Explanatory Memorandum(Circulated by authority of the Minister for Financial Services and Regulation, the Honourable J.B. Hockey, MP)
6 Schedule 3 - Amendment of the Corporations Law
The purpose of Schedule 3 to the Bill is to add to the Corporations Law set out in section 82 of the Corporations Act 1989 a proposed new Schedule 4.
The new Schedule 4 will provide for the registration of financial institutions and friendly societies as companies and regulation of those entities under the Corporations Law by ASIC. Schedule 3 to the Bill also contains amendments to the Corporations Law consequent upon financial institutions and friendly societies becoming companies.
Schedule 4 also provides that registration of the transferring financial institutions under their previous governing legislation in the States and Territories is cancelled, and no new registrations under such legislation is permitted.
6.1 Item 1 of Schedule 3 to the Bill, which inserts a new Schedule 4 in the Corporations Law, commences on the day the Bill receives Royal Assent.
6.2 The consequential changes to the Corporations Law set out in items 2 - 51 and item 54 will all commence on the transfer date, except for items 30, 31, 42 and 43. The excepted items deal with restrictions on names and include regulation making powers, so they will commence on Royal Assent together with Item 1.
6.3 Items 53 and 54 interact with other changes included in the Corporate Law Economic Reform Program Bill 1998. The manner in which those items commence is explained further in the detailed commentary below.
Part 1-Transfer of financial institutions and friendly societies
6.4 Item 1 of Schedule 3 provides for the transfer of financial institutions and friendly societies to the Corporations Law. Item 1 proposes that a new Schedule 4 is to be added to the end of the Corporations Law set out in section 82 of the Corporations Act 1989 .
6.5 Proposed Schedule 4 comprises Parts 1 to 7:
- Part 1-Preliminary
- Part 2-Transfer to Corporations Law registration
- Part 3-Terminating the application of Codes to financial institutions and friendly societies
- Part 4-The transition period
- Part 5-Demutualisations
- Part 6-Continued application of fundraising provisions of the FS Code
- Part 7-Transitional provisions
6.6 A commentary on proposed new Schedule 4 of the Corporations Law follows.
6.7 Part 1 of proposed Schedule 4 sets out some definitions used in the Schedule and a statement of the objective sought by its inclusion.
Clause 1 - Definitions
6.8 Clause 1 defines a number of terms for the purposes of Schedule 4, most of which relate to, or draw on, existing definitions in other laws.
- ' transferring financial institution of this jurisdiction' is defined to include building societies, credit unions, and associations registered under the FI Code; friendly societies and associations registered under the FS Code; Special Service Providers registered under the Australian FI Code; and may also include the CCWPSBL, referred to in the Financial Intermediaries Act 1996 of Queensland.
- ' member of a transferring financial institution' means a person who, immediately before the transfer date, was a member of a transferring financial institution for the purposes of the previous governing Code (as defined elsewhere in clause 1), or for the purposes of the rules of the institution. Most members would satisfy both limbs of this test, since they would be members for the purposes of both the rules of the institution and the relevant previous governing Code.
- The repeal of the definition of ' share' is discussed further in the explanation of clause 12.
- The ' transfer date' will be determined for the purposes of the Act by proclamation (see subclause 3(11) of the Bill). This date will be the date that transferring financial institutions will be taken to be registered as companies under the Corporations Law.
- ' transition period' is used to refer to the period of 18 months after the transfer date, during which transferring financial institutions are required to take certain steps to perfect their conversion to companies. Some provisions of Schedule 4 are operative only during that period.
Clause 2 - Objective
6.4 Clause 2 is a statement of the objective of Schedule 4, which is to facilitate the registration of transferring financial institutions under the Corporations Law with minimal disturbance to operations and cost for the entities concerned. Part 2-Transfer to Corporations Law registration
6.5 Part 2 of Schedule 4 contains provisions regarding the transfer of entities to registration under the Corporations Law. The Part is divided into Division 1, dealing with the transfer process, and Division 2, dealing with the consequences of the transfer.
Division 1-The transfer process
6.6 Division 1 of Part 2 contains clauses dealing with the process of registering transferring financial institutions as companies under the Corporations Law and other related administrative processes.
Clause 3 - Registration of transferring financial institution as company
6.7 Clause 3 is a key provision of Schedule 4. Subclause 3(1) provides that every 'transferring financial institution of this jurisdiction' (as defined in clause 1) is taken to be registered as a company under the Corporations Law in the relevant jurisdiction.
6.8 Subclause 3(2) makes it clear that even institutions which are, immediately before the transfer date, under external administration, will become companies pursuant to subclause 3(1). There are special provisions regarding the continuation of the external administration in clause 11.
6.9 There are three types of company which a transferring financial institution may become on transfer. The three types are:
- limited by shares;
- limited by shares and guarantee; and
- limited by guarantee.
6.10 The category of limited by shares and guarantee is available for transferring financial institutions notwithstanding this category is no longer available for newly incorporating companies.
6.11 Subclause 3(3) sets out in tabular form a 'default setting' for each kind of transferring financial institution and optional company types. The default settings have been selected with the intention that each class of transferring financial institution will have a default setting which 'best fits' its structure, so that the transition will involve minimal change to the current structure. The default settings for the key classes of transferring financial institution are as follows:
|Class of TFI||Default setting||Explanation|
|building society with shares||limited by shares and guarantee||Although some building societies may currently have their primary membership vehicle based on withdrawable shares, prior to transfer those shares will be converted to deposits. After transfer, a new primary membership vehicle will be required which will be the guarantee. Many building societies also issue permanent shares, and the limited by shares and guarantee structure will allow this to continue.|
|building society without shares||limited by guarantee||Building societies with no shares on issue (including withdrawable shares) are closest in character to a company limited solely by guarantee.|
|credit union with shares||limited by shares||Credit unions with shares on issue (including withdrawable shares) are likely to have a membership structure based on shares which can continue under a limited by shares structure, with withdrawable shares being converted to redeemable preference shares.|
|credit union without shares||limited by guarantee||Credit unions with no shares on issue (including withdrawable shares) are closest in character to a company limited solely by guarantee.|
|friendly society with no shares on issue||limited by guarantee||The vast majority of friendly societies have not issued shares and are closest in character to a company limited by guarantee.|
|friendly society with shares on issue||limited by shares and guarantee||A very small number of friendly societies have some shares on issue. Those entities cannot be converted to a company limited by guarantee alone, so the default setting is a company limited by shares and guarantee.|
6.4 Entities which do not wish to become the company type specified in the default setting will be entitled to elect, prior to the transfer date, to become a different type of company. However, not every option is available for every kind of transferring financial institution. The main restrictions are that:
- entities which have shares on issue immediately before the transfer date, including withdrawable shares, may not become companies limited by guarantee alone;
- other than associations and Special Service Providers, transferring financial institutions must become public (rather than proprietary) companies; and
- Special Services Providers must become companies limited by shares.
6.5 A transferring financial institution may elect, by board resolution pursuant to subclause 3(4), to become any of the available company types under subclause 3(3). To be effective the election must be in the prescribed form and be lodged with ASIC at least seven days prior to the transfer date.
6.6 Although a range of company types is available to most transferring financial institutions under subclause 3(3), there are likely to be a number of considerations relevant to an institution contemplating making an election. Company type and membership structure may be a feature which is used to distinguish entities eligible for various entitlements or concessions under other laws and policies.
6.7 Part 2B.7 of the Corporations Law includes facilities for companies to change type at any time by following various procedures. Those procedures could be utilised by transferring financial institutions to change company type after the transfer date. However, those procedures do not allow for a company limited by shares alone to convert to a company limited by guarantee, or shares and guarantee. Accordingly, if a transferring financial institution elects to become a company limited by shares only (through election or otherwise), it is not possible to rely on the existing procedures in the Corporations Law to modify that company type after the transfer date. For that to occur there would need to be special modification of the existing procedures under the regulations or through an ASIC exemption or modification order (both of which are discussed below).
6.8 Subclause 3(5) provides that, if a transferring financial institution does not make an election, it will be taken to be registered as the default company type specified in subclause 3(3), unless there is a regulation providing for the contrary.
Clause 4 - Documents to be lodged with ASIC following transfer
6.9 The SSA must transfer certain records and information about transferring financial institutions so that it can be recorded on the relevant part of ASIC's information system.
6.10 The name and registered office of each transferring financial institution under the previous governing Code immediately prior to the transfer date must be provided, together with a copy of the institution's rules in force at that time. If the institution is in external administration (for example, liquidation or receivership), the SSA must give ASIC a notice setting out the type of administration. The regulations may specify further information regarding the external administration that must be provided, such as the name and address of any liquidator.
6.11 Documents regarding charges registered under the previous governing Codes over institutions' property must also be provided to ASIC. The status of existing charges are preserved, for the purposes of the Corporations Law, under Subdivision D (see further below).
