• Disqualification
• Dissolution of corporations

8.1 One set of options for dealing with convicted corporations is to prevent them from conducting some or all of their usual activities. Broadly, there are two ways of incapacitating a corporation:

• disqualification, that is, preventing the company from carrying out certain activities or denying the company the right to enter into certain contracts; and
• dissolution, that is, preventing the company from existing at all.

DISQUALIFICATION

8.2 Disqualification (sometimes also referred to as “restraint of business”) is an option that has a more moderate impact than dissolution of a corporation (discussed below).² It may involve a number of orders designed to restrain the activities of corporations, for example, orders:

• to cease certain commercial activities for a particular period;
• to refrain from trading in a specific geographic region;
• revoking or suspending licences for particular activities;
• disqualifying the corporation from particular contracts (for example, government contracts); and
• freezing the corporation’s profits.

8.4 However, forbidding a corporation to trade focuses primarily on deterrence and offers little, if any, scope for rehabilitation. In some cases, such a sanction will simply put the corporation out of business if it is unable to redirect its operations to permitted areas of activity.⁵ Disqualification also raises the issue of “spillover”,⁶ that is, consequential harm to shareholders, employees, consumers and trading partners.⁷

8.5 It can therefore be argued that disqualification is an extreme penalty and it should only be used on rare occasions,⁸ for example, when a corporation is convicted of homicide.⁹ If such an approach is taken, it could then also be argued that the more extreme penalty of dissolution is a more appropriate sanction.¹⁰

8.6 In the United States, federal sentencing law allows for the imposition of an optional condition on probation, namely that an offender may “engage in such a specified occupation, business or profession only to a stated degree or under stated circumstances”.¹¹ The legislative history of this provision suggests that the Congress deliberately avoided allowing the complete exclusion of a corporate offender from particular activities. It is said that the drafters revised the originally intended provision because of “complaints by business leaders that such authority might be used to put legitimate enterprises out of business following a regulatory offense”.¹²

8.7 A detailed discussion of various possible disqualification orders follows.

Prevention of commercial activities

8.8 A court could order a company to cease certain commercial activities for a particular period or to refrain from trading in a specific geographic region.¹³ A further possibility¹⁴ is to suspend the right of a corporation to trade “for a term to which an individual would have been sentenced for the same offence”.¹⁵ Advantages of this form of sentence, referred to as “corporate quarantine”, include that it would overcome the problem of calculating fines based on the assets of the corporation and would impress upon the relevant communities the seriousness of the offence being punished. However, disadvantages include:

• the potentially serious harm, or spillover, to employees, shareholders, consumers and other trading partners of the corporation; and
• the difficulty of enforcing such an order, particularly in the case of large corporations with a wide range of operations.

Revocation or suspension of licences

8.9 Revocation or suspension of a licence is another means of preventing a corporation from engaging in certain specified activities. It is of more limited use than an order restraining specified activities because such an option can only be effective when a licence is required for the corporation’s activities.

8.10 Suspension of a licence is currently provided for as an administrative sanction in New South Wales, for example, by the Fair Trading Act 1987 (NSW).¹⁷ The sanction is available with respect to licences, permits and other authorities granted or issued under any legislation administered by the Minister for Fair Trading. The Director General of the Department of Fair Trading may suspend a licence for a period of not more than 60 days if he or she has reasonable grounds to believe that:

• the licensee has engaged in conduct that “constitutes grounds for suspension or cancellation of the licence”;
• it is likely the licensee will continue to engage in the conduct; and
• there is a danger that others may suffer “significant harm, or significant loss or damage” as a result of the conduct “unless action is taken urgently”.

