House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

8 Fundraising

8.1 New Chapter 6D will replace the current fundraising provisions in Divisions 2, 3, 6 and 7 of Part 7.12. Chapter 6D will also replace the current fundraising liability provisions in section 996 and Division 1, Subdivision B of Division 4 and Division 5 of Part 7.11.

Improving disclosure

8.2 The primary function of prospectus disclosure is to address the imbalance of information between issuers of securities and potential investors. Given the important role of disclosure in the market, the Bill makes a number of changes to improve the current disclosure requirements.

General disclosure requirement

8.3 The Bill will substantially retain the general prospectus content rule in current subsection 1022(1). Retaining the current flexible disclosure requirement will allow the length of a prospectus to vary depending on the investors needs.

8.4 The general content rule requires a prospectus to contain all information that investors and their professional advisers would both reasonably require, and reasonably expect to find in the prospectus, to make an informed investment decision (proposed section 710).

8.5 The requirement that a prospectus contain all information that investors and their professional advisers expect to find has in practice expanded the disclosure test. For example, in practice issuers have had regard to other prospectuses and included certain types of information merely because it has been included historically or is contained in other prospectuses. This is not the intention of the provision. The words expect to find are intended to limit, and not expand, the disclosure test.

Shorter prospectuses

8.6 Prospectus length and complexity is a particular concern for retail investors, who may not be experienced in reading and comprehending technical information. The Bill will facilitate the presentation of prospectuses to retail investors in a manner best suited to their needs, while still making available a more technical analysis to investors, professional analysts and advisers who wish to seek further information.

8.7 This is achieved by changing current section 1024F to facilitate the use of short form prospectuses. The Bill will allow a prospectus to identify documents which are lodged with ASIC and thereby incorporate the information in the document into the prospectus (proposed subsection 712(1)). The prospectus does not need to summarise each material fact in the incorporated document. However, where the issuer considers that the information may be of interest to retail investors, the prospectus must include sufficient information for investors to determine whether they need to obtain a copy of the document or part of the document to be incorporated by reference.

8.8 Where the issuer considers the information is primarily of interest to professional advisers, the prospectus must state this and describe the contents of the disclosure document (proposed subsection 712(2)). A document incorporated in this way is treated as being included in the prospectus (proposed subsection 712(3)). This will ensure that the incorporated document is subject to the content and liability rules under the new provisions.

8.9 The Bill will allow a prospectus to refer to any document lodged with ASIC, including documents that are not required to be lodged (proposed subsection 712(4)).

Profile statements

8.10 The Bill will provide for capital raising through the use of a profile statement (proposed subsections 709(2) and (3)). A prospectus will still need to be prepared and lodged with ASIC.

8.11 ASIC is empowered to authorise the use of profile statements for offers of securities in suitable industries (proposed subsections 709(2) and (3)). Industry specific profile statements will give investors the ability to make comparisons between similar products. The profile statement must:

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identify the body and the nature of the securities;

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state the nature of the risks involved;

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detail all amounts payable in respect of the securities;

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include any other information required by the regulations or ASIC; and

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state that the profile statement has been lodged with ASIC and that the investor is entitled to a copy of the prospectus (proposed subsection 714(1)).

8.12 As a primary source of information for retail investors, the profile statement attracts liability for any failure to adequately address matters required to be disclosed in it (proposed section 728). However, to ensure that issuers continue to provide full disclosure in the associated prospectus, issuers will be liable to investors in relation to the prospectus regardless of whether an investor actually received a copy of the prospectus (proposed subsection 729(2)). The defence provisions will be applicable to profile statements. A person will not be liable for a misstatement in or an omission from a profile statement if they can prove that they did not know that the statement was misleading or deceptive or that there was a material omission from the statement in relation to that matter (proposed section 732, see also proposed section 733).

Forward-looking statements

8.13 Current subsection 765(1) requires a person who makes representations about future matters to have reasonable grounds for the representation. A provision to the effect of subsection 765(1) is included in the Bill. However, the current reverse onus of proof for representations about future matters has been removed (proposed subsection 728(2) and Schedule 3, Part 1, item 55). This will encourage the inclusion of material of potential use to investors without exposing issuers to liability for legitimate forecasting. The provision also ensures that forecasts are made where there is a reasonable basis for them and not made on the basis of genuine but unreasonable beliefs of issuers.

Rights issues

8.14 The Law currently requires a prospectus for rights issues, but allows reduced disclosure for offers of securities which are already traded on the ASX. The prospectus is only required to contain information about the transaction and other information not already disclosed to the market. The Bill will maintain the current position in relation to rights issues (proposed section 713).

Advertising

Listed securities

8.15 The Bill will significantly liberalise the current advertising restrictions for issues of securities which are already listed on the ASX. Prior to the issue of a disclosure document, advertising for these securities will be permitted if the advertisement states that a disclosure document will be made available and that an application form in, or accompanying, the disclosure document must be completed in order to acquire the securities (proposed paragraph 734(5)(a)).

8.16 The current law generally allows advertising only after the prospectus is lodged provided the advertisement states that a prospectus has been lodged and contains certain details about the prospectus (current section 1025). Relaxing the advertising restrictions for quoted securities will not compromise investor protection as information regarding the issuer and the nature of the securities is publicly available (through the continuous disclosure regime) and provides a basis upon which investors may assess the merits of acquiring the securities.

Unlisted securities

8.17 In relation to issues of securities which are not listed on the ASX, the draft provisions will limit advertising prior to the issue of the disclosure document to the following:

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a statement identifying the offer or and the securities;

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a statement that a disclosure document will be made available when the securities are offered;

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a statement that persons wanting to acquire the securities will have to complete an application form in, or accompanying, the disclosure document; or

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a statement of how to receive a copy of the disclosure document (proposed paragraph 734(5)(b)). This last statement is optional.

8.18 These rules are designed to minimise the potential for persons seeking to raise funds to generate expectations among potential investors about the desirability of a proposed offer before all relevant information reaches the market and investors are able to make an informed investment decision.

8.19 For post-disclosure document advertising, the Bill will allow a streamlined statement to be made that informs potential investors that offers will be accompanied by a disclosure document and that the application form will need to be completed (proposed subsection 734(6)).

8.20 As at present, the advertising restrictions will not apply to notices lodged with a securities exchange, reports on the bodys general meeting, news reports and reports by persons who have no interest in the offer (proposed subsection 734(7)). Such notices and reports should not be tainted by promotional material intended to induce persons to purchase the securities.