Clause 5 - Documents to be lodged with ASIC by transferring financial institution
6.12 Clause 5 provides that transferring financial institutions must lodge a notice with ASIC in the prescribed form, within one month of the transfer date, setting out the personal details of directors and secretaries of the institution. The personal details required are those that would have to be set out if the notice was required under existing section 242 of the Corporations Law, being:
- given and family names;
- all former given and family names;
- date and place of birth; and
6.13 Failure to comply with the requirements of clause 5 is an offence which carries a maximum penalty of five penalty units. Division 2 of Part 9.4 of the Corporations Law contains provisions relating to offences generally.
Clause 6 - Company to set up registers and minute books
6.14 Clause 6 contains requirements relating to the establishment by transferring financial institutions of registers and minute books for the purposes of the Corporations Law.
6.15 Subclause 6(1) provides that, within 14 days of the transfer date, entities must set up:
- registers of members, debenture holders and option holders required by section 168 of the Corporations Law;
- registers of charges required by section 271 of the Corporations Law; and
- the minute books required by section 251A of the Corporations Law.
6.16 Transferring financial institutions must include in the registers of members, debenture holders, option holders and charges all the information that is required to be included in those registers and that is available to the company on registration.
6.17 The Corporations Law contains provisions which require companies to allow persons to inspect and make copies of various registers and minute books within certain time periods (see, for example, section 173). Subclause 6(2) provides that during the 14 day period provided under subclause 6(1) for setting up the registers and minute books, entities need not comply with any such request, but the time period for compliance with the request begins to run from the end of the 14 day period.
6.18 Regulations may be made in relation to inspection rights in relation to some institutions (see discussion of regulation making powers below).
Clause 7 - ASIC to complete formalities of registration
6.19 Subclause 7(1) provides that ASIC must take certain steps as soon as practicable after the transfer date to formally register transferring financial institutions under the Corporations Law.
6.20 In particular, ASIC must:
- record the registration and allocate an Australian Company Number (ACN) to each transferring financial institution;
- issue the institution with a certificate of registration which sets out its registered name, ACN, company type and jurisdiction of registration.
6.21 The date of registration is the transfer date.
6.22 Subsections 1274(2) and (5) of the Corporations Law deal with the inspection, production and admissibility in evidence of certain records lodged with ASIC. Subclause 7(2) provides that those subsections apply to the record of registration that ASIC makes pursuant to subclause 7(1) as if it were a document lodged with ASIC.
Clause 8 - Registration of registered bodies
6.23 Division 1 of Part 5B.2 of the Corporations Law provides for entities which are 'registrable Australian bodies' to become registered under that Division as a registered Australian body. Such bodies are allocated Australian Registered Body Numbers (ARBNs).
6.24 Some transferring financial institutions may have been registered as registered Australian bodies prior to the transfer date. Following the transfer date, registration as an Australian body under Division 1 of Part 5B.2 will no longer be necessary or appropriate, since the entities will be registered as companies. Subclause 8(1) provides that any transferring financial institutions which are registered Australian bodies will automatically cease to be registered as such, and ASIC must remove the name from the register under Division 1 of Part 5B.2. Subclause 8(2) provides that ASIC may keep any documents which were lodged because the company used to be a registered body.
Division 2-The consequences of the transfer
6.25 Division 2 comprises four subdivisions relating to the consequences of the transfer. Subdivision A contains some general provisions. Subdivision B deals with the consequences for members and membership. Subdivision C deals with how share capital is to be treated. Subdivision D deals with charges over the property of Transferring Financial Institutions.
Clause 9 - Effect of registration under clause 3
6.26 The purpose of clause 9 is to clarify certain matters in connection with the transfer of entities to registration to the Corporations Law.
6.27 Subclause 9(1) is directed at the institution itself. It provides that registration as a company does not create any new legal institution or affect any of the institution's rights or obligations (except as against members in their capacity as members). Legal proceedings by or against the institution or its members are not affected by the transfer.
6.28 Subclause 9(2) is a key provision. It carries forward many of the features that the institution had immediately before transfer. All members (as defined in clause 1) of the transferring financial institution immediately prior to the transfer date become members of the company following transfer. Similarly, directors and secretaries continue to hold office following the transfer, and the registered office of the institution becomes the registered office of the company.
6.29 Subclause 9(2) also provides that the rules of the transferring financial institution, as in force immediately before the transfer date, become the company's constitution. This includes benefit fund rules of a friendly society, except health benefit fund rules which are regulated under the National Health Act-subclause 9(3).
6.30 The standard set of replaceable rules described in section 135 of the Corporations Law does not apply to transferring financial institutions until such time as they choose to repeal their constitution-see subclause 9(4).
Clause 10 - Provisions applying to company limited by shares and by guarantee
6.31 The Company Law Review Act 1998 made changes to the Corporations Law so that no companies limited by shares and guarantee could be newly incorporated. That Act repealed or amended a number of provisions to delete references to those companies. Since companies of that type existing at that time were 'grandfathered', in that they could remain as that type notwithstanding that no new ones could be created, it was necessary to preserve certain references in the previous law for the purposes of those companies. Section 1416 of the Corporations Law was inserted for that purpose, and it provides that certain parts of the previous law apply to companies limited by shares and guarantee.
6.32 Some transferring financial institutions will be taken to be registered as companies limited by shares and guarantee. Subclause 10 applies section 1416 to those companies so that the provisions which that section preserves for the purposes of the grandfathered companies limited by shares and guarantee will also apply to transferring financial institutions which are taken to be registered as that company type.
Clause 11 - Transferring financial institution under external administration
6.33 Some transferring financial institutions may be in the course of external administration proceedings at the transfer date.
6.34 If the rules regarding the external administration which applied to the transferring financial institution immediately before the transfer date were those of the Corporations Law, as applied by previous governing Codes, clause 11 operates to continue those proceedings under the new rules which apply under the Corporations Law. Acts done under the rules as applied by the previous governing Codes prior to the transfer date are taken to have effect as if they were done under the Corporations Law (subclause 11(3)). Previous appointments of liquidators by SSAs will be valid for the purposes of the Corporations Law (subclause 11(5)), notwithstanding there is no equivalent method of appointment by ASIC. However, a certificate issued for the winding up of a transferring financial institution by an SSA under section 341 of the FI Code, or section 402 of the FS Code, is not a basis for winding up of the institution under the Corporations Law.
6.35 It is possible that a transferring financial institution may be under external administration pursuant to laws other than the Corporations Law as applied by the previous governing Codes. This may have occurred if it was placed in administration prior to the commencement of the previous governing Codes in the relevant jurisdiction. To deal with such cases, a specific power has been included to permit regulations to be made to deal with transitional matters (see Part 7, discussed below).
6.4 Subdivision B contains rules about how the various forms of membership of transferring financial institutions are translated when the entities become companies under the Corporations Law. There is a separate clause for each company type a transferring financial institution may become.
Clause 12 - Institution becoming a company limited by shares
6.5 If a transferring financial institution becomes a company limited by shares, clause 12 applies.
6.6 If a transferring financial institution has shares (other than withdrawable shares) on issue immediately before the transfer date, paragraph 12(1)(a) provides that those shares simply become shares of the company.
6.7 If a transferring financial institution has withdrawable shares on issue immediately before the transfer date, paragraph 12(1)(b) provides that those shares are converted to redeemable preference shares for the purposes of the Corporations Law.
6.8 It is intended that this paragraph will apply only to withdrawable shares issued by credit unions. Withdrawable shares issued by building societies are more akin to debt than equity because of their treatment under the FI Code. It is proposed that provision will be made under State and Territory laws for the conversion of all withdrawable shares issued by building societies to deposits prior to the transfer date.
6.9 Some transferring financial institutions which become companies limited by shares may have members who do not hold any kind of share as at the transfer date. Since it is a fundamental principle of company law that members of companies limited by shares alone hold at least one share, it is necessary to make provision for the issue to those persons with a share in the company that the transferring financial institution becomes.
6.10 Paragraph 12(1)(d) provides that persons in that category are taken to have been issued with a 'membership share' in the company on the transfer date. The objective is to substantially replicate, through the holding of a membership share, the relationship that existed between the institution and the member prior to the transfer date.
6.11 In the case of building societies, many persons hold 'permanent' shares for investment purposes but also have various membership rights and obligations under the rules of the society in some other capacity (such as borrower or depositor). Those persons will also receive a membership share, even though they have a permanent share, as a vehicle for the rights and obligations which they have in a capacity other than as a shareholder (paragraph 12(1)(c) and subclause 12(3)).
6.12 The features of a 'membership share' are described in subclause 12(3). Membership shares:
- carry the rights that were conferred on the holder prior to the transfer date by the institution's rules and the previous governing Code (subject to the exception for building society members with permanent shares described above);
- do not have any paid or unpaid amount attached to them;
- are personal to the member concerned and are not capable of transfer, even by transmission or devolution by will or operation of law; and
- can be cancelled in the same circumstances that a member could have had their membership cancelled, and the rules in Part 2J.1 regarding share capital reductions and share buy backs do not apply to such a cancellation.
