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Cooper, Jenny --- "Making the penalty fit the crime: the pros and cons of civil penalties as a means of enforcing commercial law" [2016] OtaLawRw 1; (2016) 14 Otago LR 213

Last Updated: 12 January 2018

^{F W Guest Memorial Lecture 2015}

Making the penalty fit the crime: the pros and cons of civil pecuniary penalties as a means of enforcing commercial law

Jenny Cooper^*

Introduction

Before I begin I would like to thank the Dean and the Faculty of Law for inviting me to give this year ’s FW Guest Memorial Lecture. It is a very great honour indeed and a pleasure to be back at my old law school, Otago.

I have chosen to talk about civil pecuniary penalties for three reasons:

• First, they present an obvious problem for discussion. By their very name they purport to be both civil and yet also penal. But can a penalty imposed by the State for a breach of a statutory rule really be considered a civil remedy?

• Secondly, despite this apparent conundrum, civil pecuniary penalties have received relatively little attention or analysis in this country (with some notable exceptions including an excellent article by Shelley Griffiths on penalties under the Tax Administration Act

^{1994,1 and the Law Commission’s comprehensive 2014 Report on}

^{Pecuniary Penalties2).}

• Thirdly, while they are conceptually problematic, civil pecuniary penalties are increasingly prevalent in commercial regulation and appear to have a number of practical benefits. Therefore, it seems worthwhile to examine their pros and cons before attempting to decide whether their increasing use should be welcomed or resisted.

In this lecture I examine some of the issues raised by civil penalties, including the potential application of the New Zealand Bill of Rights Act

1990 and whether people facing a civil penalty have, or ought to have, the same rights as people “charged with an offence”.³ I also consider the practical benefits of civil penalties and, finally, offer some comments on

^* F W Guest Memorial Lecture, presented on 4 May 2016. Jenny Cooper graduated from Otago in 1995 with a BA and LLB(Hons) and then attended Oxford University as a Rhodes Scholar, graduating with an MPhil in International Relations and a BCL. She was previously a partner at Bell Gully and now practises as a barrister, specialising in commercial litigation. She is a member of Shortland Chambers in Auckland.

^{1 S Griffiths “The ‘Abusive Tax Position’ in the Tax Administration Act}

^{1994: An Unstable Standard for a ‘Penal’ Provision?” (2009) 15 NZ J Tax}

^{L & Policy 159.}

^{2 Law Commission Pecuniary Penalties: Guidance for Legislative Design}

^{(NZLC R133, 2014).}

^{3 New Zealand Bill of Rights Act 1990, ss 24, 25.}

^{the circumstances in which the use of civil penalties as an enforcement}

^{mechanism is most appropriate and best able to be justified.}

What are civil pecuniary penalties?

Civil pecuniary penalties were first introduced in New Zealand by the Commerce Act 1986.⁴ Since that time they have been used in a number of statutes including:⁵

• the Biosecurity Act 1993;

• the Takeovers Act 1993;

• the Overseas Investment Act 2005;

• the Unsolicited Electronic Messages Act 2007;

• the Financial Advisers Act 2008;

• the Anti-Money Laundering and Countering Financing of Terrorism

^{Act 2009; and, most recently,}

• the Financial Markets Conduct Act 2013.

The use of civil pecuniary penalties is not unique to New Zealand and they are also found in other jurisdictions, including Australia and the United Kingdom.⁶

The Law Commission’s 2014 paper on civil pecuniary penalties

^{identified three fundamental features of such penalties:7}

They are investigated, sought and imposed by the State for breaches of statutory prohibitions.

They aim to deter breaches by the threat of punishment. They can result in the imposition of a severe penalty.

^{It is immediately obvious that these features do not distinguish civil}

^{penalties from criminal penalties. The distinguishing feature of civil}

^{penalties, therefore, is not so much the nature of the penalties themselves}

^{but rather the process by which they can be imposed, being based on civil}

⁴ See Commerce Act 1986, s 80, which followed the example of the

^{Australian Trade Practices Act 1974, ss 76, 77.}

^{5 For a fuller list see Appendix B to the Law Commission Report, above}

^{n 2. Note also the Tax Administration Act 1994 which permits tax penalties}

^{to be imposed by the Commissioner for Inland Revenue and the Criminal}

^{Proceeds (Recovery) Act 2009 which provides for orders for the forfeiture}

^{of property to be made in civil proceedings if the Court is satisfied on}

^{the balance of probabilities that the property in question was acquired}

^{as a result of, or derived from, significant criminal activity (see ss 10 and}

^{50 of that Act).}

^{6 For a discussion of civil penalties in the UK see RM White “Civil Penalties:}

