Corporations Law Research Report

Civil Penalties Regime in Accordance with James Hardie Litigation

Corporations Law
Research Report
On Civil Penalties Regime in Accordance
with James Hardie Litigation
Xiuyu Zheng
9/9/2016

Corporations Law Research Report

Civil Penalties Regime in Accordance with James Hardie Litigation

TABLE OF CONTENTS
ABSTRACT:.........................................................................2
INTRODUCTION...................................................................3
1. A BRIEF OUTLINE OF THE CIVIL PENALTY REGIME AND JAMES
HARDIE.............................................................................. 3
1.1 Relevant Sections of Legislation Referring to the Civil Penalty Regime.........................3
1.2 Facts and Background Referring to the James Hardie Matter...................................5

2. PROBLEMS EXISTING IN CIVIL PENALTY PROCEEDING...............6

2.1Case Law Development of James Hardies Cases.................................................7
2.2 The Nature of Civil Penalties.......................................................................8

3. RECOMMENDATIONS IN ACCORDANCE WITH AFOREMENTIONED

PROBLEMS.......................................................................... 9
4. POTENTIAL PROBLEMS OF SUGGESTED PROPOSALS..................9
5. A REFERABLE EXAMPLE THE CIVIL PENALTY REGIME IN THE
UNITED STATES..................................................................10
CONCLUSION....................................................................12
APPENDIX......................................................................... 13

Corporations Law Research Report

Civil Penalties Regime in Accordance with James Hardie Litigation

This is A Research Report Based on Literature Review of James Hardie and the Problems of
the Australian Civil Penalties Regime1.

Abstract:
In modern times, a civil penalty regime has become a crucial part of Corporations
Acts. Part 9.4B of Corporations Act 2001(Cth) describes civil consequences of
contravening civil penalty provisions, providing measures half-way between civil and
criminal consequences. However, the current civil penalty regime and its effects on
legal practice are not without problems. Concretely, the standard of proof for civil
penalties is unnecessary strict, meanwhile, the distinction between civil and criminal
is blurry, which violates the nature of civil penalties as part of a pyramid of
enforcement focused on compliance. As a consequence, it is necessary to enact new,
more appropriate legislation, to provide greater clarity and consistency relating to the
procedures to be adopted in civil penalty proceedings. However, the progress of law
reforming cannot be overhasty, the Parliament needs a number of practices to approve
the efficiency of a new legislation. Furthermore, it is necessary to consult the civil
penalty system implemented in the United States, which has been successful in
operation and resolving disputes.

Vicky Comico. "James Hardie and the problems of the Australian civil penalties regime." (2014)
University of New South Wales Law Journal, 37.1, 195.
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Introduction

The civil penalty regime contained in part 9.4B of the Corporations Act 2001
(Cth) came into operation on 1st February 19932. After 23 years, its importance to the
daily legal practice of corporations has gradually come to light. Meanwhile, scholars
throughout Australia have constantly written articles putting forward their views and
recommendations on this regime. This report is based on a literature review of James
Hardie and the Problems of the Australian Civil Penalties Regime, by Dr. Vicky
Comino, a lecturer at University of Queensland. In her article, Comino first briefly
discusses the history and theory of the civil penalty regime, then introduces James
Hardies litigation and other case law on civil penalty. Comino explains developing
problems with civil penalty proceedings generated after James Hardies case, and at
last proposes consequences of potential problems within civil penalty regime and
gives suggested solutions to ASIC. This report aims to objectively evaluate Cominos
work, elucidating the importance of understanding the problems remaining in the
current civil penalty regime, indicating the proposals given by Cominos article
relating to civil penalty regime. This report will follow the structure of Cominos
article, thoroughly combing principles established by previous legal applications and
proposing policy recommendations for each aspect in a targeted manner.