6.13 As there is no unpaid amount on membership shares, members who are taken to be issued with those shares will not incur any liability to contribute to the company. Further, as there is no paid amount on the shares, there is no impact on the company's share capital accounts by the issue of the membership shares. However, persons issued with membership shares retain any rights to surplus on a winding up that they had prior to the transfer date.
6.14 Notwithstanding the introduction of no par value in the Company Law Review Act 1998 , shares of zero paid and zero unpaid amounts would be inconsistent with the existing definition of 'share' in section 9 of the Corporations Law, which refers to a share in the share capital of a body. That definition will be repealed by clause 1 so that the membership share will not be incompatible with the section 9 definition of 'share'.
6.15 Subclause 12(2) deals with the treatment of membership shares issued in relation to memberships which were held jointly prior to the transfer. Persons who receive a membership share in relation to a membership held jointly prior to transfer date will hold the membership share jointly with the other joint members, even if the other persons in the joint membership would not be entitled to receive a membership share in their own right because they hold other shares. Subclause 12(2) also clarifies that the issue of a membership share to joint members does increase the voting rights of those members.
Clause 13 - Institution becoming a company limited by guarantee
6.16 Companies limited by guarantee alone do not issue shares, but all members guarantee to contribute a certain amount in the event the company is wound up. The object of the provisions dealing with companies which become companies limited by guarantee is to replicate, so far as possible, the relationship the members had prior to the transfer date in a limited by guarantee form.
6.17 Clause 13 provides that each person who was a member of a transferring financial institution immediately prior to the transfer date is taken to have given a guarantee. However, this deeming provision is only for the purpose of ensuring members of the transferring financial institution have status as a member of the company. Clause 16 (discussed below) provides a mechanism so that, even though members of transferring financial institutions immediately prior to the transfer date are deemed to have given a guarantee for the purposes of membership, they are not liable to contribute to the company in the event it is wound up.
6.18 A statement of the value of the undertaking provided by members of a company limited by guarantee is included in the company's constitution. Following the passage of the Company Law Review Act 1998 there is no longer a statutory form of words for the guarantee to be included in the constitution, but the usual form is:
" The liability of the members of the company is limited and each member undertakes to contribute to the company's property if the company is wound up while he, she or it is a member or within one year after he, she or it ceases to be a member, for payment of the company's debts and liabilities contracted before he, she or it ceases to be a member and of the costs, charges and expenses of the winding up and for adjustment of the rights of the contributories among themselves, such amount as may be required not exceeding a amount of [ ] dollars in addition to the amount (if any) unpaid on any shares held by him, her or it ."
6.19 Part 4 of Schedule 4 contains provisions which require modifications to be made to the constitution of transferring financial institutions and those companies which become companies limited by guarantee would need to include a statement similar to the one above to comply with that Part. It would not be permissible for companies to nominate an amount of zero for the value of the guarantee (see the definition of company limited by guarantee in section 9).
6.20 Paragraph 13(1)(b) provides that, until such time as the amount of the guarantee is determined by including such a statement in the constitution of the transferring financial institution, any members joining after the transfer date will also be taken to give a guarantee of a similar form to those persons who were members as at the transfer date (that is, one which is for the purposes of membership only and is not enforceable).
6.21 However, persons who join after the time that the statement of guarantee is included in the institution's constitution will be treated as a normal member of a company limited by guarantee and, if the institution is wound up, they will be liable to contribute to the company's property up to a specified amount as stated in the company's constitution.
6.22 Some transferring financial institutions may have joint members. Subclause 13(2) deals with such memberships by providing that joint members of transferring financial institutions are taken to have provided a guarantee jointly with the other joint member(s). Other amendments are made in this Bill to the provisions of the Corporations Law which deal with joint members in the context of meetings and other matters (see discussion of items 35, 37 and 38 below).
Clause 14 - Institution becoming a company limited by shares and guarantee
6.4 Clause 14 deals with entities that become limited by shares and guarantee. The primary membership vehicle in such companies is the guarantee, since all members are required to provide a guarantee.
6.5 In this regard, the provision of clause 14 regarding transferring members and those who join prior to the time the guarantee is determined are the same as those applying to companies limited by guarantee alone (see discussion of clause 13).
6.6 As to shares, the provisions of clause 14 are similar to those applying under clause 12 to a company which becomes limited by shares alone, except that there is no need to provide for issue of 'membership shares' because the guarantee provides a vehicle for 'pure' membership rights (such as attending and voting at general meetings). Shares, in these companies, will be issued solely for the purpose of raising capital.
Clause 15 - Redeemable preference shares that were withdrawable shares
6.7 Clause 15 deals with shares which were withdrawable shares but are converted under clause 12 or clause 15 to redeemable preference shares.
6.8 Subclause 15(1) provides that generally the provisions of the Corporations Law dealing with redeemable preference shares (such as Part 2H.2) apply to such shares. However, the subclause expressly provides that the share is redeemable on the same terms that the withdrawable share was withdrawable, and the holder of the redeemable preference share continues to have the same rights and obligations that they had by holding the withdrawable share.
6.9 Some transferring financial institutions may currently have issued only withdrawable shares. Subclause 15(2) clarifies that it is possible for transferring financial institutions to have on issue only redeemable preference shares. This subclause is intended to overcome an implication that might arise by use of the word 'preference' in the description of the share that it must be preferred over some other type of share, therefore it cannot be the only class of share on issue. Since it is possible that a share structure involving only redeemable preference shares may become the preferred or standard model for one or more classes of financial institution, subclause 15(2) will also permit all entities of certain classes of financial institution to adopt such a structure, as well as transferring financial institutions, so that a standard structure may be adopted across an industry class.
Clause 16 - Liability of members on winding up
6.10 The Corporations Law provides that members and past members of companies may be liable to contribute to the property of the company in the event the company is wound up. The object of clause 16 is to clarify the position of certain members and past members of transferring financial institutions.
6.11 Subclause 16(1) deals with past members of transferring financial institutions. It provides that persons who ceased to be members of transferring financial institutions prior to the transfer date are not liable to contribute under the provisions of the Corporations Law if the institution is wound up after the transfer date unless the person held shares. Past members who held shares (including withdrawable shares) may be liable to contribute in the event of a winding up under Division 2 of Part 5.6 of the Corporations Law if the shares they held were not fully paid.
6.12 Subclause 16(2) excludes liability of persons under guarantees which they are taken to have given because they are, or become, members of transferring financial institutions before the amount of the guarantee is determined. It provides that persons who are taken to have given a guarantee under subclause 13(1) (transferring financial institution becoming company limited by guarantee) or subclause 14(1) (transferring financial institution becoming company limited by shares and guarantee) are not liable under the provisions dealing with the liability of contributories generally (section 515), members of companies limited by guarantee (section 517) or members of companies limited by shares and guarantee (section 518, as preserved by section 1416 and clause 10) merely because of the guarantee they were taken to have given. Such persons may, however, be liable to contribute for other reasons. For example, if the institution becomes a company limited by shares and guarantee, a person may hold, or may have held, partly paid shares in the institution.
Subdivision C-Share capital
6.13 The Company Law Review Act 1998 , which commenced operation on 1 July 1998, amended the Corporations Law to give effect to significant reforms in relation to the nominal value of shares and share capital reductions. In essence, the notion of a company's 'authorised capital' and 'par value' or 'nominal value' of shares is no longer a concept relevant to newly incorporated companies under the Corporations Law.
6.14 Schedule 5 of the Company Law Review Act 1998 contained various transitional rules governing the conversion of authorised capital, par value and related matters in respect of companies that were registered prior to the commencement of the 'no par value' regime. Subdivision C of the Bill contains similar rules about how the share capital of transferring financial institutions is to be treated, since those entities are transferring from a regulatory framework which will, on the transfer date, still recognise the par value concept.
Clause 17 - Share capital
6.15 Clause 17 provides for certain amounts to become part of a transferring financial institution's share capital when it becomes registered as a company.
Conversion of withdrawable share capital
6.80 Paragraph 17(1)(a) refers to withdrawable share capital "within the meaning of the FI Code of this jurisdiction". The term 'withdrawable share capital' is not expressly defined, but it is intended to cover that term as it is used in, for example, section 159 of the Code.
6.81 Under the FI Code withdrawable shares form part of the share capital of societies. However, for some purposes (such as accounting treatment-see, for example, the requirements in Attachment A to the Prudential Standards issued by the AFIC) the amounts are treated as liabilities. Similarly, withdrawable share capital is not treated as capital for the purposes of capital adequacy standards.
6.82 It is intended that, for the purposes of the Corporations Law, withdrawable shares will, on conversion to redeemable preference shares, be treated like other redeemable preference shares in that they will become part of the share capital of the company. This will only be relevant to credit unions because any withdrawable shares of building societies will no longer exist at the transfer date as they will have already been converted into deposits.
6.83 However, the inclusion of former withdrawable shares in the share capital of the company for the purposes of the Corporations Law does not necessarily preclude the situation that, for some purposes (such as accounting standards or capital adequacy standards issued by APRA) those shares will be treated in a manner more akin to liability than capital, as they were under the FI Code, depending upon the rules of the institution relating to the redemption facility. Institutions may, as part of the modifications to their constitutions which will occur during the transitional period (see below), align the redemption facility applying to converted withdrawable shares and new redeemable preference shares.
