Advocating the complexity of corporate law: a view from the bar table

"Experience teaches: it is better to think ahead, than to get left behind."

See Part I.

To further illustrate the tensions felt by advocates in complex corporate law proceedings, it is useful to next consider different perspectives in three types of corporate law proceedings:

(1)  the perspective of the advocate representing the corporate regulator;

(2)  the perspective of the advocate representing the subject of a regulatory investigation and as a defendant in civil penalty proceedings; and

(3)  the perspective of the advocate representing a party representing the interests of a diverse group of non-parties to the proceeding.

I conclude with some insights into the challenges of advocacy in non-traditional venues, such as Royal Commissions and ICAC, and the vexed decisions in defending not just reputation, but a corporation's 'social licence to operate'.

Advocating a regulators perspective

Given ASIC’s original and primary role as a regulator of corporate laws, it is useful to begin by canvassing the perspective of an advocate advising or representing our corporate, markets and financial services regulator.

This role presents unique challenges, since complexity is increased having regard to the operation of model litigant obligations.[1]  Advocates appearing for regulators will be constrained by an over-arching requirement to act “honestly and fairly” in litigation.[2]

This requirement includes additional obligations directed more to good governance and administration than mere conduct as a litigant in Court. Examples include: acting consistently across cases; avoiding technical arguments; and not appealing unless there are reasonable prospects or it is in the public interest.

Courts have also found that a model litigant is bound to bring to the court's attention arguments of the other side where it appears the court has overlooked them. Such restrictions do not apply to a private litigant – even if they are a large, repeat and well-resourced litigant.

These advocates also need to be mindful that there are a number of ways in which a Court may exercise their powers to redress a perceived breach of the obligations of a model litigant. For example, it may be a factor that weighs into the exercise of a discretion to grant a stay or adjournment, order discovery, order the calling of a witness, or various other interlocutory or procedural matters.

There are even cases where the court has made an adverse costs order against a government litigant at the conclusion of proceedings because of a perceived breach of the obligation.

A decision about which witnesses to call is a key forensic judgment required to be exercised by counsel – for example, who should be called to prove what did, or did not occur, at a meeting of a board of directors, when there is also signed minutes approved by that board at its subsequent meeting. In ASIC v Hellicar (2012) 247 CLR 345 the High Court overturned a finding by the NSW Court of Appeal that ASIC had breached its obligation to act fairly by not calling an important material witness who was available to it. In this sense at least, the model litigant obligation is not without limits.

Advocating the perspective of a defendant to civil penalty proceedings 

The regime of sanctions for enforcement of the duties of company officers in Australia was fundamentally reformed in 1993 when the civil penalty regime was introduced. This was aimed at reducing the role of the criminal law such that criminal sanctions applied only to the most serious contraventions, and the majority of cases attracted civil penalty sanctions. The current civil penalty regime was introduced to reduce reliance on the criminal process in the hope that ASIC could more effectively deal with corporate misconduct, and that civil penalties would constitute a significant part of the overall enforcement mechanism.

Armed with these options, ASIC has made greater use of civil penalty litigation and, since 2000, has experienced success in obtaining civil penalties, especially against directors involved in high profile corporate collapses.

The case law that has developed as a result of ASIC’s use of civil penalty litigation, particularly since the High Court of Australia’s decision in Rich v Australian Securities and Investments Commission, has created procedural and enforcement problems for ASIC which defendant counsel are keen to exploit.

In particular, the amendments to the Corporations Act 2001 (Cth) (in particular the insertion of s 1349) did not abrogate the penalty privilege in relation to such proceedings. Defendants are afforded enhanced procedural protections, and much of the case law on civil penalties that has developed since 2000 concerns disputes regarding the operation of the penalty privilege. Defendants can refuse a request for discovery and are not required to file witness statements before the trial, indeed before the conclusion of evidence by ASIC’s witnesses.

As a consequence of diminished disclosure by defendants, ASIC’s counsel may not be aware of what matters will be raised in defence of the allegations they are making.

