ASIC’s handling of misconduct reports

Peter Kell discusses ASIC’s approach to complaints of misconduct and disputes between officeholders or members of small companies.

Setting up a business with other people is not too different from getting married. Mostly it works and sometimes it’s blissful. But often there are arguments and, sadly, break-ups.

How do we know that? Because quite often directors and company officers have disputes, complain to the Australian Securities and Investments Commission (ASIC) about each other and ask us to investigate.

Last October, ASIC released guidance on how we handle the thousands of misconduct reports – often referred to as complaints – we receive each year. This includes information on disputes between officeholders or members of small companies.

By way of background, ASIC has a dedicated team of analysts around the country called the Misconduct and Breach Reporting team. It analyses and assesses all information the public provides us with, be it from directors, shareholders, whistleblowers or investors.

In the financial year to 30 June 2012, ASIC received about 12,500 misconduct reports and 72 per cent of these cases received an initial consideration within 28 days. This process does not, technically speaking, constitute an investigation by ASIC, but is an important step in vetting the information reported to us, matching it with other existing information and considering it against ASIC priorities and risk criteria.

Information Sheet 162, released last October, deals with disputes between officeholders and/or members of small proprietary companies.

In the last full financial year, 176,062 new companies became incorporated in Australia, 97,198 were deregistered and 10,757 entered into external administration of some type. This left about 1.9 million at the end of the last full financial year.

Perhaps reflecting these numbers, last financial year 22 per cent of the misconduct reports ASIC received involved directors’ duties, contractual issues or where directors or officers came to ASIC on issues best described as internal disputes.

When ASIC investigates

These statistics raise an important question: Should ASIC investigate each and all, some or none of these matters?

In answering that question, it is important to understand there are key questions ASIC considers before deciding to formally investigate a matter. These include:

• What is the extent of harm or loss arising from the alleged misconduct?
• What are benefits of pursuing the misconduct, relative to the expense?
• How do other issues, like the type and seriousness of the misconduct and the evidence available, affect the matter? Is there an alternative course of action?

For obvious reasons, ASIC is less likely to investigate matters that would be better addressed by private dispute resolution between the parties involved. This is a crucial point that informs how we approach disputes between officeholders and/or members of small companies.

Disputes arising in small companies are often about how they are run. They may be disagreements between individuals over the ownership, management or control of the company.

These types of disputes commonly arise in small companies, but can be presented to ASIC from time to time in relation to all types of companies. Small companies, however, usually have relatively few shareholders.

These disputes also generally relate to the private legal rights or interests of individuals, such as shareholders and business partners under the company’s constitution. As such, they often do not affect consumers or investors in the broader community.

It is important to understand that a company’s constitution contains the rules that govern its operation. Under the law, the constitution acts as a contract between the company, its directors and its members.

Get legal advice

Usually the best step for parties in small company disputes is to get their own legal advice. While we are the corporate regulator, ASIC cannot provide legal advice nor arbitrate private disputes.

Of course, where there are concerns there have been breaches of the Corporations Act 2001 (rather than a simple private dispute), ASIC will consider those matters.

However, the key thing to remember is that generally we do not act for individuals. Rather we take action where it will have a greater effect in the market and benefit the general public more broadly.

That means the most important question people should ask before making a report of misconduct to ASIC is: "Does the matter I am raising have a greater effect in the market and for the general public?"

ASIC encourages anyone wanting to provide it with information, complaints, tip-offs and dob-ins to do so via its online form available on its website: asic.gov.au. Just click on the "How to complain" tab at the top.