1. A Brief Outline of the Civil Penalty Regime and James Hardie.

1.1 Relevant Sections of Legislation Referring to the Civil Penalty Regime.

Historically, the civil penalty regime was adopted as a result of the

recommendation presented by the Senate Standing Committee on Legal and

Pt 9.4B was inserted into Corporations Act 1989 (Cth) in 1992 with Corporate Law Reform Act
1992 (Cth) ss 2(3), 17. It is the predecessor of pt 9.4B in current Corporations Act.
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Constitutional Affairs (also known as the Cooney Report 1991)3, as the government
sought to overcome inherent deficiencies in the law relating to the enforcement of
statutory directors duties. According to Michelle Welsh, the civil penalty regime is
aimed to provide ASIC with measures half-way between civil and criminal
consequences, based on responsive regulation theory and the pyramid of enforcement
model45. For example, ASIC or the prosecution need only prove a civil penalty
offence on the balance of probabilities, which is a civil standard of proof, and it is
less fastidious than the stricter criminal standard of beyond all reasonable doubt 6. In
this sense , any doubts in a criminal case are decided in favor of the accused, whereas
under the civil standard of proof the court must decide whether it is most likely than
not that the director breached his or her duties. Accordingly, doubts are not
necessarily decided in favor of the accused7.
To take a closer look, s 1317E8 of part 9.4B stipulates consequences of a
contravention, which include:
i.

Officers duties in 180(1), 181(1) and (2), 182(1) and (2), 183 (1) and (2);

ii.

Related parties rules in 209(2);

iii.

Share capital transactions in 254L (2), 256D(3), 259F(2) AND 260D(2);

iv.

Requirement for financial reports in 344(1);

v.

Insolvent trading in 588G(2);

vi.

Market manipulation in 1041A;

vii.

False trading and market rigging in 1041B(1), 1041C(1);

viii.

Dissemination of information about illegal transactions in 1041D;

Helen Jordan. "Restrictive Trade Practices-Mergers, Monopolies and Acquisitions: Adequacy of

Existing Legislative Controls." (1992) Australian Business Law Review 20.3, 270.
4
Michelle Welsh. "Civil penalties and responsive regulation: The gap between theory and
practice." (2009) Melb. Uni Law Rev. 33, 908.
5
The Pyramid Enforcement Model was firstly suggested by Ian Ayres and John Braithwait in their
book Responsive Regulation: Transcending the Deregulation debate. It offers a solution to the
problem of how to choose between a persuasive and punitive enforcement style. See Ian Ayres,
and John Braithwaite. Responsive regulation: Transcending the deregulation debate. (1994)
Oxford University Press on Demand, 29.
6
Andre Moenssens, Carol Henderson, and Sharon Gross Portwood. Scientific evidence in civil
and criminal cases. (2007) Foundation Press.98.
7
John Coffee. "Paradigms lost: The blurring of the criminal and civil law models. And what can
be done about it." (1992) The Yale Law Journal 101.8. 1875.
8
Corporations Act 2001, s 1317E.
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ix.

Insider trading in 1043A(1) and (2).

If a director breaches a civil penalty section, the court must make a declaration of

contravention under s 1317E. The person who is liable needs to pay a pecuniary
penalty of 2,000 penalty units9 under s 1317G.10 Moreover, ASIC can apply to the
court under s 206C to disqualify the director for whatever point the court holds fit in
the prevailing condition.11 In addition, breaches of the civil penalty regime may also
be criminal offences with a term of penalty, for example, s 209(3) states that if a
person is involved in a contravention of s 208 by a public company or entity and the
involvement is dishonest, that person has committed an offence. 12 Finally, whether or
not a declaration of contravention has been made, under s 1317H, the court may order
a person to compensate a corporation for damage suffered as a result of a
contravention13.

