Australia: New requirements in establishing Commonwealth companies

Clayton Utz Insights
Last Updated: 21 August 2013
Article by Brian O'Callaghan and Justin Bernau

Most Read Contributor in Australia, November 2017

Key Points:

New processes and considerations will apply to Commonwealth agencies forming or participating in companies, and establishing corporate entities, under the new Public Governance, Performance and Accountability Act 2013.

New requirements apply to Commonwealth agencies that seek to form or participate in Commonwealth companies, and establish corporate entities, from 1July 2014. The existing requirements in relation to the accountability of Commonwealth companies will continue to apply, with some minor revisions.

The preliminary sections of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) commenced on 1July 2013, with the operative provisions expected to commence on 1July 2014. The Department of Finance and Deregulation is currently working on the PGPA Rules, which are disallowable instruments and are expected to commence on 1July 2014.

The PGPA Act and Rules consolidate the governance, performance and accountability requirements for the Commonwealth, and will replace the Financial Management and Accountability Act 1997 (FMA Act), the Commonwealth Authorities and Companies Act 1997 (CAC Act) and the regulations made under those Acts.

The PGPA Act mainly applies to Commonwealth entities. A "Commonwealth entity" includes both a non-corporate Commonwealth entity (essentially an FMA agency under current terminology) and a corporate Commonwealth entity (essentially a CACAct authority). A Commonwealth company is not a Commonwealth entity. However, the PGPA Act also contains provisions about planning by, and the accountability of, Commonwealth companies.

This article focuses on the new requirements for the establishment and regulation of Commonwealth companies and corporate entities.

Forming and participating in companies

The PGPA Act provides that the Finance Minister may form or participate in forming a relevant company on behalf of the Commonwealth.

The Finance Minister may also acquire shares (either by purchase or subscription) in a relevant company, or become a member of a relevant company, in circumstances that would result in the relevant company becoming a Commonwealth company.

These provisions refer to establishing a company under the Corporations Act. However, the company must be of a kind prescribed by the Rules (a "relevant company"), whose objects or proposed activities are of a kind prescribed by the Rules. This limitation is presumably to ensure that the Commonwealth does not inadvertently use companies to conduct activities that go beyond the activities that the Commonwealth could legitimately conduct itself within the scope of its legislative and executive powers.

The Rules will need to be carefully drafted to ensure that their scope does not limit the establishment of the range of companies used by Commonwealth agencies from time to time to assist in the achievement of a variety of policy and program objectives.

The Finance Minister's power under these provisions can only be delegated to the Finance Secretary and may not be delegated to any other persons.

Policy clarification is required on whether these provisions are the only means by which the Commonwealth will form, participate in, or acquire shares in Corporations Act companies, or whether Commonwealth agencies may also continue to rely upon the general executive power to do so. The Explanatory Memorandum to the legislation says that:

  • the Commonwealth has always believed and still believes that it may, without legislative authority, form or participate in the formation of a company and acquire shares in or become a member of a company to carry out activities without a head of legislative power; and
  • the power has been included "in the interests of abundant caution" and is in addition to any other power that the Commonwealth may have, such as, under executive power granted under the Constitution.

Creating new Commonwealth corporate entities by Rules

The PGPA Act provides that Rules may establish a body corporate and provide for the range of governance matters that would be typically contained in the enabling legislation of a Commonwealth authority or in the constitution of a company (including the body corporate's name, functions, powers and governance structure). This power is similar to the power to create R&D Corporations under the Primary Industries and Energy Research and Development Act 1989.

This is an alternative structure to establishing a statutory authority under enabling legislation or establishing a company under the Corporations Act. The stated rationale for this alternative is that establishing a body corporate under Rules can be quicker than establishing a new statutory authority by legislation, and that the PGPA Act structure can be a more appropriate framework than the Corporations Act for the functions performed by certain types of entities. Parliament can disallow the Rules.

A note in the PGPA Act provides that a body corporate may be abolished by revoking the Rules that established it (although we note that the entity's assets and liabilities would first need to be dealt with, unless the initial Rules adequately dealt with these transitional matters).

The Explanatory Memorandum explains the legislative intent that these bodies corporate will be treated as corporate Commonwealth entities under the PGPA Act, which means that their moneys and property will be "public resources", their Boards will be "accountable authorities" and their employees will be "officials".

The availability of a new form of corporate entity provides more flexibility and requires corporate structuring decisions to be made by the Commonwealth. For example, is a regulatory agency better formed under enabling legislation to provide it with detailed powers and limitations and potential exemptions from aspects of the PGPA Act? Is a multi-jurisdictional entity better formed under the Corporations Act to provide a more neutral governance framework? The preferred corporate form and structure in any given case will depend on a number of complex policy, structuring, operational, governance and taxation considerations.

Accountability of Commonwealth companies

The existing requirements in relation to planning by, and the accountability of, Commonwealth companies under the CAC Act have been generally reproduced in the PGPA Act, with some minor revisions. A "Commonwealth company" continues to be defined as a Corporations Act company that the Commonwealth controls, and a "wholly-owned Commonwealth company" continues to be a Commonwealth company other than a company any of the shares in which are beneficially owned by a person other than the Commonwealth.

The directors of a Commonwealth company must prepare a corporate plan. New requirements in this regard are that the corporate plan must comply with requirements to be specified in the Rules, and the corporate plan must set out, to the extent relevant, how the company's activities will contribute to the key priorities and objectives published in the Australian Government's statement issued under the PGPA Act from time to time. This is part of the move to establish a coherent and robust performance framework across the Australian Government, and to align with the new corporate planning, risk management and performance assessment requirements that will apply to Commonwealth entities generally from 1 July 2014.

The directors of a wholly-owned Commonwealth company must keep its responsible Minister and the Finance Minister informed of certain matters, establish an audit committee and comply with notified Australian Government policies (following consultation with the Minister responsible for the relevant policy, no longer the Minister responsible for the company).

Practical implications

In implementing new policy initiatives where the establishment of a new entity is contemplated, Commonwealth agencies will need to consider whether activities are most effectively conducted within the agency itself (or outsourced through procurement or grant arrangements), or within a new prescribed agency, statutory authority, body corporate established by Rules or a Corporations Act company.

The Rules will be important to define the objects and proposed activities for which a Corporations Act company may be established.

Further policy guidance will also be required on the use of these entity forms and the extent to which the executive power may continue to be used by agencies to establish companies.

Commonwealth companies, and Commonwealth agencies with portfolio responsibility for Commonwealth companies, will need to be familiar with the changes in relation to planning by, and the accountability of, Commonwealth companies.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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