8.11 An example in the Commonwealth sphere is the power to suspend the licence of a manufacturer of therapeutic goods if the holder of the licence has been convicted of an offence against the Therapeutic Goods Act 1989 (Cth) or if the holder controls a body corporate (“whether directly or indirectly through one of more interposed entities”) that has been convicted of an offence against the Act.¹⁸ A similar example in the United States is the power of the Securities and Exchange Commission to revoke or suspend for up to 12 months the registration of any broker, upon finding that the broker has committed various prescribed felonies or misdemeanours, including larceny, extortion, forgery, counterfeiting and embezzlement.¹⁹

8.12 An argument can be made that such forms of disqualification should not be made generally available as a sentencing option as the regulatory bodies that currently administer such orders are better able to impose them than the courts who may lack the relevant expertise.²⁰

Disqualification from contracts

8.13 A corporate offender could be disqualified from engaging in certain business such as entering into government contracts.²¹ One example of an administrative disqualification of offenders from government contracts may be found in the United States’ Federal Acquisition Regulations which apply to federal executive agencies in the acquisition of goods and services from government funds. The Regulations allow officials to exclude contractors from government contracts if they have been convicted of, among other offences, fraud, embezzlement, theft, forgery, bribery, tax evasion, receiving stolen property and also “any other offense indicating a lack of business integrity or business honesty that seriously and directly affects the present responsibility of a Government contractor or subcontractor”.²²

8.14 One advantage of such forms of disqualification is that they reward law-abiding companies by giving them a competitive advantage when dealing with the government.²³ However, in many cases, it may be considered inappropriate for the courts to interfere with the commercial decisions of the government.

Freezing of profits

8.15 The freezing of profits (that is, income over and above operating costs) for a specified period is another possible sanction that could be less harsh than other forms of incapacitation, in that it allows a corporation to continue with its legitimate activities and thereby does not impact so harshly on employees, consumers or trading partners. Such an option is similar in many respects to the civil enforcement remedy of sequestration.²⁴

8.16 Sequestration can involve depriving a corporation of its rents and profits for a limited period of time. In New South Wales, sequestration in this form is invoked in situations where a company is guilty of civil contempt of court.²⁵ In such situations, the corporation does not ultimately lose possession of its property. Rather, possession is returned at the end of the period of sequestration, the sequestor’s costs having been deducted. However, in this context, sequestration orders are said to be “coercive and compensatory rather than punitive”.²⁶

8.17 In a sentencing context the freezing of the profits of a corporation may be seen as impacting on the decision-making power of its executives. Also by depriving shareholders and directors of a share in the corporation’s profits, such orders could be used to bring home the seriousness of the offending conduct.

The Commission’s view

8.18 Significant concerns remain in relation to orders that impact directly on commercial operations, mostly because of their potential effect on other parties, in particular employees and consumers. Such orders, while supported in principle, should be invoked only in extreme cases. The Commission has therefore recommended that courts have the power to place a corporate offender under a disqualification order on such terms as the court considers appropriate. In making a disqualification order, the court should be able to deny a corporation the use of its profits for a fixed period of time, perhaps for the same period that an individual offender would be sentenced to imprisonment. This would have the dual effect of both punishing the corporation and driving home the impact of the corporation’s offending behaviour to its shareholders and directors, while still allowing the corporation to trade, thus having minimal impact on the corporation’s employees, consumers and other trading partners.

RECOMMENDATION 6
As part of an order for disqualification a court may, among other matters:
• prevent the corporation from engaging in certain commercial activities;
• revoke or suspend a licence held by the corporation;
• disqualify the corporation from entering specified contracts;
• deny the corporation the use of its profits for a fixed period of time.

8.19 Dissolution (or “deregistration”) of a corporation is a more severe sentencing option when compared to disqualification. In broad terms, a corporation can be dissolved in two ways:

• by actually dissolving the corporation and placing its assets into the hands of receivers (liquidation) or government (nationalisation);²⁷ or
• by indirectly dissolving the corporation through use of a fine that divests it of all its assets.

8.20 An advantage of dissolution is that, in appropriate cases, “it would remove from the community a corporate entity which has flagrantly violated the rules of society”.²⁸ Disadvantages however, include:

• such an action could substantially harm employees, shareholders, consumers and other trading partners of the dissolved corporation;²⁹
• the members of the dissolved company can always incorporate under a new name (even in another jurisdiction) and carry out the same activities;³⁰ and
• as a rarely used sanction, it may not have sufficient deterrent effect on the behaviour of other corporations.³¹

8.22 It has been suggested that dissolution may be more appropriate to small closely-held corporations, on the basis that the impact on employees, consumers and trading partners would not be greater than if, for example, a sole trader or a key player in a small partnership were imprisoned.³⁵ The dissolution of a larger corporation would have far more severe flow-on effects on third parties.

