be made to other companies.'' (emphasis added) In the result, as the law presently stands, in my view the proposition advanced by the plaintiff that the corporate veil may be pierced where one company exercises complete dominion and control over another is entirely too simplistic. The law pays scant regard to the commercial reality that every holding company has the potential and, more often than not, in fact, does, exercise complete control over a subsidiary. If the test were as absolute as the submission would suggest, then the corporate veil should have been pierced in the case of both Industrial Equity and Walker v. Wimborne. It remains to be seen whether the time has come for the development of a more principled approach than the authorities provide at present. The incorrect test applied In my opinion, on the present application, it should not have been held that the plaintiff had failed to prove the availability of evidence which may make out a cause of action against Hardies and Wunderlich. This is for a number of reasons. First, so to hold was to come to a conclusion as to the final outcome of the trial. In my respectful view, in this respect, the learned Judged adopted an incorrect approach. This may be shown by the following citation (p. 224): ``The plaintiff relied on Baker (1984) 3 N.S.W.L.R. 595 however, I do not think it is applicable to this problem because here there is not evidence which proves the existence of evidentiary material which could be later used for trial.'' Even assuming that the appropriate test in the present case for determining whether the corporate veil should be pierced be the test of agency, his Honour dealt with the question as though he was disposing of the issue finally at a trial rather than at the much less demanding level demanded by sec. 58(2)(b) of the Limitation Act. In the present state of the law, it is not possible to say what the evidence would ultimately suffice to make out a case. The law on the topic

appears to be in a state of flux. It may be that only the High Court and perhaps not even it, can alleviate the consequences of the decision in Salomon so as to adapt the principle of limited liability to the economic realities of today. (Cf. Sargeant, ``Corporate Groups and the Corporate Veil in Canada'' (1988) 17 Man. L.J. 156.) However, in Gorton & Ors v. F.C. of T. (1964-1965) 113 C.L.R. 604 at p. 627 Windeyer J. said: ``What occurred on the afternoon of 19th May shows up the unreality and formalism into which the decision in Salomon's case [1987] A.C. 22 has led the law. The utterance of the right ritualistic phrases in their proper sequence, the signing of documents prepared in advance to record that this was done was, if one ignores the transient transmutations theoretically involved, merely an elaborately occult means of making a gift. There is an increasing tendency of courts in England, and perhaps more markedly in the United States, to retreat from the position where they must refuse to look behind the legal personality which the law has given to a private corporation, and to examine the purpose of its creation and the manner of its control. Moreover I am by no means sure that the companies that were created to carry out what Mrs Abel should direct ought not, if their separate legal personality be insisted upon, to be regarded as her agents, or as intermediaries, in the present transaction. However, this was not argued; and in the view I take it is not necessary to consider it.'' It has been said by some that his Honour's remarks are explicable simply of the basis that revenue cases stand in a special position. Yet his Honour's remarks are couched in terms of complete generality. The circumstances which have already been adduced in evidence will obtain colour at the trial from the particular circumstances of the dayto-day operation of Asbestos. Second, the Judge fell into error when he said: ``Having carefully considered the authorities I do not infer agency on behalf of any of the defendants. To begin with the doctrine of lifting the corporate veil has never been invoked in negligence

cases. It has been invoked in tax and registration cases and in compensation cases not being compensation for personal injury.'' His Honour was not referred to, as indeed we were not referred to, decisions in the United States where, in the context of claims in negligence, attempts were made to pierce the corporate veil. Much academic writing, to which, again, no reference has been made in the argument, points out how inappropriate are the tests of the kind mentioned by Atkinson J. in Smith Stone (supra) to actions in negligence to determine whether or not to pierce the corporate veil. Generally speaking, a person suffering injury as a result of the tortious act of a corporation has no choice in the selection of the tortfeasor. The victim of the negligent act has no choice as to the corporation which will do him harm. In contrast, a contracting party may readily choose not to enter into a contract with a subsidiary of a wealthy parent. The contracting entity may enquire as to the amount of paid-up capital and, generally speaking, as to the capacity of the other party to pay the proposed contract debt and may guard against the possibility that the subsidiary may be unable to pay (cf. G.L. Davies Q.C. ``The Law of Corporations'', unpublished). It seems to me reasonable, as indeed Goff L.J. suggested in D.H.N. Food Distributors (supra), that different considerations should apply in deciding whether to pierce the corporate veil in actions in tort from the criteria applied in actions in contract or, for that matter, revenue or compensation cases. Control and dominance by a holding company of a subsidiary do not in themselves increase the risk of injury to tort victims (cf. Gillespie, ``The Thin Corporate Line; Loss of Limited Liability Protection'' (1969) 45 N.D. Law Rev. 363 at p. 369 et seq.). The failure of a corporation to comply with usual corporate formalities, such as shareholders' and directors' meetings, useful as it may be as an indicator in an action for debt, has nothing to do with a claim by a pedestrian who has been hit by a motor vehicle owned by an insolvent subsidiary and either uninsured or inadequately insured. The factors of shareholder control and dominance by a parent corporation may be equally irrelevant in determining in actions in tort whether the parent should be held liable. It has been said by Professor Downs in ``Piercing the Corporate Veil — Do Corporations Provide Limited Personal Liability?'' (1985) 53

U.M.K.C. Law Review 95 that ``such control and dominance does not increase the risk of injury to tort victims, and, of course, had no connection with the particular negligence alleged''. Even though the proposition may be too broad, there is substance in it. It may be too broad because it may be the exercise of dominance that results in inadequate safety precautions being taken. Again, it may be exercise of control that results in underinsurance. Professor Downs suggested that the real determinant in tort cases should be whether a corporation ``should be permitted to shift the risk and responsibility for such occurrences to the victims or the general public by operating the business as a corporation without sufficient capital or insurance to cover foreseeable risks''. I recognise that it is possible to argue that the proposed general tort considerations should not be applicable in cases where the injured person is an employee. It could be argued that such a person has equal opportunity with a contracting party in determining whether or not to enter into the employer/employee relationship out of which the injury arises. However, whilst the employee may be able to choose whether or not to be employed by the particular employer, generally speaking, he has no real input in determining how the business will be conducted and whether reasonable care will be taken for his safety. For the sake of completeness, I should perhaps add that, in Lake Asbestos of Quebec (supra), a claim for personal injury by an employee by reason of exposure to asbestos, the Court of Appeals for the Third Circuit, applying New Jersey law, stated one of the requirements for piercing the corporate veil to be that ``the parent so dominated the subsidiary that it had no separate existence but was merely a conduit for the parent''. Lest it be thought that it is only academic writing and the obiter statement of Goff L.J. that support the proposition that different considerations need to be applied according to the nature of the case in determining whether to pierce the corporate veil, I should mention the decision of the Court of Appeals for the Third Circuit in Zubik v. Zubik 384 F. (2d) 267 (1967). The Court said (p. 273): ``Cases in bankruptcy or in taxation call for an entirely different evaluation of `fraud' or `injustice' than cases of controlled

corporate subsidiaries, or as in this instance, a case of corporate tort. (14) The defrauded creditor or `victim' of a business transaction with an undercapitalized corporation, for instance, often has a strong case for piercing the veil of a `sham' corporation. See 63 A.L.R. 2d 1051. The controversy in such cases invariably involves some degree of reliance by the plaintiff, contributing to the fraud, or undue advantage or trick accenting the injustice. But the injured tort claimant stands on a different footing. It is not contended that the claimants here relied upon Zubik Corporation's being more than a `mere operating company'. Limiting one's personal liability is a traditional reason for a corporation. Unless done deliberately, with specific intent to escape liability for a specific tort or class of torts, the cause of justice does not require disregarding the corporate entity. The corporate form itself works no fraud on a person harmed in an accident who has never elected to deal with the corporation. Once fraud or injustice demand piercing the corporate veil, then the intertwining of personal affairs with a family corporation can provide additional grounds for arguing that the defendant cannot be heard to complain. In such cases, the failure of various corporate formalities either contributes to the fraud involved or strengthens the argument for injustice by holding the individual in effect estopped. Footnote (14) Counsel have been unable to cite a case where the corporate entity was disregarded to make an individual liable for tort. As it was stated in Geller v. Transamerica Corporation, 53 F. Supp. 625, 631 (D Del 1963): `In the absence of extraordinary circumstances, a court will not disregard the corporate fiction and hold a stockholder liable for the torts of the corporation'.'' (Footnotes, other than footnote (14), omitted.) In fairness to the learned Judge, it should be said that none of these considerations appear to have been ventilated before him. Third, the learned Judge failed to take into account the principles

