Federal Court finds getting and acting on legal advice may help avoid civil penalties
07 June 2024
07 June 2024
In a recent decision on penalty, the Federal Court has relieved a crypto asset provider from pecuniary penalties for breaches of the Corporations Act partly as a result of the provider having obtained legal advice in an area of legal uncertainty and (wrongly) concluding that there was no identified risk of a breach of the law.
Relief from liability for breaches of civil penalty provisions is available for Corporations Act and National Consumer Credit Act breaches, and for individuals under the ASIC Act. Essentially, the contravenor must show that:
If so, liability can be excused in whole or part.
There is a similar defence to certain contraventions of the ASIC Act by a corporation where, for example, the contravention was due to reasonable mistake and the defendant took reasonable precautions and exercised due diligence to avoid the contravention.
The jurisdiction to relieve liability is rarely exercised but is important to consider when liability for a civil penalty has been established.
In Australian Securities and Investments Commission (ASIC) v Web3 Ventures Pty Ltd (Penalty) [2024] FCA 578, Jackman J found that a crypto asset provider (Block Earner) should be relieved from liability to pay a pecuniary penalty. Block Earner had previously been found to have (i) provided financial services without a an Australian Financial Services Licence (AFSL) and (ii) operated an unregistered management investment scheme when offering its "Earner" cryptocurrency product for around eight months from March to November 2022. See our previous commentary on the liability decision here.
Jackman J first considered whether Block Earner had acted honestly.
There was unchallenged evidence that at the time of launching the Earner product, Block Earner had at senior levels (CEO, Head of Risk and Compliance) carefully considered whether the Earner product required an AFSL. They concluded that the product aligned with Block Earner's risk appetite, as set out in Block Earner's Enterprise Risk Management Framework, which stated that "Block Earner has no appetite for breaches in laws and regulations").
It was evident from ASIC's evidence, including a written statement Block Earner had been compelled to provide under s 19 of the ASIC Act, that Block Earner had also obtained external legal advice on its legal obligations. Jackman J accepted this as establishing that Block Earner had acted honestly and carefully, notwithstanding that privilege was not waived in the advice. The fact of the advice supported the position that Block Earner had honestly sought to comply with the law and had not identified a risk of non-compliance (given its low risk appetite for compliance breaches).
Given the important question, for the purposes of relief from liability, about whether a person has taken a calculated risk of breach, it is interesting that the Court was prepared to accept that Block Earner had not identified a risk of breach based on the risk appetite statement and the fact of the advice. Legal advice frequently contains qualifications on topics of substantial legal uncertainty. There is a question, which may be pursued in other cases, whether it is manifestly inconsistent with the maintenance of privilege to rely on the fact of legal advice to support the inference that the contravenor did not identify a legal risk, without disclosing the substance of the advice.
Jackman J took account of the following factors in assessing whether it should be excused from penalty:
Ultimately, Jackman J considered that Block Earner ought fairly be excused, particularly as Block Earner obtained legal advice and did not consider that there was any risk in launching the Earner product.
It is worth noting that in any event, the Court would not have ordered a penalty even if relief had not been granted - despite the contravention being "serious" with potential for harm. So these same factors may lead to no penalty being imposed even where relief from liability is not available for a particular civil penalty provision.
Whilst of obvious interest to participants in emerging or technically complex areas of financial services, this decision is of relatively narrow scope due to the lack of any harm arising from the contraventions and the specific product at issue being subject to significant regulatory uncertainty.
Accordingly, obtaining and relying on legal advice is clearly not a panacea in later penalty proceedings, should they arise. There may also be difficulties in relying upon legal advice in such circumstances without waiving privilege. It is notable that Jackman J was willing to place such weight on Block Earner's legal advice without waiver or sight of the advice (which, for example, could have contained qualifications or limitations) and it should not be assumed that all courts would be prepared to do so.
However, the case could nonetheless be relevant in some instances involving difficult or novel questions of compliance alongside contraventions with limited or no prejudicial effect or damage. This highlights the importance of taking legal advice before proceeding in such areas, judging whether to take a particular course having regard to applicable risk appetite statements and keeping a careful audit trail of factors considered and advice obtained, so that the honesty of a party's conduct can be demonstrated to a court if necessary.
Authors: Mark Bradley, Partner; Rani John, Partner; Daniel Pannett, Senior Associate and Claire Potter, Associate.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.