House of Representatives

Financial Sector Legislation Amendment (Restructures) Bill 2007

Financial Sector Legislation Amendment (Restructures) Act 2007

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Peter Costello, MP)

Schedule 1 - Restructure relief: corporations law aspects

4.1 Schedule 1 to this Bill extends the coverage of the Financial Sector (Transfers of Business) Act 1999 (FSTBA) to the restructure of financial groups involving the creation of a NOHC as the ultimate holding company of the group in Australia. It will be applicable to the restructure of a financial group that has an ADI, general insurer or life insurance company as the ultimate holding company of the group in Australia, and where that ultimate holding company will be replaced by a NOHC. This Bill will facilitate the adoption of a NOHC structure by providing the Minister with the power to grant financial entities relief from specific statutory requirements under the Corporations Act that currently impede such restructures. Any relief granted will be specified in a restructure instrument.

The Minister will also be provided with the power to approve the issue of associated internal transfer certificates, which provide for the transfer of specified assets and liabilities between two related bodies of a financial group, by the Australian Prudential Regulatory Authority (APRA).

The arrangement will allow APRA to work through the details of the rearrangement with the financial group so as to assist APRA to efficiently satisfy prudential requirements. This will provide financial groups with an efficient mechanism to separate their activities into separate business lines. The appropriate allocation of risk between prudentially and non-prudentially regulated businesses can assist a financial group in more efficiently and effectively meeting its prudential requirements.

Financial Sector (Transfers of Business) Act 1999

Definitions

4.2 Items 1 to 14 provide additional and amended definitions required for the extended scope of the FSTBA.

Key Changes

4.3 Items 8 and 14 extend the existing scope of coverage of 'receiving and transferring body' to include a body corporate receiving or transferring assets or liabilities under an internal transfer certificate.

4.4 Item 9 defines the group of companies that would be considered to form the financial group and, thus, be eligible for an internal transfer certificate as part of a restructure incorporating a NOHC structure. A subsidiary has the same meaning as defined in the Corporations Act.

Part 4A - Restructures

Division 1 - Outline of Part

4.5 Section 36A provides a brief outline of the effect of the Part.

Division 2 - Restructure Approvals

4.6 A written application can be made to the Minister by a financial group headed by an ADI, general insurer or life insurance company that intends to enter into a scheme of arrangement under section 411 of the Corporations Act, to restructure the group to incorporate a NOHC as the ultimate holding company of the group in Australia.

4.7 Such an arrangement would transfer existing ordinary shareholders in the operating body to become ordinary shareholders in the NOHC. This would occur through a cancellation or transfer of shares in the operating body and an issue of identical shares by the NOHC. However, this does not limit the scope of the arrangement to provide for the other matters such as the transfer of assets and liabilities.

4.8 A scheme of arrangement will ensure shareholders of the operating body heading a financial group are given the right to vote on any proposal to adopt a NOHC structure.

4.9 An application can be made for the approval of a restructure instrument and the issue of associated internal transfer certificates. It is also possible to make an application for a restructure instrument alone.

4.10 In conjunction with the approval of a restructure instrument, the Minister can provide approval for the issue of any internal transfer certificate by APRA. The content and detail of these certificates will be determined by APRA in conjunction with the operating body.

4.11 The application must be in the specified form and be accompanied by the required information. The form of the application and the information required is prescribed in the transfer rules issued by APRA under section 46(1) of the FSTBA. Transfer rules are disallowed instruments.

4.12 The NOHC must be authorised by APRA in order to be the ultimate holding company for a financial group containing an ADI or general insurer in Australia.

4.13 The Minister will approve an application if he is satisfied that the restructure would improve the operating body's ability to meet its prudential requirements as administered by APRA. This provision does not infer that an operating body be in breach or in non-compliance with prudential requirements, to seek approval for a restructure. However, it must be demonstrated to the Minister that, as a result of the restructure, the operating body would be in a better position to meet relevant prudential requirements. In examining the application, the Minister will also consider the interests of depositors/policy owners of the operating body, the interests of the financial sector, and any other matters appropriate in making a decision.

4.14 In the event that the Minister does not approve an application, the Minister will provide relevant parties with a written statement setting out the reasons for the refusal. The Minister may refuse an application on the grounds that he is not satisfied that the matters in section 36C are met. For example, approval would not be granted where the Minister believed that the restructure would adversely affect the operating body's ability to meet its prudential requirements.

