Proposed amendments


The government has released an exposure draft of the Personal Liability for Corporate Fault Reform Bill 2012, which contains proposed amendments to certain Commonwealth laws governing the derivative liability of directors for offences by their company. The majority of the proposed amendments concern provisions of the Corporations Act 2001, but they also extend to other pieces of federal legislation. The changes constitute the first tranche of amendments to directors' liability laws, with a second tranche expected to be released later in 2012.

The form of liability addressed by the proposed amendments is termed 'derivative liability', as it concerns personal liability of directors and officers for an offence committed by the company in which they hold office, often irrespective of whether the director or officer had knowledge of, or could prevent, the offence. Under Australian law, derivative liability is frequently subject to various defences - for example, that the office holder took all reasonable steps to prevent the offence by the company. Derivative liability is to be distinguished from accessorial liability (ie, an officer's liability for breaches of law by a company where the officer is an accessory to, or involved in, the breach), which is not addressed by the bill.


Wider process of reform
The bill forms part of a wider law reform agreement between the Australian Commonwealth, state and territory governments. The reforms are coordinated by the Council of Australian Governments (COAG), a body established in 1992 to organise activities between the Australian governments. Under COAG's National Partnership Agreement to Deliver a Seamless National Economy, the governments have agreed to reduce the level of "unnecessary" or "inconsistent" regulation across jurisdictions.(1) Given the current discrepancies between derivative liability across Australian jurisdictions, the bill offers a harmonised and simplified approach to the issue, and aims to address a number of further criticisms.

Criticism of directors' liability laws
The laws governing derivative liability of directors for the misconduct of a corporation have long been subject to numerous criticisms.(2) Broadly, the reoccurring concerns include:

  • that excessive worry about liability causes directors to take an overly cautious approach to decision making;(3)
  • that there are difficulties in complying with the differing regimes over multiple Australian jurisdictions (for example, the Institute of Company Directors has stated that there are over 700 laws across Australia that impose personal liability on company directors);(4)
  • that it is unfair to impose liability based on an office holder's position rather than his or her actions;(5) and
  • that it is unfair that there is a presumption of fault in many of the derivative liability laws (such as in Section 188 of the Corporations Act, which is being amended by the bill).(6)

It has also been argued that derivative liability is particularly ill-suited to address the governance of larger and more complex entities, where directors may not be involved in the day-to-day operations of the company and so are not in a position to be aware of or prevent an offence.(7)

COAG principles
In 2009 the Ministerial Council for Corporations (an intergovernmental body established in 1990, which considers amendments to corporations and financial services legislation) agreed to a set of principles that were approved by COAG. Broadly, the COAG principles seek to ensure that personal liability for corporate fault is consistent with principles of criminal justice and good corporate governance.(8) The explanatory material to the bill states that the proposed amendments have been framed against these COAG principles.

Proposed amendments

The proposed amendments affect four pieces of Commonwealth legislation: the Corporations Act 2001, the Foreign Acquisitions and Takeovers Act 1975, the Insurance Contracts Act 1984 and the Pooled Development Funds Act 1992.(9)

Corporations Act
The most significant proposed amendments apply to the provisions of the Corporations Act that impose personal liability on company secretaries and directors for failing to adhere to certain administrative and reporting requirements. These requirements are listed under Section 188 of the act, and include duties such as lodging financial reports and notices with the Securities and Investments Commission. The derivative liability imposed on secretaries for a contravention by their company is strict liability (where there is no need to find fault on behalf of the officeholder).

Although breaches of Section 188 of the act give rise to a criminal offence, the bill will make breaches of the section a civil penalty. The bill will also amend Section 1317G (which provides for substantial penalties for contraventions of the civil penalty provisions) to allow for a lighter penalty to be imposed for liability under Section 188. The explanatory material to the bill explains that this amendment will allow lighter penalties for breaches that do not meet a certain level of seriousness.

The bill also proposes to repeal Subsection 601FC(6) of the act, which imposes personal liability on individuals for intentional or reckless involvement in the breach of specified duties owed by responsible entities of registered management investment schemes. Although this source of personal liability will be repealed, liability may still arise if a person is 'involved' in the responsible entity's breach of duty (Subsection 601FC(5)). This is consistent with the COAG principles, which note that the capacity to influence the conduct of a corporation in relation to an offence is a factor in determining whether it is reasonable to impose personal criminal liability.

Foreign Acquisitions and Takeovers Act 1975
Section 31 of the act provides that where an offence against the act is committed by a corporation, an officer of the corporation who is 'in default' is guilty of an offence and punishable on conviction by the prescribed penalty. The section notes that an officer in default includes an officer who authorises or permits the commission of the offence. The proposed amendments will clarify the level of involvement required to trigger personal liability by confirming that the officer will be liable only if he or she has "authorised or permitted the commission of the offence".


Although the bill will be welcomed by company directors and officers as a first step in the reduction of risk for liability for offences committed by companies, there continues to be strong criticism of the minimal signs of reform by the Australian states and territories in pursuit of the objectives of the COAG principles.(10) It remains to be seen whether the second tranche of amendments to directors' personal liability laws due from the government later in 2012 will go further towards responding to these prevailing concerns.

For further information on this topic please contact Matthew G Latham at Jones Day by telephone (+61 2 8272 0500), fax (+61 2 8272 0599) or email ([email protected]).


(1) Clause 9(a) of the National Partnership Agreement to Deliver a Seamless National Economy (2008) (SNENP). Many of the deregulation priorities under the SNENP have already come to fruition, including creating a consumer policy framework (the Australian Consumer Law commenced at the start of 2011) and establishing a national personal properties security register (which commenced at the start of 2012).

(2) See, for example:

  • "Company Directors' Duties", Senate Standing Committee on Legal and Constitutional Affairs (1989);
  • "Directors' Duties and Corporate Governance", Corporate Law Economic Reform Program Paper No 3 (1997);
  • "Principled Regulation", Australian Law Reform Commission (2002);
  • "Rethinking Regulation: Report of the Taskforce on Reducing Regulatory Burdens on Business", Regulation Taskforce (2006); and
  • "Personal Liability for Corporate Fault", Corporations and Markets Advisory Committee (2006).

Numerous releases by the Australian Institute of Company Directors are also available at

(3) For instance, in a survey of around 600 directors of ASX-200 companies conducted by the Treasury and the Australian Institute of Company Directors, 65% of respondents noted that the risk of personal liability occasionally caused them to take an overly cautious approach to business decision making, with derivative liability laws being considered one of the most significant laws causing this cautious approach. "Survey of Company Directors", Department of the Treasury (December 18 2008).

(4) "Australia's 'seamless economy' reform in tatters", Australian Institute of Company Directors (February 3 2012), available at

(5) See, for instance, "Personal Liability for Corporate Fault", Corporations and Markets Advisory Committee (2006), p1.

(6) Id, p30.

(7) Id, p9.

(8) For instance, one of the COAG principles notes that directors should not be liable for corporate fault as a matter of course or by blanket imposition of liability across an entire act.

(9) This article does not deal extensively with the proposed amendments to the Pooled Development Funds Act 1992 and Insurance Contracts Act 1984. Essentially, the bill will repeal sections in these pieces of legislation which impose personal liability on officeholders for certain offences committed by their corporation.

(10) "Australia's 'seamless economy' reform in tatters", Ibid.