Explanatory Memorandum
(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce, MP)5 - Deterring corporate misconduct
Compulsory powers to investigate liquidators' conduct
5.1 There are limitations on the circumstances in which ASIC may use its compulsory powers for the purpose of inquiries into liquidators' conduct. Section 13 of the Australian Securities and Investments Commission Act 2001 (ASIC Act) sets out when ASIC's investigative powers in Part 3 of the ASIC Act are triggered. Those circumstances include investigation of a suspected contravention of the corporations legislation, or of a 'law of the Commonwealth, or of a State or Territory' relating to the management or affairs of a body corporate or involving fraud or dishonesty. For that purpose a 'law of the Commonwealth, or of a State or Territory' is limited to enactments of parliaments and does not extend to common law or equitable duties.
5.2 It is within ASIC's administrative functions under the corporations legislation to enquire into liquidators' actions (section 536 of the Corporations Act) and to make applications for disciplinary purposes to the Companies Auditors and Liquidators Disciplinary Board (CALDB) where a liquidator has failed to carry out the duties of a liquidator adequately (subsection 1292(2) of the Corporations Act).
5.3 However, it is not always clear that ASIC can use the full suite of its compulsory powers in Part 3 of the ASIC Act for the purposes of investigating the extent to which a registered liquidator has satisfied the duties owed by them in various proceedings. Unlike directors' duties, the fiduciary duties of registered liquidators are not codified in the corporations legislation.
5.4 The Bill will empower ASIC to use its compulsory powers in Part 3 of the ASIC Act to investigate liquidators' conduct generally, including the extent to which registered liquidators comply with those fiduciary duties that are not codified in the corporations legislation. ASIC can use its compulsory powers if it has reason to suspect certain matters, for example that a person has or may have failed to carry out or perform adequately and properly the duties of a liquidator.
5.5 Item 1 of Schedule 2 to the Bill will insert a new subsection 13(3) into the ASIC Act.
5.6 New subsection 13(3) will allow ASIC to use the investigatory powers in Part 3 of the ASIC Act when ASIC has reason to suspect that a registered liquidator has not, or may not have, faithfully performed his or her duties; or is not, or may not be, faithfully performing his or her duties as a liquidator.
Schemes of compromise or arrangement - right of recovery for breach of condition or alteration
5.7 Part 5.1 of the Corporations Act provides for schemes of compromise or arrangement, comprising plans that bind a Part 5.1 body's creditors or members or both to some form of rearrangement of their rights and obligations.
5.8 When an application is made to the court to approve a scheme proposal that has been passed by members and/or creditors, the court will consider the application and may approve the scheme subject to any alteration or condition as the court thinks just (subsection 411(6) of the Corporations Act).
5.9 Currently, the provisions do not contain a mechanism for recovery where a person suffers loss or damage as a result of a breach of any alteration or condition imposed by the court pursuant to subsection 411(6). Introduction of such a mechanism will provide the court with broader powers to protect persons who may be adversely affected by a proposal. The desirability of such a mechanism was highlighted in the context of the James Hardie Report.
5.10 The Bill will amend the scheme of compromise or arrangement provisions in the Corporations Act to introduce a new right for a person to make an application for a court order to recover compensation where:
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- the court imposes an alteration or condition on the scheme's approval pursuant to subsection 411(6);
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- that alteration or condition is breached by the Part 5.1 body; and
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- the person suffers loss or damage as a result of the breach.
5.11 Item 2 of Schedule 2 to the Bill will insert a new subsection 411(6A) of the Corporations Act, providing a right for a person to recover compensation if they have suffered loss or damage due to breach by a body of a condition or alteration imposed by the court under subsection 411(6).
5.12 The new right will only apply to those parts of the arrangement or compromise that are altered by the court or added by the court, that is, where the scheme as approved differs from the proposal passed by members and/or creditors. It does not affect any right of recovery from a breach of the arrangement or compromise as initially proposed.
5.13 If a breach of condition or alteration is made out, the court may make orders that it considers are just in the circumstances. Although such orders may be for orders to pay compensation or to enforce the condition or alteration (new subsection 411(6B)), the court will not be limited to those remedies (new subsection 411(6C)).
Court orders preventing company officers and others from avoiding liability
5.14 Section 486A of the Corporations Act allows a court to make certain orders to prevent a company officer (or related entity of a company) acting in a manner that could allow the officer (or related entity) to avoid their liabilities to a company that is being wound up. Such orders include prohibition on sending funds out of the jurisdiction, prohibitions on leaving the jurisdiction and the surrender of passports.
