COMMONWEALTHCOMPANIES ANDTHE CONSTITUTIONAustralian Atomic Energy Commission.14 Theseexamplesserveto illustrate someofthe difficulties which will beencountered in this article. Suppose

COMMONWEALTH COMPANIES AND THECONSTITUTION

Nick Seddon and Stephen Bottomley*

INTRODUCTION

The Commonwealth has since federation formed and controlled many corporations,both statutory and those created under companies legislation.1 In this article weexplore the constitutional basis for the Commonwealth forming and controlling aCorporations Law company. This is a topic which has received little attention but it isbecoming increasingly clear that a proper understanding of the Commonwealth'sconstitutional position, when it forms and controls companies, is necessary because ofthe increased emphasis on commercialisation and entrepreneurialism and thesometimes drawn-out process of privatisation of Commonwealth bodies.

It is generally assumed in this article that the Commonwealth will make use of acompany for some commercial purpose, but we acknowledge this is not always thecase. It is possible, and quite common, for the Commonwealth to use a company for theimplementation of a policy or for some other governmental purpose not directlyrelated to commercial activity.2 The use of the company form by the Commonwealth inany situation raises important questions about government responsibility andaccountability. While we do not address these questions directly in this paper, ourunderlying concern nevertheless is that the use of a company by the Commonwealthfor ordinary commercial purposes has the potential to erode the notion ofgovernmental responsibility.

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Reader and Professor, respectively, Centre for Commercial Law, Australian NationalUniversity. The authors are indebted to the referee, .Professor George Winterton, DennisRose QC, Peta Spender, Christos Mantziaris, George Williams and Wayne Leach, a formerhonours student, for his unpublished Research Unit paper "Limitations on CommonwealthPower and Commonwealth Government-Owned Corporations: the Need forConstitutional X-Ray Vision".See G Sawer, "The Public Corporation in Australia" in W Friedmann (ed), The PublicCorporation - A Comparative Symposium (1954) at 9; M Sexton and L Maher, "CompetitivePublic Enterprises with Federal Government Participation; Legal and ConstitutionalAspects" (1976) 50 ALJ 209.Two examples: Commonwealth Hostels Ltd, which was the subject of discussion inCommonwealth v Bogle (1953) 89 CLR 229; and the Maritime Industry Finance Company Ltd(MIFCo), registered by the Commonwealth in 1998 to establish a loan facility for thepurpose of paying redundant waterside workers.

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The questions which are discussed in this article are whether there are limits on theCommonwealth's power to engage in commercial activity and to form companies and,if there are, what is the consequence of the Commonwealth either forming orcontrolling a company which is arguably beyond its constitutional power.Alternatively, if there are no limits on the power to incorporate a company, are thereany limits on what a Commonwealth controlled company can do? These questions arenot easily answered, given the fact that a company, once formed, is an autonomouslegal entity which is governed by the Corporations Law. The basis upon which a legalchallenge could be mounted to the existence, or activities, of that company is not easilyfound.

The Commonwealth's capacity to form companies comes from its executive powerunless there is legislation in place which modifies or replaces the executive power, inwhich case the legislation is the source of power to act.3 The executive power isacknowledged (rather than defined) in s 61 of the Constitution. Its scope in relation tothe Commonwealth's ability to make contracts or otherwise engage in commercialactivity has been the subject of much academic debate but little in the way of judicialpronouncement.

In the first part of this article the problems are looked at from the constitutionalperspective. The principal focus is on the scope of the executive power which will inmost cases be the source of the Commonwealth's power to form a company. Thegenerally accepted view is that the Commonwealth's executive power is limited but theexact nature of the limitation will be discussed below.

The premise on which this argument is pursued is that the Commonwealth cannotdo indirectly through the use of a company what it cannot do directly (though, as willbe seen, this is merely a starting point and its soundness has to be tested). Against thispremise is the fundamental point that the company is a separate legal entity from theCommonwealth. How can this entity, though spawned by the Commonwealth, runinto problems related to the Commonwealth acting beyond its powers?

In the second part of this article, the problems are looked at from the perspective ofcorporations law. Specifically, we examine whether corporate law rules and principlesare capable of constraining the activities of Commonwealth companies and whetherthe corporate veil can be lifted to allow the actions of the Commonwealth to be dealtwith directly.

It is because the Commonwealth's executive power is limited that this articlefocuses on the Commonwealth and not on the States or Territories. State and Territoryexecutive power is, to all intents and purposes, plenary.4 The executive power of aState has been equated with the power of the sovereign.s It is therefore difficult toimagine a circumstance where a challenge could be mounted either to the existence, orthe activities, of a State or Territory owned company. Possibly, if legislation limited a

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New South Wales v Bardolph (1934) 52 CLR 455 at 496 per Rich J; Johnson v Kent (1975) 132CLR 164 at 169 per Barwick CJ; Attorney-General v De Keyser's Royal Hotel [1921] AC 508 at575 per Lord Parmoor.Building Construction Employees and Builders Labourers Federation of New South Wales vMinister for Industrial Relations (1986) 7 NSWLR 372; Union Steamship Co ofAustralia Pty Ltdv King (1988) 166,CLR 1.NeuJ South Wales v Bardolph (1934) 52 CLR 455 at 474-75 per Evatt J.

1998 Commonwealth Companies and the Constitution 273

State's ability to establish a company, a challenge could be mounted but such achallenge has never been mounted, as far as the authors know.

Commonwealth statutory corporationsIt is worth drawing a parallel with the Commonwealth's ability to form a statutorycorporation. This is simply a legislative exercise where the formation of a corporationby an Act of the Commonwealth Parliament may be challenged if the Act isconstitutionally invalid. This will depend on the limits of the Commonwealth's powersunder the Constitution, a subject which also has been little explored in connection withforming statutory corporations.

The existence of a statutory corporation has never been successfully challenged onthis basis,6 though the activities of Commonwealth statutory corporations have beenchallenged, either on the basis that a particular activity expressly authorised by thelegislation could not, on constitutional grounds, be so authorised; or on the basis that aparticular activity was ultra vires the statutory corporation's legislation. An example ofthe former was Attorney-General (Western Australia) v Australian National AirlinesCommission7 in which the High Court held that a provision of the Commission'senabling legislation8 was unconstitutional to the extent that it permitted an intrastatejourney, the Commonwealth Parliament's power in this respect being limited toauthorising interstate journeys.9 An example of the latter was Commonwealth vAustralian Commonwealth Shipping Board10 in which the High Court held that a contractmade by the Board was ultra vires its legislation.11

The two questions - whether legislation authorising a Commonwealth statutorycorporation to undertake a particular activity is unconstitutional and the questionwhether a particular activity of a statutory corporation is ultra vires its legislation - dobecome entangled. In the course of discussing whether the Commonwealth ShippingBoard had exceeded its statutory powers, the High Court did say some things aboutthe Commonwealth's power to engage in commercial activities, for example: "[t]here isno power which enables the Parliament or the Executive government to set upmanufacturing or engineering businesses for general commercial purposes. "12 Anotherway in which the two questions are linked is that a statutory corporation's enablinglegislation may be pegged back to the constitutional limits by a specific section. This

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An unsuccessful challenge was mounted to the existence of Australian National AirlinesCommission in Australian National Airways Pty Ltd v Commonwealth (1945) 71 CLR 29. InVictoria v Commonwealth and Connor (1975) 134 CLR 81, legislation purporting to establishthe Petroleum and Minerals Authority was declared to be wholly invalid for noncompliance with the Constitution, s 57 with the result that the Authority never existed.(1976) 138 CLR 492. See also Australian National Airways Pty Ltd v Commonwealth (1945) 71CLR29.Australian National Airlines Act 1945 (Cth), s 19B.Constitution, s 51(i). However, an intrastate jourriey was held by the majority to bepermissible under the Constitution, s 122 (the territories power) if it occurred in the courseof a journey between a State and Territory.(1926) 39 CLR 1. An unsuccessful attempt to challenge the Australian Atomic EnergyCommission's purchase of shares in a mining company was made in Kathleen Investments(Aust) Ply Ltd v Australian Atomic Energy Commission (1977) 139 CLR 117.Commonwealth Shipping Act 1923 (Cth).(1926) 39 CLR 1 at 9 per Knox CJ, Gavan Duffy, Rich and Starke JJ.


occurred in the legislation establishing the Australian Atomic Energy Commission13which was the subject of extensive discussion in Kathleen Investments (Aust) Ltd vAustralian Atomic Energy Commission.14

These examples serve to illustrate some of the difficulties which will be encounteredin this article. Suppose that the Commonwealth chooses to engage in a particularcommercial activity, not through a statutory corporation but through a CorporationsLaw company, using its executive power to do so. Do the same kinds of argumentsapply as in the two cases discussed above? The nature of the enquiry is obviouslydifferent because there is no legislation to attack nor can an activity which is beingchallenged be assessed against a legislative provision.

The effect of an exercise of a function which is beyond constitutional power is thatthe relevant exercise is void. For example, if the Commonwealth were to enter into acontract which was beyond power the contract would be void. The concept of theoxymoronic void contract is familiar enough to the law. Can the same conception beapplied to the creation of a company? Is the company void? If not, can contractsentered into by a Commonwealth controlled Corporations Law company be declaredvoid because they go beyond the power of the Commonwealth?

THE LIMITS OF THE COMMONWEALTH'S EXECUTIVE POWER

It is not intended to canvas extensively a question that has been the subject of detailedacademic analysis elsewhere. Instead a summary of the debate will be presented withfocus on the question which is of interest here, namely, the limits on Commonwealthexecutive power in connection with commercial activity and, specifically, incorporatinga company and then controlling it.15

The executive power

The Commonwealth's executive power stems from s 61 of the Constitution whichsimply recognises that there is executive power and that its exercise is vested in theGovernor-General. No attempt will be made here to define what is the executive poweror to enter into the debate about the difference between the executive power andCrown prerogatives,16 although within the scope of commercial activity such issueswill be canvassed. Suffice it to say that, in the absence of legislation dictating aparticular activity, the Commonwealth's power to act comes from the executive powerso long as that power is ample enough to support the activity. Therefore, when theCommonwealth decides to create a Corporations Law company, it is doing so under itsexecutive power, absent any legislation.

If the Commonwealth were not a creature of the Constitution, the executive powerwould be plenary. In the United Kingdom or New Zealand, for instance, thegovernment may do, either through legislation or directly through the executivepower, anything that a natural person can do, with no limit as to subject matter. This is

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Atomic Energy Act 1953 (Cth), s 17(4).(1977) 139 CLR 117.A more detailed treatment of the question as it applies to the Commonwealth's power toenter into contracts is found in N Seddon, Government Contracts: Federal, State and Local(1995) at 34-56.G Winterton, Parliament, the Executive and the Governor-General (1983) chs 2-3.


also generally true of the Australian States and Territories, though the constitutionalframework in Australia does mean that there are some limits on what the States andTerritories can do because a particular activity may have been reserved exclusively forthe Commonwealth. The Commonwealth is, however, a creature of the Constitutionwhich confers limited powers on it. These powers are to do with its legislative capacityand so, it might be said, the limits do not affect the executive power. However,although the matter is not entirely free from doubt, the consensus of opinion is that thelimits on legislative power do affect the executive power.17

One way of conceptualising this is to see the executive power as a derivative power.Section 61 of the Constitution provides that the executive power "is exercisable by theGovernor-General ... and extends to the execution and maintenance of thisConstitution, and of the laws of the Commonwealth". If the Constitution and the lawsof the Commonwealth are limited with res~ect to subject matter, then so too is theexecutive power which is merely supportive. 8

There is, in addition to the express powers, an undefined penumbra ofCommonwealth power which does not owe anything to the express heads of power setout in the Constitution. This is the implied nationhood power discussed at length inVictoria v Commonwealth and Hayden (the Australian Assistance Plan case)19 and in Davisv Commonwealth.20 It is recognised in these cases that there are some aspects of theexecutive and legislative power which must exist because of the essential nature ofgovernment and which cannot be found in any specified head of power in theConstitution. Nothing, for example, is said about a national flag in the Constitution but,it is assumed, the Commonwealth must have an implied power to deal with anymatters to do with a national flag. The exact scope of this implied national power is notclear and tends to be defined (if at all) in circular terms, such as that the powerencompasses all those things which a national government must do. It seems that thispower is the justification for the Commonwealth engaging in activities, such as the

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D Rose, "The Government and Contract" in P D Finn (ed) Essays on Contract (1987) at 246;Victoria v Commonwealth and Hayden (1975) 134 CLR 338 at 362 per Barwick CJ "...theexecutive may only do that which has been or could be the subject of valid legislation." Seealso ibid at 379 per Gibbs J "..~the Executive cannot act in respect of a matter which fallsentirely outside the legislative competence of the Commonwealth"; and at 396-97 perMason J. The assumption behind the arguments in Attorney-General (Victoria) vCommonwealth (the Clothing Factory case) (1935) 52 CLR 533 and Re KL Tractors Ltd (1961)106 CLR 318 is that it is necessary to tie a particular exercise of executive power (makingcontracts in these cases) to a head of power found in the Constitution (the defence powerin these cases).Of course, it might be said that the word "extends" is merely inclusive and so s 61 does notoffer guidance on the limits of executive power (as to which see G Winterton, above n 16 at28). Even so, on the rare occasions when this issue has arisen, the assumption is made thatthe executive power is limited. Winterton terms the limits on executive power stemmingfrom the limits on subject matter found in the Constitution to be the "breadth" limitation onexecutive power: see ibid at 29-31. See below n 29 as to the "depth" of executive power.(1975) 134 CLR 338. See in particular at 397 per Mason J.(1988) 166 CLR 79. The scope and existence of the unexpressed power was itself a matter ofsome controversy in Davis with Wilson, Dawson and Toohey JJ saying that they did notconsider that the legislative powers of the Commonwealth extended beyond the specificpowers conferred by the Constitution.

