Review of Criminal Penalties in Commonwealth Legislation

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Ursula Kennedy
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1 29 June 2006 Ms Judith Pini Criminal Penalties Review Team Criminal Law Branch Attorney-General s Department Robert Garran Offices National Circuit BARTON ACT criminalpenalties.review@ag.gov.au Dear Ms Pini Review of Criminal Penalties in Commonwealth Legislation The Australian Institute of Company Directors (AICD) appreciates the opportunity to comment upon the Discussion Paper. In the time available we have not been able to give the issues raised as much consideration as we would prefer. Our comments are therefore of a more general rather than specific nature. AICD is the principal professional body representing directors in Australia. Our members are directors of a wide range of corporations: publicly-listed companies, private companies, not-for-profit organisations, and government and semi-government bodies. The majority of our members come from smaller companies. For this reason, we have concentrated in our submission on the penalties for corporations and their directors (including officers). We attach two papers which may assist the Review: Limited Liability Position Paper prepared by Professor Bob Baxt, AO FAICD (Life) who is Chairman AICD s Law Policy Committee (Baxt Paper) Uniform Statutory Liability for Directors - prepared by Bruce Cowley, Partner, Minter Ellison, a member of AICD s Law Policy Committee (Cowley Paper) AICD Submission - Cth Criminal Penalties Review F2 -logo 1

2 Before commenting upon specific issues raised by the Discussion Paper we want to make the following general observations: there is widespread community misunderstanding, even mistrust, about corporations and the ways in which they operate. Community expectations must be balanced against good policy the corporation has been of great economic benefit to the community and good policy dictates that any penalty regime for corporations and their directors is fair and reasonable and based upon established principles of criminal liability the multiplier raises a key policy issue as it assumes that a corporation deserves greater punishment than an individual. We are not sure if this is based upon a view that a corporation of itself deserves greater punishment or a view that it has a greater capacity to pay. Either view is open to question since a company is owned by shareholders who can also be individuals. adverse publicity orders, for example, appear to be based upon concepts of denunciation and retribution which are new to the longstanding secular principle that the punishment should be commensurate with the crime. These new concepts appear principally directed at corporations on a seemingly discriminatory basis it needs to be accepted that the modern large corporation with a diverse and complex management structure presents a unique circumstance and punishment for criminal offences should, in most circumstances, be limited to fines statutory liabilities for corporations and their directors are often drafted with the large corporation in mind, but the majority of corporations are in the small to medium (SME) category. This often imposes unfair or unrealistic burdens upon SME corporations and their officers directors should not be subject to criminal liability, based on their position as a director only. Their criminal liability should stem from active involvement in the events in question directors should not be regarded as guarantors of a corporation s obligations there are considerable jurisdictional differences throughout Australia in the imposition of personal liability upon directors. We refer to the Cowley Paper in this regard the Commonwealth should use its influence to bring about more uniform approaches, to corporate liability and directors liability, throughout all Australian jurisdictions the concept of nationally consistent rather than uniform laws is now a feature in road transport law reform and occupational health and safety law reform. In our submission the goal should be uniformity across all areas of law AICD Submission - Cth Criminal Penalties Review F2 -logo 2

3 Scope of the Review We see difficulties in creating an appropriate categorisation system for Commonwealth criminal penalties, either types of offending or types of offender. Whilst the aim may be to assist the Review, we believe that it is necessary to consider every statute for an appropriate result in each circumstance. 1. Criminal penalty options Existing penalty options We understand the arguments against the imposition of minimum penalties, but consider that there may be a case to impose such penalties in cases of a serious nature both for corporations and individuals. Even if there is a minimum penalty for certain offences that ought not necessarily exclude alternative sentencing options. Certainty should be a key feature of any sentencing regime As the Discussion Paper points out, the main penalty option for a body corporate is the imposition of a fine. In our submission, this penalty option should remain the punishment focus. Alternative criminal penalty options Alternative sentencing options for corporations present a number of problems. Potential effects upon shareholders, employees, contractors, clients, suppliers and financiers need to be taken into account. As an example, adverse publicity orders may appear attractive or appropriate in principle. But what is their purpose? Are they intended to cause employees to lose morale or resign, customers to cease doing business or the share price to drop? In addition to a fine and the cost of such an order, borne by the corporation, these other consequences may be considerable. A frequently overlooked consequence for corporations found guilty of a criminal offence is the operation of events of default clauses in a wide range of commercial documents, including property and equipment leases, financing arrangements and trading contracts. Conviction can trigger these clauses, as can the conviction of a director or senior manager. We have read with some interest the paragraphs dealing with alternative penalty options for corporations. The corporation is a legal fiction, which is fundamental to the economic benefits it provides to the community. The principle of limited liability remains as important as ever as illustrated by (Baxt Paper). The suggestion that third party interests should be liable, particularly banks and parent companies, is of great concern to us as it not consistent with any common law principle or statutory provision. Whilst section 588V of the Corporations Act 2001 makes a holding company liable for insolvent trading AICD Submission - Cth Criminal Penalties Review F2 -logo 3

