Review of directors’ personal liability

The Ministerial Council for Corporations last week finally agreed on a set of principles by which all Australian states and territories will audit and amend their laws on the personal liability of company directors. The Ministers also agreed on actions to be taken to ensure legislative uniformity between the states and territories.

This follows from the 2006 Corporations and Markets Advisory Committee (CAMAC) report on Personal Liability for Corporate Fault, in which CAMAC expressed concern about the treatment of individuals where a company is in breach of the law. One example of a concern raised in the report is the circumstance where company officers are held personally liable because of their position in the company, but proof of knowledge or involvement in the contravention is not necessarily an essential element. CAMAC found that the wide variety of standards of responsibility and defences available for company officers across Australia made it difficult and unclear for individual officers to assess their responsibilities.

In relation to actions to be taken to ensure uniformity, the Ministerial Council for Corporations agreed that:

• Where a corporation contravenes a statutory requirement, the corporation should be held liable in the first instance
• Directors should not be liable for corporate fault as a matter of course or by blanket imposition of liability across an entire Act
• A “designated officer” approach to liability is not suitable for general application
• The personal criminal liability of 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
  • 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 offending
    • there are steps that a reasonable director might take to ensure a corporation’s compliance with the legislative obligation
• 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
• In addition, in some instances, it may be appropriate to require directors to prove that they have taken reasonable steps to prevent the corporation’s offending if they are not to be personally liable

In relation to the review and amendment of existing laws, the Ministers agreed that:

• A legislative review by each jurisdiction to identify those existing offences for which directors’ liability, or removal of that liability, is appropriate in accordance with above principles
• Harmonisation following cross-jurisdictional comparison in key policy areas
• A harmonised legislative approach to provisions imposing directors’ liability around key concepts and definitions, including the clarification of the term “director” and matters raised by the panel
• Greater clarity about the offences for which directors may be liable through a specific listing or schedule approach

These proposed changes will hopefully provide company officers with a standard of liability across all of Australia and with some certainty regarding the circumstances in which they may become personally liable.

Our Corporate Advisory lawyers will keep you updated with further developments.

Author:  Savvas Apostolou and Louise Tolson