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support of scientific research or of literature or art, which are difficult to Justify byreference to any of the enumerated heads of power found in the Constitution. 1

The Commonwealth, then, has power to engage in an activity limited by theConstitution, whether it chooses to do this through legislation or through the exerciseof the executive power. As to the latter, its limits are directly related to the same limitson legislative power, but bearing in mind the undefined implied nationhood powerjust discussed. As Rose has put it in relation to using the executive power to make acontract,

[t]he power is nowadays properly regarded as extending to any contracts that could beauthorised under a Commonwealth Act (whether or not there is such an Act), howevernovel the making of the contracts might be as a governmental activity.22

The executive power and Commonwealth commercial activityThe limits on the Commonwealth's powers mean that the Commonwealth is affected ifit decides to engage in commercial activity.23 It is accepted that the Commonwealthmay engage in commercial activity, the idea that it is only permitted to regulatecommercial activity having been rejected long ago.24 However, the Commonwealth'sparticipation in commerce, whether by means of legislation or through the use of theexecutive power, must be referable to a head of express or implied power found in theConstitution. The most obvious source is the trade and commerce power found in s51(i), though this is by no means the only head of power.25

One particular aspect of the use of executive power, namely, for making contracts,has been the subject of much debate. The view has been put that the Commonwealth asa juristic person may enter into contracts because of its status as a legal entity; in short,it may act like any other legal person with full capacity.26 The justification for this

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The Australian Assistancc Plan case (1975) 134 CLR 338 at 397 per Mason J; Davis vConln10n71JCalth (1988) 166 CLR 79 at 1"!1 per Brennan J.D Rose, above n 17 at 246.We acknowledge that there is some debate about the extent to which the Commonwealthought to engage in cOlnmercial activity. See COlnlnonwealth Parliament Joint COlnmittee ofPublic Accounts, Public Business in thc Public Intercst: An Inquiry into Con1mercialisation in theConznzon7Dcalth Public Scctor, Report 336 (1995). For similar concerns regarding Stategovernlnent cOllllllercial activity, see Western Australia Royal Comlllission intoCOllllllercial Activities of Government and Other Matters, Rcport Part II (1992) at paras[3.13.1-3.13.4]. We do not enter into that debate in this article. We begin from theassulllption that the COllllllonwealth does engage in this type of activity.Australian National Airumys Pty Ltd v Comnzon71Jealth (1945) 71 CLR 29.A non-exhaustive list of powers relevant to comlnercial activity include activities within aTerritory (s 122), activities within a "Commonwealth place" (s 52(i)), radio and television(s 51 (v)), defence (s 51(vi)), fisheries in Australian waters beyond territorial limits (s 51(x)),banking (s 51(xiii)), insurance (s 51(xiv)), railway acquisition and construction within aState (s 51(xxxiii) and (xxxiv)), matters referred to the Commonwealth by a State (s 51(xxxvii)) and Inatters incidental to an area of COlnmonwealth power (s 51 (xxxix)).The principal proponent of the view that COllllnonwealth's contracting power is notlilllited by reference to subject matter is Professor Enid Calnpbell. See E Call1pbell,"Collllllonwealth Contracts" (1970) 44 ALl 14 at 17-18 and 23. See also E Calnpbell, "FederalContract Law" (1970) 44 ALl 580. See also G Winterton, above n 16 at 45-7. But see also at121-2 where Winterton Blakes the important point that the governlllent's power must beBlore lilllited than that of the citizen when the government is exercising powers which


argument is that the exercise of a contract-making power is simply an exercise of theCrown's prerogative27 which is implicitly given recognition by s 61 of the ConstitutionThis view has not been generally accepted and the preferable view is that the'Commonwealth's contract-making power is limited in the same way as its executivepower is limited for any other purpose.28 More will be said about the Commonwealth'scontract-making power as it necessarily arises in the context of the power to create andrun companies.

As will be seen, attempts to define the constitutional limits on Commonwealthcommercial activity take on a somewhat artificial air because the limits are in factexpressed to be related to legislating in a particular area and it is sometimes difficult totranslate what has been said in the many cases on this question into relevant limits onengaging in the activity in question. The way around this problem is to see the limits onCommonwealth power as related to subject matter so that the appropriate question isto ask whether the Commonwealth has power with respect to a particular subjectmatter, whether for the purpose of testing the validity of legislation or executive action.

The ultimate test, it seems, for testing the limits of the Commonwealth's executivepower to engage in commercial activities is to ask: could it do this by legislatinginstead? In relation to incorporating, and then controlling, a company, the ultimate testis to ask: could it legislate to create a statutory corporation instead?29

The potential limits to the Commonwealth's powers in respect of commercialactivities apply principally to the Commonwealth as a supplier, that is, when theCommonwealth decides to go into the market with a product or service. It is mostunlikely that the constitutional problem will arise when the Commonwealth is apurchaser, although it is conceivable that a purchase for a purpose not referable to anygovernmental undertaking could be challenged. The admonition that "[t]here is nopower which enables the Parliament or the Executive government to set upmanufacturing or engineering businesses for general commercial purposes"30 capturesthe nature of the problem nicely.

Trying to ascertain what are the limits of the Commonwealth's power to engage incommerce becomes a somewhat untidy pursuit because it precipitates an exercise infinding the requisite threads in the fabric of the Constitution. So, for example, it may benecessary to ascertain whether a transport operation takes place within a State, withina Territory, between a State and State or Territory, and so forth. Some of the activities

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either have no parallel with what an ordinary person can do or which, when done by thegovernment (such as surveillance), take on a quite different character.Winterton prefers to call the power a "common law" power, above n 16 at 45.The debate is fully canvassed in N Seddon, above n 15.It may be that the Commonwealth's power to engage in commercial activity could befurther limited by what Winterton terms the "depth" of the executive power, that is, thescope of the power as defined by the prerogative. For example, if the Commonwealth usedits executive power in breach of legislation limiting that power, the use of the powerwould be invalid. See G Winterton, above n 16 at 29-31. As to the "breadth" of executivepower, see above n 18. A challenge to Commonwealth commercial activity is most likely tobe based on the "breadth" limit on executive power, that is, by reference to the limits onsubject matter found in the Constitution.Commonwealth v Australian Commonwealth Shipping Board (1926) 39 CLR 1 at 9 per Knox CJ,Gavan Duffy, Rich and Starke JJ.


will be valid and others not so.31 The constitutional limits are, unfortunately,unmovable (absent a referendum) and do not represent a rational plan for theorganisation of government enterprise. In fact they may very well cut across sensiblecommercial arrangements and deprive Commonwealth bodies of the opportunity tocompete with private enterprise at the very time when the demand for their serviceshas fallen off because their customers are able to go outside the Commonwealth toprivate enterprise.32 It is not overstating the position to say that the limits placed onCommonwealth commercial activity are irrational (from a commercial perspective),haphazard and, at times, very uncertain - hardly an ideal environment for suchactivity.

The spare capacity argumentOne argument that has received a certain amount of support is that theCommonwealth mar engage in commercial activity if it has spare capacity within itsnormaloperations.3 This argument clearly derives from the two cases34 in which thedefence power justified the use of Commonwealth defence factories to supply civilianmarkets. It was held by the High Court in each case that the need to maintain defencecapacity in peace time necessitated keeping the factories running, even though theitems being produced were not for the defence forces.35

It is questionable whether this argument can be extended to any otherCommonwealth activity where the Commonwealth could be said to have sparecapacity, at least if the activity were to be undertaken on any sustained basis.Maintaining defence preparedness is one thing but maintaining other government

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An example is provided by Attorney-General (Western Australia) v Australian NationalAirlines Commission (1976) 138 CLR 492, where some journeys undertaken by aCommonwealth statutory corporation were constitutionally valid while others potentiallywere not.An example being the market for legal services. It appears to be accepted that theAustralian Government Solicitor cannot compete with private sector solicitors for privatesector business. Yet private sector solicitors are allowed to compete against the AustralianGovernment Solicitor for government business.The spare capacity argument is set out in Commonwealth Parliament Joint Committee ofPublic Accounts, Public Business in the Public Interest: Inquiry into Commercialisation in theCommonwealth Public Sector, Report 336 (1995) at 30. This was relied on as being an"exception" to the general constitutional limits on the Commonwealth's powers to engagein commercial activities by the Industry Commission in Competitive Tendering andContracting by Public Sector Agencies, Report No 48 (1996) at 227.Attorney-General (Victoria) v Commonwealth (the Clothing Factory case) (1935) 52 CLR 533 andRe KL Tractors Ltd (1961) 106 CLR 318.Rich J in the Clothing Factory case stated a wider spare capacity argument, ibid at 562,saying that it would be wasteful to leave capacity idle and unemployed. He drew on oldcompany law cases (at a time when companies could be found to have acted ultra vires)."The question how far this doctrine is to be pushed in relation to corporations is one ofdegree, and has excited some difference of opinion", citing Forrest v Manchester, Sheffieldand Lincolnshire Railway Co (1861) 30 Beav 40; 54 ER 803 and on appeal (1861) 4 De GF & J126; 45 ER 1131. In KL Tractors no final decision was in fact reached about whether theactivities of the factory were within constitutional limits because the Court decided thatgoods delivered had to be paid for on the basis of the law of restitution, even if thecontracts were void.


activities for some unspecified future contingency is less easily justified. The normalresponse is to reduce that area of activity. The meaning of "spare capacity" is, in anycase, by no means clear and it would be a very dubious proposition to engage incommercial activity not otherwise referable to a head of constitutional power, justbecause there was supposedly spare capacity. For example, if in the course ofdeveloping computer software for processing social security claims theCommonwealth serendipitously found that it had a valuable and marketable computerprogramme, it is doubtful that it could then market the programme, even though suchcommercial activity might generate considerable revenue for the Commonwealth. Itcould be said that in its commercial application the programme was surplus to theCommonwealth's requirements and therefore constituted "spare capacity". The sparecapacity argument, though, is about maintaining capacity to continue to do thosethings which are essential for running the country. It is not about exploiting forcommercial gain "spin offs" from legitimate government activities. Another argumentagainst this justification for the Commonwealth engaging in commercial activity is thatthe motive for doing it will not be to soak up spare capacity (which often can be simplysold off) but to generate revenue for the Commonwealth. As Barwick CJ remarked inJohnson v Kent:

It is not sound doctrine that the Commonwealth may do anything that will help it toreimburse itself for moneys lawfully spent for its purposes.36

Another example of spare capacity would arise if the Commonwealth reduced anoperation when implementing a policy favouring smaller government and thendecided to use the spare capacity thereby generated for commercial activity. Thisnearly happened in 1992 when the Commonwealth decided to set up a hire carcommercial operation in Sydney using Commonwealth cars. The scheme wasabandoned after litigation was initiated (not related to the "spare capacity" point) but itis very doubtful whether it would have been safe against a constitutional challenge.

The spare capacity argument, with its inherent uncertainties, is evidently of littlecomfort to some government organisations which are considering engaging incommercial activities. In an Audit Report the Commonwealth Auditor-Generalbemoaned the fact that:

guidance provided by the Attorney-General's Department is not sufficiently specific toallow DSTO to develop practical guides for use by the laboratories. The ANAO is alsounable to determine whether the DSTO is operating outside the power of theConstitution.37

On the other hand, other areas of the Commonwealth have been apparently undeterredby the possible constitutional limitations on their activities and have offered property

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(1975) 132 CLR 164 at 169. This statement is too broad in the sense that it probably islegitimate for the Commonwealth to charge for its services to recover costs and even tomake a profit from activities in which it is legitimately able to engage. The reference byBarwick CJ to "do anything" is to activities not otherwise within constitutional power.The Auditor-General, Efficiency Audit. Department of Defence. Commercial Activity in theDefence Science and Technology Organisation (Audit Report No 21992-1993) at 29-30. See alsoAuditor-General, Efficiency Audit. Auscript. Commercialisation of the Commonwealth ReportingService (Audit Report No 6 1992-1993) at 11-12 where the constitutional constraints werethought to undermine the commercial viability of Auscript.


management services to a fast food chain, consultancy services relating to interiordecorating to private industry and security services to the private sector.

