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Australia – No Rubber Stamps For Directors And Officers.

14 April, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Regulatory & Compliance

 

ASIC v Ingleby [2013] VSCA 49

 

WHAT YOU NEED TO KNOW

 

  • The warnings raised by the Victorian Court of Appeal in ASIC v Ingleby should be front of mind to regulators and defendants when negotiating settlements of civil penalty proceedings.
  • As the Court of Appeal’s judgment indicates, courts will not simply “rubber stamp” agreed penalties, and will pay close attention to the underlying basis for the parties’ agreement to ensure that the agreed penalties are appropriate.

 

WHAT YOU NEED TO DO

 

Parties should consider the following matters when seeking court approval of settlements in civil penalty cases:

 

  • In Victoria, parties should put forward a range of penalties by way of joint submission, rather than precise agreed penalties. It remains to be seen whether other States, and in particular the Federal Court (1 The Victorian Court of Appeal considered that the approach of the Full Federal Court in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 and Minister for Industry, Tourism and Resources v Mobil Oil Australia Pty Ltd [2004] FCAFC 72 to represent bad law. Those cases endorse an approach whereby the court is bound to impose the agreed penalty unless it falls outside the range reasonably available.), follow this same approach.
  • A joint submission in relation to penalties is not binding on the court.
  • Care must be taken by the parties to present the agreed facts comprehensively and accurately, and to ensure that the agreed penalties bear a relationship to the underlying events.

 

While some judges have recognised the benefits of resolving civil penalty proceedings by negotiated settlement, others have cautioned against this approach and made it clear that courts will not simply “rubber stamp” deals reached between regulators and defendants. The recent decision of the Victorian Court of Appeal in ASIC v Ingleby falls into the latter category (ASIC v Ingleby [2013] VSCA 49 (Weinberg and Harper JJA and Hargrave AJA).

 

Background

 

Directors and officers who breach statutory duties, such as the duty of care and diligence or the duty to act in good faith, can face a range of potential consequences including civil penalties. Civil penalties, which include pecuniary penalties and disqualification orders, operate as sanctions and generally carry serious professional and reputational consequences for the directors and officers concerned.

 

The practice of defendants negotiating settlements with regulators in civil penalty cases is not uncommon, and courts (including the Full Federal Court) have recognised a number of potential benefits, including avoiding the time, cost and uncertainty of protracted and complex litigation (NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285; Minister for Industry, Tourism and Resouces v Mobil Oil Australia Pty Ltd [2004] FCAFC 72.). Once agreement is reached, the regulator and the defendant approach the court with a statement of agreed facts, and ask the court to approve the settlement. However courts also have raised a number of concerns about agreed penalties, including:

 

  • It may be difficult for the court to determine whether the agreed penalty is within the range that the court would otherwise fix (Australian Competition and Consumer Commission v ABB Transmission and Distribution Ltd [2001] FCA 383 at [6]..
  • An agreed penalty, while not inappropriate, may not be the penalty that would have been imposed by the court (Ibid.).
  • Lack of transparency, which may create the perception that agreed penalties are not adequately based on fact and legal principle (Australian Law Reform Commission Report, Principled Regulation – Federal Civil and Administrative Penalties in Australia, Report No 95 (2002), [16.13].).
  • The accuracy and completeness of the statement of agreed facts presented to the court for the purpose of fixing the penalty.
  • The imposition of a civil penalty is an exercise of judicial power, in respect of which the judge has a broad discretion, and is required to consider a range of factors, including the need for specific and general deterrence.
  • The court has an important role to play in ensuring that civil penalty contraventions are adequately sanctioned.
  • Agreed settlements effectively shift the responsibility for determining penalties from the courts to the regulators (J Hilton “Principles of Fairness and Accountability”, quoted in Australian Law Reform Commission Report, Principled Regulation – Federal Civil and Administrative Penalties in Australia, Report No 95 (2002) [16.24].).
  • Agreed settlements can place a judge in an invidious position of being required to approve the agreement unless it is outside the appropriate “range”, which potentially fetters judicial discretion (ASIC v Ingleby [2013] VSCA 49 at [99].). 3 NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285; Minister for Industry, Tourism and Resouces v Mobil Oil Australia Pty Ltd [2004] FCAFC 72. 4 Australian Competition and Consumer Commission v ABB Transmission and Distribution Ltd [2001] FCA 383 at [6]. 5 Ibid. 6 Australian Law Reform Commission Report, Principled Regulation – Federal Civil and Administrative Penalties in Australia, Report No 95 (2002), [16.13]. 7 J Hilton “Principles of Fairness and Accountability”, quoted in Australian Law Reform Commission Report, Principled Regulation – Federal Civil and Administrative Penalties in Australia, Report No 95 (2002) [16.24]. 8 ASIC v Ingleby [2013] VSCA 49 at [99].

 

ASIC proceedings

 

On 19 December 2007, ASIC commenced proceedings against Mr Ingleby, the former CFO of AWB, seeking declarations that he had breached his duty to act with care and diligence (s 180(1) of the Corporations Act 2001 (Cth)) and in good faith (s 181 of that Act). ASIC sought orders that he pay a pecuniary penalty in relation to each contravention, and be disqualified from managing corporations for such period as the court thought appropriate.

 

The proceedings were stayed between November 2008 and August 2010, by which time ASIC and Mr Ingleby had reached a settlement. Mr Ingleby admitted that he had contravened s 180(1) of the Act. The particulars of the contravention were, in essence, that Mr Ingleby co-authorised five payments pursuant to four AWB contracts with the Iraqi Grain Board and that, despite having information available to him to raise questions as to the legitimacy of the payments, he took no steps to ascertain the true position or inform the board of AWB. The total of the four payments amounted to approximately AUD$37.7 million.

