Has the Introduction of Civil Penalties into Australia’s Corporations Act Increased the Speed and Success Rate of Directors’ Duties Cases?

Has the introduction of the civil penalty regime into Australia’s Corporations Act increased the speed and success rate of directors’ duties cases? This question has been the subject of much commentary but, surprisingly, no empirical research. A number of commentators argue that the civil penalty regime should have increased the speed and success rate of litigation brought by regulators. The Australian Securities and Investments Commission (‘ASIC’) disagrees. In this article, the authors present the results of the first empirical study aimed at answering this question.

The civil penalty regime was introduced into Australia’s Corporations Act in 1993. It allows ASIC to bring civil proceedings for contraventions of the key directors’ duties provisions of the Corporations Act. ASIC can bring proceedings alleging contraventions of directors’ duties based on a standard of proof lower than the criminal standard, and courts can impose a wider range of sanctions or remedies where a breach of duty is established. These sanctions are a pecuniary penalty, a compensation order or an order disqualifying the defendant from managing companies for a specified period of time.

The main policy considerations that underpinned the introduction of the civil penalty regime  according to the influential 1989 report of the Senate Standing Committee on Legal and  Constitutional Affairs were to (1) introduce a more flexible set of sanctions for contraventions of directors’ duties that would be tailored to the circumstances of the contravention; and (2) give primacy to civil enforcement over criminal enforcement (which would be preserved for the most serious contraventions of the law).

An additional policy consideration identified by some commentators is that the introduction of the civil penalty regime would facilitate enforcement of directors’ duties via civil rules of evidence and procedure. In particular, a view has developed that the regime would reduce the time taken to complete enforcement action in the courts and also increase the success rate of litigation brought by the regulator. These consequences would result from the comparatively liberal civil rules of evidence and procedure. 

Some courts have expressed a similar view, with one judge observing that parliament and law enforcement authorities are moving toward the use of civil sanctions because civil proceedings are ‘likely to be cheaper and more efficient than criminal proceedings […] because the rules of evidence are less strict, the protections afforded to defendants are not as great, and the level of certainty required to secure a conviction (the standard of proof) is lower.’ 

A different view has recently been put forward by ASIC. In its submission to the Senate Standing Committee on Economics Inquiry into Penalties for White Collar Crime, ASIC states that there should be no assumption that ‘because civil penalty proceedings are “civil” in nature, and therefore conducted under the courts’ civil procedure rules, they ought to provide a more timely and efficient means of dealing with corporate misconduct than criminal prosecutions.’ Such an assumption is misconceived according to ASIC for a number of reasons including that ‘civil procedure is not necessarily more efficient or less complex than criminal procedure.’

In order to test whether the introduction of the civil penalty regime has increased the speed and success rate of litigation brought by statutory agencies for breaches of directors’ duties, we researched all directors’ duties cases brought by either ASIC or the Commonwealth Director of Public Prosecutions for the 10 year period from 1 January 2005 to 31 December 2014.

In summary, the research finds that, contrary to a widespread perception that civil proceedings are more successful for the regulator and quicker as a result of more lenient rules of evidence and procedure, there was only a relatively small difference between the success rates and duration of civil and criminal enforcement during the ten year study period.

Jasper Hedges is a Research Fellow at the Melbourne Law School of the University of Melbourne.

Ian Ramsay is the Harold Ford Professor of Commercial Law and Director of the Centre for Corporate Law and Securities Regulation at the Melbourne Law School of the University of Melbourne.