8.21 The restrictions on advertising are designed to encourage investors to rely on a disclosure document, rather than the contents of an advertisement, and to ensure that the disclosure document is the principal information document. The prohibitions against misleading and deceptive conduct and the market offence provisions in Part 7.11 of the Law will continue to apply to securities advertising and will provide additional investor protection.

Image advertising

8.1 There is often uncertainty under current paragraph 1026(2)(c)) as to whether a particular image advertising campaign breaches the restrictions on pre-prospectus advertising or is permissible advertising of the bodys general business in the ordinary course of trade. In practice image advertising can be very influential on investors, extolling the virtues of a body without referring to a pending public offer. The Bill will clarify the Law in order to ensure that a body is not inhibited from promoting its products or services in the course of trade and to provide protection to investors. The Bill specifies criteria which should be taken into account in deciding whether image advertising exists (proposed subsection 734(3)).

Pathfinder documents

8.2 To assist an issuer to set a realistic price and finalise the contents of a disclosure document, the Bill will allow draft or pathfinder documents to be circulated for comment to sophisticated and professional investors (proposed subsection 734(9)). Pathfinder documents serve a useful purpose without causing any detriment to investors, as such, pathfinder documents will be exempt from the advertising restrictions in the Bill.

Liability

Prohibitions

8.3 Division 1 of Part 6D.3 will bring together the provisions on prohibited conduct.

8.4 The Bill will remove the current overlap between the general prohibition on misleading and deceptive conduct and the prohibition on misstatements in or omissions from a prospectus (current sections 995 and 996). The current overlap is unsatisfactory as it is unclear whether the current defences available for an action under section 996 are also available for an action under section 995 where the misleading or deceptive conduct is constituted by the issue of a defective prospectus.

8.5 Actions for damages or injunctions for misleading or deceptive conduct in connection with a disclosure document will no longer be available under section 995 (proposed Schedule 3, Part 1, item 59). Instead, Division 1 of Part 6D.3 will provide a self-contained liability regime for misstatements and omissions from disclosure documents.

8.6 Similarly, the misleading and deceptive conduct provisions in the Australian Securities and Investments Commission Act will no longer apply to securities dealings (proposed Schedule 4, Part 1, items 1, 2 and 3). This will ensure that there is no overlap between the Corporations Law and the Australian Securities and Investments Commission Act in relation to securities dealings. One of the main effects of this change would be to provide a self-contained liability regime in the Law for dealings in securities.

8.7 Consistent with this approach, the misleading and deceptive conduct provisions in the State and Territory Fair Trading Acts will no longer apply to securities dealings (proposed Schedule 3, Part 1, items 24 and 61). Again, this will ensure a self-contained liability regime in the Law for dealings in securities.

8.8 It will no longer be necessary in civil actions under the Law to establish that the misleading or deceptive statement, omission or new matter was material (proposed subsection 728(1)). However, in place of a materiality element, recovery of damages will depend on establishing that loss has been suffered as a result of the misleading or deceptive statement, omission or new matter (proposed subsection 729(1)). An injunction will remain a discretionary remedy available under current sections 1324 and 1325. It will only be an offence to offer securities under a disclosure document containing a misleading or deceptive statement, omitting required material or without a significant new matter if it is materially adverse from an investors point of view (proposed subsection 728(3)).

Persons liable

8.9 The Bill will clarify the people who could be held liable for the disclosure document and the extent of their liability (proposed subsection 729(1)).

8.10 The issuer of a disclosure document, the directors and proposed directors and underwriters will be liable in relation to the disclosure document as a whole. Other persons will only be liable for statements in the disclosure document that they have made or which are based on their statements. A person will need to have consented to being named in the disclosure document in relation to a statement, or as a proposed director, before any liability may arise.

8.11 Other persons involved in a contravention of the fundraising provisions could also be liable to compensate for any loss suffered (proposed subsection 729(1), item 6).

8.12 Since the liability provisions and the offence provisions operate independently, it will not matter whether or not the person against whom compensation is being sought has been convicted for an offence in respect of the contravention.

8.13 A person who may be liable on a disclosure document must inform the person offering the securities in writing as soon as practicable after they become aware of a material misleading or deceptive statement, omission or new circumstance (proposed section 730).

8.14 The Bill will retain the current prohibitions on offering securities without a current disclosure document or in a body that does not exist (proposed sections 726 and 727).

Defences

8.15 The Law currently contains a complex set of defences for people who are liable in connection with a prospectus. These defences have been criticised as lacking coherence and a clear underlying policy. Furthermore, substantially similar concepts are expressed in different ways.

8.16 The Bill will make it easier for a person to determine whether defences are available by providing a uniform defence to all persons who are potentially liable in relation to disclosure documents. For disclosure under a prospectus, a person will not be liable if they made such inquiries as were reasonable and they believed on reasonable grounds that the prospectus did not contain any materially misleading or deceptive statements or omit any material matter (proposed section 731).

8.17 The defence provisions are modified to take account of the reduced disclosure requirements for profile statements and OISs (in particular, there is no requirement for the issuer of an OIS to undertake reasonable inquiries). A person will not be liable if they prove that they did not know that the statement made was misleading or deceptive or that there was a material omission from the statement (proposed section 732).

8.18 Because all aspects of a disclosure document will not necessarily be within the expertise of all persons who may be potentially liable, a person who places reasonable reliance on information provided by someone else will also have a defence to any liability that arises from statements or omissions in relation to that information (proposed subsection 733(1)). The Bill will extend this defence to all persons who may be liable, rather than its current application to the auditors report.

8.19 However, a person will not be able to rely on information provided by an employee or agent or, if the person is a body, its directors (proposed subsection 733(1)). This will prevent someone relying on what is effectively their own information. Although the body will not be able to rely on information supplied by its employees for the purpose of establishing a subsection 733(1) defence, it will be able to carry out due diligence through its officers and employees for the purpose of establishing a defence under proposed section 731.

8.20 The proposed limitation will not preclude a director of a fundraising body relying on information supplied by the fundraising bodys employees as those persons are not employees of the director. A person will be able to rely on someone who performs a particular advisory or professional function provided they are not an agent for some other reason (proposed subsection 733(2)).

8.21 A defence will also be available to persons who are liable as a result of being named in the disclosure document if they publicly withdraw their consent to being named (proposed subsection 733(3)). This defence is extended to underwriters.

8.22 As under the current law, there will not be a defence to an action for an injunction. A court will be able to restrain the circulation of a disclosure document that has a misleading or deceptive statement or omits required information even if due diligence has been taken in its preparation (current sections 1324 and 1325).

