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Corporations Act ‘stifles’ healthy risk taking: Justice Robson

Corporations Act ‘stifles’ healthy risk taking: Justice Robson

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Regulators have “lost sight” of the fundamental purpose of the Corporations Act, which is to encourage responsible risk taking by company directors, according to Justice Ross Robson.

Speaking on a panel at the 2015 Governance Institute of Australia National Conference in Melbourne on 1 December, Justice Robson of the Supreme Court of Victoria said over-regulation was stymieing business.

“In passing regulations we should not be stifling the taking of risk,” he said. “It is the duty of directors to take calculated risks [and] I think that should be recognised fully in the Corporations Act.”

According to Justice Robson, the initial reason for the Corporations Act was to enable people to undertake a risky business venture without putting their own private wealth at risk. This is captured in the idea of limited liability, he said.

He continued: “Secondly, the Corporations Act also facilitated the raising of capital whereby shareholders as well could participate in the venture and, again, the only money at risk was the investment they make in the shares.”

While regulators should penalise “reckless” behaviour, company directors are “under a responsibility to take calculated risks” and would be “failing in their duty” if they simply invested in government bonds, said Justice Robson.

“One of the main jobs of a commercial judge is to oil the wheels of commerce,” he added.

Another flaw in the Act is the disincentives for companies to trade on after becoming insolvent, he continued.

“The problem with our corporations law at the moment is that if there is some risk of insolvency, then the directors really just have to give up and hand it over to the administrators, which is really the death knell of the company.

“There should be some encouragement for directors to be able to take steps to try and save the company.”

Fitting into the business cycle

One of the greatest challenges in commercial cases is wrapping up court proceedings in a timely manner, according to judges on the Governance Conference panel.

“Based on my recent experience as barrister, what I found was what clients in the business community really wanted from the court system was timeliness,” said Justice Mark Moshinsky of the Federal Court.

“Because the business community generally works on a one-year cycle, if the court system takes longer than that there is not as much interest in the outcome because it’s all taking too long.”

Justice Jennifer Davies, a judge at the Federal Court of Australia, said judges rely “very heavily” on legal practitioners in bringing about a resolution to a case in an “efficient and expedient way”.

“One of the factors in many [cases involving] the Corporations Act is that there is a degree of urgency,” she said.

“The commercial world can't wait for a finely polished judgement from the court and so that there is a need for the legal counsel to provide to the judge all the judge requires in order to make an informed and cognoscente [decision] on the case as presented.”

Justice Davis said it was crucial that in-house counsel, general counsel and external lawyers work together in presenting a clear case.

“Nobody knows the inner workings of the company better than those who are inside the company,” she said.  

“In-house counsel have a very valuable role. [They] should be able to identify where to obtain the relevant evidence, where to start, who should be approached, who are the appropriate witnesses.”

Poor communication between all legal counsel is a major pitfall in complex commercial litigation, she continued.

“In my experience as a judge, when you have the three working in harmony with each other, it is a sheer delight watching a case fall into place; but if you are not working in harmony with each other, it can be disastrous.”

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Corporations Act ‘stifles’ healthy risk taking: Justice Robson
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