A renovation with many problems glossed over

Saturday, 01 November 2003


    The changes proposed in the CLERP 9 Bill appear to be more about public perceptions than addressing the real issues facing directors.

    While the community was fully prepared for much of what is contained in the CLERP 9 Bill (CLERP (Audit Reform and Corporate Disclosure) Bill), the retention of the infringement notice regime in relation to continuous disclosure, the very strong set of provisions with respect to the protection of whistle blowers, contained in Part 9.4AAA, and liability for "accessories" (including directors) for breaches of the continuous disclosure regime has caused some consternation for companies and their directors and advisers.

    The proposed legislation also contains one or two other surprises, the most puzzling in a sense being the proposal to allow for a non-binding resolution of shareholders in relation to directors' remuneration.

    The editor believes that the shareholders already have the ability to pass any resolution that they wish with respect to the running of the company's activities subject to the constitution of the company. If they do not like the terms of the constitution of the company, provided they obtain the support of a sufficient majority of shareholders, they can amend that constitution.

    The introduction of a non-binding resolution which hints to the directors that the shareholders are not happy with the nature of the remuneration that they are paying themselves, while it will make for excellent newspaper headlines, and enable many in the community to beat their breasts saying - "look what we are doing, we are doing the right thing by our companies" - achieves little if anything in dealing with perceived problems.

    There will always be criticism of the performance of the company and those in charge. If the company does very badly, and there have been some spectacular examples of companies doing rather poorly over the last two to three years, apart from those that have gone into liquidation, then it is not surprising that shareholders, and especially institutional shareholders, should feel upset.

    But these shareholders, and where breaches of the law occur, the Australian Securities and Investment Commission (ASIC), already possess the ability to pursue necessary remedies in dealing with these matters. If the government and the regulators feel that directors are breaking the law in relation to specific areas of the legislation then they should do something positive about those issues.

    The introduction of "supernumerary", if I can call them that, legislative changes which do not have any legal effect, but which are meant to persuade and "cajole" can create difficult tensions that in certain cases can lead to problems of conflict for directors. There are clear rules set out in the Corporations Act and under common law which directors must comply with if they are not to run foul of potential litigation.

    If supernumerary rules are introduced which cut across those legal directions then this places the relevant director or officer in a position of potential conflict; the only safeguard for the director in the event that a breach occurs is to seek forgiveness from the court. Shareholders in most cases cannot provide that forgiveness. This is an unsatisfactory and unnecessary way for the law to be amended.

    Let me now turn to deal with the relevant provisions of the CLERP9 Bill that are likely to cause most concern to companies and their directors.

    Auditors - some relevant issues

    There is a growing concern that where wrongs are committed within a company that the relevant regulator does not have the ammunition available to it to ensure that those wrongs are quickly uncovered and the "guilty" parties are speedily brought to justice.

    The auditor of a company, and this applies to all companies, has always had the ability to bring to the attention of ASIC breaches or potential breaches of the legalisation which cannot be adequately dealt with in the accounts. Section 311 of the legislation is to be amended by CLERP 9 to impose an even more severe obligation on auditors in these circumstances.

    Under the current regime an auditor has the discretion of informing ASIC of matters that the auditor feels have not been adequately dealt with by the company as a result of the auditor's report.

    The usual process is for the auditor, on discovering that the accounts reveal a situation which may amount to a contravention of the Corporations Act or some related matter, to raise the matter with the chairman of the company or some other official in the company with a view to having the matter addressed in the amounts.

    If the auditor still feels that the matter has not been adequately addressed, or cannot be addressed, under the current legislation the auditor may alert ASIC to this fact. I, for one, have been critical of the auditing profession in the past for not using this provision more frequently in certain situations. But I would not have contemplated that the legislation along the lines of the proposed new section 311.

    Under the proposed provision an auditor conducting an audit will be committing a breach of the law if the auditor, having become aware of circumstances that:

    • enabled the auditor to have "reasonable grounds to suspect" that a breach of the Corporations Act has occurred, or

    • there has been any attempt to influence, coerce, manipulate or mislead persons in relation to the audit, or

    • there were attempts to interfere with the proper conduct of the audit;

    the auditor must report the matter to ASIC. This must occur as soon as practicable and not later than seven days after the "event".

