House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Financial Services and Regulation, the Honourable J.B. Hockey MP and the Attorney-General, the Honourable Daryl Williams AM QC MP)

Chapter 4 - Background to the Bill

4.1. The current Corporations Law scheme commenced on 1 January 1991. Under that scheme, the Corporations Law is contained in an Act of the Commonwealth Parliament (the Corporations Act 1989 ) and is enacted for the Australian Capital Territory. Laws of each State and the Northern Territory apply the Corporations Law of the Australian Capital Territory as a law of the State or the Northern Territory. The scheme was designed to operate as a single national scheme even though it actually applies in each State and the Northern Territory as a law of the State or Territory.

4.2. The current Corporations Law is administered generally by a Commonwealth body, ASIC, established under the Australian Securities and Investments Commission Act 1989 . Each State and the Northern Territory has passed legislation applying relevant provisions of that Act, and also conferring functions relating to the administration and enforcement of the Corporations Law on, among others, the Commonwealth Director of Public Prosecutions and the Australian Federal Police.

4.3. The `cross-vesting' provisions of Commonwealth, State and Territory legislation comprising the current Corporations Law scheme were intended to establish a seamless and efficient system of adjudication by, among other things, allowing federal courts to exercise relevant State jurisdiction and State courts to exercise relevant federal jurisdiction.

4.4. The current scheme is also supported by the Corporations Agreement, an inter-governmental agreement to which the Commonwealth, the States and the Northern Territory are parties. The Agreement requires consultation and, in some cases, voting on amendments of the Corporations Law and related scheme legislation.

4.5. Recent decisions of the High Court have cast doubt on the constitutional foundations of important elements of the Corporations Law scheme.

4.6. The decision in Wakim rendered the cross-vesting arrangements invalid to the extent that they purported to confer State jurisdiction on federal courts.

4.7. In Hughes , the Court decided that the Commonwealth cannot authorise its authorities or officers to undertake a function under State law involving the performance of a duty (particularly a function having the potential to adversely affect the rights of individuals) unless the function has a sufficient nexus with a Commonwealth legislative power. As the limits of Commonwealth legislative power are uncertain, the decision has cast doubt on the ability of Commonwealth authorities or officers to exercise certain powers and functions under the Corporations Law. This has resulted in much uncertainty and inefficiency in relation to Australia's system of national corporate regulation.

4.8. These problems can be avoided by re-enacting the Corporations Law as a single federal law of national application. Under the section 51(xxxvii) of the Commonwealth Constitution, the Commonwealth Parliament may legislate with respect to matters referred to it by the State parliaments. Suitable State references can put beyond doubt the Commonwealth Parliament's power to enact the Corporations Law as a federal law of national application.

4.9. The Bill is designed as a central part of a replacement legislative scheme that would, in effect, re-enact the Corporations Law as a single federal law capable of operating nationally, partly in reliance on referrals by the States under section 51(xxxvii) of the Commonwealth Constitution. The Bill is designed so that, once enacted:

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it may be administered and enforced on a national basis by Commonwealth bodies; and

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it will re-instate an integrated system of adjudication by Commonwealth, State and Territory courts.

4.10. The Bill assumes a two-fold reference by States; the first element being a reference of the matters to which the Bill and the ASIC Bill relate, but only to the extent of the enactment of those bills, and the second (the amendment reference) being 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 Bill and the ASIC Bill (once enacted and as in force from time to time). The Bill is introduced on the assumption, in both cases, that the matters referred are limited to those within the legislative powers of the State and not otherwise within the legislative powers of the Commonwealth (see generally clause 4).

4.11. The Bill is introduced on the further assumption that:

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the amendment reference will not restrict the capacity of the Commonwealth Parliament to amend the Bill or the ASIC Bill once enacted (and as in force from time to time) in reliance on the legislative powers that it has apart from the references;

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the State reference legislation will include a general purpose or object provision to the effect that nothing in that legislation is intended to enable the making of a law under the amendment reference with the sole or main underlying purpose or object of regulating industrial relations matters even if, but for the provision, the law would be a law with respect to a matter referred to the Commonwealth Parliament by the amendment reference;

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the State reference legislation will include a `sunset' provision terminating the references after five years (with provision for extension by proclamation);

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the Corporations Agreement will provide that if four States vote to terminate the amendment reference all referring States will terminate that reference (the Bill itself will provide that if any State individually terminates the amendment reference it will cease to be part of the scheme);

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States will enact further legislation to validate the actions of Commonwealth officers and authorities under the current Corporations Law scheme which may be invalid as a result of Hughes ; and

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States and the Northern Territory will also enact further legislation to facilitate the transition from the existing legislative scheme, complementing the transitional provisions included in this Bill and the ASIC Bill (and the Commonwealth will enact the necessary provisions for the Australian Capital Territory).