Crypto platform relieved from liability following contraventions of the Corporations Act

A recent Federal Court decision has cast light on when a person found to have contravened a civil penalty provision of the Corporations Act 2001 (Act) may be relieved from liability. The decision demonstrates that the Court will give serious consideration to the fact that the person sought and relied on competent legal advice before engaging in the conduct that was ultimately found to contravene the Act. This is particularly the case where the person is operating in an area of legal uncertainty and complexity.

Contravention judgment

In February 2024, Justice Jackman delivered judgment in ASIC v Web3 Ventures Pty Ltd [2024] FCA 64 (Contravention Judgment). Jackman J found that Block Earner, the operator of an online platform offering various cryptocurrency-related products to its customers, had contravened the Act by:

• carrying on financial services business without an Australian Financial Services Licence (AFSL) (subsection 911A(1) and (5))
• operating an unregistered management investment scheme (section 601ED(5) and (8)).

Both contraventions arose in respect of Block Earner's 'Earner' product, which was available on its platform for eight months before it was voluntarily discontinued.

Penalty judgment

Following the determination of liability, the next stage of the proceedings focused on the amount (if any) of the pecuniary penalty to be paid by Block Earner.

Block Earner applied for relief from liability under section 1317S of the Act on various grounds, including that it did not seek to obtain an improper financial gain by launching or maintaining the Earner product without an AFSL or as an unregistered managed investment scheme, and it obtained legal advice from a law firm regarding the risks of breaching any laws or regulations before launching the product.

Block Earner's application was considered in ASIC v Web3 Ventures Pty Ltd [2024] FCA 578 (Penalty Judgment), delivered on 4 June 2024.

Section 1317S: Relief from liability

Section 1317S(2) of the Act provides as follows:

"If:

(a) eligible proceedings are brought against a person; and

(b) in the proceedings it appears to the court that the person has, or may have, contravened a civil penalty provision but that:

(i) the person has acted honestly; and

(ii) having regard to all the circumstances of the case (including, where applicable, those connected with the person's appointment as an officer, or employment as an employee, of a corporation or of a Part 5.7 body), the person ought fairly to be excused for the contravention;

the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention."

Justice Jackman stated that the question of relief under section 1317S involves three stages of inquiry:

1. whether the applicant for relief has acted honestly
2. whether having regard to all the circumstances the applicant ought fairly to be excused
3. whether the applicant should be relieved from liability wholly or in part, and if partly, to what extent.

Stage one – whether the applicant for relief has acted honestly

In relation to the first stage of the inquiry, the Court observed that a person acts honestly if their conduct is without 'moral turpitude', that is (a) without deceit or conscious impropriety; (b) without intent to gain an improper benefit or advantage; and (c) without carelessness or imprudence that negates the performance of the duty in question.

The Australian Securities and Investments Commission (ASIC) submitted that Block Earner's conduct was so unreasonable as to constitute carelessness or imprudence of such a degree as to permit the Court to find they did not meet the statutory requirement of acting honestly.

The Court however was satisfied that Block Earner acted honestly. The evidence demonstrated that Block Earner made a genuine attempt to comply with the law. At the time the Earner product was launched, Block Earner's director considered whether an AFSL was required to provide the product and formed the view that it was not necessary. It was also relevant that, prior to launching the Earner product, Block Earner obtained legal advice in relation to its products from its external lawyers. This advice led Block Earner to form the view (unchallenged by ASIC in the case) that there was no identified risk that the Earner product would breach any laws or regulations.

Stage two – whether the applicant ought fairly to be excused

This next stage of the inquiry involved a more wide-ranging contextual analysis of the reasonableness of Block Earner's conduct. Block Earner relied on several factors to support its submission that it ought fairly to be excused from liability, including that:

• its conduct should not be characterised as a serious departure from the requirements of the Act
• no investors suffered any loss or damage as a result of the Earner product being provided without an AFSL
• the benefit derived from the operation of the Earner product was modest
• the contraventions arose in an uncertain regulatory environment where government bodies were unsure as to the extent to which the financial product regime in the Act applied to crypto-asset service providers
• it had received adverse media coverage (in the sense that there was unfair or incorrect reporting) as a result of the Contravention Judgment which had affected its legitimate and lawful business
• it had never previously been found by a court to have engaged in similar conduct
• it was and remains an active participant in industry bodies and sought to engage with government and regulatory bodies on effective ways to regulate crypto-related products.

The Penalty Judgment demonstrates the tension in balancing the competing factors for and against relieving a contravener from liability. Jackman J accepted that the provisions contravened had significant public policy foundation and while no investors suffered any loss or damage in this case, the potential risk of loss was real and significant.

Stage three – whether the applicant should be relieved from liability wholly or in part

Considerations at this stage of the inquiry merge with those at the second stage. Jackman J assessed the general deterrence and the public interest of relieving Block Earner wholly or in part, finding that "the widely publicised declarations of contravention are more than adequate for general deterrence and the protection of the public from similar conduct by others".

Against that background, Justice Jackman held that Block Earner should be relieved from liability for a pecuniary penalty under section 1317S. His Honour went on to set out why he would not have ordered any pecuniary penalty even if relief had not been granted under s 1317S. In this case, Jackman J was satisfied that Block Earner ought to be fairly excused for the contraventions because it considered the legal uncertainty in its proposed conduct, obtained legal advice from a competent qualified person, and based on the advice, genuinely concluded that there was no identified risk of it breaching the law.

His Honour also noted that this proposition will not apply in other cases merely because a defendant obtains advice and asserts there was no identified risk of breaching the law – the more unreasonable the conclusion, the more will be required from the defendant.

Takeaways

The finding of a contravention of a civil penalty provision will, in most circumstances, result in a pecuniary penalty being ordered against the contravener. However, that is not a foregone conclusion. Although applications under section 1317S have rarely succeeded, this case demonstrates that there is a narrow path available to defendants found to have contravened the Act to satisfy the Court that they ought fairly be excused from liability. The fact that a defendant relied on competent legal advice will be a significant, but not determinative, factor in the Court's assessment.