4.15 Subsection 36 defines the prudential requirements that an operating body is required to adhere to. This includes the relevant prudential standards, rules and guidance notes issued by APRA.

4.16 The Minister can impose conditions on a restructure approval under sections 36E(1)(a) and 36E(1)(b) to ensure that the restructure satisfies the matters outlined in section 36C.

4.17 Under section 36E(1)(a), the Minister can impose conditions on the operating body, the NOHC, or any body that will be related to the NOHC after the restructure, which must be satisfied prior to the restructure instrument coming into force. Conditions that could be imposed include, but are not limited to, obtaining approval for a scheme of arrangement by the Court, obtaining regulatory approvals under the Financial Sector (Shareholdings) Act 1998 and the Foreign Acquisitions and Takeovers Act 1975 and all necessary foreign regulatory approvals. A Court will only approve a scheme of arrangement at such a time as all of the other conditions imposed under the restructure approval have been satisfied.

4.18 Under section 36E(1)(b), the Minister can impose conditions on the operating body, the NOHC, or any body that will be related to the NOHC after the restructure, which must be satisfied prior to the entry into force of the internal transfer certificate. Conditions that could be imposed include, but are not limited to, obtaining approval for a scheme of arrangement by the Court, obtaining regulatory approvals under the Financial Sector (Shareholdings) Act 1998 and the Foreign Acquisitions and Takeovers Act 1975 , all necessary foreign regulatory approvals, and any matters the Minister considers appropriate to ensure any transfer of assets and liabilities would not comprise a prudentially regulated entity's ability to meet its prudential requirements. As part of its regulatory supervision of the operating body, and the group more generally, APRA has responsibility for determining whether an entity has satisfied the conditions imposed.

4.19 Subsections 36E(2),(3) & (4) provide for the submission of an application to the Minister requesting an amendment to, or revocation of, the conditions imposed on the restructure approval. The Minister will consider the request on the basis of the matters outlined in section 36C.

Notes on specific sections

4.20 Conditions imposed under section 36E must be satisfied prior to a Court order being issued under section 411(4) of the Corporations Act to approve a scheme of arrangement. A Court will not approve a scheme of arrangement where conditions set out in the restructure approval are outstanding. Entry into force of the internal transfer certificate will also be subject to the relevant conditions imposed being met.

Division 3 - Restructure Instruments

4.21 A restructure instrument may provide relief to the NOHC established as the ultimate holding company of the group in Australia, any body corporate related to that NOHC and any persons involved in complying with a requirement, from section 254T, and sections in Division 1 of Part 2J.1 and Part 2J.2 of the Corporations Act.

4.22 The statutory measures described in 4.21 have been identified as impeding the adoption of a NOHC structure by a financial group by constraining the capacity of a NOHC to distribute dividends to shareholders following a restructure. This is not consistent with the adoption of a NOHC structure, which is an internal company restructure that is not aimed at changing the entitlements of its shareholders.

4.23 Section 254T of the Corporations Act requires that dividends be only paid out of profits. Without relief from section 254T, the pre-restructure profits paid from an operating body, and other related bodies, to a NOHC, following a restructure adopting a NOHC structure, would not be classed as profits under the Corporations Act. The implication of this is that the pre-restructure profits of the group would no longer be available as profits for distribution to shareholders as dividends. This provision materially affects shareholders by altering their rights to access profits of the group for which they have claim. This is a significant regulatory barrier to financial groups restructuring to adopt a NOHC structure.

4.24 Relief from section 254T of the Corporations Act would only apply to the payment of pre-restructure profits of an operating body, and other related bodies, to a NOHC. All profits earned by the operating body, and other related bodies, and paid to the NOHC subsequent to the restructure would be considered as profits and, therefore, available for distribution to shareholders. 4.25 Relief from section 254T of the Corporations Act will provide the NOHC with the ability to distribute the same amount of dividends as that available prior to the restructure. The relief will enable a NOHC to distribute those pre-restructure profits even though they may be classified as share capital or equity in the NOHC.

4.26 The amounts available for distribution must be sourced, directly or indirectly, to the pre-restructure profits of the operating body, and bodies related to the operating body, at the date of the restructure. These amounts should be separately disclosed on the financial statements of the NOHC in order to differentiate them from profits generated by the NOHC after the restructure.