relating to multiple defendants most recently summarised by Clarke J.A. in Broken Hill Pty. Co. Ltd. v. Waugh (supra). Having given leave to proceed against Asbestos, it seems to me that, in accordance with principle, leave should have been granted as against the other proposed defendants as well, so that when the whole of the evidence is in, a determination can be made as to the liability of the various defendants. It may be argued that before a proposed defendant is deprived of the protection of the Limitation Act, more needs to be shown than merely the fact that there will be a multiplicity of defendants and that the question of who may be liable to the plaintiff should, therefore, be deferred until the conclusion of the evidence. It is in this context that it is of importance, in the present case, that the principles of liability of defendants in the position of Hardies and Wunderlich are still so uncertain. It seems to me that the very uncertainty in the law demonstrates the possibility of Hardies and Wunderlich being held liable after a trial. Taking all these matters into consideration and bearing in mind that if leave is denied, the plaintiff will for ever be deprived of the opportunity of demonstrating the liability of Hardies and Wunderlich, makes it erroneous to adopt the approach in principle and in law manifested by the judgment in the District Court. Discretion The respondents submitted that, even if the Court should take the view that the learned Judge was in error in his approach to the application, under the Limitation Act, as a matter of discretion, the Court should refuse to order a writ of certiorari to issue. It was submitted that if the application were returned to him for determination in accordance with law, the learned Judge would be bound to refuse the application. The applicant submitted that when the evidence is supplemented by utilising procedures of discovery and interrogatories, the plaintiff's case will be much stronger and, accordingly, the discretion should be exercised in his favour. Of course, it will be a matter for Flannery D.C.J. to determine, if an application is made, whether he should allow the evidence to be reopened and supplemented. Whether the evidence is reopened or not, it is, in my opinion, not correct to say that, if appropriate principles are applied,

the application is doomed to fail. In all the circumstances, the discretion should be exercised in favour of the plaintiff. In my opinion, an order in the nature of certiorari should go, the decision of Flannery D.C.J. quashed and the application returned to him for determination in accordance with law. Hardies and Wunderlich should be ordered to pay the plaintiff's costs in this Court. The costs of the applications before Flannery D.C.J. should be left for determination by his Honour. ORDERS 1. Order that so much of the order of Flannery D.C.J. of 11 March 1988 as dismissed the motion against the first, second and fourth defendants and that the plaintiff pay their costs of the motion be quashed. 2. Order that so much of the motion as sought orders against the first, second and fourth defendants be returned to Flannery D.C.J. for determination according to law. 3. Order that the first, second and fourth defendants pay the plaintiff's costs of the appeal.

Tax Institute CommLaw2 Module 1 — ASIC regulatory guides ¶10-041 Regulatory guide 41: limited partnerships fundraising (previously policy statement 41) Date of issue: 18 January 1993; Updated: 6 December 1994; Reissued as RG 41: 5 July 2007; Updated: April 2008. Securities — Prescribed interests — Issue of prescribed interests by limited partnerships — Meaning of “promoter” — Partnership property — Liability of limited partners — Relief available for fundraising by limited partnerships — Corporations Law, Pt 7.12 Div 2, 3, 3A, 5, 5A, 6, s 1084 — Corporations Regulations, reg 1.13A, 7.12.12(1).

CCH DIGEST In this Regulatory Guide, the ASC sets out its understanding of the application of the fundraising provisions of the Corporations Law to limited partnerships and its policy on granting exemptions from those provisions. The Commission’s basic policy is that limited partnerships should receive no special exemptions from the Law. They will, however, be eligible for any exemptions that the Commission’s general policies allow. In the course of arriving at this guide, the Commission makes the following points: • the participation interest provisions of the Law cannot be avoided by having a partnership promoted by a special purpose company

• the Commission believes that it is inappropriate for the title to partnership property to be held by the general partner • the Commission believes that the possibility of liability attaching to limited partners as a result of the trustee’s actions should be disclosed in the prospectus. Revisions The text of this Regulatory Guide incorporates all amendments up to and including those made in April 2008. Date of Ruling: December 1994 Chapter 7 — Securities Issued 18/1/1993 Updated 6/12/1994 Editor’s note: This guide was updated in April 2008 to remove obsolete references to NCSC regulatory documents. From 5 July 2007, this document may be referred to as Regulatory Guide 41 (RG 41) or Policy Statement 41 (PS 41). Paragraphs in this document may be referred to by their regulatory guide number (e.g. RG 41.1) or their policy statement number (e.g. PS 41.1). Headnotes Division 2, 3, 3A, 5, 5A and 6 of Pt 7.12; prescribed interests and participation interests; offers or issues of prescribed interests restricted to public corporation by s 1064; approved deed requirements under s 1065; appointment of trustee or representative requirement under s1067; mandatory covenants required by s 1069(1); prospectus requirements under s 1018 and 1022; limited partnerships; promoter; “taking part in management”; ownership of scheme property; reg 1.13A. Purpose RG 41.1 In this guide the ASC sets out its policy on the regulation of fundraising activities for limited partnerships regulated by the Corporations Law (Law) and the exercise of its discretionary powers

with respect to those activities. Background RG 41.2 Since state legislation was passed in New South Wales and Victoria, limited partnerships can now be formed in New South Wales, Queensland, Tasmania, Victoria and Western Australia. RG 41.3 Certain fundraising activities of limited partnerships formed and registered under state legislation will be governed by the Law. RG 41.4 The ASC has received requests for exemption from provisions of the Law with respect to the promotion of various investment schemes where an investor is invited to become a limited partner in a limited partnership. The Law RG 41.5 Some limited partnership interests are prescribed interests under subparagraph (g)(i) of the definition of “participation interests” (s 9). This will be the case where the partnership agreement relates to an undertaking, scheme or enterprise promoted by or on behalf of a person whose ordinary business is to promote similar undertakings, schemes or enterprises. Under reg 1.13A, which was gazetted on 16 December 1992, a limited partnership will also be included in the definition of “participation interest” where: (a) the limited partnership relates to a scheme where the partnership or the scheme is promoted by: (i) an associate of a person whose ordinary business is to promote, or includes the promotion of, similar schemes; or (ii) a person who is not, or is not to be, a partner in the partnership; and (b) the limited partnership has, or is intended to have, more than 15 partners of any kind. RG 41.6 A person who offers for subscription or purchase or issues invitations to subscribe for or purchase prescribed interests is required to comply with the Law, and in particular with the provisions of Div 2,