5.15 Currently, such an order may only be made by the court on the application of a liquidator or provisional liquidator, and the court can only make orders if 'the company is being wound up in insolvency or by the Court, or an application has been made for the company to be so wound up' (subsection 486A(2)). In a case where an application to wind up a company has been made but the winding up has not commenced, there will not necessarily be any liquidator or provisional liquidator appointed. Accordingly, there will not be any eligible party to make the application.
5.16 The Bill will amend section 486A to allow ASIC to also make an application to a court for an order preventing an officer or related entity from avoiding liability to a company. ASIC already has standing to make an application under section 486B of the Corporations Act.
5.17 Item 4 will amend subsection 486A(1) to remove the requirement in that subsection that the application be brought by the liquidator or provisional liquidator.
5.18 Item 7 will insert new subsection 486A(2A) stating who has standing to make an application under subsection 486A(1), providing that ASIC, as well as a liquidator or provisional liquidator, has standing to apply for such an order.
5.19 To make this Division easier to understand, it will be broken up into two subdivisions. The first subdivision (Subdivision A) relates to the general powers of the court. The second subdivision (Subdivision B) relates to the procedures in relation to section 486B warrants. As part of this change, item 3 of Schedule 2 to the Bill will insert the new title 'Subdivision A - General Powers' after the heading of Division 3 of Part 5.4B.
5.20 Item 5 will clarify paragraph 486A(1)(a), by replacing the words 'the company' with the words 'a company.'
5.21 Item 6 will clarify paragraphs 486(1)(b), (c) and (d), by replacing the words 'the company' with the words 'a company.'
5.22 Item 8 will clarify subsections 486A(3), (4) and (5) by inserting the words 'for an order' before the words 'under subsection (1)' in each case.
5.23 Section 486B of the Corporations Act allows a court to issue a warrant to arrest and bring before the court a person who is absconding, or who has dealt with property or books, so as to avoid obligations in connection with a winding up.
5.24 The provision was enacted in 1992, following recommendations in the Harmer Report [7] and is modelled on section 78 of the Bankruptcy Act 1966 . However, the provision lacks any details about the procedure for how a person subject to a warrant is to be treated, both before and after they are brought before the court. In particular, the provision does not give the court any express power to order that the person remain in custody, or make other orders. In the absence of express authorisation, a court would have no authority to detain a person in custody until, for example, an examination can take place, or to require bail or other security. [8]
5.25 The Bill will insert amendments to provide guidance on how a person who is subject to a section 486B warrant is to be treated, including:
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- who may arrest the person;
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- specifying that as soon as practical the person is to be brought before a court; and
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- at the time of appearance in court, allowing the court to make orders remanding the person in custody or on bail, or remanding the person in custody or on bail until they are to be dealt with at a later date, or releasing them.
5.26 The amendments will also provide that the court may make orders relating to section 486A, 598 or 1323 of the Corporations Act when the person subject to a section 486B warrant is brought before it.
5.27 Item 9 of Schedule 2 to the Bill will insert a note in section 486B stating that the procedures for the warrant are set out in a new subdivision following the provision.
5.28 Item 10 will insert the new Subdivision B - Procedures relating to section 486B warrants, containing the process for how a person who is subject to a section 486B warrant is to be treated, (comprising new sections 489A, 489B and 489C of the Corporations Act).
5.29 Section 489A will set out the details of who can arrest the person named in the section 486B warrant, that is, a police officer or Sheriff (or Sheriff's officer) of the particular State or Territory in which the person is found or a member or special member of the Australian Federal Police. It is loosely based on section 82 of the Service and Execution of Process Act 1992 (Cth ).
5.30 Section 489B will set out the procedure after apprehension and is loosely based on section 83 of the Service and Execution of Process Act 1992 (Cth ). Section 489B will provide that as soon as practicable after being arrested, the person is to be taken before the issuing Court. The issuing Court must order either that the person be remanded on bail, or that the person be remanded in custody or that the person be released. Other conditions can also be applied to the order.
5.31 Section 489C will set out the procedure on remand on bail. Section 489D will clarify the issuing Court's power to make orders under sections 486A, 598 or 1323 when a persons appears before the Court under a section 486B warrant or section 489B. Section 489E will state that, to avoid doubt, a matter arising under Subdivision B is a civil matter for the purposes of Part 9.6A.
