ASIC v Donald and enforceable undertakings

By Nicholas Mavrakis and Felicity Slater.

Key Points:
The Full Federal Court recently held in ASIC v Donald that although there is no express right to apply to the Administrative Appeals Tribunal for review of a decision of ASIC to refuse to accept an enforceable undertaking, the Tribunal can decide that ASIC should accept an undertaking. This decision has implications for the strategy a financial services provider may formulate in responding to ASIC enforcement action.

Enforceable undertakings

An enforceable undertaking is a written undertaking provided by a company or individual to ASIC, and accepted by ASIC, in connection with a matter that ASIC has a function or power under the ASIC Act (section 93AA of the ASIC Act). It usually sets out the actions the company or individual will take to correct the contraventions, such as paying compensation to affected persons or introducing internal management systems to ensure the contravention is not repeated.

Enforceable undertakings are generally accepted by ASIC as an alternative to civil or administrative enforcement action where there has been a contravention of the legislation it administers, such as the Corporations Act. They are effective tools of enforcement to protect the public interest and to act as a deterrence to future contraventions. If ASIC considers that a company or individual who has given an undertaking has breached any of its terms, it may apply to a court for:

• orders directing the company or individual to comply with a term of the undertaking;
• orders directing the company or individual to pay to the Commonwealth an amount up to the amount of any financial benefit that the company or individual has obtained directly or indirectly and that is reasonably attributable to the breach;
• any other orders the court considers appropriate directing the company or individual to compensate any other company or individual who has suffered loss or damage as a result of the breach.

If ASIC indicates that it will take enforcement action, the corporation or the individual may initially provide ASIC with a draft undertaking for it to consider. ASIC is not compelled to accept the undertaking. It can reject the undertaking and decide to pursue an alternative means of enforcement, such as a banning order, a variation of licence conditions or suspension of a licence. Or it can provide a revised form of undertaking containing terms that are acceptable to it. It is then usually a matter for ASIC and the company or individual to negotiate the terms of the undertaking. ASIC's powers generally give it a strong base from which to negotiate favourable terms.

Review of ASIC decision - ASIC v Donald

In making its decision to reject, accept or negotiate the terms of the undertaking, ASIC is entitled to have regard to whether the undertaking will protect the public and act as deterrence to future similar conduct: ASIC v Whitlam (No.2) (2002) 42 ACSR 515.

The decision of ASIC to accept or reject an undertaking is not a decision that is reviewable by the Administrative Appeals Tribunal. This means that a company or individual adversely affected by a decision of ASIC to reject an undertaking may not present the case on the merits to the Tribunal for a different decision to be made.

However, in the recent case of ASIC v Donald ([2003] FCAFC 318, 23 December 2003), the Full Federal Court had to consider whether, in reviewing a decision by ASIC to impose a banning order against an individual, the Tribunal was able to decide that ASIC should accept a written undertaking from the individual.

The case involved a decision of ASIC made in 1999 to imposed a banning order against a dealer’s representative, Andrew William Donald, pursuant to sections 829 and 830 of the Corporations Law. ASIC declined to exercise its power under section 93AA of the ASIC Act to accept an undertaking offered by Donald.

Donald applied to the Tribunal for review of the ASIC decision.

The Tribunal's role in conducting such a review is to stand in the shoes of the decision-maker and make its own decision. Under section 43 of the Administrative Appeals Tribunal Act 1975 (Cth), the Tribunal, for the purpose of reviewing a decision, "may exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision". If the Tribunal finds that an applicant has failed to comply with the provisions of the Corporations Act, the Tribunal must decide whether the correct and/or preferable decision should involve enforcement action being taken against the applicant: Re Chapel Road Pty Ltd v ASIC (2003) 75 ALD 264.

Donald was successful in his application to the Tribunal. The Tribunal set aside the 1999 banning order, and made another banning order, effective for a shorter length of time than the original order.