3, 3A, 5 and 6 of Pt 7.12 of the Law (the fundraising provisions) except where the offer or invitation is an excluded offer or invitation as defined in s 66 of the Law. [6/12/1994] RG 41.7 These fundraising provisions require, among other things, the person making an offer or invitation: (a) to be a public corporation (s 1064); (b) to enter into an approved deed (s 1065); (c) to appoint an approved trustee or representative for the purposes of the deed (s 1067(3)); and (d) to lodge and, where appropriate, obtain registration of a prospectus which complies with the requirements of Div 2 of Pt 7.12 of the Law (s 1018). RG 41.8 In addition to the requirements referred to in the preceding paragraph, the Law imposes many other obligations on persons dealing in prescribed interests. Some of those obligations are: (a) to comply with the provisions of Pt 7.3 of the Law so that the promoter of a scheme offering a limited partnership may be required to hold a dealer’s licence; (b) the prohibitions and limitations on advertising of, and security hawking in relation to, prescribed interests which result from the operation of s 1025 and 1078 of the Law; and (c) the restrictions on secondary sales of interests in a prescribed interest scheme unless there is compliance with the obligation to prepare, and lodge a secondary trading notice under Div 3A of Pt 7.12 of the Law; and lodge and, if appropriate, have registered a secondary prospectus and to be a public corporation; and (d) the prohibition of misleading or deceptive conduct and other matters under Pt 7.11 of the Law, the breach of which entitles

persons affected to claim damages from a wide range of persons involved in the preparation of the prospectus or marketing of the securities. [6/12/1994] RG 41.9 Under s 1084(2) of the Law, the ASC has a discretion to exempt a person or a class of persons, either conditionally or unconditionally, from compliance with all or any of the provisions of Div 2, 3, 3A, 4, 5 and 6 of Pt 7.12 of the Law. There is no power to exempt any person from liability under Pt 7.11. [6/12/1994] RG 41.10 In addition, under s 1084(6) of the Law, the ASC has discretion to modify or vary any of the provisions of Div 2, 3, 3A, 4, 5 and 6 of Pt 7.12 of the Law in respect of their application to a person or class of persons. [6/12/1994] Partnerships Who is the promoter? RG 41.11 It has been suggested that as the definition of “participation interest” includes partnership interests promoted by a person whose business involves such promotion, the application of the Law could be avoided in relation to partnerships simply by having each partnership promoted by a special purpose company. In the ASC’s view this is not so, as it ignores the very wide interpretation of the meaning of the term “promoter” to include a variety of commercial roles involved in the establishment and financing of a new company or investment scheme, whether or not by the person who ultimately “offers” the securities. RG 41.12 The expression “promoter” can cover more than the persons who take part in the formation and floating; it can cover persons who leave it to others to get up the venture on the understanding that they also will profit from its establishment — see Tracy v Mandalay Pty Ltd (1953) 88 CLR 215. RG 41.13 Any doubt on this interpretation is clarified by reg 1.13A

which includes any interest in a partnership issued by an associate of the promoter. Partnership property RG 41.14 The ASC is of the view that in the case of a limited partnership subject to the Law it is inappropriate for the title to the partnership property to be held by the general partner. Such property must be held by a trustee for the partners or by all the partners in proportion to their partnership share. This ensures that the trustee or representative can comply effectively with s 1069(1)(e)(i) of the Law, required to be included in an approved deed, requiring a trustee or representative to exercise all due diligence and vigilance in protecting the rights and interests of investors. “Taking part in management” RG 41.15 A limited partnership is like an ordinary partnership except that it has two categories of partners: general and limited. The principal attraction for passive investors is that a limited partner’s liability for the debts and obligations of the partnership may be limited to his or her agreed contribution to the partnership capital. However, this limitation does not apply to liabilities incurred while he or she is taking part in the management of the partnership. RG 41.16 It has been put to the ASC that wide exemptions from the statutory covenants should be granted because a limited partner might incur unlimited liability if he or she takes part in the management of the partnership, whether directly or through the actions of a trustee or representative. The ASC will not grant relief on the basis of this proposition to detract from the rights which the trustee or representative and the limited partners have under a complying deed. RG 41.17 The ASC does not consider it appropriate to take a view as to whether the performance of the rights and obligations imposed by the statutory covenants on the trustee or representative in the discharge of its duties to all the partners constitutes “taking part in management” by the limited partners. This is a matter which relates to the liability of the prescribed interest holders and is a risk which should be fully disclosed in the prospectus under reg 7.12.12(1). It is then up

to the prospective prescribed interest holder to choose whether or not to take the risk. Relief RG 41.18 The ASC has given further consideration as to whether exemptions from the Law should be given due to the nature of a limited partnership and has affirmed its view that there is no justification for giving promoters of schemes involving a limited partnership a privileged position under the Law. Such schemes must meet the same standards of investor protection as other prescribed interest schemes. However, relief will be available where consistent with ASC policy in relation to the general nature of the investment, as set out in para 19 below. RG 41.19 Where an applicant is seeking approval of a deed which relates to interests in a limited partnership, he or she should refer to the guide (if any) issued by the ASC relevant to the underlying investment or purpose of the scheme or in relation to prescribed interest schemes generally. For example: (a) Regulatory Guide 77 16— property syndicates; (b) Regulatory Guide 19 — film investment schemes; (c) Superseded Policy Statement 20 — horse racing schemes; (d) Superseded Policy Statement 23 — approval of deeds relating to prescribed interests; and (e) Superseded Policy Statement 34 — horse breeding schemes (see 1994 ASC Digest at page PS 7/166, Superseded Policy Statements guidecard). [6/12/1994]

Tax Institute CommLaw2 Module 3 — ASIC regulatory guides ¶10-243 Regulatory guide 243: registration of selfmanaged superannuation fund auditors History: issued December 2012, updated January 2013. Auditors of self managed superannuation funds — Registering “approved SMSF auditors” — Competency standards — Deregistering or suspending auditors — s 128F of the Superannuation Industry (Supervisory) Act 1993. Date of ruling: January 2013 About this guide This guide is for people who wish to audit self-managed superannuation funds (SMSFs) under the Superannuation Industry (Supervision) Act 1993 (SIS Act). This guide explains how to apply for registration as an approved SMSF auditor, the types of registers of SMSF auditors maintained by ASIC and the transitional arrangements for the registration of existing approved auditors of SMSFs. It also gives guidance on the continuing legal obligations of approved SMSF auditors. About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by: • explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act) • explaining how ASIC interprets the law

• describing the principles underlying ASIC’s approach • giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project.

Document history This guide was issued in January 2013 and is based on legislation and regulations as at the date of issue. Previous version: • Superseded Regulatory Guide 243, issued 10 December 2012 Disclaimer This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the SIS Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Examples in this guide are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. A Overview Key points To audit an SMSF on or after 1 July 2013, you must be registered by ASIC as an ‘approved SMSF auditor’: see RG 243.1–RG 243.5. You can apply to register as an approved SMSF auditor from 31 January 2013. Transitional arrangements will apply between 31 January and 30 June 2013 for existing ‘approved auditors of SMSFs’: see RG 243.7–RG 243.13.

The requirement to register as an ‘approved SMSF auditor’ RG 243.1 A registration scheme for self-managed superannuation fund (SMSF) auditors will commence on 31 January 2013 under:

(a) the Superannuation Industry (Supervision) Act 1993 (SIS Act), as amended by the Superannuation Laws Amendment (Capital Gains Tax Relief and Other Efficiency Measures) Act 2012 (Superannuation Laws Amendment Act); and (b) the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations), as amended by the Superannuation Industry (Supervision) Amendment Regulations 2012 (Superannuation Amendment Regulations). Note: References to legislation and regulations in this guide are to the SIS Act and the SIS Regulations, unless otherwise specified.

RG 243.2 Under the new regime, ASIC has responsibility for registering ‘approved SMSF auditors’, setting competency standards and imposing any necessary administrative outcomes. The Australian Taxation Office (ATO) will continue to monitor the conduct of SMSF auditors and, in some cases, may refer an auditor to ASIC to consider taking further action. Note: ‘Approved SMSF auditor’ has the meaning given in s 10(1) after 31 January 2013.

RG 243.3 To audit an SMSF on or after 1 July 2013, you must be registered as an approved SMSF auditor under the SIS Act. You can apply to register as an approved SMSF auditor from 31 January 2013. Note: You should submit your application to ASIC by 30 April 2013 to ensure your application can be processed by 1 July 2013.