Time limit for the lodgement of reports by liquidators
5.32 If it appears to liquidators of a company, in the course of winding up, that there have been offences committed by officers or employees, or the company may be unable to pay unsecured creditors more than 50 cents in the dollar, then the liquidator is required by section 533 of the Corporations Act to lodge a report with respect to the matter with ASIC.
5.33 Currently, section 533 requires such reports to be lodged 'as soon as practicable'. ASIC guidelines suggest two months for lodgement. Subsequent reports are permitted to be lodged by the liquidator under subsection 533(2) if he or she thinks fit.
5.34 Reports are often lodged outside the time frame suggested by ASIC. Sometimes reports are lodged years after the commencement of the liquidation - which may be too late to take any remedial action. It is in the interests of creditors that corporate misconduct identified in the course of a winding up be notified to ASIC within a reasonable timeframe.
5.35 The law will provide a specific time limit of six months for the lodgement of reports by liquidators about the possible commission of offences by officers or members of corporations. This will assist in ensuring that ASIC is notified of the possible offences in a timely fashion. The six month period will commence at the point in time the liquidator became aware of the possible offence. Reports should continue to be lodged as soon as practicable before six months.
5.36 There will be no additional mechanism for liquidators to seek an extension to the new timeframe. As ASIC's guidelines suggest a two month timeframe for lodgement, a six month statutory timeframe is considered ample time. In any case, subsequent reports are permitted to be lodged by a liquidator under subsection 533(2).
5.37 Item 11 of Schedule 2 to the Bill will amend subparagraph 533(1)(d) to provide a time limit of six months in addition to the current requirement for the liquidator to lodge the report 'as soon as practicable' after becoming aware of a matter.
Removal of penalty privilege in relation to bannings and disqualifications and licence suspensions and cancellations
5.38 Banning and disqualification orders and orders to cancel or suspend a licence under the Corporations Act are important tools for deterring corporate misconduct. They allow the removal of unwanted participants from the corporations and financial services market and thereby maintain the integrity of the market. One of their main benefits is that they allow for an expeditious response to corporate misconduct.
5.39 Prior to the High Court's decision in Rich v Australian Securities and Investments Commission [9] , the use of banning or disqualification as a remedy for corporate misconduct was viewed as protective rather than penal in nature. However, in that case, the High Court found that a banning or disqualification order was a penalty and, as a direct consequence, allowed people to invoke the common law privileges protecting the disclosure of information that may expose a person to a penalty in a banning or disqualification proceeding.
5.40 As a result of the Rich decision, where this privilege is claimed, ASIC is not able to obtain discovery of documents or the filing and serving of certain affidavits by defendants in proceedings seeking a banning or disqualification or licence suspension or cancellation order. In addition, material subject to the privilege obtained by ASIC during an investigation is not admissible in evidence in these proceedings or to comply with a statutory requirement. Relevant proceedings include civil or criminal proceedings in a court, administrative proceedings in the Administrative Appeals Tribunal (AAT) and other administrative proceedings, for instance hearings before the CALDB.
5.41 That this privilege is now available to these proceedings has reduced the ability for ASIC to act quickly to remove unwanted participants from the corporations and financial services market, which can endanger the integrity of the market.
5.42 The Bill will remove penalty privilege for proceedings where a disqualification, banning, suspension or cancellation order, or a declaration to that effect, is being sought. A person in such an administrative, civil or criminal proceeding will not be entitled to refuse or fail to comply with a requirement on the grounds that to do so might tend to make the person liable for a penalty by way of a disqualification, banning, suspension or cancellation order, or a declaration to that effect. This will restore the longstanding provision that penalty privilege does not apply to these types of proceedings.
5.43 The Bill will also remove penalty privilege in relation to a person complying with a statutory requirement under the Corporations Act or the ASIC Act on the grounds that to do so might tend to make the person liable for a penalty by way of a disqualification, banning, suspension or cancellation order, or a declaration to that effect.
5.44 The requirements that a person is not entitled to refuse or fail to comply with in relation to the proceeding or other statutory compulsion include:
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- to answer a question or give information; or
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- to produce a book or any other thing; or
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- to do any other act whatever.
5.45 These requirements are deliberately wide so that they will encompass any of the requirements ASIC could have imposed on a person prior to the Rich decision when it was seeking such an order and no other penalty. At that time, as penalty privilege could not be claimed, a defendant could not rely on it to refuse to do any act or fail to comply with any requirement. While these amendments do not affect the High Court's classification of these orders as penalties, the removal of penalty privilege is limited to when ASIC is seeking one of these remedies and no other penalties.
