Most D&O insurance policies cover directors “to the extent permitted by law”. A recent ACCC cartel case shows that cover is unlikely to be available for serious civil penalties imposed on individuals.

    Serious commercial misconduct — like cartel behaviour — rightly attracts significant penalties against the companies and individuals involved. In Australia, penalties for cartel behaviour are not restricted to criminal fines. The law also provides for pecuniary penalties imposed by courts in civil enforcement litigation brought by regulators. 

    Large civil penalties are increasingly common across regulatory statutes. Regulators use them to enforce the law with the primary goal of deterring future breaches by the defendant or by the regulated community generally. Because that enforcement occurs in civil courts, a lower burden of proof applies and many of the traditional protections for individuals in the criminal justice system are not available. 

    Regulatory contraventions by individuals, or in which they are involved, typically occur in discharging their functions as directors or officers. Most will look to either their company or their D&O insurer for indemnification when caught up in enforcement proceedings. 

    This happened in civil penalty proceedings run by the Australian Competition and Consumer Commission (ACCC) against BlueScope Steel and its sales and marketing general manager, Jason Ellis. In ACCC v BlueScope Steel Limited (No 6) [2023] FCA 1029, Justice Michael O’Bryan found that BlueScope and Ellis had attempted during 2013–14 to induce nine competing suppliers of flat steel products in Australia to arrive at an understanding that contained a cartel provision. 

    Justice O’Bryan decided to apply a civil penalty of $57.5m to the company. He concluded Ellis “had a central role in the offending conduct” and ordered a penalty of $575,000, and also ruled that “Ellis is not to pursue any claim or accept any indemnity under any directors and officers insurance policy to which BlueScope or Ellis is a party or an insured for payment or reimbursement of any part of the pecuniary penalty”. 

    The BlueScope D&O cover included a clause that required the insurer to pay to or on behalf of Ellis any amount he “is legally obligated to pay as a fine or penalty, to the extent permitted by law”. 

    Indemnity and insurance 

    Most directors expect their companies to indemnify them for, and insure them against, liabilities incurred in discharging their office. Sections 199A and 199B of the Corporations Act 2001 (Cth) set the broad parameters for these arrangements. 

    Relevantly, these include that the company cannot indemnify a director for a liability (other than legal costs) to the company itself or a related body corporate, to others where their conduct was not in good faith, and for specified civil penalties imposed under the Corporations Act. It can cover legal costs, but for criminal and some civil enforcement proceedings, these must be repaid if the individual is found to have broken the law. 

    The insurance rules are separate. They prohibit a company from paying for D&O insurance that covers liabilities (other than for legal costs) arising out of conduct involving a wilful breach of duty in relation to the company, or for a breach of the misuse of position or information prohibitions in the Corporations Act. 

    In the BlueScope case, the company was prohibited from indemnifying Ellis for the penalty under a provision of the cartel legislation similar to Corporations Act s 199A. The relevant question was whether the court could make a personal payment or non-indemnification order that prevented Ellis from claiming the amount as an insured party under the company’s D&O policy. 

    The ACCC argued that the court had implied power to require personal payment as part of its broader statutory power to order the payment of civil penalties. It relied on an earlier decision of the High Court in Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union (2018) 262 CLR 157, where the ABCC successfully argued that the penalty power in the Fair Work Act 2009 (Cth) could support a personal payment order requiring a contravener (in this case, a union official) pay the penalty and not seek or accept indemnity from his co-contravener, the CFMEU. 

    Although the ABCC case concerned an indemnity from a co-contravener, three High Court judges observed that the implied power extended more broadly to cover “the making of orders designed to ensure that a particular person cannot defeat the purpose of an order that the person pay the penalty imposed on him or her”. 

    In the BlueScope case, the regulator submitted that Ellis’ “central, ongoing and relentless role in the attempts to induce the price-fixing understandings, his conduct during the investigation and trial, and his absence of contrition” meant a non-indemnification order was necessary to ensure he felt the “real sting or burden” of the penalty and it achieved a deterrent effect. 

    Justice O’Bryan agreed, saying, “If Mr Ellis were to claim and obtain indemnity for the pecuniary penalty under the D&O Policy, the pecuniary penalty would be entirely devoid of sting or burden… [If] a penalty is devoid of sting or burden, it may not have much, if any, specific or general deterrent effect, and so it will be unlikely, or at least less likely, to achieve the specific and general deterrent effects that are the reason for its imposition… It is important that the deterrent effect of the penalty being imposed is not undermined by the ability of company directors and officers to insure against the financial cost of the penalty.” 

    Future directions 

    Over the past decade, both the number of regulatory contraventions that attract civil penalties and the size of maximum penalties have grown exponentially. For example, the maximum civil penalty for directors’ negligence is now $1.565m. In the BlueScope case, the individual officer’s conduct was clearly blameworthy, but many civil penalty provisions can be contravened without regulators having to prove serious personal fault.

    The BlueScope decision does not make it unlawful for D&O insurance to cover civil penalties — it just recognises a power in courts to make orders a particular contravener cannot claim under his or her policy. But given the emphasis Justice O’Bryan put on ensuring that civil penalties operate as an effective specific and general deterrent, we can expect regulators increasingly to request them.

    Dr Pamela Hanrahan is an Emerita Professor of the University of NSW and a consultant at Johnson Winter Slattery.

    This article first appeared under the headline 'Penalty goal’ in the May 2024 issue of Company Director magazine.

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