Amendments to continuous disclosure laws tackle the tricky concept of “fault” in corporate regulation, writes Professor Pamela Hanrahan.

    In August, the federal government passed its controversial amendments to the continuous disclosure laws. The Treasury Laws Amendment (2021 Measures No 1) Act 2021 (Cth) reinstates fault elements — removed in 2001 — for civil contraventions of the continuous disclosure requirement. A listed entity’s “state of mind” is now relevant in deciding whether it (and its directors) should be liable for a failure to disclose price- sensitive information to the market. The legislation draws attention to the difficult notion of “fault” in corporate regulation and its relationship with the cascading forms of liability that can arise when a corporation contravenes a regulatory or disclosure obligation contained in a Commonwealth law.

    Like many Commonwealth laws, the continuous disclosure laws prescribe a requirement — that a listed entity publicly discloses material price-sensitive information when required by the ASX Listing Rules — and a set of consequences for failure to meet that requirement. The possible consequences include a fine (if the failure to comply is a criminal offence); a pecuniary penalty (if the failure to comply contravenes a civil penalty provision); an opportunity to pay money under an infringement notice to avoid prosecution; and civil liability to compensate investors who suffer loss or damage because of the failure to comply. This is where the different fault elements and cascade of regulatory consequences come in.

    Criminal acts

    The criminal law has traditionally cared about people’s motives. At common law, a crime usually involves both doing a prohibited act, and intending to do the prohibited act. The Criminal Code Act 1995 (Cth) talks about the physical and fault elements of an offence. There can be more than one of each element in a single provision.

    A Commonwealth statute can specify, for each physical element of an offence, whether the fault element is intention, knowledge, recklessness or negligence. If the provision is silent, then the fault element is intention (if the physical element is conduct) or recklessness (if the physical element is a circumstance or result). Alternatively, the statute can specify that a physical element is strict liability or absolute liability, so no fault element needs to be proved.

    In the continuous disclosure laws, the fault element for the criminal offence is recklessness. So, in a criminal trial, the prosecutor must prove beyond a reasonable doubt that the entity did not disclose the information, and that the entity knew or was reckless as to whether the information was price-sensitive.

    Civil penalties

    Civil penalty provisions work differently. If the provision does not include a fault element, there isn’t one. This was made clear by the Full Federal Court in the Whitebox Trading case in 2017 — and put beyond doubt (for Corporations Act 2001 (Cth) purposes) by section 1317QB (state of mind).

    Usually, in a civil penalty proceeding, the Australian Securities and Investments Commission (ASIC) needs only to prove on the balance of probabilities that the entity contravened the relevant provision — its state of mind is generally irrelevant. But the recent amendment changes this aspect of the continuous disclosure laws. Now, a listed entity only contravenes the provision if ASIC can show that the entity knew, or was reckless or negligent as to whether, the information withheld was price-sensitive.

    In continuous disclosure, the penalties for the criminal offence and the civil contravention are different. Oddly, perhaps, the maximum fine that can be imposed on a listed entity for committing the criminal offence of failing to disclose is smaller than the maximum civil penalty for nondisclosure.

    This disparity is common for provisions of the Corporations Act that have both criminal and civil penalty consequences attached to them. It reflects regulators’ preference for civil penalties — with their less exacting requirements of evidence and procedure, and lower or no fault elements — as a means of regulating corporate conduct.

    No-fault infringement notice

    Alternatively, ASIC can issue an infringement notice for a continuous disclosure breach, which gives the entity the option of paying an agreed amount to avoid a criminal prosecution. ASIC must have reasonable grounds to believe the entity has contravened the offence provision, but for the purposes of issuing an infringement notice, the offence is treated as strict liability (that is, there is no need for ASIC to establish a fault element). Of course, the entity can elect not to pay and send ASIC back to the drawing board on enforcement.

    State of mind

    All this draws us back to the difficult notion of fault in corporate regulation. How does a regulator establish the state of mind of an artificial entity that has no actual “mind” of its own? It depends on the context.

    In a criminal prosecution, fault elements can be attributed to a corporation in different ways, depending on which law is broken. Where (as in the continuous disclosure laws) Part 2.5 of the Criminal Code applies, then the fault elements are attributed to a corporation that “expressly, tacitly or impliedly authorised or permitted the commission of the offence”. This can be established by looking to the state of mind of the board or a “high managerial agent”, but also by “proving that a corporate culture existed within the body corporate that directed, encouraged, tolerated or led to noncompliance with the relevant provision”, or “proving that the body corporate failed to create and maintain a corporate culture that required compliance with the relevant provision”. However, as the Australian Law Reform Commission’s recent work on corporate criminal responsibility pointed out, this part of the Criminal Code has never been tested as a basis for establishing corporate fault.

    For civil penalty proceedings, section 1317QE of the Corporations Act provides that “if an element of a civil penalty provision is done by an employee, agent or officer of the corporation acting within the actual or apparent scope of their employment or authority, then the element must also be attributed to the body corporate”. The provision was introduced as part of the expansion of the civil penalty regime in 2018. How this provision applies to an element that is a state of mind, rather than a thing done, has not yet been considered by the courts.

    In its submission to the parliamentary committee inquiring into the recent amendments, ASIC argued against including a fault element for regulatory (as distinct from private) civil actions arising out of continuous disclosure failures. In rejecting that submission, the government’s reform reverses the recent direction of travel in corporate regulation, which has been towards more extensive use of civil penalties that do not require regulators to prove fault elements. For that reason alone, the recent continuous disclosure amendment has broader significance.

    The AICD welcomes the continuous disclosure reforms. For the AICD view, see Advocacy.

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