4.27 As a consequence of granting relief from section 254T of the Corporations Act, relief from Division 1 of Part 2J.1 and Part 2J.2 of the Corporations Act will also be necessary to ensure that the distributions maintain the same entitlements as ordinary dividends.

4.28 The restructure instrument will provide the legal basis for the payment of dividends, up to the value of the pre-restructure profits of the operating body and bodies related to the operating body at the date of the restructure, out of the NOHC's share capital.

4.29 For the purposes of section 256B of the Corporations Act and granting relief to the above mentioned provisions, the Minister will give consideration to whether allowing the distribution of pre-restructure profits from the NOHC's share capital materially prejudices the company's ability to pay its creditors and is fair and reasonable in relation to the company's shareholders as a whole.

4.30 Relief may also be granted from section 256D of the Corporations Act to ensure that any persons involved in the distribution of pre-restructure profits out of the NOHC's share capital is not considered to have committed an offence.

4.31 In the process of adopting of a NOHC structure, the operating body may hold shares in the ultimate holding company prior to the completion of the restructure and, as a result, breach section 259C of the Corporations Act. ASIC currently has power under section 259C(2) to exempt a company from the operation of section 259C. To facilitate the restructure in a timely fashion and streamline the approval process, the Minister will be provided with the power to exempt a company, that is part of a NOHC restructure, from section 259C. In such situations, a separate approval from ASIC will not be required.

4.32 In conjunction with the relief granted in relation to the Corporations Act, the income tax law will be amended to facilitate the distribution of pre-restructure profits from the NOHC's share capital and facilitate the adoption of the NOHC structure. These amendments are discussed in Schedule 2.

4.33 The relief provided through the restructure instrument is specific and considered transitional and consequential in nature to facilitate the restructure. It will not relieve the NOHC, operating body or bodies related to the NOHC from having to meet all their other obligations under the Corporations Act and other relevant legislation. The allowable relief is specific to section 254T, Division 1 of Part 2J.1 and Part 2J.2 of the Corporations Act and its duration is transitional. Although the payment of dividends from the pre-restructure profits of the operating body may not occur until an undetermined time in the future, the relief relates back to the restructure event. Only the payment of dividends out of the pre-restructure profits of the operating body will be given this exceptional treatment. The NOHC, operating body or bodies related to the NOHC are otherwise subject to the normal application of section 254T of the Corporations Act for the payment of dividends out of profits.

4.34 The restructure instrument provides the legal basis for granting relief to the NOHC, any body related to the NOHC, and any persons provided for, from the requirements of the specific provisions of the Corporations Act.

4.35 A restructure instrument's entry into force will be subject to the conditions imposed under section 36E(1)(a) having been met and the issuance of a Court order approving the scheme of arrangement under section 411(4) of the Corporations Act.

4.36 A restructure instrument may be amended by the Minister where particular aspects of the relief provided is either no longer required or considered appropriate. This provision is intended to address the implications of any future amendments to the Corporations Act that affect the relief provided under the instrument.

Notes on specific sections

4.37 Subsection 36G(3) provides definitional certainty that a restructure instrument is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 . A restructure instrument is not a legislative instrument because it only applies in relation to a specific case. Restructure instruments will be provided a case-by-case basis and will be tailored to the specifics circumstances of the restructure.

Division 4 - Internal Transfer Certificates

4.38 Division 4 provides an alternative mechanism to financial groups wishing to restructure. It does not prevent a group from choosing to use other available restructure mechanisms in other legislation such as Part 5.1 of the Corporations Act.

4.39 As part of a restructure approval, the Minister may authorise APRA to issue an internal transfer certificate. An internal transfer certificate provides for the transfer of specified assets and/or liabilities or groups of assets and/or liabilities between any two related bodies of the group involved in the NOHC restructure. This could include a transfer between the operating body and the NOHC, the operating body and a subsidiary of a NOHC, or between two subsidiaries of a NOHC. These certificates can also provide for the transfer of, among other things, classes of financial securities and wholly-owned subsidiary entities.

4.40 In issuing an internal transfer certificate APRA will consider the application for restructure approval, any additional information provided by the operating body, the matters in section 36C(1)(b) & (c) and the restructure arrangement approved by the Minister. APRA has the flexibility to settle the detail of the transfer arrangements with the applicant consistent with the restructure approved by the Minister.

