The Federal Court’s Recent Landmark Verdict: Largest-Ever Penalty for Breaching Continuous Disclosure Regulations

Simone Rees, Co-Founder and Principal at Buchanan Rees Dispute Lawyers shares her insight on the Federal Court’s recent landmark verdict.

 

In a significant milestone, the Federal Court has delivered a record-breaking penalty against a corporate entity for its violation of continuous disclosure laws. The verdict mandates that GetSwift Limited remit a staggering $15 million in response to its infringement of s 674(2) of the Corporations Act 2001.

The court’s ruling revolved around GetSwift’s persistent negligence of its continuous disclosure commitments on 22 separate instances spanning from February to December 2017. Among the litany of allegations, the company stood accused of withholding crucial updates regarding substantial contract losses from the market.

Amidst the recent flurry of legal actions capturing headlines, the Australian Securities and Investments Commission (ASIC) has initiated civil proceedings against Noumi Limited, formerly known as Freedom Foods Group. This legal action names not only the company but also its former managing director, CEO, and ex-CFO.

The charges revolve around the alleged suppression of vital information concerning inventory valuations in financial reports for the fiscal year culminating on June 30, 2019, as well as the half-year concluding on December 31, 2019. Similarly, the failure to disclose pertinent data related to sales revenue, gross profit, and post-tax profit in the financial report for the half-year culminating on December 31, 2019, has also come under scrutiny. ASIC contends that these omissions misled investors, directors, and auditors and facilitated a breach of continuous disclosure obligations, resulting from the failure to reveal a substantial write-down.

In another recent case, shareholders of Medibank have embarked on legal proceedings against the private healthcare insurer. Their allegations centre on the alleged concealment of cybersecurity vulnerabilities, a matter highlighted by a massive data breach that compromised the sensitive health records of almost 10 million Australians.

In a parallel development, ASIC has commenced an inquiry into potential breaches of disclosure regulations at ASX Ltd, a prominent share market operator. This probe has been catalysed by the abrupt abandonment of a blockchain-driven overhaul of its trading, clearing, and settlement system, contradicting years of assurances regarding the project’s progress.

These incidents collectively underscore the critical importance of upholding continuous disclosure responsibilities, not solely for corporations but also for their officers and directors.

Understanding the Tenets of Continuous Disclosure Obligations

The essence of the continuous disclosure obligation lies in assessing the materiality of emerging, non-public information related to an entity. Should this information hold material significance with regards to the entity’s share price or value, disclosure to the market is mandated.

This pivotal obligation finds its legal basis within section 674 of the Corporations Act 2001 (Cth).  Any violation constitutes an offence.

Scope of Disclosed Information

The concept of “information” is discussed within the listing rules. It encompasses data necessary to prevent or rectify any false market situations. Additionally, it includes matters of conjecture, insufficiently defined subjects warranting market disclosure, as well as intentions or probable intentions of individuals.

Illustrative instances include:

  • Transactions instigating substantial shifts in the nature or scale of an entity’s operations
  • Material acquisitions or disposals
  • Material licence issuance or revocation
  • Involvement in significant legal disputes
  • Over- or under-subscription to securities offerings

The list is not exhaustive. The legal framework provides for specific exceptions to disclosure obligations, such as situations where disclosing the information would breach the law or when the information classifies as trade secrets.

Deciphering “Material Effect on Price and Value”

Section 677 of the Corporations Act defines material effect on price and value as information possessing the potential to sway individuals who are accustomed to investing in securities, in their decision-making concerning security acquisition or divestment.

The determination of materiality hinges upon judgement and context. Historically, companies have addressed substantial compensation claims in class action suits based on what a rational individual would anticipate. This benchmark, labelled the “reasonable person” standard, required class action members to establish that such an individual would anticipate the information’s capacity to impact share price or entity value.

Notably, establishing “fault” on the entity’s part wasn’t necessary to trigger civil action or ascertain the entity’s knowledge or foresight of the information’s consequential impact.

Evolution in the Face of Legislative Amendments

In August 2021, Parliament ushered in amendments to the continuous disclosure obligation framework, aimed at mitigating the surge in class actions against corporations.

These amendments introduced a “fault” component, with section 674A of the Corporations Act stipulating that an entity must be “knowing, reckless, or negligent” with respect to information’s material impact on an entity’s price or value.

Applicability of Knowledge, Recklessness, or Negligence

Despite the more stringent standards imposed on shareholders seeking civil recourse against companies and their directors or officers, companies, along with their directors and officers, remain obliged to disclose non-public information likely to wield material influence on securities’ price or value. This remains valid even without the need to prove “knowledge,” “recklessness,” or “negligence.”

In instances of criminal sanctions due to non-compliance, the requisites of section 674 requisites hold sway—hinging on the reasonable person test for ascertaining the breach’s material effect on price and value. However, the “knowledge,” “recklessness,” or “negligence” parameter is absent in criminal proceedings against an entity.

Section 674 of the Corporations Act remains relevant when ASIC issues an infringement notice, with no insistence on “knowledge,” “recklessness,” or “negligence” for pursuing administrative measures necessitating administrative penalties.Conversely, section 674A’s requirement of knowledge, recklessness, and negligence applies exclusively to civil penalty proceedings.

A Paradigm Shift in Liability

Companies now face civil compensation or pecuniary penalties exclusively if the plaintiff demonstrates:

  • The company’s awareness of information is pivotal to the market’s well-being.
  • Recklessness or negligence on the company’s part concerning information’s potential to influence price or value.
  • The extent of the courts’ interpretation and engagement with these amendments remains to be seen in the realm of civil penalty proceedings. The divergence between the negligence test and the reasonable person test in deciphering “material” impact promises to be intriguing.
Guiding Principles for Imposing Civil Penalties

The GetSwift case serves as a testament to evolving legal landscapes, especially since the violation predates the March 2019 escalation of maximum penalties. Notwithstanding, Justice Lee laid down the fundamental precepts governing the imposition of pecuniary penalties. Civil penalties serve the primary goal of fostering public interest compliance with relevant legal provisions through deterrence of future contraventions.

Key Insights from Recent Developments

While the path for shareholders to initiate a civil action against a company and its directors or officers may have become more intricate, the onus remains on listed companies and their leadership to reveal information that a rational individual would deem capable of exerting a substantial influence on the price or value of securities. Neglecting this responsibility may lead to ramifications including criminal prosecution, administrative proceedings, and associated penalties.

Furthermore, any company or director that knowingly, recklessly, or negligently participates in withholding significant information from the public domain can potentially be exposed to civil penalties and claims for compensation.

Directors must adhere to their continuous disclosure obligations outlined in sections 674 and 674A of the Corporations Act. Their vigilance is essential to provide the public and investors with comprehensive data, thereby empowering them to make informed decisions regarding investments in the company.


Simone Rees is an established solicitor known for her adept handling of commercial disputes, mediation, and alternative dispute resolution. She practises extensively in the areas of commercial property, trustee and fiduciary duties and also assists clients with insolvency related matters. Consistently recognised in “The Best Lawyers in Australia” for litigation, Simone co-founded Buchanan Rees Dispute Lawyers, a specialist litigation practice with a focus on technical excellence and exceptional client service.  She was recently awarded the exclusive position in Australia of dispute resolution representative by Global Law Experts and is a Global Law Experts Recommended Attorney.