Defendant counsel advocate so as to preserve that advantage for as long as possible. This can be a problem if a defendant wishes to run a positive case. Ordinarily a positive case must be raised in the defence, but not every form of positive defence might detract from the penalty privilege. One which would so detract is any requirement of the Court rules that require a defendant to reveal her belief in the truth or otherwise of facts alleged by ASIC.

The desire to preserve the advantage may also affect the questions counsel put to witnesses, and what counsel do with any documents shown to those witnesses.

Of course, the intricacy of civil penalty proceedings come to naught when advising subjects of investigation by ASIC during the investigation stage, since neither corporate nor individual clients enjoy privilege against self-incrimination or penalty privilege insofar as they may be compelled to produce documents and answer questions at compulsory examinations.

ASIC can and will use documents produced and transcripts of examination (despite any express claim for privilege) in the exercise of its administrative powers to cancel licenses, to disqualify directors or to ban individuals from providing financial services.

Attempts to run a positive case or explanatory demurrer during ASIC’s administrative hearings necessarily abrogate any remaining privilege, and so create a dilemma for lawyers advising individuals who could remain at risk of potential criminal or civil penalty proceedings. This is particularly acute in investigations of insider trading, and unlicensed provision of financial services or products.

Advocating a representative partys perspective

Three class action regimes currently operate in Australia,[3] and shareholder class actions have represented about 25 per cent of all class actions in the past five or so years.

In these types of proceedings, the named applicant represents others who are not on the record (unless they opt out). Steps taken by the plaintiff in the conduct of these case are binding on group members, because she acts as their representative. Findings and rulings in the course of the case are binding on group members.

Representative procedures themselves are not new, having been available under English law for a long time. Building on these principles, there are even cases where representative defendants have been appointed, for example, to represent a group of investors in the winding up of unregistered managed investment schemes. 

Settlement of class actions is the most common way in which this form of litigation is resolved. This is despite the fact that settlement in the representative context is more complicated, and more regulated, than other litigation. Interestingly, empirical research by Professor Vincent Morabito reveals that during the 17 year period from 1992 to 2009, every class action under the federal system that was supported by a litigation funder resolved in favour of the class.

Whilst most judges do not view the class action regime with suspicion, they do acknowledge that they are effectively discharging what is a beneficial supervisory jurisdiction.

Hence the reason for requiring court approval, because the risk of conflicts of interest, collusion and outcomes that are not for the benefit of absent group members, remain. For example, the Court must be mindful of the conflicts involved where the terms may be acceptable to a funder who can avoid the risk of trial and invest in another case, compared to the group member who has only the one opportunity to obtain compensation to remedy their position.

The settlement approval process, including the process for the distribution of settlement funds, requires close and careful scrutiny. Lawyers appearing in representative proceedings have come to play a critical role in assisting the Court’s exercise of its supervisory and protective role to ensure that a settlement is in the interests of all the group members. This is achieved usually by way of the solicitor for the applicant filing an affidavit addressing the relevant criteria for approving a settlement, and a confidential opinion of counsel for the applicant assessing the fairness and reasonableness of the proposed settlement that focuses on the prospects of success of the litigation. That includes canvassing any difficult questions of law, causation and quantum. Sometimes, the Court also receives opinions from opposing counsel.[4]

Advocating in non-traditional venues

Increasingly, counsel are obliged to advocate complex corporate law questions in non-traditional venues. Indeed, it is not uncommon for a Royal Commission or other public inquiry to be instituted as the preferred response to large scale corporate collapses or perceived misconduct.  

At the James Hardie Inquiry, our task as counsel assisting was to focus on a central objective – the adequacy (or otherwise) of the funding set aside to compensate long-tail asbestos liabilities of the James Hardie Group, and thereafter, if the funding was not adequate, to determine who was responsible and what could be done to fix it. A part of that process engaged in difficult, intricate debates about the validity and appropriateness of (inter alia) corporate reorganization plans. 

