Flexibility under the Corporations Act and Corporations Regulations

The Coronavirus Economic Response Package Omnibus Bill came into effect on Wednesday 25 March 2020 as part of the Federal government’s response to the economic impact of COVID-19. While the majority of the changes lend assistance to individuals, households and small to medium sized businesses, there are also amendments to the Corporations Act to assist corporate entities affected by COVID-19.

Part 9.11 of the Corporations Act establishes a temporary mechanism to provide regulatory relief to classes of persons who, for one of the reasons outlined below, are unable to meet their obligations under the Corporations Act or the Corporations Regulations. The Federal Treasurer may provide this relief either via an exemption from specified obligations of the Corporations Act or Corporations Regulations or a modification of such obligations.

Classes of persons have not been specifically identified, giving flexibility to the Federal Treasurer to offer relief to various persons who are subject to the Corporations Act. The Federal Treasurer suggested that the power could be used to grant relief where the regulatory requirements would “interfere with the ability of companies to manage their businesses through the impacts of the coronavirus”.

This power to grant relief is available from 25 March 2020 for a maximum of 6 months, and is available where the Federal Treasurer is satisfied that:

1. it would not be reasonable to expect the persons in the class to comply with the provisions; or
2. the exemption or modification is necessary or appropriate, in circumstances relating to COVID-19, to facilitate continuation of business or to mitigate the economic impact of the coronavirus.

Certain classes of businesses, irrelevant of size, may hence obtain some kind of relief from Corporations Act and Corporation Regulations obligations, such as financial reporting requirements, where the Federal Treasurer determines it is reasonable, necessary or appropriate. Any legislative instrument made under this power can grant relief for a maximum period of six months.

How could this mechanism be used?

ASIC has recently issued guidance confirming its formal ‘no action’ position if entities with a 31 December 2019 year end postpone their AGMs for up to two months or hold AGMs using appropriate technology. However, ASIC has noted some limitations in its guidance. Doubt remains as to whether the Corporations Act permits virtual AGMs and if resolutions passed at virtual AGMs are valid. ASIC does not have the power to modify the Corporations Act to facilitate virtual AGMs.

The broad nature of the Federal Treasurer’s power could overcome some of the limitations. For example, the Federal Treasurer’s temporary relief could be used to modify the Corporations Act to allow entities to hold virtual AGMs for six months from the date of the instrument (for example, by specifying that ‘place’ in s249R of the Corporations Act, which obliges companies to hold shareholder meetings at a ‘reasonable time and place’, includes online locations or web addresses).

In contrast to ASIC’s ‘no action’ stance, the relief is likely to preclude third party legal action in relation to AGM conduct, or a court ruling, because the exemption from or modification to the Corporations Act provisions will mean the entity granted the relief will not be in breach of the relevant legislation. This power may therefore be used to provide relief to companies to give greater certainty in circumstances where they are unable to comply with particular requirements under the Corporations Act due to the impact of COVID-19.

Restrictions on the Treasurer’s power to grant relief

In addition to the uncertainty around the classes of persons the Treasurer can grant relief to, it is also unclear if the Treasurer’s power to grant relief is unlimited. Can the Treasurer provide relief from or amend statutory obligations at will and on an ad hoc basis? There is no doubt that regulators need to be flexible and respond quickly to the severe and far reaching impacts of COVID-19 – broad powers enable such a response. However, there are circumstances where the extent of the Treasurer’s power may be restrained. Deferral of dividend payments is one example. It is clear under section 254V(2) of the Corporations Act that when a company “declares” a dividend it ‘incurs a debt when the dividend is declared’ (given the company’s constitution provides for the declaration of dividends). At a time where companies are more likely to contemplate the cancellation of dividend payments, the Treasurer could use its power to allow companies that had declared dividends to cancel the dividend. In doing so, the Treasurer would effectively reverse what is legally considered a debt. This could result in the expropriation of wealth from shareholders. Whether the Treasurer can legally expropriate wealth using this new power is up for debate, however there is a real possibility that the Treasurer’s power in this circumstance could be curtailed.  The power may not be a ‘blanket’ power after all if the modification or exemption would cause the Treasurer to contravene the law.

Other changes that may impact big business

The current Federal economic package contains further mechanisms to assist businesses in particular situations and industries. Such mechanisms include legislative authority for government spending on new measures to assist employers to retain apprentices / trainees or financial assistance to participants in the Australian aviation sector, temporary increases to time limits and debt thresholds for financially distressed businesses and the introduction of a special appropriation bill for severely affected regions, communities and industry sectors to enable economic recovery from COVID-19.

Further details can be found at Gilbert + Tobin’s COVID-19 Hub at  https://www.gtlaw.com.au/knowledge/covid-19.