In the midst of a focus on the enforcement activity of ASIC following a critical Senate Committee report,[1] we have an article – Penalty Regimes Enforced by the Australian Securities and Investments Commission [2] – which examines the civil penalty regime under the Corporations Act, the ASIC Act and related legislation, and its history. The article, by Ian Ramsay and Miranda Webster of the University of Melbourne Law School, pre-dates the Senate report.
There were originally only eight civil penalty provisions enforced by ASIC in 1993; now as the authors explain, there are “436 – a 2,237.5% increase”. This increase and the expansion of accessorial liability under all of ASIC’s civil penalty regimes means that debates about the merits of civil penalty proceedings assume more importance. Also, the recent significant increase in the maximum civil pecuniary penalties that apply to the civil penalty regimes administered by ASIC, and other regulators, means that courts are likely to increasingly focus on whether penalties are oppressive.
A potential penalty of over $186 million against an individual in a recent tax case shows that.
That Senate Committee report has suggested that ASIC’s enforcement functions be hived off to a separate entity: see Splitting ASIC 2024 and the 2010 Senate Committee Report – Murrays Legal. The Committee heard that ASIC rarely takes criminal enforcement action against corporate actors, preferring instead to prosecute individuals, and that corporations can more easily avoid accountability for corporate crime than individuals due to their size and resources. ASIC’s subsequent greenwashing case results [3] suggest otherwise. Other recent cases, mentioned below, from tax law, give another view, when insolvency is involved.
Insolvency of the perpetrator
Recent cases show how the disruptive impact of the perpetrator’s insolvency on penalties needs to be understood.
Civil penalties are often not provable in and therefore not extinguished by bankruptcy, in the case of an individual, and are not provable in the liquidation of a company. The broad policy reason for that is that creditors should not have to have their dividend return [should there be any] diluted by the misconduct of the insolvent. The state loses out.
Company in liquidation, directors walk free
The consequence is that a miscreant company entering liquidation, perhaps as a consequence of the penalty being imposed, simply extinguishes the debt owed; more dramatically so if the directors, whose actual misconduct was central to the penalty, are not joined as respondents to the civil penalty proceeding.
In imposing a $153 million penalty on the Australian Institute of Professional Education, already in liquidation, for its “deliberate and protracted unconscionable conduct of a highly predatory nature“ in selling education services, Justice Bromwich expressed particular regret that the company’s [named] former CEO was
“not able to be made the subject of any liability or other adverse findings against him in person, or any related penalty”.[4]
That was because the proceedings were brought by the ACCC against the company in liquidation only. The unpaid penalty did serve a purpose, of general deterrence.
Individual in bankruptcy, debt remains payable
If a penalty is imposed on an individual, in an amount that they simply cannot pay, they are unable to extinguish the debt through bankruptcy. Unlike a company, the individual cannot simply disappear. That may be oppressive.
Mr Van Dyke
The Tax Practitioners Board obtained a pecuniary penalty of $1.8 million against a Mr Van Dyke on the grounds he performed tax agent services without being registered under the Tax Agent Services Act 2009 (Cth) (TASA). There were 3,359 contraventions of s 50-5(1) of the TASA by preparing and lodging 3,359 income tax returns for taxpayers, generally for a fee of $500, over a period of 4 years.
Also, he had not declared this income resulting in a total tax shortfall of $1,326,974, with administrative penalties of $785,542.90 imposed.
The law takes a softer approach in penalising a person where the liability to pay a civil penalty that has no real prospect of being discharged may be “crushing”. The Court took into account the need for a “deterrent sting”, that the penalty had to be greater than the moneys earned, though in the end not unduly so. Here, the total maximum available penalties amounted to an astonishing $186,823,000. The Court imposed a penalty of $1,800,000 on Mr Van Dyke: Tax Practitioners Board v Van Dyke [2024] FCA 899 (14 August 2024) (austlii.edu.au).