^{Oxymoron, Chimera and Stealth Sanction” (2010) 126 LQR 593. For a}

^{discussion of the history of civil penalties in Australia see Commonwealth}

^{of Australia v Director, Fair Work Building Industry Inspectorate [2015] HCA}

^{46[2015] HCA 46; , (2015) 90 ALJR 113, 326 ALR 476.}

^{7 Law Commission, above n 2, at [17].}

procedure and rules of evidence. They therefore have some resemblance to exemplary damages, being another form of civil remedy with the purpose of punishment. However, as noted by Blanchard J in Couch v Attorney General, in the case of exemplary damages, the subject of the punishment is the private wrong committed against the plaintiff, not a public wrong against the State and the exemplary damages go to the plaintiff, not to the State.⁸

By way of example, s 80 of the Commerce Act 1986 provides that the Court may, on the application of the Commerce Commission, order a person to pay to the Crown such pecuniary penalty as the Court determines to be appropriate, if it is satisfied that a person has contravened, or has been a secondary party to a contravention of, Part 2 of the Commerce Act, which prohibits restrictive trade practices. Section 80 is silent on whether the penalties it imposes are civil or criminal, and on the standard of proof, and rules of evidence and procedure that apply. However, s 79A, which was introduced to the Commerce Act in 2008, expressly provides that the civil standard of proof applies in proceedings for a pecuniary penalty and that the Commission may obtain discovery and administer interrogatories (which would not be available in a criminal proceeding). Section 79B was introduced at the same time as s 79A and addresses the risk of double jeopardy by excluding the possibility of both criminal proceedings and pecuniary penalty orders against the same person in respect of the same conduct.

As if concerned that the Court may be reluctant to use the power to impose a pecuniary penalty against real people, s 80(2) of the Commerce Act provides that: “The Court must order an individual who has engaged in any conduct ... to pay a pecuniary penalty, unless the Court considers that there is good reason for not making that order.” (emphasis added). The term “individual” is not defined but is clearly intended to mean a real person, as opposed to a body corporate.

Section 80(2A) of the Commerce Act then provides that the Court must have regard to all relevant matters in determining the appropriate penalty, including any exemplary damages awarded, and, in the case of a body corporate, (but, oddly, not a real person), the nature and extent of any commercial gain. Section 80(2B) specifies the maximum amount of any pecuniary penalty as $500,000 for an individual or, for a body corporate, up to the greater of:

• $10 million; or

• three times the value of any commercial gain resulting from the contravention; or

• if the commercial gain cannot be readily ascertained, 10 per cent of the turnover of the body corporate and all of its interconnected bodies corporate.

⁸ Couch v Attorney General [2010] NZSC 27, [2010] 3 NZLR 149 at [58].

Several observations may be made about these provisions:⁹

• Firstly, penalties may only be sought by the regulator (in this case, the Commerce Commission) and are paid to the Crown – they are not a remedy available to ordinary litigants.

• Secondly, the penalties apply to real people as well as body corporates.

• Thirdly, the amount of the penalties is very significant, particularly for corporates. But even the amount for individuals is much higher than the fines available for many criminal offences.

The reason for such high penalties is not so much that anti–competitive conduct is regarded as particularly heinous compared to other breaches of the law, but that the commercial incentives to engage in it are very strong so the penalties must be large enough to not only remove any economic advantage that might be gained but also to create a strong deterrent.¹⁰

Although the details of civil penalty provisions in other statutes vary, they have broadly similar features to the penalties under the Commerce Act 1986. As the fundamental features identified by the Law Commission show, they all have in common the fact that they are fines which may be imposed by the State, (usually through a regulatory body), for conduct in breach of certain statutory provisions following proceedings in which the civil standard of proof and rules of procedure and evidence apply.

The application of the civil standard and rules, rather than criminal, immediately begs the question of why a person accused of, for example, anti-competitive conduct and facing a penalty of up to $500,000 does not have the same rights and privileges as a person accused of failing to keep their dog under control and facing a fine of up to only $3,000. This issue has received little attention in the New Zealand case law, no doubt because the relevant statutory provisions in most cases make it clear that Parliament’s intention is that the civil standard and rules should apply.

The relationship between civil penalties and the criminal law received some consideration in Black v R.¹¹ In that case the Court of Appeal had to determine whether a proceeding under the Proceeds of Crime Act

1991 resulting in an order forfeiting property to the Crown was a civil or criminal proceeding.¹² Their conclusion was that, despite the application being civil in form, a forfeiture order was “part of the criminal justice process”.¹³ The Court’s reasoning was based on its view that the purpose

⁹ For example, the offence of failing to keep a dog under control is punishable by a maximum fine of only $3,000. See Dog Control Act 1996, s 53(1).

¹⁰ For a discussion of the rationale behind Commerce Act penalties see B Hamlin, M Connell and M Sumpter “Fixing the Price of Commerce Act Breaches” [2011] NZLJ 230.

