Gilligan, George; Bird Helen; Ramsay, Ian --- "Civil Penalties and the Enforcement of Directors' Duties" [1999] UNSWLawJl 3; (1999) 22(2) UNSW Law Journal 417
[#] The research for the study was funded by grants from the Criminology Research Council and the Australian Research Council. The views expressed are not necessarily those of the Councils. Although the study was carried out in cooperation with ASIC this article is an independent analysis by the research team of the issues discussed. The views of ASIC staff set out in this article are the views of individual case officers and not necessarily the views of ASIC. The conclusions drawn from the information provided by ASIC case officers represent the views and findings of the research team and should not be seen as the views or policies of ASIC.
[*] Research Fellow, Centre for Corporate Law and Securities Regulation, the University of Melbourne.
[[**] ] Lecturer in Law and Member of the Centre for Corporate Law and Securities Regulation, the University of Melbourne.
[[**] *] Harold Ford Professor of Commercial Law and Director of the Centre for Corporate Law and Securities Regulation, the University of Melbourne.
[1] The Corporations Law is the principal statute regulating Australian corporations.
[2] On 1 July 1998 the Australian Securities Commission became ASIC. The establishment of ASIC is part of a significant restructuring of the Australian financial regulatory system based on a ‘twin peaks’ policy approach, as recommended by S Wallis (Chair), Financial System Inquiry Final Report, March 1997. The other regulatory twin peak is a new body, the Australian Prudential Regulatory Authority (APRA), which regulates the banking industry. APRA was also established on 1 July 1998, but by a separate statute, the Australian Prudential Regulatory Authority Act 1998 (Cth).
[3] The civil penalty regime was integrated into the Corporations Law by the Corporate Law Reform Act 1992 (Cth), effective from 1 February 1993.
[4] The new regime implemented the recommendations in the Senate Standing Committee on Legal and Constitutional Affairs, Company Directors’ Duties: Report on the Social and Fiduciary Duties and Obligations of Company Directors, 1989 (referred to hereafter as the Cooney Report since the Committee chair was Senator Barney Cooney). The report had criticised the former regime, finding its criminal sanctions too severe, and its fines system too lenient. In the Committee’s view, lawbreakers were not sufficiently deterred, and the system lacked credibility with both the regulated and regulators.
[5] Cooney Report, ibid at 190-1. See also on the history and theory of civil penalties in Australian company law, H Bird, “The Problematic Nature of Civil Penalties in the Corporations Law” (1996) 14 Company and Securities Law Journal 405 and M Gething, “Do We Really Need Criminal and Civil Penalties for Contraventions of Directors’ Duties?” (1996) 24 Australian Business Law Review 375.
[6] ASIC has been supportive of the research project, making available a sample of senior personnel from regional offices across Australia to contribute their analyses of the effectiveness of civil penalties.
[7] Academic proponents of strategic regulation theory include: J Scholtz, “Deterrence, Cooperation and the Ecology of Regulatory Enforcement” (1984) 18 Law & Society Review 179; I Ayres and J Braithwaite, Responsive Regulation: Transcending the Deregulation Debate, Oxford University Press (1992); C Dellit and B Fisse, “Civil Liability under Australian Securities Regulation: The Possibility of Strategic Enforcement” in G Walker and B Fisse (eds), Securities Regulation in Australia and New Zealand, Oxford University Press (1994).
[8] See, for example, F Haines, Corporate Regulation: Beyond ‘Punish or Persuade’, Clarendon Press (1997); N Gunningham and R Johnstone, Regulating Workplace Safety: Systems and Sanctions, Oxford University Press (1999).
[9] G Richardson, A Ogus and P Burrows, Policing Pollution: A Study of Regulation and Enforcement Clarendon Press (1982); K Hawkins, Environment and Enforcement, Clarendon Press (1984).
[10] See Appendix A for the interview schedule.
[11] Section 318(1) became, with some modifications, s 344(1) on 1 July 1998.
[12] Remedial proceedings meaning those instituted to recover loss or damage arising from non-compliance with the Corporations Law.
[13] Corporations Law, s 1317HE.
[14] See generally Corporations Law, ss 1317HA-HE.
[15] Corporations Law, s 1317EA(3)(b). This power is limited by the requirement that the contravention must be a serious one: s 1317EA(5). A pecuniary fine cannot be ordered where the person has already been ordered to pay punitive damages: s 1317EA(6). If made, the order is enforceable as a judgment: Corporations Law, s 1317EG. If the order results from an ASIC investigation, the court may also order payment of ASIC’s expenses: Australian Securities and Investments Commission Act 1989 (Cth), s 91.
[16] Corporations Law, s 1317EA(3)(a). The court is not to make an order under s 1317EA(3)(a) if it is satisfied that, despite the contravention, the person is a fit and proper person to manage a corporation: s 1317EA(4). The expression “managing a corporation” is defined in s 91A. Criminal consequences are attracted if the person subsequently fails to comply with the order not to manage the corporation: s 1317EF.
