NSW's reform of directors' liability is great news for directors – except for any director or manager whose organisation might fall foul of environmental laws, reinforcing the seriousness with which the Government views these offences.

The Miscellaneous Acts Amendment (Directors' Liability) Bill 2012, which has just been passed by the NSW Parliament, applies to all legislation which contains director and manager liability provisions in NSW, by reducing the number and severity of provisions which make directors and managers liable for the offences of the corporation.

The only Act which retains the more severe director and manager liability provisions is the Protection of the Environment Operations Act 1997 ("Operations Act") because the Government considered that there were compelling public policy reasons for keeping those offences. The offences for which directors and managers may be liable under the Operations Act have now been split into two categories.

Two types of environmental offences

There will be two types of environmental offences:

  • the more severe 19 "special executive liability" offences under the existing section 169, which essentially remains unaltered by the Bill; and
  • the less severe 20 "executive liability" offences under a new section 169A.

"Special executive liability"

Director and manager "special executive liability" applies to the most severe offences. They include all the Tier 1 offences under sections 115-117 of the Operations Act, carrying maximum penalties of $1 million or 7 years' imprisonment or both in the case of an individual and a number of Tier 2 strict liability offences, including, for example, failing to notify a pollution incident (section 152) and pollution of waters (section 120). The listed Tier 2 offences have clearly been viewed by the Government as the more serious offences to attract "special executive liability".

These offences sheet home responsibility for the corporation's offences to the director or manager. This is done by a presumption of responsibility – the prosecution does not have to prove that the director or manager was responsible, as it is presumed.

To avoid liability, the director or manager must prove, on the balance of probabilities, that he or she:

  • was not in a position to influence the conduct of the corporation in relation to its contravention of the provision, or
  • used all due diligence to prevent the contravention by the corporation.

"Executive liability offences"

A new section 169A has been introduced which will deal with an identified list of 20 Tier 2 offences referred to as "executive liability offences". These are less severe, as the prosecution will have to prove all the elements of the offence:

  • the corporation commits an offence; and
  • a director or manager commits an offence if the person knows or ought reasonably to know that the executive liability offence would be or is being committed and
  • the person failed to take "reasonable steps" to prevent or stop the commission of the offence.

"Reasonable steps" includes (but isn't limited to) the following kinds of actions, as is reasonable in all the circumstances:

  • actions towards assessing the corporations compliance with the offence and ensuring that the corporation arranged regular professionals assessment of its compliance;
  • actions towards ensuring that the corporation's employees are provided with information and training to enable them to comply with provision creating the offence;
  • action towards ensuring that plant and equipment and work systems relevant to compliance with the provision are appropriate in all circumstances;
  • action towards creating a corporate culture that does not encourage, tolerate or lead to non-compliance.

These factors essentially reflect good corporate governance and due diligence.

Accessorial offences

A new section 169B imposes accessory offences, such as:

  • aiding and abetting the commissioning of the offence;
  • inducing the commission of the offence by threats or promises; or
  • conspires to effect the commission of the corporate offence.

This section applies to both "special executive liability" and "executive liability".

What do you need to do now?

As we've noted over the years, there is more enforcement of environmental offences, including a clear willingness to go after directors and managers, coupled with the large fines available under the Act – fines which courts are happy to impose – and the increase in directorial liability for environmental offences such as contaminated land under other Acts.

This doesn’t mean directors and managers should panic. In fact, the status quo for Tier 1 offences and a selected number of the more severe Tier 2 offences under the Operations Act, have been maintained. However, the need to maintain good corporate governance remains and directors and managers should ensure:

  • their environmental compliance systems are robust and regularly reviewed and audited;
  • any due diligence or other reasonable steps are done properly;
  • they draw clear lines of responsibility in their organisation; and
  • their directors' and officers' liability cover is up to date and responds to the full range of liability they might face under State and Federal laws.