8.23 Nationalisation (the acquisition of a corporation’s assets by the government), while providing a certain level of protection for employees, consumers and trading partners, may be viewed as “draconian and ideologically repugnant”.³⁶ However, liquidation, as an alternative, could achieve the protection of employees, consumers and trading partners by the selling of some or all of a corporation’s assets to new parent companies which could then continue the corporation’s legitimate trading activities.³⁷ It has been suggested that the possibility of a penalty that effectively involves a takeover of the corporation could deter some offending behaviour by playing on corporate managers’ fear of hostile takeovers.³⁸

Dissolution as a civil remedy

8.24 An example of a civil remedy providing for dissolution of a corporation may be found in the Corporations Act 2001 (Cth) which allows for the winding up of a corporation if “the Court is of opinion that it is just and equitable that the company be wound up”.³⁹ There is, however, a limited number of persons and authorities entitled to apply to the court for winding up.⁴⁰ On at least one occasion the Supreme Court has ordered the winding up of a number of companies on the grounds of public interest in order to protect investors. In the case in question the companies had been responsible for “improper dealings with moneys raised from the public, failure to keep or to produce appropriate records, and failure to provide that degree of basic public accountability as to the operations of each of the companies as is required under the Corporations Law”.⁴¹ The Federal Court has also ordered the winding up of corporations on a number of grounds including breaches of the Corporations Law.⁴²

8.25 Another example of a civil remedy that allows for the dissolution of a corporation may be found in the Texas Business Corporation Act which states that when a corporation is convicted of a felony the Attorney General may file an action to dissolve the corporation involuntarily. The dissolution is justified if the court finds that the corporation “has engaged in a persistent course of felonious conduct” and it is in the public interest to prevent similar offences.⁴³

Minimising the impact on other parties

8.26 Given the drastic nature of dissolution as a penalty, it should only be used in a very limited range of cases involving the most serious kind of criminal wrongdoing.⁴⁴ One approach would be to reserve it for cases where, the corporation was “operated primarily for a criminal purpose or primarily by criminal means”. In such egregious cases the effect of dissolution on employees, shareholders, consumers and other trading partners of the corporation will be of little, if any, concern. Such “victims” of dissolution would be of concern only if they were associated with a legitimate part of the corporation’s activities.

8.27 Where a corporation is not operated primarily for a criminal purpose or primarily by criminal means it may be appropriate in some cases for the court to order the liquidation of the corporation and sale of the legitimate part of the corporation’s operations to new parent companies on such terms and conditions as may be necessary to minimise the impact of the dissolution on other parties.

Potential inconsistency with Commonwealth corporations law

8.28 A question arises whether the inconsistency provisions of the Commonwealth Constitution would operate to render a New South Wales provision for the winding up of a corporate offender invalid. The interaction between the Commonwealth’s corporations legislation and State laws is dealt with expressly by the Corporations Act 2001 (Cth). First, the Commonwealth legislation is not intended to “exclude or limit the concurrent operation of any law of a State or Territory”.⁴⁵ Secondly direct inconsistencies are dealt with by limiting the operation of the Commonwealth legislation so that Commonwealth provisions relating to the external administration of a corporation do not apply to any winding up or administration carried out in accordance with a State provision and furthermore any New South Wales provision enacted after the commencement of the Corporations Act must be declared to be a “Corporations legislation displacement provision” in order to displace a Commonwealth provision.⁴⁶

RECOMMENDATION 7
A provision relating to the dissolution of corporations should contain a statement to the following effect: “to extent necessary to do so, this provision is declared a Corporations legislation displacement provision”.

