When a director has been charged with a safety breach - who pays the bill?

By Glen Bartlett.

Key Points:
There are various ways prudent managers and directors can manage the risk.

Personal liability of directors and managers is both clearly possible and has been well articulated in our May edition. A significant question to be asked in these circumstances is: Who is paying the bill?

Risk management is a key role for directors and managers of corporations which inevitably and critically involves ensuring that the corporation, as an employer, provides a safe place of work and meets statutory obligations imposed by relevant safety legislation. If the systems fail and the corporation breaches the safety legislation, managers and directors facing prosecution frequently question what indemnity or insurance is available to them.

Personal liability of managers

Safety legislation in Australian jurisdictions frequently imposes significant personal consequences on directors and managers of corporations where the corporation is guilty of breaching the safety legislation. For example, in Western Australia, a director, officer or manager faces a maximum penalty of $250,000 and two years imprisonment for a first offence under the Occupational Safety and Health Act 1984 (WA) or the Mines Safety and Inspection Act 1994 (WA).

The legislation in each jurisdiction differs, but in regard to personal liability, legislation falls within two broad categories. That is, personal liability of directors and managers arises when the company commits an offence under safety legislation and either:

• the director or manager is deemed to have committed the breach and will only escape liability if they can prove they have no control over the relevant matters or that they had exercised all due diligence; or
• the company's offence occurred with the consent, connivance or due to the neglect of the director or manager.

A director or manager acting on behalf of the corporation may well seek to be indemnified or insured by the corporation for a prosecution, principally because it is almost always that the offence occurred in the performance of their duties, albeit that the performance may have been inadequate or inappropriate.

Indemnity or insurance may be sought to cover both the penalties and the legal fees in defending a prosecution. There are however a number of problems associated with both insurance and corporate indemnities that need to be considered.

Corporate indemnity

Section 199A of the Corporations Act 2001 (Cth) imposes some specific limitations on any indemnity provided by a corporation.

Briefly, indemnity is not allowed:

• when the director or manager did not act in good faith; and
• for legal costs arising from a criminal proceeding in which the person is found guilty.

Therefore, when the director or manager is guilty of the offence, the corporation must not pay for the legal costs of that person but can make payments for the penalty unless the conduct was not in "good faith". Offences that are committed not in good faith are likely to coincide with claims of "gross negligence". Therefore a director or manager guilty of gross negligence will be unable to be indemnified for the penalty or legal costs.

In addition to the Corporations Act, the terms of the corporation's constitution should also be reviewed to determine whether there are further limitations on a corporation's capacity to issue indemnities.

There is significant merit in agreement being reached prior to an accident occurring where indemnity may be sought.

Further, a corporate indemnity will only be of value where the corporation can pay those costs. If the corporation is insolvent or in liquidation following an accident (which is not an unusual experience), seeking or having an indemnity from them is going to be of little use.

Insurance

Many corporations have taken out a Directors' and Officers' Insurance Policy ("D & O Policy") to provide some coverage for directors, officers and some managers. Many D & O Policies exclude claims under mine safety or petroleum safety legislation. In addition to a D & O Policy, there are some "statutory liability insurance" policies available that provide for a wider range of cover.

These policies however usually exclude liability for breaches resulting from any wilful, intentional or deliberate acts, gross negligence or recklessness or any fraud, dishonesty or malice.

Therefore, the most serious offences and maximum penalties may not be covered.

Seeking to manage the risks associated with a statutory prosecution through insurance is certainly wise. Directors and managers should consider the cost of policies, the scope of coverage and the exclusions within any policy as they assess the insurance products available.

It is important to note that there is some criticism (that may lead to future challenges to the application of these policies) based on claims that insurance policies that insure against a fine or penalty are against public policy, specifically that they release individuals from the personal responsibility the legislation places on them. A successful legal challenge by a prosecutor holding that the policy was void would result in a director being personally liable despite their insurance policy.

Risk management action

Prudent directors and managers should manage the risks by:

• being diligent in ensuring that the corporation develops and maintains a sound safety management system and does not breach safety legislation
• exploring with insurance advisers the policies in place and the cost and coverage that may be available to them; and
• formalising corporate indemnity in accordance with the requirements of the Corporations Act prior to any event occurring.

Thanks to Rob Greig for his effort in preparing this article.

For further information, please contact Glen Bartlett.