At its meeting held on 23 July 2012, the Council of Australian Governments (COAG) agreed to a set of principles and guidelines for the imposition of personal criminal liability on directors and other officers (directors) as a consequence of corporate offences.
COAG agreed that future legislation will comply with the principles, and also that all jurisdictions will review the existing directors' liability provisions in their legislation. If necessary, these existing provisions will be repealed or amended to make them consistent with the COAG principles.
The Commonwealth and a number of States and Territories have moved quickly to review and amend their existing legislation. The Personal Liability for Corporate Fault Reform Act 2012 (Cth) is in operation and the Miscellaneous Acts Amendment (Directors' Liability) Act 2012 (NSW) has received assent, but is yet to commence.
The Directors' Liability Reform Amendment Bill 2012 (Qld), Directors Liability Legislation Amendment Bill 2012 (ACT) and the Directors' Liability (Miscellaneous Amendments) Bill 2012 (Tas) are all currently before their respective Parliaments.
Types of liability
Under the COAG principles there are three types of directors' liability provisions:
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Type 1 provisions require the prosecution to prove every element of the offence. A director will be presumed to have taken reasonable steps to prevent the commission of the offence (and, as a result, not be liable) unless the prosecution proves otherwise.
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Type 2 provisions provide that a director is presumed to be guilty of the offence, unless the director can produce at least enough evidence to suggest that there is a reasonable possibility that the director took reasonable steps to ensure the corporation did not engage in the conduct constituting the offence.
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Once this evidence is produced, the prosecution bears the onus of proving (beyond reasonable doubt) that those reasonable steps were not taken, or that there were other reasonable steps that should also have been taken.
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Type 3 provisions are similar to Type 2, in that they presume that the director is guilty, but to avoid liability, the director is required to prove, on the balance of probabilities, that they took reasonable steps.
A significant feature of the directors' liability Acts and Bills is that some Type 2 and 3 offences have been reduced to Type 1 offences, and some Type 3 offences to Type 2.
It is important to note that the directors' liability amendments do not affect:
- Direct liability: Obviously, directors will continue to be criminally liable for offences committed by them personally. In such cases, the person is not liable because of the office they hold, but because they are the offender.
- Liability as an accessory: Directors will continue to be criminally liable if they have acted as an accessory. The wording of accessorial liability provisions varies, but some Commonwealth Acts provide that a person is liable as an accessory where that person aided, abetted, counselled or procured the offence.
Different jurisdictional approaches
Unfortunately, there are some differences in the application of the COAG principles by the various States and Territories.
For example, with one exception, the NSW Act removes Type 3 provisions from the Acts it amends, while the Queensland Bill retains Type 3 provisions in some Acts.
Also, the NSW Act inserts an express definition of "reasonable steps" into some of the amended Acts – this has not been an approach adopted by other jurisdictions. Nevertheless, it is useful to examine the NSW definition of "reasonable steps", especially for companies operating nationally and seeking to adopt a standard approach across all jurisdictions.
What amounts to "reasonable steps"?
Under the NSW definition, "reasonable steps" includes, but is not limited to, such action (if any) of the following kinds as is reasonable in all the circumstances:
(a) taking steps to:
(i) assess the corporation's compliance with the provision creating the executive liability offence, and
(ii) ensure that the corporation arranged regular professional assessments of its compliance with the provision,
(b) ensuring that the corporation's employees, agents and contractors are provided with information, training, instruction and supervision appropriate to them to enable them to comply with the provision creating the executive liability offence so far as the provision is relevant to them,
(c) ensuring that:
(i) the plant, equipment and other resources, and
(ii) the structures, work systems and other processes,
relevant to compliance with the provision creating the executive liability offence are appropriate in all the circumstances,
(d) creating and maintaining a corporate culture that does not direct, encourage, tolerate or lead to non-compliance with the provision creating the executive liability offence.
Type 1 liability clauses in the Queensland Bill state that in deciding whether things done or omitted to be done by an executive officer constitute reasonable steps, a court must have regard to:
- whether the officer knew, or ought reasonably to have known, of the corporation's conduct constituting the offence; and
- whether the officer was in a position to influence the corporation's conduct in relation to the offence; and
- any other relevant matter.
What should you do now?
It is likely that in most jurisdictions, the directors' liability amendments will reduce the number of Type 3 offences and increase the number of Type 1 provisions which require the prosecution to prove all elements of the offence (including that the director failed to take reasonable steps).
Directors will not be guilty of an offence if they can prove (to the relevant evidentiary standard) that they have taken reasonable steps.
In order to do this, effective governance, risk and compliance (GRC) arrangements are essential. As a minimum, we suggest that GRC arrangements must:
- identify those of a company's legal obligations which give rise to director liability;
- assess and rate such obligations in the context of what they mean for the company and its directors (particularly if these obligations are breached);
- contain steps and controls so that the organisation complies with such obligations;
- be continually monitored and reviewed to ensure that the arrangements are functioning as intended and are actually effective in preventing breaches;
- contain measures to respond to any breaches, rectify them and to prevent further breaches; and
- keep appropriate records of any actions taken so that evidence of reasonable steps can be produced to the regulator, or if necessary, to a court.
In addition:
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the company must communicate and train its personnel on its GRC arrangements; and
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directors must be actively involved in the company's GRC arrangements – including discharging any GRC responsibilities allocated to them under the arrangements, overseeing the effectiveness and performance of GRC arrangements, and setting the company's tone and culture on compliance and actively promoting the required behaviours within the company.
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