8.29 The concern that corporations might circumvent a dissolution order by reincorporating can be met by allowing courts to issue further precautionary orders, such as orders disqualifying shareholders and directors of a corporation from reincorporating as well as other measures designed to pierce the corporate veil.⁴⁷ Existing procedures under the Corporations Act 2001 (Cth) which provide for the disqualification of persons who have been involved in the management of a corporation may provide a useful model.⁴⁸ For example, one such provision allows ASIC to apply to the court to disqualify a person from managing a corporation for an appropriate period if the person:

has at least twice been an officer of a body corporate that has contravened [the Corporations Act 2001 (Cth)] while they were an officer of the body corporate and each time the person has failed to take reasonable steps to prevent the contravention.⁴⁹

8.30 One proposal is that the court could order the disqualification of a person “where that person has been concerned in the management of a corporation which the court has ordered to be deregistered”.⁵¹

8.31 There are a number of problems involved with making such orders available. These problems flow from the fact that the courts would be ordering the disqualification of a person where it was not the person being disqualified but the corporation that was found guilty of an offence. This involves questions of natural justice and the constitutionality of such orders being available to a court that could potentially exercise federal jurisdiction.

8.32 These concerns may, however, be baseless by analogy with cases dealing with the forfeiture of property where the owner of the property is not the person who committed the offence. The High Court has held that, so long as the terms of the provision are clear, the punishment of forfeiture of property need not be inflicted only on the person who committed the offence. For example, a provision allowing for forfeiture of a fishing boat may be invoked even when the boat is owned by someone other than the person who committed the offence.⁵² The High Court has also held that the owner of the property need not be notified of the court’s intention to exact the penalty of forfeiture, the only person required to be notified being the person charged with the offence.⁵³

8.33 Such forfeiture orders can be justified on the grounds of incapacitation:

Forfeiture by way of penalty has an element of incapacitation which has no regard to the innocence or otherwise of the person who must bear the loss of property. Rather the concern of the law is that the offence will not be repeated by the same means.⁵⁴

8.34 The Commission therefore recommends that a court should be able to issue orders preventing shareholders and directors from reincorporating in certain circumstances once a corporation has been dissolved. Such circumstances could include where the new corporation is intended to carry on the same activities as the dissolved corporation. It may also be necessary to prohibit the directors and shareholders of the dissolved corporation from having any beneficial interests in other corporations that conduct substantially similar activities to those of the dissolved corporation.

8.35 The Commission is of the view that natural justice concerns should be addressed by providing that any person bound by an order should be given an opportunity to be heard by the court prior to sentencing. Examples of provisions giving third parties rights when they are affected by punishments imposed on others can be found in legislation relating to the confiscation of proceeds of crime⁵⁵ and the imposition of home detention orders.⁵⁶

RECOMMENDATION 8
In ordering the dissolution of a corporation a court should have the power to order that shareholders and directors cannot reincorporate in certain circumstances, including where the new corporation is intended to carry on the same activities as the dissolved corporation.

The court may also order that the directors and shareholders of the dissolved corporation cannot have any beneficial interests in a corporation that substantially conducts the same activities as the dissolved corporation.

Such an order should be imposed only once any other person bound by it has been given an opportunity to be heard by the court prior to sentencing.

8.36 The United States Sentencing Commission’s Guidelines make special provision for organisations that are “operated primarily for a criminal purpose or primarily by criminal means”. In such cases “the fine shall be set at an amount (subject to the statutory maximum) sufficient to divest the organization of all its net assets”. “Net assets” means the assets remaining after the payment of all claims made by “known innocent bona fide creditors”.⁵⁷ Examples of “criminal purposes” include:

a front for a scheme that was designed to commit fraud; an organization established to participate in the illegal manufacture, importation, or distribution of a controlled substance.⁵⁸

a hazardous waste disposal business that had no legitimate means of disposing of hazardous waste.⁵⁹

8.37 If adapted as a sentencing option, a fine aimed at divesting a corporation of all its assets will most likely force it into bankruptcy. It would also ensure that the government in effect received the value of the company’s assets. Divestment could also be adapted to allow the payment of restitution for the benefit of the community or even of more specific victims of the offending conduct. However, such an approach is at best an indirect way of achieving dissolution. Further, the introduction of such “fines” as a sentencing option does not sit well with the view of fines in Chapter 6, since any fines would probably have to be far greater than any statutory maximum to achieve divestment in some cases.⁶¹ The more direct method of dissolving a corporation is, therefore, preferred.⁶² In any case, it is possible (although unlikely) that such a divestment would not be sufficient to prevent future criminal activity by the corporation since the corporate entity remains untouched and could obtain further assets, for example, by way of personal loans or guarantees from its directors, shareholders and related entities.

