ASIC can continue investigating even though it has commenced proceedings

By Nicholas Mavrakis and Michelle Bakhos.

Key Points:
A recent decision of the NSW Supreme Court considered the extent to which ASIC is entitled to use its statutory powers once it has commenced a prosecution or civil penalty proceeding. And held that ASIC has power to continue its investigations once civil penalty proceedings have commenced provided its dominant purpose in utilising these powers does not lead to a situation where there is a real risk or likelihood that advantages, not available under the rules of Court, would be obtained by ASIC.

A recent decision of the NSW Supreme Court considered the extent to which ASIC is entitled to use its statutory powers once it has commenced a prosecution or civil penalty proceedings. It that ASIC has power to continue its investigations once civil penalty proceedings have commenced provided its dominant purpose in utilising these powers does not lead to a situation where there is a real risk or likelihood that advantages, not available under the rules of Court, would be obtained by ASIC.

The proceedings concerned an ASIC investigation into certain conduct of Elm Financial Services Pty Limited, a financial services licensee. As a result of information received from an anonymous source, on 29May 2003 ASIC commenced an investigation into Elm pursuant to its general powers of investigation under section 13 of the Australia Securities & Investments Commission Act 2001 (Cth). During October 2003, the scope of this investigation widened when ASIC received further complaints from disgruntled investors about Elm.

On 6April 2004, as a result of this investigation, ASIC commenced proceedings against Elm and others, alleging that they had engaged in misleading and deceptive conduct under the Corporations Act, operated an unregistered managed investment scheme contrary to the Act, failed to provide current disclosure documents and gave inappropriate advice to inexperienced investors.

Notwithstanding the commencement of these proceedings, on 3 May 2004 ASIC served:

• a section 19 notice on a Mr Stokes, who was a representative of Elm, to appear before a member of ASIC for examination under oath to answer questions in connection with the investigation; and
• a section 32A notice on Elm to produce documents in relation to a client file relating to one of the investors who dealt with Mr Stokes.

On 5 May 2004, Elm sought an undertaking from ASIC that information obtained from this part of the investigation would not be used against it in the course of the proceedings. ASIC declined to give the undertaking. Elm applied to the Court to restrain ASIC from enforcing these and other related notices.

In support of its application, ASIC contended that:

• the subject matter of the notices directly overlapped with the subject matter of the proceedings;
• ASIC was pursuing the notices to obtain information to aid the Court proceeding and such use of its statutory powers would give ASIC an unfair advantage in the proceeding; and
• ASIC's powers under sections 19 and 32A are spent once civil penalty proceedings the subject of the investigations have commenced.

Elm relied on a line of authority which held that legislation conferring investigatory powers on public authorities, although appearing to have no temporal restriction, may only be exercised during the period up to the commencement of the proceedings (Huddart Parker [1]). The reason for such a limitation is that its use is capable of abrogating a defendant's privilege against self incrimination (Melbourne Steamship [2]). Elm also submitted that there was authority supporting the proposition that exercising a statutory power to obtain information or documents from a party to the proceedings that would not otherwise be available through court processes would be a contempt of Court (Brambles; [3] Pioneer Concrete [4]).

In response, ASIC submitted that there was no statutory or common law principle restricting ASIC's ability to continue its investigation after it had commenced proceedings. ASIC noted that the section 19 notice was not directed at any defendant, and Elm, being a corporate licensee, had no privilege against self-incrimination or exposure to a penalty arising from compliance with the Act. ASIC also submitted that as it could compel Elm to produce the documents the subject of the section 32A notice through the issue of a subpoena or notice to produce and use the documents against the defendants in the proceedings, there was no risk to the administration of justice because, in the course of a wider investigation, ASIC obtains information from non-parties which may be relevant to the proceedings.

Decision

In deciding the case, the Court characterised the issues before it into the following questions:

• A question of power - that is, whether as a matter of statutory construction ASIC's power to use sections 19 and 32A was extinguished once proceedings had commenced; and
• A question of contempt of Court - if ASIC has power to continue with its investigations, should it be restrained from doing so because its purpose was to obtain information for use in a proceeding to which it is a party, such that it gains an advantage over ordinary litigants?

ASIC's power

The Court held that the proper construction of sections 19 and 32A is that ASIC's powers may be exercised for a variety of purposes not dependent upon or connected with the commencement of legal proceedings and that as a matter of statutory interpretation it was unlikely that those powers came to an end upon the commencement of a civil proceeding for contravention. The Court stated that the section should not be read down to prevent ASIC from using its powers against a person other than the defendant in a civil penalty proceeding just because a civil penalty proceeding had commenced. In this case, Mr Stokes was a representative of the defendant and not a party to the proceedings.

Having said that, the Court stated that if the issue had been whether section 19 authorised ASIC to examine persons who are defendants to a prosecution or civil penalty proceeding already underway, it would be unlikely to find that the section confers such a power. The Court reasoned that in an examination under section 19, the privilege against exposure to a penalty is restricted by section 68 of the Act and, except by express words in the statute, Parliament should not be regarded as having extended that advantage to ASIC once it becomes a plaintiff in civil penalty proceedings or a prosecution has commenced.

Purpose

The Court held that the evidence in this case did not support a finding that ASIC wished to continue its investigations for the dominant purpose of gathering evidence for use against the defendants in the proceeding or to gain an advantage in respect of the proceeding that would not otherwise be available to it under the Court rules. The Court held it was not an abuse of its process for ASIC to take advantage of a "legitimate means of obtaining evidence".[5]

Interestingly, the Court used a dominant purpose test, that is, whether the initiating and abiding or substantial purpose of ASIC in seeking to continue its investigation was to obtain information for use in proceedings or to obtain an advantage not available under the rules of Court. By using this test, the Court acknowledged the possibility that information obtained under the notices may be used by ASIC in the proceedings if it satisfies this dominant purpose test.

The Court also noted that insofar as the section 19 notice was concerned, ASIC did not propose to use its statutory powers to abrogate the long standing privilege against exposure to a penalty or the privilege against self-incrimination available to individual defendants under the rules of Court with respect to discovery and interrogatories (and under section 128 of the Evidence Act 1995 (NSW) at the trial). This is because it was not proposed that any of the defendants would be examined under section 19.

Concluding comments

This decision makes it clear that it should not be assumed that ASIC will cease to use its investigatory powers under sections 19 and 32A of the Act once it has commenced civil penalty proceedings. The Court held that as a matter of statutory interpretation, ASIC has power to continue to use its investigative powers after the commencement of proceedings, subject to the proviso that ASIC's powers do not enable it to abrogate the long standing protections of defendants against exposure to a penalty or the privilege against self-incrimination. Nor can it utilise its statutory powers to obtain information that would not ordinarily be available to litigants in order to obtain an advantage in the proceedings, effectively amounting to contempt of Court.

[1] Huddart, Parker & Co Pty Limited v Moorehead (1909) 8 CLR 330

[2] Melbourne Steamship Co Limited v Moorehead (1912)15 CLR 333

[3] Brambles Holdings Ltd v Trade Practices Commission (No 2) (1980) 44 FLR 182

[4] Pioneer Concrete (Vic) Pty Ltd v Trade Practices Commission (1982) 152 CLR 460

[5] Environment Protection Authority v Caltex Refining Co Pty Limited (1993) 178 CLR 477