House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Josh Frydenberg MP)

Chapter 18 Australian Business Growth Fund (Coronavirus Economic Response Package) Bill 2020

Outline of chapter

18.1 The Business Growth Fund Bill authorises investment by the Commonwealth in the Australian Business Growth Fund and appropriates $100 million for that purpose.

Context of the measure

18.2 A challenge for SMEs seeking to grow can be access to capital. In 2018, the Reserve Bank of Australia and the Small Business and Family Enterprise Ombudsman released separate reports outlining the difficulties Australian SMEs face in accessing finance.

18.3 The Reserve Bank of Australia found that banks were reluctant to finance start-ups given the high risks involved. Entrepreneurs found it difficult to borrow more than around $100,000 on an unsecured basis to support their day-to-day trading activities. In addition, medium-sized businesses reported that it was hard to obtain additional finance once they have pledged all of their real estate as collateral. As a result, many entrepreneurs delay expanding their businesses until the expansion can be funded from retained profits.

18.4 Both the Reserve Bank of Australia and Small Business and Family Enterprise Ombudsman reports concluded that certain business models are not suited to debt finance as there is often a distinct time gap between investing in a business's future growth and realising sufficient profits to repay the debt. Equity financing would often be more appropriate for these business models. However, this is not always an attractive option for SMEs because of the loss of management control of the enterprise if traditional private equity funds are used.

18.5 Australia currently lacks a patient capital market for SMEs. Patient capital can provide entrepreneurs the finance needed to expand without relinquishing control of their business. Patient capital equity funds established in the United Kingdom and Canada have shown that there is a need for this type of finance and that patient capital investment can be profitable for investors.

18.6 The Government will help SMEs grow by co-investing with other financial institutions to establish an Australian Business Growth Fund that will provide equity finance to SMEs across a range of industries and locations.

18.7 The Government has recognised the potential for an Australian Business Growth Fund to support SMEs during economic conditions as result of the impact of the Coronavirus. As a result, the Government has extended the intended use of an Australian Business Growth Fund to enable an increased availability of equity finance for SMEs during the economic impact of the Coronavirus.

18.8 The Business Growth Fund Bill also gives effect to amendments to the Australian Business Growth Fund Bill 2019 as agreed to by the Senate.

Summary of new law

18.9 Part 1 of the Business Growth Fund Bill sets out when the Business Growth Fund Bill commences, the objects of the Business Growth Fund Bill, definitions of key terms used in the Business Growth Fund Bill, and the application of the Business Growth Fund Bill. This Part also contains a simplified outline of the Business Growth Fund Bill.

18.10 Part 2 of the Business Growth Fund Bill authorises the Minister to invest in the Australian Business Growth Fund and places limitations on the exercise of the Minister's investment powers.

18.11 Part 3 of the Business Growth Fund Bill contains administrative provisions that support and govern the Minister's powers to invest in the Australian Business Growth Fund.

Detailed explanation of new law

Part 1-Preliminary provisions

Short title

18.12 The Business Growth Fund Bill, once enacted, may be cited as the Australian Business Growth Fund (Coronavirus Economic Response Package) Act 2020. [Section 1 of the Business Growth Fund Bill]

Commencement

18.13 The Business Growth Fund Bill will commence on the day after it receives Royal Assent. [Section 2 of the Business Growth Fund Bill]

Objects and simplified outlines

18.14 The object of the Business Growth Fund Bill is to increase investment in Australian SMEs by the Commonwealth participating in, and investing in (together with other persons), the Australian Business Growth Fund in accordance with the Business Growth Fund Bill. [Section 3 of the Business Growth Fund Bill]

18.15 The Business Growth Fund Bill contains a simplified outline, as do Parts 2 and 3 of the Business Growth Fund Bill for those individual parts. The simplified outlines are included to assist readers to understand the substantive provisions of the Business Growth Fund Bill. These outlines are not intended to be comprehensive. It is intended that readers should rely on the substantive provisions of the Business Growth Fund Bill. [Sections 4, 9 and 17 of the Business Growth Fund Bill]

