Civil penalty and disqualification orders: An overview of the Vizard case

by Kim Reid

This article considers the implications of the successful proceedings for civil penalties and a disqualification order brought by the Australian Securities & Investments Commission against a former non-executive director of Telstra.

Breach of director's duties

The fiduciary duties of directors and other officers of corporations are given statutory force by the provisions contained in Chapter 2D of the Corporations Act (CA). Coupled with provisions that regulate the conduct of directors of insolvent or near insolvent companies (such as the duty of a director to prevent a corporation from trading while insolvent), these provisions and their predecessors have been the subject of a range of litigation in recent years. In particular, a spate of high-profile corporate collapses, including those of HIH and One.Tel, has resulted in the Australian Securities & Investments Commission (ASIC) pursuing a number of directors and officers in relation to their management of corporations.

A recent Federal Court of Australia decision serves as a timely reminder of the powers that have been given to ASIC to pursue suspected contraventions of the CA by way of civil penalty proceedings, and that such proceedings may be brought against directors of substantial and high profile companies.

Elements of improper use of information

ASIC v Stephen William Vizard [2005] FCA 1037 concerned the duty of a director to refrain from using confidential information obtained during the course of a directorship for an improper purpose. Section 183(1) of the CA provides that a person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to gain an advantage for themselves or someone else, or cause detriment to the corporation.

Section 183(1) is a 'civil penalty provision' by virtue of s1317E of the CA. If a court is satisfied that a person has contravened s183, it must make a declaration of contravention under section 1317E. The court may then make an order under s1317G that the director or officer pay the Commonwealth a pecuniary penalty (which becomes a civil debt payable to ASIC on behalf of the Commonwealth) if the court is satisfied that the contravention:
  • materially prejudices the interests of the corporation, or its members; or

  • materially prejudices the corporation's ability to pay its creditors; or

  • is serious.
In addition, the court may make an order under s1317H of the CA requiring the director or officer to compensate a corporation for damage that resulted from the contravention. As set out below, the court has power to make other orders, including disqualifying a director from managing corporations for a specified period.

The facts of the Vizard case

Recently, ASIC commenced Federal Court proceedings against Stephen William Vizard for civil penalties and a disqualification order. The judgment of Justice Finkelstein sets out the findings of fact against Mr Vizard, which were derived from a joint statement of agreed facts, a bundle of documents tendered by ASIC and in affidavits filed on behalf of Mr Vizard.

In 2000, Mr Vizard was a non-executive director of Telstra Corporation Limited. He had also established a company called Creative Technology Investments Pty Limited (CTI), of which his accountant, Mr Lay, was the sole director and shareholder. In December 1999, Brigham Pty Limited (Brigham) was a trustee company, the shares of which were beneficially owned by Mr Vizard, his wife and their children. Brigham entered into a loan agreement with CTI by which it made loans to CTI from funds provided by Mr Vizard or his related entities. The loan funds were to be applied toward the purchase of a share portfolio. The court found that Mr Vizard entered into three share transactions in 2000 because he obtained confidential information in his capacity as a director of Telstra, which indicated to him that the transactions would be profitable.

First, Telstra held a strategic stake in Sausage Software Limited and Solution 6 Holdings Limited. The court noted that in March 2000 there were confidential discussions between Telstra, Sausage and Solution 6, involving a possible merger of Sausage and Solution 6 and the acquisition by Telstra of a substantial interest in the merged entity (the Solution 6 transaction). The Telstra CEO sent emails to the board of directors (including Mr Vizard) on 2 and 5 March 2000 in relation to the proposed Solution 6 transaction. Justice Finkelstein found that it was obvious to Mr Vizard that when the proposed merger became public there would be an increase in the share price of the target company, Sausage. Mr Vizard instructed Mr Lay to buy shares in Sausage on 7 March 2000. That purchase took place and was followed by Telstra's announcement of the merger on 20 March 2000. The Sausage share price rose substantially and CTI made an immediate 'unrealised' profit of approximately $140,000. Mr Vizard instructed Mr Lay to sell the shares about seven days after the announcement and a small parcel of shares was sold at a profit. Mr Vizard instructed Mr Lay to dispose of the balance of the shares on 31 March 2000. Ultimately, CTI suffered a net loss of approximately $150,000 on the investment. The court noted that this loss followed the dramatic drop in the share price of Sausage due to the 'tech-wreck' of April 2000.

The second transaction related to shares that CTI had acquired in Computershare Limited, on Mr Vizard's instruction. Telstra held an interest of about 15 per cent in Computershare. Justice Finkelstein noted that the Telstra CEO informed Telstra directors that it needed to raise funds for the Solution 6 transaction, and that it would do so by the sale of Telstra's stake in Computershare. His Honour found that Mr Vizard was concerned that the sale of a large parcel of Computershare securities would result in a drop in its share price and that, accordingly, Mr Vizard instructed Mr Lay to sell CTI's holding in Computershare and CTI made a small profit on the sale. Telstra then made the announcement concerning its divestment of its shares in Computershare, and the market price of Computershare's securities fell, but then 'picked up'.

The third transaction involved an acquisition by Telstra of an interest in Keycorp Limited. Justice Finkelstein noted that the Telstra CEO advised the directors in late June and early July 2000 of a proposal by Telstra to acquire a 51 per cent interest in Keycorp. His Honour found that in all likelihood the price of Keycorp shares would rise when the proposed acquisition was announced and that, for this reason, Mr Vizard instructed Mr Lay to acquire a number of Keycorp shares. The price of Keycorp shares did in fact increase following the announcement and Mr Vizard ultimately attempted to realise a profit by instructing Mr Lay to dispose of the shares.

