Australia's unique and uniquely burdensome director liability environment

Australian directors face some legal exposures that their counterparts in the United Kingdom, the United States and other leading economies do not, write Rachel Nicolson and Andrew Wilcock of Allens.

On 15 November 2019, the Australian Law Reform Commission ('ALRC') released a discussion paper reviewing Australia's corporate criminal responsibility regime. The ALRC's review is focused on whether Australia's laws for holding corporations to account for criminal misconduct should be reformed. However, the ALRC also has recommended sweeping changes to individual liability for corporate conduct, whereby 'liability would be based on capacity to influence the conduct of the corporation, and would focus on the senior or executive management team, rather than directors per se'.

In the lead-up to the ALRC's review, Allens prepared a paper for the AICD taking stock of the liability environment for directors in Australia, as compared with Canada, Hong Kong, New Zealand, the United Kingdom and the United States available here, and Allens and the AICD presented this research to the ALRC. In short, Allens' research demonstrated that the liability environment for directors in Australia stands out as unique, and in many regards, uniquely burdensome.

Distinguishing features of Australia's director liability environment

Allens identified several key distinguishing features of the Australian director liability environment.

First, Australia regulates corporations' interactions with most of their key stakeholders through the imposition of director liability, including shareholders and creditors (through corporations law), employees (through employment law), customers (through consumer law), and the community generally (through competition, environmental and tax law). None of the foreign jurisdictions Allens reviewed use director liability to regulate a broader range of corporate activities.

Second, Australia imposes criminal liability on directors for a relatively broad range of corporate governance contraventions.

Third, Australia imposes relatively harsh criminal and civil penalties on directors for breaches of their corporate governance obligations. As a result of post-Financial Services Royal Commission legislative reforms, Australia has the heaviest criminal penalties regime for corporate governance breaches among the jurisdictions Allens reviewed. In addition, Australia's directors are exposed to a unique civil penalties regimes for directors' duties contraventions, and Australian courts may impose civil fines that rival criminal fines in other jurisdictions.

Fourth, Australia uniquely relies on its corporate regulator—ASIC—to enforce general directors' duties, whereas the foreign jurisdictions Allens reviewed rely almost exclusively on private enforcement, through company actions, derivative actions and shareholder class actions (which also are available to corporate stakeholders in Australia). ASIC's enforcement record indicates that it prioritises protecting the wider community over compensating victims in directors' duties actions, giving Australian directors' duties a uniquely public nature that their foreign counterparts' duties lack.

Fifth, further enhancing the public nature of Australian directors' duties, the emerging legal doctrine of 'stepping stone liability' is creating new exposures for directors. Typically, an action is brought against a company for contravening the Corporations Act as a first step. If the company is found to be at fault, a claim that a director contravened one or more of their statutory duties under the Corporations Act by exposing their company to liability is brought as a second step. ASIC is using stepping stone liability to seek to impose civil liability on directors for company Corporations Act contraventions. There is some concern that this doctrine could be used to make directors liable for contraventions of other company contraventions (e.g., of environmental or workplace legislation), or for company conduct that, while not a breach of law, nonetheless damages the company's interests (e.g., by causing significant reputational damage).

Sixth, Australia and the foreign jurisdictions Allens reviewed impose director liability on the same three general bases – first, direct liability which is the imposition of liability on a person for their own conduct; second, accessorial liability, which is the imposition of liability on a director for their involvement in a legal contravention by a company or another person; and third, deemed liability, which is the imposition of liability on the basis of a director's relationship to a company that has engaged in culpable conduct, irrespective of their involvement in the conduct itself. However, Australia uses the more onerous bases (in particular deemed liability) relatively liberally, whereas some other jurisdictions prefer less onerous bases (in particular, accessorial liability, which generally is the least burdensome basis).

Seventh, the Australia's corporate criminal responsibility model exposes Australian directors to entanglements in criminal proceedings against their companies. Australia's model uniquely allows liability for some Commonwealth offences to be sheeted home to a company on the basis of director authorisation or permission of relevant conduct, or on the basis of a deficient corporate culture. Consequently, an Australian regulator, prosecutor or court has cause to scrutinise the actions of a director, even if the director's own conduct has not been impugned, in considering whether to investigate, prosecute or convict a corporation.

The ALRC's proposed reforms

Under the ALRC's proposed reforms to Australia's laws that hold individuals to account for corporate conduct, senior officers would be civilly liable for corporate offences if they were in a position to influence the conduct but failed to take reasonable measures to prevent the offence, and criminally liable if they engaged in the conduct the subject of a civil penalty intentionally, knowingly or recklessly.

If adopted, this reform could fundamentally change Australia's director liability environment, by narrowing the range of conduct to which civil and criminal liability attaches for non-executive directors. On the other hand, unique aspects of the Australian director liability environment likely would remain in place, including relatively harsh criminal and civil penalties for directors' duties contraventions, and primarily public enforcement of directors' duties. Furthermore, the reform could significantly increase the exposure of senior managers, by deeming them responsible for a wide range of corporate conduct, unless they can prove that they took appropriate reasonable measures to prevent relevant conduct.

The AICD and Allens separately made submissions in response to the ALRC's discussion paper. The AICD’s submission can be found here and a summary of the AICD’s position can be found here. The ALRC's final report is due on 30 April 2020.