    A similar obligation applies to a firm of auditors where the lead auditor becomes aware of these circumstances and one would have to conjecture that in the case of a firm the auditor would be assumed to have knowledge of the information available to any of the persons working with the lead auditor in relation to this matter.

    Breaches of these provisions carry strict liability regimes under the Criminal Code. This will make it imperative for audit firms to introduce a proper culture of compliance.

    The notion of having reasonable grounds to suspect is one that has been the subject of significant challenges in the context of the administration of the Corporations Act, the Trade Practices Act and the Income Tax Assessment Act, and no doubt other pieces of legislation as well. It will be interesting to see how these issues are addressed in the context of auditors in the future. I will also comment on this later.

    But there is a very significant difference between the position of the whistleblowing employee and the auditor. There is no obligation on the part of the employee who suspects that a breach of the legislation has occurred to "dob the company in". The auditor, on the other hand, has an obligation to do so.

    Third force

    More importantly, the proposed whistleblowing provisions, are aimed at creating a "third force", if you like to call it that, in the community which will be out there assisting ASIC, and to a lesser extent the Australian Stock Exchange (ASX), in "disciplining" directors and officers of companies.

    They will be given protection from litigation, either criminal and civil, if they inform ASIC about certain events that are taking place in the company which the relevant whistleblower has a reasonable ground to suspect amount to a contravention of any corporations law. The protection will apply if the whistleblower informs ASIC of the information and does so in good faith.

    There is no indication as to what amounts to reasonable grounds to suspect that a particular breach occurs in this part of the law either. As noted above, our regulators already have power under their statutory regimes to issue notices to individuals (directors and others) to disclose information and attend hearings if they have reasonable grounds to suspect that a breach of the legislation has occurred.

    Many of those initiatives, on the part of ASIC, the Australian Competition and Consumer Commission and the Commissioner of Taxation, have been the subject of vigorous and expensive litigation in the courts.

    One assumes that companies, or persons, who are identified by a whistleblower in relation to such a disclosure may seek to undo the protection afforded by section 1317AA, if the companies, or persons, believes that the relevant whistleblower did not have reasonable grounds to suspect that the information was present, or if the relevant whistleblower was not acting in good faith.

    The whistleblowing disclosure can be in relation to the actions, etc of an officer of the company; this of course includes all directors, or an employee of the company.

    It also applies in relation to persons who have a contract for services with the company or an employee of a person who has a contract for services with the company. Interestingly enough, the legislation does not extend to "dobbing in" by persons who have a contract for the supply of goods to the company. If goods are supplied to a company in ways that suggest that there are breaches of the Corporations Act should not such activity also be the subject of potential "dobbing in"? This does not mean that I support the inclusion of such legislation in its current form but merely ask why it is limited in its current form.


    The proposed legislation provides important protection to whistleblowers who make the disclosure. They will not be subject to any civil or criminal liability for making a disclosure, for example if the disclosure turns out to be completely unwarranted or unfounded, no action can be brought against the whistle blower; nor can the relevant whistleblower's contract with the company be interfered with by the company. The whistleblower will enjoy qualified privilege in relation to the disclosure made, in other words cannot be sued with respect to information that is disclosed; finally section 1317AC specifically prohibits victimisation against the whistleblower. The whistleblower will be able to seek compensation against persons who victimise him/her if they suffer damage.

    The legislation contains no guidelines as to what if any publicity can be made in relation to the whistle blowing. One assumes that the usual publicity regimes will apply in relation to these matters with ASIC adopting its current policy of maintaining a low key public relations profile in relation to any investigations that are pursued as a result of the whistleblowing occurring.

    However, it is clear that if ASIC were to prosecute, say a director, as a result of information provided by a whistleblowing employee that information would become public with all of the connotations that it involves in relation to the matter.

    Let us assume that ASIC prosecutes a director of a company and the prosecution fails.

    While the whistleblowing employee cannot be "victimised", how difficult will it be for that whistleblowing employee to remain within the employment of the company, working side by side with other workers who may have given evidence opposed to the evidence of the whistleblower?