[17] Corporations Law, ss 1317FA(1) and 1311(2)-(3). See also Corporations Law, Third Schedule, Penalties.
[18] Corporations Law, s 1317FA(1).
[19] Corporations Law, s 1317FB. The reverse is not the case. See Corporations Law, ss 1317GC-GD.
[20] To address the concern that a defendant is not exposed to both civil and criminal penalties for the same contravention.
[21] Corporations Law, s 1317ED(1).
[22] Corporations Law, s 1317EB.
[23] Corporations Law, s 1317JA.
[24] See also H Bird, note 5 supra at 413-20.
[25] Companies Code, s 570; Corporations Law, s 1311.
[26] Companies Code, ss 229(6), (7) and (10); Corporations Law, ss 232(7), (8) and (11).
[27] K Mann, “Punitive Civil Sanctions: The Middle Ground Between Criminal and Civil Law” (1992) 101 Yale Law Journal 1795 at 1798.
[28] Note 4 supra.
[29] Ibid at 190.
[30] Ibid at 191.
[31] Ibid at 190. A further recommendation concerning ‘on-the-spot’ fines was also made: ibid at 192.
[32] Ibid.
[33] Ibid at 190.
[34] Ibid at 188.
[35] Ibid at 191.
[36] Ibid at 80.
[37] Ibid at 190-1. C Dellit and B Fisse, note 7 supra at 583-92.
[38] Professor Braithwaite formulated and developed the enforcement pyramid in a number of his publications: see, for example, J Braithwaite, To Punish or Persuade: Enforcement of Coal Mine Safety, State University of New York Press (1985); I Ayres and J Braithwaite, note 7 supra.
[39] I Ayres and J Braithwaite, note 7 supra. These views reflect the ‘game’ theory of regulation which argues that regulation is a game of negotiation and interaction between the regulator and the persons regulated. Those regulated are presumed to be rational, single actors who determine whether to comply with regulation by assessing the costs and benefits which compliance produces for them at a particular time. See J Scholtz, note 7 supra.
[40] P Grabosky, “Discussion Paper: Inside the Pyramid: Towards a Conceptual Framework for the Analysis of Regulatory Systems” (1997) 25 International Journal of the Sociology of Law 195 at 196.
[41] J Braithwaite, “Responsive Business Regulatory Institutions” in C Coady and C Sampford (eds), Business, Ethics and the Law, Federation Press (1993) 88.
[42] Australian Securities and Investments Commission Act 1989 (Cth) (ASIC Act); Crimes Act 1914 (Cth) and state Crimes Acts.
[43] This representation of the enforcement pyramid is adapted from the work of I Ayres and J Braithwaite, note 7 supra; C Dellit and B Fisse, note 7 supra; B Fisse and J Braithwaite, Corporations, Crime and Accountability, Cambridge University Press (1993) p 142.
[44] N Gunningham and R Johnstone, note 8 supra, p 117.
[45] ASIC website address: <http://www.asic.gov.au> .
[46] ASIC Act, s 93AA.
[47] See, for example, MR 98/236 and MR 98/340.
[48] See ASIC Act, s 89. There is no common law right to recover expenses: Re Equiticorp Finance Ltd; Ex parte Brock (No 2) (1992) 27 NSWLR 391.
[49] N Gunningham and R Johnstone, note 8 supra, p 122.
[50] For companies different considerations may apply. For example, a civil compensation order may be the ultimate sanction if it is large enough to result in the winding-up of the company.
[51] Section 229 of the Corporations Law provides for automatic banning from managing a company in certain circumstances. Unlike ss 230, 599 and 600, there is no requirement for the court or ASIC to impose the order. Rather, in the specified circumstances, there is an automatic prohibition on managing a company. The specified circumstances are:
• a person becoming an insolvent under administration;
• a person being convicted:
- on indictment of an offence against an Australian law, or any other law, in connection with the promotion, formation or management of a company; or
- of serious fraud; or
- of any offence for a contravention of specified sections of the Corporations Law including s 232 (dealing with directors’ duties); or
- of an offence of which the person is guilty because of s 1317FA(1) (criminal proceedings for breach of a civil penalty provision).
Section 229 provides that a person who is convicted within the circumstances specified must not, within five years after the conviction or, if the person was sentenced to imprisonment, after release from prison, manage a company without the leave of the court. In the case of an insolvent under administration, the person must not manage a company without the leave of the court.
[52] For more detailed discussion of ss 229, 230, 599 and 600, see HAJ Ford, RP Austin and IM Ramsay, Ford’s Principles of Corporations Law, Butterworths looseleaf (1999) at [7.191].
[53] It is the intention of the research team to continue to develop this picture through subsequent empirical research involving other regulatory players.