The corporations powerIf the Commonwealth registers a company, could this act be justified by referencesimply to the corporations power? A very wide view of the Commonwealth's powersto engage in entrepreneurial activities derived from s 51(xx) of the Constitution wasput forward by Murphy J in Kathleen Investments (Aust) Ltd v Australian Atomic EnergyCommission:38

In my view, the Parliament has legislative competence under the corporations power(s.51 (20) of the Constitution) to authorize the acquisition and holding by theCommonwealth or its agent of shares in any foreign corporation or in any trading orfinancial corporation formed within the limits of the Commonwealth. It may form orauthorize the formation of trading or financial corporations.

If this view is correct, then the problem of central concern in this article is solved: thereare no limits on the Commonwealth's power to register and run a trading or financialcompany formed within the limits of the Commonwealth. However, the viewexpressed by Murphy J appeared to be based on the supposition that theCommonwealth could legislate for incorporation of companies,39 an argument sincerejected in the Incorporation case.40 The Commonwealth does not have a general powerto legislate for the incorporation of companies. It seems to be accepted that it canlegislate for this purpose within the Australian Capital Territory, using the territoriespower41 which is plenary in its operation within a territory.42 It is therefore possible forthe Commonwealth itself to incorporate a company in the Australian Capital Territory,using the executive power.43 When the Commonwealth applies for registration of acompany in a State, it must do so by reference to some head of power other than thecorporations power.

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(1977) 139 CLR 117 at 159.The next sentence was, ibid, "The word 'formed' in s. 51(20) does not confine Parliament tolaws with respect to corporations which have been formed."New South Wales v Commonwealth - the Incorporation Case (1990) 169 CLR 482 in which itwas held that the Constitution, s 51(xx) only covers regulation of existing trading andfinancial corporations but not the initial incorporation of such corporations.Constitution, s 122. Whether this power is limited in its scope by other provisions of theConstitution is a matter of some controversy. In Newcrest Mining (WA) Ltd v Commonwealth(1997) 147 ALR 42 the High Court was divided on whether s 122 was limited by s 51(xxxi)(acquisition of property on just terms). Gaudron, Gummow and Kirby JJ were prepared tooverrule Teori Tau v Commonwealth (1969) 119 CLR 564 on this issue. See also Toohey Jat71. In a future case it may well be that s 122 is limited at least by those provisions of theConstitution which are in the nature of guarantees. See C Horan, "Section 122 of theConstitution: a 'Disparate and Non-Federal' Power?" (1997) 25 F L Rev 97 which waswritten before the High Court's decision in Newcrest.See text at n 47 below. Whether there are limits on the Commonwealth's power to establisha territory company are discussed below.As to any relevant limits on the Commonwealth's power under the territories power, seebelow.


In this article, we assume that, if the Commonwealth is to incorporate a company, itwill do so in the Australian Capital Territory or, if in another jurisdiction, under somehead of power other than s 51(xx).44

The trade and commerce power

Under s 51(i) of the Constitution the Commonwealth has power to legislate withrespect to trade and commerce with other countries and among the States. Thus, itcould use its executive pnwer to engage directly in commercial activities which fit thisdescription.

In my view, the Parliament may authorize the conduct by the Commonwealth of tradeand commerce with other countries and among the States. This may be done directlythrough a department of the Government or through an agency such as a tradingcorporation. The Parliament may provide for supervision and regulation of corporationsengaged in such trade and commerce. It may also provide for £articipation by theCommonwealth as a shareholder or otherwise in such corporations.

There is a great deal of learning on the question of exactly what the words in s 51(i)mean.46 It is not the purpose of this article to visit that debate. It is sufficient here topoint out that the Commonwealth would have to be careful in establishing a businessto ensure that, as far as s 51(i) is concerned, the activities of the business were either forthe purpose of export or for interstate trade. To the extent that the business wasestablished to engage in intrastate trade, the constitutional problem would arise (unlesssome other head of power could be found).

The territories power

Under s 122 of the Constitution, the Commonwealth has plenary power with respect tothe territories.47 The constitutional limits applicable to the Commonwealth as anational government do not exist if it is making laws or engaging in other activitiesrelating to the government of the territories. It thus appears to be in the same positionas a State government as far as scope of this power is concerned. However, the caseswhich have examined the scope of s 122 have made it clear that the law or activitymust in some way be connected to the territory and therein lies a difficulty ofdefinition. The parallel with a State government's powers may not be valid. Forexample, if the Commonwealth were to set up a business within the Australian CapitalTerritory, and that business could not be justified constitutionally by reference to theother powers in the Constitution, could the operation of the business anywhere inAustralia be justified simply because it operates from the Territory? By comparison, if aState government were to set up a business within its borders and that businessengaged in activities allover Australia, there could be no challenge to these activities.The same probably could not be said of a Commonwealth Territory-based business.

If the business is restricted to a Territory, then the Commonwealth has a widepower to engage in that business. In Johnson v Kent Barwick CJ said:

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The Commonwealth has used State companies legislation to incorporate a company in thepast. This occurred in Commonwealth v Bogle (1953) 89 CLR 229.Kathleen Investments (Aust) Ltd) v Australian Atomic Energy Commission (1977) 139 CLR 117at 159 per Murphy J.See L Zines, The High Court and the Constitution (4th ed 1997) ch 4.Spratt v Hermes (1965) 114 CLR 226.


[T]he executive power in relation to the Territory is not federally restrained.Consequently, whatever the position in other parts of Australia, the executive, unless itspower is relevantly reduced by statute, may in my opinion do in the Territory upon orwith respect to land in the Territory anything which remains within the prerogative ofthe Crown.48

In this case the connection with the Australian Capital Territory was very obviousbecause the case concerned the issue of whether the Commonwealth could, under itsexecutive power, build a telecommunications tower on Black Mountain, whichincluded a restaurant and tourist facilities. The land was owned by the Commonwealthwithin the Australian Capital Territory. It was held that the Commonwealth could dothat and in fact the Commonwealth could engage in any entrepreneurial activity itwished within, and confined to, the Territory, so long as that activity was notconstrained by any legislation or the prerogative.

There is still the problem of the necessary connection with a territory. Unfortunatelythe case law on this issue leaves unanswered questions, particularly in relation to thelimits on possible commercial activity emanating from a territory - the very issue ofconcern here.49 If a commercial activity which is justified as having a sufficientconnection to a territory is also conducted outside the territory as an incidence of itsintra-territorial operation, then it may be arguable that the extra-territorial operation isjustifiable. There is no absolute geographical limit on the operation of the powersderived from s 122.50 However, if the Commonwealth were simply to use a territory asa base in order to conduct activities around Australia some of which could not be saidto have any connection to the territory, then it is very doubtful whether those activitieswould be a valid exercise of Commonwealth power51 (unless some other head ofpower could be found). The fact that it makes economic sense to expand thecommercial operation beyond the constitutional limits is probably not a good reasonfor doing so. Whether the economic viability of the business could be seen as incidentalto the exercise of permissible power is a difficult question.52

It is nevertheless difficult to specify with precision what the limits are and the"untidy pursuit", referred to above, of trying to find one's way through theconstitutional limits is amply demonstrated by the territories power. For example, inconnection with transport it has been held that a journey from a Territory to a State

4849

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(1975) 132 CLR 164 at 169.The analogous problem of whether, in relation to an activity which is justified by referenceto the trade and commerce power (s 51(i», an intrastate aspect is also permissible hasgenerated some fine distinctions but, overall, the answer appears to be that the intrastateactivity is likely to be invalid. See L Zines, The High Court and the Constitution (4th ed 1997)68-75.Lamshed v Lake (1958) 99 CLR 132; Attorney-General (Western Australia) v Australian NationalAirlines Commission (1975) 138 CLR 492.Davis v Commonwealth (1988) 166 CLR 79 at 94-95 per Mason CJ, Deane and Gaudron JJ.See, for example, Airlines of Ne'W South Wales Pty Ltd v Ne'W South Wales (No 2) (1965) 113CLR 54 at 88 per Barwick CJ; at 115 per Kitto J where this point was made with respect tothe trade and commerce power. In Attorney-General (Western Australia) v Australian NationalAirlines Commission (1975) 138 CLR 492, a majority (Stephen, Mason and Murphy JJ) heldthat engaging in an intrastate journey in the course of conducting an airline servicebetween a State and a Territory was justified because it made practical and economic sense.Barwick CJ and Gibbs J thought otherwise. See, generally, L Zines, The High Court and theConstitution (4th ed 1997) at 68-79.


(and vice-versa) is within the territories power (whereas a journey within a State wouldnot be unless it formed part of the aforementioned journey).53 Can this argument beextended so that any trade or commerce emanating from, say, the Australian CapitalTerritory would be justified by reference to the territories power? If goods weresupplied from the Territory to destinations throughout Australia this would seem to bewithin the limits of s 122. The same could be said of services, though the "movement"of services is more difficult to conceptualise. On the other hand, if the Commonwealthestablished a business within the Australian Capital Territory which necessarilyprovided services or goods from a place within a State to another place within thatState, then this would not be legitimate under the territories power. Thus if thebusiness had branch offices within a State and the branch office serviced the needs ofthat State, this would not appear to be constitutionally justified under the territoriespower.54

In short, the Commonwealth cannot get around the constitutional limits by thesimple expedient of basing a business in, say, the Australian Capital Territory. If theCommonwealth could do this it would be a simple solution to the problem which is thecentral focus of this article. Nevertheless, the territories power provides a very goodstarting point for the Commonwealth to engage in commercial activities in Australia.

The appropriation powerThe argument has been put that the Commonwealth's power to engage in commercial(or other) activities could be wider than the implied and express legislative powersfound in the Constitution. Under ss 81 and 83, so it is argued, the Commonwealthcould appropriate money "for the purposes of the Commonwealth" which wordsshould not be given a meaning which is confined by the legislative powers.55 Theincidental power56 could then be employed either to pass legislation for the spendingof the money appropriated or the executive power could be expanded by reference tothe incidental power to justify the expenditure without recourse to legislation (apartfrom the original Appropriation Act). Again, although the matter is not free fromdoubt,57 the more accepted view is that, although an Appropriation Act probably

53

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Attorney-General (VVestern Australia) v Australian National Airlines Commission (1975) 138 CLR492.An example is Employment National, the Commonwealth company which operates toprovide case management services to job seekers in competition with private sectorproviders. Its intrastate operations would have to be justified by reference to the socialsecurity power (s 51(xxiiiA» on the basis that providing these services was "provision of ...unemployment ... benefits".Attorney-General (Victoria) v Commonwealth (the Pharmaceutical Benefits case) (1946) 71 CLR237 at 254 per Latham CJ; the Australian Assistance Plan case (1975) 134 CLR 338 at 417-18per Murphy J. And see M Sexton and L Maher, above n 1 at 215. Latham CJ in thePharmaceutical Benefits case, ibid, argued that the Commonwealth's financial support forAntarctic exploration, medical and scientific research, literary grants and public health wasjustified by reference to "purposes of the Commonwealth" in the appropriation power. Seealso the remarks of Mason J in the Australian Assistance Plan case, ibid at 394-395 and 397.Constitution, s 51(xxxix).In the Australian Assistance Plan case (1975) 134 CLR 338, the Court was divided 3-3 on thequestion whether there were limits, dictated by the terms of the Constitution, on the use bythe Comlnonwealth of money appropriated under an Appropriation Act for running thePlan.


could not itself be challenged,58 the spending of money so appropriated (that is, theexercise of the executive power) could be challenged on the basis that the spending isoutside the enumerated powers found in the Constitution.59

The implied nationhood powerFrom the little that has been said about the implied nationhood power, it seems veryunlikely that this would justify the Commonwealth engaging in entrepreneurialactivities. In Davis v Commonwealth Brennan J did speak of the "advancement of theAustralian nation"60 and so it may be argued that it is for the advancement of Australiaif the Commonwealth undertakes business activities which may, in part, relieve the taxburden on its citizens. However, the context in which this was said was thebicentennial celebrations and Brennan Jmade it clear that a national purpose must bethe objective of the activigr in question, that is, an enterprise "peculiarly adapted to thegovernment of a nation"61 and one which there is a lithe need for national action".62

As already mentioned, it appears that the use of Commonwealth money forscientific research, cultural activities, grants to industry and a myriad of other activitieswhich cannot be justified by reference to any specific power found in the Constitutionare supportable either under this head of power or on the basis that theCommonwealth may simply appropriate money IIfor the purposes of theCommonwealth" on one view of the appropriation power, discussed above.Nevertheless, it would appear that the use of Commonwealth money to engage inentrepreneurial activities does not fit within this category. There must be some elementof public good or national purpose if an activity is to be justified by reference to theimplied nationhood power.

