Directors, take note: Increased penalties under Corporations Act are now law

As reported in our article The year ahead for directors: what’s in store for 2019, the Federal Government presented the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 (Penalties Bill) which proposed to significantly increase the civil and criminal penalties for breaches of the Corporations Act 2001 (Cth) (Corporations Act) and to ensure that the word “dishonest” has an objective and universal meaning in the Corporations Act. The Penalties Bill has now received royal assent and these amendments to the Corporations Act came into effect on 13 March 2019.

 

 

Last year the Commonwealth Treasury issued a warning that the Penalties Bill “… would double maximum imprisonment penalties for some of the most serious ‘white-colour’ criminal offences bringing Australia’s penalties in closer alignment with leading international jurisdictions”.1

The Treasury’s warning is now a reality with the Federal Government delivering on its promise in response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

On 13 March 2019, major changes to the Corporations Act were implemented, including:


  • widespread amendments to the penalty regime to significantly increase the maximum penalties for civil and criminal contraventions; and
  • a new objective meaning of “dishonesty”, including consequential amendments in the Corporations Act.

Summary of the new penalties

The maximum penalties for civil and criminal contraventions that are now law, compared to the previous penalties under the Corporations Act, are summarised below:

Increased civil penalties


Increased criminal penalties

While there is a 2.5 million penalty unit cap for the maximum penalty for civil contraventions committed by companies as calculated by the formula under section 1317G(4), there does not appear to be similar cap for the maximum penalty for criminal offences committed by companies under section 1311C(3) of the Corporations Act.

Whilst it was originally proposed to increase the maximum imprisonment penalty for contraventions of section 184 of the Corporations Act in respect of reckless and dishonest breach of duty by directors from 5 to 10 years, the final Penalties Bill passed significantly increases the maximum penalty for this offence to 15 years.

New objective test for dishonesty under the Corporations Act

The Penalties Bill also inserted a new definition of “dishonest” in section 9 of the Corporations Act that means “dishonest according to the standards of the ordinary people”. This introduces an objective test about whether the director’s conduct was dishonest or not.

Consequential amendments have been made (such as to subsections 184(2) and 184(3) for dishonest use of position or information, and section 588G for dishonestly trading while insolvent) throughout the Corporations Act, such as section 184(1) which now provides (as amended):

(1)   A director or other officer of a corporation commits an offence if they:

(a)   are reckless; or

(b)   are intentionally dishonest;

and fail to exercise their powers and discharge their duties:

(c)   in good faith and in the best interests of the corporation; or

(d)   for a proper purpose.

For an abundance of clarity, the Penalties Bill inserted a new subsection (4) at the end of section 184 of the Corporations Act which states:

(4) To avoid doubt, it is not a defence in a proceeding for an offence against subsection (3) that the person uses the information dishonestly:

(a)   with the intention of directly or indirectly gaining an advantage for the corporation; or

(b)   with the result that the corporation directly or indirectly gained an advantage.

What do these amendments regarding dishonesty mean?

The effect of the new definition of the “dishonesty” in the Corporations Act is to:

  • establish a consistent meaning of the word throughout the Corporations Act;
  • require an objective assessment of the dishonest act. This means that it will not be necessary to prove whether the defendant knew that the relevant conduct was dishonest or intended to act dishonesty; and
  • lower the threshold of whether someone acted dishonestly under the Corporations Act as it is often difficult to prove an offender’s intention or knowledge.

Directors, take note

The highly anticipated amendments to the Corporations Act by the Penalties Bill are now law, which means that ASIC will now be able to seek much higher penalties against those who contravene the Corporations Act.

This is an important development, particularly when combined with ASIC’s ‘why not litigate’ stance, its focus on deterrence, public denunciation and punishment of wrongdoing by litigation as well as its focus on corporate and individual accountability (particularly at the executive and board level) for breaches of the Corporations Act. Directors who do not comply should be very worried.

The new definition of “dishonesty” will change the way liability is understood for the provisions which involve an element of dishonest conduct. It is no longer a defence to assert you did not know your conduct was dishonest or that you had no intention to act dishonestly or gain an advantage for the corporation from the use of information. If a director’s conduct is objectively assessed to be dishonest, a finding of dishonesty would be made by the Court.

As outlined in our article The year ahead for directors: what’s in store for 2019, there is further proposed legislation in the works that will impact on directors. These changes are likely to come into effect in the near future and directors need to be aware of them as there will be penalties for those who do not comply – watch this space for updates.


1 Treasurer of the Commonwealth of Australia, ‘Government consults on stronger penalties for corporate and financial sector misconduct’ (Joint Media Release, 26 September 2018) 3.

Contributors

Fiona Lymant Senior Associate
Gidon Kangisser Lawyer