Small business fundraising

8.1 Access to capital has been a concern for SMEs, as they may find that the cost of preparing and lodging a prospectus can be excessive having regard to the amount of capital which is sought to be raised. The provisions will facilitate fundraising by SMEs in a number of ways.

Small scale offerings

8.2 A disclosure document will not be required if a person makes an unlimited number of personal offers of securities that result in securities being issued to 20 or fewer persons in a rolling 1 year period with no more than $2 million being raised (proposed subsections 708(1) - (7)). This will reduce the costs for small business when making small scale offerings and will free them from constraints in fundraising without exposing investors to unnecessary risks.

8.3 The 20 issue exclusion will facilitate fundraising by SMEs that are currently required to prepare a prospectus if they do not raise enough funds after making 20 offers in 12 months (current paragraphs 66(2)(d) and (3)(d)). The current exclusion for 20 offers in 12 months is considered to be unduly restrictive and difficult to apply in practice. For example, it can be difficult to ascertain whether an offer has been made.

8.4 Offers under the proposed 20 issue exclusion are limited to personal offers, which is consistent with the existing exclusion. This will prevent the exclusion being abused by making offers to retail investors at large without proper disclosure in a disclosure document. The Bill will remove uncertainty about what constitutes a personal offer. An offer will be a personal offer only if it can be accepted by the person it is made to, and if the person is likely to be interested in the offer because of any previous contact, professional or other connection to the person making the offer, or because they have indicated that they are interested in offers of that kind (proposed subsection 708(2)). This will allow offers to be made to self designated small business investors (known as business angels) who have previously stated their interest in the offer, even though there had been no previous contact between the person making the offer and the prospective investor.

8.5 Furthermore, by limiting the amount raised in any 12 month period to $2 million, the Bill will prevent an unlimited amount of funds being raised from 20 investors (proposed subsections 708(1) and (7)). Issuers seeking to raise larger amounts of capital are expected to bear the costs of preparing a disclosure document.

8.6 The Bill will rectify other unsatisfactory aspects of the existing 20 offer exclusion by:

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making it clear that securities issued as a result of offers made under other exclusions are not counted towards the 20 issues (proposed paragraph 708(5)(a)); and

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extending the exclusion to registered managed investment schemes (the 20 investors required before a scheme must be registered would be counted towards the 20 issues allowed in any 12 months).

Sophisticated investors

8.1 The current sophisticated investor exemption (current paragraphs 66(3)(a) and 66(3)(ba)) applies only to persons who invest over $500,000 in the securities in question. There are a number of avoidance problems with the current exemption. The Bill will resolve these by ensuring that:

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any moneys lent to the investor by the person offering the securities, or an associate, are not included when calculating the $500,000 (proposed subsection 708(9)); and

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the $500,000 is payable for the securities on acceptance of the offer rather than payable by instalments of much smaller amounts over a prolonged period of time (proposed paragraphs 708(8)(a) and (b)).

8.2 However, from an issuers perspective the problem is that the $500,000 threshold is too high because of the difficulty of finding investors willing to invest such large sums or because less than $500,000 is sought in total. Consequently, in addition to the $500,000 exemption, the Bill will introduce two new sophisticated investor thresholds.

8.3 Investors will be able to invest less than $500,000 if the offer is made through a licensed dealer and the dealer is satisfied on reasonable grounds that they have previous experience in investing in securities which allows them to assess the investment (proposed paragraph 708(8)(c)). Placing experience as a test for sophistication will allow issuers to offer securities to those who do not fit the threshold income and asset tests referred to below but are sophisticated because of their experience in investing in securities without the need for a disclosure document.

8.4 In addition, investors will be able to invest less than $500,000 if a qualified accountant certifies that they have a gross income over the previous 2 financial years of at least $250,000 or have net assets of at least $2.5 million (proposed paragraph 708(8)(d)).

8.5 The Bill will also extend the current $500,000 exemption to allow investors to top up existing investments to over $500,000 (proposed paragraph 708(8)(b)). This is consistent with the rationale of the exclusion to allow persons who are considered to have sufficient resources to obtain independent professional advice or who, because of the size of their potential investment, have sufficient leverage over the issuer to obtain the required information. The exclusion will be amended to make it clear that this amount is the amount invested and not the amount of the offer (proposed subsection 708(8)(b)).

Offer information statements

8.6 The Bill introduces the Offer Information Statement (OIS) as a new fundraising mechanism for SMEs (proposed subsection 709(4)). An issuer will be able to raise up to $5 million by way of an OIS instead of a prospectus. An issuer could raise several tranches of capital under OISs provided the total raised during its life did not exceed $5 million. The limit of $5 million would accommodate the fundraising targets of SMEs. Issuers seeking to raise larger amounts of capital are expected to bear the costs of prospectus preparation.

8.7 Disclosure obligations under the OIS are limited to the information that proposed subsection 715(1) requires to be included in the OIS. This is expected to be material information known to the corporation. External inquiries are not expected to be undertaken to ascertain information about matters on which disclosure is required.

8.8 An OIS will be required to include a prominent statement that it is not a prospectus, that it has a lower disclosure requirement than a prospectus and that investors should obtain professional advice before accepting the offer (proposed paragraphs 715(1)(g) and (h)). The warnings are particularly important in making investors aware of the risks involved in an OIS offering. An OIS will also be required to include a financial report prepared in accordance with Chapter 2M of the Law. A person is not liable for a misstatement in or an omission from an OIS if they can prove that they did not know that the statement was misleading or deceptive or that there was a material omission from the statement (proposed section 732).

8.9 Use of an OIS to raise up to $5 million will not be limited to SMEs. However, to prevent abuse of the exemption, ASIC will be able to determine that the transactions of different bodies are to be aggregated (proposed section 740). As at present, a proprietary company will not be able to engage in fundraising which would require a disclosure document (proposed Schedule 3, Part 1, item 46). This will include fundraising under an OIS.

Electronic commerce

8.10 The Bill will facilitate the issue of a disclosure document in electronic form as well as paper documents. The Bill will remove barriers to electronic commerce by providing a statutory framework for electronic disclosure documents which is designed to promote investor confidence in the integrity of the electronic financial services marketplace.

8.11 The existing requirement for all directors to sign a disclosure document will be replaced with a requirement that all directors consent to the issue of the disclosure document in writing (proposed section 720). This approach avoids having a requirement for signatures on the lodged copy of the disclosure document, which would be difficult if the disclosure document is lodged electronically, while preserving the policy that each director is to have a veto on the issue of the disclosure document.

