Australia has long been in the vanguard when it comes to enforcement of duties of corporate directors. Australia was the first English-speaking jurisdiction to introduce statutory directors’ duties in 1896, and the first English-speaking jurisdiction to introduce criminal sanctions to enforce statutory directors’ duties in 1958. However, following the recent global financial crisis, questions were raised in Australia (as they were elsewhere) about the effectiveness of Australia’s enforcement regime for directors’ duties. These questions in turn raised the question about what was in fact being done by to enforce directors’ duties under Australian law. In a March 2016 paper entitled “An Empirical Analysis of Public Enforcement of Directors’ Duties in Australia: Preliminary Findings” (here), five academics have taken a comprehensive look at the public enforcement of directors’ duties under Australian law. Their paper reaches a number of interesting conclusions, as discussed below. A summary of their paper and its findings appeared in a June 9, 2016 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation (here).
The duties of corporate directors under Australian law are codified in the provisions of the Corporations Act 2001, the statutory predecessor of which was the Corporations Act of 1989. The statute specifies the directors’ duties as encompassing the following: the duty of care and diligence; the duty to act in good faith and in the best interests of the corporation; the duty not to improperly use their position to gain an advantage for themselves or to cause detriment to the corporation; the duty not to improperly use information; the duty to disclose material personal interests; the duty not to vote on matters in which the director has a personal interest; duty not to give a financial benefit to a related party without member approval; and a duty to prevent insolvent trading by the company. All of these duties are subject to both civil and criminal sanctions, except the duty to exercise care and diligence.
The statutes allow for both private and public enforcement of directors duties; the private enforcement is pursued through civil litigation. The public enforcement of the duties is pursued through civil enforcement actions by the Australian Securities and Investments Commission (ASIC) and criminal enforcement actions by the Commonwealth Director of Public Prosecutions (CDPP). ASIC is empowered to pursue pecuniary penalties up to A$200,000 per contravention; management disqualification orders, and compensation orders for loss incurred by the company. The CDPP can pursue a wide range of sanctions including prison sentences of up to five years per offense, fines of up to A$360,000 per offense, pecuniary penalties, compensation orders, good behavior bonds and community service orders.
In order to assess and analyze the public enforcement of directors’ duties, the authors assembled a database of all sanctions imposed in civil and criminal proceedings brought by ASIC and the CDPP for contravention of the statutory provisions specifying the directors’ duties. The authors identified 27 civil and 72 criminal court matters from January 1, 2005 thought December 31, 2014. (The database excluded enforcement actions pursuant to other procedural means, including, for example, administrative proceedings and negotiated outcomes.) From their review of this database, the authors made a number of interesting findings.
Interestingly, the authors found that criminal enforcement of directors’ duties was significantly more prevalent than civil enforcement. Criminal enforcement by the CDPP was responsible for about 81% of all matters in which liability was established and about 61% of all defendants found liable.
The authors also made some interesting findings about penalties for corporate wrongdoing. Following the financial crisis, many commentators suggested the maximum civil pecuniary penalty of A$200,000 is too low. The authors concluded first that the imposition of other types of sanctions was much more frequent than the imposition of the pecuniary penalty, and that penalties imposed were typically much lower than the maximum. Custodial sentences and civil management disqualification orders were much more frequently imposed than pecuniary penalties. Prison sentences and disqualification orders together accounted for about 67% of sanctions imposed, while only about 18% were civil pecuniary penalties and only about 2% were fines.
With respect to the pecuniary penalties imposed, the authors found that median civil pecuniary penalty imposed on defendants who had engaged in a single contravention was only about A$25,000, and the median penalty imposed on all defendants (including those that had engaged in multiple contraventions) was A$50,000.
The average civil management disqualification order was about 5.2 years and the average maximum prison sentence was about 2.25 years. However about 46% of the prison sentences involved immediate release suspended sentences, in the form of immediate release subject to good behavior.
The ASIC and the CDPP enjoy a high rate of litigation success. The CDPP and ASIC established liability in about 88% and 89% of matters, respectively. The CDPP and ASIC established liability in relation to about 84% and 92% of defendants respectively.
In the text of their study, the authors make an interesting observation about the relative impact of civil and criminal enforcement. The authors note that it is “important not to equate prevalence of enforcement with the overall societal impact on enforcement, as the impact of enforcement is not just a matter of the particular matters won and particular defendants punished, but also the broader media exposure and public knowledge of the proceedings.” Given that some civil matters involve high-profile defendants, “it may be the case that some civil matters attract greater media coverage and public attention than criminal matters, which are predominantly litigated in the inferior courts.” The authors note that the distinction between civil and criminal jurisdictions is “not as meaningful as it first appears.” For example, the authors note, “criminal sanctions can be lenient, such as a 12 month good behavior bond,” while civil sanctions “can be severe, such as a 25 year management disqualification order.”
The authors’ analysis of the Australian directors’ duties enforcement regime is interesting, but it would be even more interesting to see an analysis comparing the Australian regime to that of the U.S. and U.K. For starters, directors’ duties in the U.S. equivalent to the ones enumerated in the Australian statutes are mostly regulated at the state rather than federal level. (Obviously directors’ duties under the federal securities laws are regulated at the federal level). The enforcement and sanctions regimes in the various U.S. states vary widely, and the U.S. system enforcement system relies heavily on the private enforcement mechanisms through private civil litigation.
Along with the comparative legal analysis, another assessment that would be interesting would be the relative effectiveness of the system – that is, which are better at deterring director misconduct and what is more effective – higher fines or greater sanction of disqualification? A final analysis that would also be helpful for directors in Australia is discussion of the steps they can take to reduce the likelihood of becoming involved in an enforcement action.