In good news for insolvency practitioners, the NSW Government formally adopted the Council of Australian Governments guidelines on "Personal Liability for Corporate Fault" as NSW policy on 31 July 2012 .
What are the "Personal Liability for Corporate Fault" guidelines?
COAG developed the guidelines in 2009 to assist in achieving its commitment to deliver a nationally-consistent and principles-based approach to the imposition of personal criminal liability for directors and other corporate officers as a consequence of a corporate offence (Directors' Liability Provisions).
As well as applying the COAG guidelines in the future, existing NSW legislation has been audited against the guidelines and the NSW Government plans to introduce a Bill to implement the audit outcomes later this year.
How does this affect insolvency practitioners?
As insolvency practitioners will be aware, the definition of "officer" of a corporate entity in section 9 of the Corporations Act 2001 (Cth) expressly includes receivers, administrators and liquidators, as well as any person who makes or participates in making decisions that affect the whole or a substantial part of the business of the corporation.
In this way, in addition to their conventional statutory duties as administrators, receivers or liquidators, external administrators are also subject to the same common law and statutory duties (and potential liabilities) as company officers – including, for example, those under Part 2D of the Act and section 18 of the Competition and Consumer Act 2010 (Cth).
More industry-specific, and thus perhaps less apparent, are the thousands of potential offences under State and Territory legislation (including the 1,000 or so NSW offences which were the focus of the NSW Government's audit) for which an officer may become personally liable as a consequence of the corporation's offence.
While COAG's stated aim is to ensure that all Australian jurisdictions and agencies interpret and apply the COAG guideline principles consistently, this note focuses on NSW's recent formal adoption of the guidelines and what that will mean for insolvency practitioners.
Corporate offences in NSW
At present, the majority of corporate offences in NSW legislation provide that, if a corporation commits the relevant offence, directors and persons "who [are] concerned in the management of the corporation" are taken to have personally committed that offence unless those persons can prove that they have taken reasonable steps to prevent the corporation from committing the offence (that is, a "Type 3" Directors' Liability Provision).
In contrast with "Type 1" Directors' Liability Provisions (which require the prosecutor to prove beyond a reasonable doubt that the director or officer failed to take reasonable steps to prevent a company's contravention), "Type 3" Directors' Liability Provisions deem a director to be liable for the corporation’s contravention, and afford the director a defence (of having taken reasonable steps to prevent the contravention by the company) if he or she discharges both the evidential onus of a prima facie case and the legal onus of proving the defence on the balance of probabilities.
Some pieces of NSW legislation also contain Directors' Liability Provisions which apply specifically to "officers" of a corporation (within the meaning of the Act).
An external administrator's potential exposure
When a company enters external administration, the external administrator assumes control of the company's affairs and in consequence becomes substantially involved in the management of the company. Not infrequently, prior to taking office, the external administrator will have limited information in relation to the company's activities and, quite often, little visibility in relation to the company's historic or ongoing non-compliance with statutory obligations.
Where the existing regime imposes potential criminal liability on officers for a company’s failure, for example, "to notify the Long Service Corporation of an employment contract within 7 days after the worker commences" (currently an offence under section 16A of the Building and Construction Industry Long Service Payments Act 1986 (NSW)), it may be difficult in practice for a newly-appointed external administrator to avoid such liability. The position is exacerbated where the onus of proof is reversed because the offence is a Type 3 Directors' Liability Provision.
In NSW, the legislation the subject of the recent review and audit includes legislation in relation to environment and planning, industrial relations, real estate, retail, tax, security activities, gaming, food and drug uses and animal research.
Proposed directors' liability reform in NSW
Neither the COAG guidelines nor the new NSW policy are concerned with civil liability provisions nor with circumstances where directors or other officers personally commit an offence, or are liable as an accessory to the commission of such offence (for example because they "aided, abetted, counselled or procured" the corporation’s offence; or "knowingly authorised or permitted" or were "knowingly involved" or "knowingly concerned" in the offence or some other offence).
The COAG guidelines (and NSW policy) are concerned only with Directors’ Liability Provisions that hold directors and other corporate officers liable because an offence has been committed by the corporation.
Under the proposed reform to directors' liability announced by the NSW Government:
the Government will reduce the number of NSW offences to which Directors' Liability Provisions apply from over 1,000 to less than 150; and
of those that remain, many "Type 3" Directors' Liability Provisions will be replaced with "Type 1" Directors' Liability Provisions, where the "reverse onus of proof" will be removed (ie. the officer is presumed to have taken reasonable steps unless the prosecution can prove otherwise).
The proposed scaling back of Directors' Liability Provisions is good news for insolvency practitioners given the consequential diminution, in NSW at least, of potential exposure to personal liability for (often industry-specific) offences which they may not even be aware of (nor aware of the company's transgression). In that respect, the amendments are to be welcomed.
Of course, external administrators' common law and statutory duties, and potential exposure to a range of civil liability provisions, still remain. Short of becoming overnight experts in multiple fields of commercial activity, insolvency practitioners should be mindful, at least, of the greater potential liability exposure in high-risk industries (such as, for example, operations impacting the environment or industries involving significant operational health and safety requirements).
Ultimately, continuing to trade a business will always give rise to greater potential risk of personal liability. Seeking industry-specific advice, at an early stage, is recommended.