^{11 Black v R (1997) 15 CRNZ 278 (CA).}

^{12 This question was relevant to the application of appeal rights under the}

^{New Zealand (Appeals to the Privy Council) Order 1910.}

^{13 Black v R, above n 11, at p 280.}

^{of the forfeiture provisions was deterrence and punishment and that the}

^{“form of the proceeding cannot be allowed to dictate the substance”.14}

^{In principle, one would expect this approach to apply equally to the}

^{question of defendants’ rights in civil penalty cases, at least to the extent}

^{that such rights are not clearly removed by the terms of the relevant}

^legislation.

This issue has received greater judicial attention in Australia where a number of decisions have held that defendants in proceedings for civil penalties are entitled to certain protections not normally available to civil litigants, although the effect of these decisions has subsequently been curtailed by legislation. For example, in Rich v Australian Securities

& Investments Commission (Rich v ASIC) the High Court of Australia considered whether defendants who were exposed to the risk of being disqualified as directors as a result of civil proceedings brought by the Australian Securities and Investments Commission (ASIC) under the Corporations Act 2001 could be ordered to give discovery. The Court held that no discovery order could be made on the grounds that the common law privilege against being forced to expose oneself to a penalty, (similar to the privilege against self–incrimination), applied. The majority of the Court asserted that “the privilege against exposure to penalty now serves the purpose of ensuring that those who allege criminality or other illegal conduct should prove it.”¹⁵

As a side–note, the status of the common law privilege against self– exposure to a penalty in New Zealand is not clear as it is not included in the Evidence Act 2006. One of the Law Commission’s recommendations in its 2014 Report on Pecuniary Penalties was that consideration should be given to introducing such a privilege into the Evidence Act, which would then apply to civil penalty proceedings unless it was expressly excluded by statute.¹⁶

However, the majority decision in Rich v ASIC in favour of the penalty privilege was subject to a strong dissent by Kirby J. He argued that contemporary economic regulation rejected the rigid classification of provisions as “civil” or “criminal” and said that:¹⁷

... an understanding of the very significant shift in the design of legislative sanctions and remedies to enforce Parliament’s will makes it important that this Court should avoid superimposing on the graduated statutory pyramid of sanctions and remedies any over-simplification inherent in past common law and equitable principles reflected in the penalty privilege.

Following the Rich v ASIC decision, legislative amendments were introduced in Australia to remove the penalty privilege from proceedings

¹⁴ At 281.

^{15 Rich v Australian Securities & Investments Commission [2004] HCA 42, (2004)}

^{[2004] HCA 42; 220 CLR 129 at [24] [Rich v ASIC].}

^{16 Law Commission, above n 2, at [27]–[30].}

^{17 Rich v ASIC, above n 15, at [108].}

for disqualification as a director. Nevertheless, Australian Courts have continued to afford special recognition to the rights of defendants in civil penalty proceedings including: by refusing to order them to provide particulars of their defence; not requiring them to confirm whether they will call evidence; and by imposing stricter disclosure requirements on the regulator, similar to those on a prosecutor.¹⁸

The recent High Court of Australia decision in Commonwealth v Director, Fair Work Building Industry Inspectorate may mark a turning point away from this judicial reluctance to let civil penalties be civil.¹⁹ In this case the Court held that joint submissions by the plaintiff and defendant on an agreed penalty following a settlement were acceptable in civil penalty proceedings, despite judicial authority that they were not permitted in criminal proceedings. The Court justified the departure from the position in criminal proceedings by distinguishing civil penalty proceedings as adversarial in nature, as opposed to criminal proceedings which it described as “accusatorial”.²⁰ It also distinguished the purpose of civil penalties from that of criminal penalties, holding that the primary object of civil penalties is to deter, while the primary object of criminal penalties is to punish.²¹

This reasoning is a complete turnaround from the majority decision in Rich v ASIC, no doubt reflecting a different bench and, perhaps also, a greater level of comfort and familiarity with the idea of civil penalties than had existed 10 years earlier. However, with respect to the High Court of Australia, the distinctions they draw between civil and criminal penalties are not very convincing. First, their reasoning in relation to the adversarial/accusatorial divide is circular. Civil penalty proceedings are only adversarial because they have been labelled as civil proceedings and civil rules have been applied. But the mere act of applying such a label to them says nothing about whether it is appropriate to do so, and does not alter the underlying purpose of the proceedings which is, fundamentally, exactly the same as a criminal proceeding, save that the punishment imposed is not accompanied by a conviction.

While a conviction may have further consequences for an individual, such as disqualification from certain roles, this can also be true of civil penalties. For example, under the Financial Markets Conduct Act 2013 an order banning a person from being a director may be made if a person

¹⁸ See the examples discussed in V Comino “Effective Regulation by the Australian Securities and Investments Commission: The Civil Penalty Problem” [2009] MelbULawRw 27; (2009) 33 MULR 802 and V Comino “James Hardie and the Problems of the Australian Civil Penalties Regime” (2014) 37 UNSWLJ

^195.

