The enactment of the civil penalty regime in 1993 introduced a new approach to the enforcement of directors’ duties by statutory agencies in Australia. Prior to the 1993 reforms, enforcement of directors’ duties by statutory agencies predominantly involved criminal enforcement by the Commonwealth Director of Public Prosecutions (‘CDPP’). The civil penalty regime empowered the specialist corporate regulator, the Australian Securities and Investments Commission (‘ASIC’) to bring civil proceedings involving a broader range of duties and sanctions and this was followed by the expansion of ASIC’s administrative powers.
The regime was enacted in response to the Senate Standing Committee on Legal and Constitutional Affairs’ Report on the Social and Fiduciary Duties and Obligations of Company Directors. Three key policy considerations can be distilled from the Report and other extrinsic material surrounding the enactment of the civil penalty regime. First, civil enforcement should be given primacy as the mode of enforcement applicable to the bulk of directors’ duties matters, while criminal enforcement should be reserved for more serious misconduct. Second, a range of different sanctions should be tailored to the circumstances of the misconduct, in accordance with a pyramidal model of enforcement. Third, sanctions should be set at a sufficient level to deter corporate misconduct, both by the defendant (specific deterrence) and the public at large (general deterrence).
Our article analyses the extent to which these policy considerations have been applied in practice by reference to a 10-year dataset of civil, criminal and administrative directors’ duties matters brought by ASIC and the CDPP that were finalised between 1 January 2005 and 31 December 2014. The dataset, which includes data obtained directly from ASIC and the CDPP that has not previously been published, indicates that these policies have, to a large extent, not been applied in practice in relation to the enforcement of directors’ duties. Civil enforcement was significantly less prevalent than criminal enforcement, despite the ostensible primacy of civil enforcement. Civil enforcement accounted for only 19.23% of matters in which contraventions of directors’ duties that attract both civil and criminal forms of liability were proven. The majority of sanctions were incapacitative, which is contrary to a pyramidal model of enforcement, as such a model requires that more lenient enforcement measures be considered prior to incapacitation (see the article for a full explanation of this model). Incapacitative sanctions – encompassing custodial sentences involving a minimum period of incarceration, civil disqualification orders and administrative disqualification outcomes – collectively accounted for at least 78.81% of all sanctions. Monetary sanctions and custodial sentences were set well below the statutory maxima, casting doubt on their deterrence value. The median civil pecuniary penalty imposed on defendants who engaged in a single contravention of a directors’ duty was $25 000 (12.5% of the statutory maximum of $200 000 per contravention), while 46.43% of custodial sentences imposed for contraventions of directors’ duties were fully suspended.
These research findings are significant given the central role that enforcement of directors’ duties performs in the regulation of corporate activity in Australia and the impact of such activity on society and the economy. Directors’ duties regulate the conduct of individuals who exert significant influence on the actions of corporations, which collectively command substantial social and economic power.
The research findings presented in this article are also significant from the perspective of comparative law and policy. Unlike some other common law jurisdictions in which enforcement of directors’ duties by statutory agencies (as opposed to private litigants) is limited, such as the United States and the United Kingdom, public enforcement of directors’ duties has occupied a central role in Australia for many years. Proceedings brought by ASIC and the CDPP account for approximately half of all judicial matters involving directors’ duties. In addition, ASIC is responsible for a significant number of administrative actions involving directors’ duties, principally in the form of disqualification orders. Australia pioneered a number of key developments in relation to the enforcement of directors’ duties by statutory agencies. It was the first common law jurisdiction to enact statutory directors’ duties in 1896 and to introduce public enforcement of such duties in 1958. Scholars have encouraged other jurisdictions, including the United States, the United Kingdom, Hong Kong, Singapore and New Zealand, to look to Australia’s enforcement regime in regard to establishing, expanding or refining their own public enforcement regimes.
Jasper Hedges is Research Fellow at the Centre for Corporate Law & Securities, Helen Bird is Research Fellow, George Gilligan is Senior Fellow, Andrew Godwin is Associate Professor, and Ian Ramsay is Harold Ford Professor of Commercial Law, all at the University of Melbourne Law School.