The effect of the Commonwealth engaging in an unconstitutional activityIf the Commonwealth engages in an activity which is not referable to a head of powerfound in the Constitution, then the activity is ineffective in law. Of course, if legislationis enacted, the legislation is struck down to the extent necessary.63 If a contract isentered into under the executive power, or purportedly under statutoryJiower whichdoes not justify entry into the contract, then the contract is void ab initio. This meansthat any rights or duties normally generated by the existence of a contract do not existand cannot be enforced. This does not mean that the relationship is entirely bereft oflegal consequences. This is because of the operation of the law of restitution which willnot permit any party to the relationship to be unjustly enriched.65 Thus, for example,

58

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Davis v Commonwealth (1988) 166 CLR 79 at 96 per Mason CJ, Deane and Gaudron JJ. CfBarwick CJ in the Australian Assistance Plan case (1975) 134 CLR 338 at 361.The Australian Assistance Plan case (1975) 134 CLR 338 at 360 per Barwick CJ; at 375 perGibbs J; at 396 per Mason J. L Zines, The High Court and the Constitution (4th ed 1997) at 261262.(1988) 166 CLR 79 at 110.The Australian Assistance Plan case (1975) 134 CLR 338 at 397 per Mason J, cited by BrennanJ ibid at 111.(1988) 166 CLR 79 at 111 per BrennanJ.The Acts Interpretation Act 1901 (Cth), s 15A allows for legislation to be struck down inpart.N Seddon, above n 15 at 62-66.See K Mason and JW Carter, Restitution Law in Australia (1995).


goods delivered or services provided must be paid for at a reasonable market rate(rather than necessarily the "contract" price).

Applying these principles to the act of creating and controlling a company is not sostraightforward as it is to the act of legislating or making ordinary contracts.

THE USE OF EXECUTIVE POWER TO INCORPORATE A COMPANY

What has been said about the limits of the Commonwealth's executive power has beenconcerned principally with making contracts. It is now necessary to examine morespecifically the use of the Commonwealth's executive power to incorporate, and thencontrol, a company. Assuming that there are some limits to the Commonwealth'sexecutive power in the sense described above, the question of what it means for theCommonwealth to exceed that power when registering and controlling a companyraises some difficult conceptual problems. To repeat, the intuitive argument which isthe starting point for this enquiry is that the Commonwealth cannot engage in anactivity through the vehicle of a company if it could not do so directly or bylegislation.66

We begin with the act of incorporating the company.

The act of incorporating a companyThe Commonwealth, like any other legal entity, may go through the necessaryprocesses required by the Corporations Law to incorporate a company.67 It appearsthat when an ordinary citizen engages in this exercise, no questions are asked aboutthat citizen's power to act unless, possibly, the citizen lacks legal capacity.68 It istempting to equate capacity and power so that it could be said that the Commonwealthis in a position which can be compared to a natural person, albeit with limited capacity.However, it is too simplistic to equate power and capacity.69 There is no doubt that theCommonwealth has the same capacity as any other legal entity to enter into contracts,to incorporate companies, and so forth. Capacity is an attribute; it answers thepreliminary question: can the Commonwealth do that? The use of the executive power,by contrast, is an exercise or use of that capacity.70 It may then raise the next question: isthere some limit if the Commonwealth does decide to do that? It is here that the

66

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70

From a corporate law perspective, of course, it is the company - as a separate legal entity- which engages in the activity. In the second part of the article we examine whether it ispossible to lift the corporate veil in the case of Commonwealth companies.Davis v Commonwealth (1988) 166 CLR 79 at 94 per Mason CJ, Deane and Gaudron JJ.In fact there are no provisions in the Corporations Law dealing with this issue. It isinteresting to note, however, that in New South Wales the Registrar-General did refuseregistration under the Companies Act 1936 (NSW) when one of the subscribers to thememorandum was a minor: N Burns, "Infants as Shareholders" (1955) 28 AL] 407 at 408.See the discussion by Barwick CJ in Kathleen Investments (Aust) Ply Ltd v Australian AtomicEnergy Commission (1977) 139 CLR 117 at 128.A somewhat similar distinction was made by the Full Federal Court in General NewspapersPty Ltd v Telstra Corp (1993) 117 ALR 629, which held that a statutory corporation's powerto contract provided for in its enabling legislation was not the same as its capacity to enterinto contract. The issue was whether, by entering into a contract, the corporation had donesomething "under an enactment". It was held that it had not because it had simplyexercised its inherent common law capacity to contract.


constitutional limits may apply. A parallel can be drawn with the Commonwealth'sability to appropriate money. Mason Jin the Australian Assistance Plan case71 made thepoint that the Commonwealth is perfectly free to appropriate money by anAppropriation Act and it is not possible to challenge the validity of the Act at thatstage. This is analogous to having capacity. However, the position is very differentonce the Commonwealth decides to spend the money on some activity. Here theanalogy is with exercising the capacity and Mason Jmade the point that the relevantactivity could be challenged if it was not referable to one of the Commonwealth'sconstitutional heads of power.

Here, then, there is no parallel with what a citizen does when he or she incorporatesa company. So, the problem we are examining is unique to artificial legal entities suchas bodies politic (and indeed possibly corporations themselves) which may be limitedin the exercise of their powers.

The underlying contractsThe idea that a contract may be void because it was beyond the executive power of theCommonwealth has already been outlined. Can this analysis apply to the contracts thatspring into life on the incorporation of a company? Upon registration three contractsare said to come into existence: a contract between the new entity, the company, and itsmembers; a contract between the company and each director and company secretary;and a multi-partite contract between all the members.72 The nature of these contracts ispeculiar and is arguably unique to the "statutory contract"73 which is brought about bythe companies legislation.74 The terms of the "statutory contract" are found in thememorandum and articles of association.75 In Bailey v New South Wales Medical DefenceUnion Ltd McHugh and Gummow JJ pointed out that some of the normal consequencesof the ordinary law of contract do not operate with regard to this contract. For example,the rules that normally govern contract variation are inapplicable, and the rights underthe contract are attached to the shares and are transferred to the new shareowner if theshares are sold. However, whatever the special nature of the "statutory contract", thereis no reason to suppose that such a contract cannot be declared to be void on ordinaryprinciples.

As just noted, upon registration there is a contract between the company and theCommonwealth as member. If this contract were to be declared void because theCommonwealth, as the only intended member, lacks power to enter into themembership contract, then is the whole company structure brought down? Thisquestion raises two interrelated issues: whether a company can exist without itsunderpinning of contracts, and whether a company can exist without members.

717273

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(1975) 134 CLR 338 at 396.Corporations Law, s 140(1).Bailey v New South Wales Medical Defence Union Ltd (1995) 132 ALR 1 at 28 per McHugh andGummowJJ.The current version of this section (Corporations Law, s 140(1» was introduced in July1998 by the Company Law Review Act 1997 (Cth). It is intended as a simplified version ofthe previous section (s 180(1» which, in tum, was preceded by Companies Act 1981,s 78(1).As we note later (see below n 110) the Corporations Law no longer requires a company tohave a memorandum and articles of association.


The answer to the first issue is not free from doubt, because the wording of s 140 ofthe Corporations Law, presupposes that a company already exists with which themember can be said to have contracted. Moreover, the Corporations Law does notexpressly provide for the possibility that any of the contracts which come into existenceupon incorporation of a company might be void. It is therefore necessary to go thecommon law which is equally unhelpful. As far as we have been able to ascertain, theissue has not been considered. The nearest that a court has come to analysing thisproblem is found in Kathleen Investments (Aust) Ltd v Australian Atomic EnergyCommission76 where it was alleged that a Commonwealth statutory corporation, theAustralian Atomic Energy Commission, had acted beyond its powers in acquiringshares in a company. The majority in Kathleen Investments came to the conclusion thatthe Commission had not acted beyond its powers. Barwick CJ dissented and, on theassumption that the acquisition of the shares was beyond power, said:

A person, including of course a corporation or company, can only become a member of alimited liability company by making an agreement to do so with the company and mustagree to pay the face value of the shares in respect of which he or it proposes to become amember unless the allotment without such payment is authorized by statute. Thecompany has no right to enter upon the register a person who has not so agreed. If thename of a person is on the register without that person's agreement in that behalf, anymember of the company may apply to the appropriate court for the rectification of theregister: see, e.g., s. 155 of the Companies Act.

If it be right to say, as in my opinion it is, that the Commission lacked power andauthority to agree to become a member of the second defendant, that defendant couldnot make an agreement with the Commission to become a member of the seconddefendant. It matters not that the second defendant is quite willing to have theCommission as one of its members. If that defendant has no capacity so to agree in thenecessary sense, no agreement in that sense with it can result: and, of course, theCommission itself can assert its own lack of power and authority. Thus, in my opinion,there was no agreement by the Commission to become a member of the seconddefendant. In my opinion, the name of the Commission has been improperly entered inthe register of the second defendant.77

It is clear ehough that if a contract to acquire shares is void then there is simply noacquisition of shares and the purchaser is not a member of the company. It is not soclear that a parallel argument will necessarily apply to the "statutory contracts" whichspring into life on incorporation of the company. It is, however, reasonably safe toassume that if the Commonwealth exceeded its powers in purporting to incorporate acompany, at least the "contract" between the Commonwealth and the company wouldbe void and so the Commonwealth would, as in the purchase of shares example, not bea member of the company. If the Commonwealth was the sole member of the company,then a company without a member would be no company at all, because under theCorporations Law a company must have at least one member.78

The consequence is that there is a possibility of arguing that a company created bythe Commonwealth under the Corporations Law is "void" because its underpinning ofcontracts is void on the basis that, in the particular circumstances, the Commonwealthlacked power to incorporate the company.

767778

(1977) 139 CLR 117.Ibid at 132. See also Gibbs Jat 138-39 and Stephen Jat 147-51.Corporations Law, s 114.


Proof of want of powerIn order to determine whether the Commonwealth's possible lack of power is relevantat the company incorporation stage, it is necessary to ask the question: what was theCommonwealth's purpose when forming this company? The Commonwealth'spurpose may be revealed by an announcement, by the memorandum and articles of thecompany or it may not be clear what the Commonwealth's purpose is. In KathleenInvestments Gibbs Jmade it clear that, in investigating purpose, it is not sufficient to putforward hypothetical possibilities about what might be done. Rather, "all thecircumstances of the case"79 must be examined, that is, the facts rather thanconjecture.80 It is therefore not sufficient that the Commonwealth's purpose could beopen-ended and quite unrelated to any constitutional head of power. This is apossibility of course because the company need not have express objects. If it does, thecompany can act validly outside those objects81 and, indeed, it may by specialresolution change or delete its objects.82 If the Commonwealth were in a positionwhere it was participating in, or operating, a company which was carrying outactivities which were beyond the powers of the Commonwealth, then a challengewould have to be mounted at that stage.

Standing83It would therefore be possible, at the incorporation stage, to challenge theCommonwealth's exercise of executive power in applying for company registration if apurpose has been declared and that purpose is demonstrably not referable to anyconstitutional head of power. The likelihood of such a challenge is, of course, remoteand, although the remedies available would be effective (either a declaration or aninjunction), the person bringing the challenge may run into difficulties of standing. Atthis early stage how can that person demonstrate that he, she or it is peculiarly affectedby the Commonwealth's act of forming a company?84 Possibly a potential rival tradercould have standing if it could show that the Commonwealth was going intocompetition with the trader, particularly if it could show that the competition wasunfair. But the standing argument would be very dubious on this basis alone. Noparticular participant in a market could show that it was peculiarly affected by theCommonwealth's entry into the market. Neither, it would seem, could a citizen astaxpayer mount a challenge.8S A State, on the other hand, could have standing tochallenge, although the basis on which this standing operates is not entirely settled.86

7980

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85

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(1977) 139 CLR 117 at 138 per Gibbs J.See also ibid at 157 per Jacobs J "... it is not a hypothetical but an actual absence ofrelationship between the purported exercise of the power and the function or purposewhich would need to exist."Corporations Law, s 125.Corporations Law, s 136(2).See H Burmester, "Locus Standi in Constitutional Litigation" in HP Lee and G Winterton(eds), Australian Constitutional Perspectives (1992) ch 6.In a different context it was held that a fellow member of a company had standing tochallenge the membership of a statutory corporation as a shareholder in the company:Kathleen Investments (Aust) Ltd v Australian Atomic Energy Commission (1977) 139 CLR 117.The Australian Assistance Plan case (1975) 134 CLR 338 at 402 per Mason J. See alsoH Burmester, above n 83 at 168-71.See H Burmester, ibid at 171-76.


Barwick CJ in the Australian Assistance Plan case was of the view that a State hadstanding because the Plan had a potential effect on State finances;87 whereas a broaderview - that a State has an interest in ensuring that the Constitution is upheld - wasexpressed by Gibbs and Mason JJ.88 Finally, the Commonwealth Attorney-Generalcould also have standing by bringing a relator action at the behest of some other personwho themselves lacks the "special interest" necessary for standing.

