Directors' Counsel - Crime and punishment

Thursday, 01 June 2017


    Professor Bob Baxt considers a number of recent court cases and questions whether current Corporations Law penalties are high enough.

    The continued calls from the chairman of the Australian Securities and Investments Commission (ASIC), Greg Medcraft, for penalties in the Corporations Act 2001 (Cth) (the Act) to be increased has been endorsed by the Economic References Committee in its recent report Lifting the fear and suppressing greed: penalties for white-collar crime and corporate and financial misconduct in Australia. The suggestion that our courts cannot (or will not) impose higher penalties on “white-collar crime” is misplaced, in my respectful view, and should be disregarded.

    The report appears likely to be embraced by the Commonwealth Government in the near future. If the Commonwealth Government needed any evidence to support the call for an increase in penalties, the High Court of Australia in ACCC v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181, confirmed that the significant increase in the penalties awarded against the Reckitt organisation for alleged misleading or deceptive conduct involving the sale of tablets that combat headache and related pains, showed that our courts will not be frightened off by the size of the penalties that may be awarded. Penalties under the competition law were increased some time ago and the courts are now handing down very high penalties in that regard.

    In contrast to the High Court of Australia is an even more recent decision of Justice Robson in the Victorian Supreme Court case of ASIC v Flugge (No. 2) [2017] VSC 117. Flugge, who was the chairman of the Australian Wheat Board (AWB), had been sued by ASIC for alleged breaches of his duties under sections 180 and 181 of the Act as well as other pieces of legislation.

    The conduct arose out of the contractual relationship between the AWB and the government of Iraq, pursuant to which AWB sold wheat to Iraq under the United Nations Oil for Food Program (UNOFFP). In the earlier decision of ASIC v Flugge [2016] VSC 779, Justice Robson held that ASIC had not established the case against Geary, an officer in the AWB, but ruled that Flugge had breached section 180 of the Act. In the more recent case, ASIC sought two sets of penalties against Flugge – a disqualification order for a period of 10 years, plus the maximum $200,000 penalty that is available under the legislation for a breach of section 180 of the Act.

    Penalty observations

    Justice Robson made a number of interesting observations about provisions in the Act dealing with penalties and the ability of judges to forgive directors who may have breached the law, yet have acted honestly.

    It is unnecessary for the purposes of this note to comment on his consideration of the treatment of sections 1317S and 1318, which deal with such relief, other than to note that judges have been very reluctant in the past to exercise their discretion in relieving directors of their liability where they have acted honestly even though breaches of the law had occurred.

    The most striking example in recent times of where a judge had been placed in a position where he showed such discretion in favour of the relevant directors could have been exercised was ASIC v Healy (No. 2) [2011] FCA 1003 involving the directors of the Centro organisation.

    In the Flugge case, Justice Robson relied on the decision of Rich v ASIC [2004] HCA 42 (see paragraph 41) where it was noted that the protection of the public was not the only consideration when disqualification was considered. Retribution, deterrents, reformation and mitigation were other matters to be considered in line with the consideration of the relevant persons’ fitness to manage a corporation in the future.

    The nature of the loss suffered by the company as a result of the breach of duty, the gravity of the relevant breach, the previous good character and other factors concerning the individual person subject of the disqualification order were also relevant. Justice Robson ruled that as Flugge was 70 years old and had no real interest in holding corporate positions in the future, that a five-year disqualification as a signal of deterrence was all that was necessary.

    The maximum monetary penalty of $200,000 was one the judge, at paragraph 120, said should only be reserved for the “most egregious cases”. Here, however, with great respect, I believe the judge may have been too cautious and too forgiving. Here there were flagrant breaches of the United Nations rules with respect to trading with Iraq at a time when that country was under severe examination by the rest of the world, and war was imminent. In my view the penalty of $50,000 was hardly sufficient.

    The significance of the mistakes made by the directors of the AWB resulted in other prosecutions being brought yet very few were successful. Nonetheless, a Royal Commission was held, namely the Cole Royal Commission, which looked into the particular activities of the AWB and Justice Cole in his report made some very damming recommendations about the actions of the senior executives of the AWB. The fact that ASIC was unable to gain successful high profile prosecution results in this situation has been very influential, in my view, in the call by ASIC for an increase in corporate penalties.

    Competition laws

    As noted earlier, the competition laws in this country have now been amended to increase the size of penalties that may be awarded for price fixing, contracts dealing with restraint of trade and related activities, to a maximum of $10 million or even more in certain circumstances. The maximum penalty of $200,000 in the context of breaches of the Act including breaches for insider trading and other offences that generally produce very outspoken comments in the media and elsewhere, suggest that such a maximum penalty is well and truly too low.

    In the Economic References Committee report referred to earlier, one of the recommendations put forward by the committee was that the government should amend the Act to increase the current level of civil penalties, not only for companies, but for individuals and that in doing so “the government should have regard to non-criminal penalty settings for similar offences in other jurisdictions” (see recommendation 4).

    It also recommended that the government provide that civil penalties, which were set in respect of white-collar offences, should be set as a “multiple of the benefit gain or loss avoided” (see recommendation 5).

    The position in the US is quite different. The Securities and Exchange Commission, and other regulators, have been successful in obtaining very large penalties (in the millions of dollars) for whistleblowing and other offences, but also have brought many high profile criminal cases against directors.

    ASIC, on the other hand, while successful in a number of important insider trading cases and other cases involving more significant fraudulent market activity breaches, has been largely unsuccessful in relation to obtaining high profile orders against directors for breaches of the Act, including breaches of their duty of care.

    It is clear with the continued outcry for a Royal Commission into banking and financial services, and other associated criticisms of the performance of our regulators in overcoming the failings of many public company collapses and significant multi-million dollar losses suffered by members of the public, that the government will produce some significant changes in this area of the law. As noted earlier, there is no reason why our judges cannot, and will not, impose penalties where they find that the directors and senior officials of companies have behaved in a way that shows a disregard of the law and the way in which it should be administered.

    Finally, it should be noted that while ASIC has been successful in obtaining these penalties against Flugge, it is yet to have its appeal with respect to the dismissal of its claims against Geary, which were made by Justice Robson in the first case in this series of cases, reviewed by the Victorian Court of Appeal. We will await with interest the result of that litigation.

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