1.2 Facts and Background Referring to the James Hardie Matter.

Comino mainly focuses on potential problems with the civil penalty regime
generated after a series of cases related to James Hardie Industries Ltd (JHIL or
James Hardie). This series of cases starts at Briggs v James Hardie & Co Pty Ltd14 in
1989, in which Mr. Briggs was a long-lasting employee of Marlew Ltd in its asbestos
mining business. James Hardie Pty Ltd eventually became the sole shareholder of
Marlew. Mr. Briggs contracted lung disease from working with asbestos and wanted
to sue James Hardie instead of Marlew, because James Hardie had more funds.
Although due to the principle that a business should take reasonable care for its
employees, the court tends to adjudicate such accusations hold water, however, the
court held the point that a holding company-subsidiary relationship is not of itself
A penalty unit equals $110 at present time, its was defined in s 4AA of the Crimes Act 1914
(Cth).
10
Corporations Act 2001, s 1317G.
11
Corporations Act 2001, s 206C.
12
Corporations Act 2001, s 209 (3).
13
Corporations Act 2001, s 1317H.
14
Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549.
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sufficient reason to lift the corporate veil. As a consequence, the question whether
Marlew was a agent of James Hardie was not finally determined. After this case,
similar cases against James Hardie have continued to appear, such as James Hardie &
Co Pty Ltd v Hall15 in 1998, which the plaintiff was a New Zealand asbestos victim.
James Hardie thus set up the Asbestos Injuries Compensation Fund (AICF) to fully
settle of all asbestos claims arising from its operation. 16 But later, according to James
Hardie Industries NV v ASIC17, it was alleged that this fund was inadequately
financed. Finally, in ASIC v Hellicar18, ASIC successfully appealed to the High Court,
which ruled that the non-executive directors and general counsel secretary breached
their duty of care and diligence under s 180(1)1920. Ultimately, as the result of much
bad publicity, James Hardie agreed to make additional contributions to the fund.

2. Problems Existing in Civil Penalty Proceeding.

According to a enforcement record of ASIC, since 2000, ASIC has successfully

used part 9.4B to obtain civil penalties against directors in many profile cases 21.
However, Comino argues that the decision set up by ASIC v Rich22, along with
ideology used in James Hardies case 23, suggests that the penalty privilege is available
in civil penalty proceedings, generating significant evidential, procedural and
enforcement problems in cases where ASIC has sought to rely on civil penalty

James Hardie & Co Pty Ltd v Hal (1998) 43 NSWLR 554.

Helen Anderson. "Parent company liability for asbestos claims: Some international insights."
(2011) Legal Studies 31.4, 547-569.
17
James Hardie Industries NV v ASIC (2010) 274 ALR 85.
18
ASIC v Hellicar [2012] HCA 17.
19
Corporations Act 2001, s 180(1).
20
Relevant cases also include: Macdonald [No 11] (2009) 256 ALR 199; Macdonald [No 12]
(2009) 259 ALR 116; Gillfillan v ASIC [2012] NSWCA 370; Morley v ASIC (2010) 274 ALR
205.which are mainly discussed in follow parts of this report.
21
Vicky Comico. "The enforcement record of ASIC since the introduction of the civil penalty
regime." (2007) Australian Journal of Corporate Law 20.2, 183-213.
22
ASIC v Rich (2009) 236 FLR.
23
See ibid n 15.
15

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provisions. In accordance with Spender, she states that ASIC has been on a slippery
slope, and courts are interpreting the civil penalty provisions in a manner which
privileges criminal process values to the detriment of the overarching regulatory
rationale of the provisions.24 Comino further explains emerging difficulties with civil
penalty proceedings in two aspects: first, problems generated after James Hardies
litigation, and second, an unrealized nature of civil penalties.
2.1Case Law Development of James Hardies Cases.

Refer to Rees, since 2000, the courts have been obviously seeking to develop a
hybrid process or a third way for civil penalties though case law.25 However, this
approach, which involves a balance between civil with criminal procedure, actually
impedes the process of some serious civil penalty cases. A good example is a series of
cases after the financial scandal of AICF. In Macdonald,26 ASIC successfully sued
Peter Macdonald, former director and Chief Executive Office of JHIL, and other
defendants for misconduct during decision-making in a board meeting , although, the
level of pecuniary penalties incurred was considered just a slap on the wrist to the
public27. Despite this, all of the defendants, except Peter Macdonald, appealed to the
New South Wales Court of Appeal. In Morley v ASIC,28 the New South Wales Court of
Appeal upheld the appeal by the non-executive directors of JHIL, mainly because
ASIC did not call all material witnesses of the board meeting, which the Court felt
could breach the special obligation of fairness owed to the defendant in civil penalty
proceedings. After that, in ASIC v Hellicar,29 the High Court rejected the proposition
put forward in Morley v ASIC and stated that each participating director had the
obligation to see the contents of any document that was tabled or discussed. However,
Peta Spender, Negotiating the Third Way: Developing Effective Process in Civil Penalty
Litigation (2008) 26 Company and Securities Law Journal 249, 257.
25
Anne Rees, Civil Penalties: Emphasizing the Adjective or the Noun (2006) 34 Australian
Business Law Review 139, 139, cited in Spender, above n 20, 249.
26
See ibid n 18.
27
Hannah Low, Hardie Directors Penalties Slashed, The Australian Financial Review (Sydney),
13 November 2012, 9.
28
Morley v ASIC (2010) 274 ALR 205.
29
See ibid n 16.
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in Gillfillan v ASIC,30after the High Court referred the matter of penalties back to the
New South Wales Court of Appeal, the Court of Appeal reduced the original penalties
on the directors of JHIL. In her article, Comino regards these cases as evidence for
her previously-stated opinion that the standard of evidence proof of civil penalty
procedure is too stringent, and the reliance of the court is criminal rather than civil
procedural frameworks in civil penalty proceeding in spite of section 1317.31
2.2 The Nature of Civil Penalties.

