The 1st July 2019 saw more changes coming into effect in the world of corporate law and governance. Post the Hayne’ Royal Commission into the Misconduct of Banks and Financial Services Industry, there has been a lot of expectations around the 76 recommendations put forward on the 1st February 2019. In the area of enforcement, the Federal government had established a Taskforce with the regulator, the Australian Securities and Investments Commission (ASIC). The ASIC Enforcement Review Taskforce produced a report for the government in December 2017, which contained 50 recommendations. Note this is before the establishment of the Royal Commission in March 2018. On the 16th April 2018 the government gave its response, including significantly increasing the criminal and civil penalties for corporate crimes. However, the decision was made to defer the implementation of laws in the light of the Royal Commission’s final recommendations.
After the delivery of the Hayne Interim Report in September 2018 and then the Final Report in 2019, Federal Treasury moved quickly to put forward draft legislation, with the title Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019. The bill was passed and for any contravention of the Commonwealth law under the Corporations Act 2001 (Cth) the penalties under the criminal law and the civil penalties jumped significantly. The criminal law requires both the mens rea (Latin for guilty mind or intention) and the actus reus (the actually doing or being involve din the criminal act) elements to be proved. The rules in respect of the proving of such crimes are included in the Federal Criminal Code Act 1995 (Cth). Some crimes in the Corporations Act are specified to be “strict liability” which means the intention (or mens rea) does not have to be proved by the prosecution.
The maximum jail sentence for a contravention of the Corporations Act was tripled from five years to now 15 years imprisonment. Similarly, the civil penalties relating to directors’ duties have been increased significantly to 5,000 penalty units. A penalty unit, under s 4AA of the Crimes Act 1914 (Cth) is currently set at $210. Thus, an individual that breaks the corporate law can be fined up to AUD$1.05 million. Traditionally, a corporate body (rather than an individual) pays five times the penalty, as a company cannot be sent to jail. So the penalty for crimes committed after 12th March 2019 will be up to a maximum of 50,000 penalty units or AUD$10.5 million. Additionally for some specific financial services crimes or civil penalties, the court can apply 10% of the company’s turnover as the penalty – which means in theory a company could be court ordered to pay the government the maximum sum of AUD$525 million.
To place this in context, in 1991, when the corporate law became part of the Commonwealth law, rather than a State/Territory law, there were 893,000 companies and five directors were sent to jail and 203 major cases were brought in the courts by the regulator. In 2018, there are 2.6 million companies in Australia and six directors were sent to jail and only 138 major cases were brought to the courts. Since 2000 to 2018, the ASIC annual reports have shown that 336 corporate officers (mostly directors) have been sentenced to imprisonment and the average jail time has increased from two years to 3 years and nine months.
On 1st July 2019, the Federal government also decided to change the definitions of small and large proprietary companies (private companies). A Pty Ltd is defined in dictionary section 9 of the Corporations Act 2001 (Cth) as the definition in s 45A. Public companies are defined as not being a proprietary company. Section 45A requires no more than 50 shareholders and does not raise capital from the public. Then there is a more significant distinction between small and large proprietary companies!
A large proprietary company has the same financial reporting requirements as a public company (a full set of audited accounts, which are filed with ASIC) under s 292. A small proprietary company has to keep financial records (by s 286) but not full accounts nor be audited under s292. Thus the definition of small and large is critical.
This law was created as part of the governments Corporate Law Simplifications Programme in 1995. The section 45A(2) required two out of three criteria based around a turnover of under AUD$10 million and gross assets of under AUD$5 million and up to 50 employees. These definitions were applied without changes for inflation until 2007, when they were increased to a turnover of less than AUD$25 million and gross assets less than 12.5 million and still up to 50 full time employees.
As of the 1st July 2019, the new definitions of a small proprietary company have been increased to a turnover under AUD$50 million and gross assets under AUD$25 million and the number of employees under 100 full time equivalent. This will exempt nearly two million companies from the requirements to audit and file a full set of accounts with ASIC.
These laws are different to the Australian Taxation Office requirements and other definitions for small business for loans and/or government assistance programs. The small proprietary definition relates to the actual disclosure requirements under the Corporations Act 2001 (Cth). As the famous USA Supreme Court justice and jurist wrote in 1913 (in Other People’s Money) “size, we are told, is not a crime. But size may, at least, become noxious by reason of the means through which it was attained or the uses to which it is put”.
— About the Author —
Prof Michael Adams
Head of School, UNE Law School