Standing may be easier to establish if a challenge is mounted at a stage later thaninitial incorporation. This is taken up below.

THE USE OF EXECUTIVE POWER TO OPERATE A COMPANY

Even if the existence of the company could not be challenged, its activities arguablycould be if the company were effectively an arm of the Commonwealth. The outerlimits of the Commonwealth's power to operate and control a company are dictated bythe limits on executive power. We have already seen that a parallel argument has beenemployed in respect of Commonwealth statutory corporations and successfulchallenges can be mounted to the activities of a Commonwealth statutory corporation,either on the basis that its legislated powers were beyond the Commonwealth'sconstitutional powers or that the corporation exceeded its legislated powers.89 In thecase of a Corporations Law company, the challenge would be based on the propositionthat the Commonwealth cannot through the use of a company enga§e in activitieswhich it could not do directly through the use of the executive power.9 In controllingand directing the company, the Commonwealth is using its executive power.

This is to look at the problem from the perspective of constitutional law. Theproblem has another aspect: once a company is properly incorporated under theCorporations Law (and we are now assuming that no challenge could have beenmounted to its incorporation), it is then an autonomous legal entity governed by theCorporations Law. Most significantly, the Corporations Law has abolished the ultravires doctrine so that any challenge to the activities of the company would appear to befutile. This aspect of the problem will be taken up below in the second part of thispaper. For the moment the constitutional aspect will be discussed.

The Commonwealth's ownership of sharesThe Commonwealth could become the controller of a company by various means. Itcould acquire the company by purchasing all of its shares; it could acquire a controllinginterest in a company by purchasing a sufficient number of shares; it could incorporatea company making itself or a Commonwealth officer the sole shareholder. Of course,control of a company can be achieved by means other than direct ownership of amajority of the company's voting share capital. This is recognised in the Corporations

87888990

Ibid at 365-66.Ibid at 383 per Gibbs J; at 401-402 per Mason J.See text at above n 7.This argument may involve "lifting the veil of incorporation", an issue which is examinedin the second part of this article.


Law for a number of different purposes.91 In their classic study of corporate control,Berle and Means defined control as having:

the actual power to select the board of directors, (or its majority), either by mobilising thelegal right to choose them - "controlling" a majority of the votes direct¥ or throughsome legal device - or by exerting pressure which influences their choice.9

For the purposes of the present discussion we focus on control through direct shareownership.

Drawing on what was said by the High Court in Kathleen Investments,93 it would bebeyond Commonwealth power to own shares if the objects and activities of therelevant company were not related to a constitutional purpose, or the purpose of theCommonwealth in buying the shares was not sufficiently related to a head ofconstitutional power. This would be tested, as in the case of a challenge to theCommonwealth incorporating a company for a purpose allegedly outside itsconstitutional limits, by looking at the factual background which revealed theCommonwealth's purpose in controlling the company. It would not be sufficient thatthe company could hypothetically engage in activities not related to Commonwealthpurposes. Indeed, as already mentioned, it is always possible for a company to doanything which is not related to its memorandum and articles, and it may alter itsmemorandum and articles. The challenge would have to be based on proof of purposeby actions rather than possibilities. Of course, it would be possible for the companyinitially to be acting within Commonwealth constitutional powers and then later tomove outside those powers. But this is not an unusual problem where activity orlegislation is challenged on constitutional grounds.

We draw a distinction here between the Commonwealth owning shares for thepurpose of controlling a company so as to achieve some commercial or policy objectiveand the Commonwealth investing in a company for the limited purpose of "parking"money. As to the latter, the Commonwealth's ability to invest public moneys is limitedby legislation.94 Could it be argued that owning shares in a company is not anauthorised investment as defined? Taking a narrow view of the word "investment" inthe context of the finance legislation, it is arguable that it is confined to investing publicmoney in order to earn interest rather than the Commonwealth engaging in

91

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For example, controlling the composition of a company's board of directors is relevant toits status as a subsidiary company (s 46(1)); having the capacity to determine the outcomeof a company's decisions in relation to its financial and operating policies is relevant to theapplication of the share self-acquisition rules (s 259E).A Berle and G Means, The Modern Corporation and Private Property (1968 rev ed) at 66.(1977) 139 CLR 117. The case involved the question whether a Commonwealth statutorycorporation could own shares in a company. However, much of what was said in that casecould be applied equally to the question of the Commonwealth owning shares incompany.The Financial Management and Accountability Act 1997 (Cth), s 39(1) allows the FinanceMinister to invest Comnlonwealth money in any "authorised investment" which is definedin s 39(8) to mean Commonwealth, State or Territory securities or securities guaranteed bythe Commonwealth, a State or a Territory, a deposit with a bank or "any other form ofinvestment prescribed by the regulations". Regulation 22 then limits investment to bills ofexchange accepted or endorsed by a bank; and a professionally managed money markettrust so long as the Minister is satisfied that the trust is only in government securities andno charge over the assets of the trust is incurred in support of borrowings.


entrepreneurial activities. On this view, there is no impediment in the financelegislation to the Commonwealth owning shares for an entrepreneurial or otherpurpose. If this is not correct and "investment" includes any form of share ownership,then for the Commonwealth to own shares in a company simply for the purpose ofcarrying on a business would require an amendment to the Financial Management andAccountability Regulations 1997.

A constitutional challenge

Assuming that the Commonwealth has established or bought into a company which isacting in ways which are beyond the constitutional limits of the Commonwealth'sexecutive power, what could be done about it? For the purposes of discussion we drawa distinction between a constitutional challenge and a challenge mounted under theCorporations Law. The latter will be taken up below. As to the former, as alreadydiscussed in connection with challenging the act of incorporating a company, a personwith sufficient standing could seek a declaration and possibly an injunction, either ofwhich would be effective remedies against the Commonwealth. WhereCommonwealth officers have been appointed to manage a company then remediesmight be sought against those officers, in their capacity as officers of theCommonwealth, in so far as they purported to act in a way which was beyondconstitutional power. Separate issues would arise if it was sought to challenge theiractions in their capacity as directors of the company. This is dealt with later in thearticle. If the Commonwealth were not the sole shareholder in a company, anothershareholder would have standing to challenge the allotment of shares to theCommonwealth on the ground that the Commonwealth did not have power to take upthose shares. In Kathleen Investments it was held that a member of a company in which aCommonwealth statutory corporation (the Atomic Energy Commission) had taken upshares had standing to challenge on the basis that the Commission lacked power totake up the shares.9'5 A contractor to the Commonwealth company would be able toraise the constitutional argument in defence to a claim on the contract. It would arguethat the contract is void because the company had no power to make it if the companywas carrying out a purpose of the Commonwealth which was beyond its (theCommonwealth's) constitutional powers.

This type of argument raises a further issue: is it legitimate to assume that thecompany is, for the purpose of a constitutional challenge, "the Commonwealth"? In thesecond part of this paper the undeniable fact that the company is a separate legal entityfrom the Commonwealth is discussed, and the ramifications of the corporate veil whenchallenging a Commonwealth company's activities are explored from the perspectiveof corporations law. Here, it is necessary to investigate the "identity" of aCommonwealth company for public law purposes.

IS THE COMMONWEALTH RESPONSIBLE FOR THE ACTIVITIES OF ACOMMONWEALTH COMPANY?

As already mentioned, the premise on which this article is argued is that theCommonwealth should not, through the medium of a company, do something which it

95 The challenge was in fact not successful.


could not do directly. The unexpressed assumption is that the company is somehow an"arm" of the Commonwealth.

The company as a Commo~wealth "agent"The use of the word "agent" is possibly misleading, at least if it is taken in its privatelaw sense. We are not concerned here with agency in its true sense where the companyis an agent of the Commonwealth with the consequence that, for example, if thecompany entered into a contract it would be acting for and on behalf of theCommonwealth and the proper party to put on the contract document would be theCommonwealth as principal, rather than the company.

Instead, we are concerned to use the word "agent" in a broader sense which issometimes employed in public law. For instance, for the purposes of determiningwhether a body is able to claim Crown immunity, the word "agent" is sometimes usedto describe that body. For this type of enquiry it is permissible to say that the body inquestion is "the Commonwealth" or a "Commonwealth agent". It is this sense in whichthe question in the heading is meant.

There is a great deal of case law on the question whether a particular body is "theCrown" for Crown immunity purposes. The test is elusive and it is sometimes verydifficult to know whether a body is, or is not, "the Crown" in this sense. It is possiblefor a body to enjoy Crown immunity for some purposes but not for others. Theelaborate case law on this question will not be explored here.96 Most of the casesconcern statutory corporations. However, it is quite possible for a Corporations Lawcompa~ to be "the Crown". In Deputy Commissioner ofTaxation v State Bank (New SouthWales)9 the High Court said that it would be possible by legislation to confer Crownimmunity on a private corporation. In Woodlands v Permanent Trustee Co Ltd98 the FullFederal Court held that private sector companies, which participated in implementinga scheme for the New South Wales government, were entitled to claim the sameimmunity from provisions of the Trade Practices Act 1974 (Cth) as could the NewSouth Wales government itself. The Trade Practices Act itself contemplates thepossibility of a Corporations Law company being an "authority of the Commonwealth"which is defined in s 4 to include "an incorporated company in which theCommonwealth, or a [statutory corporation], has a controlling interest". Section 2Aprovides that the Act applies to the Commonwealth, or an authority of theCommonwealth, in a limited way, namely, only when the Commonwealth or anauthority "carries on a business". Thus a Corporations Law company which is anauthority of the Commonwealth may be bound by the Trade Practices Act in the samelimited way as the Commonwealth itself.

If it is possible for a Commonwealth company to be "the Commonwealth" forCrown immunity purposes, is it also possible for a company to be treated as "theCOlnmonwealth" for the purpose of challenging either its incorporation or its activities

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98

A discussion of the question can be found in N Seddon, above n 15 at 104-113.(1992) 174 CLR 219 at 230. See also State Government Insurance Corp v Government InsuranceOffice of New South Wales (1991) 28 FCR 511 at 558-559 per French J. Cf Commonwealth vBogle (1953) 89 CLR 229, in which it was held that Commonwealth Hostels Ltd,incorporated under the Companies Act 1938 (Vic), was not a manifestation of the Crownand could claim no Crown immunities or privileges.(1996) 139 ALR 127. The case is, at the time of writing, on appeal to the High Court.


on constitutional grounds? It may be objected that there is a confusion in this questionbetween the two legal entities, the Commonwealth and the company. A challengewould in essence be directed to the Commonwealth: it would be its executive activitywhich would be allegedly beyond power. But, in order to forestall the argument thatwhat the company does is quite irrelevant in any challenge directed against theCommonwealth - the company is a separate legal entity - it is necessary in a sense toattribute the activities of the company to the Commonwealth. Hence it is necessary toanswer the question whether the company is "the Commonwealth" for the purpose of aconstitutional challenge.

The Commonwealth as controllerFor the purpose of ss 75(iii) and 78 of the Constitution, (suits against theCommonwealth), a wide meaning has been given to the concept of "theCommonwealth".99 There would, accordingly, be little difficulty in suing theCommonwealth in respect of activities of a Commonwealth company, the latter being"the Commonwealth" for the purposes of a suit.

This still leaves the question whether the acts of the company can, for the purposesof such a suit, be treated as the Commonwealth's acts. As far as we have been able toascertain this question has not had to be answered. The case law, as already mentioned,has been concerned to discover whether a particular body can claim a Crown privilege.It has not had to be concerned with the question whether a particular body is hobbledby a Crown disability. Nor has it been necessary to decide whether the activities of aparticular body might cause the Crown to be acting in excess of its powers. The nearestwe get to this is the situation when a statutory corporation's activities are held to bebeyond power because the underlying legislation which established the corporationwas constitutionally invalid. Does the same result follow when the underlying use ofexecutive power is constitutionally invalid?

It is suggested here that an analogy may be drawn from the concept of vicariousliability where the acts of an agent (in the private law sense) or employee may beattributed to the principal for the purpose of establishing liability in the principal. Inthis sense, the acts of a company controlled by the Commonwealth can be attributed tothe Commonwealth for the purpose of ascertaining whether the Commonwealth isacting beyond its constitutional limits. This is, of course, on the assumption that thecompany is in reality "an arm of the Commonwealth". Just as in the law on vicariousliability, the nexus between employer and employee or agent may not be established,so too here, if the company was truly independent of the Commonwealth. But if thenexus is close then it is suggested that the Commonwealth must take constitutionalresponsibility for the actions of the entity which it controls. One test used in thevicarious liability cases is the control test - does the employer have sufficient controlover the employee so that the acts of the employee should be attributed to the

99 See, for example, State Authorities Superannuation Board v Commissioner of State Taxation forthe State of Western Australia (1997) 189 CLR 253 at 282-4 per McHugh and Gummow JJwhere it is made clear that the "Commonwealth" or a "State", for the purpose of s 75, is adifferent concept from a body which is entitled to the privileges and immunities of theCrown. In the present case a Commonwealth company may be the "Commonwealth" forthe purpose of s 75(iii) and yet may not necessarily enjoy Crown privileges andimmunities.