RG 243.4 To be registered as an approved SMSF auditor: (a) we must be satisfied that you meet the eligibility requirements in the SIS Act and the SIS Regulations for registration — subject to the transitional provisions outlined in RG 243.7–RG 243.13 (see Section B); (b) you must lodge an online application for registration and pay the prescribed registration fee (see Section C); and (c) you must comply with any conditions imposed on your registration and with your ongoing obligations under the SIS Act, including undertaking continuing professional development

(CPD), complying with required competency and auditing standards, holding professional indemnity (PI) insurance, lodging an annual statement with ASIC and notifying ASIC of certain matters (see Section D). RG 243.5 We will assess your application based on the information you submit. You may be asked to provide us with further information to demonstrate that you satisfy these eligibility requirements. RG 243.6 If we refuse your application for registration, we will give you the reasons for that decision. You may, if dissatisfied with our decision, request that we review the decision: see Section E. Transitional arrangements for existing ‘approved auditors of SMSFs’ RG 243.7 Transitional arrangements will apply for existing ‘approved auditors of SMSFs’ between 31 January and 30 June 2013 (the transitional period). Approved auditors of SMSFs who lodge their applications after 30 June 2013 will not be eligible for any transitional arrangements. Note: ‘Approved auditors of SMSFs’ has the meaning given in s 10(1) of the SIS Act before 31 January 2013.

RG 243.8 If you are an approved auditor of SMSFs immediately before 31 January 2013, you may continue to audit SMSFs during the transitional period. Under the transitional provisions in the SIS Act, you will be taken to be an ‘approved SMSF auditor’ from 31 January 2013 until your registration takes effect or until 30 June 2013 (whichever occurs first). RG 243.9 From 1 July 2013 SMSF audits can only be conducted by auditors who are registered as approved SMSF auditors with ASIC. Exemptions from certain conditions of registration RG 243.10 If you are an existing approved auditor of an SMSF who has lodged an application for registration during the transitional period, the following exemptions from certain conditions for registration may apply to you: (a) If you have signed off on at least one SMSF audit within the 12-

month period before applying for registration, you will be exempt from the practical experience requirement in s 128B(1)(a)(ii). (b) If you have signed off on 20 or more SMSF audits in the 12month period before applying for registration, you will be exempt from both the practical experience requirement in s 128B(1)(a)(ii) and the requirement to pass a competency examination in s 128B(1)(a)(iii). If you apply for registration during the transitional period and have signed off on less than 20 SMSF audits in the 12-month period before applying, we may register you with a condition on the registration requiring you to pass the competency examination before 1 July 2014. Failure to pass the competency examination by 1 July 2014 would result in the cancellation of your registration. You can only make two attempts in this time to pass the competency examination. (c) If you are a registered company auditor, you will be exempt from the practical experience requirement in s 128B(1)(a)(ii) and the requirement to sit a competency examination in s 128B(1)(a)(iii). RG 243.11 Those applicants who are able to take advantage of the exemptions under the transitional arrangements from the experience and/or competency examination requirements must still satisfy ASIC that they: (a) are unlikely to contravene the obligations of an approved SMSF auditor (see RG 243.24–RG 243.25); and (b) have the capability of performing the duties of an SMSF auditor (see RG 243.26–RG 243.27); and (c) are a fit and proper person to be an approved SMSF auditor (see RG 243.28–RG 243.30). RG 243.12 In coming to a decision on the above matters, we will take into account relevant matters and information available to us. This would include an applicant’s conduct and compliance with the requirements of the SIS Act and Corporations Act 2001 (Corporations

Act) while acting in other roles such as a registered company auditor or company director. RG 243.13 The transitional arrangements are only available for applications for registration as an approved SMSF auditor lodged by 30 June 2013. If you have lodged an application for registration but it has not been assessed by 30 June 2013, you will not be able to audit SMSFs until you have been notified by ASIC that you are a registered approved SMSF auditor. Note: Under s 128L(5), your application to be registered as an approved SMSF auditor will not be considered lodged if the application fee is not received by us: see RG 243.53 and RG 243.61. The replacement to an application that is deemed withdrawn (see RG 243.51) or that was refused (see RG 243.67–RG 243.70) is a fresh application and would need to be lodged by 30 June 2013 to satisfy the transitional provisions.

B Eligibility requirements for registration Key points To be registered as an approved SMSF auditor, you must satisfy us that you meet the following eligibility requirements prescribed under the SIS Act and the SIS Regulations, subject to any applicable transitional arrangements: • you have the prescribed qualifications (see RG 243.14–RG 243.16); • you have the prescribed practical experience (see RG 243.17–RG 243.20); • you have passed a competency examination in accordance with s 128C (see RG 243.21–RG 243.23); • you are unlikely to contravene the obligations of an approved SMSF auditor (see RG 243.24–RG 243.25); • you are capable of performing the duties of an approved SMSF auditor (see RG 243.26–RG 243.27); • you are a fit and proper person to be registered as an approved SMSF auditor (see RG 243.28–RG 243.30); • you have adequate and appropriate professional indemnity (PI) insurance (see RG 243.31–RG 243.35); • you are an Australian resident (see RG 243.36); and • you do not have certain disqualifications or suspensions in force (see RG 243.37). We have the discretion to register you even if you do not meet certain eligibility requirements prescribed under the SIS Act: see RG 243.38.

Prescribed qualifications RG 243.14 You will be asked to provide information to demonstrate you have the qualifications to be registered as an approved SMSF auditor. RG 243.15 To satisfy us that you meet the requirement under s 128B(1)(a)(i), you must show that you have: (a) the academic qualifications prescribed under regs 9A.01(1)– 9A.01(4); or (b) qualifications that are equivalent to the prescribed academic qualifications, as prescribed under reg 9A.01(1)(5). RG 243.16 See Table 1 for the prescribed qualifications. You must send all your supporting material, set out in Table 1, by email to [email protected]. The subject line of the email should include the transaction number, the name of the applicant and type of transaction.

Table 1: Summary of the prescribed qualifications requirement What qualifications you need Prescribed academic qualifications: s 128B(1)(a)(i) and regs 9A.01(1)– 9A.01(4)

You need a degree, diploma or certificate from a university prescribed in Part 1 of the table in reg 9.2.02 of the Corporations Regulations 2001 (Corporations Regulations) or from

What you need to provide You will need to provide the following documents in support of your application: •

a copy of your degree, diploma or certificate from the prescribed university or institution;

•

a copy of your statement of academic record from

an institution prescribed in Part 2 of the table in reg 9.2.02 of the Corporations Regulations that represents a course of study in accounting of not less than 3 years and either: • includes a course of study in auditing; or

the prescribed university or institution;

•

a copy of a certificate or statement of academic record indicating that you have satisfactorily completed a course in auditing prescribed by reg 9A.02; or

• if the degree, • diploma or certificate does not include a course of study in auditing, you must have satisfactorily completed:

a copy of a certificate or statement of academic record indicating that you have satisfactorily completed the SMSF specialist auditor program conducted by the SPAA.

– a course in auditing prescribed by reg 9A.02; or – the selfmanaged superannuation fund specialist auditor

program conducted by the SMSF Professionals’ Association of Australia (SPAA). Equivalent qualifications: s 128B(1)(a)(i) and reg 9A.01(5)

If you do not hold any of the prescribed academic qualifications, we will assess whether your qualification or combination of qualifications (obtained in Australia or overseas) is equivalent to the prescribed qualifications.

