Directors can’t sleep easily on personal liability reformsDec 2013 |
Much fanfare has been given to the Commonwealth's introduction of thePersonal Liability for Corporate Fault Reform Act 2012(Cth) and to its recently passed Queensland Government relativeDirectors' Liability Reform Amendment Act 2012(Cth) which also resembles similar legislation enacted or planned in other States. The big question is: Do these reforms go far enough?
The reforms covered by the above legislation can be traced back to a 2005 Corporations and Markets Advisory Committee (CAMAC) report and persistent lobbying by the Australian Institute of Company Directors which believed that directors were becoming entrepreneurially reclusive and more concerned about compliance and personal liability so as to represent a major hindrance or distraction to their roles. Risks presented by the innocent breach of the plethora of laws affecting directors was said to be stifling creativity and innovation in directors.
What's the issue?
The issue that a number of commentators have discussed is that both the Commonwealth's directors' liability reform legislation and the State's equivalent only acts to decriminalise director's liability on a selective basis.
Typically, the honest diligent director has nothing to fear from the re-written criminal liability provisions in this reform legislation because those directors will expectedly have one of these defences to raise:
They took all reasonable steps to prevent their company committing an offence or
They did not know or could not reasonably have known the conduct would cause an offence.
For most circumstances, directors now have the comfort that they do not automatically commit an offence if their company commits an offence. However, is this where reform will stop? Will directors be satisfied with no civil liability reform?
The prospects of civil liability reform
Company directors should not wait for the introduction of reforms to change their exposure to civil liability, including civil penalties. Reforming civil liability for directors does not appear to be on any government agenda.
This ultimately means that the liabilities many directors were personally worried about, for example, damages and civil penalties arising from the directors' duties provisions in theCorporations Act 2001(Cth) will remain 'out of bounds' for reform.
The 'big ticket' issues
Excluded from the personal liability reforms was the review of workplace health and safety legislation and environment protection legislation.
In Queensland, in theWork Health and Safety Act 2011(Cth) (WHSA), persons who conduct a business or enterprise, persons who control workplaces and the operation of fixtures, fittings or plant, have a duty of care to employees and others at the workplace to preserve their ongoing health protection and safety to the extent that is reasonable and practical. This duty of care also extends out to a director or officer of a corporation operating a business, workplace or equipment. Basically, directors and officers are required to exercise due diligence to ensure ongoing health and safety at the workplace. The due diligence concept requires a number of reasonable steps to be actively taken in order to allow a director or officer to have a viable defence.
At present, the WHSA creates three categories of offence with corresponding penalties. Corporations are exposed to a maximum penalty of a $3 million fine whilst officers of an offending corporation at the high penalty level can be faced with a $600,000 fine, five years in jail or both.
In Queensland, theEnvironment Protection Act 1994(Qld) (EPA) contains a general environmental duty imposed on anyone who carries on an activity that may cause environmental harm, to take reasonable and practical measures to prevent or minimise environment harm. Offences and penalties arise under the EPA if material or serious environmental harm is caused. For example, s 43 of the EPA imposes a penalty equivalent to $283,050 or two years jail for causing wilful and unlawful environmental harm. Section 493 of the EPA imposes a duty on a corporations' executive officers if their corporation commits an offence. The penalty is the equivalent penalty for an individual committing the same offence. Executive officers have only two defences:
1. Firstly, if they were in an influential position, that they took all reasonable steps to ensure compliance by their corporation or
2. Secondly, that they were not in an influential position to influence the corporation's conduct.
The importance of good habits
It is important to have a robust risk management system working in your company as well as properly structured corporate governance mechanisms and protocols designed to minimise the exposure of directors and executive officers to personal liability, whether criminal or civil. Because the recent director liability reforms are only superficially comforting, directors should be looking to minimise their liability exposure and looking to legal defences if their precautionary safeguards break down Additionally, directors should ensure that their company carries adequate Directors' & Officers' (D&O) insurance, which is intended to be available as a first line of defence in the event a liability surfaces. Unfortunately, D&O insurance is only useful if you don't get convicted of an offence. Also, D&O insurance does not cover civil penalties.
The personal liability reforms enacted for the benefit of directors are superficially comforting for directors, but many will continue to be concerned that there is still some residual exposure to criminal liability. It is not yet known what stance governments will take on personal liability for directors when workplace health and safety legislation, as well as environment protection legislation, is reviewed. The reality is that directors still face ongoing risks for civil liability as part and parcel of their role. Directors should insist on their companies having a robust risk management strategy with relevant corporate governance mechanisms as part of an active survival plan. It is certainly better to be proactive with protective checks and balances in place, then to be reactive after the event.