294 Federal La'll) Review Volume 26

employer? Control is also the relevant test when assessing whether a company's actsshould be attributed to the Commonwealth. As already mentioned, if aCommonwealth officer is either a shareholder or director of the company, then it isclear that the Commonwealth is exercising its executive power through that officer andthe necessary nexus is established. We conclude, therefore, that a constitutionalchallenge could be mounted against the Commonwealth if it could be shown that theCommonwealth has exercised sufficient control over a company which engaged inactivities which were not related to any subject matter within the limits of executivepower.

The question of the "separateness" between the company and the Commonwealth,from the perspective of corporations law, is now taken up in the second part of thispaper.

COMMONWEALTH COMPANIES AND CORPORATIONS LAW

In the first part of this article we have examined arguments about the power of theCommonwealth to incorporate companies for commercial purposes which lie outsideconstitutional limits, and the possibility of a constitutional challenge to both the act ofincorporation and the activities of the company after incorporation. In the remainder ofthis article we consider whether it is possible to confine the operations of aCommonwealth company within those constitutional limits by recourse to corporationslaw procedures or remedies. We work from the premise, already stated, that, as amatter of public policy, Commonwealth companies should not be able to engage inactivity denied to the Commonwealth itself because of constitutional limitations onpower.

Challenging the validity of the company's registration?The first question to be dealt with is whether the formation of the Commonwealthcompany can be challenged for failing to meet the registration requirements of theCorporations Law. The prerequisites to the formation of either a proprietary or a publiccompany are set out in ss 112-117 of the Corporations Law. These sections stipulate theminimum number of required members, the need for names to be subscribed to thecompany's memorandum of association, and the need for compliance with otherspecific registration requirements. On the face of it, a company will be validlyregistered if all of these factors are satisfied. Yet according to one group of leadingauthors "[o]nly persons who are associated for a lawful purpose may form a registeredcompany."100 They add that the Australian Securities Commission (now the AustralianSecurities and Investment Commission and hereafter referred to as ASIC) wouldnormally refuse to register a company which was formed for an unlawful purpose orwhich was prohibited by legislation from being registered under the CorporationsLaw.101

100 H Ford, R Austin and I Ramsay, Ford's Principles of Corporations Lau} (8th ed 1997) at 165.This argument refers to s 114 prior to the amendments made by the Company Law ReviewAct 1997 (Cth).

101 Ibid, giving the example of trade unions which cannot be registered under theCorporations Law: see s 116 (replacing s 1347 to which Ford et al refer).


If this argument is correct it might be a possible ground for challenging theregistration by ASIC of a Commonwealth company where the purpose of thatregistration is for the company to act outside constitutional limitations. This involvestwo specific questions: do the registration requirements of the Corporations Law carrya requirement that registration must be for a lawful purpose and, if so, is an attempt bythe Commonwealth to incorporate a company with the purpose of causing it to actoutside the powers set out in the Constitution "an unlawful purpose"?

On the first question, the obvious difficulty is that the statute does not make expressreference to registration having to be for a lawful purpose. That reference was removedfrom the section by the First Corporate Law Simplification Act 1995 (Cth). Prior to theamendment, what was then s 114 read:

Subject to this Law, any 5 or more persons, or where the company to be formed will be aproprietary company, any 2 or more persons, associated for any lawful purpose may ...form an incorporated company [emphasis added].

This wording can be traced back to the Uniform Companies Acts of 1961 and, priorto that, to companies legislation in the United Kingdom. There is nothing in theExplanatory Memorandum which accompanied the 1995 amending legislation whichprovides any guide as to why the words were omitted.102 It may be that the expressrequirement was deleted because of the difficulties facing the Commission indetermining the actual purpose of incorporation in any given case. These difficultiesare exacerbated by the fact that the Corporations Law does not mandate the inclusionof objects clauses in the memorandum of association.103 Yet it may still be the case that,as Ford, Austin and Ramsay seem to assume, the previously stated prerequisite oflawful purpose continues as an implied requirement in the current provisions. Thedifficulty is that there is no clear authority for this proposition.

Assuming, for the moment, that there is an implicit requirement that registration befor a lawful purpose, the next question is whether the purpose of defeating the limitsset by the Constitution is "unlawful" within the meaning of the section. Is therequirement of lawfulness defeated only if the company's purpose is punishable, or (asseems more likely) is it also an unlawful purpose to do something "in the sense that thelaw will not aid it"104 or which is against public policy? Again, there is little by way ofauthority to assist in formulating a clear answer to this question.

Even if both of these questions are answered affirmatively, issues of standing andremedy still remain. We have already referred to the difficulties involved indetermining who would have standing to challenge the Commonwealth's exercise ofexecutive power in applying for company registration. Similar difficulties would existwhere the challenge related to the validity of the registration itself. There would also beproblems about the remedy. Once issued, a certificate of registration is conclusiveevidence that the company has been duly registered and that all of the registrationrequirements have been met (Corporations Law, s 1274(7A)). Although in AustralianSecurities Commission v SIB Resources NL it was held that this presumption does notbind the Commission, the court also held that the Corporations Law did not give it the

102 Nor is there any discussion in the proposal which preceded the draft Bill- see CorporateLaw Simplification Program, Forming a company: Proposal for simplification (1994).

103 Corporations Law, s 125(2).104 Bowman v Secular Society Ltd [1917] AC 406 at 425 per Lord Finlay.


power to make orders which would retrospectively deprive a company of thecorporate existence conferred by what is now s 119.105

We conclude that the prospects of challenging the registration of a Commonwealthcompany on these grounds are at best uncertain and, more likely, will not succeed. Forthe remainder of this article we will assume that the Commonwealth has validlyincorporated a company under the Corporations Law and that the Commonwealth isthe only member of the oompany or that it has a majority position which gives itcontrol over the company. Therefore we must look to the ordinary rules and principlesof corporate law to see whether limitations on the company's activity are possible andpracticable.

The legal status and capacity of Commonwealth companiesGiven the premise stated above, there are two immediate problems which arise fromprinciples which are axiomatic to corporate law. First, from the moment it is registered,a company is a legal entity separate from its incorporators, directors, and members.This, of course, is the well known principle from Salomon's case.106 It is also embodiedin s 119 of the Corporations Law, which states that a company "comes into existence asa body corporate". The consequences of this separate legal status are well known. AsCozens-Hardy MR said in Gramophone and Typewriter Ltd v Stanley:

The fact that an individual by himself or his nominees holds practically all the shares in acompany may give him the control of the company in the sense that it may enable him byexercising his voting powers to turn out the directors and to enforce his own views as topolicy, but it does not in any way diminish the rights or powers of the directors, or makethe property or assets of the company his, as distinct from the corporation's. Nor does itmake any difference if he acquires not practically the whole, but absolutely the whole, ofthe shares. The business of the company does not thereby become his business.107

Secondly, s 124(1) of the Corporations Law, gives each company "the legal capacityand powers of an individual". A company's legal capacity is not dependent on, orlimited by, the legal capacity of the person(s) who incorporate it, or who are itsmembers or its directors.

These two points apply to any company incorporated under the Corporations Law;Commonwealth companies are not treated any differently in this respect. Thus, thereare no corporate law grounds for arguing that a company is automatically affected bythe constitutional limitations on Commonwealth power simply because it is controlledby the Commonwealth. For corporate law purposes, the company is legally distinctfrom the Commonwealth.

The separate relationship between the Commonwealth and a Commonwealthcompany was the subject of discussion by the High Court in Commonwealth v Bogle.10B

Commonwealth Hostels Ltd was a company limited by guarantee which had beenincorporated in 1951 by the Commonwealth under the Companies Act 1938 (Vic). Allof the subscribers to the memorandum of association were Commonwealth publicservants, and the articles of association gave the Minister for Labour and NationalService complete control over the composition of the board of directors. At issue was

105 (1991) 9 ACLC 1,147 at 1,156. The Court referred to the previous provision found in s 123.106 Salomon v Salomon & Co Ltd [1897] AC 22.107 [1908] 2 KB 89 at 95.lOB (1953) 89 CLR 229.


whether the company was bound by a Victorian statute regulating charges at hostels. Amajority of the High Court held that the company was not able to claim immunity fromthe provisions of the Victorian Act. The majority decisions were argued in termssimilar to the views expressed in the Gramophone and Typewriter case, noted above.Thus, despite evidence that the company had been incorporated by theCommonwealth exercising its executive power, that the Minister controlled the boardand the company's business, that the company relied on public revenue, and that itcontrolled Commonwealth property, the majority concurred with Fullagar J's view that

none of these things can affect the legal character of the company as a person suing in thecourts. If the company were a company limited by shares, it could make no differencethat the Commonwealth held ninety-nine per cent of the shares. ... Having beenincorporated under the Companies Acts of the State, it seems to me that it must besubject to the Companies Acts and all other State legislation which in terms applies tosuch companies.10g-

Given this precedent, the task becomes that of examining ways in which theseparate legal status of, and the exercise of full legal capacity by, a Commonwealthcompany can be limited in practice. Given that a Commonwealth company is subject togeneral and statutory company law principles just like any other company, it isappropriate to examine whether those principles offer assistance. From a corporate lawperspective there are several possibilities, each with its own problems and limitations.We examine four approaches.

Challenge using corporations law mechanismsThe first approach is to try to restrict the company's ambit of operation through carefuldrafting of the memorandum and articles of association. This is a preventive measure,the intention being to guard against the possibility that a company might exceed thelimitations imposed on the Commonwealth. The next two approaches are only relevantafter the company has been found to have acted in this way. We examine thepossibility of challenging the actions of the directors, and the possibility of lifting thecorporate veil. We argue that none of these approaches is adequate or sufficient torestrain the activities of Commonwealth companies. What is required, in our view, isthe introduction of specific legislation to regulate these companies. Thus the fourthapproach which we examine is the possibility of amending the CommonwealthAuthorities and Companies Act 1997 (Cth) (the CAC Act) with the aim of restrictingthe scope of activity in which Commonwealth companies can engage.

Restrictions in the memorandum and articles ofassociationThe Corporations Law provides that a company's constitution110 may contain expressrestrictions on the exercise by the company of its powers, or may expressly prohibit the

109110

Ibid at 267-68.Following the commencement of the Company Law Review Act 1997 on 1 July 1998, theCorporations Law uses the term "constitution" instead of referring to the tnemorandumand articles of association (s 136). Indeed a company is no longer required to have amemorandum or articles of association. Instead it can either -adopt the standard"replaceable rules" which are found in the Corporations Law, or it can modify thos~rules

and thereby adopt its own "constitution". Because we are concerned in this article with theconstitutional position of Commonwealth companies, we will try to avoid confusion bycontinuing to use the label "memorandum and articles".

298 Federal Lcrw RevieuJ Volume 26

exercise of a power (s 125(1». One way of imposing a restriction would be to include astatement of objects in the constitution as permitted (but not required) by s 125(2).Relying on these provisions, the memorandum and articles of a Commonwealthcompany could be drafted to define the company's area of operations in terms whichcoincide with the constitutiollal limitations which affect the Commonwealth. Thiswould be a sensible step towards achieving the policy goal set out earlier in this paperbut it is not a complete solution to the problem.

The most immediate difficulty is that the memorandum and articles can be alteredby a special resolution passed at a general meeting of the company.lll A company'spower to alter its memorandum and articles can be made subject to some furtherrequirement in addition to a special resolution, as set out in the memorandum andarticles, but even under the new Corporations Law provisions a company cannotdeprive itself of the power to alter its memorandum and articles.ll2 At best, then, theactivities of a Commonwealth company could be limited by entrenching provisions inits memorandum and articles which are designed to duplicate the Commonwealth'sconstitutionally limited powers. Of course, the task of drafting an appropriate andeffective provision could prove to be difficult. Entrenchment could take the form ofsome procedural requirement in addition to a special resolution, and that requirementc~uld not be changed without itself being complied with.ll3

Even if this step is taken the protection which it offers is limited. The option ofimposing restrictions on a company's power (via s 125) must be read in conjunctionwith s 124(1), which gives the company the legal capacity of an individual. Theseprovisions have their origins in a set of reforms, introduced in 1985, which weredesigned to reduce uncertainty for persons having dealings with a company whilstsimultaneously ensuring that company officers and members give effect to thecompany's memorandum and articles. The fact that a company's memorandum andarticles contain an objects clause or some other restriction or prohibition on thecompany's exercise of power does not negate the company's legal capacity which isgranted by s 124(1). As a result, when a company acts contrary to a restriction orprohibition in its memorandum and articles, that act is not invalid merely because ofthat contravention (s 125(1». The fact that a company has not complied with any suchrestriction or prohibition may be relevant to a limited range of actions under theCorporations Law:

(i) An action against a director or officer of the company for breach of the statutoryduties of honesty or care in s 232(2) and (4), or for making improper use of his orher position to cause detriment to the company. Where the breach of s 232 isrepeated, an application may be made under s 230 for an order prohibiting aperson from being a director or from taking part in the management of acompany.ll4 Where a threatened failure to comply with a restriction or

111

112

113114

Corporations Law, s 136(2). A special resolution must be passed by at least 75% of thevotes cast by members: s 9.Corporations Law, s 136(3). The authority for the proposition that a company cannotdeprive itself of the power to alter its articles of association is Allen v Gold Reefs of WestAfrica Ltd [1900] 1 Ch 656.Corporations Law, s 136(4).Breach of s 232 is governed by the civil penalty provisions in Corporations Law Part 9.4Bunder which only the'Australian Securities and Investment Commission or some other


prohibition entails a potential contravention of s 232, it may also be possible toseek an injunction under s 1324.