You will need to provide the following documents in support of your application: •

a statement setting out your qualifications, and the reasons why we should treat your qualifications as equivalent to the prescribed academic qualifications;

•

a copy of your degree, diploma or certificate from a university or institution;

•

a copy of your statement of academic record from each university or institution from which you have obtained your qualification; or Note: If you are relying on an overseas accounting or related qualification, you may have to provide an

assessment letter from an authorised assessing authority of the National Office of Overseas Skills Recognition (NOOSR). This letter should confirm the comparability of your qualifications to an Australian undergraduate degree in accounting or a related degree from a prescribed university or institution: see www.aei.dest.gov.au. •

a copy of your certificate or statement of academic record indicating that you have completed satisfactorily a course that you rely on as being equivalent to a course in auditing prescribed by reg 9A.02. Note: If you are relying on an overseas auditing course, you may have to provide an assessment letter from one of the Australian accounting bodies that conducts such courses in Australia, confirming

the comparability of this course and the course conducted by the Australian body. Prescribed practical experience RG 243.17 You will be asked to provide information to demonstrate you have the practical experience to be registered as an approved SMSF auditor. RG 243.18 To satisfy us that you meet the practical experience requirement under s 128B(1)(a)(ii), you must show that you have: (a) the prescribed practical experience in auditing in reg 9A.03(a); or (b) experience we consider equivalent to the prescribed practical experience in reg 9A.03(b). RG 243.19 Existing approved auditors of SMSFs who apply for registration during the transitional period will be exempt from the practical experience requirement in s 128B(1)(a)(ii) (see RG 243.10(a) and RG 243.10(c)) if they: (a) have signed off on at least one SMSF audit within the 12-month period before applying for registration; or (b) are registered company auditors under s 1280 of the Corporations Act. RG 243.20 A summary of the prescribed practical experience requirement for registration as an approved SMSF auditor is set out in Table 2.

Table 2: Summary of prescribed practical experience requirement

What experience you

What you must provide with your

Prescribed practical experience: s 128B(1)(a)(ii) and reg 9A.03(a)

need

application

You must:

You must provide information about your registered company auditor number and/or practical experience, as well as the details of your supervisor.

•

have at least 300 hours experience in auditing SMSFs during the 3 years immediately before the date of your application under the direction of an approved SMSF auditor or, if the experience in auditing SMSFs was obtained before 31 January 2013, under the direction of a person who was an approved auditor of SMSFs; Note: A person who was an approved auditor of SMSFs on 31 January 2013 is deemed to be an approved SMSF auditor from 31 January 2013 until 30 June 2013. Consequently, experience obtained under their supervision before 30 June 2013 can be included in your application.

•

be a registered company auditor under s 1280 of the Corporations Act

the Corporations Act and apply between 31 January and 30 June 2013; or •

have signed off on at least one SMSF audit within the 12-month period before applying for registration and apply between 31 January and 30 June 2013.

Equivalent If you do not have at least experience: reg 300 hours experience 9A.03(b) auditing SMSFs under the direction of an approved SMSF auditor in the 3 years before your application (and do not qualify for one of the two transitional arrangements above), you must be able to satisfy us that you have equivalent practical experience.

You must provide a written statement setting out details of your equivalent practical experience (it can be a separate attachment to your application if space does not permit).

Note: The prescribed practical experience requirement is subject to the transitional arrangements that will apply between 31 January and 30 June 2013: see RG 243.7–RG 243.13.

Passing of competency examination RG 243.21 You must pass a competency examination conducted by or on behalf of ASIC within the 12-month period before you apply and you can only attempt the competency examination twice within that period. Note: This requirement is subject to the transitional arrangements that will apply between 31 January and 30 June 2013: see RG 243.7–RG 243.13.

RG 243.22 Existing approved auditors of SMSFs who apply during the transitional period will be exempt from the requirement to sit a

competency examination in s 128B(1)(a)(iii) if they either: (a) have signed off on 20 or more SMSF audits in the 12-month period before applying for registration; or (b) are a registered company auditor. Note: For more information, see s 128B(1)(a), 128C and 128D, reg 14.01 and Class Order [CO 12/1687] Competency standards for approved SMSF auditors.

RG 243.23 If you apply for registration during the transitional period and have signed off on less than 20 SMSF audits in the 12-month period before applying, we may register you with a condition on the registration requiring you to pass the competency examination before 1 July 2014. Failure to pass the competency examination by 1 July 2014 would result in the cancellation of your registration. Unlikely to contravene your obligations RG 243.24 We must be satisfied that you are unlikely to contravene the ongoing obligations of an approved SMSF auditor under Subdiv B: see Section D. RG 243.25 In determining whether you are ‘unlikely’ to contravene the obligations of an approved SMSF auditor under Subdiv B, we will take into consideration the information provided in your application as well as other relevant information available to us. In some cases, we may request additional information be provided within a specified timeframe to make this determination. Capable of performing your duties RG 243.26 We must be satisfied that you are capable of performing the duties of an approved SMSF auditor. RG 243.27 In determining whether you are ‘capable’ of performing your duties as an approved SMSF auditor, we will take into consideration the information provided in your application as well as other relevant information available to us. In some cases, we may request additional information be provided within a specified timeframe to make this determination. A fit and proper person

RG 243.28 We must be satisfied that you are a fit and proper person to be an approved SMSF auditor. RG 243.29 We consider you to be a fit and proper person to be an approved SMSF auditor if we are satisfied as to your honesty, integrity and good reputation. This is in addition to our being satisfied about your overall capability and whether you are unlikely to contravene the obligations of an approved SMSF auditor under Subdiv B. RG 243.30 We will consider whether you are a fit and proper person based on your individual circumstances. As outlined in the Explanatory Memorandum to the Superannuation Laws Amendment Act (paragraphs 2.28–2.29), any of the following matters may indicate that you are not a fit and proper person to be an approved SMSF auditor, but a single factor might not be determinative in a particular case: (a) you have not carried out or performed adequately and properly the duties and functions of an approved SMSF auditor; (b) you have been subject to disciplinary action, including, but not limited to, suspension and exclusion from practice, by a regulatory body or a professional association; (c) you have been or are currently disqualified or banned under provisions of an Act or legislative instrument under Commonwealth, state or territory law; (d) you have been or are currently the subject of administrative, civil or enforcement action, which was determined adversely (including consenting to an order or direction, or giving an undertaking not to engage in unlawful or improper conduct) in any country; (e) you have been convicted or have legal proceedings pending for any criminal offences, any acts of dishonesty (such as theft or fraud), any breach of trust or fiduciary duty, any professional misconduct or other misconduct;

(f) you have served a term of imprisonment; (g) you have been obstructive, misleading or untruthful in dealing with regulatory bodies, or a court; (h) you have failed to deal with conflicts of interest appropriately; or (i) you have or have had the status of undischarged bankrupt or insolvent under administration, or there is any such action pending. This list is not exhaustive and we may take other relevant matters into account. Adequate and appropriate professional indemnity insurance RG 243.31 You will need to provide a copy of a certificate of currency with your application for registration as evidence you hold PI insurance cover for the audit of SMSFs. You will be required to provide us with a completed and signed PI statement confirming you hold ‘adequate and appropriate’ PI insurance cover in accordance with the requirements of the SIS Regulations. If you are a member or employee of an audit firm, you must ensure that at all times you are covered by an insurance policy maintained by that firm that complies with the SIS Regulations. Note: A copy of the PI statement can be obtained from ASIC’s website.

Meaning of ‘adequate and appropriate’ RG 243.32 Information about what is considered to be adequate and appropriate PI insurance is in reg 9A.05 and the accompanying Explanatory Memorandum. Adequacy (quantum) RG 243.33 Regulation 9A.05 prescribes the adequate level of PI insurance required as either: (a) a level set under a limitation of liability scheme provided by a professional organisation mentioned in Sch 1AAA to its members; or

(b) if you are not part of a limitation of liability scheme, the level that is adequate to ensure that the amount of coverage for a single claim or in aggregate is at least $500,000 and is adequate because other terms of the policy will indemnify the auditor against civil liability that may arise from an act, error or omission in connection with audits of SMSFs. Appropriateness (terms and conditions) RG 243.34 To be considered appropriate, the PI insurance must have the following features. The policy must: (a) cover claims made in respect of SIS Act audits; (b) cover costs and expenses, including legal costs and expenses of investigating, defending and settling claims (a costs-in-addition cover is preferred); Note: Costs-in-addition cover provides for payment of legal and other defence costs in addition to the nominated level of cover in the PI policy.