Conversion of share premium account and capital redemption reserve
6.84 Some transferring financial institutions (particularly building societies) may have established share premium accounts and capital redemption reserves under their previous governing Codes. Those amounts will become part of the share capital of the company that the society becomes. This conversion occurred for companies registered under the Corporations Law on 1 July 1998 pursuant to section 1446, which was inserted by the Company Law Review Act 1998 .
Use of share premium account
6.85 It will no longer be possible for transferring financial institutions to redeem redeemable preference shares out of their share premium account, because those moneys will become part of the share capital of the company. However, subclause 17(2) provides that any amount which was in a transferring financial institution's share premium account immediately prior to the transfer may be used to:
- pay any premium on the redemption of redeemable preference shares or debentures issued prior to the transfer; or
- write off preliminary expenses incurred or discounts allowed before the transfer date, in respect of any issue of shares or debentures.
Clause 18 - Application of no par value rule
6.80 Section 254C of the Corporations Law, which commenced on 1 July 1998, provides that shares of a company have no par value. Section 1444 of the Corporations Law, which commenced at the same time, provides that section 254C applies to shares of companies issued both before and after its commencement. Section 1445 deals with how references in the law after 1 July 1998 to the 'amount paid' and 'amount unpaid' on shares applies in relation to shares issued before that date.
6.81 Clause 18 is intended to clarify the position for transferring financial institutions, since they were not registered as at 1 July 1998. Subclause 18(1) mirrors section 1444 and provides that section 254C applies to all shares of a transferring financial institution, whether or not they are issued after the transfer date. Subclause 18(2) mirrors section 1445, and provides that, in relation to shares issued before the transfer date:
- the amount paid is the sum of all amounts paid to the institution at any time for the share (but not including any premium); and
- the amount unpaid on a share is the difference between the issue price (not including any premium) and the amount paid on the share.
Clause 19 - Calls on partly-paid shares
6.80 Clause 19 provides that the liability of a shareholder for calls on partly paid shares is not affected by the elimination of the par value concept by the application of section 254C. This clause mirrors section 1448 of the Corporations Law.
Clause 20 - Reference in contracts and other documents to par value
6.81 Prior to the transfer date, transferring financial institutions and other persons may have entered into various contractual and other arrangements which refer to par value of shares issued by the institution. There may also be references to the par value of shares in the rules of some transferring financial institutions, which will become part of the company constitution.
6.82 Clause 20 mirrors section 1449 of the Corporations Law. That section provides for how certain references in contracts, trust deeds and other documents to certain terms should be interpreted. Clause 20 provides for how references in documents to par value of a share; aggregate par value of issued share capital; share premium; and right to return of capital in respect of transferring financial institutions should be interpreted if those contracts or documents were entered into prior to the transfer date. The objective is to provide a 'default' translation mechanism for references to par value and other matters no longer recognised by the Corporations Law into terminology which has a similar or equivalent meaning, so that the documents concerned will not fail. However, it would still be possible for parties to negotiate amendments to contracts and documents to reflect the new terminology as they see fit.
6.83 Under clause 4, ASIC receives from SSAs details of charges over the property of transferring financial institutions which have been registered under the previous governing Codes. Subdivision D contains rules to preserve registered status of pre-existing charges following the transfer to Corporations Law.
Clause 21 - Registration of prior charges
6.84 The purpose of clause 21 is to provide for a deeming mechanism which will, in combination with subsection 265(3) of the Corporations Law, ensure that charges registered under the previous governing Codes will be taken to have been registered under the Corporations Law from the time that they were lodged under the previous law.
6.85 The previous governing Codes (the FI Code and the FS Code) applied the provisions of the Corporations Law with respect to registration of charges. Clause 21(1) provides that, where details of a charge were registered under provisions of the Corporations Law as applied by the previous Codes, ASIC is taken to have entered in the Australian Register of Company Charges established by ASIC under section 265 of the Corporations Law the relevant particulars of the charge that were entered pursuant to the previous governing Code. ASIC is taken to have done this at the beginning of the transfer date in accordance with the requirements of subsection 265(2) of the Corporations Law (subclause 21(2)). Subsection 265(3) will operate to deem the charges included in the register pursuant to subclause 21(2) to have been registered from the time that they were lodged under the previous Code-see also subclause 21(3).
6.86 The deemed registration of charges for the purposes of the Corporations Law under clause 21 does not affect the operation of laws, such as the priority for depositors under the Banking Act, which may take effect as a result of transferring financial institutions becoming regulated under those laws.
Part 3-Terminating the application of the Codes to financial institutions and friendly societies
6.87 It is intended that, after the transfer date, the transferring financial institutions will no longer be subject to their previous governing Codes except insofar as transitional and savings provisions apply. There will be no more entities registered under those Codes. From the transfer date, registration, corporate governance and market integrity aspects will be dealt with under the Corporations Law. Prudential supervision will be carried out by APRA pursuant to the Banking Act and the Life Insurance Act.
6.88 Clause 22 and clause 23 deal with these matters. Since they form part of the Corporations Law, they will be applied in each State and the Northern Territory as laws of those jurisdictions pursuant to the respective Corporations ([name of State]) Acts . In the Australian Capital Territory, the provisions will apply directly through the Corporations Act 1989 .
Clause 22 - Cancellation of Code registrations
6.89 Clause 22 provides that, on the transfer date, the registration of each transferring financial institution under the relevant previous governing Code is cancelled. The terms 'transferring financial institution' and 'previous governing Code' are defined in clause 1.
Clause 23 - No new registrations under the Codes
6.90 Clause 23 provides that after the transfer date, no more entities may be registered under the FI Code, the FS Code or the AFIC Code. The defined term 'previous governing Code' is not used in this clause because it is not intended to apply to the Financial Intermediaries Act 1996 of Queensland.
Part 4-The transition period
6.91 The mechanism provided for in Schedule 4 is intended to provide for a simultaneous transfer of entities on the transfer date, with the least possible disturbance and cost for the entities concerned. However, the transition to the Corporations Law regulatory framework as companies will involve some steps to be taken by the transferring financial institutions.
6.92 In particular, entities will be required to make some changes to their own constitutions to recognise the relevant form of membership vehicle (shares and/or guarantee). Part 4 provides for a transition period (18 months) during which transferring financial institutions can take the required steps to required to modify their constitutions. There will be a streamlined mechanism for achieving these changes.
6.93 It is likely that there are some requirements in the Corporations Law affecting transferring financial institutions with which it is not practicable to require immediate compliance because of administrative steps which the entities would need to take. It is not considered practical to provide for a transitional regime in relation to each and every such matter, since some may only affect a small number of entities and some issues may not have been identified.
6.94 This situation is addressed in three ways. During the transitional period, there will be a regulation making power which can be used to modify the operation of the Corporations Law as it applies to classes of transferring financial institutions or individual entities. Further, ASIC will have powers to make orders which modify or exempt individual or classes of transferring financial institutions from compliance with parts of the Corporations Law. Finally, the Court is given power to resolve transitional difficulties arising out of the application of the Corporations Law to transferring financial institutions, and the Court's orders have effect notwithstanding the provisions of the Corporations Law (see discussion of clause 38 below).
Clause 24 - Modifications of constitution
6.80 Subclause 24(1) imposes a requirement on transferring financial institutions to modify their constitutions within the 18 month transition period so that they:
- give effect to Schedule 4;
- are consistent with the Corporations Law; and
- set out the rights and obligations attaching to each class of share, including shares that are taken to be issued pursuant to other provisions of the Schedule.
6.81 The bulk of modifications contemplated by this subclause relate to recognition of shares and rights attaching to shares.
6.82 In the case of companies limited by guarantee or shares and guarantee, the inclusion of a statement in the constitution regarding the limitation of liability and the amount of the guarantee would be a modification consistent with the Corporations Law, even though there is no longer an express requirement in the Corporations Law to include such a statement in the constitution.
6.83 Subclause 24(2) expressly clarifies that transferring financial institutions which have been taken to have issued membership shares under clause 12 may, rather than merely expressly recognising those shares in its constitution:
- modify its constitution to alter the statutory rights and obligations attaching to those shares; or
- cancel any such shares (for the terms of cancellation, see clause 12) and not provide for them in the constitution at all.
6.84 Failure to comply with the requirements of clause 24 renders a company guilty of an offence under section 1311 and subject to the maximum penalty provided for in that section and section 1312.
Clause 25 - ASIC may direct directors of a company to modify its constitution
6.85 If a transferring financial institution does not comply with clause 25 by making the required changes to its constitution by the end of the 18 month transition period, clause 25(1) gives ASIC power to direct that the institution to take necessary or specified steps to modify its constitution so that it does comply, or make such modifications as ASIC specifies, within a time limit which must be more than 28 days. Failure to comply with such a direction without reasonable excuse amounts to a contravention of the direction. Intentional or reckless contravention is an offence, punishable by a maximum penalty of 100 penalty units or imprisonment for 2 years, or both. Section 1314, which deals with continuing offences, will apply to this offence.