5.46 The Bill also ensures that when ASIC receives information during an investigation pursuant to its powers in Part 3 of the ASIC Act or from a Court examination in relation to an external administration over which penalty privilege is claimed, ASIC may make use of this information in the proceedings for a disqualification, banning, suspension or cancellation order, or a declaration to that effect.
5.47 The removal of penalty privilege has effect despite the Court being required to apply the rules of evidence and procedure for civil proceedings. That the rules of evidence may otherwise deny the use of privileged information will not apply in proceedings for a disqualification, banning, suspension or cancellation order, or a declaration to that effect. This amendment operates in conjunction with the confirmation of admissibility within the new section. The removal also operates despite other provisions in the Corporations Act, ASIC Act or Administrative Appeals Tribunal Act 1975 .
5.48 Item 12 will introduce new subsection 1349(1) of the Corporations Act, which will provide that in a civil or criminal proceeding under, or arising out of, the Corporations Act or the ASIC Act, or a proceeding in the AAT, a person is not entitled to refuse or fail to comply with a requirement to answer a question or give information; produce a book or any other thing; or do any other act whatever on the ground that the information or act, as the case may be, might tend to make the person liable to a disqualification or banning, or licence suspension or cancellation penalty within the specified provisions of the Corporations Act.
5.49 The proceedings for the penalties to which the removal of penalty privilege applies are set out in the provision, and are proceedings for:
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- a disqualification under Part 2D.6 of the Corporations Act; or
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- a declaration under section 853C of the Corporations Act; or
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- a suspension or cancellation under section 915B of the Corporations Act; or
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- a suspension or cancellation under section 915C of the Corporations Act; or
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- a banning order under section 920A of the Corporations Act; or
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- an order under section 921A of the Corporations Act; or
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- a cancellation or suspension under Division 3 of Part 9.2 of the Corporations Act; or
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- a requirement to give an undertaking under paragraph 1292(9)(b) or (c) of the Corporations Act; or
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- a cancellation or suspension under Division 2 of Part 9.2A of the Corporations Act.
5.50 New subsection 1349(2) ensures that the removal of the penalty privilege applies whether or not the person is a defendant in a proceeding before a court or a party to a proceeding before the AAT or any other proceeding.
5.51 New subsection 1349(3) applies the removal of penalty privilege to compliance with a statutory requirement in the Corporations Act or ASIC Act. A person will not be entitled to refuse or fail to comply with a requirement in those Acts to answer a question or give information; produce a book or any other thing; or do any other act whatever on the ground that the information or act, as the case may be, might tend to make the person liable to a disqualification or banning, or licence suspension or cancellation penalty within the specified provisions of the Corporations Act. It is intended that this amendment will include any requirements in relation to CALDB proceedings, along with other statutory requirements.
5.52 New subsection 1349(4) ensures that the limitations on admissibility of statements compelled by use of ASIC's powers in Part 3 of the ASIC Act and made in Court examinations in relation to an external administration over which penalty privilege is claimed are removed. The effect of this amendment, in combination with the new subsection 1349(5) and the current section 76 of the ASIC Act, ensures these statements are admissible in proceedings for a disqualification or banning, or licence suspension or cancellation penalty within the specified provisions of the Corporations Act.
5.53 New subsection 1349(4) modifies the operation of paragraph 597(12A)(d) of the Corporations Act and paragraph 68(3)(b) of the ASIC Act in relation to admissibility, while new subsection 1349(5) modifies the removal of privilege in relation to the Court being required to apply the rules of evidence and procedure for civil proceedings. That the rules of evidence may otherwise deny the use of privileged information will not apply in proceedings for a disqualification, banning, suspension or cancellation order, or a declaration to that effect. This amendment operates in conjunction with the confirmation of admissibility within the new subsection 1349(4). The removal also operates despite other provisions in the Corporations Act, ASIC Act or Administrative Appeals Tribunal Act 1975 .
5.54 New subsection 1349(6) clarifies that for the purposes of the penalty privilege removal in the section, penalty includes forfeiture.
5.55 The amendments commence on the date of Royal Assent, and where relevant, will apply to a proceeding for a disqualification or banning order, or order for licence suspension or cancellation within the specified provisions of the Corporations Act that commences on or after the date of Royal Assent.