As company directors and managers can be personally prosecuted for breaches of environmental laws, it is essential that they are aware of liability under environmental laws and are also up-to-date on how to avoid the risk of prosecution.
Defending a criminal prosecution can also be costly and it is therefore important that directors and managers are aware of how their company deed of indemnity and directors and officers (D&O) insurance can cover them.
Prosecutions by environment protection authorities
With the recent cases in NSW of Environment Protection Authority v Foxman Environmental Development Services; EPA v Botany Building Recyclers Pty Ltd; EPA v Foxman (No 2)[i] and a growing list of other prominent prosecutions, it is clear that directors are increasingly coming under scrutiny by environment protection authorities. With this comes the greater personal risk of penalties (of up to $792,850[ii]) and civil damages awards arising from environmental related contraventions.
Since September 2016, Victoria’s Environment Protection Agency (EPA) has prosecuted 11 matters. In four of those, orders were made against directors personally. These directors were either given a fine of less than $5000 or provided an undertaking to be of good behaviour for 12 months.
Air emissions, waste disposal and operating underground storage tanks are some common areas where companies trip up environmentally – and potentially face major prosecutions as a result.
Directors and officers across a broad range of industries – including manufacturing, property development and construction, and operators of industrial facilities - need to be aware of potential personal liability they may be facing under their state’s environmental laws.
EPA v Foxman
In September 2016, Phillip Foxman and his two companies were convicted and fined a total of $390,000 for six waste offences involving the unlawful transport, deposit and storage of at least 15,900 tonnes of waste material. Mr Foxman was personally fined $250,000.
The offenders also had to pay the EPA’s investigation costs of $4,646, publish a notification of the offences in the Sydney Morning Herald and Inside Waste Magazine and remove the waste within 90 days.
Mr Foxman was found guilty of offences pursuant to the NSW equivalent[iii] of the Victorian Environment Protection Act 1970 (Vic) (Act). The Court determined that the major criminality in this case was on the part of Mr Foxman himself because he was ‘deeply and personally involved in every aspect of the behaviour proven’.[iv]
It’s in the detail
In Victoria, if a corporation by act or omission has broken the law, Section 66B of the Act holds individual directors and those concerned in the management of the corporation to account subject to various statutory defences.
In substance, Section 66B provides that if a corporation contravenes the Act, the directors or persons concerned in the management of the corporation are also guilty of an offence and liable to a penalty.
If a person in a partnership contravenes the Act, the other partners are also guilty and liable to a penalty. Similarly, if a manager of an unincorporated association contravenes the Act, each person concerned in the management is also guilty and liable for a penalty.
Reducing risk – training and compliance
Given the current focus and the growth of environmental litigation, now is a good time for company directors and managers to get up to speed with how they can best avoid an environmental breach – and also what to do if one occurs.
In the event of a breach, directors and managers can help reduce their exposure to penalties in a prosecution by taking a few simple steps.
We suggest three tips to avoid personal prosecutions:
- Ensure that all persons who are directors or concerned in the management of corporations are aware of their liability under relevant environmental laws
- If you are a director or concerned in the management of a corporation, and are in a position to influence the conduct of the corporation, use due diligence to prevent potential breaches of environmental laws by appropriate and regular training so as to minimise exposure
- Ensure that not only directors and senior managers are trained on EPA risks but that a corporate culture that emphasises training and risk management of potential exposures, is put in place.
They must ensure they did not influence the conduct of the corporation in relation to the contravention and also that they used due diligence in their position to try to prevent the contravention.
Indemnity and D&O insurance – are you covered?
If you are a director or officer and are prosecuted for breaches of environmental laws, your legal costs may be covered through a deed of indemnity provided by the company or through D&O insurance. Indemnities and insurance cover directors and officers.
A director is a person who:
a. is appointed to the position of a director; or
b. is appointed to the position of an alternate director and is acting in that capacity; regardless of the name that is given to their position.
An officer of a corporation includes:
a director or secretary of the corporation; or
b. a person:
- who makes, or participates in making decisions that affect the whole or a substantial part of the business of the corporation; or
- who has the capacity to affect significantly the corporation’s financial standing; or
- in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation); or
c. a receiver, or receiver and manager; of the property of the corporation; or
d. an administrator of a deed of company arrangement executed by the corporation; or
e. a liquidator of the corporation; or
f. a trustee or other person administering a compromise or arrangement made between the corporation and someone else.
As noted above, under the Corporations Act, a person concerned in the management of a company, as well as a director, can be personally liable for breaches of the environmental laws. Therefore, persons involved in management will need to consider whether they fall within the definition of an ‘officer’ for the purposes of indemnity and insurance.
It is important that directors and officers understand the scope of their company deed of indemnity. The deed of indemnity usually provides for liability indemnification and advancement of defence costs, as permitted by law.
Section 199A(3)(b) of the Corporations Act limits the extent to which companies can indemnify their directors and officers. A company or related body corporate must not indemnify a person against legal costs incurred in defending an action for a liability incurred as an officer of the company if the costs are incurred in defending or resisting criminal proceedings in which the person is found guilty (emphasis added).
Leckenby v Note Printing Australia Limited
Leckenby v Note Printing Australia Limited  VSC 538 is the leading Victorian authority on the extent to which companies can indemnify their directors and officers.
The Court had to determine whether Mr Leckenby was entitled to be indemnified by NPAL in respect of his ongoing legal costs of defending the criminal proceedings both during the interlocutory and trial stages and prior to any verdict of the jury as to his guilt or innocence.
The Court construed the relevant clause of the deed of indemnity within the context of sections 199A(3)(b) and 212(2) of the Corporations Act.
Relevantly, clause 2.2 of the deed of indemnity provided that:
‘NPAL hereby indemnifies the Officer against each and every liability for legal costs and expenses the officer may incur or for which the Officer may become liable in defending an action for a liability incurred as such an officer of NPAL…’
Clause 2.2(b) included a carve out that mirrored Section 199A(3)(b) of the Corporations Act.
NPAL argued that the right to indemnity arose after verdict. However, the Court held that the right to indemnity arose immediately. The Court recognised the real, practical and substantial burden potentially faced by officers mounting defences in substantial criminal proceedings or regulatory matters. The payment that is able to be made prior to verdict can be a loan, an advance or otherwise.
If a director or officer is prosecuted by the EPA, D&O insurance is likely to cover them personally, to the extent permitted by law. D&O insurance covers them for any personal liability and associated expenses and legal costs arising from an actual or alleged wrongful act or omission by an insured officer or director.
It is important that directors and officers carefully examine the content of their D&O insurance, to ensure that it covers the legal costs of defending a criminal prosecution, and also as to whether the policy gives them choice of legal representation. In any regulatory litigation, EPA or otherwise, it is important to retain suitably experienced lawyers who deal with these types cases.
Take away messages
- Training and compliance - it is important that directors and officers understand the relevant environmental laws, to ensure that they comply and that they promote an appropriate corporate culture – never forget: “tone starts from the top” directors and managers set the “tone” for their company’s conduct
- Pay attention to detail - directors and officers should carefully examine their company deed of indemnity and their D&O insurance in order to understand the scope of cover
- Be proactive – directors and officers should be aware of potential liabilities and the extent to which they are covered, before they are prosecuted and take all the reasonable steps so that the statutory defences can be called upon.