Advisory Committee Discussion Paper

 

In October 2005, the Honourable Chris Pearce, MP, Parliamentary Secretary to the Treasurer, requested the Advisory Committee (“AC”) constituted under Part 9 of the Australian Securities and Investments Commission Act 2001 to review a proposal to broaden existing protections afforded to statutory creditors to those falling within the category of “unidentified future personal injury claimants” against corporate entities where a “mass future claim” was contemplated.

The “Referred Proposal” was published by the AC and public submissions were invited in relation to the various initiatives proposed.

In June 2007, a Discussion Paper (“DP”) was issued by the AC inviting further submissions.

 

 

The term “long-tail liabilities” refers to those corporate liabilities for personal injuries involving an act or omission by the corporate entity, its servants or agents in circumstances where the potential claimants do not yet have a completed cause of action either because:

 Such persons are referred to in the DP as “unascertained future personal injury claimants” or “UFCs”.

Background

The underlying public concern, which formed the basis for Referred Proposal, was the lack of statutory provision for the recognition of the existence of long-tail liabilities in circumstances of commercial insolvency, which was noted in the Report of the Special Commission of Inquiry into the Medical Research and Compensation Foundation (September 2004) (the James Hardie Inquiry). 

 

The DP gives consideration as to whether UFCs have rights under the Corporations Act 2001 (“Act”).

Noting that the Act does not define the term “creditor” reference is made by the AC to section 553, which stipulates the types of debts or claims that are admissible to proof in a winding up.

While noting that present, certain and ascertained debts are “clearly inapplicable” to the position of UFCs, “future claims”, according to the AC, arguably cannot include UFCs and there is Australian authority in the form of Edwards v Attorney-General (NSW) 2004 NSWCA 272 which states that a UFC is not a “contingent claim”. 

The AC acknowledges that the Australian Accounting Standard AASB 137, Provisions, Contingent Liabilities and Contingent Assets, dealing with the disclosure of future probable or possible corporate liabilities, applies to the annual financial reports of all reporting entities.

 

The AC notes that the Referred Proposal additional protections for UFCs are applicable only in circumstances where the company in question is exposed to a “mass future claim”.

In considering the arguments for the proposed test, the AC cites the intended purpose of the test as being to “limit the regulatory burden on companies by confining any protections for UFCs to those companies that are facing a multitude of claims”. 

Arguments against the test include its arbitrary nature in determining whether or not protective provisions would apply to UFCs and the uncertainty of the test’s application.

The AC suggests as an alternative that the provisions for UFCs could be activated as soon as at least one personal injury claim is made in circumstances where many more such claims can be expected.

 

The AC acknowledges it is not appropriate to regulate the daily activities of companies in a manner that “will guarantee their commercial success and all creditor claims, including future claims by UFCs, will be met as and when they fall due or crystallise”. However, it is noted that some corporate transactions may be particularly significant both for current creditors and for UFCs.

Essentially, the Referred Proposal is that the creditor protection elements for the share capital and share buyback provisions should be amended specifically to cover UFCs. According to the AC, it is necessary to give consideration as to whether such restrictions may have “perverse consequences”, for instance in circumstances where companies with large amounts of liquidity demonstrate reluctance to reduce capital because of potential UFC liability.

As an alternative to amending the provisions of section 256B(1)(b) and section 257A(1)(a) of the Act, one possible alternative approach would be to disclose the existence of UFCs and have recourse to the general principles of directors’ duties to guide boards in corporate decision making. 

The Referred Proposal is to require the administrator to admit and make provision in voluntary administrations for UFCs where the mass future claim test is satisfied.  Where a Deed of Company Arrangement (“DOCA”) is entered into, the deed would include some financial provisions for UFCs (for instance, some corporate funds being set aside in a trust for UFCs).  A UFC representative would have standing to challenge the proposed DOCA in Court. 

In relation to schemes of arrangement, the Referred Proposal is that the scheme of arrangement provisions for UFCs would be similar to those for UFCs under a voluntary administration. 

In relation to liquidations, the Referred Proposal is that when a Court determines that the liquidator is required to appear to make provision for mass future claims for personal injury, an external administrator would be required to inform known creditors at the earliest opportunity and provide for the payment of such claims in the future.

Importantly, the Institute of Actuaries of Australia has queried whether insurance cover for pre liquidation liabilities should benefit all creditors or only personal injury creditors. It has been suggested that funds obtained from insurers should be preserved solely for UFCs.

 

 

The AC gives consideration to anti-avoidance provisions and in particular the Referred Proposal which contains an anti-avoidance provision in the form of a prohibition on persons entering into agreements or transactions to prevent the recovery of all or a significant part of amounts owing to UFCs.  The proposal contemplates that such behaviour be subject to criminal prosecution and claims for compensation.

 

 

The AC has invited submissions on any aspect of the matters covered in the DP by Friday, 5 October 2007.

If you would like more information, please contact a member of our Insolvency Team listed on the right hand side of the screen.