Reminder: Fines and penalties generally not provable (s. 553B) – Importance for DOCA proponents looking to restore the company's solvency

13 October 2016

It is useful to revisit the circumstances in which fines and penalties are caught as part of a liquidation or deed of company arrangement (DOCA), given the increasingly regulated environment in which companies operate and the apparent willingness of regulators to impose ever greater fines and penalties for corporate misbehaviour. This is a particularly important consideration for DOCA proponents and other stakeholders who are looking to restore a company’s solvency post-DOCA.

Fines and penalties “imposed by a court”

Section 553B of the Corporations Act 2001 (Cth) provides that “penalties or fines imposed by a court in respect of an offence against law are not admissible to proof against an insolvent company”. The rationale for the exclusion being that a fine should be borne by the company and its shareholders, rather than by creditors whose dividend would otherwise be diminished.

The section is limited in its operation, in that it only applies to a penalty or fine “imposed by a court”. The key inquiry is whether:

  • The relevant legislative framework (which imposes the penalty or fine) establishes a regime by which the regulator can itself trigger a legally enforceable liability for the company to pay the penalty or fine (eg upon an administrative assessment or determination) – in which case the penalty or fine will not be subject to s. 553B.
  • Alternatively, the relevant legislation merely creates a framework for the regulator to make an application to the court, for the court to then impose a legally enforceable liability for the penalty or fine, upon the court being satisfied about the existence of the relevant elements of the offence – in which case the penalty or fine will be subject to s. 553B.
Significance for companies being restructured through a DOCA

Section 553B can be expressly incorporated by the terms of a DOCA.

Where it is incorporated, the courts have made it clear that a penalty or fine within the scope of s. 553B (ie a penalty or fine imposed by court) will not be provable under the DOCA and will not be extinguished when a dividend is paid to creditors under the DOCA: see Australian Winch and Haulage Company Pty Ltd (subject to DOCA) v State Debt Recovery Office (2005) 189 FLR 315. This means that the company will continue to remain liable in respect of the penalty or fine post-DOCA, even if the effect of the DOCA is to restore the company’s solvency. By contrast, where the penalty or fine is not subject to s. 553B (eg where it is imposed administratively), it will be provable against the company and will be extinguished by the DOCA, leaving the company free from the fine or penalty post-DOCA.

In this way, the application of s. 553B to a fine or penalty can have significant implications for a distressed company looking to be restructured through a DOCA, as it effectively means that the company will continue to remain liable for some penalties or fines post-DOCA (ie court imposed penalties or fines), and not liable for others (ie non-court imposed penalties or fines).

The premise for drawing a distinction between court imposed and non-court imposed penalties or fines appears to stem, at least historically, from the idea that it was in the public interest, as a matter of deterrence, to continue to punish companies (even upon insolvency) for stricter court imposed sanctions, but not for lesser administratively imposed sanctions. Arguably, the reason for this distinction has diminishing relevance in circumstances where regulators appear to have a greater ability (through legislative provision) and appetite (through broader mandates) to administratively impose sanctions of substance to deal with serious corporate misbehaviour.

Even so, the importance of the distinction between court imposed and non-court imposed penalties and fines still remains, due to the express wording of the exclusion in s. 553B. Accordingly, DOCA proponents and other stakeholders need to be mindful to carefully analyse the precise nature of any applicable fines or penalties to see exactly how they were imposed, as part of assessing the overall solvency and viability of the company going forward post-DOCA.

This article was written by Sam Dundas, Partner.

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