The Personal Liability for Corporate Fault Reform Act 2012 (Cth) (Liability Act) commenced on 11 December 2012. It was intended to implement the Council of Australian Governments’ Director’s Liability reform (COAG Reform). The reform initiative aims to remove regulatory burdens on directors and officers (Ds&Os) that cannot be justified on public policy grounds and to minimise inconsistencies between Australian jurisdictions on the application of personal liability for corporate fault in government laws. Whether the Liability Act achieves this aim, and its impact on D&O liability insurance, will be considered in this article.

The Liability Act

The Liability Act is mainly concerned with derivative liability, that is, where a director or officer is made criminally liable for the acts of the corporation in which they serve. This derivative form of liability arises without the need to establish that these persons either breached the law through their own misconduct or were accessories to the misconduct of their corporation1.

The Act amends a number of laws including the Corporations Act 2001 (Cth) (Corporations Act), the Foreign Acquisition and Takeovers Act 1974 (Cth), the Health Insurance Act 1973 (Cth) and the Insurance Contracts Act 1984 (Cth) (ICA).

It is unclear whether the aims set out in the explanatory memorandum to the Liability Act have been achieved. These are to:

  • remove personal criminal liability for corporate fault where such liability is not justified;
  • remove the burden of proof on defendants to establish a defence to a charge;
  • replace personal criminal liability for corporate fault with civil liability where a non-criminal penalty is appropriate; and
  • where personal criminal liability is justified, to make clear the circumstances where such liability would apply.

This article will concentrate on the amendments to the Corporations Act and the ICA.

The Corporations Act

The amendments to the Corporations Act are, in summary, to:

  • replace the current criminal liability imposed on company secretaries and directors for offences under s 188 which generally relate to administrative defects with a civil liability (s 188);
  • impose a penalty for the breach of the civil liability; and
  • improve the readability and clarity of the provision of the Corporations Act which imposes the liability.

Despite the aims set out above, as pointed out by the Bills Digest, the Liability Act only contains one significant amendment to the Corporations Act, in section 188. The amendment to section 188 maintains derivative liability and a person who wishes to rely on the defence of ‘reasonable steps’ continues to bear the onus of proof.


Section 76A of the ICA has been repealed because it was a blanket liability provision which applied to a number of offences. The section was in contravention of the COAG Principles as it created personal liability for breaches of all relevant offences located elsewhere in the ICA. This was considered inappropriate because it resulted in personal criminal liability being applied by default to breaches of the rest of the ICA, and made the full extent of potential liability for the company breaching a requirement difficult to ascertain. Therefore, it was more difficult for Ds&Os to ascertain the limits of their legal obligations and the required standard of conduct.

A new s 11DA has been inserted which applies personal criminal liability to a more limited range of offences. Section 11DA preserves personal criminal liability in relation to ASIC’s ability to obtain documents, and the supply of false and misleading information to ASIC. Whilst the scope of offences for which personal criminal liability could be imposed has become more limited, the new s 11DA has lowered the bar for the fault element of the offences. Instead of requiring the prosecution to prove that the person “intentionally or recklessly permit[ted] or authorise[d] a contravention of [the] Act by the company” (as under the repealed s 76A), the fault element under new s 11DA is the same as the fault element for the underlying offence for the insurer company (insurer offence) for which personal criminal liability is being imposed. The fault element for the insurer offence under s 11C(2) and s 11D(3) is that “an insurer must not fail, without reasonable excuse, to comply with the requirements of a notice…”. Intentionality or recklessness is not required to be proved.

Is the reform enough?

As discussed in KWM’s Directions 2013 Report (which can be accessed here), the top concern for directors surveyed was an increase in their compliance burden (and their risk of personal liability).

Whilst the Liability Act was intended to address the different standards for director’s fault and responsibilities across various pieces of legislation in order to promote certainty and consistency, as the Bills Digest concludes:

“The tension that this Bill and the accompanying Explanatory Memorandum does not dissolve is that there remain, at the Commonwealth and state levels, many provisions which impose derivative liability on directors, company officers and agents. In fact, at the same time that demand was being made for COAG reform, other Bills were introduced into the Commonwealth Parliament which increase the liabilities of directors in their personal capacity and the tax and corporate law obligations of the companies they represent. It would appear then, that calls for a consistent model law for director liability will continue.”

As set out in the Directions Report, there are a number of key regulatory issues that Ds&Os are concerned with which increase their risk of personal liability. In particular, changes to the occupational health and safety laws which impose new obligations on directors, including an obligation to exercise due diligence to ensure compliance. It seems that whilst, on the one hand, the Government is trying to decrease derivative liabilities for Ds&Os, but on the other hand, they are increasing Ds&Os’ direct liability. This inconsistency is unlikely to foster director confidence.

The COAG Reform has also resulted in legislation being passed in some States and Territories. However, by failing to implement a model provision dealing with derivative liability which could be adopted across both Commonwealth and State and Territory legislation, the aim of consistency and harmonisation has not been achieved.

Implications for D&O insurance

The Liability Act does not insert a new concept of “derivative liability”. Instead, it clarifies the situations which extend the liability of a corporation to an individual. For example, in the Corporations Act, notes have been inserted to refer to the definition of “involved” under s 79 of the Corporations Act to clarify when a person is “involved” in a contravention. “Involved” is defined under the Corporations Act as:

“A person is involved in a contravention if, and only if, the person:

(a) has aided, abetted, counselled or procured the contravention; or

(b) has induced, whether by threats or promises or otherwise, the contravention; or

(c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or

(d) has conspired with others to effect the contravention.”

Most D&O policies contain a conduct exclusion. This exclusion is sometimes driven by s 199B of the Corporations Act which prohibits a company and its related bodies corporate from paying a premium for a contract insuring a person who is, or has been, an officer or an auditor of the company against a liability arising out of:

  • conduct involving a wilful breach of duty in relation to the company; or
  • a contravention of ss 182 or 183 of the Corporations Act - which impose duties on officers and others not to improperly use their position, or information they obtain due to their position, to gain an advantage for themselves or someone else, or to cause a detriment to the corporation.

There is a potential gap between liabilities which are prohibited from coverage under s 199B and the liability which can be imposed on a D&O under the definition of “involved” in the Corporations Act. Ds&Os should consider whether their policy provides coverage for this “gap” where commercially possible.

Further, Ds&Os should consider whether their D&O policy provides coverage for liabilities introduced by the new regulatory reforms. For example, in relation to occupational health and safety law, is there an exclusion under the D&O policy for bodily damage and injury? If so, is there a carve back for a breach of occupational health and safety law? If there is a carve back, what is the scope of the carve back? Does it extend to fines and penalties or defence costs? How does it interact with other exclusions or extensions under the D&O policy?