1. See Chapter 3.

2. See para 8.19-8.28.

3. F L Rush, “Corporate probation: invasive techniques for restructuring institutional behavior” (1986) 21 Suffolk University Law Review 33 at 83.

4. D J Miester, “Criminal liability for corporations that kill” (1990) 64 Tulane Law Review 919 at 946.

5. Rush at 83.

6. See para 6.8-6.11.

7. See Criminal Law and Penal Methods Reform Committee of South Australia, The substantive criminal law (4th Report, 1977) at 357; M Levi, Regulating fraud: white collar crime and the criminal process (Tavistock Publications, London, 1987) at 239; D J Miester, “Criminal liability for corporations that kill” (1990) 64 Tulane Law Review 919 at 946.

8. E Lederman, “Criminal law, perpetrator and corporation: rethinking a complex triangle” (1985) 76 Journal of Criminal Law and Criminology 285 at 335.

9. Miester at 946.

10. F L Rush, “Corporate probation: invasive techniques for restructuring institutional behavior” (1986) 21 Suffolk University Law Review 33 at 84-85.

11. 18 USC §3563(b)(5).

12. R Gruner, “To let the punishment fit the organization: sanctioning corporate offenders through corporate probation” (1988) 16 American Journal of Criminal Law 1 at 45 n 258.

13. Miester at 946.

14. Originally proposed in a Senate bill presented to the United States Congress in 1973; S 1, 93rd Cong, 1st Sess (1973).

15. S 1, 93rd Cong, 1st Sess (1973) §1-441(c)(1). See S A Yoder, “Criminal sanctions for corporate illegality” (1978) 69 Journal of Criminal Law and Criminology 40 at 54.

16. S A Yoder, “Criminal sanctions for corporate illegality” (1978) 69 Journal of Criminal Law and Criminology 40 at 54.

17. Fair Trading Act 1987 (NSW) s 64A.

18. Therapeutic Goods Act 1989 (Cth) s 41(1).

19. 15 USC §78o(b)(4) (the Securities Exchange Act of 1934 (US)). See also S A Yoder, “Criminal sanctions for corporate illegality” (1978) 69 Journal of Criminal Law and Criminology 40 at 54.

20. C A Wray, “Corporate probation under the new organizational sentencing guidelines” (1992) 101 Yale Law Journal 2017 at 2039.

21. See Australian Law Reform Commission, Sentencing: penalties (Discussion Paper 30, 1987) at para 293.

22. Federal Acquisition Regulations §9.406-2.

23. ALRC DP 30 at para 293.

24. See, eg, Supreme Court Rules 1970 (NSW) Pt 42 r 6.

25. Supreme Court Rules 1970 (NSW) Pt 42 r 6. See also, NSWLRC DP 43 at para 13.49-13.56.

26. Australian Consolidated Press Ltd v Morgan (1965) 112 CLR 483 at 501.

27. See J Braithwaite and G Geis, “On theory and action for corporate crime control” [1982] Crime and Delinquency 292 at 307.

28. ALRC DP 30 at 292.

29. ALRC DP 30 at 292; M Jefferson, “Corporate criminal liability: the problem of sanctions” (2001) 65 Journal of Criminal Law 235 at 261; E Lederman, “Criminal law, perpetrator and corporation: rethinking a complex triangle” (1985) 76 Journal of Criminal Law and Criminology 285 at 335.

30. Australian Taxation Office, Submission at 8-9. See also, W B Fisse, “Responsibility, prevention, and corporate crime” (1973) 5 New Zealand Universities Law Review 250 at 252; ALRC DP 30 at 292; Jefferson at 261; S A Yoder, “Criminal sanctions for corporate illegality” (1978) 69 Journal of Criminal Law and Criminology 40 at 54; J Clough, “Sentencing the corporate offender: the neglected dimension of corporate criminal liability” (2003) 1 Corporate Misconduct eZine.

31. Yoder at 54; Jefferson at 261.

32. See para 6.8-6.11.

33. United States Sentencing Commission, Guidelines manual (2002) §8C1.1.

34. F L Rush, “Corporate probation: invasive techniques for restructuring institutional behavior” (1986) 21 Suffolk University Law Review 33 at 87.

