In brief - Proposed reforms to have significant impact on directors, officers and insurers
On 27 January 2012, the Federal Treasurer announced proposed directors' liability reforms and released the exposure draft for the Personal Liability for Corporate Fault Reform Bill 2012. This is the first in a series of proposed legislative reforms that will have a significant impact on directors' and officers' liability. This article takes a look at the reforms, some of the proposed changes to the Corporations Act 2001 (Cth) and the potential impact on D&O insurers.
Directors' and officers' liabilities
The laws relating to liabilities of directors and officers have increasingly become a minefield, with over seven hundred state and federal laws in areas which range from environmental controls to workplace safety regulations.1 The sheer number and complexity of these laws has led to an outcry by many directors, who profess an increasing reluctance to take up positions on boards, with some even considering stepping down from their posts, particularly in the wake of the Federal Court's ruling against the directors of the Centro group of companies.2
A rising concern is that the laws imposing derivative liability on directors are negatively impacting the country's entrepreneurialism and economic growth because directors are compelled to adopt an overly cautious approach, in turn curtailing competitiveness, innovation and profitability.3
Directors' Liability Reform Project
The Council of Australian Governments (COAG) established the Director's Liability Reform Project as part of the 27 deregulation priorities identified by COAG in 2009.4 The Reform Project forms part of COAG's wider National Partnership Agreement to deliver a Seamless National Economy.5
It seeks to "harmonise the approach to imposing personal criminal liability for corporate fault... by requiring jurisdictions to audit their laws against COAG agreed principles and to amend legislative provisions to reflect a truly national approach to imposing personal criminal liability on corporate officers".6 (Please also see our article COAG reports on progress towards seamless national economy.)
Personal Liability for Corporate Fault Reform Bill 2012
On 27 January 2012 the Commonwealth government responded to the Reform Project by releasing the exposure draft of the Personal Liability for Corporate Fault Reform Bill 2012.7 The Reform Bill's amendments focus on derivative liability imposed on directors in cases where they may not be aware or able to prevent the commission of an offence by the company.8 The legislative amendments are set against COAG principles that form the policy behind the amendments.
COAG principles regarding liability of directors and officers for misconduct of corporations
The principles agreed by COAG are:
1. Where a corporation contravenes a statutory requirement, the corporation should be held liable in the first instance.
2. Directors should not be liable for corporate fault as a matter of course or by blanket imposition of liability across an entire Act.
3. A ‘designated officer’ approach to liability is not suitable for general application.
4. The imposition of personal criminal liability on a director for the misconduct of a corporation should be confined to situations where:
a) there are compelling public policy reasons for doing so;
b) liability of the corporation is not likely on its own to sufficiently promote compliance; and
c) it is reasonable in all the circumstances for the director to be liable, having regard to factors including:
– the obligation on the corporation, and in turn the director, is clear;
– the director has the capacity to influence the conduct of the corporation in relation to the offending; and
– there are steps that a reasonable director might take to ensure a corporation’s compliance with the legislative obligation.
5. Where principle four is satisfied and directors’ liability is appropriate, directors could be liable where they:
a) have encouraged or assisted in the commission of the offence; or
b) have been negligent or reckless in relation to the corporation’s offending
6. In addition, in some instances, it may be appropriate to put directors to proof that they have taken reasonable steps to prevent the corporation’s offending if they are not to be personally liable.9
Consistent with these principles, the Reform Bill amends Treasury (non-taxation) legislation,10 specifically provisions in the Corporations Act 2001 (Cth), the Insurance Contracts Act 1984 (Cth), the Foreign Acquisitions and Takeovers Act 1975 (Cth), and the Pooled Development Funds Act 1992 (Cth).
Proposed amendments to the Corporations Act 2001 (Cth)
By way of example, under section 188 of the Corporations Act, company secretaries currently have criminal liability imposed on them for the company's breaches of sections of the Corporations Act. The Reform Bill proposes to transform breaches of this section from an offence to a civil penalty.11
The Reform Bill additionally proposed to expand section 188 to capture section 1302 of the Corporations Act, which provided that a register required to be kept under section 271, except in specific circumstances, is to be kept at the registered office or at an office at the principal place of business in the company's jurisdiction.12 In addition, section 1317G currently provides for significant penalties for contraventions of certain provisions. It too will be amended to provide lesser penalties for contraventions of section 188.13
Additionally, section 601FC of the Corporations Act imposes personal liability for intentional or reckless involvement in breaching specified duties owed by responsible entities in registered schemes.14 The Reform Bill will remove personal liability whilst retaining legal principles of accessorial liability where an individual is involved in the commission of an offence.15
The amendments to the Corporations Act will also see an increase in the number of civil penalties. Schedule 3 provides the civil penalties for breaching relevant provisions of the Corporations Act. While removing the criminal element of some of these breaches, the amendments will increase the maximum civil penalty available for certain contraventions.16
Impact of proposed changes to the Corporations Act on D&O insurers
The proposed changes to the Corporations Act that seek to replace strict liability offences with civil penalty provisions may have an impact on claims under Directors & Officers (D&O) liability insurance.
D&O insurers are precluded from indemnifying an insured director or officer found liable for a criminal offence under the Corporations Act. Most D&O insurance policies provide for the advancement of defence costs, subject to recoupment upon a final adjudication or judgment finding guilt.
In line with the relevant Corporations Act provisions17 and associated public policy considerations, cover provided by D&O insurance policies would generally provide less extensive cover for criminal penalties, as opposed to civil penalties. Counterintuitively, despite the fact that the proposed reform is a win for directors and officers, because it reduces penalties from criminal offences to civil penalties, it may have the effect of placing a potentially greater coverage burden on D&O insurers.
For example, the proposed conversion of section 188 of the Corporations Act would result in a number of contraventions by a corporate secretary changing from criminal offences to civil penalties to which D&O policies are likely to respond, depending on the particular wording of the policy and the relevant facts.
This is only the first of a number of proposed reforms that will have a significant impact on directors and officers as well as their D&O insurers. Both insureds and insurers should stay abreast of these proposed reforms and consider the impact on the insurance cover available in the market.
We will continue to monitor these reforms and bring you further updates when there are new developments.
2 Ibid.; see also ASIC v Healey & Ors  FCA 717
3 http://www.theaustralian.com.au/business/companies/company-directors-win-watered-down-liability-provisions/story-fn91v9q3-1226255764931 (based on comments by Australian Institute of Company Directors' Ian Zakon)
5 Personal Liability for Corporate Fault Reform Bill 2012 - explanatory document http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=2300
6 http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2012/001.htm&pageID=003&min=djb&Year=&DocType quote by The Hon David Bradbury MP
7 Personal Liability for Corporate Fault Reform Bill 2012 - explanatory document http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=2300
8 Personal Liability for Corporate Fault Reform Bill 2012 - explanatory document http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=2300
9 Subsequent to the adoption of these COAG principles in 2009, the Business Regulation and Competition Working Group (BRCWG), which consists of representatives from Commonwealth, State and Territory governments, has developed additional and supplementary guidelines which provide assistance to the various jurisdictions in auditing their legislation to comply with the COAG principles. Ibid.
10 Personal Liability for Corporate Fault Reform Bill 2012 - explanatory document http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=2300
12 Section 1302 however has been repealed by the Personal Property Securities (Corporations and Other Amendments) Act 2010 which became effective at 30 January 2012.
13 Personal Liability for Corporate Fault Reform Bill 2012 - explanatory document http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=2300
16 Ibid; see also Corporations Act 2001 (Cth) s 601FC.
17 See Corporations Act (2001) (Cth) s 199A.