Of particular interest, however, was the Tribunal's decision that ASIC should accept an enforceable undertaking from Donald to:

• complete certain courses offered by the Securities Institute;
• co-operate with the ASX and ASIC in the preparation and presentation of seminars on particular subjects;
• undertake not to create a false or misleading of active trading in any securities on a stock market or with the respect to the market for, or the price of, any securities; and
• give a copy of the undertaking to all licensed dealers by whom he was employed during the period of the banning order.

ASIC appealed the Tribunal’s decision to accept Donald's undertaking to the Federal Court. ASIC argued that this was not a decision reviewable by the Tribunal as there was no right to apply for such a review. The court rejected ASIC's arguments and dismissed the appeal. It held that the powers of the Tribunal on review included all the powers that were available to ASIC even though the Tribunal may not have been empowered to review a decision that was open to ASIC to make. Justice Merkel stated that the "power to require the entry into an undertaking was interrelated with the power to impose a banning order, and the Tribunal could exercise that power when reviewing a banning order."

ASIC then appealed Justice Merkel's decision to the Full Federal Court. On appeal, ASIC argued that the Tribunal did not have jurisdiction to review the decision made under section 93AA not to accept an enforceable undertaking from Donald as there was no direct appeal and the Tribunal did not have power to do indirectly that which it could not do directly. ASIC argued that it was Parliament's intention for ASIC to have control over the questions of undertakings, to the exclusion of the Tribunal.

The court disagreed with ASIC and held that the Tribunal had power to accept the undertaking. It held that while there is no right to apply to the Tribunal to review a decision by ASIC not to accept an undertaking, it is open to the Tribunal, just as it was open to ASIC, to treat section 93AA as amongst the powers available to it, providing it does so only for the purpose of reviewing the reviewable decision that was made by ASIC.

The court observed that:

• It is difficult to believe that Parliament intended to place the Tribunal in a situation in which, if it thought that a banning order was too severe a penalty for the conduct of the person concerned, it would have to impose no penalty at all, because it had no power to bring about the acceptance of an undertaking; and
• Although the jurisdiction of the Tribunal is found in the conferral of powers of review by individual Acts of Parliament, the decisions which the Tribunal may make when it has substantive jurisdiction, under section 43 of the AAT Act, includes the exercise of all the powers and discretions which the original decision-maker had. In this case, that included the power to decide whether or not the undertaking should be accepted.

Implications of ASIC v Donald

ASIC v Donald is a relatively straightforward decision of the Full Federal Court in the sense that it followed a long line of reasoning which held that the Tribunal is not confined to the decision-making power upon which the previous decision maker actually relied in making the decision under review, but is armed with all the powers and discretions of the original decision-maker that are relevant to the review.

is a relatively straightforward decision of the Full Federal Court in the sense that it followed a long line of reasoning which held that the Tribunal is not confined to the decision-making power upon which the previous decision maker actually relied in making the decision under review, but is armed with all the powers and discretions of the original decision-maker that are relevant to the review.

However, the decision highlights that in the course of reviewing a reviewable decision, such as a decision to make a banning order, to vary a licence condition or to suspend or revoke a dealers licence, the Tribunal may also consider whether a more appropriate course to be taken is the acceptance of an enforceable undertaking from the individual or company in question.

This means that in formulating a strategy to respond to an ASIC threat of enforcement action, a financial services provider needs to seriously consider whether to offer ASIC an enforceable undertaking, and whether the terms offered are reasonable given the ASIC allegations of contravention. It also means that financial services providers should not give up offering to provide ASIC with an undertaking, if the first undertaking is rejected by ASIC.

This decision may also impact upon ASIC's willingness to accept an undertaking because in considering whether or not to accept that undertaking, or to provide an alternative undertaking with different terms, in light of ASIC v Donald ASIC will be aware that its decision may ultimately scrutinised by the Tribunal.

For further information, please contact Nicholas Mavrakis.