The days of the Royal Commission into the collapse of HIH Insurance Limited, and the James Hardie Special Commission of Inquiry seem almost sedate compared to the hyper-glare of the modern social media driven news cycles. It is not too hard to imagine complicated questions being dwarfed by today’s unrelenting focus on personalities. Advocates need to be vigilant that counsel’s every question is webcast live to a hypervigilant populace, and the Twitter feed of hungry journalists drives traffic to online media, only to be amplified and contorted by trolls and ‘fake news’ sites.  Entreaties about the ultimate application of the rules of evidence, the privilege against self-incrimination and high standards of proof are of little comfort to those whose corporate reputations may not survive such public outings.

Reputation is the overall favourability of the image of a company or project.  But the social licence is a perception of legitimacy – does the company go about its business in a proper way? A growing focus on responsible business conduct means we can only expect more vigilance from stakeholders, regulators, politicians and civil society in relation to the deliberations of corporate boards and their advisors.

Indeed, as Westpac Remuneration Committee Chair Ewen Crouch observed in his keynote address at today's 33rd Governance Institute of Australia National Conference, we can already detect a shift from 'buyer beware' to 'seller beware', particularly in the financial services industry.

The questions for corporate governance professionals, and the in-house and external counsel who advise them include: How ready is your company's board, management and shareholders to maintain and defend its social licence? Is there low and infrequent conflict between stakeholders and the company, or are there disconcerting signs of discontent? Is the company or its project seen as an inextricable and valued component of the social and economic fabric of the community, or is there a community perception that the company or its project better belongs to yesteryear? Political intervention resulting in closure of a project, disaggregation of vertically integrated groups, indeed wholesale industry closures, are not unknown. 

As a counsel who has had to advocate these complex questions in high profile inquiries into industries as diverse as insurance, asbestos manufacturing and installation, to financial planning and greyhound racing, I acknowledge the real challenges these questions pose for future-thinking boards and their advisors.

Experience teaches: it is better to think ahead, than to get left behind.

***

Dominique Hogan-Doran SC is a Senior Counsel of the independent Australian Bar with a national commercial/regulatory litigation & dispute resolution practice, operating from chambers in Sydney, Canberra and Adelaide. 

This is an extract from her presentation to the Governance Institute's National Conference in the panel session "Advocating the Complexity of the Corporate Law" on Tuesday 29 November 2016.

Web www.dhdsc.com.au 
Email dhogan@barnet.com.au
Twitter @DHoganDoranSC

FOOTNOTES

[1] The Commonwealth "Model Litigant Policy", as it is commonly described, is a Legal Service Direction issued by the Attorney-General pursuant to s 55ZF of the Judiciary Act 1903. It was first issued in 1999. There are similar, but not identical, regimes in Victoria, Queensland, New South Wales, the Australian Capital Territory and the Northern Territory.

[2] Paragraph 2 includes:

(a) dealing with claims promptly and not causing delay;

(b) making an early assessment of the prospects of a matter;

(c) paying legitimate claims without litigation;

(d) acting consistently in the handling of claims and litigation;

(e) endeavouring to avoid, prevent and limit the scope of litigation including by participating in alternative dispute resolution where appropriate;

(f) keeping the costs of litigation to a minimum by:

(i) not requiring the other party to prove a matter the Commonwealth or agency knows to be true;

(ii) not contesting liability if the real dispute is about quantum;

(iii) using appropriate methods to resolve litigation including settlement offers or alternative dispute resolution; and

(iv) ensuring that a person participating in settlement negotiations can settle on behalf of the Commonwealth or agency.

(g) not taking advantage of a claimant who lacks resources;

(h) not relying on technical defences;

(i) not appealing from a decision unless there are reasonable prospects for success or it is otherwise justified in the public interest; and finally

(j) apologising where the Commonwealth or agency has acted wrongfully or improperly.

[3] The first was introduced in 1992 by Part IVA of the Federal Court of Australia Act 1976 (Cth), and largely identical regimes in the Supreme Court of Victoria since January 2000 by Part 4A of the Supreme Court Act 1986 (Vic) and in New South Wales March 2011 by Part 10 of the Civil Procedure Act 2005 (NSW).

[4] Such as in the Storm Financial Settlement: Richards v Macquarie Bank Ltd [No 4] [2013] FCA 438 (14 May 2013) [13] (Logan J).