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Further legislation belies simpler regulatory regime

Further legislation belies simpler regulatory regime

A NEWLY announced package set to simplify regulation and reduce the compliance burden on businesses actually adds further complexity to corporate law reform, according to commentators. Touted as…

A NEWLY announced package set to simplify regulation and reduce the compliance burden on businesses actually adds further complexity to corporate law reform, according to commentators.

Touted as the most comprehensive package of corporate law reform since the Corporate Law Economic Reform Program (CLERP9), proposals to form part of the Simpler Regulatory Systems Bill were released last week by Chris Pearce, Parliamentary Secretary to the Treasurer.

In announcing the reforms, Pearce said he builds on a commitment to “facilitate a simpler regulatory system that achieves continued consumer protection, reduced compliance costs, greater ability for companies to attract capital and, importantly, enhanced accountability of regulators”.

Pearce said there were several topics that warranted a more focused approach because of the scope and complexity of the policy issues they raise, in particular the role of a business judgment rule.

While the trend of reforms such as CLERP9 has been to increase regulation upon directors, the announced plan to extend the business judgment rule is the start of a trend in the other direction, lawyer James McConvill told Lawyers Weekly.

“[Extending the business judgment rule is] actually protecting them, given that there is a lot of criticism by directors that they are under an increasing amount of responsibility. So it’s perhaps a response to that culture of excessive compliance that directors feel they are burdened by,” said McConvill.

But while the package is designed in part to reduce red tape, McConvill argues that it actually adds further burden in that it adds a new level of complexity to regulation.

He pointed to the business judgment rule, noting that the change is not necessary because it doubles up on a current provision in the Corporations Act, section 1318, which allows courts to relieve directors from any potential or actual breaches of duty if they have acted honestly.

“Really, rather than extending this business judgment rule, which could become quite messy because it’s not easy to establish that the business judgment rule is satisfied … As far as I know there has been no case up until this point where the existing business judgment rule has successfully been used by directors in the court. Whereas there have been cases where section 1318 has been successfully used.

“I suppose the ironic thing about much of this [Simpler Regulatory Systems Bill] is that the idea is to make regulation simpler, but the reforms would make it more complex because it is increasing the amount of regulation,” said McConvill.

He argued that provisions in the Corporations Act, such as section 1318, could be relied upon instead of the business judgment rule, and that there was therefore no need to increase regulation with more complexity.

“When you don’t need something, and there are existing provisions in place that can do the job, a simpler regulation program shouldn’t be about adding to the law, it should be about working out how the law can be applied as it is, or reduced and minimised.”

Professor Michael Adams, professor of corporate law at the University of Technology, Sydney’s Faculty of Law, told Lawyers Weekly that section 1318, the courts relief, has always been there, and that “the reality is there has always been the ability to grant relief, so by expanding the business judgment rule, it will make the waters greyer and dirtier and muddier, rather than making life much easier and sweeter than before”.

For lawyers, an imposed simpler regime will see them spending more time with clients, working through the changes, said McConvill.

“Any time you add pages to the Corporations Act there is a correlation in the amount of hours that lawyers are advising clients … There are already procedures that can do the job so there is no need to fix it,” he said.

Regulation in Australia has increasingly been moving towards more stringent controls on directors, said a CFO of a well-known Australian company. “Whether you look at CLERP9 or other pieces of Australian legislation, it seems to be heading that way.”

But, the CFO said, this can be cyclical and things are likely to change. “That’s the normal way — something horrible happens, you put in controls — you probably over control — they stay with you for a number of years, and then things slack off a bit. Then we hit another problem and off we go on the cycle again.”

Adams said that since CLERP9 there has been, in terms of legislation, a slowing down. This, he said, has given corporations, and in turn corporate academics and corporate lawyers, “a bit of breathing space”.

According to Adams, unlike taxation which changes from fiscal year to fiscal year, corporate law does not necessarily need to change, “but there has been a constant mouse wheel of change”.

“You do wonder whether it adds value and whether we ever get a chance to test whether regulations really are good for consumers or shareholders or other stakeholders. And that it is failing to ever take into account whether change is worthwhile, and then it changes again. This does concern me,” he said.

Treasurer Peter Costello also criticised the overuse of regulation of business in Australia last week. He released the government’s full response to its red tape taskforce, which handed down 178 recommendations on ways to reduce paperwork and compliance costs for business earlier this year.

Costello said the government would make it tougher for new regulations to be introduced, and said a special committee would be established to find ways to reduce duplication, as well as to align some bureaucratic terms and reporting periods.

McConvill said Costello’s comments are relevant also to Pearce’s announced proposals, noting that “the cost of greater complexity in the law would outstrip the benefit of having this new protection in the Act for directors”.

“From that perspective it is probably unnecessary and probably is ironically making regulation more complex even though it attempts to make it more simple,” McConvill said.

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