 

The settlement reached with ASIC, which was supported by a statement of agreed facts, was that Mr Ingleby would pay a pecuniary penalty of $40,000, and be disqualified from managing corporations for 15 months. The agreement was brought before the Victorian Supreme Court in June 2012 for approval (ASIC v Ingleby [2012] VSC 332 (Robson J).). However, the trial judge was of the view that, based on the statement of agreed facts, the proposed penalty was too harsh. The trial judge found that the agreed contravention by Mr Ingleby did not involve any deliberate wrongful act, dishonesty or moral turpitude, but rather was one of mere negligence. Instead of the agreed penalties, the trial judge imposed a pecuniary penalty of $10,000 and a disqualification order of approximately four and a half months.

 

ASIC’s appeal

 

ASIC appealed the penalties imposed by the trial judge.

 

The Court of Appeal was critical of both the agreed penalties, and the statement of agreed facts which purported to justify the penalties.

 

Statement of agreed facts

 

The Court of Appeal found the statement of agreed facts to be “less than a desirably sound basis upon which to reach important decisions about appropriate penalties” (ASIC v Ingleby [2013] VSCA 49 at [73].) and one that “represented, at the very least, a watered-down version of Mr Ingleby’s true level of culpability.” (Ibid at [41].).

 

 The Court of Appeal identified numerous inadequacies in the statement of agreed facts, such as:

 

  • The agreed facts did not spell out in any appropriate detail the authority and responsibility that Mr Ingleby’s position entailed.
  • The agreed facts suggested that Mr Ingleby played only the most insignificant part in this entire enterprise – as the court put it, “One could be forgiven for thinking, on the basis of those facts, that there was virtually no moral obloquy attached to anything that he did.” (Ibid at [34].). 
  • The true situation was in fact markedly different. The court noted that far from being a “minor functionary”, Mr Ingleby “was at the very centre of [AWB’s] operations.” (Ibid at [37].).
  • Although the agreed facts did characterise Mr Ingleby’s contraventions as “serious”, that description was not reflected in the specific components of the agreed facts.
  • The agreed facts did not record what information, if any, Mr Ingleby obtained or attempted to obtain.
  • The agreed facts did not explain why it was not open to draw an inference that Mr Ingleby, rather than merely falling short of the statutory duty of care and diligence, was wilfully blind as to what was happening. Mr Ingleby was a member of AWB’s executive committee and received minutes of the committee’s meetings in which the nature of the payments were discussed.

 

“[The imposition of a pecuniary penalty] is quintessentially an exercise of judicial power. Courts have stated repeatedly that they do not merely ‘rubber stamp’ agreements entered into by parties, and no one suggests that they should.” Weinberg JA at [15]

 

  • The agreed facts did not adequately explain Mr Ingleby’s reaction, or apparent lack of reaction, to certain emails which adverted to significant irregularities associated with the relevant transactions.
  • The agreed facts did not touch upon any harm which might have been done to Australia’s reputation as an ethical partner in international trade.

 

The Court of Appeal stated that if a court is not satisfied that it has sufficient information to support the “agreed” approach, it should ask the parties to provide additional information. If that information is not forthcoming, the court may well decide to impose different penalties to those sought.

 

In this particular case, the Court of Appeal considered that the statement of agreed facts did not place the court in a position from which it could properly discharge its responsibilities, and the trial judge ought to have sought more information from the parties before determining the appropriate penalties.

 

Agreed penalties

 

The Court of Appeal endorsed the approach, sometimes taken in the course of plea hearings for criminal offences, where parties put forward a range of penalties by way of joint submission, rather than precise agreed penalties. Although any such joint submission would not be binding, the proffering of a range recognises the breadth of the court’s discretion, and the need for the court to consider various factors in imposing penalties.

 

Although the Court of Appeal doubted that the agreed penalties adequately recognised the extent of Mr Ingleby’s failure to adhere to standards appropriate to his office, which the court characterised as “a most serious breach of his obligations under s 180”, it reimposed the original agreed penalties because:

 

  • ASIC asked the court to impose the agreed penalties, and nothing higher;
  • Mr Ingleby chose not to participate in the appeal, and the Court of Appeal was not at liberty to increase the agreed penalties in his absence; and
  • The court had no power to interfere with ASIC’s decision to allege breach of s 180 (as stated in the statement of agreed facts), rather than a provision which might more adequately reflect the extent of Mr Ingleby’s role and the seniority of the office he held.

 

It is clear from the judgment that if Mr Ingleby had participated in the appeal, the Court of Appeal would have increased the agreed penalties.

 

High standards imposed on directors and officers

 

The heavy demands imposed on directors and officers are unlikely to be viewed by courts an excuse for breaches of their duties. At first instance, senior counsel for Mr Ingleby submitted that his client’s failure to see what he ought to have seen was a consequence of the demands placed upon him by his job; demands which did not allow for a sufficiently careful reading of correspondence or attention to the detail which would, if known, have led to the truth.

 

Harper JA stated that he was “unimpressed with this argument” and that it is “essential that those who accept the rewards of important offices also accept the responsibilities which go with them. Proper corporate and professional behaviour depends upon that acceptance, and must be supplemented by the knowledge that the courts will play their part in the maintenance of appropriate standards.” (Ibid at [95].) Harper JA’s comments reinforce that courts will hold directors and officers to a high standard of conduct.

 

 

For further information, please contact:

 

Angela Pearsall, Partner, Ashurst

lisa.d’oliveyra@ashurst.com

 

Sagar Thakur, Ashurst

sagar.thakur@ashurst.com
 

 

 

 

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