    These, and other interesting moral, rather than legal, questions, will arise as a result of this very different climate to the way in which our commercial enterprises will be governed in the future.

    Infringement Notices

    Whilst the introduction of infringement notices for non-compliance with the continuous disclosure provisions of the Corporations Act will only apply effectively to companies whose shares are listed on the ASX, the initiative which has been persisted with by the Federal Government, notwithstanding strong criticism from the Australian Law Reform Commission about the initiative, sets the scene for a new approach to regulation in this country.

    ASIC has, for some time, been vested with the power to issue what are called penalty notices for minor breaches of the Corporations Act - for example the failure to file annual returns. These are often equated to "parking infringement" notices or "minor speeding fines".

    But, to introduce a regime where companies can be fined or risk prosecution, for failure to comply with certain aspects of the continuous disclosure regime is an extraordinary development.

    It is important to note that the proposal is not unique to Australia. A similar regime exists in other jurisdictions. But, it is important to remember that the UK provision upon which it is based has been developed in a country where the role of the stock exchange and the way in which securities markets have operated are quite different to developments in this country.

    I have said in these pages in the past, and repeat them, that ASIC has enough ammunition available to it under the Corporations Act, and under the provisions of the criminal legislation, to deal with these matters.

    To create a new regime, carrying with it the uncertainty concerning publicity that will accompany the payment of these fines without a finding of guilt on the part of the company, translates into a very different approach to company regulation. This is particularly relevant in the context of the contentious disclosure provisions of the Corporations Act which are relatively untested.

    Having said all of that proposed Part 9.4AA contains significant improvements on the discussion draft released in 2002. For a start, before an infringement notice is issued, ASIC must give the relevant company a statement indicating why it believes the company has breached the relevant provisions of the legislation, either section 674(2) or 675(2).

    It must then give a representative of the company an opportunity to:

    • appear at a private hearing before ASIC;

    • give evidence to ASIC; and

    • make submissions to ASIC in relation to the alleged contraventions.

    ASIC will take this information into account in deciding whether or not to issue the notice.


    Importantly, and this is an extremely vital concession, evidence or information that is given by the company or the representatives of the company to ASIC, either at the hearing or otherwise in the context of the fining power scenario, cannot be admitted in evidence against the company in any later proceedings; nor can it be used against any representative of the company in the relevant proceedings, unless the allegations against the representatives are based on allegations that the evidence or information given was false or misleading.

    Once ASIC has conducted the inquiries it may issue an infringement notice which must contain information set out in section 1317DAE.

    Importantly, the notice must state that a copy of the infringement notice "may be published in the Government Gazette" when it is complied with.

    The maximum, and it appears non-discretionary, penalty that is payable in relation to such penalty notices has been fixed by the legislation to the following amounts: $33,000 for companies which are described as Tier 3 companies (market capitalisation of less than $100 million on the relevant date); $66,000 for a Tier 2 company,(market capitlaisation between $100 million and $1000 million; and $100,000 for a Tier 1 company,(market capitalisation in excess of $1000 million).

    Importantly, however, the legislation recognises that these penalties, which are fines to be paid to ASIC, will not tie the hands of the court which in the appropriate circumstances may order a larger penalty.

    If the infringement notice has not been withdrawn or the amount has not been paid the company may be liable to prosecution in accordance with the relevant provisions of the legislation.

    The legislation is silent on whether the persons who are investigating the matter will be the same persons who participate in the hearing at which representation is to be made. A separation of the investigators and the persons who make the orders is essential in my view and may well be implemented by ASIC in administering this legislation.

    This is clearly desirable for natural justice reasons.

    As noted earlier ASIC has the discretion as to whether it will publicise the fact that the infringement notice has been complied with by the relevant company. There are, however, some safeguards which have been introduced.

    If ASIC discovers it was wrong in pursuing the particular matter and the amount is eventually repaid, then the bad publicity will already have done the damage.

    If ASIC does publish information in relation to the payment of an infringement notice, it must comply with the terms of section 1317DAJ but, if ASIC fails to comply with these provisions this is not an offence and no remedy can be sought.

