ASIC’s track record in enforcing director’s duties using civil penalty procedures continues to be impressive. We take this opportunity to update on some recent case law developments.
What is civil penalty liability?
ASIC has the option to pursue Corporations Act breaches using civil penalty proceedings in relation to certain defined areas. The most significant of these areas from a director perspective are director’s duties (particularly the duty to exercise care and diligence) and continuous disclosure violations.
Importantly misleading and deceptive disclosure is not included in this list which is why claims for making false statements are pursued using continuous disclosure instead.
Civil penalty proceedings are brought by ASIC itself (rather than the Director of Public Prosecutions as is the case with criminal proceedings) and involves a lower civil burden of proof than a criminal prosecution.
If a court makes a declaration of contravention the consequences can be:
- pecuniary penalties (up to $200,000 per breach for individuals and $1million for corporations)
- banning orders from managing corporations for individuals
- compensation orders.
An impressive track record
Looking at the director’s duty of care and diligence, ASIC’s use of civil penalty proceedings has been extremely impressive in terms of enforcement outcomes. According to our research, in the two decades that the enforcement option has been available to ASIC there have been 26 decided cases involving alleged breaches of the duty of care and diligence. The track record is as follows:
|Cases where ASIC successful at first instance||22 (85%)|
|Cases successfully appealed by the director||3|
|Cases where ASIC successful on appeal||2|
The noteworthy appeal cases were ASIC v James Hardie (ASIC success in High Court) and
ASIC v Fortescue (ASIC loss in High Court). The only other high profile instance where ASIC failed on appeal was ASIC v Whitlam (ASIC loss in Full Federal Court). The high profile of the Fortescue loss belies the overall success that has been enjoyed by ASIC.
A duty to ensure compliance with law?
A particularly potent argument that ASIC has pressed in recent years is that it is a breach of the duty of care and diligence if a director fails to prevent a company from contravening its legal obligations. This theory is described as the “stepping stones” theory of director liability.
The courts have been clear that it is only possible to impose director duty liability on this basis if the director has essentially been negligent in guarding against the company breaching the law.
In 2016 the ASIC track record using this argument has been strong, with ASIC success against directors using the stepping stones argument in ASIC v Cassimatis (Storm Financial collapse), ASIC v ACN 101 634 146 (MFS Group collapse), ASIC v Sino Australia Oil & Gas, ASIC v Padbury Resources and ASIC v Astra Resources.
The lessons for directors
The lesson from this case law for the director is clear – be scrupulous in obtaining clear and unconflicted legal advice when issues of compliance with law are being considered and the stakes are high. Exercise care in reviewing continuous disclosure issues.
Some important recent examples
- ASIC v Cassimatis
- The breach of duty - The directors breached their director’s duties by allowing Storm to contravene its financial advice obligations to its clients. This way so even though the directors were the only shareholders of Storm and had approved the conduct as shareholders – the Court considered that the statutory director’s duties perform a public role and cannot be contracted out of.
- ASIC v Padbury Resources
- The breach of duty - Padbury made misleading statements to the market in breach of continuous disclosure concerning the availability of funding to build the proposed Oakajee port infrastructure in WA. The directors breached their duties in permitting that to occur.
- Penalties imposed - 3 year banning orders, $25,000 pecuniary penalty, reimbursement of ASIC costs $200,000.
- ASIC v MFS
- The breach of duty - The directors breached their director’s duties for allowing the responsible entity of a managed investment scheme to engage in related party transactions that were incorrectly accounted for.
- ASIC v Astra Resources
- The breach of duty - The directors breached their director’s duties by permitting the company to breach the Corporations Act through the issue of shares without a prospectus, relying on legal advice that should have been considered suspect.
- Penalties imposed - Banning orders from 9 to 12 years, share issues in breach of law voidable.