#7359 - How Do We Regulate Criminal And Civil Penalty Contraventions - Securities and Financial Services Regulation

Under the securities provisions of the CA and ASICA a number of consequences can follow – criminal sanctions, civil penalty and civil liability for contraventions as well as injunctions, and other orders affecting peoples activities

Contraventions of most, if not all of Pt 3 Div 3 requirements may be a criminal offence depending on the circumstances of the contravention and sometimes the state of mind of the person concerned

• The exceptions are ss 1041H, 12DA which prohibit MODC and give rise only to civil liability

In some cases the statutory provision will specify if the contravention is an offence or not

• S 1311 is a general offence provision which states that a person who does an act that the person is forbidden to do by or under a provision of the Act, or doesn’t do a thing they are required/directed to do under the Act, or otherwise contravenes the Act, is guilty of an offence unless another provision or that one provides that the person is not guilty of an offence

• S 12GB of the ASICA is also a general offence provision for unconscionable conduct and consumer protection

The provisions of the CCC also apply to the CA and ASICA

ASIC’s role is confined to investigations – once they are on foot ASIC prepares a brief and gives it to the CDPP who decides whether or not to prosecute. Their relationship is governed by an MOU

Some provisions of the Act are CPPS ftpo Pt 9.4B – they are set out in s 1317E and include s 674-5 (CD obligations), s 798H (compliance with market integrity rules) and the market manipulation provisions

The CPP regime allows for punishment of the contraventions and the purpose of these penalties are punitive (closer to criminal fines than civil damages)

The relationship between criminal proceedings is governed by s 1317M, N, P – the first of which provides that a court mustn’t make a declaration of contravention if the person has been convicted on an offence constituted by conduct substantially the same as that constituting the contravention

S 1317J provides that where ASIC believes a contravention to have taken place, they have standing to make an application to a court for a declaration of contravention, a PPO and a compensation order

S 1317E provides that if the court is satisfied of a contravention they must make a declaration of contravention which may be accompanied by a civil penalty order or compensation order

Proceedings for a declaration of contravention or PPO are civil and therefore the civil rules of evidence apply (s 1317L) and the burden of proof is on BOP subject to the Briginshaw standard which means the gravity of the consequences flowing from a particular finding are considerations that affect whether the issue has been proved to the satisfaction of the tribunal (Morley v ASIC)

Since PPO’s involve the imposition of a penalty, the privilege against exposure to penalties apply and the defendant cannot be compelled to provide prove against themselves (Rich v ASIC – this case involved the application of this privilege to early stages like case management and discovery)

ASIC is a government agency and is therefore expected to be a model litigant and adhere to standards of fair dealing in the conduct of litigation. This does not include a duty to call particular evidence (ASIC v Hellicar)

Once a declaration of contravention is made, s 1317G(1) empowers a court to require payment of a PPO if the contravention has a material impact or is otherwise serious

• This can be up to $200k for an individual or $1m for a corporation if the contravention:

  • Materially prejudices the interests of the company or the scheme, or their representative members

  • Materially prejudices the company’s ability to pay its creditors

  • Is serious in the sense that the default or neglect constituting the breach of requisite duty is grave or significant (ASIC v Donovan)

• The amount of the penalty is determined by reference to principles of general and personal deterrence, rehabilitation an d retribution (ASIC v Vizard)

ASIC has standing to bring or intervene in various types of civil proceedings iro contraventions of the CA or ASICA

ASIC has standing to seek injunctive relief wrt contraventions of the CA (s 1324) and ASICA (s 12GD) – the principles underlying the exercise of the power are the ordinary principles which apply to the grant of an interim injunction (there must be a serious to be tried and the balance of convenience must favour the award)

• Corporations Act

  • s 1324(1) allows the court to grant an injunction to restrain a (/potential) breach of the CA and it can be granted iro conduct that is a contravention or amounts to being involved in a contravention of the Act

  • s 1324(2) gives the court the power to grant an injunction requiring someone to do an act required by the CA

  • s 1324(10) gives the court power to order the payment of damages in addition or substituted with the injunction

• ASICA

  • S 12GD provides for prohibitory injunctions to restrain contraventions of the unconscionable conduct and consumer protection irt financial services provisions) and to restrain conduct contravening the provisions or amounting to involvement in those contraventions

ASIC may bring civil proceedings for damages or recovery of property in the name of the third party if as a result of investigation it appears that to do so is in the public interest (this is a wide discretion including consideration of the regulatory purpose of the proceedings, prospects of success and likelihood of recovery – ASIC v Deloitte)

• ASIC can do so in the name of a company with or without consent of the company and in the name of natural persons (but only with their written consent s 50(c)-(d))

• Decisions to bring proceedings may be challenged under the ADJR Act

ASIC may, in certain circumstances, make application to the court for orders compensating people affected by contraventions of Chs 5C (MIS), 6CA (CD), 6D (Fundraising), Pt 7.10 (market misconduct)

If a person is found to have been engaged in conduct contrary to these provision, ASIC can make an application under s 1325(2) on behalf of 1+ persons identified in the application who have (/are likely to) suffered loss or damage to the conduct

• BUT ASIC has to get consent of the person before doing so

S 12GM provides similar rights irt the unconscionable conduct and consumer protection provisions

ASIC has standing to make application for a variety of other specific orders icw contraventions of the securities and financial services law such as:

• S 983A – restraining orders irt accounts of FSL

• S 1101B – contraventions of Ch 7 or market operating rules

• S 1323 – for orders prohibiting payment or transfer of money/property

• S 1324B – orders disclosing information or publishing advertisements

• S 1324A – for contraventions of Ch 6, 6A-C

• S 1325B – in relation to takeover bids

• S 1324C – in relation to unfair or unconscionable arrangements

• S 12GLA – non punitive orders, s 12GLB for punitive orders requiring adverse publicity, s 12GN for orders prohibiting payment/transfer of money

ASIC can also intervene in proceedings as to matters arising under s 1330

ASIC has a number of other administrative actions open to it

ASIC can prevent the dissemination of, and issue of, securities or FPs pursuant to defective disclosure documents using its stop order powers under s 739. ASIC may do so where:

• A disclosure document iro an offer of securities has in fact been lodged with ASIC

• ASIC is satisfied that an offer of securities under that disclosure document would contravene s 728

• It remains possible for an order under the subsection to operate according to its terms in the sense that an offer/issue/sale/transfer of securities under the disclosure document lodged with ASIC may stillb e made

Where ASIC is authorised to act under s 739(1) it must, before making any order other than an interim order, hold a hearing giving reasonable opportunity to any interested people to make oral/written submissions to ASIC (s 739(2))

• IF ASIC considers a delay in making the order pending a hearing to be prejudicial to the public interest, they can make an interim order under s 739(3) [but IFF they are authorised to act under s 739(1)]

• In order to do so ASIC must:

  • Have decided to exercise the discretion in favour of making an order under s 739(1)

  • Consider that any delay in making an order under that section pending the holding of the hearing would be prejudicial to the public interest

Pt 9.4AA allows for ASIC to issue of infringement notices for alleged contraventions of the CD provisions in ss 674, 675 as a substitute for civil penalty proceedings

A disclosing entity hit with an infringement notice has two choices – complying and paying the fine (in which case ASIC can’t bring certain proceedings against them irt the alleged contravention) or choose not to comply in which case ASIC can take the full range of remedies

ASIC can accept enforceable undertakings under s 93AA ASICA ‘icw a matter irt which they...