The civil penalties regime was introduced into Australia’s Corporations Act 2001 (Cth) in 1993. It was designed to overcome some of the hurdles of bringing criminal actions against directors who had breached their duties under the Act.
The civil provisions are often referred as “quasi-criminal” or “punitive civil sanctions” and allow ASIC to bring civil proceedings against directors for conduct that clearly falls short of the standards imposed by the Act but which may not meet the evidentiary burden of proof required for a criminal conviction.
The civil penalties provisions are most often used to prosecute breaches of the duty to exercise due care and diligence or failure to meet continuous disclosure obligations.
ASIC of course still has the power to bring criminal proceedings and works closely with public prosecutors in both civil and criminal matters.
Some of the most recent and well-known civil actions have included Storm Financial Services, in which ASIC pursued the directors for contravening their obligations to provide financial advice, and the MFS Group collapse, in which ASIC prosecuted directors under the civil penalties provisions for entering into related-party transactions.
When the civil penalties provisions were introduced in 1993, it took nearly for years for ASIC to bring the first case, and the corporate watchdog earned a reputation as a toothless tiger.
Several years later, however, new legislation was introduced that removed some of challenges faced by the interplay between the civil and criminal provisions, and in the years that followed we saw the collapse of HIH, One.Tel and Citigroup. ASIC began making use of the civil penalties provisions.
The ASIC Enforcement Outcomes Report for the period January 2016 to June 2016 shows 107 civil matters pending before the courts in relation to misconduct, including failure to disclose and corporate governance misconduct. In the same period, and in addition to the matters still before the courts, ASIC successfully prosecuted 11 instances of misconduct using the civil penalties provisions.
In all, 32% of the civil penalties actions are bought against individual directors. Importantly, in the small business category, the percentage of enforcement results for misconduct by directors is as high as 94%. Consequences can vary depending on the severity of the breach, but include pecuniary penalties of up to $200,000 for an individual and $1 million for a corporation. The court may order payment of compensation and can prohibit individuals from managing or directing companies.
ASIC continues to demonstrate its commitment to enforcing good governance, and its success rate using the civil penalties provisions is impressive.
The takeaway for all directors is to ensure that they are fulfilling their continuous disclosure obligations and complying with appropriate standards of due care and diligence. If in doubt, always seek professional legal advice.
