#7097 - Corporations Power - Constitutional Law

Under CC s 51(20), the Cth has the power to make laws with respect to foreign corporations and trading or financial corporations (‘constitutional corporations’) formed within the limits of the Commonwealth.

[where relevant] The corporations power cannot be used to regulate the formation (incorporation) of companies (Incorporations Case).

• Cth will argue [the law] is valid under the corporations power.

• [Corporation X] will argue

  • it is not valid

  • that [corporation] is not itself a constitutional corporation

A law will be valid enacted under s 51(20) if it applies to constitutional corporations and regulates activities within the scope of the corporations power.

• Additionally, even if valid, if the affected corporation, here [corporation] is not a constitutional corporation, the law will not apply to it.

The law must apply to foreign, trading or financial corporations to be valid under s 51(20).

• While financial corporations may also be trading corporations in most cases, s 51(20) does not need a corporation to be designated as one or the other (Fencott v Muller).

• If the law applies to a class of corporation generally: Here, the law clearly applies to [type of corporation], as [part of legislation referring to type of corp].

  • [X] may seek to argue that it is not a [type of corp] and so avoid the effect of the law.

• If the law applies to a particular corporation: Here, the law is expressed to apply to [X]. For the law to be valid, [X] must be a constitutional corporation.

A foreign corporation is any corporation incorporated overseas. [Note if X incorp overseas]

This will depend on the current activities test, under which a corporation is a trading corporation if a substantial or sufficiently significant proportion of its activities are trading activities (Adamson/Tasmanian Dams).

• The fact that a corporation is not-for-profit does not mean it is not a trading corporation (Adamson)

• Statutory corporations (created by legislation) can still be trading corporations (Tasmanian Dams)

• Test is presumed to cover corporate bodies incl schools, universities, child care centres, hospitals, charities, no-profit organisations and various other incorporated State statutory bodies.

• POLICY: Note criticisms of the current activities test: it is very broad and potentially includes most Australian corporations in the definition of trading or financial corporations (Tas Dams, SSB, Adamson). Inactive corporations will largely be included also (Fencott). In the recent case of Australian Workers’ Union of Employees Queensland v Etheridge Shire Council (2008), a single Federal Court judge, Spender J, found that the correct test was that a corporation is a trading/financial corporation if its ‘predominant and characteristic’ activity was trading or financial activity (per Barwick CJ in St George County Council). While this is only a single judge, this case shows it is not out of the question that such test may be applied here.

Test

1. Does the corporation engage in trading activities?

   • Trading activities are revenue generating activities (Adamson)

2. Is the proportion of trading activities substantial or sufficiently significant?

   • This is a question of degree; however, the HCA has never clarified the precise meaning of substantial or sufficient significance (unsure etc if 20-30% significant?)

   • A corporation that engages in slight trading activities or trading activities incidental to some other purpose (such as religion (churches) or education (schools)) will not be a trading corp (Mason J in Adamson).

This will depend on the current activities test: a corporation will be a financial corporation if a substantial or sufficiently significant proportion of its activities are financial activities (State Superannuation Board v Trade Practices Commission).

• Note criticisms of the current activities test: it is very broad and potentially includes most Australian corporations in the definition of trading or financial corporations (Tas Dams, SSB, Adamson). Inactive corporations will largely be included also (Fencott). In the recent case of Australian Workers’ Union of Employees Queensland v Etheridge Shire Council (2008), a single Federal Court judge, Spender J, found that the correct test was that a corporation is a trading/financial corporation if its ‘predominant and characteristic’ activity was trading or financial activity(per Barwick CJ in St George County Council). While this is only a single judge, this case shows it is not out of the question that such test may be applied here.

Test

1. Does the corporation engage in financial activities?

   • Financial activities are transactions where finance is the subject of the transaction (Ku-ring-gai)

     • Eg borrowing or lending (Ku-ring-gai)

     • Investing funds (State Superannuation Board)

2. Is the proportion of financial activities substantial or sufficiently significant?

   • Slight/incidental financial activities will not be substantial enough

Whether ‘shelf companies’ (incorporated but inactive corporations) are trading or financial corporations is not decided by the current activities test (since there are no activities), but instead by the purpose test. This test involves examining the corporation’s constitution (memorandum and articles of association etc) to decide on the purpose for which it was established (Fencott v Muller). If it was established to engage in trading or financial activities, it is a trading or financial corporation.

• Criticisms of this test: it is too broad, since a corporation’s memorandum of association commonly includes a wide range of objects to prevent restrictions on its future capacities (minority in Fencott).

ANSWER: According to the above analysis (choose one of the following):

1. The law applies to constitutional corporations, namely [type] corporations, of which [X] is one. Accordingly, the next question must be considered.

2. The law applies to constitutional corporations, but [X] is not a constitutional corporation. However, if I am wrong, the next question must be considered.

3. The law does not apply to constitutional corporations and is therefore invalid. However, if I am wrong, the next question must be considered.

4. The law does not apply to constitutional corporations, and in any case, [X] is not a constitutional corporation. However, if I am wrong, the next question must be considered.

Different principles apply to decide this question, depending on whether the law is regulating a corporation or natural persons. Here, since the law is

• [how the law is affecting][corporation X] it would appear it is regulating corporation/s.

• [how the law is affecting] [person Y] it would appear that it is regulating natural person/s.

Where a law regulates the activities of constitutional corporations themselves (ie the direct scope of the power is exercised), the object of command test states that there are no limits to the kinds of activities may be regulated (Work Choices).

• There is one exception, in that, based on the wording of s 51(2) (‘formed within the Commonwealth’), corporations power cannot be used to regulate the formation (incorporation) of companies (Incorporations Case).

• Work Choices decided the scope of the corporations power after a long period of debate on whether a narrow view or the broad view now adopted was the correct view (see eg, Fontana, Tasmanian Dams).

• Kirby J in Work Choices thought that the scope of s 51(20) should be impliedly limited by s 51(35) in cases relating to the industrial disputes of constitutional corporations, since the latter section limited the Cth’s power in respect of IR to conciliation and arbitration of interstate disputes. They thought that s 51(20) could not be used to avoid the safeguards of s 51(35). This argument was rejected by the majority.

• PROBLEMS WITH KIRBY J’S VIEW

  • HCA has accepted that where Cth powers positively exclude power over certain things, other powers should not be interpreted as allowing the Cth to regulate/control those things. S 51(35) does not contain a positive exclusion.

    • S 51(13): positively excludes Cth power over banking carried out by a State government corporation or instrumentality (except interstate)

    • S 51(14): positively excludes Cth power over insurance provided by a State government corporation or instrumentality (except interstate)

    • S 51(31):the Cth cannot use another power to get around having to provide just terms for acquisition of property

      • It could be argued that s 51(35)’s presence means the Cth cannot use another power to get around the limits in s 51(35), despite the absence of a positive exclusion (since this was accepted in relation to s 51(31), which also does not contain a positive exclusion). However, s 51(31) has always been treated by the HCA as intending to positively exclude the power to acquire property on unjust terms, and so the situations are not exactly analogous.

  • S 51(35) was not accepted as limiting the EA power (ILO Case); similarly the trade and commerce power has not in the past been held to limit the corporations power.

  • Arguably trying to limit the power in this way is a resurrection of the reserved...