Definitions

18.16 The Business Growth Fund Bill includes definitions of expressions used in the Business Growth Fund Bill. Key definitions are explained throughout this explanatory memorandum as part of the explanation of the substantive provision to which they relate. [Section 5 of the Business Growth Fund Bill]

Crown and geographic application

18.17 The Business Growth Fund Bill, once enacted, will bind the Crown in each of its capacities. However, the Business Growth Fund Bill will not make the Crown liable to be prosecuted for an offence. [Section 6 of the Business Growth Fund Bill]

18.18 The Business Growth Fund Bill, once enacted, will extend to every external Territory and will extend to acts, omissions, matters and things outside Australia. [Sections 7 and 8 of the Business Growth Fund Bill]

Part 2-Commonwealth investment in the Australian Business Growth Fund

18.19 The Business Growth Fund Bill authorises investment by the Commonwealth in a Corporations Act company that will become the Australian Business Growth Fund.

18.20 This investment may be given effect by the Minister, on behalf of the Commonwealth, doing one or more of the following:

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forming, or participating in the formation of, a Corporations Act company; [Paragraph 10(1)(a) of the Business Growth Fund Bill]

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acquiring shares (either by purchase or subscription) in a Corporations Act company or becoming a member of a Corporations Act company; [Paragraph 10(1)(b) of the Business Growth Fund Bill]

•

acquiring debentures of a Corporations Act company. [Subsection 10(2) of the Business Growth Fund Bill]

18.21 A Corporations Act company is defined as a body corporate that is incorporated, or is taken to be incorporated, under the Corporations Act. Debenture has the same meaning as in the Corporations Act. [The definitions of 'Corporations Act company' and 'debenture' in section 5 of the Business Growth Fund Bill]

18.22 These powers can only be exercised in relation to one company. Once these powers are exercised in relation to a company, that company is known as the Australian Business Growth Fund or Fund for the purposes of the Business Growth Fund Bill. [The definitions of 'Australian Business Growth Fund' and 'Fund' in section 5, and subsections 10(3) and (4) of the Business Growth Fund Bill]

18.23 The Minister may, on behalf of the Commonwealth, enter into arrangements with the Fund, a member of the Fund, or a subsidiary of the Fund, relating to the operations of the Fund if the arrangements would not result in the Fund becoming a Commonwealth company. Subsidiary has the same meaning as in the Corporations Act. Commonwealth company has the same meaning as in the PGPA Act. [The definitions of "Commonwealth company" and "subsidiary" in section 5, and section 11 of the Business Growth Fund Bill]

18.24 The Minister has the rights, responsibilities, duties and powers associated with being a member or shareholder of the Fund, holding debentures of the Fund or being a party to an arrangement with the Fund. [Section 12 of the Business Growth Fund Bill]

18.25 The Business Growth Fund Bill primarily relies on the power of the Parliament to make laws with respect to:

•

'trade and commerce with other countries, and among the States';

•

the government of Territories;

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with respect to nationhood; or

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otherwise with respect to the executive power of the Commonwealth.

[Subsections 13(1) to (3) of the Business Growth Fund Bill]

18.26 Subsections 13(1) to (3) of the Business Growth Fund Bill are not intended to prevent the Fund from generating a commercial return. [Example to subsection 13(2) of the Business Growth Fund Bill]

18.27 The Minister is required to divest any shares in, or debentures of, the Fund as soon as practicable if these arrangements are not in place by the time the Fund starts making investments, or cease to be in place. [Subsection 13(4)]

18.28 The restrictions on the exercise of Ministerial powers apply equally to the exercise of the Minister's rights, responsibilities and duties under section 12. [Subsection 13(5) of the Business Growth Fund Bill]

18.29 The Minister must also ensure that the Fund does not become a Commonwealth company (see section 89 of the PGPA). This means that the Minister must ensure that the Commonwealth:

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does not control the composition of the Fund's board; and

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is not in a position to cast, or control the casting of, more than one half of the maximum number of votes that might be cast at a general meeting of the Fund; and

•

does not hold more than one half of the issued share capital of the Fund (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital).