8.12 The general provisions dealing with the lodgment of documents in Part 2N.2 of the Law will apply to the lodgment of disclosure documents. This means that a disclosure document lodged in writing must be signed by a director or secretary. Section 352 of the Law permits a document to be lodged and authenticated electronically if agreed to by the person lodging the document and ASIC. ASIC has indicated in Policy Statement 107 on electronic prospectuses that it will allow a body to issue an electronic prospectus provided that certain conditions are satisfied.

8.13 The difficulty with the current requirement that the application form be attached to the prospectus or supplementary prospectus (current paragraph 1020(b) and subsection 1024(3)) is dealt with in the Bill by allowing an application form to be included in, or accompanied by, the disclosure document (proposed subsection 723(1)).

8.14 The Bill will also make it clear that offers received in Australia, irrespective of where the securities are transferred or issued, are subject to the fundraising provisions (proposed subsection 700(4)). Therefore, offers transmitted electronically into Australia from outside Australia will be caught. Similarly, an offer placed on an Internet site generated by a server situated outside Australia will be subject to the fundraising provisions if it is capable of being received in Australia. The existing territorial limitations of the provisions will be retained and will not apply to offers made overseas by Australian companies.

8.15 The securities hawking provisions in current sections 1077 to 1082 have been identified as an impediment to electronic commerce. Instead, the Bill will prohibit the making of unsolicited offers of securities, whether by meeting with another person or by a telephone call (proposed subsection 736(1)). This prohibition is based on the unsolicited calls provisions in the Financial Services Act 1986 (UK). It is an improvement on the existing securities hawking prohibition (current section 1078) in that it:

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focuses more directly on the mischief sought to be prevented, namely the unsolicited offer; and

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only covers those forms of communication that result in badgering the potential investor, rather than applying to all eligible telecommunications services including post or fax.

8.16 As at present, there will be exclusions for offers of quoted securities by licensed dealers, offers by dealers to their clients, offers to professional investors and offers to sophisticated investors (proposed subsection 736(2)).

8.17 The Bill will also improve the remedies available to persons who acquire securities as a result of an unsolicited offer (proposed section 738). Those persons will be entitled to return the securities within a period of 1 month and receive their money back. Unlike current section 1082, this remedy does not depend on there having been a conviction. Nor does it require an order to be made by the Court.

Prospectus lodgment

8.18 The Bill will continue to require the lodgment of a disclosure document with ASIC (proposed section 718 and subsection 727(1)). However, the Bill will remove the current requirement that certain prospectuses must be registered with ASIC.

8.19 Instead, a person offering securities will be able to distribute the disclosure document immediately after it has been lodged with ASIC. However, a person offering non quoted securities will not be allowed to accept an application for the issue or transfer of the securities until 7 days after lodgment of the disclosure document with ASIC (proposed subsection 727(3)). ASIC may extend this 7 day period to a maximum of 14 days. The 7 to 14 day period gives ASIC and the market an opportunity to consider the disclosure document before the commencement of subscriptions for the securities on offer. Where the disclosure document was defective, the market could draw it to the attention of ASIC or aggrieved parties could, if appropriate, seek injunctions preventing the fundraising.

8.20 The 7 to 14 day period will not apply to a person offering quoted securities. These securities already have an established market price and are subject to the continuous disclosure regime.

8.21 The Bill will continue to require a disclosure document to state that ASIC takes no responsibility for its contents (proposed paragraphs 711(7)(b), 714(1)(e) and 715(1)(f)).

Fundraising by the Federal Government

8.22 The Bill will remove the immunity of the Federal Government and its agencies from the fundraising provisions of the Law (proposed Schedule 5, items 14 and 15).

8.23 Applying the fundraising provisions to the Federal Government and Federal Government entities will require them to compete with private sector bodies for investors funds on the same terms. This is consistent with the tenor of the competitive neutrality principles agreed to by all Australian Governments for government business enterprises.

8.24 Investors will benefit significantly as government entities will be required to disclose information that will allow investors to make informed investment decisions. They will also have greater protection in relation to the fundraising activities of the Federal Government and Federal Government entities.

8.25 Competitive neutrality is part of broader economic policies aimed at increasing reliance on market based mechanisms and competition to promote efficiency and competitiveness. An advantage of removing governmental immunity is that the Federal Government and its entities will be able to issue a disclosure document in a form that is familiar to the marketplace. This could increase the marketability of the securities offered in the disclosure document in local and overseas markets by providing investors with the confidence that the full requirements of the Law are applicable. This encourages increased public investment which may in turn increase the price that can be obtained for the securities as well as leading to more competitive returns.

8.26 Applying the fundraising provisions of the Law to the Crown has already been implemented in the partial privatisation of Telstra (section 8AT of the Telstra (Dilution of Public Ownership) Act 1996 ).

8.27 Debt instruments offered by the Federal Government and its agencies that are guaranteed by the Government will continue to be exempt from the fundraising provisions. These securities are more secure than bank and building society deposits that are exempt from the fundraising provisions, because there is a Government guarantee and they are subject to a specific prudential supervision regime.

Rewriting the fundraising provisions

8.28 When the Government announced the Corporate Law Economic Reform Program, it was noted that the project of rewriting the Law in order to simplify it would be subsumed within the Governments overall corporate law reform program. Accordingly, as well as implementing the CLERP proposals, the Bill will rewrite the fundraising provisions. As a result of this rewrite, a number of reforms have been made to modernise the existing provisions and ensure they are consistent with the earlier work on simplifying the Law. The key changes made as part of this process are set out below.

Securities covered by the fundraising provisions

8.29 The securities covered by the fundraising provisions will continue to include shares and debentures and will apply to interests in registered managed investment schemes (proposed paragraph 700(1)(c) and section 701). Under Part 5C.1 of the Law, a managed investment scheme must be registered where it has more than 20 members.

8.30 The current definition of securities of a body includes units of shares and prescribed interests (current paragraph 92(2)(d)). Unit is defined in current section 9. The securities which will be covered by the fundraising provisions will include the instruments currently known as units, namely any legal or equitable right or interest in relation to shares, debentures or interests in registered managed investment schemes and options to acquire these rights or interests (proposed paragraphs 700(1)(d) and (e)).

8.31 The provisions will, however, be redrafted so that they no longer apply to offers of securities of a corporation but to offers of securities of a body. By avoiding the use of the term corporation there is no longer an implication that the provisions only apply to securities of incorporated bodies.

8.32 The shift to securities of bodies results in substantially the same entities being covered. However, the change in focus will remove an anomaly in the current coverage of the provisions by applying them to unincorporated bodies, which may be sued in the name of their secretary, in their jurisdiction of formation. This will ensure that unincorporated entities offering securities will be covered by the fundraising provisions.