He had earlier gone bankrupt, on 16 April 2024. The Court noted however that the penalties imposed would not be discharged by his bankruptcy: ss 82(3), s 153(1) Bankruptcy Act.[5] They would remain with him for his lifetime or until payment. While the penal objects of general deterrence and giving appropriate recognition to the harm that the person has caused are valid, at the same time, it may be unsatisfactory that a person’s rehabilitation is hampered for ever without recourse if they simply cannot pay the amount imposed. The Court raised the possibility of Mr Van Dyke negotiating a payment plan with the Commissioner of Taxation.
Ultimately, the Commonwealth will generally not pursue a debt if satisfied that the debt is not economical to pursue, or if it is irrecoverable at law, or if it is written off under other legislation. If written off as uneconomical to pursue, the debt can be re-raised at a future time. A debt that is irrecoverable at law, such as a debt provable in bankruptcy, is effectively extinguished: Rule 11 of the Public Governance, Performance and Accountability Rule 2014. There is then an ultimate discretion in the government to waive any debt. See Managing Debt | Department of Finance.
Ms Pavihi
Another ameliorating option was adopted in a case brought by the Commissioner of Taxation involving contraventions of superannuation legislation [6] by a woman promoting to trustees of self-managed superannuation funds schemes to gain early release of funds otherwise than as permitted by the legislation. This occurred over a period of about 11 months involving 22 trustees, thereby adversely affecting accumulated superannuation benefits.
A substantial penalty could have been imposed. However, the Judge accepted an agreed penalty of $220,000.[7]
The offender was a single mother who was the victim of domestic violence and was living in rented accommodation in straightened circumstances. She was then unemployed, bankrupt, and her future earning capacity was limited.
The Court took into account these difficult personal circumstances and that she would remain liable to processes of execution for 15 years under Victorian law. [8]
The Commissioner offered an undertaking that, after six years, the ATO would seek court leave before taking any enforcement action in light of any changes to her financial circumstances such as a financial windfall, the discovery of any concealed assets, or a significant increase in earning capacity. Otherwise, within the period of six years from the making of the penalty order, the debt would be enforceable in the normal way.
All this should be contrasted with the ease with which a court can impose a multi-million dollar fine against a company whereby its liquidation simply extinguishes the debt: s 553B Corporations Act. The Senate Committee’s concern about limited criminal enforcement action against corporate actors as opposed to individuals may in some cases be misplaced.
Generally, Ramsay and Webster also examine the impact of the High Court decision in Australian Building and Construction Commissioner v Pattinson [2022] HCA 13, under the Fair Work Act 2009 (Cth), and the need for an “appropriate” civil pecuniary penalty that is “proportionate” in striking a reasonable balance between deterrence and oppressive severity.
Balance
The balance is not an easy one to achieve in Australia’s deep seated severe response to crime and its punishment, to the extent, it is said, that we imprison “208 people per 100,000 [the] second highest in the developed world.” [11].
The ALRC considered the question of penalties and insolvency over 20 years ago in its report – Principled Regulation: Federal Civil and Administrative Penalties in Australia (ALRC Report 95), recommending [32-2] inter alia that both criminal and civil penalties be provable in corporate insolvency proceedings, and be provable in personal bankruptcy proceedings and discharged upon discharge of the bankrupt with the option available to a regulator creditor to apply to the court prior to discharge for an order that outstanding penalties not be discharged. There was never any formal response to that ALRC Report 95 from the government.[9]
Deterrence
Getting back to civil penalties, and their purpose, the article by Ramsay and Webster refers much to their deterrent purposes and it is important for breaches of the law to be pursued and punished, in order to maintain the integrity of the regime, while accepting that any such pursuit has its resource limits: ASIC’s approach to enforcement | ASIC.
The concept of deterrence is one I prefer to avoid or not to so readily endorse for the reason that its grounding is in non-law disciplines beyond my expertise. I think we need to accept that deterring, persuading, incentivizing human conduct is not a precise art, and one in which the law often has only a limited role.