6.86 Some constitutions may impose various procedural requirements for constitutional changes which it is not possible or practical to comply with in the context of making the changes required under clause 24. Subclause 24(1) permits ASIC to give a direction after the transition period requiring steps to be taken to modify a constitution which are inconsistent with the company's constitution. Subclause 25(3) excludes civil and criminal liability for actions taken by a director in accordance with such a direction. Subclause 25(2) permits the directors of a transferring financial institution to request ASIC to issue a direction prior to the end of the transition period so that they can take steps to make the required changes in accordance with the direction.
Clause 26 - ASIC's power to make exemption and modification orders for the transition period
6.87 As mentioned above, it is not feasible to include in the Corporations Law all the exemptions and variations necessary or desirable to deal with the transition to the Corporations Law framework. Under clause 26, ASIC is given powers to make orders about how the Corporations Law and regulations apply to transferring financial institutions during the transitional period. The types of orders made may include, but are not limited to:
- orders which modify or omit various procedural requirements (such as member approval requirements under Parts 2G and 2F) to permit entities to make changes to their membership structures to comply with the Corporations Law and/or laws relating to prudential supervision with a minimum of cost and disturbance to members; and
- orders which relax or vary various other requirements which it would not be appropriate or necessary to immediately apply to transferring financial institutions.
6.88 The orders may take the form of exempting one or more entities from compliance, or declarations that the Corporations Law applies with modifications (subclause 26(1)). ASIC orders may be drafted as general or specific in relation to the provisions affected, the entities affected or other matters (subclause 26(3)). Orders must be in writing and published in the Commonwealth Gazette (subclause 26(5)).
6.89 The power can be used to make orders about the application to transferring financial institutions during the transitional period of any aspect of the Corporations Law or regulations made under it (see section 8A). Clause 26(2) sets out particular matters which the exemption and modification may be used for (without limiting its general application). However, if the order contemplated relates to a matter directly affecting the rights and obligations of members, being altered procedures for changes of company type, changes to the company constitution or matters affecting shares, clause 27 (discussed below) imposes special procedural requirements for modifications to constitutions made under exemptions or declarations.
6.90 Subclause 26(4) provides that ASIC may impose conditions on orders which can apply to the institution or other persons. Failure to comply with a condition renders a person liable to a penalty under Division 2 of Part 9.4. In addition, ASIC is given power to apply to the Court for an order that the person must comply with a condition in a specified way.
Clause 27 - When certain modifications of a company's constitution under an exemption or declaration take effect
6.91 The orders that ASIC may make under clause 26 may relate to procedural requirements in connection with modifications to company constitutions. Although ASIC is given wide powers under clause 26 to make orders to relax procedural requirements, in the case of modifications to company constitutions clause 27 imposes another set of requirements that apply even if ASIC, by way of an exemption or modification order, disapplies the usual provisions.
6.92 Subclause 27(1) provides that, if a company is exempted from complying with other provisions which require the lodgement with ASIC of a copy of modifications to the constitution (see Part 2B.4), a copy must be lodged within 14 days of it being made.
6.93 Subclauses 27(3) - 27(8) provide that where modifications to constitutions are made in the absence of unanimous agreement by members of an affected class because ASIC disapplied provisions relating to class rights (see Part 2F), members in the class may apply to the Court to have the modification set aside. These provisions result in a procedure which is largely identical to the procedure which would ordinarily apply under section 246D to a variation or cancellation of class rights, or a modification of a company's constitution to allow class rights to be varied or cancelled. The key difference is that 246D allows an application to be made to have the modification set aside by members holding 10 per cent or more of the votes in the class, while subclause 27(3) refers to 10 per cent or more of the members of the class. The difference in this regard is directed at ensuring that the general body of members in a class is not prevented from challenging a modification due to large blocks of voting rights held by a small number of persons.
6.94 The Court may set aside the modification if it is satisfied that the modification would unfairly prejudice the applicants, but if not so satisfied the Court must confirm the modification (subclause 27(7)). The company must lodge a copy of the Court's order with ASIC within seven days of it being made (subclause 26(8)).
6.95 An application must be made within one month of the modification being made (subclause 26(4)). If no application is made, the modification takes effect after one month. If an application to set it aside is made, the modification does not take effect unless and until the application is withdrawn or finally confirmed (subclause 26(5)).
Clause 28 - Modification by regulations for the transition period
6.80 Clause 28 allows regulations to be made which modify the operation of the Corporations Law (including the regulations made under it-see section 8A) with respect to individual transferring financial institutions or a specified class of those entities. The regulations may also modify provisions of the FS Code which are applied to some transferring financial institutions as part of the Corporations Law pursuant to clause 36.
6.81 Subclause 28(3) provides that regulations made under this clause take effect only for the transitional period. There is, however, a separate power to make regulations for ongoing modifications with respect to limited subject matters (see clause 38).
Subclause 28(2) restricts the capacity of regulations made under the clause to modify or create new penalties or modify any obligations, contravention of which would result in commission of an offence.
6.82 Many transferring financial institutions have a membership structure which is commonly described as 'mutual'. Although what constitutes a mutual organisation is not clear cut, some characteristics commonly (though not necessarily) found in such organisations are:
- the organisation provides services only to its own members;
- members each have one vote; and
- members share equally in profits and/or rights to surplus reserves on a winding up.
6.83 All of these characteristics are dealt with in the constitution of the entities concerned. However, only the latter two are of importance in the present context in that they directly affect the rights of members.
6.84 Under the previous governing Codes, entities which sought to demutualise, in addition to the usual requirements for membership approval of changes to the constitution and complying with the usual requirements for sale of securities, were required to comply with various prudential standards issued by AFIC regarding the demutualisation scheme. Those standards were directed at ensuring that an institution seeking to demutualise gave proper regard to members' interests, and disclosed the scheme fully.
6.85 The existing Corporations Law does not contain special provisions concerning demutualisations. In particular, ASIC does not have power to issue binding standards. However, given the nature of the transferring financial institutions it is considered desirable, in the interests of protecting the rights of members of transferring financial institutions, to carry over into the Corporations Law framework some aspects of the regulatory framework regarding demutualisation which applied under the previous governing Codes.
6.86 To this end, Part 5:
- establishes comprehensive disclosure requirements to ensure that members are fully informed so they can make a sound judgement about whether the demutualisation proposal is in their best interests; and
- includes a prohibition on unconscionable and/or misleading and deceptive conduct relating to a demutualisation, and various civil remedies and other enforcement mechanisms relating to the prohibition.
6.87 The requirements of Part 5 only apply to transferring financial institutions which do not have voting shares (as defined in section 9) listed on a stock exchange, because such entities would not be 'mutual' in character. Further, if ASIC is satisfied that a transferring financial institution does not have a mutual structure, it may exempt that company from the operation of the Part.
Clause 29 - Disclosure for proposed demutualisations
6.88 A demutualisation would normally involve a number of processes. Not all demutualisations would proceed in the same way. However, most would involve:
- modification of the constitution; and/or
- the issue of shares to members.
Modification of constitution
6.80 The internal procedures for modifying company constitutions are set out in Part 2B.4 of the Corporations Law, and normally require the modification to be approved by a special resolution of members. Subclause 29(1) identifies a range of types of modifications which may be part of a demutualisation process, being modifications which have the effect of:
- varying or canceling the rights of some or all members to:
- the reserves of the company (as defined in subclause 29(8));
- the assets of the company on a winding up; or
- varying or canceling class rights (for the purposes of section 246C of the Corporations Law; or
- allowing one of the above variations to take place.
6.81 Not all of the abovementioned types of modification would necessarily be part of a demutualisation process. ASIC is given power under clause 30 to exempt proposed modifications from the operation of Part 5. That power is discussed further below.
6.82 If Part 5 applies to a proposed modification, subclause 29(1) provides that notice of the meeting of the company's members must be accompanied by certain documents, as set out in subclause 29(4) (discussed below), some of which must be lodged with ASIC within 7 days of giving notice of the meeting. Subclause 29(1) also provides that the notice period for such a meeting may not be shortened under the procedures set out in subsection 249H(2) of the Corporations Law.
6.83 Depending on the terms of the constitutions of individual entities, some boards have powers to issue and vary rights attaching to shares. In those cases, it is possible that a board could, through those mechanisms, effectively demutualise a company directly, without seeking approval of a constitutional change. However, not all issues of shares would amount to an effective demutualisation-only one which would effectively vary the rights of the existing members. Such a share issue would, under existing section 246C of the Corporations Law, amount to a variation of rights and therefore subject to the procedures for under Part 2F.2.
6.84 Subclause 29(2) provides that if an issue of shares by a transferring financial institution would be subject to Part 2F.2 and a meeting of the company's members is required to consider the class rights variation or cancellation (see existing section 246B), similar requirements apply to that meeting as apply under subclause 29(1) with respect to meetings to consider constitutional change.
