A ruling in the High Court this week has left the federal-state co-operative scheme of corporate law under threat. The upheld the validity of parts of the corporations law on very narrow grounds. But it warned that the next challenge to the law might be successful. The court gave a clear warning to state and federal parliaments or governments to fix the problem.
The difficulties arise from the words of the Constitution. It provides that the Commonwealth Parliament has power to make laws with respect to “”foreign corporations and trading or financial corporations formed within the Commonwealth”.
It means the corporation has first to be formed before the Commonwealth power over it arises. It presumes, therefore, that corporations must be formed under state law. The present co-operative scheme has a single Australian incorporation process and a single Australian Securities and Investment Commission. This is constitutionally wobbly. It is likely that ASIC, as a federal body, has no constitutional power to investigate and prosecute crime committed during the formation of companies. Further, it probably has no power over trusts and other entities that feature so strongly in the corporate world.
The High Court ruled several years ago that the federal corporations power did not run to regulating the formation of corporations, but only to controlling them after they have been formed. Hence the co-operative scheme. The latest trouble arises when Commonwealth authorities want to prosecute offences. It is difficult to foresee the extent of future strife. We might end up with eight separate company schemes with all the waste and duplication that involves. In the past the High Court has not shied away from rulings involving huge changes to federal-state relations involving major disruption. The two most recent examples were the striking down of all state fuel, tobacco and alcohol tax, which now have to be administered by the Commonwealth and the striking down of the practice of federal courts deciding minor matters under state law when dealing with big matters of federal law involving the same parties — the so called cross-vesting arrangements. These two changes were made by the court despite unanimous federal-state contentment of the pre-existing arrangements.
The striking out of key parts of the Australia’s corporations law could be equally inconvenient and costly. It is tragic that the method foreseen by the Founding Fathers to deal with such developments – the referendum – has been lost as an effective reform method. It is far too easy for a referendum to go off the rails by sill scare-mongering. And the fact that in the first 75 years of federation the referendum process was often abused as grabs for power by the central government. People became suspicious of them and remain so. A simple three-question referendum could solve the major federal-state difficulties. Yes, the states have power to tax fuel, alcohol and tobacco. Yes, federal courts can rule on matters of state law in major federal cases. And, Yes the Federal Parliament has power to legislate for a scheme to create and regulate all corporations and trusts.
But it won’t happen.
The only other way is for the states to refer their corporations power to the Federal Parliament. But the High Court’s warning is likely to go unheeded. The path of simple, uniform law in Australia is littered with the petty jealousies and political point-scoring. Invariably one or more states refuse to yield any power. In the case of corporations law, South Australian and Western Australia have reiterated their determination not to give the Feds any power. NSW would only refer the power if every other state did.
The Premiers of Western Australia, South Australia should put the interests of Australian commerce ahead of their own petty jealousy a desire for power. They should refer the power to the Commonwealth. It makes sense and economy to have one national companies scheme in Australia with one enforcing body. The Commonwealth in turn should ensure the states get their fair share of any revenue and a fair input into any appointments to key positions.