Comino states that difficulties arising with applying civil evidence and procedure
rules are manifested in two factors. Firstly, the nature of civil penalties in part 9.4B is
a statutory remedy, which was developed as part of a pyramid of enforcement focused
on compliance.32 As a consequence, civil penalties cannot easily be accommodated
within the traditional criminal-civil dichotomy.33 Secondly, as a civil penalty is a civil
action which results in the imposition of penalties on the defendant, the law shows a
hybrid nature. Referring to Kenneth Mann, the sharp distinction between civil and
criminal law has become dulled, with more punishments rendered in civil
proceeding.34 Therefore, due to both factors, civil penalties have demonstrated
effectiveness in cases dealing with serious, albeit non-criminal contravention of the
corporations legislation.

3. Recommendations in Accordance with Aforementioned Problems.

In accordance with the problems addressed above, the indeterminacy between

civil and criminal procedure will not be solved if our present method of leaving it up

Gillfillan v ASIC [2012] NSWCA 370.

Vicky Comico. "Effective Regulation by the Australian Securities and Investments Commission:
The Civil Penalty Problem." (2009) Melbourne Univeristy Law Review 33, 10-38.
32
See ibid n 5.
33
See ibid n 29.
34
Kenneth Mann, Punitive Civil Sanctions: The Middleground between Criminal and Civil Law
(1992) 101 Yale Law Journal 1795, 1799.
30
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to the courts to draw a valid process for civil penalties stays unchanged. The ideal
solution put forward for Parliament by Comino is to pass appropriate legislation to
provide greater clarity and consistency relating to the procedures to be adopted in
civil penalty proceeding35. The new legislation or court rules should apply to all
Australian regulatory agencies that have power to bring civil penalty proceeding,
including ASIC. The author further agrees with Spenders suggestion that a paradigm
shift is required which reconsiders the bifurcation of criminal and civil procedure to
effectively accommodate regulatory law and statutory remedies.36 Also, the author
recognizes the contributions of Issachar Rozen-Zvi and Talia Fisher, in which they
recommended replacing current procedural division based along civil-criminal lines
with a more comparable model, which considers both the severity of the sanction or
remedy and the balance of power between the parties, 37 as the present civil regime
provides a potential advantage for powerful and well-resourced defendants to draw a
favorable procedure (civil but not criminal).

4. Potential Problems of Suggested Proposals.

Overall, the ideal solution put forward by Dr Comino that the Parliament should
launch a new legislation, as well as Spenders proposal on paradigm shifting of
criminal and civil procedures, have positive meaning to present civil penalty
procedure, as the current standard of proof for civil penalty is unnecessary strict and
the gap between civil and criminal is unclear. However, these recommendations have
inherently evidential defects, because the Parliament can not launch an unproven code
or statue without a number of practices. In this sense, the idea to replace present civil
penalty regime is overhasty.
Meanwhile, the suggestion presented by Issachar Rozen-Zvi and Talia Fisher that
Also see ibid n 24 at p. 829.
See ibid n 21 at p. 249.
37
Issachar Rosen-Zvi and Talia Fisher, Overcoming Procedural Boundaries (2008) 94 Virginia
Law Review 79, 84.
35

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introducing a new model which measures both severity of the sanction or remedy and
the balance of power between the parties is a remarkable innovation on civil penalty
procedure, as it has the possibility to solve the problem that the powerful party
(usually large corporations) is enjoying a inbuilt advantage in litigation. Nevertheless,
this proposal is not without a problem. Firstly, there are no available experiences from
processors for reference in such measurement on relative power of each party, as a
result, the strength of this new model become challenged. Second, if the powerful
parties are inflecting present procedure division, how can it be insured that they
cannot manipulate the new model? Because, anyhow we acquiesce they have power
and adequate resources. At this point, Rozen-Zvi and Fishers recommendation is
regarded as a good starting point for the paradigm shift proposed by Spender38, but the
progress of law reforming still need practical reasoning.

