Regulators are now targeting individual directors and officers involved in corporate misconduct – taking a more aggressive enforcement approach, writes Andrew Eastwood.
Australian regulators are seeking to take a more aggressive enforcement approach. In the case of the Australian Securities and Investments Commission (ASIC), it has adopted a “Why not litigate?” policy in the fallout from the criticisms it received during the banking Royal Commission. The application of that policy has, of necessity, been dampened somewhat due to the impacts of the COVID-19 pandemic. Nonetheless, we have seen a steady stream of new court actions brought by the corporate regulator and that pace is expected to quicken in the year ahead.
It is also apparent that regulators are placing a greater focus on individual accountability. In some sectors, this tougher stance towards individuals has included specific statutory reforms; for example, in the financial services sector, the Banking Executive Accountability Regime (BEAR) and the proposed Financial Accountability Regime. More broadly, this trend is seen in the conduct of investigations and enforcement actions, with regulators increasingly targeting individuals involved in the alleged misconduct, as well as corporates.
In that environment, it is worth considering the principal ways by which regulators can seek to establish liability against directors and officers. One means is, of course, via the duties of directors and officers. Another common vehicle is accessorial liability provisions, under which persons who are “knowingly concerned” in the relevant contravention are also liable. Such statutory provisions are reasonably prevalent, including in our principal corporate and competition laws.
- Australian regulators are putting a greater focus on individual accountability.
- One common way in which regulators can seek to establish liability against individuals is through “knowingly concerned” provisions.
- It is a reasonably high bar for regulators to establish that an individual is “knowingly concerned”.
Knowledge of contravention
Establishing that a person is knowingly concerned presents a reasonably high bar for the regulator to meet. Australia’s highest court has made clear that, in order to be knowingly concerned, there must be “knowledge of the essential elements of the contravention”. There is some uncertainty as to what, precisely, that test requires, but a few things are clear.
First, “knowledge” means actual knowledge, not what lawyers refer to as “constructive knowledge”; that is, knowledge the person ought to have had if they had acted reasonably. However, courts have indicated that actual knowledge can sometimes be inferred if the person has wilfully shut their eyes to the obvious. Secondly, the requirement to establish knowledge of the “essential elements” of the contravention does not mean it is necessary to prove that the individual knew there was a breach of a particular statutory provision. Ignorance of the law is not an excuse.
It is useful to consider the application of the above in a particular context; namely, allegations that directors or officers were knowingly concerned in a breach of the relevant corporation’s continuous disclosure obligations. This issue has been considered in two relatively recent Federal Court cases: ASIC v Vocation Limited (In Liquidation)  FCA 807 and ASIC v Big Star Energy Limited (No 3)  FCA 1442. In both cases, directors were found to have contravened the Corporations Act. But in both cases, ASIC accepted that, in order to establish liability against the relevant director, it needed to show the director was aware of the existence of the relevant information and that such information was not generally available. However, in relation to the materiality limb of the continuous disclosure obligation, ASIC contended that it only needed to establish that the director was aware of “the underlying facts”. If that was the case, ASIC contended, the court could infer that “a reasonable person would have expected” that the information — if generally available — would probably influence an investor in his or her decision to acquire or dispose of securities in the company.
ASIC’s contention was rejected, with the court finding in each case that in order to find the director was knowingly concerned, the court must be satisfied that the director:
- Knew of the relevant information
- Knew the information was not generally available
- Knew the information was information that a reasonable person would have expected, if it were generally available, to have had a material effect on the company’s share price.
In a continuous disclosure case, the issue of whether the relevant information was material is often hotly contested, with competing expert evidence led by the parties. In such cases, it might be thought that it will be difficult for the regulator to prove a director actually knew the information was material; it not being enough to establish that the director should have known or made proper inquiries relating to materiality. But the court in the Big Star case emphasised that that won’t always be the case, and that to establish liability in such cases it is not necessary for the individual to have detailed knowledge of investors’ behaviour. For instance, the court observed, “some information might clearly and unquestionably require disclosure. An obvious example would be the incurring of an unexpected and significant liability which impacts on solvency”. It is not easy for regulators to prove a “knowingly concerned” case. However, depending on the facts, such claims can pose a regulatory and litigation risk for directors and officers.
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