The new financial year sees a number of changes to the laws of Australia. Specifically, after 1 July 2019, we will see more changes coming into effect in the world of corporate law and governance. There are a number of sources for the changes in the laws, mostly by way of amendments to legislation at the federal level.
This article focuses on two major areas of change. First the significant increase in the corporate penalties, under both the criminal law and the civil penalty regime. Secondly, the financial records and disclosure legislation, which has been significantly changed for propriety companies. In particular the difference between a small private company (usually abbreviated as ‘Pty Ltd’) and a large private (proprietary) company.
Post the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (banking royal commission), there has been a lot of expectations around the 76 recommendations put forward in the Final Report, on 1 February 2019. In the area of corporate enforcement, the federal government had already established a task force with the regulator, the Australian Securities and Investments Commission (ASIC), prior to the royal commission. The ASIC Enforcement Review Taskforce produced a report for the federal government in December 2017, which contained 50 recommendations. This was well before the establishment of the royal commission in March 2018. Although, on 16 April 2018 the federal government gave its response to the Taskforce Report, including the significant increase to both the criminal and civil penalties for corporate contraventions of the law. However, the decision was made to defer the actual implementation of laws in light of the royal commission’s final recommendations and report.
After the delivery of Commissioner Hayne’s Interim Report on the royal commission in September 2018, there was a focus on obeying the law and why should the regulators not focus on litigation rather than settlement. Then the Final Report in February 2019 was delivered and the federal Treasury moved swiftly to put forward draft legislation into the Commonwealth Parliament. The new law was titled, the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019. The bill was passed quickly by both major political parties and for any contravention of the Commonwealth law under the Corporations Act 2001, the penalties under the criminal law and the civil penalties increased significantly.
The criminal law requires both the mens rea (Latin for guilty mind or intention) and the actus reus (the actually doing or being involved in the criminal act) elements to be proved. The legal rules in respect of proving such crimes are specifically included in the federal Criminal Code Act 1995. Some crimes within the Corporations Act are specified to be ‘strict liability’ offences, which means the intentional element (or mens rea) does not have to be proved by the prosecution.
So the outcome for all corporate crimes committed after 12 March 2019 that 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 is currently set at $210. Previously, the penalty unit value was set at $180, but the Criminal Amendment (Penalty Unit) Act 2017 increased the amount from 1 July 2017 to $210. There is a different penalty unit dollar value for each state and territory in Australia.
The changes include all public and large proprietary companies must have formal whistleblowing policies in place by
1 January 2020.
Thus, an individual that breaks the corporate law can be fined up to $1.05 million. Traditionally, a corporate body (rather than an individual) pays five times the penalty, as stated in s 1312 Corporations Act. As a company cannot be sent to jail, the fine is greatly increased and cannot be paid by insurance policies. So the penalty for crimes committed after 12th March by a company will be increased up to a maximum of 50,000 penalty units, which is $10.5 million. Additionally, for some specific financial services crimes or civil penalties, the court can apply ten per cent of the company’s turnover as the pecuniary penalty — which means in theory a company could be ordered by a court to pay the government the maximum sum of $525 million.
To place this in context, in 1991, when the corporate law became part of the regulated Commonwealth law, rather than the former state/territory code, there were 893,000 registered companies and just five directors were sent to jail and a further 203 major cases were brought in the courts by the regulator. In 2018, there are now 2.6 million registered companies in Australia and just six directors were sent to jail and only 138 major cases were brought to court. 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 nearly four years.
There has been a push by the regulator to provide better laws and protections for corporate whistleblowers). In July 2004 Part 9.4AAA of the Corporations Act 2001 was passed to amend the protections, but the provisions have not been used much in practice. From July 2019, the laws have been amended again to provide greater protections for whistleblowing. The changes include all public and large proprietary companies must have formal whistleblowing policies in place by 1 January 2020. There are greater responsibilities and obligations on company officers and auditors to act if a whistleblower reports a potential breach of the law. There are also protections, with civil penalties against the company or its officers if they bully or cause detriment to the person whistleblowing.
From 1 July 2019, the federal government decided to change the definitions of small and large proprietary companies (private companies). A Pty Ltd is defined in the legal dictionary of s 9 of the Corporations Act 2001 as the definition found in s 45A. Public companies are also defined in s 9 as ‘not being a proprietary company’. Section 45A requires no more than 50 shareholders and they must not raise capital from the public. Then the law imposes a more significant distinction between small and large proprietary companies!
A large proprietary company has the same financial reporting requirements as a public company. That is, the company is required to produce a full set of audited accounts, which are to be filed with ASIC under s 292. A small proprietary company still has the legal obligation and responsibility to keep financial records (all companies are bound by the obligations under s 286) but not full accounts nor do they need to be audited under s 292. Thus the definition of small and large proprietary private companies is critical.
This law was created as part of the federal government’s corporate law simplifications program in 1995. The originally drafted s 45A(2) required that two out of three criteria in a financial year to be demonstrated, based upon a turnover of under $10 million and gross assets of under $5 million and up to 50 equivalent full-time employees. These definitions were applied without changes for inflation until 2007. Then legislation was passed to increase the values in the definitions to a turnover of less than $25 million and gross assets less than $12.5 million and still up to 50 full-time equivalent employees.
As of 1 July 2019, the new definitions of a small proprietary company have been significantly increased. All three criteria in a financial year have been increased so that the turnover under $50 million and gross assets under $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 the filing 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. As the famous USA Supreme Court Justice and jurist, Louis Brandeis, 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’. Watch this space carefully or you, in the role of a company officer, could be held liable.