4 by a subsidiary, a breach of the section is not an offence and it gives the liquidator of the subsidiary rights of recovery against the holding company. Banks provides financial accommodation to corporations, often on secured basis. Why this ought to be the basis for criminal responsibility is not explained, nor is any explanation readily apparent. Of the alternatives mentioned, community service orders seem most practical and there is no discussion about the circumstances in which they may be appropriate. As to probation or supervisory orders, these are inconsistent with the longstanding principle that courts will not interfere in the internal management of corporations. There is no discussion about the ways in which such orders might be implemented or operate, but we do not see them as appropriate or workable. We can also identify some legal issues associated with them. We note that the Australian Law Reform Commission has only just released its Report 103 Same Crime, Same time: Sentencing of Federal Offenders. Because of the time available, we have been unable to discuss its recommendations about sentencing options for corporations (30. Corporations) in relation to the issues in this Discussion Paper. We disagree with some of the recommendations, particularly winding up orders. The Review needs to consider the provisions of the Corporations Act 2001 and the matters that should remain within its exclusive jurisdiction. Federal law should not derogate from this. There have been too many instances in recent years when State and Territory jurisdictions have overturned longstanding principles of company law and practice when imposing liability upon corporations and their directors. Again we refer to the Crowley Paper. In our submission winding up is not an appropriate penalty under any circumstances and should remain within the exclusive jurisdiction of the Corporations Act Penalty-setting mechanisms Penalty units In general, existing options for fines and/or terms of imprisonment provide a sufficient range of penalties for Commonwealth offences. However, other penalty options should be available, but only in cases where it is clear that a fine or term of imprisonment is not appropriate. We are not aware of any reason for moving away from the system of penalty units. The main problem with the penalty unit system is its inconsistency between jurisdictions and the difficulty in finding the particular unit of value. The penalty unit system should be consistent across jurisdictions. We recommend that the Commonwealth make sure that in each relevant statute, the term penalty unit is defined by reference to section 4AA of the Crimes Act 1914 AICD Submission - Cth Criminal Penalties Review F2 -logo 4

5 The corporate multiplier As mentioned above, the corporate multiplier raises a key policy issue. Whichever view supports the use of the multiplier, it ought not to be applicable in many cases. As long as a court has the discretion to apply the multiplier, we consider this is a sufficient safeguard. However, in at least one jurisdiction, there is no discretion. Other issues It is unclear whether changing penalty setting mechanisms will have a disrupting or destabilising effect on recent legislation. It is our experience that any legislative change is likely to have unintended or unanticipated consequences. 3. Inter-jurisdictional comparison It is worthwhile to make comparisons between Commonwealth and State jurisdictions for similar or comparable offences. As we have already emphasised, there ought to be a uniform approach and the Commonwealth should use its influence to promote uniformity. Jurisdictional differences are an understandable legacy of federalism, but have no place in a modern economy. 4. Understanding community expectations We understand and acknowledge the emphasis upon community expectations. However is the community in a position to project an informed and impartial view of corporate criminal punishment? Would the community, for example, have a knowledge or understanding of trademark infringement? What would be their position in relation to certain levels of tax offence, welfare fraud and insurance fraud? There has been much reliance in recent years upon the level of penalty acting as a deterrent. AICD supports heavy penalties for serious crime, but believes the deterrent factor is limited. Penalty is always about punishment. Deterrence only comes through change in behaviour. We would welcome the opportunity to provide any further information you may require or discuss any aspects of our submission. Should you have any questions, please contact Gabrielle Upton, Legal Counsel/Senior Policy Adviser on (02) Yours sincerely Rob Elliott General Manager Policy & General Counsel AICD Submission - Cth Criminal Penalties Review F2 -logo 5

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