First disqualification order in a competition matter
The global financial crisis demonstrated that the only thing standing between most people and hardship is their job. In addition to macroeconomic conditions, it appears there is now an additional threat to job security in the form of ACCC enforcement action. In a recent Federal Court decision that did not make a big splash in the media, the ACCC quietly shifted the boundaries of competition enforcement by securing its first disqualification order in a competition matter. In October 2014, the Federal Court made an order in Australian Competition & Consumer Commission v Renegade Gas Pty Ltd & Anor  FCA 1135 disqualifying the managing director of one of the respondents from managing a corporation as a result of involvement in cartel activity. These powers have been around since 2007 and there have been a number of disqualification orders made under corresponding provisions of the Australian Consumer Law. However, the application of these powers to a competition scenario is likely to target a different set of managers, namely, those in major companies that have the ability and incentive to engage in conduct that impacts the competitive process. Australia is not alone in having powers to disqualify directors following breaches of the competition rules. A brief global survey reveals that these powers exist in Argentina, Brazil, Colombia, Czech Republic, Hong Kong, Indonesia, Lithuania, Mexico, Russia, Slovenia, Sweden and the UK. A survey commissioned a few years ago by the UK competition authority famously revealed that business respondents ranked director disqualification as the second most effective deterrent for breaching competition law (after criminal penalties). But it appears that these powers are seldom, if ever, used in the countries that have them. It will be interesting to see if the ACCC’s action here is a taste of things to come.
Implications for company managers
If you think about it, this is a very significant development. There is a broad belt of management in Australian business who, having worked for many years to get there are about to enjoy a period of remuneration that will pay off their house, square away some school fees and underpin their wealth in retirement. In this context, the inability to manage a corporation for an extended period has the potential to be hugely disruptive. When the likely difficulty in securing a management role after the period of disqualification is taken into account, the financial impost could be seen as significantly larger than the historical pecuniary penalties for individuals that have contravened the competition prohibitions in the Competition and Consumer Act (CCA). The ACCC is likely to see this as a valuable general deterrent for managers that may be exposed to or tempted by cartel conduct. The ACCC has already filed another claim this year seeking disqualification orders against three individuals for breaches of cartel provisions and it is a safe assumption that such orders will be pursued in circumstances involving serious competition compliance failures. For anyone that thinks this approach is woefully unfair, be careful what you wish for. Jail terms also apply for cartel conduct.
What the case says
The case involved two companies which were found to have a no-poaching understanding, which included each company not supplying liquid petroleum gas cylinders for forklifts to each other’s customers. The individual, who was disqualified from managing companies for a period of 3 years, was the managing director and one of the instigators of the unlawful arrangement. The disqualification order was made pursuant to section 86E of the CCA which is linked to the disqualification provisions in section 206EA of the Corporations Act. In making the order, the Court applied the principles developed in relation to the equivalent disqualification provisions in the Corporations Act. There are a number of matters which have been considered by courts when determining the appropriateness and duration of a disqualification order, including but not limited to:
- whether the order will provide for either general or specific deterrence;
- the seriousness of the breach, including whether it involves dishonesty or has resulted in significant losses;
- the character of the defendant, including whether they have shown contrition for their unlawful acts;
- the structure of the companies and the nature of their business;
- the interests of shareholders, creditors and employees;
- the honesty and competence of the defendant;
- the risk to others from the defendant continuing to manage companies, including the potential harm to the public;
- hardship to the defendant; and
- the likelihood of the defendant reforming or re-offending.
In this case, a key consideration was the managing director was deficient in his understanding of competition law which resulted in an “gravely inadequate understanding of the proper role of a Managing Director and the duty he owed” to the company. By failing to have regard to competition law requirements, he was found to have demonstrated serious incompetnce and irresponsibility resulting in him being a danger to customers and the lawful functioning of markets.
Actions to consider
If you are involved in the management of a company, the case serves as a timely reminder of the importance of being aware of your obligations under the CCA and the substantial risks associated with not fulfilling them. If you are unclear on your obligations, now is a great time to undertake further compliance training (as against waiting for a court to order you to). There is only one clear take away from this development: know the rules and don’t engage in conduct in breach of the competition law. By Rowan McMonnies and Elizabeth Huckerby (Baker & McKenzie Sydney)