(c) cover fraud/dishonesty of directors/partners, employees and contractors of the insured (although fraud cover is not required for sole practitioners); (d) not be cancellable by the insurer solely because of an innocent non-disclosure or misrepresentation; (e) include at least one automatic reinstatement; and Note: ‘Automatic reinstatement’ means that if the limit of indemnity (amount of cover) is depleted (reduced) by a claim or series of claims that equal the limit of indemnity under the policy, the limit of indemnity is automatically reinstated. For more information, see ‘Key terms’ at the end of this guide.

(f) be on ordinary commercial terms offered by insurers for insurance of that type at the time the insurance contract is entered into. RG 243.35 The PI insurance may: (a) cover claims for audits other than audits under the SIS Act;

(b) have a deductible or excess — however, the excess in a policy should be set at a level at which the approved SMSF auditor has sufficient financial resources to cover but without affecting the minimum level of cover. Note: In some circumstances, we may accept a bank guarantee that covers the amount of any deductible or excess. For further information, contact ASIC on 1300 300 630.

An Australian resident RG 243.36 You must provide information about your Australian residency. If you are not an Australian resident, your application for registration will be refused. Note: In s 10(1) an Australian resident means a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936.

Not disqualified or suspended RG 243.37 Your application for registration will be refused if you are subject to a disqualification or suspension order that is in force under s 130F or if you are disqualified from being or acting as an auditor of all superannuation entities under s 130D. Note: A person who has a disqualification order that is in force under s 131 is taken to be disqualified under s 130F.

ASIC discretion to register RG 243.38 We may exercise our discretion to register under s 128B(2). This section allows us to grant registration to an applicant despite them not meeting one or more of the requirements in s 128B(1)(a) — including the qualifications, practical experience and competency examination requirements — as long as they still meet the requirements of s 128B(1)(b). The requirements of s 128B(1)(b) are met if the applicant demonstrates they: (a) are unlikely to contravene the obligations of an approved SMSF auditor; (b) are capable of performing the duties of an approved SMSF auditor; and (c) are a fit and proper person to be registered as an approved

SMSF auditor. In certain circumstances our discretion will be exercised together with our ability to impose conditions on a registration under s 128D. C Lodging your application for registration Key points To register as an approved SMSF auditor, you will need to complete an online application form, lodge it with us and pay the prescribed registration fee. You can access the online application form on ASIC Connect: see RG 243.39–RG 243.49. Your application must be submitted electronically with all of the required supporting material and the registration fee: see RG 243.50–RG 243.63. You will need to make declarations that the information in the application is complete, accurate and true: see RG 243.54–RG 243.56. Your application will not be available to the public, but, if you are registered, some information about your business will be uploaded to a searchable public register: see RG 243.71–RG 243.81.

Accessing the registration system RG 243.39 To register as an approved SMSF auditor, you will need to complete an online application form, lodge it with us and pay the prescribed registration fee. Note: If you cannot access, or have difficulties with, the online application, you can contact ASIC on 1300 300 630 for assistance.

Accessing ASIC Connect RG 243.40 Before you can access the online application form on our website, you will need access to our online service, ASIC Connect. You can create an ASIC Connect account through the ASIC website at www.asic.gov.au. Note: ASIC Connect services for approved SMSF auditors will be available through ASIC Connect close to the commencement date of the Register of Approved SMSF Auditors (31 January 2013).

RG 243.41 You will be asked to provide your email address and a password to control access to your account. Your email address will serve as your user name. You will also need to provide your full name

and phone number, so we can identify the user of the account. RG 243.42 You will be asked to provide a security question and answer that only you should know. If you forget your password, you can generate a new one after your identity has been verified using your security question and answer. RG 243.43 After you have provided us with all the relevant information and we send confirmation that the account has been created/activated, you will be able to log on to ASIC Connect using your user name and password. Starting the online registration process RG 243.44 To find the online application, you will need to go to our website at www.asic.gov.au and log into ASIC Connect. You can start the online application by selecting the ‘Licences and Registrations’ tab and then ‘Apply for SMSF auditor registration’. Saving and resuming your application RG 243.45 After you have started your application, you can save it at certain points in the process and resume it as many times as you like before you submit it. You can access your incomplete application by logging into ASIC Connect. We will store the information under an incomplete application for 90 days from when you last saved your application. RG 243.46 The online application is designed so that certain information must be provided before you can progress to the next screen. This is to ensure that you do not accidentally omit any important information or submit an incomplete application. RG 243.47 If you realise that you have made a mistake on a previous screen, you can go back to that screen to amend it at any time up until you submit your application. RG 243.48 Your application is automatically saved by us every time you hit ‘Next’. If you are disconnected from the internet or you close out of the application, we will have saved all information up until the question you last answered before you selected ‘Next’. RG 243.49 You will need to provide details about yourself in your

application. You should be able to prepare your application without any professional assistance (but another person may lodge it on your behalf). What you must provide RG 243.50 You must provide us with: (a) your application for registration electronically; (b) all of the required supporting material in the required format; and (c) the registration fee. Note: All required supporting material should be emailed to [email protected]. The subject line of the email must include the transaction number, the name of the applicant and the type of transaction

RG 243.51 We may request that you provide us with further information to support your application within a specified timeframe. It is important that you comply because otherwise your application will be deemed to have been withdrawn. Note: If your application is deemed to have been withdrawn, you may submit another application for registration in accordance with s 128A.

RG 243.52 You must ensure that all the details in your application are correct. We may check the information you provide as part of our request for further information. After you have submitted your application, you will not be able to change your answers. RG 243.53 When you are satisfied that your application for registration is complete, the system will lead you through the steps to submit it. Your application will be lodged after you have submitted it online, paid the registration fee (see RG 243.60–RG 243.63) and the lodgement is accepted. Note: There will be an online confirmation of your submitted application, which you should print out.

Declarations RG 243.54 You must declare that certain statements in your application are complete, accurate and true. For example, you must declare that you are not disqualified from being registered as an

approved SMSF auditor. RG 243.55 If you are not the applicant, you must be authorised by the applicant to make each declaration, and submit the application, on their behalf. RG 243.56 It is a criminal offence to make false or misleading statements in, or omit material from, your application. Additionally, under s 130F(2)(c), we may make a written order disqualifying a person from being an approved SMSF auditor, or suspending a person’s registration as an approved SMSF auditor, if that person provides a false declaration in their application. Requesting an extension of time RG 243.57 We may grant an extension of time to provide information to support your application. Extensions of time will be considered on a case-by-case basis. It should not be assumed that an extension of time will be granted automatically. RG 243.58 Any request for an extension of time must be provided in writing (e.g. through ASIC Connect) and include a detailed reason as to why the extension is required. RG 243.59 Applicants must have lodged an application by 30 June 2013 to be eligible for the transitional arrangements under the Superannuation Laws Amendment Act (see RG 243.7–RG 243.13). No extensions of time for lodging an application past 30 June 2013 will be granted. Transitional arrangements only apply to applicants who lodge their application for registration by 30 June 2013. Payment of the registration fee RG 243.60 The fees to register as an approved SMSF auditor are prescribed by the Superannuation Laws Amendment Act and the Superannuation Amendment Regulations. For more information on registration fees, go to our website at www.asic.gov.au. RG 243.61 You can choose to pay during the registration process using your credit card, or an invoice for the fees can be sent to you detailing the various methods of payment for settlement at a later date. Under s 128L(5), your application to be registered as an

approved SMSF auditor will not be considered lodged if the application fee is not received by us. Will you be reimbursed if you withdraw your application? RG 243.62 Once the application has been accepted for lodgement, the application fee will not be reimbursed if you decide to withdraw your application. RG 243.63 Your fee will not be reimbursed if we refuse to register you as an approved SMSF auditor. What happens after your application is lodged? RG 243.64 We will grant your application and register you as an approved SMSF auditor if we are satisfied that you meet the eligibility requirements for registration under the SIS Act. RG 243.65 Our ability to make a decision will be affected by: (a) whether we require further information from you about any aspect of your application and the time it takes for you to reply; and (b) how quickly we receive confirmation about the information you provided in your application, which we may request from third parties. Note: If you do not comply with our request for further information within a specified timeframe, your application is taken to be withdrawn: see RG 243.51.