5. A Referable Example The Civil Penalty Regime in the United States.

The civil penalty regime of the United States has an evident character in
establishment and implementation. In establishment, the penalty regime is mainly
drafted by the legislative branch. In implementation, the penalty procedure is mostly
triggered by civil action, and negotiation becomes an important mechanism to resolve
divergences accordingly. Furthermore, in some areas of corporate acts, American civil
penalties are utilized as enforcement mechanisms. For example, the civil penalty
regime is used for workplace safety, health care, and environmental issues, according
to Jane Cove and David Brown.39 For the American civil penalty system, Chen Taiqing concludes three referable advantages. Firstly, as the civil penalty regime is
established by legislation, it effectively reduces the overflow of penalty application,
while the limitation of penalties is flexible, which balances the power between
parties.40 Secondly, the United States has a mechanism of negotiations on disputes,
See ibid n 22, 258.
Jane Cove, and David Brown. Critical cooperation: An alternative form of civil societybusiness engagement. (2001) London: Institute for Development Research. 1327-8
40
In consider of the author was mainly judging differences between Chinese and American civil
38
39

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which significantly reduces implementing the cost of a civil penalty system. Thirdly,
the funds that come from penalties is used for public and personal rewards that
evidently enhance the transparency of civil penalty procedures.41
Nevertheless, as with the Australian Corporations Act, many regulations in
America provide overlapping civil penalties and criminal sanctions, which have been
described as punitive civil sanctions.42 With regard to this issue, Michael Mann,
former director of the U.S. Securities and Exchange Commission (SEC), advises that
the rules of successful securities regulation must be easily understandable and the
application of the rules must be done in a predictable manner.43 Thus, for both
American and Australian civil penalty practice, it is urgent to clarify the scope of civil
and criminal procedure.
As mentioned above, the design of the American civil penalty regime and
opinions of Michael Mann are a valuable reference for the governance of the civil
penalty regime in Australia, in such issues as the solution of entanglements, setting for
fund use, and de-escalation of conflicts between civil and criminal procedure.

Conclusion

This report, in agreement with Cominos article, proposes the importance of part
9.4B in the implementation of the Corporations Act, and indicates the limitations of
the present civil penalty regime. In summary, it is important to realize the
penalties, China has not elevated civil penalties to a legal height. Whereas, Australia does not
seem to have this problem.
41
Chen Tai-qing. The Civil Penalty System of America and Its Implication, (2012) Journal of
Anhui University (Philosophy and Social Sciences) 2012-05, 115.
42
See ibid n 25, 1798.
43
Michael D Mann, What Constitutes a Successful Securities Regulatory Regime? (1993) 3
Australian Journal of Corporate Law 178, 180.
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discrepancies between civil and criminal procedure and the nature of civil penalty, as
misunderstandings may cause evidential, procedural and enforcement problems in
judgment and decisions. It is suggested that Parliament has a duty to enact a new
road map to ASIC, in accordance with a truly responsive regulation theory and the
pyramid of enforcement model. Nevertheless, it is not advised to upgrading current
civil penalty legislation hastily and unsystematically, as there is no adequate evidence
to prove the validity of the new approach. In the end, in comparison with the civil
penalty system in the United States, it is apparent that the American one has a stronger
ability to solve disputes and is more transparent. Overall, Cominos work is of great
documentary value to study the civil penalty provision of the Corporations Actm and
has offered a powerful way to better understand the juridical logic behind judgment
and decisions.

Appendix

Vicky Comico. "James Hardie and the problems of the Australian civil penalties regime." (2014)
University of New South Wales Law Journal, 37.1.

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13