[54] This approach is influenced by the theory of regulatory tripartism, which advocates a system of regulation involving three institutional forms; the government, the regulated entities and third parties representing public interest concerns and causes. See generally, I Ayres and J Braithwaite, note 7 supra.
[55] Australian Securities and Investments Commission, Annual Report, 1997-98 at 2.
[56] Ibid.
[57] Section 14(2) describes the possible matters which the Minister may direct ASIC to investigate. These include alleged or suspected contraventions of the Corporations Law or other laws concerning the management or affairs of companies; dealing in securities; dealing in futures contracts; the affairs of a company; or the giving of advice, analyses or reports about securities or futures contracts.
[58] For more detail on the circumstances in which ASIC may commence investigations and its powers when conducting such investigations, see J Kluver, “ASIC Investigations” in Australian Corporation Law: Principles and Practice, Volume 3, Butterworths looseleaf, Ch 15.
[59] ASIC Act, Part 3, Division 3 and Part 3, Division 4.
[60] ASIC Act, Part 3, Division 2.
[61] Note 55 supra at 33.
[62] Ibid at 33.
[63] Ibid at 60.
[64] Ibid at 2.
[65] Ibid at 23.
[66] Most of the interviews were conducted in mid-1998, just prior to 1 July 1998 when the Australian Securities Commission became the Australian Securities and Investments Commission. Hence the references in many of the interviews are to the ASC.
[67] See Appendix B for comparative verdicts and other specific details of the individual civil penalty actions.
[68] The topic of alternative civil strategies is discussed in more detail in Part VIII.
[69] This topic is discussed in more detail in Part VII.
[70] An example of the perceived ambiguity about the directors’ duties provisions given by a number of the interviewees is s 232(6) of the Corporations Law. This section provides that an officer or employee of a company (or a former officer or employee of a company) must not make improper use of his or her position to gain, directly or indirectly, an advantage for himself or herself or for any other person or to cause detriment to the company. There has been a series of cases, including several judgments of the High Court of Australia, regarding what it means to “gain an advantage” and to make “improper use of position”. These judgments include Chew v R [1992] HCA 18; (1992) 173 CLR 626; R v Byrnes [1995] HCA 1; (1995) 130 ALR 529; R v Cook [1992] HCA 18; (1996) 107 ALR 171; and R v Towey (1996) 21 ACSR 46. The judgments are discussed in HAJ Ford, RP Austin, IM Ramsay, note 52 supra at [9.280].
[71] The role of CMPs and TRACs was explained in Part V.
[72] The pyramid of enforcement applying to directors’ duties in the Corporations Law was outlined in Part IV. One respondent referred to the work of Harvard University academic Malcolm Sparrow (Imposing Duties: Government’s Changing Approach to Compliance, Westport (1994)) as giving rise to some approaches that, among others, ASIC is considering. The essence of that approach is that a particular important problem is identified, and a whole range of strategies and enforcement tools are brought to bear to solve the underlying causes of the problem. These tools can include education, new policy statements, amnesties, surveillance visits and enforcement action.
[73] The respondents did not acknowledge expressly any such restraint on their decision-making relating to civil penalties.
[74] Ministerial Orders, ASC Digest, 1992, Update 183.
[75] Ibid.
[76] This is certainly the case regarding civil penalties. The research team did not view these guidelines, but was provided with an Information Sheet: ASIC Working Relationship With DPP, by the National Director, Enforcement of ASIC.
[77] Section 232 of the Corporations Law contains the basic duties of directors such as the duties to (1) act honestly, (2) exercise reasonable care and diligence, and (3) not make improper use of information or position.
[78] Sections 230, 599 and 600 were outlined in Part III.
[79] A phoenix company has been described as “a company of limited liability that fails and is unable to pay its debts to creditors… At the same time, or soon afterwards, the same business rises from the ashes of the former company with the same directors or management, under the guise of a new limited liability company, but disclaiming any responsibility for the debts of its predecessor, sometimes with a similar name and operating from the same premises”: Law Reform Committee of the Parliament of Victoria Third Report, Curbing the Phoenix Company, 1995 at [1.1].
[80] For a broader discussion, see H Bird, note 5 supra at 413-20.
[81] Section 997 prohibits stock market manipulation while s 998 prohibits false trading of securities and market rigging transactions.
[82] Note 55 supra at 23.
[83] This issue of the relative disenfranchisement of much of the population from the whole legal process, not merely corporate law is a major issue in late-modern legal and political discourse and cannot be covered within the confines of this article. What is true, and what needs to be emphasised here, is that the levels of disenfranchisement of the majority of citizens are accentuated in the corporate law sphere. The reality for most people is that it is a ‘no-go’ domain for them and they are entirely dependent on public regulators such as ASIC. This stark truth underlines the increasing need to ensure that regulators such as ASIC do have sufficiently flexible regulatory instruments (including an effective civil penalty regime), and the necessary resources to meet their public interest responsibilities.