Realising the Public Potential of Corporate Law: Twenty Years of Civil Penalty Enforcement in Australia
| Published date | 01 March 2014 |
| Date | 01 March 2014 |
| DOI | 10.22145/flr.42.1.9 |
| Subject Matter | Article |
REALISING THE PUBLIC POTENTIAL OF CORPORATE LAW:
TWENTY YEARS OF CIVIL PENALTY ENFORCEMENT IN
AUSTRALIA
Michelle Welsh*
ABSTRACT
Traditionally corporate law has bee n viewed as having characteristics that ar e commonly
associated with private law. Largely this vie w developed as a result of the “law and economics”
scholarship which d ominated the corporate law debate, especially in the United States, in the last
quarter of last Century. While the traditional “law and economics” approach supports the view that
corporate law should be treated as a branch of private law, and that the state should have no role in
its enforcement, other scholars, p articularly those that adopt a progressive approach, argue that
corporate law has, and sho uld be recognised as having characteristics that are usually associated
with public la w. Arguably, an area of Australian corporate law that displays characteristics that are
usually associated with public law is the statutory directors’ duties and the civil p enalty regime that
supports them. This enforcement regime gives the state through the corporate regulator, standing to
take court based proceedings to enforce what are in effect, contracts that established corporate
governance structures.
This article seek s to determine the app ropriate role of a public regulator in these circumstances.
The questions considered are: whose interest s should the public regulator represent when it is tasked
with the responsibility of enforcing the statutory directors’ duties t hat largely codify fiduciary and
common law d uties? Given that the duties are owed by d irectors to their company should the
primary role of the public regulator be to represent the interests o f t he co mpany, and its
shareholders, who have suffered a loss as a result of the alleged contravention of the directors’
duties or should the primary role of the public regulator be to act in the interests of the members of
the larger community? In these situations what are the interests of the larger community? Drawing
on regulatory theory the argument advanced in this paper is that despite the fact that the statutory
directors’ duties codify what are in effect private ri ghts between directors and their companies, the
primary role of a public regulator is not to utilise the enforcement mechanisms at its disposal in
order to obtain compensation for companies who have suffered a loss. Rather, the regulator’s
primary role is to act in the interests of the larger community by utilising the enforcement
mechanisms at its disposal strategically in order to encourage greater compliance.
* Associate Professor and Co-Director Workplace and Corporate Law Research Group, Department of
Business Law and Taxatio n, Monash University. The author wishes to thank the anonymous referees for
their useful comments and suggestions.
2 Federal Law Review Volume 42
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I INTRODUCTION
Traditionally corporate law has been viewed as having characteristics that are commonly
associated with private law. Largely thi s view developed as a result of the 'law and
economics' scholarship which dominated the corporate law debate in the last quarter of
last century, especially in the United States. The c entrepiece of the scholarship is the
'contractarian' theory of corporate law, which conceptualises companies as a 'nexus of
contracts' that arises between managers and shareholders, who are the parties to the
enterprise. Agency problems may arise because the interests of the managers may not be
perfectly aligned with the interests of the shareholders. Corporate law is one method by
which these a gency problems are controlled, by providing standard terms that govern the
relationship between these parties.
1
Those standard terms include the fiduciary and
common law duties that are owed by directors to their companies.
In Australia, directors owe fiduciary duties to act in good faith in the best interests of
the company, to exercise powers for proper purposes and to avoid undisclosed conflicts
between their personal interests and the interests of the company.
2
Directors are required
to exercise their powers a nd discharge their duties for the benefit of the company, which is
interpreted as the shareholders as a collective gr oup.
3
These fiduciary duties promote the
traditional 'shareholder primacy norm'. In addition, d irectors owe a duty at common law
to exercise reasonable care, skill and diligence.
4
The duties are o wed by directors to their
company and the company is the proper plaintiff to enforce those duties.
5
Individual
shareholders have limited capacity to take enforcement action following a contravention of
the fiduciary and common law duties.
While the traditional law and economics approach supports the view that corporate law
should be treated as a branch of private law, and that the state should have no role in its
enforcement, other scholars, particularly those who adopt a progressive approach, argue
that corporate law has, and should be recognised as having characteristics that ar e usually
associated with pub lic law.
6
This progressive view of corporate law is adopted by many
scholars who promote corporate social responsibility. These authors argue that rather than
solely being focused on shareholder in terests, companies should be re quired to take int o
consideration a wide gr oup of stakeholders, including employees and the environment for
example.
7
1
See, eg, Michael Jensen and William Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs
and Ownership Structure’ (1976) 3 Journal of Financial Economics 305; Eugene Fama and Michael
Jensen, ‘Agency Problems and Residual Claims’ (1983) 26 Journal of Law and Economics 327; Eugene
Fama and Michael Jensen, ‘Separation of Ownership and Control’ (1983) 26 Journal of Law and
Economics 301.
2
See, eg, Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286; Darvall v North Sydney Brick & Tile Co Ltd
(1987) 6 ACLC 154; Howard Smith Ltd v Ampol Petroleum Ltd [ 1974] AC 821; Aberdeen Railway Co v
Blaikie Bros [1854] 1 Macq 461.
3
Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286.
4
Daniels v Anderson (1995) 37 NSWLR 438.
5
Foss v Harbottle (1843) 2 Hare 461; 67 ER 189.
6
See, eg, Kent Greenfield, The Failure of Corporate Law: Fundamental Flaws and Progressiv e
Possibilities (University of Chicago Press, 1st ed, 2006), which argues that the proper view of corporate
law is that it is a branch of public law.
7
See, eg, John Edward Parkinson, Corporate Power and Responsibility: Issues in Theory of Company Law
(Oxford University Press, 1st ed, 1993); Daniel Attenborough, ‘How Directors Should Act when Owing
Duties to the Companies' Shareholders: Why We Need to Stop Applying Greenhalgh’ (2009) 20(10)
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