8.33 Offers of securities of various bodies established under specialist State and Territory legislation, such as co-operatives, will continue to not be subject to the prospectus provisions in their jurisdiction of incorporation (proposed subsection 708(19)).

Options

8.34 The Bill will apply the fundraising provisions to options to acquire shares by way of issue (proposed paragraph 700(1)(e)). It is currently unclear whether the definition of securities in subsection 92(2) of the Law includes rights or options over unissued securities. A person may not acquire a legal or equitable interest in an unissued share until it is issued, and therefore the definition of unit may be interpreted to not include options over unissued shares (see, for example, Exicom Pty Ltd v Futuris Corporation Ltd (1995)
18 ACSR 404 ). However, as the offer of a right or option in relation to an unissued security constitutes an offer of the underlying security, a prospectus will generally be required in relation to that offer: AG (NSW) v Mutual Home Loans Fund of Australia Ltd
[1971] 2 NSWLR 162 . As the right or option is not itself a security, currently the prospectus only has to contain information about the underlying security and not about the option itself.

8.35 The fundraising provisions will also apply to options to acquire shares by way of transfer (proposed paragraph 700(1)(e)). Under the existing law, it appears that such options are only securities if they fall within the definition of unit. However, where options relate to a particular class of securities rather than particular identifiable securities, it is generally accepted that the instrument will not constitute a right or interest over a security and hence will not be a unit. It seems anomalous that options over identified securities should be subject to the fundraising provisions but offers of options over a class of securities are not. The Bill will rectify this.

8.36 One consequence of the change is that it clarifies the application of the fundraising provisions to offers to subscribe for long-dated options over quoted securities (generally marketed as warrants). Issuers of listed warrants are currently required to provide Offering Circulars containing prospectus-type disclosure: ASX Business Rule 8.7. While at present a prospectus will not be required for a direct offer of an existing quoted security, a disclosure document is proposed to be required in relation to warrants because of the additional need of investors to make an assessment of the capacity of the party issuing the option to meet its obligations under the option.

8.37 It will be made clear that options are securities in their own right for both the issue and transfer of securities. As a result, the fundraising provisions will ensure that information about the options themselves as well as any underlying securities will be disclosed when required (proposed section 710). This will ensure that investors receive adequate information in relation to fundraising involving options where the bulk of the consideration is obtained through the option premium.

8.38 As at present, the fundraising provisions will apply in relation to offers of securities rather than the issue of securities. Accordingly, a disclosure document will be required for the offer of options but not for exercise unless there is a further offer made at that point (proposed section 702). While investor protection considerations suggest that a prospectus should be required upon the exercise of long-dated options where the bulk of the consideration is paid upon exercise, this approach has not been proposed because of the significant practical difficulties it would create, particularly where options may be exercised at any stage over their lifetime.

8.39 The fundraising provisions will not apply to options to sell a security, known as a put option. This is because the fundraising provisions seek to regulate people who make securities available. Put options, however, are issued by the person who has the obligation to buy the security and are more appropriately regulated by other provisions of the Law.

8.40 As at present, exchange traded options, namely those options quoted on the Australian Options Market, will also not be subject to the fundraising provisions (proposed subsection 700(1)). These options can be distinguished from other options as they are subject to clearing arrangements which provide investors with an added degree of protection. Similarly, the fundraising provisions will not apply to futures contracts over securities (proposed subsection 700(1)).

8.41 The CLERP Financial Markets and Investment Products paper proposed that a consistent and comparable disclosure regime for all financial instruments, other than securities which are subject to the fundraising provisions, be developed (proposal no 7). There is a question whether some of the securities covered by the disclosure obligations of the draft fundraising provisions should instead be covered by the disclosure regime developed as a result of the CLERP Financial Markets and Investment Products paper.

8.42 In the interim, it is appropriate that these products are subject to the fundraising provisions, with ASIC being able to provide relief from certain requirements where appropriate. Accordingly, it is recognised that the application of the fundraising provisions to some securities will be examined in developing provisions implementing the CLERP Financial Markets and Investment Products paper.

General disclosure requirement

8.43 As noted above, the Bill will retain the requirement that a prospectus contain all information that investors and their professional advisers would reasonably require to make an informed investment decision (proposed section 710). However, the provision has been recast to overcome ambiguities in the language of the existing provision. Under the redrafted provision, a prospectus must contain:

•

all the information that a reasonable investor would both reasonably require and reasonably expect to find in the prospectus, having regard to what investors could reasonably be expected to already know, and

•

all the information that professional advisers would both reasonably require and reasonably expect to find in the prospectus, having regard to what professional advisers could reasonably be expected to already know.

8.44 The general disclosure test will only require information to be included if certain persons actually know or ought reasonably to have obtained the information by making enquiries (proposed subsection 710(1)). The persons whose knowledge is relevant include directors and proposed directors of the body offering the securities and others who are involved in preparing the prospectus (proposed subsection 710(3)).

8.45 For an offer to issue or transfer a share, debenture or interest in a managed investment scheme, the draft provisions will require the person making the offer to include information that would allow an investor and a professional adviser to make an informed assessment of:

•

the rights and liabilities attaching to the securities offered; and

•

the assets and liabilities, financial position and performance, profits and losses, and prospects, of the body issuing the securities (proposed subsection 710(1), item 1).

8.46 This substantially retains the current position. However, to be consistent with the financial reporting requirements in Chapter 2M of the Law, the Bill includes a requirement that the company disclose its financial performance. The use of these words is not intended to mean that an issuer must always include forward looking statements in a prospectus. The inclusion of forward looking statements is a matter for the issuer, having regard to its obligations under the general disclosure test.

8.47 Consistent with their treatment as securities in their own right, a prospectus for an offer to grant or transfer an interest, option or warrant over securities will also need to contain information on the rights and liabilities attaching to the interest, option or warrant. This ensures that investors can assess the value of both the security and the underlying securities. Information will be required about the capacity of the person offering options or warrants to complete the contracts so that investors can assess the counterparty risk (proposed subsection 710(1), item 2). However, the prospectus will only be required to contain information on the body issuing the underlying securities where the person making the offer will have access to the information or in the case of an indirect issue with an anti-avoidance purpose (proposed subsection 710(1), item 2).

8.48 The Law currently allows a prospectus to omit information previously disclosed to the market under any law or the business rules or listing rules of a securities exchange (current paragraph 1022(3)(d)). However, in practice, persons issuing prospectuses are reluctant to omit the information because there is uncertainty about the meaning of the provision. Also, the provision has been supplanted by the concessional requirements for continuously quoted securities which allow a transaction specific prospectus to be prepared and the short form prospectus provisions (proposed sections 712 and 713). Consequently, the Bill will repeal the provision ensuring that the prospectus contains information reasonably required for an informed investment decision.