^{19 Commonwealth v Director, Fair Work Building Industry Inspectorate, above}

^{n 6.}

^{20 At [20].}

^{21 At [20]–[21].}

^{has been convicted of an offence under financial markets legislation or}

^{if a pecuniary penalty order has been made against them.22}

Secondly, it is impossible to discern any difference between the aims of a civil penalty regime and those of a criminal penalty regime. Deterrence and punishment are simply two sides of the same coin – deterrence is achieved through the threat of punishment and the imposition of a punishment deters future would–be transgressors. In this respect there is no difference at all between a civil penalty and a criminal penalty.²³

Another claim which is sometimes made to distinguish between civil penalties and criminal penalties is that a criminal conviction carries a social stigma whereas a civil penalty does not. While there is something in this distinction, it is not entirely clear–cut. Intuitively, one would expect the degree of social stigma resulting from any proceeding to depend as much on the circumstances of the case, as on whether it is classified as civil or criminal. For example, in his article Corporate Criminal Liability: What Purpose Does it Serve?, VS Khanna gives the hypothetical example of Exxon and Shell each receiving $200 million fines for breaches of environmental regulations in different jurisdictions, one under a criminal regulatory regime and the other under a civil regulatory regime, and suggests that the loss of reputation is unlikely to be materially different between the two.²⁴

To use another illustration, one would expect a greater degree of social stigma to attach to a person who receives a civil penalty for serious unlawful conduct such as insider trading, than to a person convicted of a minor offence such as failing to keep his or her dog under control (assuming that no harm had been done by the dog). Accordingly, it seems safe to assume that both civil penalties and criminal fines can result in social stigma and reputational loss, to a greater or lesser degree, depending on the particular circumstances of the case.

What are the pros and cons of civil pecuniary penalties?

The concept of civil pecuniary penalties as a method of law enforcement is supported by responsive regulation theory which argues that it is impossible for the State to detect and enforce every contravention of the law, therefore regulation must be designed to encourage voluntary compliance and to maximise efficiency through a pyramid model of enforcement.²⁵ This theory was explicitly adopted in the design of the

²² Financial Markets Conduct Act 2013, s 517.

^{23 The Law Commission describes the purpose of pecuniary penalties as}

^{“both deterrent and denunciatory”, above n 2, at 37.}

^{24 VS Khanna “Corporate Criminal Liability: What Purpose Does it Serve?”}

^{(1996) 109 Har L Rev 1477.}

^{25 See the discussion of responsive regulation theory in M Welsh “Civil}

^{Penalties and Responsive Regulation: The Gap between Theory and}

^{Practice” [2009] MelbULawRw 31; (2009) 33 MULR 908.}

^{Financial Markets Conduct Act 2013, which was described by the Minister}

^{of Commerce as creating “an escalating hierarchy of liability”.26}

In accordance with this approach, the enforcement options available under the Financial Markets Conduct Act 2013 include:

• infringement offences for contraventions of administrative–type provisions – these are punishable by fines of up to $50,000 which are able to be imposed by the Financial Markets Authority by notice to the defendant, who has the option to request a hearing if he or she chooses;

• civil remedies, including compensation orders, pecuniary penalties and banning orders, for breaches of substantive provisions likely to cause harm or loss; and

• criminal liability, including the threat of both fines and imprisonment for the most serious cases where a person has knowingly or recklessly contravened the Act.

For example, an offeror may receive a civil penalty if there is a false or misleading statement in a Product Disclosure Statement, whether or not the offeror knew the statement was false or misleading, but will incur criminal liability only if the offeror knew or was reckless as to whether the statement was false or misleading.²⁷ This enables a more nuanced distinction to be made between different levels of culpability than would be possible if only purely civil or purely criminal liability was available, which may arguably assist with both deterrence and enforcement.

Apart from creating an extra step in the enforcement pyramid, the main advantages of civil penalties, (at least in theory), are procedural and stem from precisely the same features that make them concerning to traditionalists. Because the lower civil burden of proof applies, and the usual criminal procedural protections do not, the costs to the State of investigating and bringing proceedings for civil penalties should, in theory, be lower than for criminal penalties with a higher likelihood of success.

However, it is not clear that this theory holds true in practice. The Law Commission’s 2014 Report refers to submissions it received from the Commerce Commission suggesting that it is not necessarily easier for the Commerce Commission to succeed in civil penalty proceedings than criminal.²⁸ There is also evidence that Australian regulators have chosen to bring criminal proceedings more often than civil penalty

²⁶ Cabinet Paper by Minister of Commerce “Securities Law Reform” (February 2011) at [191] <www.mbie.govt.nz/info-services/business/ business-law/financial-markets-conduct-act/cabinet-decisions-february- march-2011>. The pyramid model of enforcement is also explicitly referred to in the Commerce Commission’s Enforcement Response Guidelines (October 2013) <www.comcom.govt.nz/the-commission/ commission-policies/enforcement-response-guidelines/>.