(ii) An application by a member of the company or ASIC for an order under s 260 thatthe affairs of the company are beiIlg conducted in a manner that is oppressive orunfairly prejudicial to or unfairly discriminatory against one or more members orare contrary to the interests of the members as a whole;

(iii) An application by a member for an order to wind up the company on the groundsthat this is just and equitable (s 461(k)) because the company is no longer beingrun according to "the general intention and common understanding" of itsincorporators}.15

It is difficult to say how useful this limited range of actions will be in the situationwhere a Commonwealth company has not complied with restrictions or prohibitionscontained in its memorandum and articles which are intended to restrict it to activitieswithin constitutional limits. In most of these actions standing is given to ASIC or to amember of the company. The Commission is only likely to act where the case concernscompliance with the Corporations Law or the protection of investors' interests. ASIC isnot a guardian of the Constitution and it would not initiate action on that basis. As foran action brought by a member, this would depend upon factors such as the extent ofCommonwealth ownership of the company and whether the Commonwealth had someinterest in allowing the company to pursue its activities. For example, where theCommonwealth is the only member of the company and wishes the company to pursuecommercial activities which fall outside constitutional limits, it is unlikely that theCommonwealth would avail itself of any of the actions under the Corporations Law.

In summary, the limited range of actions available where a company does notcomply with restrictions or prohibitions in its memorandum or articles, and the limitedrelevance of those actions in the context of a Commonwealth company, means that theuse of the memorandum and articles, though sensible, cannot guarantee compliancewith the Constitution.

Challenging the actions of Commonwealth appointed directors.Imagine that a Commonwealth company has been incorporated for purposes, expresslystated in the memorandum and articles, which are intra vires the Constitution.Sometime later the directors of the company, all of whom are Commonwealth officersappointed to the board by the Commonwealth, resolve that the company will enter intoa transaction which is clearly ultra vires the Constitution. Can the resolution of thedirectors be challenged?

Some possibilities have already been canvassed under the previous heading, suchas an action for breach of the statutory duty to act honestly, or for improper use ofposition to cause detriment to the company (Corporations Law, s 232). To this might beadded an action alleging breach of the general equitable duty of a director to act in thebest interests of the company. In these actions the underlying concern is that thedirectors have exercised their powers for improper purposes. An alternative approach

delegate or authorised person may make an application (s 1317EB). Standing under s 230 isgiven to ASIC, a member, creditor, liquidator or administrator of the company, or a personauthorised by ASIC to make an application: s 230(6).

115 Re Tivoli Freeholds Ltd [1972] VR 445 at 468 per Menhennitt J.


would be to try and question the scope of those powers by arguing that, as officers ofthe Commonwealth, the appointees to the board are limited in the same way as theCommonwealth's executive power. The argument would be that they cannot do asdirectors of the company what they cannot do as officers of the Commonwealth.

While this argument meets our concerns about government responsibility andaccountability it has to contend with the formalities of corporate law. Once appointedto the board of a Commonwealth company, the person's powers and capacities as adirector are distinguished from those which she or he has as a Commonwealthemployee. A director is an officer of the company, and his or her powers and capacitiesare granted by the company's memorandum and articles and supplemented by theCorporations Law. Thus it is possible that a person as director can have powers whichhe or she does not have in some other capacity, even where that other capaci~ is thereason why the person was appointed as director in the first place.1 6 Thisdifferentiation of roles is evident in the situation of so-called nominee directors persons appointed to the board of a company to serve the particular interests of theappointer. In cases dealing with conflict between the nominee's loyalty to theappointor's interests and his or her duties to the company as a director, the courts haverepeatedly affirmed that the person's role as a director prevails.117

Another possible way of challenging the resolution of the directors may arise fromthe decision of the Full Court of the SUfreme Court of Queensland in ANZ Executors &Trustee Co Ltd v Qintex Australia Ltd.11 The Court held that the effect of the corporatecapacity sections in the Corporations Law (see ss 124-125 discussed above) is simply tomake the validity of corporate dealings with outsiders unimpeachable. These sectionsdo not, however, disturb "the fundamental rule that powers or funds of a companymay be used only for company purposes".119 The Court thus distinguished betweentwo applications of the ultra vires doctrine. The Corporations Law has abolished theapplication of the doctrine to the company's capacity to act (described by McPherson Jas "ultra vires in the narrow sense"),120 but it has left intact the application of thedoctrine to abuse of power by directors or shareholders ("ultra vires in the widesense").121 This allows the actions of directors or shareholders to be challenged wherethey are ultra vires in that second sense.

This decision has attracted some criticism, particularly because it seems to have thepotential to resurrect the ultra vires doctrine for companies.122 This alone suggests thatcaution is necessary when considering the application of the decision. But whatever its

116

117

118119120121122

For a well-known illustration of this point see Lee v Lee's Air Farming Ltd [1961] AC 12. Wenote that it may be possible to challenge the actions of the Commonwealth in appointingthe directors, but this would only be likely where it was apparent at the time ofappointment that the purpose of company was to engage in unconstitutional activities.Bennetts v Board of Fire Commissioners of New South Wales (1967) 87 WN (Pt 1) (NSW) 307.The duties of the nominee director can be attenuated by agreement amongst the companymembers: Levin v Clark [1962] NSWR 686. This will not be necessary where the appointer isthe sole shareholder in, or member of the company, as in the case of a wholly-ownedCommonwealth company.[1991] 2 Qd R 360.Ibid at 371.Ibid at 370.Ibid.See R Baxt, "Ultra Vires - Has it Been Revived?" (1991) Companies & Securities LII0l.

1998 Conzmonwealth Companies and the Constitution 301

merits or problems, it offers little help as a device for restricting the scope of aCommonwealth company's commercial activity. This is because the principle upheldby the Court hinges on the idea of furthering "the purposes of the company". Thereference to purposes here seems to equate to the commercial interests which thecompany has been established to pursue on behalf of its shareholders. In relation to aCommonwealth company, for example, those purposes might be to engage in theprovision of certain goods or services. The Qintex case is directed at the commercialobjects to which corporate resources are put. In contrast, our concern in this article is toassess whether the decision can be used to constrain Commonwealth company activitywithin constitutional limits. In seeking to apply the Qintex case, it would be odd todescribe the purpose of such a company as being "to operate within the limits of theConstitution". The Qintex case is therefore of little assistance to us.

Lifting the corporate veilCan it be argued that, when a Commonwealth company acts outside the limits of theConstitution, we should ignore the separate legal status of the company and treat theCommonwealth as the real actor? We examine two possible arguments, both wellknown but rarely used. One is based on agency, and the other on avoidance of legalduty.

An introductory note of caution is required. There are a number of cases in whichthe courts have, for a variety of reasons, looked behind the legal status of the companyin order to take into account the reasons for its incorporation and the methods bywhich it is controlled. The consensus amongst commentators, however, is that "it is stillimpossible to discern any broad principle of comfany law indicating the circumstancesin which a court should lift the corporate veil".12 This is, then, a haphazard method ofconstraining the commercial activities of Commonwealth companies.

We consider the agency argument first. As we have already noted, public lawyersand commercial lawyers tend to use the idea of "agency" in different ways. Forexample, the majority decision in Bogle rejected the argument that the CommonwealthHostels company should be treated as an agent of the Commonwealth, as had beensuggested by the minority judges (McTiernan and Williams JJ).124 According to themajority the fact of incorporation under the general companies legislation negated anagency relationship. This decision was concerned with "agency" in a broad, public lawsense. It did not, we suggest, address the possibility that the Commonwealth and oneof its companies could have a principal-agent relationship in the narrower senseunderstood by commercial lawyers. Thus we can address the specific question: could aCommonwealth company be regarded as an agent of the Commonwealth if we treatthe Commonwealth as analogous to a parent company with the Commonwealthcompany as its subsidiary? In other words, could we apply the reasoning similar tothat in Smith, Stone & Knight Ltd v Birmingham Corporation?125 If so it might then beargued that the company, as agent, was bound by the same constitutional limitations asthe Commonwealth.

123 Ford, Austin and Ramsay, above n 100 at 130.124 (1953) 89 CLR 229 at 249 and 253.125 [1939] 4 All ER 116.


In the Smith, Stone & Knight case Atkinson J listed six questions which must beanswered affirmatively before an agency relationship between a parent company andits subsidiary can be held to exist:1 Were the profits treated as the profits of the parent company?2 Were the persons conducting the business appointed by the parent company?3 Was the parent company the head and the brain of the trading venture?4 Did the parent company govern the adventure, decide what should be done and

what capital should be embarked on by the venture?5 Did the parent company make the profits by it skill and direction? and6 Was the parent company in effectual and constant control?

The questions are all directed at establishing that there is such a high level ofcontinuing control being exercised by the parent over the subsidiary that, as Atkinson Jput it, all that needs to be done for the parent to take over the business is to paint overthe subsidiary's name and change the business paper and forms.

There are two potential drawbacks to the application of this test to the relationshipbetween the Commonwealth and a Commonwealth company. The first is that there islittle authority on the acceptability of the Smith, Stone & Knight case in Australiancourts, and what authority there is offers mixed support.126 If the aim of the presentexercise is to bring clarity and certainty to the position of Commonwealth companies,this is not a sound basis on which to build. The second drawback is the narrowapplication of the test. As we understand it, in practice many Commonwealthcompanies have greater operational autonomy than this test envisages, and if it were tobe applied it could only be in limited circumstances.127

The second "veil lifting" argument draws on cases in which courts have lookedbehind the company's legal status because the company has been formed for thepurpose of avoiding a pre-existing legal restriction. A potential analogy lies in the factsof Gilford Motor Co Ltd v Horne,128 where Horne had covenanted with the Gilford Motorcompany that he would not attempt to solicit customers of the company, either duringor after his employment. After he had left the company Horne commenced a businessin competition with Gilford Motor. He incorporated a separate company to conduct thebusiness. That company's only directors and shareholders were Horne's wife and anassociate of his, but the business was conducted by Horne. The Gilford Motor companysought an injunction to restrain Horne and the company from soliciting customers. Thecourt granted the injunction, being convinced that "one of the reasons for the creationof that company was the fear of Mr Horne that he might commit breaches of the

126

127

128

The case was applied in Hotel Terrigal Pty Ltd v Latec Investments (No 2) [1969] 1 NSWR 676,which was distinguished (along with Smith, Stone & Knight) by the Federal Court in DennisWilcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267. Dennis Wilcox was thendistinguished, and Smith, Slone & Knight applied, in Spreag v Paeson Pty Ltd (1990) 94 ALR679 (a trade practices case).For the same reason there would be difficulties in applying the decision in StandardChartered Bank of Australia v Antico (1995) 13 ACLC 1381 and arguing that theCommonwealth is a "shadow director" of a Commonwealth company. This autonomy iswhat prompted the enactment of the Commonwealth Authorities and Companies Act 1997(Cth).[1933] Ch 935.


covenant in carrying on the business ... and that he might possib y avoid that liability ifhe did it through the defendant company".129 This finding was ot rebutted by Horne.