6.85 The documents that subclause 29(4) provides must accompany the notice of meeting to each member are:
- a disclosure statement which ASIC has registered;
- in the case of a proposed constitutional change, an estimate of the financial benefits (if any) that would be offered to the member if the proposed modification occurs; and
- an expert's report regarding the proposal.
6.86 The required content of the disclosure statement and ASIC's consideration of it are discussed in detail below (see discussion of clauses 31 and 32). The estimate of financial benefits must be individually tailored to each member. For example, it may include a statement of the number of shares and/or amount of alternative cash compensation that the member would be entitled to receive if the demutualisation proposal were to proceed as a result of the proposed modification(s) being approved. The expert's report must include a statement about whether, in the expert's opinion, the proposed modification is in the best interests of the members of the company as a whole, and the reasons for forming that opinion. There are also further requirements for the content of the expert's report, which are set out in clause 33 (discussed below).
6.87 Failure to comply with the disclosure requirements does not result in the company being guilty of an offence (subclause 29(5)). However, contravention of subclauses 29(1) and 29(2) will be subject to civil penalties under Part 9.4B of the Corporations Law. This has a number of consequences including that:
- ASIC may apply to the Court for a civil penalty order that a person involved in a contravention is prohibited from managing a corporation and/or is required to pay a pecuniary penalty of up to 2,000 penalty units; and
- persons who suffered loss or damage due to the contravention may seek compensation (section 1317 HA), and the person may also be liable to compensate the company itself (section 1317HD).
6.88 Injunctions under section 1324 of the Corporations Law and undertakings to ASIC under section 93AA of the ASIC Act would also be available in relation to the contravention.
6.89 A contravention which meets certain further requirements concerning intention under section 1317FA may amount to a criminal offence under that section. A contravention which is dishonest will amount to an offence under subclause 29(7), punishable by a maximum penalty of 2,000 penalty units or imprisonment for five years, or both.
6.90 The disclosure requirements under clause 29 operate in addition to, not in substitution for, the other disclosure requirements (if any) that would apply in connection with the offer or issue of securities as part of a demutualisation procedure.
6.91 It may be possible, in the case of some transferring financial institutions, to use schemes of arrangement or selective capital reduction to effect what amounts to a demutualisation, without issuing further shares or making constitutional changes. These types of procedures are not dealt with specifically by the demutualisation provisions in the Bill because they are already subject to comprehensive regulatory requirements, including member disclosure and remedial protections, which would operate to protect the interests of members.
Clause 30 - ASIC's exemption power
6.92 As mentioned above, Part 5 does not attempt to identify with precision the characteristics of a mutual structure. A number of characteristics may tend to signal that a company is mutual, but not all of them are necessary.
6.93 The approach taken is to apply Part 5 to all unlisted transferring financial institutions at first instance, and give ASIC exemption powers so that the requirements will only apply to relevant types of entities and modification proposals.
6.94 Subclause 30(1) allows ASIC to exempt a transferring financial institution from Part 5 (and any regulations made under it-see subclause 30(7)) altogether if it does not have a mutual structure. Subclause 30(3) sets out some indicators which ASIC may take into account in assessing whether or not a company has a mutual structure, but ASIC may also take into account other relevant matters.
6.95 Subclause 30(2) allows individual modification proposals to be exempted from the Part if it will not result in, or permit, the mutual structure of a company to be modified. Subclause 30(4) states that ASIC must take into account for that purpose whether the proposed modification would result in, or allow a further modification, which would convert the company into one run on the basis of yielding dividends to shareholders.
6.96 Exemptions in relation to particular modification proposals may be granted subject to conditions (subclause 30(5)), which must be in writing and published in the Commonwealth Gazette (subclause 30(6)). ASIC may apply to the Court for an order that a condition is complied with in a specified way.
Clause 31 - Coverage of disclosure statement
6.97 The disclosure statement must be one which ASIC has registered under clause 32. That clause contains specific requirements in relation to the information to be included. However, obtaining registration of the statement does not necessarily mean that the statement complies with the requirements of clause 30 (see subclause 32(5)).
6.98 In addition to the specific requirements in clause 32, clause 31 sets out a general standard for the disclosure statement to accompany the notice of meeting required under subclause 30(3). The statement must include all information that members would reasonably require and expect to be given in order to make an informed decision about the proposed modification. This general approach is similar to that used under the Corporations Law in relation to prospectus documents.
Clause 32 - Registration of disclosure statement
6.99 Subclause 32(1) provides that ASIC must register a disclosure statement if it adequately sets out or explains various specified aspects of a demutualisation proposal that would clearly be relevant to the decision of members. The information specified in subclause 32(1) includes:
- the proposed variation of members' rights;
- details of a proposed share issue, including its implications for management and structure;
- the financial benefits that will be offered to members generally and the basis on which those entitlements will be determined;
- any benefits the company officers may receive; and
- how voting on the proposed modification or share issue will take place.
6.100 Some of the listed matters will not be applicable to a proposed modification or share issue. Only relevant matters must be included in the statement.
6.101 Subclause 32(2) provides that the readability and ease of comprehension of the statement by members is a factor that ASIC may take into account in deciding whether or not to register the statement.
6.102 Subclause 32(3) provides that a disclosure statement must include a disclaimer to the effect that ASIC's registration of the statement merely indicates the statement contains the required information-it does not in any way imply that ASIC considers the proposal is in the best interests of members.
Clause 33 - Expert's report
6.103 As mentioned above, ASIC's role in relation to the disclosure statement is limited to reviewing whether it contains the information specified in clause 32-ASIC is not required to examine the merits of the demutualisation proposal as it relates to members.
6.104 However, clause 30 requires that the notice of meeting is accompanied by a report by an expert, which does contain an opinion about whether the proposal is in the best interests of members of the company as a whole. If the company obtains two or more such reports, each report must be lodged with ASIC and provided to members (subclause 33(1)). Failure to lodge or provide copies of all reports is an offence.
6.105 An expert must not be an associate of the company (subclause 33(2)). 'Associates' are defined in Division 2 of Part 1.2 of the Corporations Law. Subclause 33(3) provides that expert must include in his or her report the details of the relationships (if any) between the expert and the company, any financial or other interest the expert has which might reasonably cause the expert to give a biased report, and any fee or other benefit which the expert will or may receive in connection with the report.
Clause 34 - Unconscionable conduct in relation to demutualisations
6.106 Members of mutual transferring financial institutions are, by and large, likely to be members in order to obtain financial services from the entities concerned. In that sense, they are akin to consumers of financial services rather than investors in financial service providers.
6.107 Under the ASIC Act, there are various provisions in relation to unconscionable conduct and misleading or deceptive conduct in connection with the provision of financial services to consumers. However, for various reasons, those provisions would not apply to the various steps involved in a demutualisation. It is considered that, given the nature of the entities and their members, such provisions should apply to the extent that they are relevant.
6.108 Subclause 34(1) prohibits persons from engaging in unconscionable conduct, or misleading and deceptive conduct, in relation to a modification of a company constitution, or anything done in conjunction or connection with the modification, or share issue to which Part 5 applies. The scope of the prohibition covers not only procedures and acts in relation to the members' voting on a constitutional change, but also matters consequent on the modification, such as the allocation and issue of securities or other financial benefits associated with a demutualisation.
6.109 Subclause 34(2) provides that in determining whether a person has engaged in unconscionable conduct for the purposes of subclause 34(1), matters which should be taken into account are whether the person exercised undue influence or pressure on members, or unfair tactics against members. These matters are based on matters to be taken into account in determining whether there is unconscionable conduct for the purposes of the ASIC Act .
Clause 35 - Orders the Court may make
6.110 A contravention of subclause 34(1) is not a criminal offence (see subclause 34(4)). There are, however, a number of civil remedies available in relation to a contravention or proposed contravention, including:
- orders to make disclosure of information or publish advertisements under (paragraph 35(1)(a));
- orders to protect the rights or interests of any person affected by the modification or share issue, including orders relating the acquisition or divestiture of shares or exercise of voting rights and other rights in relation to those shares (paragraphs 35(1)(c) and (d));
- injunctions and other orders under Part 9.5 of the Corporations Law; and
- orders under subclause 35(2) to refund money, return property or pay compensation to persons suffering loss or damage due to the conduct in question.
6.111 The orders may be applied for by ASIC or a member of the company (subclause 35(3)).
6.112 In addition to those remedies, ASIC may be able to accept enforceable undertakings under section 93AA of the ASIC Act .
6.113 These provisions will serve to protect members of transferring financial institutions from unfair and discriminatory behaviour by officers or other persons in connection with a demutualisation which might result in an inequitable distribution of the property of the institution and other financial benefits to the disadvantage of the members as a whole.
Part 6-Continued application of fundraising provisions of the Friendly Societies Code
6.114 Currently, a friendly society which offers benefits in a benefit fund is subject to the disclosure obligations contained in Part 4B of the FS Code. The disclosure obligations in Part 4B are modeled on the fundraising provisions in Part 7.12 of the Corporations Law.