35. E Lederman, “Criminal law, perpetrator and corporation: rethinking a complex triangle” (1985) 76 Journal of Criminal Law and Criminology 285 at 335.

36. S Box, Power, crime, and mystification (Tavistock Publications, London, 1983) at 72.

37. See H Croall, White collar crime: criminal justice and criminology (Open University Press, Buckingham, 1992) at 158; See also J Braithwaite and G Geis, “On theory and action for corporate crime control” [1982] Crime and Delinquency 292 at 308.

38. J Coffee, “‘No soul to damn: no body to kick’: an unscandalized inquiry into the problem of corporate punishment” (1981) 79 Michigan Law Review 386 at 412, 418.

39. Corporations Act 2001 (Cth) s 461(1)(k). Previously Corporations Law (Cth) s 461(k).

40. Corporations Act 2001 (Cth) s 462(2).

41. ASIC v Barrack Mortgage Managers Pty Limited [1999] NSWSC 272 at para 5.

42. Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504 at 530-534.

43. Texas Business Corporation Act Art 7.01 s F. See also Texas Non-Profit Corporation Act Art 7.01 s F; and Texas Limited Liability Company Act Art 7.11 s F. Similar proposals were also made in s 6.04 of the United States Model Penal Code: Model Penal Code (Proposed Official Draft 1962) and see S A Yoder, “Criminal sanctions for corporate illegality” (1978) 69 Journal of Criminal Law and Criminology 40 at 54.

44. E Lederman, “Criminal law, perpetrator and corporation: rethinking a complex triangle” (1985) 76 Journal of Criminal Law and Criminology 285 at 334-335.

45. Corporations Act 2001 (Cth) s 5E(1).

46. Corporations Act 2001 (Cth) s 5G.

47. E Lederman, “Criminal law, perpetrator and corporation: rethinking a complex triangle” (1985) 76 Journal of Criminal Law and Criminology 285 at 335.

48. See Corporations Act 2001 (Cth) Pt 2D.6.

49. Corporations Act 2001 (Cth) s 206E(1)(a)(i). See also J Clough, “Sentencing the corporate offender: the neglected dimension of corporate criminal liability” (2003) 1 Corporate Misconduct eZine.

50. Corporations Act 2001 (Cth) s 206E(1)(b).

51. J Clough, “Sentencing the corporate offender: the neglected dimension of corporate criminal liability” (2003) 1 Corporate Misconduct eZine.

52. Cheatle v The Queen (1972) 127 CLR 291; Re Director of Public Prosecutions; Ex Parte Lawler (1994) 179 CLR 270.

53. Cheatle v The Queen at 299 (Barwick CJ), 301 (McTiernan J), 304 (Menzies J) and 310-311 (Mason J), Walsh J dissenting at 307.

54. Re Director of Public Prosecutions; Ex Parte Lawler at 290 (Dawson J).

55. Confiscation of Proceeds of Crime Act 1989 (NSW) s 20, where a third party with an interest in the property to be confiscated may make application for an exemption.

56. Crimes (Sentencing Procedure) Act 1999 (NSW) s 78(1)(c) where persons who are likely to live with the offender during a period of home detention must consent in writing to the making of the home detention order.

57. United States Sentencing Commission, Guidelines manual (2002) §8C1.1, Commentary.

58. United States Sentencing Commission, Guidelines manual (2002), §8C1.1, Commentary.

59. United States Sentencing Commission, Guidelines manual (2002), §8C1.1, Commentary.

60. Confiscation of Proceeds of Crime Act 1989 (NSW); Criminal Assets Recovery Act 1990 (NSW); Proceeds of Crime Act 1987 (Cth); Proceeds of Crime Act 2002 (Cth). See also Australian Law Reform Commission, Principled regulation: federal civil and administrative penalties in Australia (Report 95, 2002) at para 28.20.

61. Compare the proposal for punitive damages in civil matters, M Jefferson, “Corporate criminal liability: the problem of sanctions” (2001) 65 Journal of Criminal Law 235 at 248-249.

62. See J Clough, “Sentencing the corporate offender: the neglected dimension of corporate criminal liability” (2003) 1 Corporate Misconduct eZine.