8.49 Current paragraph 1022(3)(e) allows a prospectus to omit information known to investors or their professional advisers because of any Commonwealth, State or Territory legislation. However, the effect of this provision is uncertain. One view is that the paragraph allows relevant statutory provisions to be omitted from a prospectus. Another view is that the paragraph allows information made available to investors under any law to be excluded from the prospectus. The Bill will repeal the provision as it is incorrect in principle. It is unclear why information of this kind should not be made available in a prospectus if it is reasonably required by investors to make an informed decision about the offer. The extent to which this information should be included in a prospectus should therefore be determined in accordance with the general disclosure test in proposed section 710.

Specific disclosure requirement

8.50 Where persons involved in the preparation of a prospectus have an interest in the outcome of the offer, the draft provisions will require these interests to be disclosed. This will extend the current disclosure requirement for directors, proposed directors and promoters in the case of schemes (current subsection 1021(6) and regulation 7.12.11), as other persons involved in the preparation of a prospectus may have an equal, if not greater, interest in the outcome of the offer. The Bill will also cover persons named in the prospectus as performing a professional, advisory or other function in connection with the preparation or distribution of the prospectus, and if the securities are interests in a managed investment scheme the person or directors of a body that is making the interests available, promoters for bodies, stockbrokers and underwriters (proposed subsections 711(2)-(4)). Requiring the disclosure of all significant interests in the body or in the issue will provide a significant disincentive for persons involved in the offer to act improperly.

Offers of securities issued for resale

8.51 The Bill will provide that a disclosure document is required if a person offers securities for sale within 12 months after their issue and the body issuing the securities did so without a disclosure document and with the purpose of having the securities resold by the person to whom they were issued (proposed subsection 707(3)).

8.52 In the absence of evidence to the contrary, where securities are sold within 12 months of their issue, that issue will be regarded as having been for the purpose of resale (proposed subsection 707(4)). The body or the person who controls the body issuing the securities will have to show that there was no purpose of resale. The Bill will make it clear that the obligation to prepare a disclosure document is on the person offering the securities for sale. However, the directors of the issuing body or the controller must consent to the issue of the disclosure document (proposed section 720, item 3). After 12 months, the securities would be able to be traded freely in the market.

8.53 This anti-avoidance provision replaces current section 1030, which deems a document offering securities issued for the purpose of on-sale to be a prospectus issued by the corporation which issued the securities. Where securities are sold within 6 months of their issue, they are deemed to have been issued for the purpose of on-sale. The aim of section 1030 was to prevent avoidance of the prospectus provisions by issuing securities to an intermediary under one of the exclusions and the intermediary then on-selling the securities at large.

8.54 The Bill will rectify a number of problems which have been identified with the operation of current section 1030, including:

•

the indefinite tainting of securities issued for the purpose of resale (at present, whenever the securities are resold in the future, a prospectus is required);

•

the potential for subsection 1030(1A), which provides an exemption for offers made on the Stock Exchange Automated Trading System screens, to undermine the anti-avoidance purpose of section 1030;

•

uncertainty whether the resale purpose is that of the issuer or the seller; and

•

deeming a sale document to be a prospectus, with the corporation potentially being made liable for the contents of a document prepared by another party, and the persons purchasing the securities to be subscribers, with uncertainty whether the rules relating to offers for subscription apply.

Secondary sales notices

8.1 The Bill will remove the existing disclosure requirements for offers of unquoted securities for sale other than by a person who controls the body (current section 1043D).

8.2 Current sections 1043B and 1043D require the person offering the securities to lodge with ASIC a notice containing certain information about the securities, the seller, the corporation and its directors. The notice only contains information which is already publicly available. Consequently, the preparation of the notice imposes additional costs on the seller of the securities, without providing purchasers of securities with any additional information. The regulation of these offers will therefore be governed by the general prohibitions on insider trading and misleading and deceptive conduct.

8.3 Where an offer of unquoted securities for sale is made by a person who controls the body, the Bill will require the person to prepare a disclosure document (proposed subsection 707(5)). Currently, the Law requires an offer of at least 30 per cent of a companys unquoted shares to be accompanied by a prospectus-type document (current section 1043C). This is consistent with equating a secondary sale by a controller with a primary offer of securities. A controller of a body will either have direct access to, or be in a position to obtain, the necessary information to prepare a disclosure document. This is readily apparent in relation to so called spin off floats where a body corporate sells off a business by a secondary sale of the shares of the subsidiary conducting the business.

8.4 The Bill will make a number of other important changes to the disclosure requirements for these offers.

•

It will replace the current arbitrary 30 per cent threshold with a test based on control. The current 30 per cent threshold is effectively a proxy for control of the company. However, the disclosure requirements can be avoided where the person who controls the company limits any secondary sales of shares to less than 30 per cent. The Bill will overcome this by adopting the definition of control in proposed section 50AA.

•

It will extend the disclosure requirements to off-market sales of quoted securities by controllers.

•

It will extend the disclosure requirements to securities. Currently, the provisions only apply to voting shares (current subsection 1043C(1)).

•

The exception for 20 issues in 12 months will not be available to a controller effecting an indirect off-market sale under proposed subsection 707(5) (proposed subsection 708(1)).

Restrictions on issuing securities

8.1 The Bill will remove procedural difficulties created by the current restrictions on issuing securities in Divisions 2 and 3 of Part 7.12. In particular, the current rules are inconsistent and are poorly integrated with the provisions on supplementary and replacement disclosure documents and out of date application forms.

8.2 The Bill will replace current sections 1024E, 1028, 1031 and 1035 to 1043. The Bill will restate the current sections in plain English to clarify their operation and the choices available to the issuer (proposed sections 723, 724 and 725).

8.3 A person will be prohibited from offering securities under a disclosure document if there is a misleading or deceptive statement in, or omission from, the disclosure document, or a new circumstance has arisen which should have been included in the disclosure document. In addition, a person cannot offer securities where a condition in the disclosure document has not been met, for example, a shortfall on the minimum subscription of shares (proposed subsection 723(2)), or a failure to obtain quotation on a securities exchange (proposed subsection 723(3)). A person cannot offer securities where the disclosure document passes its expiry date (proposed section 725).

