Civil penalties: are negotiated outcomes still negotiable?

In brief

A recent decision of the High Court could intensify uncertainty about the legitimacy of resolving civil penalty proceedings by the regulator and the defendant approaching the court with an 'agreed penalty' supported by an agreed statement of facts. Partner Matthew McLennan and Lawyer Megan Sandler report.

'Negotiated settlements' in civil penalty proceedings

It has been common practice for civil penalty proceedings to be resolved by the regulator and the defendant approaching the court with an 'agreed penalty' supported by an agreed statement of facts. Provided the 'agreed penalty' fell within an appropriate range, the court would endorse the terms of the negotiated settlement and make orders accordingly.

Both regulators and defendants have something to gain from negotiated settlements in civil penalty proceedings. The regulator can encourage cooperation with the offer of a lesser penalty. The parties can avoid the cost and uncertainty of litigation.

In its cooperation policy, the Australian Securities and Investment Commission (ASIC) states:

If you cooperate with ASIC we can, in administrative and civil matters, make particular submission to the tribunal or court as to what your penalty should be.¹

Similar sentiments are included in the Australian Competition and Consumer Commission's cooperation policy for enforcement matters.²

The Full Court of the Federal Court of Australia has found that negotiated settlements have a legitimate role to play in civil penalty proceedings. The court held that there are strong public policy reasons to conclude litigation as early as possible so that both the courts and regulators are freed up to deal with other matters.³ Such efficiency motivations do not undermine the ultimate purpose of the civil penalty regime: deterring future breaching conduct.⁴ It is on this basis that the Full Federal Court concluded that:

The court will not depart from an agreed figure merely because it might otherwise have been disposed to select some other figure, or except in a clear case.⁵

Thus, provided the 'agreed penalty' proposed by the parties is reasonable in that it is within the 'permissible range' and is supported by the agreed statement of facts presented to the court, a court ought to endorse the deal as the ultimate purpose of the civil penalty regime is still achieved.

This approach is not without its critics. Regulators have been criticised for offering lighter penalties in return for cooperation. One controversial case involved prominent businessman, Mr Steve Vizard, who misused information that he obtained as a non-executive director of a major company, Telstra Corporation Limited. ASIC did not charge Mr Vizard with insider trading. The agreed facts and proposed penalty presented to the court were tailored to support declarations that Mr Vizard had only breached his director's duties.

Similarly, the Full Federal Court has been accused of abandoning its role as ultimate arbitrator by 'rubber stamping' negotiated settlements which, at least to the public eye, do not always seem to adequately punish the offender.

Notwithstanding such criticisms, both Federal and State courts have considered themselves bound to follow the Full Federal Court and accept a penalty proposed by the parties unless it was clearly out of bounds. However, last year in ASIC v Ingleby ⁶ (Ingleby), the Victorian Court of Appeal unanimously held that the Full Federal Court's approach was incorrect and bad law.

ASIC v Ingleby

Ingleby concerned the investigation by ASIC into the dealings of the Australian Wheat Board (AWB) with the Iraqi Government under the Oil-for-Food Program. As a result of that investigation, ASIC commenced a number of actions against directors and officers of AWB. Mr Ingleby was the Chief Financial Officer and the subject of one of ASIC's cases. ASIC and Mr Ingleby reached an agreement whereby he would admit to breaching the Corporations Act by failing to act with the appropriate care and diligence and, as a consequence, he would pay a fine of $40,000 and be disqualified from managing corporations for 15 months.

Upon finding that the statement of agreed facts were insufficient to support the proposed penalty, the trial judge refused to accept the settlement agreement and instead imposed a lesser penalty on Mr Ingleby (a $10,000 fine and disqualification for four-and-a-half months). ASIC appealed this decision.

The Court of Appeal took the opportunity to review the Full Federal Court's approach to 'agreed penalties', finding that the approach was plainly wrong. The Court of Appeal unanimously held that a court's discretion should not be fettered by the principle that the agreed penalty ought to be endorsed where it fits within the permissible range.⁷ In particular, Justice Weinberg stated that this resulted in trial judges impermissibly exercising appellate functions as they do not determine the penalty independently, but rather assess the agreed amount according to whether it falls within the permissible range.⁸

While a Federal Court judge at first instance has already held that he is not bound by the decision in Ingleby⁹ and it is still unclear whether other State Supreme Courts will follow this decision, the reasoning in a recent High Court decision in the criminal context, Barbaro v R¹⁰ (Barbaro), tends to support the Ingleby approach.

Barbaro v R

The applicants in Barbaro pleaded guilty to serious offences against the laws of the Commonwealth, including trafficking and conspiracy to traffic a commercial quantity of a controlled drug, MDMA. The pleas of guilty were entered into following discussions between the defendants and the prosecution during which the prosecution indicated an appropriate sentencing range (referred to by the High Court as 'the plea agreement'). Nevertheless, both applicants were sentenced to terms of imprisonment far greater than that indicated in the plea agreement.

The applicants sought special leave to appeal to the High Court. They argued that the sentencing hearing was unfair, as the judge proclaimed from the outset that the court would not be accepting submissions from the prosecution as to the sentence range that ought to be imposed on the offenders. This, on the applicants' submissions, precluded the judge from taking account of a consideration relevant to sentencing; namely, the plea agreement.

The High Court unanimously dismissed the appeal, finding:

• The prosecution's statement as to the bounds of the available range of sentences is a statement of opinion only.¹¹
• The prosecution is not required, and should not be permitted, to make a statement of the appropriate sentencing range to a sentencing judge.¹²[emphasis added]
• If a sentencing judge is properly informed by the parties' submissions, the relevant sentencing principles and comparable sentences, the judge will have all the information necessary to decide what sentence should be passed without any need for the prosecution to proffer its view about available range.¹³

Conclusion

The High Court in Barbaro and the Court of Appeal in Ingleby emphasise that the process of sentencing an offender or imposing a pecuniary penalty is quintessentially an exercise in judicial power; it is for the judge alone to determine the appropriate punishment. To this end, the court should only permit a prosecutor/regulator to submit a statement of agreed facts. Both cases make it clear that any submission as to penalty range is merely an opinion and, as such, the parties should not be permitted to provide the court with such guidance.

As Barbaro is a criminal case, one cannot assume that its reasoning is applicable to the setting of civil penalties. However, like criminal sentences, civil penalties are punitive in nature and designed to operate as sanctions. Further, the processes for determining a civil penalty and imposing a sentence on a criminal offender are largely the same. These similarities have been previously recognised by the High Court. In Rich v ASIC, the majority found that the factors relevant to determining a criminal sentence, such as protecting the public, deterrence, retribution and reformation, are also key to imposing an appropriate civil penalty.¹⁴ If the conflict between the Full Federal Court and the Victorian Court of Appeal came before the High Court, the reasoning in Barbaro suggests that that the High Court is likely to decide in favour of the Ingleby approach.

In the meantime, regulators and defendants face considerable uncertainty. In proceedings before a court other than the Federal Court, the uncertainty may be sufficient to prevent either side from 'agreeing' a civil penalty. In Federal Court proceedings, the approach preferred by the Full Federal Court is still binding on first instance judges. Regulators who have the choice may prefer to commence proceedings in that jurisdiction to take advantage of this circumstance, otherwise known as 'forum shopping'. But where the stakes are high, as they typically are in civil penalty proceedings, defendants may be unwilling to give up the option of taking a case to trial in return for a negotiated settlement that could be upset by an unpleasant surprise as the case law develops.