^{27 Financial Markets Conduct Act 2013, ss 510 and 511.}

^{28 Law Commission, above n 2, at [5.35].}

proceedings where both options are available to them.²⁹ Some possible explanations for this are:

• pressure on regulators to be seen to be tough;

• the capacity for civil proceedings to be slowed down by discovery and interlocutory applications; and
• a tendency for the Court to impose a higher burden on the regulator in penalty proceedings, even if they are civil.

However, while some claimed regulatory advantages might not be as significant in practice as theory would suggest, civil penalties have some clear procedural benefits. One is that they can be sought in the same proceedings as other civil remedies, thereby avoiding the need for both criminal and civil trials in respect of the same conduct. Under the Financial Markets Conduct Act 2013, for example, the Financial Markets Authority is able to seek declarations of contravention, compensation for persons who have suffered loss, management banning orders, and pecuniary penalties all in the same proceeding. This is much more efficient than it having to issue parallel criminal and civil proceedings, then have the civil proceedings stayed to await the outcome of the criminal trial, before returning to the civil proceedings once the criminal proceedings have been determined, subject to the issue of whether continuing the civil proceedings is an abuse of process in light of the outcome of the criminal trial.³⁰

Another significant benefit of civil penalties is that they can facilitate settlement, thereby saving time and avoiding trial costs for both parties. Although in most cases a civil penalty can only be imposed by the Court, settlement of civil penalty proceedings is encouraged by the fact that the Court will generally accept a negotiated civil penalty as appropriate and a large number of penalties have in fact been imposed on an agreed basis following settlements.³¹ The approach taken by the Court in such cases was described by Hansen J in Commerce Commission v Alstom Holdings SA as follows:³²

... the task of the Court in cases where penalty has been agreed between the parties is not to embark on its own enquiry of what would be an appropriate figure but to consider whether the proposed penalty is within the proper range ... [T]here is a significant public benefit when corporations acknowledge wrongdoing, thereby avoiding time- consuming and costly investigation and litigation. The Court should play

²⁹ Welsh, above n 25.

^{30 Continuing civil proceedings after a criminal trial may be an abuse of}

^{process in certain circumstances, for example, if the proceedings relate to}

^{allegations of which the defendant has been acquitted – see Johnson v Gore}

^{Wood & Co [2002] 2 AC 1 at 31, cited in Z v Dental Complaints Assessment}

^{Committee [2008] NZSC 55, [2009] 1 NZLR 1 at [63].}

^{31 See the discussion in T Pasley “Regulators’ Penalties and Court Approval”}

^{[2013] NZLJ 136.}

^{32 Commerce Commission v Alstom Holdings SA [2008] NZHC 2127; [2009] NZCCLR 22 (HC) at}

^[18].

its part in promoting such resolutions by accepting a penalty within the proposed range. A defendant should not be deterred from a negotiated resolution by fears that a settlement will be rejected on insubstantial grounds or because the proposed penalty does not precisely coincide with the penalty the Court might have imposed.

In reaching a view as to the proper penalty range the Court takes a sentencing type approach: identifying an appropriate range based on the seriousness and circumstances of the case and then discounting it to take account of any mitigating factors such as cooperation and early settlement.³³ This approach has been welcomed as providing a more transparent and predictable approach to penalties, enabling parties to better know their position in settlement discussions and improving the deterrent value of the penalty regime.³⁴

While accepted in New Zealand, the question of whether submissions as to an agreed penalty should be permissible was, until recently, the subject of some judicial controversy in Australia. Initially it was held, in NW Frozen Food Pty Ltd v Australian Competition and Consumer Commission, that such submissions were appropriate for the same reasons subsequently adopted and relied on in the New Zealand case law.³⁵

^{However, some later Australian decisions raised concerns that:}

• consent to a settlement might be coerced, especially if a defendant has limited resources;

• the absence of a full hearing on the merits and frequent use of agreed penalties made it difficult for the Court to determine whether an agreed penalty was appropriate;

• there was a danger of the Court being seen to rubber stamp decisions taken by the regulatory body which was charged with investigating and prosecuting contraventions; and

• such submissions were a fundamental departure from the judicial function in relation to sentencing.³⁶

As already mentioned, this debate has now been resolved by the High Court of Australia in Commonwealth v Director, Fair Work Building Industry Inspectorate which determined that submissions on an agreed penalty are permissible for civil penalties despite not being permitted for criminal penalties.