Could it be argued, by analogy, that if it is shown that t e Commonwealth hasincorporated a company for the reason of engaging in commer ial actions outside thelimitations of the Constitution then a similar result could app y? A parallel problemcould arise where it is found that the purpose of incorporati g the Commonwealthcompany is to avoid a legislative obligation with which the ommonwealth wouldotherwise have to comply? A recent example m~ht be found the establishment ofthe Maritime Industry Finance Company Ltd,13 the purpose of which is to borrowmoney to pay redundancy benefits to employees in the restrue ring of the Australianstevedoring industry. Section 37 of the Financial Management nd Accountability Act1997 (Cth) states that the Commonwealth cannot borrow mo ey without legislativeauthorisation. The incorporation and use of a Commonwealth controlled and ownedcompany arguably to evade this requirement raises the prospe t of applying a GilfordMotor type of argument.131

Despite its possible attractions, we see two difficulties in applying this argument.First, in cases such as Gilford Motor the court is concerned with a deliberate attempt touse the corporate form to circumvent what would otherwise be a legal restriction on aperson's power to act. This is evident from the decision in Gilfo d Motor itself, in whichthe judge described Horne's company as "a device, a stratage II which was used tocarry out a business which was "a cloak or a sham".132 As we have noted already, itwill not always be so easy to determine the Commonwealth's r ason for incorporatinga company, and unrebutted inferences of the type relied on in ilford Motor will not becommon. At any rate, subsequent cases have narrowed the scope of the argument.According to Young J in Pioneer Concrete Services Ltd v Yelnah P y Ltd it must be shownthat the company was formed "for the sole purpose or the dominant purpose ofevading a contractual or fiduciary duty".133 In the case of a Co monwealth company itis more likely that the activating purpose of incorporation is not a deliberate attempt tocircumvent constitutional limitations, but to adopt a legal for which is conducive toeffective commercial activity. Nor would this argument catch the situation where acompany has been formed for purposes which are intra vires th Constitution but later

129130

131

132133

Ibid at 955-956 per Lord Hanworth MR.This company was registered by the Commonwealth Government in April 1998 in thecontext of the industrial dispute between the Maritime Union of Australia and the Patrickgroup of stevedoring companies.There is no doubt that the Commonwealth could register a company which has the powerto borrow money, for example, for some entrepreneurial purpose which is within theconstitutional limits. The possible objection in this case is that the Comluonwealth hasestablished a company to assist in carrying out a policy, namely, reform of the stevedoringindustry. The purpose behind s 37 is evidently to ensure that, if the Commonwealth everneeds to borrow money to implement its policies, the borrowing must be scrutinised andapproved by Parliament. It is arguable that s 37 represents a limit on the Commonwealth'sexecutive power in which case the formation of MIFCo was ultra vires the executive power.[1933] Ch 935 at 956 per Lord Hanworth MR.(1987) 11 ACLR 108 at 120.


engages in ultra vires activity or the case where the Commonwealth acquires control ofan already incorporated company.134

The second problem, assuming that the veil-lifting argument is sustainable,concerns standing to bring the action. In the situation typified by Gilford Motor theplaintiff's action is based on rights arising from a pre-existing contract with theincorporator. In the case of a challenge to the Commonwealth's use of the companyform to circumvent the Constitution, the potential plaintiffs will have a less directconnection and may include trade rivals, a State Attorney-General, or theCommonwealth Attorney-General (suing ex officio or ex relatione). As we have alreadynoted, there are uncertainties in the determination of who has standing to sue. It issufficient to say here that these uncertainties add to our conclusion that reliance onjudicial discretion to "lift the corporate veil" is an unsatisfactory method of securingconstitutional compliance by Commonwealth companies.

Conclusion on corporate law controls over Commonwealth companiesWe have not attempted an exhaustive survey of all of the possible ways in whichcorporate law might be used to control the activities of Commonwealth companies. Wehave, however, sought to demonstrate that, in general, corporate law approaches andremedies do not offer any clear or conclusive method of restricting the scope ofarguably unconstitutional activities of Commonwealth companies.

This is hardly surprising. Modern Australian corporate law has developed out of aconcern to facilitate the wide-ranging use of corporate structures within the privatesector. The limitations which are found in the Corporations Law are oriented primarilytowards the responsible and accountable use of the corporate form by directors for thepurposes of protecting members' interests. The issues which are the central concern ofthis article - the control of Commonwealth commercial activity - do not fit easilywithin this legal framework.

That being the case, we argue that the most appropriate method of restrainingCommonwealth company activity is by imposing limitations through legislationspecially designed for that purpose. We explore this under the next heading.

Restraining Commonwealth companies by special legislationIt is possible for the powers of a company which is incorporated under theCorporations Law to be restricted by other legislation. For example, under the StateOwned Corporations Act 1989 (NSW) a "company State owned corporation"135 cannotform or acquire subsidiaries, acquire or dispose of fixed assets or investments, or sell ordispose of its main undertaking without the approval of its two voting shareholders.The Act does not specify any consequences for failure to comply with these limitations.The Act, however, specifies the content of the memorandum and articles of such acompany and states that those documents cannot be altered in a way which isinconsistent with these statutory requirements. Similarly, the State Owned Enterprises

134 This is suggested by Ford, Austin and Ramsay, above n 100 at 128, and depends onwhether emphasis is placed on the idea of the company being formed or on the misuse ofthe company form.

135 This expression refers to a Corporations Law company which is classified as a State ownedcorporation by being included in Schedule 1 to the Act.


Act 1992 (Vic) defines the principal objectives of State owned companies, andprescribes in part the contents of the memorandum and articles.

Our suggestion is that legislation should be enacted at the Commonwealth levelwith a similar purpose in mind. For the sake of simplicity this could be done byamending the Commonwealth Authorities and Companies Act 1997 (Cth) (the CACAct). That Act already regulates the financial reporting and accountabilityrequirements of Commonwealth authorities and companies. Furthermore, the CAC Actalready contains mechanisms for restricting - or generally guiding - the activities ofCommonwealth companies. For example, s 43 states that the directors of a whollyowned Commonwealth company must ensure that the company complies with generalpolicies of the government that are notified to the directors by the responsible Minister.Given this, we argue that it would be appropriate for the Act to be amended so as toclarify the matters raised by this article.136 ,

In more detail, we suggest that the CAC Act be amended by adding a restriction onthe powers of Commonwealth companies such that they cannot engage in activitieswhich would be ultra vires the constitutional powers of the Commonwealth, with theresult that any such activity on the part of the company is invalid. The nearest analogywhich we have been able to discover is that from time to time, the powers of statutorycorporations are limited by reference to constitutional limits. For example, thefunctions of the Australian Atomic Energy Commission, which was the defendantstatutory body in the Kathleen Investments case,137 were described as the provision ofuranium "only" for defence, overseas sales to other governments or "for any otherpurpose of the Commonwealth".138

If such an amendment were made, the validity of the company's actions would bedetermined by an inquiry which is similar to that applied to acts of the Commonwealthitself. It should be noted that this proposal would effectively reintroduce the doctrineof ultra vires for Commonwealth companies and would put them on the same footingas Commonwealth statutory corporations as far as their powers are concerned.139 Weargue that this is defensible because the policy behind the abolition of the doctrine inthe Corporations Law is directed at providing certainty in private sector commercialtransactions; it is not appropriate for public sector corporate activity. The origins of theultra vires doctrine lie in a concern _to limit the actions of companies which, in the earlynineteenth century, were perceived to be creatures of the state. As Stokes describes it:

What gave legitimacy to these companies was the theory that as creatures of the statethey were supervised and regulated by the state. In the eighteenth and early nineteenthcenturies the theory found its doctrinal expression in the ultra vires rule. The ultra viresdoctrine was used by the courts to keep corporate bodies within the narrowly defined

136

137138

139

For further suggestions about reform of the CAC Act, see S Bottomley, "Corporatisationand Accountability: the case of Commonwealth Government Companies" (1997) 7 Aus JofCorp Law 156 at 175-176.(1977) 139 CLR 117.Atomic Energy Act 1953 (Cth), s 17(4). Compare the Acts Interpretation Act 1901 (Cth),s 15A which provides "Every Act shall be read and construed subject to the Constitution,and so as not to exceed the legislative power of the Commonwealth ..."The Government Owned Corporations Act 1993 (Qld) does the reverse, expressly statingthat the Act does not reintroduce the doctrine of ultra vires in relation to governmentowned companies (s 153). This can be explained by the fact that the Queensland Stategovernment does not have close constitutional limitations on i~ powers.


powers granted to them by the statute or charter of incorporation conferring corporateidentity upon them.140

Stokes goes on to note that this rationale lost its force after the introduction of companystatutes which allowed incorporation by registration, generally available to anyonewho complied with the basic statutory requirements. Our argument, however, is thatthe old rationale, as stated by Stokes, should be adapted and applied toCommonwealth companies. These entities are "creatures of the state" in two senses:they owe their corporate status to an exercise of power by a state agency (ASIC); andthey are established, controlled and owned by the Commonwealth to conduct activityon behalf of the Commonwealth.

If this proposal is accepted, then two ancillary amendments to the CAC Act wouldalso be required. First, the Act defines a Commonwealth company as "a CorporationsLaw company in which the Commonwealth has a controlling interest", but excludessubsidiary companies from the definition (s 34(1».141 In our view the statutorylimitation on corporate power suggested ~bove should also apply to subsidiaries whichare controlled by the Commonwealth. Secondly, to avoid any doubt, the statutorylimitation on corporate power should expressly override any inconsistent provisions inthe Corporations Law.

The final question is: who would have standing to bring an action alleging that aCommonwealth company had exceeded its power under this proposal? Our view isthat there is a public interest in seeing that Commonwealth companies operate withinproper limits, and so standing should be defined widely. We suggest that standing forthese purposes should be defined along similar lines to those recommended by theAustralian Law Reform Commission in 1996, whereby any person has standing tocommence and maintain proceedings that have a public element unless precluded bylegislation or the proceedings would interfere unreasonably with the ability of a personhaving a private interest in the matter to deal with as he, she or it wishes.142 This mayappear to be a radical suggestion but in a time when government institutionalarrangements are going through radical changes, radical solutions are called for. Manyof these changes effectively remove old channels of accountability. New channels areneeded.

CONCLUSION

In exploring the apparent contradiction which exists if the Commonwealth registers acompany to undertake activities which are beyond the Commonwealth's powers, thispaper has uncovered much uncertainty concerning the correct legal analysis. Onesource of uncertainty is inevitable when dealing with questions of constitutionalpower. The Constitution and commercial activity do not mix very well and there is nodoubt that the Commonwealth Constitution represents an irrational scheme governingCommonwealth commercial activities. It is necessary to weave a sometimes intricatepath through the Constitution to find heads of power to justify the activities of the

140 M Stokes, "Company Law and Legal Theory" in W Twining (ed), Legal Theory and CommonLaw (1986) 155 at 162.

141 The Act does not define what is meant by the term "controlling interest".142 Australian Law Reform Commission, Beyond the Doorkeeper: Standing to Sue for Public

Remedies (ALRC 781996) AppendiX F.


company which on commercial grounds may make perfect sense. Another source ofuncertainty is the difficulty of characterising the entity established by theCommonwealth. Is it to be treated as the Commonwealth or as a separate entity? It is,of course, a separate entity in law but when considering questions of propergovernmental activity, the use of public money and accountability, the technical legalanalysis appropriate to private law becomes inapt. In order to side-step thesedifficulties we have suggested a solution by way of amendment to the CommonwealthAuthorities and Companies Act 1997 so that it imposes limits on what Commonwealthcompanies can do (as is done by similar legislation at State level) with standingconferred on anyone to challenge.

Instead of amending the CAC Act, it might be thought simpler to imposerestrictions on the activities of Commonwealth companies through the use of financialcontrols and guidelines which are formulated and administered departmentally. Wedo not favour this approach because it is not publicly visible and relies too heavily onthe discretionary decisions of departmental officers. The growing reliance onCorporations Law companies by government is sufficientlr. widespread that it can nowbe described as part of lIa 'fourth arm' of governmentll

• 43 If the Commonwealth isserious about responding to the potential problems posed by Commonwealthcompanies, then the response should be visible, providing clear mechanisms foraccountability and means of enforcement which are generally available. We considerthat keeping proper controls on the use of companies by the Commonwealth is notonly important in relation to the Commonwealth's commercial activities, but also and arguably more importantly - in relation to the use of companies either toimplement a policy or to carry out other activities which are governmental rather thancommercial.

Another solution is to do nothing on the assumption that challenges will be rareand, even if successful from time to time, this would be a small cost to pay for virtuallyunrestricted activities by Commonwealth companies. The consequence of this tacticwould be that the Commonwealth would be armed with a very effective way ofstepping around the constitutional limits which normally apply.l44 As Daintith hasargued in connection with the use of contract by government, there is a "newprerogative" which allows the government to by-pass Parliament.145 TheCommonwealth company potentially provides the Commonwealth with the means toby-pass the Constitution.

143144

145

P Finn, "Public Trust and Public Accountability" (1994) 3 Griffith L Rev 224 at 237.It may also provide the Commonwealth with a way of avoiding existing legislation, on thesame "pragmatic" argument that the chance of a challenge is low. We saw an example ofthis in the registering of the Maritime Industry Finance Company Ltd the purpose ofwhich was to raise a loan facility - something the Commonwealth itself could not doexcept by legislative authority under s 37 of the Financial Management and AccountabilityAct 1997 (Cth).See T Daintith, "Regulation by Contract: the New Pr~rogative" (1979) 32 Current LegalProblems 41.

Documents

COMMONWEALTHCOMPANIES ANDTHE CONSTITUTIONAustralian Atomic Energy Commission.14 Theseexamplesserveto illustrate someofthe difficulties which will beencountered in this article. Suppose