8.4 Where a person offering securities ceases to comply with any of these requirements, the Bill will provide uniform procedures for dealing with any unprocessed application forms. The person will be able either to:

•

repay the application money received;

•

continue to hold the application money in trust and issue a supplementary, replacement or new disclosure document and give the investor an opportunity to withdraw their application and be repaid; or

•

issue the securities and give the investor a supplementary, replacement or new disclosure document and an opportunity to return the securities and be repaid (proposed sections 724 and 725).

8.5 Application money is to be held on trust (proposed section 722). The Bill will remove the requirement that the trust account be held at a bank. The money will be able to be held by any financial institution.

13 month prospectus life

8.6 Currently, the maximum period during which a prospectus can remain on issue is 12 months. This requirement has been criticised by continuous issuers because in practice a prospectus must be prepared and lodged before the expiration of the 12 month period to ensure that a current prospectus is always on issue. The Bill will extend that period to 13 months to facilitate issuers rolling over prospectuses on an annual basis (proposed subsection 711(6)).

Clearing house

8.7 An amendment will also clarify the entitlement of a clearing house to realise securities lodged by clients for margin obligations. The treatment of such securities will be brought into line with the existing treatment, under paragraphs 1209(5)(a) and (b) of the Corporations Law, of cash lodged by clients in similar circumstances. In so doing it will overcome any existing uncertainty as to whether a clearing house has constructive notice that a client has an equitable interest in those securities (proposed Schedule 6, item 15).

Debentures

8.8 To complete the reform of Part 7.12, new Chapter 2L will replace the current debenture provisions in Division 4 of Part 7.12. The Bill will rewrite the debenture provisions to streamline and update them to reflect actual commercial practices.

Definition of debentures

8.9 The current definition of debenture reflects the common law definition which is based on a class of documents issued by a company acknowledging or creating a debt. However, not all instruments which satisfy these criteria are necessarily debentures and the Law currently excludes a number of items from the definition (current section 9).

8.10 To facilitate electronic commerce in debentures, the definition of debenture will be recast. The definition will focus on the legal right to repayment of the debt, rather than on the piece of paper evidencing the debt. The Bill will define a debenture as a chose in action (or property right), which more accurately reflects the true nature of debentures (proposed Schedule 3, Part 2, item 78). This will also bring the definition of debenture more closely into line with the definition of securities.

8.11 The Bill will retain the current exclusions from the definition of debenture (proposed Schedule 3, Part 2, item 78), except the exclusion in relation to current section 1023, which is repealed by the new fundraising provisions.

What can be called debentures

8.12 The Law currently prevents issuers from describing a document evidencing a corporations debt as a debenture unless the deposit or loan is secured. Where the loan is unsecured, it must be referred to as an unsecured note (current section 1045). This provision will be rewritten and retained by the Bill (proposed section 260GH).

Definition of borrower and guarantor

8.13 The Bill will replace the terminology used in the current debenture provisions of borrowing corporation and guarantor corporation with borrower and guarantor (proposed Schedule 3, Part 2, items 76, 77, 82 and 83). This reflects the application of the provisions to debentures of a body rather than debentures of a corporation and is consistent with the application of the new fundraising provisions to bodies.

When an offer of debentures needs a trust deed and trustee

8.14 The Bill will retain the current requirements for a trust deed and a trustee where a borrower makes a public issue of debentures. Where an offer of debentures needs a disclosure document under the fundraising provisions or is made as consideration for an off-market takeover bid, or an issue of debentures is made under a compromise or arrangement under Part 5.1, the body making the offer or issue must enter into a trust deed, appoint a trustee and comply with Chapter 2L (proposed section 260FA).

The Trust Deed

8.15 The Bill will require the trust deed to contain a provision specifying the property that is held on trust under the deed is in the nature of a bundle of rights. This provision has been inserted to avoid any ambiguity concerning the actual nature of the trust property (proposed section 260FB).

8.16 The Bill will no longer require trust deeds to contain a limitation on the amount that the borrower may borrow under the deed or the debentures. The current requirement contained in subsections 1054(1) and (2) is considered meaningless as it does not provide any guidance as to the extent or nature of the limitation which is required. It is also considered possible to reduce a corporations capacity to pay back the debt under the debenture by, for example, creating prior or equal ranking charges.

8.17 The removal of the rule against perpetuities for issues of debentures in current section 1050 has been restated without change (proposed subsection 1481(1) and Schedule 3, Part 2 item 87). The rules on the redemption of debentures in current section 1051 have been restated and moved into the winding up provisions of the Law (proposed section 1481(2) and Schedule 3, Part 2 item 103 section 563AAA).

The Trustee

8.1 The Bill will retain the current categories of bodies corporate who are eligible to appointed as trustee (current subsection 1052(1), proposed subsection 260FC(1)). ASIC will continue to have the ability to approve other bodies corporate as eligible trustees (proposed paragraph 260FC(1)(f) and section 260MB).

8.2 The Law currently contains a complicated list of situations in which a person cannot be a trustee for an issue of debentures (current subsections 1052(5) to (7)). The current rules are based on an arbitrary set of situations. The Bill will replace the current rules with a simple conflict of interest test (proposed subsection 260FC(2)). The new test reflects the trustees common law fiduciary duty to avoid conflicts of interest.

8.3 The rules on the appointment of a replacement trustee in current section 1053 are replicated with only one significant change. The Law currently allows, but does not require, a borrower to appoint a new trustee where the existing trustee retires. The Bill removes this anomaly by placing a positive obligation on the borrower to replace a trustee where they become incapable of continuing as trustee (proposed sections 260FD, 260FE and 260GD). This is intended to ensure that there is a validly appointed trustee at all times.

Specific performance of debenture contracts

8.4 The Bill will remove the specific provision allowing a contract for debentures to be enforced by an order for specific performance (current section 1049).

8.5 This provision is no longer necessary in light of the development of the common law in this area. It was initially inserted into the Law in response to a Privy Council decision preventing an order of specific performance for a contract to lend money to a company upon the security of debentures to be issued by the company: The South African Territories Ltd v Wallington
[1898] AC 309 . The common law position has subsequently changed and a series of decisions have held that specific performance will be available in relation to these contracts where an award of damages is not an adequate remedy (see, for example, Wight v Haberdan Pty Ltd
[1984] 2 NSWLR 280 ).

Debenture issues for particular purposes

8.6 The Law currently specifies a number of requirements with which a borrower and trustee must comply where debentures have been issued and money raised for a particular purpose (current section 1060). This provision is considered outdated and will be repealed for the following reasons:

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there is no statutory requirement to state in the disclosure document a purpose for which the money is to be applied (in practice, purposes are seldom, if ever, stated);

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additional statutory requirements are not essential where a purpose for the debenture issue is stated in the disclosure document (what is essential is that the issuer complies with the agreed terms of the debenture and their duties under the deed); and

•

there is no similar statutory requirement in the fundraising provisions covering cases where a purpose for the share issue is set out in the disclosure document.