    Lack of Review

    Another very real concern under the proposed legislation is that while ASIC must have reasonable grounds to believe that a disclosing entity has breached the relevant provisions before it may issue an infringement notice, and although ASIC must have regard to any guidelines issued by a market operator that relates to the Listing Rules governed by the operation of section 674(1) of the Corporations Act, ASIC's power to issue infringement notices cannot be reviewed by the Administrative Appeals Tribunal.

    It is stated in the commentary accompanying the Bill that a merits review of such a decision "is inappropriate because there is no obligation on entities to comply with the notice and non-compliance with the notice leaving ASIC with a decision whether or not to initiate court proceedings to enforce the continuous disclosure requirements." (see para 453 of the commentary). This is an inappropriate carve out.

    ASIC's ability to issue notices etc under the Act can be challenged – why not the exercise of this power? In any event, will this prevent a challenge under other grounds of law? Only time will tell!

    A company that complies with the infringement notice is not deemed to have contravened the relevant provision nor would it be subject to any proceedings either criminal or civil in relation to an alleged contravention of the relevant provision of the Corporations Act.

    This immunity against civil litigation will be extremely important for companies that decide to co-operate with ASIC.

    There is little doubt that ASIC will be using this fining power as a means to persuade, sometimes more aggressively than on others, companies not to fight what may appear to be minor breaches of the continuous disclosure provisions but ones which will enable ASIC to gain some mileage in publicising the fact that companies are breaching these provisions and are complying with ASIC's rather soft approach to regulation. This is the problem.

    Of course, the cost of litigation is extraordinarily expensive. It will be much cheaper for companies simply to pay the fine and get on with life.

    But if the company is to be exposed to negative publicity in relation to situations where, in fact, the company believes that no contravention has occurred, this creates a false impression of the regulatory regime working effectively.

    Directors and Accesorial liability

    Another set of provisions that will be of major concern to directors, again, this will only apply to directors of companies whose shares are listed on the ASX, is the fact that unlike the current law, a director will be potentially liable for a breach of the continuous disclosure provisions ie. section 674(2) and 675(2).

    Both sections 674 and 675 will contain a new sub-section 2A which, in effect, provides that the person who is involved in a listed disclosing entity's contravention of the relevant subsection contravenes the regime.

    The penalties for breaches of the legislation will be quite high – they are to be increased to $1 million for companies and $250,000 for individuals.

    But, what is more significant is that if a director is pursued by ASIC for breaches of the continuous disclosure regime personally, the director cannot obtain the protection that is available to that director under the infringement notice regime.

    Under that regime any information that is disclosed by the director, the company's representative, to the ASIC cannot be used in evidence against that director.

    On the other hand, if ASIC were to pursue the director individually for a breach of these new provisions that protection would not appear to be available.

    In addition, civil penalties may be sought against the director for breaches of these obligations.

    The director will be liable under the civil penalty regime; actions may well be available to a relevant range of persons under Section 1324 of the Corporations Act.

    While directors may be able to obtain relief under section 1317S, this may be little consolation in the general measure of things.

    This is an extraordinary development and one that directors will need to be extremely careful about in the context of the ongoing pressure on companies to disclose information.


    It is highly unlikely that these, or other particular provisions, will be withdrawn. They may be amended to introduce some further safeguards.

    But, what is most important is that we are seeing the introduction of a new form of regulation in different areas.

    Today it is the continuous disclosure area; tomorrow it may be matters which relate to market offences - such as insider trading or market manipulation.It may even turn to deal with issues relating to insolvent trading.

    After the CLERP 9 process is complete the Government should take the opportunity of taking stock in the area of corporate law. It is time we had a proper review of this area of regulation before we destroy the very framework which has been the basis of the Australian system. We have had too many stop gap amendments to the legislation over the past few years that have been at times contradictory to each other; that our system is straining at the edges.

    No further reform of any consequence, unless absolutely necessary, should take place until we have had this thorough review.

    Wastepaper a winner for ACCC

    Now that Graeme Samuel has been firmly ensconced in the Australian Competition and Consumer Commission (ACCC) he will be pleased with some of the successes the regulator has enjoyed.