The contraventions

At the relevant time of the acts described above, s232 and (later) s183 of the Corporations Law provided, in effect, that a director must not make use of confidential information for his or her own purpose. The court found that contraventions of those sections were established because:
  • Mr Vizard was a director of Telstra.

  • He obtained confidential information by reason of his position as a director.

  • He made improper use of that information by basing his decision to purchase or sell shares on the information.

  • The improper use was made to obtain an advantage for CTI (and through that company for Brigham, Mr Vizard and his family).
Penalty considerations

In considering whether the contraventions were 'serious' (a prerequisite to the making of a pecuniary penalty order unless it can be established that the conduct materially prejudiced the interests of the corporation, or its members, or the ability of the corporation to pay its creditors), Justice Finkelstein noted that:
  • The cost of white-collar crime is extremely high and can cause many people to suffer greatly.

  • A director is denied the ability to use confidential information for his or her own purposes, and it does not matter whether the director's action causes no harm to the company or does not rob it of an opportunity which it might have exercised for its own advantage; Regal (Hastings) Limited v Gulliver [1967] 2 AC 134.

  • The relief provided under the CA is directed to avoiding the potential harmful consequences of a particular type of conduct.

  • Section 232 sought, and s183 seeks, to establish a norm of behaviour for the 'proper conduct of commercial life'. The sections carry with them 'a significant degree of moral blameworthiness'.
ASIC and the court accepted Mr Vizard's submission that he would not engage in such conduct again. Mr Vizard expressed contrition and there was evidence of his good character, including his philanthropic roles and his services to the community. However, Justice Finkelstein referred to his Honour's decision in Australian Competition and Consumer Commission v ABB Transmission and Distribution Ltd (No 2 – Distribution Transformers) (2002) ATPR 41-872, in which he found that the nature of the offence, rather than the character of the offender, should be the principal consideration for the punishment to be imposed.

Other factors that the court considered relevant were:
  • The lack of profit was the result of a decline in the share market. The fact that no profit was realised from the contraventions was irrelevant.

  • General deterrence of conduct should be considered in imposing penalties.

  • While 'shaming' is a form of punishment, it is no substitute for 'formal retribution'.

  • A 'discount' in penalties is appropriate if there has been early acknowledgment of wrongdoing and cooperation with the regulator.

  • The court should not depart from a penalty jointly recommended by the parties unless it is 'clearly out of bounds': NW Frozen Foods Pty Limited v Australian Competition and Consumer Commission (1996) 71 FCR 285.

ASIC submitted that the appropriate penalty for each contravention was $130,000. The court ordered that Mr Vizard pay penalties in the amount of $390,000, but noted that it would have imposed a higher penalty if 'left uninstructed'. Importantly, Justice Finkelstein noted that the current maximum penalty amount of $200,000 for each contravention had been in place for more than 13 years and may require review by Parliament.

Disqualification order

Section 206C of the CA gives ASIC the power to ask the court to disqualify a person from managing corporations for a period if a declaration of a civil penalty provision contravention is made and the court is satisfied that the disqualification is justified. Justice Finkelstein noted that in Rich v Australian Securities & Investments Commission [2004] 50 ACSR 242, the High Court held that a disqualification order can be imposed:
  • to protect the companies' shareholders against further abuse;

  • by way of punishment; and

  • for general deterrence.
ASIC submitted that a five-year disqualification was appropriate. Mr Vizard acknowledged that there ought to be some period of disqualification. Justice Finkelstein held that the real concern of the court is punishment for retributive purposes and general deterrence and noted that a 'message' must be sent to the business community about the merits of 'white collar crime'. His Honour declined to follow ASIC's recommendation and imposed a ten-year disqualification order on Mr Vizard. In doing so, his Honour noted that if the order caused hardship (for example by preventing Mr Vizard from sitting on the board of a private family trustee or the Vizard Foundation), the court had power to grant leave under s206G of the CA for him to be involved in the management of a particular corporation.

Where to from here?

The Vizard case represents another chapter in increased regulation of the conduct of directors and officers of corporations. In particular:
  • It created a significant media storm which will be likely to impact on the regulators' approach to similar matters in the future. ASIC and the Director of Public Prosecutions will be concerned to ensure that any 'deal' to be struck with respondents to civil penalty proceedings will not be the subject of criticism in the press or by the court.

  • It may be that Justice Finkelstein's comments will precipitate an increase in the maximum penalty for contraventions of the civil penalty provisions, if those comments are taken up by the Parliament.

  • Parties to civil penalty proceedings ought to be aware that the court may, in appropriate circumstances, impose more onerous penalties than those which are recommended by the regulator.
Importantly, there are now moves to apply the obligations of directors and officers to employees of corporations and other individuals. Two papers released by the Corporations and Markets Advisory Committee (CAMAC) in May 2005 consider the extent to which corporate officers (excluding directors), employees and other individuals are subject to personal duties and liabilities under the CA and whether those classes of persons should be extended. In particular, the discussion paper entitled Corporate Duties Below Board Level gives consideration to some of the recommendations made by Justice Neville Owen in the HIH Royal Commission Final Report.


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