Punishment versus protection Law Reporter

Saturday, 01 May 2004


    The New South Wales Court of Appeal in Rich amp; Anor v Australian Securities and Investments Commission ((2003) 48 ACSR 6) has handed down a vital decision in answer to the above question in relation to disqualification of directors. It ruled that the regime is a protective regime. Certain consequences flow from this interpretation.

    Punishment versus protection

    Is the regime for disqualification of directors under the Corporations Act a punitive or a protective regime?

    The New South Wales Court of Appeal in Rich & Anor v Australian Securities and Investments Commission ((2003) 48 ACSR 6) has handed down a vital decision in answer to the above question in relation to disqualification of directors. It ruled that the regime is a protective regime. Certain consequences flow from this interpretation.

    In this case, the issue was whether the regulator, ASIC was entitled to obtain certain information from Rich and Silbermann, former directors of OneTel Limited (now in liquidation) in pursuing its claims against them.

    Rich and Silbermann argued that the information being sought cut across their entitlement to protect the information on the basis of the rule against self-exposure in relation to an action under which a penalty might be imposed under the Corporations Act (the Act).

    ASIC had brought proceedings under section 1317E of the Act under which compensation was sought (on behalf of shareholders); and it also sought certain orders for disqualification under section 206C and 206E of the Act.

    Austin J held that the proceedings were not proceedings for the imposition of a penalty and that the privilege against self-exposure did not apply. He ruled that the disqualification orders being sought were protective not punitive in nature. There was therefore no real or appreciable risk that either Rich or Silbermann would be exposed to penalty proceedings by ASIC on this information.

    The New South Wales Court of Appeal granted leave to Rich and Silbermann. Rich and Silbermann argued that where a person was exposed to the risk of a disqualification order by reason of a contravention of the Act the relevant sanction could not be considered merely as protective. It must be considered as also as enabling ASIC to seek a punishment. Therefore the privilege against self-exposure which is a well understood and respected criminal law rule of law should be maintained.

    The New South Wales Court of Appeal by majority, Spigelman CJ with Ipp JA agreeing, dismissed the appeals. McColl JA delivered a lengthy dissenting judgment.

    On April 2, Rich and Silbermann were granted special leave by the High Court of Australia to appeal this decision. It goes without saying that this appeal will be extremely important but it will be some considerable time before the High Court will rule on this matter.

    The critical issue before the NSW Court of Appeal was whether the disqualification of directors was a matter that related to the protection of the community, or whether it was punitive. After all, if a director is disqualified from managing a corporation for a number of years this will prevent that director from earning income from that particular activity, thus in a sense imposing quite a significant burden on that person.

    The relevant regime for disqualification orders is contained in Chapter 2D.6 of the Act. This is expressly linked to Part 9.4B of the Act under which the regulator can pursue compensation orders and disqualification orders.

    There has been a long and detailed history of these provisions in the courts and in literature surrounding this area. The changes to the regime introducing civil penalty orders is based on American and other jurisprudence and on reports of the Australian Law Reform Commission. These are aimed at ensuring that the law is more efficiently managed to deal with breaches that are less serious in a different form to breaches which carry with them elements of fraud and similar concepts.

    Spigelman CJ in accepting the conclusion of Austin J examined a significant number of cases dealing with the question of privilege, the penalty regime that applies in relation to breaches of the Act and the Trade Practices Act (where civil penalties apply) and concluded that there was a long line of authority (48 ACSR paras 114-116)

    "[which identified] a disqualification order under corporations law as having an exclusively protective purpose … [This] together with the textual indications which [I have described above] lead me to conclude, on balance, that an order under either ss 206C or 206E of the [Act] should not be characterised as a penalty for purposes of the penalty privilege.

    [115] The distinction between a 'punitive' and a 'protective' purpose is one of substance and of considerable significance. It is not just a question of characterising the purpose or effect of the court's order. It is, in essence, a question of characterising the power conferred by the legislative scheme. In so far as the power to order disqualification is purely protective, the decision to make the order and the determination of the period for which the order can take effect must be made on the basis that only protective considerations are relevant. The power cannot be exercised in order to punish.

