Not another knee jerk reaction to law reform Early Warner

The Special Commission of Inquiry into the Medical Research and Compensation Foundation (arising out of the restructuring of the James Hardie Group of Companies - the asbestos inquiry) has once again led to cries for changes to our company law, including the Corporations Act.

Not another knee-jerk reaction to law reform!

The Special Commission of Inquiry into the Medical Research and Compensation Foundation (arising out of the restructuring of the James Hardie Group of Companies - the asbestos inquiry) has once again led to cries for changes to our company law, including the Corporations Act.

This unfortunately once more reflects on the extraordinary knee-jerk reaction to law reform in this country. I do not intend to make any specific comments on the matters arising out of the asbestos enquiry - that should be left to Mr Jackson QC.

What I am concerned about is the extraordinary tirade levelled by certain groups against the concept of the limited liability company and the claims that we should reform the law so as to allow the courts, on almost any pretext associated with the failure of a company, to disregard the corporate structure and to look to others to pick up the liabilities.

While the law should look with critical attention on fraudulent or grossly negligent activities which eventually lead to the collapse of companies, and while regulators such as ASIC should be encouraged to pursue those responsible in such circumstances (admirably done by ASIC after the collapse of the HIH group) we should be very cautious in changing the fundamental concepts of our law whenever difficulties arise, especially where external events have an impact on the affairs of companies or company groups. The limited liability company, introduced in England and then imported into countries such as Australia, has led to the development of extraordinary wealth for not just those companies but for a vast number of citizens. Western economies have prospered in a significant fashion through the use of the limited liability company. Where the law has identified activities or transactions which clearly impact in a negative way on society, the courts have made appropriate orders (for example in the classic decision of Smith, Stone and Knight Limited v Birmingham Corporation decided in 1939) to drive home liability to others outside the corporation. In addition changes have been made to the statute to target any fraudulent or grossly negligent activities. In addition we have industry-specific or special areas of legislation such as strong trade practices laws which prohibit price fixing and other collusive behaviour; our environmental laws are also far reaching and impact on activities that might otherwise be harmful; and there is a growing list of similar legislation. In 2000 the Companies and Securities Advisory Committee (CASAC), now the Corporations and Markets Advisory Committee, presented a detailed and challenging report to the Federal Government on the operations of corporate groups.

This report also looked at when it was appropriate to "lift the corporate veil" and to make companies within the group liable for the activities of other companies within the group in the context of certain scenarios. For reasons that are not entirely clear, the Federal Government has not responded to that report. The report discussed a number of issues, including those which appear to be relevant to the asbestos enquiry (if one believes the newspaper reports on that particular matter). Propositions were put forward by CASAC for certain reforms.

In many cases, however, CASAC recommended that no change be made to the way in which the law operates and warned against allowing the corporate veil to be lifted and for the obligations of one company in a group of companies to be driven home to another company, simply because "it seemed to be a good idea at the time".

What appears to have been ignored by many commentators is that our courts have, in appropriate circumstances, lifted the corporate veil and looked behind the facts of a particular situation. Far too often legislation is amended to make directors liable. This is often done in the context of insolvent trading but has now been extended to other areas (industrial manslaughter, certain market practices, etc); not only are directors made liable in these cases but the onus for proof is usually reversed, making it even more difficult for directors to protect themselves. Limited liability means very little these days and one is concerned that the current asbestos enquiry will lead to even more dramatic legislation which will have general application.

AICD and others should fight this initiative as hard as they have done in relation to the proposed amendments to Bankruptcy legislation where the Federal Government looks like it has now backed down from draconian changes that were proposed.

One hopes that we will hasten very slowly indeed in the context of these developments.

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