Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Corporate Criminal Responsibility – final ALRC report

The Australian Law Reform Commission report, Corporate Criminal Responsibility (ALRC 136), was tabled in Parliament on 31 August 2020. The 20 recommendations made seek to ‘significantly strengthen and simplify the Commonwealth corporate criminal responsibility regime’. 

A question will be whether this ALRC 136 report will receive better legislative attention than the more substantial ALRC 95 report of 2002 on related issues of regulatory penalties.  

Australian crime

This is of course in the context that crime generally is the preserve of the states and territories.  Under the Australian Constitution, the federal parliament has no general law making power in criminal matters, although under s 51(39) it has specific power to make laws with respect to matters incidental to the execution of any power vested by the Constitution in the parliament.  This incidental power has been used to expand the reach of federal criminal law, and in this context, connected with the constitutional powers shown in s 3 of the Corporations Act 2001.

Over the past 20 years, there has been a significant increase in the scope and coverage of federal criminal law, in areas such as national security, drug enforcement, immigration, money laundering, environmental protection, food tampering, and internet security, and most recently illegal phoenix activity.  These are national laws.

In contrast, in the states and territories, Australia has a complex system of intersecting and overlapping criminal laws and enforcement mechanisms.  Crime stops at borders, evident in the need for one state to in effect extradite an accused from another state;[1] and in one case where A, standing on the ‘southern bank of the River Murray above the actual water level’ in Victoria, shot B who was in NSW, raising the jurisdictional principle that the location of the crime and therefore the jurisdiction of the court is determined not by where the physical act was done but by where it took effect upon its victim.[2]

Federal criminal law

But while federal criminal law may not be concerned with state boundaries, and may be nationally consistent, it is not wholly satisfactory.  In relation to corporations, the ALRC 136 report found over 3,100 criminal offences from a sample of only 25 statutes. At the same time, the report found that corporations are much less likely to be prosecuted than individuals, and when they are, it is typically for a relatively minor regulatory offence. Small corporations are more likely to be targeted than large corporations, even though the wrongdoing of large corporations may potentially affect far more people. Further, individuals are not held accountable when they commit crimes for the advantage of a corporation.

The backdrop to ALRC 136 is said to be the need for

“a renewed focus on the protection of Australian consumers from flagrant misconduct, and increasing regulation in the area of corporate wrongdoing”.

Criminal law only for serious misconduct

A major theme is that the criminal law should be reserved for the most serious and egregious criminal conduct, and not be replicated through civil penalty provisions.

The report says that corporate conduct should be regulated primarily by civil regulatory provisions, expressed in what is termed “principled criminalisation”, recommendation 2, and that a criminal offence should be created in respect of a corporation only when: a) denunciation and condemnation of the conduct constituting the offence is warranted; b) imposition of the stigma that should attach to criminal offending would be appropriate; c) the deterrent characteristics of a civil penalty would be insufficient; d) it is justified by the level of potential harm that may occur as a consequence of the conduct; or e) it is otherwise in the public interest to prosecute the corporation itself for the conduct.

The report also recommends an increase in the range of penalty and sentencing options in order to punish and rehabilitate corporations more effectively, for example by public denunciation and barring from government work; and to make corporations criminally responsible for “failing to prevent” certain criminal conduct.

Insolvency related issues

Illegal phoenixing is mentioned, putting its costs to the economy in perspective as representing 0.11 to 0.21% of GDP (2015-16) and noting that the new director identity number will assist in phoenixing regulation.

It refers to ARITA’s submission saying that “the most urgent response to illegal phoenixing was addressing ‘unregulated pre-insolvency advisors’’, whose conduct the ALRC agreed warranted further scrutiny, but not by it. That scrutiny may come from the 2019 Senate recommendation for AFCA to take on this regulatory space.[3] The ALRC 136 report noted its previous concerns about the constitutional validity of some of ASIC’s phoenixing powers and its other recommendations to improve that new 2019 law.

ALRC 136 also noted that various recommendations were made about insolvency related matters back in its 2002 report – ALRC 95 – Principled Regulation[4] – including that both criminal and civil penalties should be provable in corporate insolvency proceedings, and it suggested that this recommendation be revisited.[5]

The report also raises for consideration whether penalties should be given “standing priority”, subject to court discretion, over the claims of owners and shareholders of the corporation, and entities associated with it.  It says that

“it would generally be appropriate for penalties to rank behind genuine third-party creditors.  Potential injustice to innocent third parties could also be mitigated by court discretion. For example, in some circumstances, the court might consider it appropriate to indicate the penalty that would have been imposed without awarding the penalty, in view of the impact on creditors”.

This is fine in principle, but it may not be necessary given the nil or low dividend return in most insolvencies.

Noting that in Principled Regulation, the ALRC did not make any recommendations on the priority of penalties in corporate insolvency proceedings, this ALRC 136 report likewise said that it warranted further detailed consideration following any comprehensive review of the law of insolvency.

Such a review might also resolve whether s 500 Corporations Act- “no action or other civil proceeding” – prevents criminal proceedings against a company in voluntary liquidation; cf s 471B.[6]

Comment

As to what will happen with this ALRC 136 report, it should be noted that the more substantial ALRC 95 of over 15 years ago has never had a formal response from the government. ALRC does say however that it has been influential in a number of developments, for example 2004 A Guide to Framing Commonwealth Offences, Civil Penalties and Enforcement Powers of 2004, and in the CLERP 9 reforms.  Also, Treasury’s 2007 Review of Sanctions in Corporate Law, which reviewed criminal, civil and administrative sanctions in the Corporations Act and the ASIC Act drew heavily on the work in ALRC 95. ALRC 95 is also referred to in a number of court decisions.

Whether this latest ALRC 136 report fares better, we will wait and see.

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[1] Under the Service and Execution of Process Act 1992 (Cth)

[2] R v Ward [1980] HCA 11; (1980) 142 CLR 308, going back to R v Coombes (1785) 1 Leach’s Crown Cases 388.  See also R v Graham [1984] VR 649

 

[3] Report of the Legal and Constitutional Affairs References Committee – Resolution of disputes with financial service providers within the justice system April 2019, recommendation 8 3.37 … extend the membership of [AFCA] to debt management firms; registered Debt Agreement Administrators; ‘buy now pay later’ providers …

[4] ALRC 95 Principled Regulation: Federal Civil & Administrative Penalties in Australia, 2002.

[5] Criminal and civil penalties are not provable: Mathers v Commonwealth [2004] FCA 217; ACCC v Cornerstone Investment Aust Pty Ltd (in liq) (No 5) [2019] FCA 1544 [31].

[6] Keay’s Insolvency 10th ed, [13.65].

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