³³ See for example Commerce Commission v Alstom Holdings SA, above n 32, Commerce Commission v Geologistics International (Bermuda) Ltd HC Auckland CIV–2010–404–5490, 22 December 2010.

^{34 See Hamlin, Connell and Sumpter, above n 10.}

^{35 NW Frozen Food Pty Ltd v Australian Competition and Consumer Commission}

^{[1996] FCA 1134; (1996) 71 FCR 285.}

^{36 See for example Australian Competition and Consumer Commission v}

^{ABB Transmission and Distribution Ltd [2001] FCA 383, (2001) ATPR}

^{41–815, discussed in Commonwealth v Director, Fair Work Building Industry}

^{Inspectorate, above n 6.}

In those cases where civil penalties are subject to final determination or approval by the Court, even though a settlement has been reached, the risk that the regulator becomes the effective arbiter of what is an appropriate penalty is mitigated by the requirement for Court approval, which also ensures transparency. However, there is greater cause for concern in those cases where Court approval is not required. These include tax penalties under the Tax Administration Act 1994 which can be imposed directly by the Commissioner of Inland Revenue, and undertakings to the Financial Markets Authority (FMA) under s 46A of the Financial Markets Authority Act 2011. Under this section, the FMA can accept an undertaking to pay an amount to the FMA in lieu of a pecuniary penalty, without the need for Court approval. An example of this section being applied in practice is the FMA’s 2015 settlement with Milford Asset Management in which Milford agreed to pay the FMA

$1.1 million in lieu of a pecuniary penalty as well as $400,000 towards the costs of the investigation.³⁷

Section 46A of the Financial Markets Authority Act 2011 expressly requires an undertaking in lieu of a penalty to be published on the FMA’s website, with details of the amount to be paid and a brief description of the circumstances and nature of the alleged contravention, so there is some transparency (although very few details were given in the Milford case due to ongoing proceedings against the individual involved). Nevertheless, the absence of an independent judicial arbiter in the process increases the risk (if only theoretical) that outcomes could be affected by the institutional interests of the regulator and the private interests of the other party with a corresponding risk of detriment to the public interest in consistent and fair enforcement of the law.

Civil pecuniary penalties and New Zealand Bill of Rights Act

Before attempting to weigh up the pros and cons of civil penalties, it is relevant to consider the extent to which they are consistent with the New Zealand Bill of Rights Act 1990 and whether that Act has any potential relevance to the way in which they are applied.

The question of the application of the Bill of Rights Act to civil penalties was considered by Shelley Griffiths in her 2009 article looking specifically at shortfall and abusive position penalties under the Tax Administration Act 1994.³⁸ These differ from the penalties under the Commerce Act 1986 and the other Acts I have referred to because they can be imposed by the Commissioner of Inland Revenue directly without any proceedings. Associate Professor Griffiths argued that, in view of the rights issues raised, it was appropriate for the penalty provisions to be reconsidered by Parliament and that it was “time to reassess whether the exclusion

³⁷ See the Financial Markets Authority “Milford Asset Management to Pay

^{$1.5 Million Following FMA Investigation” (Media Release, MR No.2015-}

^{25, 18 June 2015) <www.fma.govt.nz>.}

^{38 S Griffiths, above n 1.}

^{of criminal protective norms from the shortfall penalties and from the}

^{abusive position avoidance penalty in particular, remains appropriate.”39}

The most relevant sections of the New Zealand Bill of Rights Act are ss 24 and 25 which set out the rights of persons “charged with an offence”. These include:

• the right to receive legal assistance without cost if the interests of

^{justice so require and if the person does not have sufficient means;}

• the right to a fair and public hearing by an independent and impartial court;

• the right to be tried without undue delay;

• the right to be presumed innocent until proved guilty according to law; and
  • the right not to be compelled to be a witness or to confess guilt. Section 26 deals with retroactive penalties and double jeopardy and is

^{also, potentially, equally relevant to civil penalty proceedings. Together}

^{with the privilege against self–incrimination, set out in s 60 of the}

^{Evidence Act 2006, these rights have long been recognised as necessary}

^{safeguards against arbitrary or unfair punishment of individuals by}

^{the State.}

The term “offence” is not defined in the New Zealand Bill of Rights Act. It is therefore possible that the Court could take a purposive approach and define it in a manner that reflects the substance of a provision, rather than relying solely on whether it is expressly described as creating an offence or not. Such a substance–over–form approach has been taken by the European Court of Human Rights in a number of cases, with the Courts in the UK being obliged, reluctantly, to follow suit.⁴⁰ The result is that a person in Europe facing proceedings for a civil penalty may be entitled to rights under the European Convention on Human Rights along the lines of the rights in ss 24 and 25 of the New Zealand Bill of Rights Act.

