The proposed sale of Medibank Private could be stymied by declassified cabinet documents containing legal advice from 1981 that said the fund was not owned by the Commonwealth and therefore could not be sold by it.

The documents, obtained by The New Daily through the National Archives of Australia, include details of legal opinions given to senior ministers that indicate the Commonwealth was not the beneficial owner of the fund.

“The Commonwealth does not in any legal sense have equity in the Health Insurance Commission or in its assets (Medibank Private),” the cabinet minute says.

The documents raise serious questions about the status of the Commonwealth’s interest in the insurer, which the Abbott Government may have to account for in the disclosure documents it publishes for the float.

Last Wednesday, Finance Minister Mathias Cormann announced that Medibank would be sold through an initial public offering in the next financial year. The government expected to earn about $4 billion from the sale, with the funds to be spent on infrastructure projects.

But the proposed float of Medibank Private conveys risks to investors, including the possibility that the Commonwealth of Australia may not be the beneficial owner of the assets now accorded to the company.

The Fraser cabinet documents, compiled by the Committee on Review of Commonwealth Functions in March 1981, might also widen the float’s litigation risk because they contain legal opinions that could feasibly be deployed by aggrieved policyholders to assert a legal claim over a portion of the sale proceeds.

If such a prospect was thought likely, the Abbott government might be compelled to indemnify future shareholders of Medibank Private against a potentially unfavourable court decision.

That would complicate the $4 billion asset sale and it would likely dampen the confidence of many investors in the float.

Alternatively, the Abbott Government could abandon the sale process, leaving the problem of competitive neutrality in the private health insurance market to fester for at least another generation.

Since the Howard Government restructured Medibank Private as a public enterprise in 1998, a debate has percolated on whether policyholders of the health fund would be entitled to some portion of the proceeds of a sale.

The substance of the debate provides a possible explanation for why no government has been able to offload the private health insurer since Malcolm Fraser’s coalition government first explored privatisation options after the 1980 federal election.

George Lekakis has been a finance journalist for 20 years, working at the Herald-Sun, the Australian Financial Review and Alan Kohler’s Eureka Report. He currently teaches investigative and business journalism at Monash University.