Corporate Advisory and Governance Alert: Federal Government proposes changes to directorsí liability regulations - 24 Feb 2012

The Federal Government has released the first exposure draft of the Personal Liability for Corporate Fault Reform Bill 2012, which aims to ensure consistency in the way 'derivative liability' for corporate fault is imposed across Australia. Derivative liability is criminal liability imposed on directors in situations where they are unaware of, or unable to prevent, statutory offences being committed by companies.

Here, partner Brian Moller and associate Jessica McKenzie outline the changes introduced by the Personal Liability for Corporate Fault Reform Bill 2012, and discuss how the Bill will impact on company directors and officers.

Key points

  • The Personal Liability for Corporate Fault Reform Bill 2012 has been drafted to correspond with principles previously agreed to by the Council of Australian Governments (COAG). Those principles aim to ensure that where derivative liability is imposed on company officers, it is done so in accordance with principles of good corporate governance and criminal justice.
  • The Bill amends sections of the Corporations Act 2001, the Foreign Acquisitions and Takeovers Act 1975, the Insurance Contracts Act 1984 and the Pooled Development Funds Act 1992.
  • The proposed changes will change the liability for directors and company secretaries related to the way they carry out their administrative functions under relevant legislation. While the proposed Bill intends to replace criminal penalties for breaches of those functions with civil penalties, it also proposes significant increases in the penalty rates for breaching the civil provisions.

COAG principles

The COAG principles and the proposed Bill are designed to ensure that directors are not held liable for corporate fault as a matter of course, or as a result of a blanket imposition of liability across an entire act. Instead, they provide that personal criminal liability should only be imposed on directors for the misconduct of a corporation in situations where:

  • there are compelling public policy reasons for doing so (eg the potential for significant public harm is high should such an offence occur);
  • the imposition of liability on the corporation itself is not enough to sufficiently promote compliance by directors; and
  • it is reasonable in all the circumstances for the director to be liable, having regard to various factors, including whether:
    - the obligation on the corporation, and in turn the director, is clear;
    - the director has the capacity to influence the corporation's conduct related to the offence; and
    - there are steps that a reasonable director could take to ensure a corporation's compliance.

The principles also provide that derivative liability could be imposed on directors if they have encouraged or assisted the offence, or have been negligent or reckless in relation to the offence.

Key amendments to the Corporations Act 2001

The Corporations Act 2001 gives responsibility for certain administrative functions to company secretaries, and makes secretaries personally liable for non-compliance. The proposed Bill will amend the Act so that breaches of such provisions will be subject to a civil penalty, rather than a criminal one, as it is thought that civil penalties will provide an appropriate incentive for compliance.

Section 319 of the Corporations Act, which imposes strict liability for failing to lodge an annual report with ASIC, is to be repealed completely, and numerous notes are to be included throughout this Act to clarify when criminal liability will apply to an officer following a breach of the relevant provisions.

Amendments will also be made to Schedule 3 of the Corporations Act, which sets out the penalties available for breaches of relevant provisions. Although the proposed Bill will remove the criminal aspect of various provisions of the Corporations Act, it still needs to adequately deter breaches of these provisions. Because of this, there will be a significant increase in the amount of the penalties imposed for breaches.

Key amendments to the Foreign Acquisitions and Takeovers Act 1975, Insurance Contracts Act 1984 and the Pooled Development Funds Act 1992

In order to reflect the agreed COAG principles, the Foreign Acquisitions and Takeovers Act will be amended to clarify the level of involvement required by an officer in order to trigger personal liability. Notes will be appended to section 31 to clarify its application and to specify that criminal liability could be applied to an officer of a corporation if the officer authorised or permitted the offence.

The proposed Bill will repeal section 76A of the Insurance Contracts Act, which imposes a broad brush personal liability on directors, employees or agents of a company for contraventions of this Act. This section is to be replaced by section 11DA, which will impose criminal liability on directors, employees and agents of insurers who authorise or permit a contravention of this Act.

The proposed Bill also plans to repeal section 50 of the Pooled Development Funds Act, which sets out the offences that officers or investment managers are liable for, in order to maintain compliance with the COAG principles.

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