It is possible that the New Zealand Courts could follow the European case law and treat some civil penalty provisions as creating offences for the purposes of the Bill of Rights Act. However, as the Bill of Rights Act does not enable statutory provisions to be struck down or amended by the Court, this would only be possible where the legislative language allows it. It is likely to be very difficult in statutes such as the Financial Markets Conduct Act 2013 which expressly create criminal offences in addition to the civil penalty provisions and clearly denote them as such. It would be very hard to argue in that case that Parliament’s intention was that the pecuniary penalty provisions should also be treated as offences when it has so clearly distinguished between them.

³⁹ At 180.

^{40 See for example, International Transport Roth GmbH v Secretary of State for}

^{the Home Department [2002] EWCA Civ 158.}

Likewise, where there are express provisions stating that the civil standard of proof applies in proceedings for a pecuniary penalty or that the usual rules of evidence and procedure for civil proceedings apply, (such as in s 509 of the Financial Markets Conduct Act 2013), then these provisions must prevail.

Accordingly, full recognition and application of the rights set out in the Bill of Rights Act to civil penalty proceedings is likely to require the intervention of Parliament. This is unlikely to occur given that a significant part of Parliament’s purpose in making penalties civil appears to be to distinguish them from criminal offences.

In addition, the potential application of these rights in the civil context is problematic. Civil procedure and evidence is not designed to accommodate rights such as the right to be presumed innocent and the privilege against self–exposure. These rights may conflict with various aspects of civil proceedings, such as:⁴¹

• the requirement for particularised statements of defence to be filed

^{before trial;}

• the availability of discovery orders and interrogatories against defendants;

• the requirement for pre-trial service of briefs of evidence;

• the ability to require a defendant to give evidence;

• the inability to rely on the privilege against self-incrimination in civil proceedings by virtue of s 63 of the Evidence Act 200; and
• the use of reverse onuses of proof, presumptions and deeming provisions in many statutes that impose civil pecuniary penalties.

These features of civil procedure also make the Law Commission’s proposal to introduce a privilege against self–exposure to a pecuniary penalty into the Evidence Act problematic.⁴² This would give rise to the same sort of procedural difficulties faced in Rich v ASIC and would remove many of the advantages of being able to pursue civil proceedings rather than criminal.

In any case, even if ss 24 and 25 of the Bill of Rights Act apply, the rights they recognise are not absolute and may be subject to “such reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society”.⁴³ This brings us back to the question of whether there is anything about civil penalties that justifies them being treated differently to criminal penalties.

⁴¹ For example, see s 534 of the Financial Markets Conduct Act 2013 which deems directors of an issuer to be liable for various contraventions by the issuer relating to defective disclosure and makes them liable for a pecuniary penalty.

^{42 Law Commission, above n 2, at 8, paras 27–30.}

^{43 New Zealand Bill of Rights Act 1990, s 5.}

^{Can civil pecuniary penalties be justified?}

For the reasons discussed earlier in this paper, it is difficult to identify any substantive difference in either the purpose or effect of civil and criminal penalties. Therefore, if it is accepted that the procedural protections and rights given to defendants in criminal proceedings are necessary and desirable, there is a strong argument that the same procedural protections and rights should also apply to defendants in civil penalty proceedings.

Against this, there are two possible (partial) justifications for treating civil penalties differently, at least in some circumstances:

• The first is that they are frequently applied to body corporates and the argument in favour of protecting the rights of body corporates is somewhat weaker than it is with regard to the rights of individuals.

• The second is that limitations on the rights of both body corporates and individuals may be justified by the public interest in improving the effectiveness of regulation in certain specialised areas where the actors involved have a high degree of regulatory knowledge and have access to resources to protect themselves against the risk of liability. For example, it might be reasonable to say that forgoing certain rights in the event they are subjected to penalty proceedings is a reasonable price that financial service providers should have to pay in order to operate in the financial services market, and a risk that they are well placed to protect themselves against through good compliance systems, legal advice and insurance.

To expand on the first issue, New Zealand law makes little distinction between body corporates and real people. In most cases, a body corporate can be the subject of both criminal and civil penalties in the same way as a real person. By virtue of s 29 of the New Zealand Bill of Rights Act

1990, the rights recognised by that Act apply, so far as practicable, to legal persons as well as real persons. However, given that it is not possible to imprison them and they have no ability to feel any shame that might be thought to accompany a criminal conviction, the potential harm that may be inflicted by wrongfully imposing liability on a body corporate is less. As noted by VS Khanna in his paper Corporate Criminal Liability, “false convictions of corporations are not as problematic to society as false convictions of individuals”.⁴⁴ He argues that the procedural protections for corporations should therefore be set lower to reflect the lower cost to society of a false conviction. Arguably, therefore, we are entitled to place less weight on the so–called human rights of body corporates than on those of real people.

