Australia has a huge amount of legislation which imposes obligations and penalties on directors in instances of corporate fault. This article will examine the principles underlying the recently announced corporate fault reforms and the proposed changes to the Corporations Act 2001 (Cth) (the Act) through two recent tranches of draft or proposed legislation.

Underlying Principles

In 2009 the Council of Australian Governments (COAG) agreed on a set of principles to ensure that any imposition of personal liability for corporate fault is consistent with principles of criminal justice and good corporate governance.

The principles agreed upon by COAG are as follows:

  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:
    1. there are compelling public policy reasons for doing so;
    2. liability of the corporation is not likely on its own to sufficiently promote compliance; and
    3. it is reasonable in all the circumstances for the director to be liable, having regard to factors including:
      1. the obligation on the corporation, and in turn the director, is clear;
      2. the director has the capacity to influence the conduct of the corporation in relation to the offending; and
      3. there are steps that a reasonable director might take to ensure a corporation’s compliance with the legislative obligation.
  5. Where the principle in (d) is satisfied and directors’ liability is appropriate, directors could be liable where they:
    1. have encouraged or assisted in the commission of the offence; or
    2. have been negligent or reckless in relation to the corporation’s offending
  6. In addition, in some instances, it may be appropriate to put directors to proof that they have taken reasonable steps to prevent the corporations offending if they are not to be personally liable.

Based on these principles, supplementary guidelines were developed to assist with the audit of legislation relating to directors derivative liability for corporate fault.

Proposed Reform

Based on the audit of relevant legislation, the Government has announced a number of reform proposals which are in exposure draft stage.

First Tranche Exposure Draft

On 27 January 2012, the Government released the Personal Liability for Corporate Fault Reform Bill 2012 (Liability Reform Bill). The Bill proposed changes to Treasury portfolio legislation (excluding tax legislation). The proposed amendments under this Bill seek to impose civil penalties of up to $3,000 on company secretaries and directors for a company's contravention of certain Corporations Act administrative and reporting provisions listed under s 188 (Responsibility of secretaries and directors for certain contraventions) of the Act. These amendments will replace criminal penalties which are currently imposed on the relevant parties and will allow a director or officer to escape liability where they took reasonable steps to ensure that the company complied with its obligations.

Second Tranche Exposure Draft

The Government released a second tranche exposure draft of the Liability Reform Bill on 1 June 2012. The second tranche exposure draft proposes further amendments to non-Treasury portfolio legislation pursuant the COAG reforms, and follows on from the first tranche exposure draft. In particular, the second tranche reform exposure draft seeks to amend provisions in the Classification (Publications, Films and Computer Games) Act 1995, the Corporations (Aboriginal and Torres Strait Islander) Act 2006, the Health Insurance Act 1973, the Therapeutic Goods Act 1989, Veterans' Entitlements Act 1986, the National Vocational Education and Training Regulator Act 2011 and the National Measurement Act 1960 to align more closely with the COAG principles.

Alongside the announcement of the second tranche to the Liability Reforms, the Government indicated its intention to introduce a consolidated Liability Reform Bill, composed of the amendments proposed in the two exposure draft tranches, by the end of 2012.

Next Steps

Submissions for the first and second tranche exposure drafts to the Liability Reforms Bill close on Friday 29 June 2012. The Government will then review submissions and determine whether further review of draft legislation is required before introducing the Bill to Parliament.