    [116] When a court comes to exercise its discretion to make an order under ss 206C or 296E, and to determine the length of time for which disqualification should occur, quite different issues arise, and difference in emphasis will ensue, if the disqualification is being imposed by way of punishment than arise if it is being imposed by way of protection of the public. The order, particularly in terms of its length, will be significantly affected if the purpose is only protection and does not contain a punitive element."

    In all of the circumstances Spigelman CJ dismissed the appeal. Ipp JA agreed with his conclusions.

    As noted earlier, McColl JA delivered a lengthy dissenting judgment. While the Chief Justice engaged in a brief review of the relevant cases, McColl JA's judgment is over 45 pages in length. Because of the High Court appeal it is useful to evaluate his analysis. He considered the same cases (and others) which had been considered by Spigelman CJ and reviewed the history of the penalty regime under our corporations legislation from the early 1990s until the current legislative scheme. He accepted the fact that the disqualification provisions in the legislation has now been consolidated into a new Part of the Act, but concluded that the trial judge and the majority in this case were incorrect. His emphasis on the importance of the rule of privilege and the privilege against self-exposure, as well as legal professional privilege, will have even greater significance as in this general area of the law develops further and more powers are given to ASIC (such as, for example, the infringement notice power in relation to continuous disclosure). He concluded his analysis of the relevant cases and other cases outside of the area of the operation of the Act with these words:

    "In my view, as will be apparent [from other parts of this judgment] that [proceedings under the relevant provisions of the Act] are of a hybrid nature, displaying features found both in civil and criminal proceedings. … While a compensation order appears to bear the classic traits of the outcome of civil proceedings, it is obtained in proceedings which depend upon a finding of a contravention of public law." (48 ACSR para 343)

    He added that while there was some force in the views which that disqualification orders are protective in nature, they were nevertheless not relevant in the context of the Act. In his view

    "the statutory scheme of which section 206C [of the Act forms part] bears all of the hallmarks of a scheme intended to impose disqualification as a punishment, or as a consequence in the nature of punishment, albeit in a civil framework. These features are sufficient to attract penalty privilege. Although structured as a civil case both in terms of procedures to be applied … and the onus of proof …, the proceedings are, in effect brought by the state and 'accused' the defendant of a contravention of a public law – just as, in the criminal context the defendant is accused of a breach of statute. The civil penalty scheme pivots around the declaration of contravention which operates in the same sense as the finding of guilt and leads, in turn, to the imposition of one or other of the available civil penalty orders. It is not a suit which is purely of a civil nature ...

    [383] In my view ... the history of Part 9.4B [of the Act] and the insertion of section 206C indicate a legislative intention that the disqualification order operate by way of punishment, even if, like most punishments, it may also have a protective purpose. This manifestation is sufficient to displace an inference that the legislature relied upon an assumption that a Part 9.4B disqualification order would be perceived to be protective." (48 ACSR paras 379 and 383)

    In the context of other areas of the law where an order was made which led to a loss of office, the historical analysis in those cases suggested that the orders in those cases "would disable a person from carrying on a profession or holding an office. I see no distinction between the loss of such offices and disabling a person from acting as a director." (at 386) This supported his view that the regime was a penalty regime.

    As noted, the High Court of Australia will now have the opportunity to review this particular area of the law. It will no doubt be faced with a very interesting argument not only of statutory interpretation but of policy. A finding by the High Court that the regime is a penalty regime may have the effect of undermining a long history of cases that have been handed down in this area of the law, and may well expose ASIC to an impossible task in pursuing future prosecutions. It may require the whole regime of corporate legislation as we now know it to be reassessed. It will certainly impact on whether the Federal Government pursues the current intention of introducing criminal sanctions in the trade practices area.


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