An Empirical Analysis of Public Enforcement of Directors’ Duties in Australia

Jasper Hedges is Research Fellow, George Gilligan is Senior Research Fellow, and Ian Ramsay is Harold Ford Professor of Commercial Law at Melbourne Law School, The University of Melbourne. This post is based on a recent paper authored by Mr. Hedges, Mr. Gilligan, Mr. Ramsay, Helen Bird, and Andrew Godwin.

There is significant international interest in enforcement of directors’ duties. Our paper presents the findings of an empirical study of judicial proceedings brought by the Australian Securities and Investments Commission (ASIC) and the Commonwealth Director of Public Prosecutions (CDPP) for breaches of the directors’ duties provisions of the Corporations Act 2001 (Cth) in the ten year period from 2005 to 2014. The paper examines the directors’ duties to: (a) act with reasonable care and diligence, in the best interests of the company, and for a proper purpose; (b) avoid conflicts of interest; (c) not engage in related party transactions; and (d) prevent the company trading while it is insolvent.

Australian law provides for both public and private enforcement of directors’ duties. In the case of public enforcement, the legislation provides for both criminal proceedings (brought by the CDPP) and what are termed “civil penalty” proceedings (brought by ASIC). Key differences between the two are the civil standard of proof that applies to civil penalty proceedings and different sanctions. The sanctions that can be sought by ASIC in civil penalty proceedings include pecuniary penalties of up to A$200,000 per contravention, management disqualification orders that are either indefinite or of a specified duration, and compensation orders for loss incurred by the company. The CDPP can seek a wide range of sanctions in criminal proceedings, such as custodial sentences of up to five years per offence, fines of up to $360,000 per offence, pecuniary penalties, compensation orders, good behaviour bonds and community service orders.

This study is the most in-depth empirical analysis of public enforcement of directors’ duties in Australia to date, examining the type, frequency and magnitude of sanctions imposed in civil penalty and criminal proceedings, as well as the success rates, duration and reporting of such proceedings. Its findings provide the foundation for evidence-based legal analysis and policy development in relation to this fundamental area of corporate regulation.

Some countries do not allow for public enforcement of directors’ duties. In the case of Australia, the evidence indicates that judicial proceedings brought by ASIC and the CDPP perform a significant role in the enforcement of directors’ duties, constituting approximately half of all public and private proceedings involving breaches of directors’ duties.

The key findings of the research are:

  • Most previous commentary on enforcement of directors’ duties in Australia has focussed on civil penalty proceedings brought by ASIC, yet the research shows that criminal enforcement of directors’ duties by the CDPP was significantly more prevalent than civil enforcement by ASIC. Comparing directors’ duties that attract both civil and criminal liability, 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.
  • Much of the debate surrounding penalties for corporate wrongdoing in Australia has centred on the maximum pecuniary penalty of A$200,000 for contravening a civil penalty provision of the Corporations Act 2001 (Cth). However, our research reveals that incapacitative sanctions, such as custodial sentences and civil management disqualification orders, were much more frequently imposed than pecuniary penalties. Prison sentences and disqualification orders each accounted for about 33.5% of the total number of sanctions imposed (67% collectively), while about 18% of the sanctions were civil pecuniary penalties and only about 2% were criminal fines.
  • While the statutory maximum civil pecuniary penalty is A$200,000, our research reveals that the penalties imposed by courts were typically much lower than the maximum. The median civil pecuniary penalty imposed on defendants who had engaged in a single contravention of a directors’ duties provision was A$25,000, which is only 12.5% of the statutory maximum. The median penalty imposed on all defendants, including defendants who had engaged in multiple contraventions, was A$50,000.
  • The average civil management disqualification order was about 5.2 years. The average maximum prison sentence was about 2.25 years, while the average minimum (i.e. minimum amount of time that must be served) was about 1.4 years. However, a significant proportion of prison sentences, about 46%, involved immediate release subject to a good behaviour bond (i.e. fully suspended sentences).
  • Both ASIC and the CDPP enjoyed high litigation success rates. Despite the higher standard of proof applicable to criminal proceedings for breaches of directors’ duties, the CDPP’s success rates were not significantly lower than ASIC’s. The CDPP and ASIC established liability in about 88% and 89% of matters respectively. In terms of individual defendants, the CDPP and ASIC established liability in relation to about 84% and 92% of defendants respectively.
  • Contrary to a commonly held view that civil enforcement is more efficient than criminal enforcement, the duration of both the civil and criminal enforcement processes was lengthy. From the first detected contravention to the final judgment, the average duration of civil matters was about 6.9 years, while the average duration of criminal matters was about 7.9 years.

These are important findings that are relevant to those with an interest in the enforcement of directors’ duties in both Australia and other jurisdictions.

The full paper is available here.

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