4.41 In determining a transfer certificate's entry into force and the specific timing of any transfer, APRA must take into account the wishes of the transferring and receiving body as practical and operational issues may constrain the timing of the transfer.

4.42 The internal transfer certificate must include the names of the entities involved in the transfer, the entities which will be the transferring and receiving bodies, an agreed list of all the assets and liabilities to be transferred and state a time or method when an internal transfer certificate will come into force. 4.43 In conjunction with an internal transfer certificate being issued, APRA must provide a written notice to the transferring and receiving body, the operating body (where it is not the transferring or receiving body) and the Minister. The notice must include a copy of the internal transfer certificate/s. In the event that APRA refuses to issue an internal transfer certificate, or issues a certificate different from that which was applied for, APRA must provide written notice to the transferring and receiving body, the operating body (where it is not the transferring or receiving body) and the Minister with an explanation of the decision or why the certificate has not been issued.

4.44 An operating body may apply to APRA to seek amendment to an internal transfer certificate provided the certificate has not entered into force. An application may be lodged in circumstances where the transferring and receiving body wish to modify the assets and liabilities to be transferred or the body transferring or receiving the assets and liabilities has changed. The application must be submitted in the form prescribed by the transfer rules.

4.45 APRA may amend an internal transfer certificate having regard to the matters outlined in subsections 36C(1)(b) & (c). If APRA amends a certificate, it must provide written notice to the transferring and receiving body, the operating body (unless it is the transferring or receiving body) and the Minister. If APRA amends a certificate, it must provide written notice to the transferring and receiving body, the operating body (unless it is the transferring and receiving body) and the Minister including a statement providing reasons for not amending the certificate.

4.46 An internal transfer certificate can enter into force in one of three ways: at the time the restructure instrument enters into force (restructure time); at the date specified in the certificate, which must be within twelve months of the restructure time; or at a time approved under section 36Q.

4.47 An internal transfer certificate can specify multiple transfer times to provide for the transfer of specific assets and liabilities at different times. On a practical and operational level, it would be very unlikely that the transfer of all assets and liabilities could be completed at one time.

4.48 An internal transfer certificate can specify the exact time of day that a transfer is to occur. For example midnight or market closing time in a particular location.

4.49 Any transfers provided for in an internal transfer certificate must be completed within twelve months of the entry into force of the restructure instrument.

4.50 The transferring and receiving bodies may submit an application to APRA seeking approval for a different transfer time to that specified in the transfer certificate. On the basis that APRA considers the revised timing appropriate, it can approve such applications.

4.51 The entry into force of an internal transfer certificate is subject to all conditions imposed by the Minister under subsection 36E(1)(c) having been satisfied. The Minister may impose conditions to ensure that the matters outlined in subsection 36C(1) are met. The conditions are discussed in more detail above.

4.52 At the time an internal transfer certificate takes effect, the assets and liabilities being transferred from the transferring body, become the assets and liabilities of the receiving body. Any duties or obligations relating to the assets and liabilities being transferred become the duties or obligations of the receiving body following any transfer. That is the transfer affects a statutory novation and not an assignment of rights.

Notes on specific sections

4.53 Section 36R provides for the receiving body becoming the successor in law to the transferring body for the specific assets or liabilities transferred under an internal transfer certificate. The receiving body is taken to be responsible for rights and obligations of the transferred assets and/or liabilities.

Division 5 - Engagements of employees and contractors

4.54 Division 5 provides for the continuity of term and conditions of employment for each person who was, immediately before the restructure, performing duties in the group. The objective is to leave the employer and employee in the same position, and with the same entitlements, following the restructure. The restructure cannot be used by either party to change employment conditions or to trigger redundancies.

4.55 To the extent that an internal transfer certificate results in the receiving body becoming the successor in law to the transferring body, the receiving body is responsible for the relevant employment contracts and contracts for service. That is, if the activities of an employee are moved as a result of an internal transfer certificate, the employee can be moved with activities that relate to the assets and liabilities being transferred.

Key changes

4.56 Section 36S covers contracts for service unlike section 30 and 36 of the FSTBA.

Notes on specific sections

4.57 Subsection 36S(4) provides that employers and employees are not prevented from renegotiating the terms and conditions of employment in the event that both parties agree to do so.

Review of Decisions

4.58 Item 15 makes decisions made by APRA under section 36M, section 36P and section 36Q(3) reviewable by the Administrative Appeals Tribunal.


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