[Section 14 of the Business Growth Fund Bill]

18.30 The provisions of Part 2 do not have the effect of limiting the executive power of the Commonwealth. [Section 15 of the Business Growth Fund Bill]

18.31 Rules can be made in relation to the exercise of rights, responsibilities, duties or powers by the Minister under the Business Growth Fund Bill. This power may be used particularly in the case where these powers are delegated. [Section 16 of the Business Growth Fund Bill]

Part 3-Miscellaneous provisions

Appropriation

18.32 The Consolidated Revenue Fund is appropriated to the extent of $100 million for the purposes of paying costs, expenses and other obligations incurred by the Commonwealth in connection with its investment in the Fund. This may include, for example, paying the Commonwealth's costs of acquiring shares in the Fund, or paying amounts payable under arrangements made with the Fund or its members. [Subsection 18(1) of the Business Growth Fund Bill]

18.33 There is a time limit on this appropriation. If no amounts are debited within 2 years after commencement, the appropriation ceases. However, if any amount is debited within the two-year timeframe, there is no time limit on debiting any remaining amounts of the $100 million appropriation. [Subsection 18(2) of the Business Growth Fund Bill]

Delegation

18.34 The Minister may delegate the Minister's powers, functions or duties under the Business Growth Fund Bill to:

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the Secretary of the Department; or

•

an SES employee, or an acting SES employee, in the Department.

[Subsection 19(1) of the Business Growth Fund Bill]

18.35 The Minister will not be able to delegate the power to make rules under section 22. The Minister will also not be able to delegate the power to delegate (see paragraph 34AB(1)(b) of the Acts Interpretation Act).

18.36 The delegate must comply with any relevant rules made by the Minister. [Subsection 19(2) of the Business Growth Fund Bill]

18.37 It is intended that the powers, functions and duties delegated under section 19 will only be delegated to officials in certain areas of the Department of the Treasury that are best placed to exercise those powers, or perform those functions or duties. This ensures that there is not a wide delegation of the Minister's powers, functions or duties under the Business Growth Fund Bill.

Governance

18.38 The Department's annual reports under the PGPA Act will be required to include a report on the operation of the Business Growth Fund Bill. [Section 20 of the Business Growth Fund Bill]

18.39 Three years after commencement, the Minister must cause a review of the operation of the Business Growth Fund Bill to be undertaken. The review must include:

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the effectiveness of the Business Growth Fund Bill in meeting the Business Growth Fund Bill's objects; and

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the effectiveness of any investment by the Commonwealth in the Fund in relation to the following:

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demand for equity investments by business;

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the impact of the creation of the Fund on the overall access to capital for small and medium Australian enterprises;

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the impact of the creation of the Fund on competition within capital markets in relation to small and medium Australian enterprises; and

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the operation of the rights and powers of the Commonwealth in relation to the governance arrangements of the Fund.

[Subsections 21(1) and (2)]

18.40 A written report of the review must be given to the Minister and must not include information that is commercially sensitive. The Minister must table a copy of the report in each House of the Parliament within 15 sitting days of that House. [Subsections 21(3) and (4) of the Business Growth Fund Bill]

Rules

18.41 The Minister will have the power to, by legislative instrument, make rules prescribing matters:

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required or permitted by the Business Growth Fund Bill to be prescribed by the rules; or

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necessary or convenient to be prescribed for carrying out or giving effect to the Business Growth Fund Bill.

[Subsection 22(1) of the Business Growth Fund Bill]

18.42 The rules cannot:

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create an offence or civil penalty;

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provide coercive enforcement powers;

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impose a tax;

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set an amount to be appropriated from the Consolidated Review Fund; or

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directly amend the text of the Business Growth Fund Bill.

[Subsection 22(2) of the Business Growth Fund Bill]

18.43 The only matter covered by paragraph 22(1)(a) is set out in section 16, relating to limitations on the Minister's rights, responsibilities, duties or powers under the Business Growth Fund Bill.

Application and transitional provisions

18.44 The Business Growth Fund Bill commences on the day after the Bill receives Royal Assent.