increasing the load

  • Date:01 Nov 2005
  • Type:CompanyDirectorMagazine

Increasing the load

When the Parliamentary Secretary to the Treasurer,  Chris Pearce, announced on October 12 that there would be reforms to Australian insolvency laws, the first since the Harmer Report in the early 1990s, he also indicated that he would be referring the matter to the Corporations and Markets Advisory Committee (CAMAC) which would be asked to examine a number of questions arising out of the Report of the Special Commission of Inquiry into the Medical Research and Compensation Foundation (the James Hardie Inquiry).
This inquiry has, of course, led to the earlier reference to CAMAC on whether there should be a widening of the duties of company directors to take into account corporate social responsibilities, a matter that is also being looked at by the Joint-Parliamentary Committee of the Senate.
   The reference to CAMAC in relation to insolvency law may well mean that we will not need any changes to laws relating to director’s duties. Rather the legislation may be amended to ensure that “existing creditor protections [might] be extended to future unascertained creditors, where a mass future claim is afoot”.
   CAMAC will be asked specifically to assess whether new provisions  “could provide that if a company is subject to a mass future claim:
• existing creditor protections will apply to any future unascertained personal injury claimants;
• conduct intended to avoid or reduce payments to personal injury claimants will be prohibited (that is, a new provisions modelled on Part 5.8A of the Corporations Act); and
• if the company is put into external administration, the external administrators will be required to admit and make provision for future unascertained personal injury creditors.”
The aim of these reforms will need to ensure that creditors are appropriately protected and persons who are involved in corporate decision making will be asked to better assess the impact of certain transactions on the ability of the company to pay its creditors.
In particular, the provisions will be aimed at those transactions “that are most likely to reduced the pool of assets (or share capital) available for the creditor to recover against any liability”. The aim of these new laws will be to maintain an appropriate “allocation of risk between creditors and shareholders”.
There will be new provisions introduced to ensure that directors and others do not allow the company to engage in transactions that have the impact of reducing the capital pool in the manner described.
The Parliamentary Secretary has also asked CAMAC to consider that in this particular case for special prosecution of an offence would result in the possibility of penalty of 10 years jail and fines of up to $110,000. The potential prohibitions would apply not only to directors but to “any person knowingly involved in such a contravention”.
The new provisions will enable compensation to be sought against directors from the relevant company or the companies within the group, and from any person who is involved in the transactions or arrangements ie. civil actions will be able to be pursued.
This will clearly heighten the obligation and risks for directors when they plan payments by a company, or companies within a group, which may avoid liabilities at a time when the company is in financial difficulties.
There is some chance, that with the introduction of these possible changes, any appetite for changing the duties of directors to taken into account corporate social responsibilities, a direct result from the James Hardie inquiry, will be softened, or perhaps eliminated. It will be interesting to see how these matters will progress.
The timing of the report from CAMAC will obviously be impacted upon by its overall workload.
It will be interesting to see how all of these developments pan out in the new year.
Certainly the Institute and its members will need to make submissions in relation to these matters.