    The most important decision that has been handed down in the last month is the High Court judgment in Visy Paper Pty Ltd v Australian Competition and Consumer Commission. On October 8, 2003 the High Court, in a 5-1 majority, dismissed an appeal by Visy Paper which had ruled in favour of the ACCC in relation to a non-competition clause.

    The facts of the case were briefly these.

    Northern Pacific Paper Pty Ltd (NPP) was in the business of collecting waste for recycling.

    It sold wastepaper and cardboard to Visy Paper.

    Visy Paper also itself collected wastepaper for recycling from various customers.

    In that respect, Visy Paper and NPP were regarded as competitors for the acquisition of wastepaper.

    Between September, 1996 and April, 1997 negotiations were entered into between the two companies to establish a new arrangement.

    It was intended that NPP would become exclusive agent to collect waste for Visy Paper.

    A number of versions of the draft agreements were exchanged between the parties. Each of the drafts contained what is in effect a non-competition or a non-compete clause.

    Under the clause NPP agreed that it would not approach any of Visy Paper's customers to deal directly with them.

    No agreement was in fact reached between the parties. Nevertheless, as a result of a falling out between them the ACCC took proceedings against Visy Paper. It alleged that the company and two of its executives had attempted to breach section 45 of the Trade Practices Act which treats such non-competition clauses between competitors is per se illegal.

    A key issue in this case concerned whether section 45 or section 47 of the Trade Practices Act applied.

    Under section 45, by virtue of the relevant prohibition, it is unnecessary to show that competition in markets is likely to be affected by such a non-competition clause. On the other hand, if the agreement was subject to Section 47, then the assessment of whether the agreement breached the Act would turn on whether there had been a substantial lessening of competition in the relevant market. In other words, the ACCC would have to show that the agreement was one that stifled competition substantially.

    The legislation also contains what is known as an anti-overlap provision (section 45(6)). This provides that where both section 45 and section 47 apply to a set of circumstances that section 47 should prevail.

    If you enter into a section 47 arrangement, known as an exclusive dealing arrangement - this can cover such things as an arrangement whereby someone agrees to supply all the services or goods to another party on the basis that the other party, for example, does not acquire goods or services from anyone else, in order to assess whether that agreement or conduct is anti-competitive, you need to assess how it impacts on the market.

    Visy Paper argued that this agreement was a section 47 agreement.

    Furthermore, if parties can fit the agreement within the operation of section 47 of the Act, those parties can notify the particular agreement to the ACCC , under a formal document that is available pursuant to section 101A of the Act, and receive complete immunity from the operation of the legislation until that notification is challenged.

    This is a safeguard that is being used, for example, by Woolworths and Coles at the moment in relation to their arrangements with Caltex and Shell respectively. Such protection is vital and valuable.

    The ACCC argued that in substance the relevant agreement in this case was a "naked" non-compete clause.

    Whilst the ACCC lost at first instance before Sackville J, the Full Federal Court found in favour of the ACCC.

    Now the High Court, in agreeing with the ACCC, warned against the use of artificial arguments and drafting to try to obscure the impact of such non-compete agreements between parties.

    One should look behind the language of an agreement in appropriate circumstances to see what the agreement is really trying to do. In this case the majority of the High Court felt that this was a naked non-compete clause trying to limit competition between competitors. It had nothing to do with an exclusive supply agreement whereby Visy Paper appointed NPP as its operator in relation to certain services, or in relation to the supply of goods, or vice versa.

    The case will now be returned to Sackville J to determine what penalty should be imposed on Visy Paper and its executives for breaching the Act.

    Whilst the ACCC was successful in this case, it failed in an interesting price fixing case. In ACCC v The Australian Medical Association of Western Australia Inc (2003) ATPR 41-945) Carr J, in the Federal Court, dismissed a claim by the ACCC that price fixing arrangements had been entered into for the supply of medical services at a Western Australian hospital.

    The court held that for the branch to be guilty in this case the person acting on its behalf would have had to have sufficient authority to bind the organisation to enter the relevant agreements. This decision is one that the ACCC may well appeal because under section 84(2) of the Trade Practices Act, a company is usually bound by the actions of its agents and servants. Nevertheless, on this occasion, Carr J felt that the third party allegedly entering the agreements did not have the relevant authority to bind the organisation.


    The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.

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