6.115 The disclosure obligations applying to an offer of a benefit in a friendly society benefit fund is to be transferred to the Corporations Law. Rather than simply applying the existing fundraising provisions in Part 7.12 of the Corporations Law to friendly society benefit funds, the approach taken under Part 6 is to incorporate the relevant provisions of Part 4B of the FS Code into the Corporations Law.
6.116 This approach is designed to ensure that, as far as possible, the status quo is maintained in this area of regulation of friendly societies, pending the current review of disclosure obligations applying to financial products under the Government's Corporate Law Economic Reform Program.
Clause 36 - Application of the Friendly Society Code
6.117 Subclause 36(1) will incorporate into the Corporations Law Divisions 2 and 3 of Part 4B of the FS Code, as set out in Schedule 1 of the Friendly Societies (Victoria) Act 1996 as in force immediately before the transfer date.
6.118 Subclause 36(1) also incorporates into the Corporations Law the text of other provisions of the FS Code which support the operation of Divisions 2 and 3 of Part 4B of the FS Code. In particular, the text of any necessary interpretation provisions, sections 28, 29 and 128 of the FS Code and any relevant regulations are incorporated.
6.119 To ensure that the provisions of the FS Code which are incorporated into the Corporations Law operate effectively within the general structure of the Law, a number of modifications have been made to the incorporated provisions. These modifications are contained in subclause 36(2). For example, references to an SSA have been changed to references to ASIC. This ensures that the incorporated provisions provide ASIC with appropriate regulatory powers.
6.120 Currently, offers of benefits in a friendly society benefit fund are exempted from complying with the fundraising provisions in Part 7.12 and the managed investment provisions in Chapter 5C of the Corporations Law pursuant to Class Order relief granted by ASIC. It is expected that ASIC will continue this relief.
6.121 As a result, where a friendly society offers interests in a benefit fund the fundraising provisions in Part 7.12 and the managed investment provisions in Chapter 5C of the Corporations Law will not apply. Instead, the provisions of the FS Code incorporated by clause 36 will apply. However, where a friendly society offers securities other than benefits in a benefit fund, such as shares or debentures, the fundraising provisions in Part 7.12 of the Corporations Law will apply.
Part 7-Transitional provisions
6.122 Part 7 contains provisions about:
- how unclaimed money and other property relating to transferring financial institutions under the previous governing Codes is to be dealt with; and
- regulations that may be made to deal with other transitional issues arising out of the application of the Corporations Law to transferring financial institutions.
Clause 37 - Unclaimed money
6.80 The intention is that the unclaimed money provisions in the Corporations Law will apply without modification to unclaimed monies which arises after the transfer date. Those monies will be paid to ASIC in accordance with the usual Corporations Law procedures. However, unclaimed monies which are paid to State or Territory authorities prior to the transfer will remain with those authorities or will be dealt with under the relevant State or Territory laws-those monies will not be transferred to ASIC.
6.81 There are two types of unclaimed monies dealt with under the Corporations Law which may arise in relation to matters which occurred prior to the transfer date but will not yet be in the hands of relevant State or Territory authorities as at the transfer date. These types of unclaimed monies require transitional provisions to ensure that they will be collected by State and Territory authorities rather than ASIC.
6.82 Section 414 of the Corporations Law deals with the compulsory acquisition of shares from persons who dissent from a scheme of arrangement or reconstruction approved by a majority of members under Part 5.1 of the Corporations Law. Section 414 is applied by the previous governing Codes, with modifications. It is intended that any property which becomes unclaimed as a result of a scheme entered into prior to the transfer date should be administered under the unclaimed money laws of the States and Territories. Subclause 37(1) applies section 414 to any sum or other property to which that section had applied under the previous governing Codes. Subclause 37(3) substitutes the Minister responsible for unclaimed money in the relevant Code for ASIC, so that if any transferring financial institutions hold such monies as at the transfer date, they will be required to pay it within the time limits set out section 414, except that rather than paying it to ASIC (as required by section 414) it is paid to the relevant Minister responsible for unclaimed monies.
6.83 A similar framework is established for unclaimed monies which may be payable by liquidators under section 544 (as applied by the previous governing Codes). Monies which remain in the hands of liquidators relating to liquidations which occurred prior to the transfer date will be covered by section 544, but liquidators will be required to pay them to the relevant Minister responsible for unclaimed money, rather than to ASIC.
Clause 38 - Modification by regulations
6.80 In addition to the power in clause 28 which permits modifications to the Corporations Law in relation to transferring financial institutions during the transitional period, clause 38 permits ongoing modifications to be made in relation to specified subject matters not only in respect of those institutions but also other classes of institutions engaged in financial business.
6.81 This power may be used to make modifications to the Corporations Law necessary or desirable due to the nature of the business of the entities concerned, their particular membership structure, or due to interaction with other regulations applying to institutions of a particular class. Most of the envisaged modifications would arise out of the special interaction of the company/member relationship with the financial service provider/customer relationship.
6.82 The types of regulations made under this clause might include:
- modifying the rights of inspection of members' registers (since this right may, in the case of building societies and credit unions, be inconsistent with laws relating to the privacy of the customers of those institutions);
- modifying the requirements to issue share certificates in respect of certain types of shares;
- procedures for issuing, canceling or redeeming membership shares or redeemable preference shares; or
- modifying reporting requirements to members.
6.83 Like the power to make regulations modifying the law during the transitional period, the regulations made pursuant to the ongoing regulation making power cannot modify the law so as to create significant offences or increase penalties or obligations giving rise to existing penalties.
Clause 39 - Regulations may deal with transitional, savings or application matters
6.84 Subclause 39(1) provides for a broad-based regulation making power to deal with matters of a transitional, application and savings nature connected with the transfer of transferring financial institutions to the Corporations Law framework, or the consequential amendments to the Corporations Law made by this Bill. This includes power to save the application of various things which applied prior to the transfer date.
6.85 Subclause 39(2) expressly provides for modifications made under subclause 39(1) to apply or save provisions (with or without modifications) of Commonwealth, State or Territory law, including provisions which have been repealed or amended, or by otherwise specifying rules to deal with the matter or consequence or outcome of the matter for the purposes of the Corporations Law.
6.86 Subclause 39(3) expressly provides that the regulations may deal with the continued effect of instruments made, or things done, under the previous governing Codes, with or without modifications. Subclause 39(4) expressly authorises the making of regulations which allow a specified authority (such as ASIC) to make determinations in this regard. There is a complementary regulation making power which can be used in connection with preserving instruments and things done relevant to other Acts which may apply to transferring financial institutions (such as the Banking Act and the Life Insurance Act).
6.87 Subclause 39(5) specifically refers to regulations made to handle the external administration of transferring financial institutions, which were, prior to the transfer date, subject to external administration other than pursuant to the Corporations Law as applied by previous governing Codes. Most entities under external administration at the transfer date would be covered by the transitional provisions in clause 11.
6.88 It may not be possible, prior to the transfer date, to pass regulations relating to all matters which require transitional, savings or application provisions, as some may not be identified until a specified matter arises. Accordingly, it is considered highly desirable to allow such transitional, savings and application regulations to operate retrospectively where necessary, so that complex legal difficulties do not arise due to an unintended lapse of the legal effectiveness of a particular instrument, act or thing done under the previous governing Code. Any retrospective regulations would be subject to scrutiny to ensure they did not unduly interfere with person's rights. However, in the cases envisaged for retrospective provisions it is more likely that they are designed to preserve rights back to the transfer day and prevent undesirable consequences.
Clause 40 - Court may resolve transitional difficulties
6.89 If, notwithstanding the powers to modify the operation of the Corporations Law under regulations and ASIC administrative powers, transitional difficulties do arise, interested persons (such as the transferring financial institution, members or officers of the institution, and other affected parties) may apply to the Court under clause 40 for an order to remove the difficulty. Subclause 40(2) provides that any such order has effect notwithstanding a provision of the Corporations Law. This power is expressly conferred in subclause 40(3) subject to the Constitution, to ensure that the powers conferred on the Court under the clause do not exceed the powers that could be validly conferred.
6.90 Items 2 - 62 provide for amendments to the rest of the Corporations Law consequential on the addition of the new Schedule 4 at the end (see further the explanatory material for Part 1 of Schedule 3).
Items 2, 4 - 5, 8 - 13, 15, 17 - 27, 49, and 51 - 59
6.91 These items repeal or amend a number of provisions of the Corporations Law by deleting definitions of, and references to, institutions, regulators or laws which are no longer meaningful in the context of the Corporations Law following the transfer of financial institutions and friendly societies to the Corporations Law.
6.92 A definition of 'APRA' is inserted in section 9 of the Corporations Law.
Items 6, 7, 30, 31, 32 and 36
6.93 Existing sections 136 and 137 of the Corporations Law deal with the mechanisms for adoption, modification and repeal of a company constitution. Existing Part 2F.2 deals with special voting procedures for variation of class rights, which may be relevant in the context of changes to a company constitution. Section 9 includes a definition of 'constitution'.