RG 243.66 If we are satisfied that you meet the eligibility requirements for registration, we will register you and issue your certificate of registration within 14 days of being satisfied that you meet the requirements: s 128B(6). We will write to you advising that your application for registration has been successful and that you are registered as an approved SMSF auditor. We will also give you an SMSF auditor number (SAN) at this time, which should be used when reporting to the ATO. Note: If you provided an email address with your online application, we will send you the letter and certificate of registration by email. If you have not provided an email address, it will be sent by post.

What if your application is refused?

RG 243.67 Subject to transitional arrangements, we may refuse your application if you do not meet the qualification, practical experience and competency examination eligibility requirements, as described in Section B, unless we exercise our discretion under s 128B(2). For an explanation about exercising our discretion, see RG 243.38. RG 243.68 We must refuse your application for registration as an approved SMSF auditor if you: (a) do not meet the requirements under s 128B(1)(b); (b) have a disqualification order or suspension order in force against you under s 130F; or (c) have been disqualified from being or acting as an auditor of all superannuation entities under s 130D. RG 243.69 If we refuse your application for registration, we will give you the reasons for that decision. You may, if dissatisfied with our decision, request ASIC to review the decision: see Section E. RG 243.70 If your application is refused and you address the matter that resulted in the refusal, you can apply again for registration. What happens to the information you provide? RG 243.71 The information you enter in your online application is protected by industry-standard encryption and stored on a secure server at ASIC. RG 243.72 The application lodged by you is not available to the public. However, after you are registered with us, certain information about you will be uploaded to the Register of Approved SMSF Auditors: see RG 243.74–RG 243.78. RG 243.73 ASIC may also disclose the information you provide to the ATO for the purposes of the ATO administering the provisions under the SIS Act. Such disclosure from ASIC to the ATO is permitted under s 128N. Note: See the privacy statement at www.asic.gov.au for more information.

Register of Approved SMSF Auditors RG 243.74 ASIC maintains a Register of Approved SMSF Auditors under the SIS Act, which records the details of approved SMSF auditors and suspended SMSF auditors. RG 243.75 If you are registered as an approved SMSF auditor, the Register of Approved SMSF Auditors will include the following details: (a) your name; (b) your SAN; (c) the date your registration took effect; (d) your principal place of practice; and (e) if you practise as an auditor or a member of a firm, or under a name or style other than your own name — the name of the firm, or the name or style under which you practise. RG 243.76 If you are a suspended SMSF auditor, any particulars of your suspension will appear on the Register of Approved SMSF Auditors. RG 243.77 We may, from time to time, decide to place other details that we consider appropriate on the Register of Approved SMSF Auditors. RG 243.78 We must remove your details from the Register of Approved SMSF Auditors if you cease to be an approved SMSF auditor — for example, if your registration has been cancelled or we have issued an order that disqualifies you from acting as an approved SMSF auditor. Register of Disqualified SMSF Auditors RG 243.79 ASIC maintains a Register of Disqualified SMSF Auditors under the SIS Act. RG 243.80 If you have been issued with an order disqualifying you from being an approved SMSF auditor under s 130D, 130F or 131,

your name and contact details last known to us will be placed on the Register of Disqualified SMSF Auditors while that order is in force. We must also publish details of this order in the Government Notices Gazette as soon as practicable after it is made. RG 243.81 If you have applied successfully for the disqualification order to be revoked, we must remove your details from the Register of Disqualified Auditors. In these circumstances, we will also publish the details of the revocation in the Government Notices Gazette as soon as practicable after the decision is made. D Your obligations after you are registered Key points As an approved SMSF auditor, you must comply with any conditions we impose on your registration: see RG 243.82–RG 243.84. You must also comply with your ongoing obligations, including: • undertaking continuing professional development (see RG 243.88–RG 243.90); • complying with required standards (see RG 243.91–RG 243.93); • holding a current policy of PI insurance (see RG 243.94); • lodging an annual statement (see RG 243.95); and • notifying ASIC of certain matters (see RG 243.96–RG 243.97).

Complying with any conditions on registration RG 243.82 Under s 128D, we may impose conditions, or impose additional conditions or vary or revoke conditions, on your registration as an approved SMSF auditor and may do so at any time by giving written notice. We may do so, for example, if we think it is necessary to address concerns about the conduct of a particular approved SMSF auditor or approved SMSF auditors generally, or we may impose a condition or conditions immediately following the granting of the application for registration as an approved SMSF auditor. RG 243.83 We are not limited to the nature or type of conditions that

may be placed on a person’s registration. Conditions are determined on a case-by-case basis. RG 243.84 Conditions may include requiring the person to complete a course of education or training, or requiring the person to undertake and pass a competency examination within a timeframe specified by us: see s 128D(3). Our decision to impose or vary conditions, or impose additional conditions, on a person’s registration and our decision to refuse an application to vary or revoke conditions, or impose additional conditions, on a person’s registration is a reviewable decision: see Section E. Complying with your ongoing obligations RG 243.85 Approved SMSF auditors have ongoing obligations under the SIS Act, including: (a) undertaking continuing professional development (see RG 243.88–RG 243.90); (b) complying with required standards (see RG 243.91–RG 243.93); (c) holding a current policy of PI insurance (see RG 243.94); (d) lodging an annual statement (see RG 243.95); and (e) notifying ASIC of certain matters (see RG 243.96–RG 243.97). RG 243.86 The ATO has powers under the SIS Act to monitor compliance by approved SMSF auditors with their ongoing obligations. The ATO will refer matters of non-compliance to ASIC. RG 243.87 If we determine that an approved SMSF auditor has failed to comply with their ongoing obligations under the SIS Act, we will decide what appropriate action to take in the circumstances. The SIS Act includes provisions for us to decide on whether to: (a) cancel an approved SMSF auditor’s registration; (b) suspend an approved SMSF auditor’s registration;

(c) impose or vary conditions on an approved SMSF auditor’s registration; (d) accept a written enforceable undertaking from an approved SMSF auditor; or (e) issue a disqualification order. Undertake continuing professional development (CPD) RG 243.88 Approved SMSF auditors must satisfy a requirement to undertake a set number of CPD hours that could reasonably be expected to enhance the auditor’s technical skills or professional service delivery. RG 243.89 You will need to complete 120 hours of CPD over each three-year period, which must include 30 hours of development on superannuation and at least 8 hours of development on auditing SMSFs. RG 243.90 You must keep a written record of the development undertaken for at least 3 years after the end of the calendar year in which the development occurred. Note: For more information, see s 128F(a) and reg 9A.04.

Comply with required standards (competency and auditing) RG 243.91 You will need to comply with competency standards issued by ASIC. These standards cover an ability to conduct certain tasks and knowledge of auditing and assurance engagement standards as well as SIS compliance matters. Note: For more information, see [CO 12/1687] and s 128Q.

RG 243.92 For each financial year of an audited SMSF, the auditor must form an opinion and report in accordance with the requirements of the SIS Act. This includes forming an opinion on the SMSF’s financial report and the SMSF’s compliance with certain requirements of the SIS Act and SIS Regulations. RG 243.93 In addition to the competency standards we set, you will need to comply with standards applicable to your duties as an

approved SMSF auditor. These standards are: (a) any relevant Australian auditing and assurance engagement standards issued by the Auditing and Assurance Standards Board, including the Australian auditing standards and the Australian Standard on Assurance Engagements ASAE 3100 Compliance engagements; and (b) auditor independence requirements prescribed by the SIS Regulations — specifically, the independence requirements included in the Accounting Professional and Ethical Standards APES 110 Code of ethics for professional accountants. Hold PI insurance RG 243.94 Approved SMSF auditors must hold current PI insurance to reduce the risk that, in the event of claims being made against the auditor in connection with audits of SMSFs, inadequate compensation is available due to a lack of available financial resources. You must hold a current policy of PI insurance that is adequate and appropriate, as specified by the SIS Regulations: see RG 243.31–RG 243.35. Note: For more information, see s 128F(b) and reg 9A.05.