Borrowers and guarantors duties

8.1 Current section 1054 requires a debenture trust deed to contain covenants which impose obligations on the borrower and the guarantor. The Bill will restate most of these covenants as direct statutory obligations (proposed sections 260GA and 260HA). This will avoid the need for each trust deed to include these covenants and will place borrowers and guarantors under a statutory obligation to comply with each covenant. The imposition of the obligations in terms of direct statutory obligations is consistent with the approach taken under Chapter 5C of the Law in relation to responsible entities.

8.2 For example, a borrower will be under a duty to carry on and conduct its business in a proper and efficient manner, to provide a copy of the trust deed to debenture holders and the trustee, to make its financial records available for inspection by the trustee and to notify the trustee about any charges it creates (proposed sections 260GB to 260GF). The borrower is also under a duty to call a meeting of unit holders where the holders of 10 per cent or more of the nominal value of the issued debentures direct the borrower to call a meeting (proposed section 260KA).

8.3 A guarantor will be under a duty to carry on and conduct its business in a proper and efficient manner, to make its financial records available for inspection by the trustee and to notify the trustee about any charges it creates (proposed sections 260HB and 260HC).

8.4 If a borrower or guarantor is under external administration or has a receiver appointed, it will be exempt from complying with some of its duties (proposed sections 260GG and 260HD). This is consistent with exemptions in current subsection 1058(11).

8.5 The Bill will create a specific offence if the borrower or guarantor intentionally or recklessly contravene any of the statutory covenants (proposed sections 260GI and 260HE).

8.6 Borrowers will be prohibited from describing debentures as mortgage debentures or debentures unless the debentures are secured by a first mortgage over land or a charge over property of the borrower or any of the guarantors (proposed section 260GH). If an issue of debentures does not have either of these forms of security, borrowers will only be able to describe the debentures as unsecured notes or unsecured deposit notes. This reflects the existing prohibition in current section 1045.

8.7 Borrowers will continue to be required to maintain registers of debentures. The provisions applicable to registers of debentures maintained by companies were reformed by the First Corporate Law Simplification Act 1995 and now appear at current sections 168 to 178. The remaining provisions in current section 1047 apply to registers of debentures maintained by non-companies. The Bill will replace these remaining provisions and bring them into line with the provisions applicable to registers of debentures maintained by companies (proposed Schedule 3, Part 2, item 102 sections 601CZA to 601CZD).

Reporting requirements of borrowers and guarantors

8.8 The quarterly reporting requirements for borrowers and guarantors contained in current section 1058 will be retained (proposed section 260GF). These requirements are intended to ensure that borrowers focus and report on compliance with their obligations under the Law every 3 months. All other special reporting requirements in current section 1058 will be repealed.

8.9 Current section 1058 requires borrowers which are holding companies to lodge audited annual and half-year accounts consolidating any guarantor subsidiaries and requires guarantors to lodge audited annual and half-year accounts and balance sheets (and provide copies to the trustee). Borrowers that are locally incorporated disclosing entities will be subject to half-year and annual reporting requirements under Chapter 2M of the Law. Guarantors that are companies will also be subject to annual reporting requirements under that Chapter.

8.10 To ensure that there is no regulatory gap in relation to foreign borrowers and guarantors, section 601CD of the Law will be extended to apply to these bodies (proposed Schedule 3, Part 2, item 101). This section currently requires registered foreign companies to lodge with ASIC a balance sheet and profit and loss account complying with the requirements of the law in the companys home jurisdiction. Half-year accounts of these bodies will no longer be required.

Trustees duties

8.11 The Bill will restate most of the duties imposed on trustees by current section 1056 (proposed section 260JA). However, the current duty of the trustee to satisfy itself that the debenture prospectus does not contain any false or misleading statements is omitted. This is consistent with the fundraising reforms which ensure that liability for false or misleading statements in a disclosure document only attach to persons involved in the preparation of the disclosure document.

8.12 The Bill will restate current section 1062, setting out when a trustee can properly be released from liability for something done or omitted to be done (proposed section 260JB and subsections 1481(3) and (4)). The Bill will also clarify that the trustee is not liable for anything done by it in accordance with a direction given by a meeting of debenture holders (proposed section 260JC).

ASIC and court powers

8.1 ASIC has the power under current section 1084 to exempt a person from the debenture provisions or modify the application of the debenture provisions. The Bill will retain this power (proposed section 260MA).

8.2 Currently the courts powers in relation to debentures are scattered throughout Division 6 of Part 7.12. The Bill will restate the courts powers and relocate them in one place (proposed sections 260NA and 260NB). The Bill will make a number of changes which streamline the courts powers and the processes involved in obtaining a court order.

8.3 The most significant change will be to clarify the ability of ASIC and the trustee to apply to the court. Under the current law, if the trustee believes the borrower or any of the guarantors will not be able to repay the debentures, the trustee may apply to ASIC for certain orders or may apply to the court for remedial orders. ASIC may even direct the trustee to apply to the court (current subsections 1056(2) to (8)).

8.4 The Bill will remove the complexity of the current procedures for applying to the Court. The Bill gives ASIC and the trustee a clear right to apply to the court for remedial orders. The right to apply to the court can be exercised at any time, and does not require the trustee to believe the borrower or any of the guarantors will not be able to repay the debentures (proposed subsection 260NB(1)). The current power of ASIC to make an order restricting the borrowers advertising for deposits and restricting its borrowing have been given to the court (proposed paragraphs 260NB(1)(e) and (f)).

8.5 The courts current power to order that irredeemable debentures are enforceable immediately is subject to a number of conditions (current section 1055). The Bill will remove these conditions (proposed paragraph 260NB(1)(c)). Placing conditions on the courts powers is unnecessary given the overriding requirement that the court have regard to the interests of each of the parties.

8.6 The trustees ability to apply to the court for directions in current subsection 1057(1) has been restated without change (proposed section 260NA). The courts power to order a meeting of debenture holders in current subsections 1057(2) and (3) has also been restated without change (proposed section 260KC).

Civil liability

8.7 The current location of the debenture provisions in Part 7.12 means that a person who suffers loss or damage as a result of a contravention of the debenture provisions can recover the amount of their loss or damage under section 1005. As the debenture provisions will be moved to Chapter 2L, that Chapter will contain a civil liability provision which restates current section 1005 (proposed section 260L).