It can also be argued that body corporates are statutory creations and have only those rights which Parliament has chosen to give them. It is therefore easier to accept that Parliament might chose to limit or remove some rights which prove to be an obstacle to effective regulation. Indeed, one of the reasons why civil penalties have thus far provoked little debate

⁴⁴ See VS Khanna, above n 24, at 1512.

in this country may be the fact that the recipients of such penalties have mostly been big corporations. For example, the largest penalty to date was a penalty of $12 million imposed on Telecom in 2011 for restrictive trade practices under the Commerce Act.⁴⁵ The risks inherent in the power imbalance between the State and a defendant do not appear as great when the defendant is a large corporation with access to large teams of lawyers.

It is also worth noting that Parliament has already drawn a distinction between body corporates and individuals in relation to the privilege against self–incrimination under s 60 of the Evidence Act 2006, which expressly does not apply to body corporates.

Therefore, one possible way to address the inconsistency between treatment of civil and criminal penalties would be to limit civil penalties to body corporates. If it is accepted that criminal procedural protections are less necessary or desirable for corporate defendants, as opposed to real people, then civil pecuniary penalties are a sensible and efficient approach to take to imposing liability on them. Where the defendant is a corporation, a civil penalty may apply. Where the defendant is a real person, a criminal penalty should apply or, at least, a civil penalty should only be applied following a process that includes the same safeguards as a criminal trial.

However, the downsides of drawing such a distinction between individuals and corporate entities in relation to civil penalties are that it would remove the benefits of having civil penalties available against individuals and would require separate proceedings to be brought against a company and its directors in situations where penalties were being sought against both. In addition, many individuals facing a potential penalty may very well prefer to face civil proceedings, rather than criminal proceedings, notwithstanding the lesser procedural protections afforded by the former. This may be for both reputational and practical reasons. For example, the greater potential ability to negotiate a settlement in relation to a civil penalty gives a defendant the opportunity to resolve all aspects of their potential liability, including liability for damages, at the same time.

This brings us to the second possible justification for civil penalties, which is that the abrogation of rights of individuals may be justified where they have chosen to undertake an activity or participate in an industry that is subject to a specific regulatory regime. Arguably, such individuals make a conscious decision to enter into the regulated sphere of activity and are therefore better placed to protect themselves from the threat of liability than the general public undertaking day–to–day activities that might inadvertently lead them into circumstances where

⁴⁵ Commerce Commission v Telecom Corporation of New Zealand Ltd HC Auckland CIV–2004–404–1333, 19 April 2011; upheld by the Court of Appeal in Telecom Corporation of New Zealand Ltd v Commerce Commission [2012] NZCA 344.

they are accused of criminal offending. For example, the directors of a company considering an issue of debt securities should take legal advice on their obligations and are able to ensure they have suitable insurance cover.

This reasoning has some attraction but is by no means a complete answer to the problem. First, it is difficult to apply to all civil penalty regimes. It might apply to conduct by financial market participants under the Financial Advisers Act 2011, Takeovers Act 1993 and Financial Markets Conduct Act 2013, for example, but it is more difficult to apply to the Commerce Act 1986 and the Tax Administration Act 1994 given their very broad application. Secondly, it does not distinguish civil penalty regimes from many criminal provisions which also apply to specific groups of people who have chosen to undertake a particular activity, such as the criminal liability for directors and managers under the Health and Safety at Work Act 2015 or, indeed, for people who chose to own a dog under the Dog Control Act 1996.

Conclusion

Civil pecuniary penalties have real potential benefits in making the enforcement of commercial regulation more efficient and effective. As regulation becomes more complex, and litigation correspondingly more lengthy and expensive, these benefits must be welcomed. However, it is difficult to identify any fundamental difference in purpose or effect between civil and criminal penalties that would provide a principled justification for treating defendants who are exposed to civil penalties differently to those accused of criminal offences. In the absence of any such distinction, it is difficult to counter the argument that long established rights and privileges that apply under the criminal law are being eroded.

Despite this, civil penalties seem to have attracted relatively little negative comment in this country (in contrast to the reaction to the criminalisation of certain breaches of directors’ duties and the proposed, but abandoned, criminalisation of cartel conduct). The absence of protest could mean that those most affected so far do not find civil penalties objectionable, or that they appreciate the advantages of being subject to civil rather than criminal proceedings, or it could simply reflect that, once exposed to the prospect of being subject to a civil penalty, defendants and their advisers do not perceive any likely benefit in debating their taxonomy.

In conclusion, there are reasons to welcome the development of civil penalties as an enforcement mechanism in commercial law, but we should not overlook or lightly dismiss the risk of erosion of individual rights and privileges, even when they are inconvenient and, particularly, where they affect real human beings and not just corporate entities. While it may be the price we are asked to pay for effective commercial regulation, we should stop to ask ourselves from time to time whether the asking price is a fair one.