Being caught up in any protracted regulatory investigation disrupts personal and professional lives, regardless of the eventual outcome.
If a director or officer waits several years to find out whether he or she will be the subject of enforcement action, or if several court processes — including class actions — are running simultaneously, that disruption is even more significant.
Federal regulators, including the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC), have been given expanded powers to act against individual officers caught up in corporate compliance failures, including disclosure failures. Early in 2019, the banking Royal Commission recommended that new personal accountability rules, based on the Banking Executive Accountability Regime (BEAR), be extended to all financial firms, and cover conduct as well as prudential failures in those firms. While regulatory enforcement action against individual officers for involvement in a company’s contravention, or for negligent failures of oversight, was rare in the past, these new rules and ASIC’s “why not litigate” posture may change that.
The responsibilities of federal regulators in commencing litigation against corporate officers were the subject of an important preliminary decision by Justice Jonathan Beach in the Federal Court in October, in ASIC v Helou  FCA 1634. The ASIC proceeding, commenced in June 2019, arises out of a significant disclosure failure by the Murray Goulburn group in 2016. ASIC is seeking declarations and disqualification orders against former CEO and director Gary Helou and former CFO Bradley Hingle for involvement in a continuous disclosure breach and for negligence. In August 2019, the defendants applied to the court to have the proceeding permanently stayed (discontinued) on the basis it was an abuse of process.
Regulatory enforcement action against individual officers for involvement in a company’s contravention or for negligent failures of oversight was rare in the past.
ASIC’s proceeding against the officers is the fifth separate court action to arise out of the same disclosure failure, and the third regulatory action. In 2017, ASIC had settled an action against the company for breach of the continuous disclosure rules for an agreed penalty of $650,000. A separate action by the ACCC against the company and the officers for misleading dairy industry participants was settled in 2018, with both officers agreeing not to be involved in the dairy industry for three years and to pay $50,000 towards the ACCC’s costs, and Helou paying a further agreed penalty of $200,000. The events of 2016 also generated two class actions, one of which continues.
The defendants argued that the new ASIC proceeding was an abuse of process as it “is unjustifiably oppressive or vexatious and… only serves to bring the administration of justice into disrepute”. Various arguments were advanced, including that ASIC should have rolled up the action against the officers with its earlier proceedings against the company, and that the Commonwealth — unhappy with the result of the ACCC proceedings — was looking for a second bite of the cherry. The new ASIC case was said to put the defendants to significant cost, expense and stress, all of which could have been avoided or greatly minimised if ASIC had commenced its proceeding sooner, either as part of the earlier ASIC proceeding or during the pendency of the ACCC proceeding.
Justice Beach declined to order a permanent stay, finding that the defendants failed to meet the high bar such an order required. But his Honour was critical of ASIC’s conduct. Expressly rejecting ASIC’s arguments justifying its delay in commencing proceedings against the officers, he found ASIC could have run its case with its earlier action against the company, given “there was no additional investigation or evidence that was necessary at that time. It should have got on with it, so to speak”. He said it was “not the preferable course for ASIC not to have commenced the present proceeding until after the result of the ACCC proceeding had become known” — and that he should have been informed ASIC was potentially intending to take disqualification proceedings against the same directors when he dealt with the penalty phase in the ACCC proceeding.
Justice Beach concluded: “The present proceedings could have and desirably should have been issued by ASIC much sooner, and certainly before the resolution of the ACCC proceeding. But to so find does not, in and of itself, justify the permanent stay sought by each defendant on any of the bases contended for.”
“There can be no duty as such on the regulator to inform all persons under investigation that it reserves its position.” Justice Jonathan Beach, Federal Court
Nevertheless, the case raises real issues of fairness. ASIC frequently lectures the businesses it regulates on its expectation they should “look to do the right thing and act with integrity and fairness, not just comply with the law”. As a Commonwealth agency, ASIC is required to approach litigation with “complete propriety, fairly and in accordance with the highest professional standards”. ASIC chair James Shipton has said to business: “Some people might say fairness is intangible… [but] ‘fairness’ is a concept we can all readily understand… Fairness means doing what’s right; it’s the quality of being reasonable and just.”
However, as Justice Beach found, “there can be no duty as such on a regulator to inform all persons under investigation that it reserves its position. Nor is there any duty as such on a regulator to inform a person that it intends to issue proceedings against him shortly”. His Honour also rejected the defendants’ submission “concerning some amorphous ‘duty of fairness’… [which] seemed to be infused with subjectivity asymmetrically weighted to the interests of the defendants only”.
Although he dismissed the defendants’ stay application, Justice Beach acknowledged that “this all highlights a broader problem that needs to be addressed concerning the coordination and disposition of multiple regulatory actions and class actions concerning the same events, circumstances and parties”. In a welcome move, his Honour set out a protocol for future cases before him, including requiring regulators “to inform the court at the first case management hearing of whether they have sued all targets and, if not, the timing for completion of that course” and requiring a defendant who may be subject to multiple regulatory actions to inform the court so “the stance of the potential second mover regulator can then be ascertained”. If class actions are on foot, “the regulator should proceed efficiently and expeditiously to crystallise its position in terms of whether it is to institute,
inter alia, civil penalty proceedings and, if so, against whom”.
It is hoped that, in the interests of fairness, all federal regulators will adopt this protocol in future actions involving individual defendants.