Director liability laws gain steam

Guerdon Associates take a closer look at the Australian government's new draft of personal director liability laws, and what they could mean for you.

The Australian government has released an exposure draft of the proposed Personal Liability for Corporate Fault Reform Bill 2012.

The ED would amend Treasury (non-taxation) portfolio legislation to comply with Council of Australian Government principles that aim to ensure that derivative liability is imposed on directors in accordance with principles of good corporate governance and criminal justice, and is not imposed as a matter of course. A copy of the ED can be found here.

Derivative liability provisions impose criminal liability in situations where directors may not be aware of, or have the ability to prevent, the commission of an offence by the company. They also often require directors to prove their innocence, which is a reverse of the usual situation under the criminal law.

The COAG principles against which director derivative liability provisions are being assessed are:

1. Where a corporation contravenes a statutory requirement, the corporation should be held liable in the first instance.

2. Directors should not be liable for corporate fault as a matter of course or by blanket imposition of liability across an entire Act.

3. A ‘designated officer’ approach to liability is not suitable for general application.

4. The imposition of personal criminal liability on a director for the misconduct of a corporation should be confined to situations where:
- there are compelling public policy reasons for doing so (e.g. in terms of the potential for significant public harm that might be caused by the particular corporate offending);
- liability of the corporation is not likely on its own to sufficiently promote compliance; and
- it is reasonable in all the circumstances for the director to be liable having regard to factors including: the obligation on the corporation, and in turn the director, is clear; the director has the capacity to influence the conduct of the corporation in relation to the offence; and there are steps that a reasonable director might take to ensure a corporation’s compliance with the legislative obligation.

5. Where principle 4 is satisfied and directors’ liability is appropriate, directors could be liable where they:
- have encouraged or assisted in the commission of the offence; or
- have been negligent or reckless in relation to the corporation’s offending.

6. In addition, in some instances, it may be appropriate for directors to prove that they have taken reasonable steps to prevent the corporation’s offending if they are not to be personally liable. It is surprising, to say the least, that these very basic principles have not been followed when enacting legislation in the past. In brief, the amendments proposed by the Bill are:
- Amendments to the Corporations Act that: Modify the penalties to which company secretaries are liable for certain breaches relating to administrative requirements (refer sections 188, 1302, 1317G); Remove explicit references to personal liability for intentional or reckless involvement in the breach of certain duties owed by responsible entities in registered schemes (refer section 601FC); Remove the criminal aspect of some penalties specified for relevant breaches in Schedule 3 of the Corporations Act, but with some civil penalties increased.
- Amendments to the Foreign Acquisitions and Takeovers Act 1975 to clarify the level of involvement required of an officer to trigger personal liability (refer section 31 of the Act)
- Replacement of section 76A of the Insurance Contracts Act 1984 with a new section 11DA, which will impose criminal liability on a director, employee or agent of an insurer who permits or authorises a relevant offence against the Act (instead of the previous ‘intentionally or recklessly permit or authorise’ a contravention of the Act)
- The repeal of section 50 of the Pooled Development Funds Act 1992, which lists offences for which officers or managers of pooled funds are liable.

According to the government’s explanatory comments on the Bill, the scope of the review of director liability provisions has been restricted because, "While quite a number of provisions may, at first glance, appear to be derivative liability provisions, many are in fact a form of accessorial liability, and therefore fall outside the scope of this review”.

Accessorial liability is an officer’s liability for breaches of law by a company where the officer is an accessory to, or otherwise involved in, the breach.

The proposed amendments form the first part of the government’s implementation of the COAG Directors’ Liability Reform Project; a further exposure draft bill covering the second tranche of proposed amendments relating to other Commonwealth legislation is expected to be released for public comment before the end of March 2012.

It will be interesting to see how significant the second tranche of reforms are as a comprehensive review of director liability provisions is warranted.

The closing date for submissions on the exposure draft bill is 30 March 2012.

Guerdon Associates is an independent consulting firm operating from Sydney and Melbourne that provides advice on executive and director remuneration, performance management, governance, and employee equity data and solutions.