Lodge an annual statement with ASIC RG 243.95 You will need to lodge an annual statement with ASIC within 30 days of the annual anniversary of your registration. This requirement applies regardless of whether you are an approved SMSF auditor or a suspended SMSF auditor. If you need an extension of time to lodge the annual statement, you must make a written request to us before the due date. Notify ASIC of certain matters RG 243.96 As an approved SMSF auditor, you must give information to ASIC within 21 days after the occurrence of the following events: (a) you cease to practise as an approved SMSF auditor; (b) you are no longer an Australian resident;

(c) there are changes to any of the details about you on the Register of Approved SMSF Auditors; or (d) your contact details have changed. Note: Contact details, including your phone numbers (business and private), email and residential address, are not displayed on the Register of Approved SMSF Auditors.

RG 243.97 You can give this information to us using online notifications that are accessed through ASIC Connect. Note: For more information on the notifications that may be lodged by approved SMSF auditors, see the ‘Related information’ section at the end of this guide.

E Your rights of review Key points A number of our decisions are reviewable decisions for the purposes of the SIS Act: see RG 243.98. If you are dissatisfied with a decision made by ASIC, you may request a review of that decision: see RG 243.99–RG 243.102.

Types of decisions that can be reviewed under the SIS Act RG 243.98 A number of ASIC’s decisions are reviewable decisions for the purposes of the SIS Act. These are a decision: (a) refusing your application for registration as an approved SMSF auditor made under s 128A; (b) imposing or varying conditions, or additional conditions, on your registration as an approved SMSF auditor under s 128D; (c) refusing an application to vary or revoke conditions, or impose additional conditions, imposed under s 128D on your registration as an approved SMSF auditor; (d) cancelling your registration as an approved SMSF auditor under s 128E(2);

(e) refusing an application to waive the payment of the whole or a part of a fee under s 128L(4); (f) making an order under s 130F disqualifying you from being an approved SMSF auditor; and (g) refusing your application to revoke a disqualification order under s 130F. Applying for a review of a decision RG 243.99 Your request for review of our decision must be made in writing and given to us within 21 days after the day on which you first receive notice of our decision. When we have received your request, we will reconsider the decision. We may confirm or revoke the decision, or vary the decision, in any manner we think is appropriate. RG 243.100 If we do not confirm, revoke or vary a decision before the end of the period of 60 days after the day on which we received the request to reconsider the decision, we are taken, at the end of that period, to have confirmed our original decision. RG 243.101 However, if we confirm, revoke or vary a decision before the end of the period of 60 days after the day on which we received the request to reconsider the decision, we will give written notice to you or the person making the request on your behalf advising: (a) the result of the reconsideration of the decision; and (b) the reasons for confirming, varying or revoking the decision, as the case may be. RG 243.102 If you are still dissatisfied with our decision, you may within 28 days of being informed of the decision seek a review of our decision by the Administrative Appeals Tribunal. Note: For more information, see s 344(2)–(6). Information Sheet 9 ASIC decisions — Your rights (INFO 9) sets out an overview of your rights connected with the decision.

Key terms Term

Meaning in this document

approved auditor of Has the meaning given in s 10(1) of the SIS Act SMSFs before 31 January 2013 approved SMSF auditor

Has the meaning given in s 10(1) of the SIS Act after 31 January 2013

ASIC

Australian Securities and Investments Commission

ASIC Connect

ASIC’s online portal for SMSF auditor registration

ATO

Australian Taxation Office

Australian resident

Has the meaning given in s 10(1) of the SIS Act

automatic reinstatement

If the limit of indemnity (amount of cover) is depleted (reduced) by a claim or series of claims that equal the limit of indemnity under the policy, the limit of indemnity is automatically reinstated. Depending on the number of reinstatements provided by the policy, this clause can provide indemnity for multiple claims during the year if the total of these claims exceeds the policy limit of indemnity. It is important to note that no one claim payment by the insurer will exceed the policy limit of indemnity. For example, if an insured entity purchases a policy with a $250,000 limit of indemnity, and the policy contains one automatic reinstatement, the policy provides cover for claims aggregating up to $500,000 during the period of insurance, subject to any one claim being no greater than $250,000

competency examination

A competency examination, in accordance with s 128C, conducted by or on behalf of ASIC

competency

An auditing competency standard established

standard

by ASIC under s 128Q of the SIS Act

Corporations Act

Corporations Act 2001, including regulations made for the purposes of that Act

Corporations Regulations

Corporations Regulations 2001

costs-in-addition cover

Provides for payment of legal and other defence costs in addition to the nominated level of cover in a PI policy

deductible excess

The first part of a loss, which is borne by the insured. The insured is responsible for the loss up to the deductible amount and the insurer pays the remainder of the loss, up to the policy limit

exclusions

A provision of an insurance policy that precludes coverage in particular circumstances

limitation of liability scheme

A scheme limiting the civil liability of members of the applicable professional association approved under the Civil Law (Wrongs) Act 2002 (ACT), the Professional Standards Act 1994 (NSW), the Professional Standards Act 2004 (NT), the Professional Standards Act 2004 (Qld), the Professional Standards Act 2004 (SA), the Professional Standards Act 2003 (Vic.) and the Professional Standards Act 1997 (WA)

minimum requirements

The amount and terms of cover that ASIC requires to be included in the insurance coverage of a registered agent, as specified by ASIC from time to time

PI insurance

Professional indemnity insurance

reg 9A.01 (for example)

A regulation of the SIS Regulations (in this example numbered 9A.01), unless otherwise

specified Register of Approved SMSF Auditors

The register of approved SMSF auditors established and maintained under s 128J of the SIS Act

Register of Disqualified SMSF Auditors

The register of disqualified SMSF auditors established and maintained under s 128K of the SIS Act

s 128 (for example) A section of the SIS Act (in this example numbered 128), unless otherwise specified SAN

SMSF auditor number

SIS Act

Superannuation Industry (Supervision) Act 1993

SIS Regulations

Superannuation Industry (Supervision) Regulations 1994

SMSF

Self-managed superannuation fund

SPAA

SMSF Professionals’ Association of Australia

Superannuation Amendment Regulations

Superannuation Industry (Supervision) Amendment Regulations 2012

Superannuation Laws Amendment Act

Superannuation Laws Amendment (Capital Gains Tax Relief and Other Efficiency Measures) Act 2012

suspended SMSF auditor

Has the meaning given by s 10(1) of the SIS Act

transitional arrangements

The transitional arrangements that will apply for existing approved auditors of SMSFs between 31 January and 30 June 2013

Related information Headnotes

approved SMSF auditor, ASIC Connect, Register of Approved SMSF Auditors, Register of Disqualified SMSF Auditors Class order [CO 12/1687] Competency standards for approved SMSF auditors Legislation Corporations Act, s 1280 Corporations Regulations, regs 9.2.02 Income Tax Assessment Act 1936 SIS Act, Subdiv B, s 10(1), 128A, 128B, 128C, 128D, 128E, 128F, 128L, 128N, 128Q, 130D, 130F, 131 and 344 SIS Regulations, regs 9A.01, 9A.02, 9A.03, 9A.04, 9A.05 and 14.1 Superannuation Amendment Regulations Superannuation Laws Amendment Act Superannuation (Self Managed Superannuation Fund Auditors) Fees Imposition Regulation 2012, reg 4(1) Information release INFO 9 ASIC decisions — your rights