What is a ‘large proprietary company’?
A policy objective adopted by lawmakers is to reduce the cost of doing business in Australia.
In Australia there are 2 main categories of companies – proprietary or private companies and public companies. Most small to medium-sized businesses choose to register as a proprietary company however, they are restricted to not more than 50 non-employee shareholders. A public company may be listed on the stock exchange.
Pursuant to the provisions of the Corporations Act 2001 (the Act) ‘proprietary companies’ are defined as either large or small depending on their consolidated revenue, asset value and number of employees.
Small proprietary companies are protected from the full raft of reporting obligations imposed on large proprietary companies and public companies including the lodgement of annual financial reports, a director’s report, the appointment of an auditor and lodgement of an auditor’s report.
Effective 1 July 2019 2019 the Corporations Amendment (Proprietary Company Thresholds) Regulations 2018 (the Regulations) modernise the thresholds by doubling them as follows:
- increasing the annual consolidated revenue threshold to $50 million or more;
- increasing the value of gross assets to $25 million or more; and
- increasing the maximum employee size to 100 employees or more.
The stated objective of the regulation is to ensure financial reporting obligations are targeted at economically significant companies, while reducing costs for smaller sized companies that would no longer be required to lodge audited financial reports with ASIC.
It is essential therefore that the change in the thresholds are considered by directors of proprietary companies before 1 July 2019, so consideration can be given as to whether they are likely to satisfy at least 2 of the threshold requirements and take steps to plan for accounting and reporting standards required by the Act.
Am I an ‘officer’ for the purposes of the Corporations Act 2001?
An ‘officer‘ of a company owes statutory and common law duties to both the Company and to persons with whom the company deals.
Undischarged bankrupts are disqualified from engaging in the management of a company by section 206B of the Corporations Act 2001; who then is an officer the purposes of that provision?
The answer may be found in King v Australian Securities and Investments Commission  QCA 352. In that case the Queensland Court of Appeal was required to determine whether a person was ‘officer’ of a Company and breached duties owed to the company. The court considered competing views expressed by the Federal Court and the High Court which are, essentially, a consideration of form versus substance.
In Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 the Full Federal Court held that for a person to be an ‘officer’ it was implicit that they hold an office within that company referring to the express provisions of the Corporations Act 2001 where the word ‘officer’ is used in conjunction with terms such as ‘position’ or ‘office’.
The alternative view considered by the Queensland Court of Appeal were comments made by the High Court in Shafron v Australian Securities and Investment Commission (2012) 247 CLR 465 where it was said that the term ‘officer’ applied to a broader class of people than those who hold a particular ‘office’.
The High Court noted that in Corporations Act sub-paragraphs 9(i) and (ii) define ‘officers’ by what they do and that it follows therefore that the inquiry must be directed to ‘what role the person in question plays in the corporation’, rather than whether they hold an nominal ‘office’ in the company.
The Court of Appeal did not follow the High Court’s observations in Shafron as it considered the comments obita dicta and instead followed Grimaldi. It followed therefore that the ASIC were required to prove Mr King acted in an ‘office’ of the company in order to be considered an ‘officer’.
The Court of Appeal held that for a person to be deemed an ‘officer’ of a company that person must ‘act in an office’ of the corporation ‘in the sense of a recognised position with rights and duties attached’.
(‘obiter dicta‘ are observations by a judge or legal question suggested by a case under consideration but not arising in such a manner as to require decision. The observations are therefore not binding is a precedent however when made by a superior court like our High Court are often considered persuasive)
A very helpful summary of the King decision relied upon by me in this post appears in the Queensland Law Reporter published 25 January 2019: https://mailchi.mp/queenslandreports/your-weekly-queensland-law-reporter-m8chjfsqke-1483353?e=b451bce4f5.
SAFE HARBOUR REFORMS – A BETTER OUTCOME FOR WHOM?
Much has been published about the ‘Safe Harbour Reforms’ recently enacted into Australian law. Its stated goal is to protect directors and officers of companies who believe that their company is or may be insolvent and on satisfaction of certain preconditions may make a proposal to restructure the company and continue to trade within the ‘Safe Harbour’ provided it can be demonstrated that the proposal is likely to achieve ‘a better outcome for the company’.
But who was ‘the company’? What does a better outcome for the company really mean – is it a better outcome for creditors, if so, is it the secured creditors or unsecured creditors or all of them? Is it shareholders? What of other stakeholders including employees in the community as a whole?
Clearly the survival of a trading entity is vastly superior outcome to a typical external administration – if ‘a better outcome’ is treated as a reference to a better outcome for a broader group of stakeholders than simply shareholders and creditors, such an outcome is clearly in the public interest and to be applauded.
The survival of a trading entity leaves the community as a whole better off. It provides an opportunity to sustain the enterprise which would be lost in a conventional external administration – the maintenance of jobs, both within the entity and suppliers (witness the effect of the withdrawal of the car manufacturers in Melbourne and Adelaide), the payment of accumulated but unpaid employee entitlements, the maintenance of the goodwill, intellectual property and expertise built up by an enterprise, an opportunity for unsecured creditors to receive payment and avoids the sale of valuable assets by secured creditors resulting extraordinary losses and of course, the generation of tax revenue is a worthy goal.
These are highly leveraged values – spiral down if lost – spiral up on survival.
The return to health of a trading enterprise in our community is clearly ‘a better outcome’.