6.94 Amendments to the Life Insurance Act made by Schedule 4 of this Bill propose to introduce a special regime under that Act for the adoption of benefit fund rules by friendly societies as part of their company constitution, modification of benefit fund rules and consequential amendments to other parts of the constitution. These provisions will impact on the mechanisms set out in sections 136, 137 and Part 2F.2 of the Corporations Law.
6.95 These items add notes explaining the effect of the provisions dealing with benefit fund rules in the Life Insurance Act on the mechanisms in the Corporations Law, and changes the definition of 'constitution' in section 9 of the Corporations Law to recognise the impact that those provisions may have on the content of a company's constitution.
Items 14 and 16
6.96 The definitions of 'share' and 'withdrawable share' in section 9 of the Corporations Law are repealed. The term 'withdrawable share' is no longer used in the Corporations Law. The existing definition of the term 'share' no longer is applicable to some types of shares, particularly the 'membership share' introduced by the new Schedule 4 to the Corporations Law.
6.97 A provision is inserted after section 92(2) of the Corporations Law providing that interests in friendly society benefit funds are 'securities' for the purposes of Parts 7.3 to 7.6 of the Corporations Law. Those Parts deal with the licensing and conduct of participants in the securities industry, including dealers and advisers.
6.98 The licensing and conduct of dealers and advisers in relation to friendly society products is currently regulated under Division 4 of Part 4B of the FS Code. The FS Code provisions are almost identical to similar provisions in Parts 7.3 to 7.6 of the Corporations Law.
6.99 The effect of item 28 will be to apply the licensing and conduct provisions of Parts 7.3 to 7.6 of the Corporations Law to dealings in friendly society products rather than the provisions of Part 4B of the Code. Given the similarity of the provisions, there will be little change in the requirements applying to persons authorised to deal in, or advise on, friendly society products.
6.100 This will ensure that persons who conduct a business of dealing in, or advising on, benefits of a benefit fund will be required to be licensed by ASIC and subject to the licensing provisions of the Corporations Law. However, amendments to the Corporations Regulations will ensure that a friendly society will not be required to be licensed merely because of any dealing with a person in relation to its own securities. This is consistent with a similar exemption provided to bodies corporate in Corporations Regulation 7.3.12.
6.101 It is anticipated that the current exemptions in section 128 of the FS Code for health benefit funds and superannuation funds will be maintained in the Corporations Regulations. Section 30 of the Corporations Act 1989 allows the making of regulations amending the application of the licensing and conduct provisions of the Corporations Law.
6.102 Existing Part 1.2B of the Corporations Law explains how various parts of the Corporations Law affect financial institutions under the FI Codes. As those entities will become companies, the Part is no longer required and will be repealed.
Items 33 and 45
6.103 After transfer, all transferring financial institutions will be companies, so there will be no easily identifiable difference, in terms of the type of registration, between, say, a credit union and a building society. This is a significant difference to the position under the previous governing Codes, where building societies and credit unions were registered under separate distinct categories.
6.104 However, under section 66 of the Banking Act, there are restrictions on the use of the expressions 'bank' and like words, 'building society', 'credit union' and 'credit society' without the consent of APRA. APRA may impose conditions on its consent. It is expected that APRA will develop a policy for the use of such terms, which may include conditions about how entities are structured in terms of their membership and voting. This will be one of the critical issues that transferring financial institutions will need to consider when deciding which company type and membership structure they wish to adopt.
6.105 After transfer, this will be the mechanism for distinguishing between credit unions, building societies and other forms of ADIs. Only an ADI which has consent under section 66 of the Banking Act to use the expression building society or credit union will be permitted to do so.
6.106 With respect to friendly societies, the position is somewhat different. There will be restrictions on the use of the expression 'friendly society' relating to financial business in the Life Insurance Act and APRA will be given power to determine that a company may not use that expression. APRA will also have power to consent to entities using the expression.
6.107 However, some friendly societies are not engaged in financial business and therefore do not fall within APRA's sphere of operations. It is expected that State and Territories will establish restrictions on the use of the expression 'friendly society' in connection with other types of business (including pharmacy business).
6.108 The proposed amendment to section 147 the Corporations Law set out in item 33 will allow the regulations to provide that a prescribed word is unacceptable to include in a company name unless a specified authority (including a State and Territory authority) has consented to the company using or assuming the name, or if the company is otherwise permitted to use the name under a specified provision of a law (at the Commonwealth, State or Territory level). This will enable the Corporations Law framework to support the names restrictions imposed under other legislation at the Commonwealth, State and Territory level, because ASIC will be able refuse to register a company name which includes restricted words (such as building society, credit union or friendly society) unless the applicant is entitled to use or assume that name under the other relevant laws.
6.109 The proposed amendment to section 601DC set out in item 45 will provide for a complementary power in relation to names of registrable Australian bodies and foreign companies. The amendment to section 147 made by item 33 only applies to company names.
6.110 Transferring financial institutions will be deemed to be registered under the name they had immediately before the transfer date (subject to the possible addition of 'Limited'), so any that had restricted words in their name will not need to obtain a consent for the purposes of the regulations. Further, each law which restricts the use or assumption of restricted words (such as the Banking Act and the Life Insurance Act) already provides, or will provide, for transitional arrangements so that relevant transferring financial institutions will not be in breach of those provisions.
6.111 The other way the Corporations Law framework supports the names restrictions in other laws is by giving ASIC power to direct a change of name. This is discussed immediately below.
Items 34 and 46
6.112 Existing section 158 of the Corporations Law authorises ASIC to direct a company to changes its name in certain circumstances. The amendment proposed in item 34 will extend this authorisation so that ASIC will be permitted to direct a company to change its name if a consent of an authority under the amended subsection 147(4) is withdrawn, or if the company has breached a condition on consent given by an authority under amended subsection 147(4), or if the company ceases to be otherwise permitted to use or assume the name under amended paragraph 147(4)(b).
6.113 This will allow ASIC to direct that a company remove one or more words from its name if, under other laws dealing with restricted words, it is no longer entitled to use or assume that name.
6.114 The amendment to subsection 601DJ(1) is a complementary amendment which relates to the names of registrable Australian bodies and foreign companies.
Items 35, 37 and 38
6.115 Existing subsections 169(8), 249A(2) and 249J(1) of the Corporations Law provide for how joint holders of shares in a company or interests in a scheme should be treated in the context of the rules regarding registers of members and meetings of members.
6.116 These items amend the relevant subsections so that they extend to joint guarantors, since many transferring financial institutions may have members in this category.
Items 39 - 41
6.117 These items substitute existing references to 'Australian Prudential Regulation Authority' in paragraphs 461(1)(j), 462(2)(h) and subsection 462(3) of the Corporations Law with the acronym 'APRA', which will be defined in section 9.
Items 42 - 44
6.118 Existing subsection 482(1) of the Corporations Law deals with the power of the Court to stay or terminate the winding up of a company on the application of a creditor or contributory. The subsection will be amended so that, in the case of a company registered under the Life Insurance Act, APRA will have power to apply to the Court to have a winding up stayed or terminated.
6.119 Existing section 511 permits applications to be made to the Court by a liquidator, contributory or creditor, to determine questions arising in the context of a voluntary winding up. The section will be amended so that, in the case of friendly societies registered under the Life Insurance Act, APRA will have power to apply to the Court to have those questions determined. The proposed power does not extend beyond friendly societies, since other types of company registered under that Act may not be wound up voluntarily.
6.120 This power will complement the other functions and powers APRA will have regarding external administration of companies registered under the Life Insurance Act proposed in Schedule 4 of the Bill.
Items 48 and 50
6.80 These items remove existing special exemptions for financial institutions from the fundraising disclosure provisions in Part 7.12 and the fundraising liability provisions in Part 7.11 of the Corporations Law. With the transfer of regulation of these financial institutions to the Commonwealth, these exemptions are no longer necessary.
Items 60 and 61
6.81 These items include subclause 29(5) of Schedule 4 as a civil penalty provision. See further the explanation of subclause 29(5) under item 1.
6.82 Item 60 amends existing section 1317DA. When Schedule 1 of the Corporate Law Economic Reform Bill 1998 takes effect section 1317DA will be replaced with a subsection numbered 1317E(1). Item 61 makes a corresponding amendment to the replacement provision.
6.83 The commencement provisions take effect so that if section 1317DA is replaced by a new subsection 1317E(1) before this Bill commences, item 60 will not come into operation.
6.84 This item adds a new Division 11A and section 1465A to Part 11.2, which deals with commencement and application of certain changes to the Corporations Law. Proposed section 1465A explains the purpose of the addition of new Schedule 4.
6.85 Part 3 contains a miscellaneous amendment to the Corporations Law.
6.86 This item corrects and error in paragraph 437D(a) of the Corporations Law arising out of a drafting omission in Act No. 48 of 1998. The reference to 'Australian bank' in paragraph 437D(3)(a) was changed to 'Australian ADI' by that Act, but due to a drafting omission, a second reference to 'bank' in the paragraph was not replaced.