While many will say that deterrence may work on a particular individual contemplating misconduct, or if not, then on others more generally, and more generally still in a culture of compliance being instilled, others’ views aren’t so certain, the theory of general deterrence being described as
“an absolute myth. Ninety-three per cent of criminologists around the world know that there is no correlation between the severity of the penalty and a reduction in crime. …. We could escalate white-collar sentences to a mandatory 30 years imprisonment for every white-collar crime. Do you know how much crime that would reduce? Zero. The only thing that will reduce white-collar crime is to increase the perception in people’s minds that if they do something wrong they will get caught”.[10]
The likelihood of getting caught, and promptly, is certainly accepted as a more accepted and relevant factor. It is one reason it is difficult to see liability for insolvent trading having much of a deterrent effect.[12]
That likelihood is much assisted, in the words of an eminent scholar, by “sunlight”, in this context, by
“comprehensive, readily available information about companies and their directors [that] will help to overcome the invisibility and ease with which phoenix [and other corporate and tax misconduct] operates”.[13]
Instead, as I have said earlier – Senate report on ASIC’s investigation and enforcement roles – July 2024 – Murrays Legal – the Senate and others are being a little disingenuous in their criticism of ASIC, given the lack of sunlight mechanisms that are waiting to be adopted in Australia:
- we have been waiting 15 years for fully effective anti-money laundering laws;
- 10 years for a beneficial ownership register;
- we have arcane trust, insolvency and tax laws;
- no public director IDs;
- no quality insolvency statistics as to the law’s outcomes;
- overly complex corporate law; and
- corporate illegality and misconduct seemingly at a high level, let alone misconduct in the areas of tax, competition and insurance, under the control of other regulators.
Then there is insolvency law which, for one, can disrupt penalty regimes. Fudging its impact does not help.
Media releases by ASIC, ACCC and other regulators will often grandly refer to a million-dollar penalty being imposed, but not that the company is already in liquidation and will not pay. That could be said to be misleading and deceptive.
While there is little role for specific deterrence where a company is in liquidation, the object of general deterrence is at least served by imposing appropriate and accurate “sunlight” penalties that reflect the seriousness of the contraventions that should influence the conduct of other trading companies: ACCC v Birubi Art Pty Ltd (in liq) (No 3) [2019] FCA 996 at [23]‑[25].
Postscript
This website commentary does not at all do justice to the thinking and research given by Ramsay and Webster in their article.
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[1] Senate Economics References Committee – ASIC Investigation and Enforcement, July 2024. Australian Securities and Investments Commission investigation and enforcement (aph.gov.au)
[2] The Origins, Evolution and Merits of the Civil Penalty Regimes Enforced by the Australian Securities and Investments Commission by Ian Ramsay, Miranda Webster: SSRN
[3] For example, ASIC v Mercer Superannuation (Australia) Limited [2024] FCA 850.
[4] Australian Competition and Consumer Commission v Australian Institute of Professional Education Pty Ltd (in liq) (No 3) [2019] FCA 1982. See Unconscionable and immoral corporate conduct – nothing personal – Murrays Legal. See also “Record penalties” imposed … against insolvent companies – Murrays Legal. In the unlikely event of there being a surplus, the penalty may be payable from those surplus funds.
[5] Australian Competition and Consumer Commission v Smart Corporation Pty Ltd (No 3) [2021] FCA 347, at [19] and [20].
[6] Section 68B(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).
[7] Commissioner of Taxation v Pavihi [2019] FCA 2056
[8] Section 53(1) of the Federal Court of Australia Act 1976 (Cth); r 41.10 of the Federal Court Rules 2011 (Cth); Supreme Court (General Civil Procedure) Rules 2015 (Vic); and s 5(4) of the Limitation of Actions Act 1958 (Vic).
[9] That report pre-dated the decision in Mathers v Commonwealth [2004] FCA 217 which held that neither civil nor criminal penalties were provable debts under s 82.
[10] by how much could we reduce white collar crime by imposing 30 year jail sentences? “Zero”. – Murrays Legal
[11] by how much could we reduce white collar crime by imposing 30 year jail sentences? “Zero”. – Murrays Legal
[12] M Murray, The empty threat of insolvent trading, (2009) INSLB 126.
[13] Helen Anderson, ‘Sunlight as the Disinfectant for Phoenix Activity’ (2016) 34 Company and Securities Law Journal 257.
