Section 50 of the ASIC Act – KPMG v Commonwealth

On Tuesday, Hayne J referred to the Full Court a Constitutional challenge to the validity of s 50 of the Australian Securities and Investment Commission Act 2001 (Cth).

Section 50 says:

Section 50 - ASIC may cause civil proceeding to be begun

Where, as a result of an investigation or from a record of an examination (being an investigation or examination conducted under this Part), it appears to ASIC to be in the public interest for a person to begin and carry on a proceeding for:

(a) the recovery of damages for fraud, negligence, default, breach of duty, or other misconduct, committed in connection with a matter to which the investigation or examination related; or
(b) recovery of property of the person;
ASIC:
(c) if the person is a company--may cause; or
(d) otherwise--may, with the person's written consent, cause;

such a proceeding to be begun and carried on in the person's name.

ASIC has initiated proceedings against KPMG for negligence in relation to its auditing of companies in the Westpoint Group, which collapsed devastatingly in 2006.

Those proceedings were lodged on behalf of the company pursuant to s 50.

I haven’t seen the documents but I understand from ASIC press releases that KPMG argue that s 50 purports to compulsorily acquire property – a cause of action – of the company on other than just terms, contrary to s 51(xxxi) of the Constitution. (At least I assume the alleged acquisition is from the ‘company’, a more nebulous argument might suggest the acquisition is from KPMG.)

It’s hard to consider the case properly without the documents but a few matters immediately jump to mind.

First, the argument could only extend to s 50(c) and not to s 50(d), because a ‘method of agreement’, such as consent, is accepted as being ‘just terms’ (John Cook & Co v Commonwealth (1928) 34 CLR 269).

Secondly, this is not an acquisition in the traditional sense. Rather than the Commonwealth expropriating the property from the company, it is forcing the company to use the property in a particular way. That is, it is forcing the company to convert its chose in action into cash by enforcing a claim. So the Government does not receive any proprietary interest in the chose. And there is a real question as to whether there is even any extinguishment of a property right. (NB: section 50 does not permit ASIC to take over proceedings that are already being pursued: Carey v ASIC (2008) 169 FCR 311.)

As Mason CJ, Dean and Gaudron JJ said in Georgiadis v Australian and Overseas Telecommunications Corporation (1994) 179 CLR 297 (at 305):

Accordingly, "acquisition" in s 51(xxxi) extends to the extinguishment of a vested cause of action, at least where the extinguishment results in a direct benefit or financial gain (which, of course, includes liability being brought to an end without payment or other satisfaction) and the cause of action is one that arises under the general law. (emphasis added)

Thirdly, even if there were an acquisition, it is likely that it has been on just terms. This is because ASIC doesn’t keep the proceeds of a claim pursued under s 50, they go back to the Company. So, assuming that there is no unreasonable settlement for less than the amount of the claim, ASIC would be paying the exact right price for the chose in action. Indeed, in the context of liquidation, the conversion that it is enforcing (from claim to cash) is usually financially beneficial to the Company.

So, I don’t consider this to be a strong case for KPMG, but if they were successful, this case would drastically undermine ASIC’s efficacy, not just in relation to enforcing audit negligence but also with respect to a host of other claims, in particular breach of directors’ duties.

In any event it will be interesting for the Court to reconsider the nature of the proprietary interest that a person has in a cause of action, as well as the degree to which regulation of proprietary rights might amount to ‘acquisition’.

[[UPDATE 18/10/2010: post on next hearing here]]