Principle of corporations law
A fundamental principle of corporation's law is that a corporation is a separate legal person who is liable for its own actions. This principle suggests that a corporation should take responsibility and be liable for its corporate wrong rather than the individuals who run it. However, a company must act through human hands and therefore company directors are taken to be the ‘direct mind and will' of the corporation. It is for this reason that both the general law and the Corporations Act 2001 (Cth) (‘CA') regulates the standard of conduct to be expected of company directors in relation to the internal conduct of the corporation in the form of director's duties. If director(s) breach one of these duties they may be held to be liable to the corporation, and in the case of civil penalty provisions, also face public law consequences.
Company directors may also be found to be personally liable to third parties of the company's corporate wrongs both on civil and criminal basis. One of these ways is through derivative personal liability (‘DPL'). DPL has become increasingly common in Australian law, as a form of liability that allows company directors to be held personally liable for harm caused by the company in which they were directors. This may be the case even though they had no direct role in causing harm. These statutory provisions effectively lift the corporate veil and punish the director for the actions of the corporation. DPL has recently been the subject of much academic debate and has been the focus of a Corporations and Markets Advisory Committee (‘CAMAC') discussion paper and an Australian Law Reform Commission (‘ALRC') report. This highlights the extremely controversial nature of DPL. This is not surprising as DPL potentially seeks to punish individuals who may have played no role in a company's wrongdoing. Although the area of corporate criminal law is generally treated as peripheral to corporate governance, it is becoming increasingly relevant to directors are given the ever increasing compliance obligations placed upon them.
Therefore, this paper will examine the potential liability that company directors face for corporate wrongs by virtue of their position within a company under Australian law. It is important to note that this paper will assume that DPL should in fact be a feature of Australian law. This differs from the recent stance taken by CAMAC who suggest DPL should only be available in ‘exceptional circumstances' and may be able to be effectively covered by extending the accessorial liability provisions.
However, CAMAC is taking a more principled approach to suggesting that alternative methods, such as accessorial liability, produce fairer results for directors. A more pragmatic approach suggests that law enforcement practices may require the use of DPL, as other mechanisms of enforcement are not sufficient. The general issue(s) that are discussed in this paper prompting the implementation of DPL, of ensuring corporate compliance and accountability, remains central to this issue and corporate accountability may never be achieved if the legislature merely implements accessorial liability. Furthermore, DPL is entrenched in our legal system and the reality is that directors may in fact have to continue to work with this fact for the foreseeable future.
This paper will argue that the current regime of DPL is problematic and is in need of reform. It will contend that the law of DPL in Australia must be standardised in a uniform test that clearly sets out criteria for imposing DPL. Chapter II provides a background of DPL, highlighting the current approaches towards DPL throughout the various jurisdictions in Australia. This will be done not only to emphasise the difficulties company directors face in complying with the different rules, but also to attempt to discern a potential standard framework. Chapter III illustrates some of the major justifications used to support the presence of DPL in Australian law. Chapter IV discusses the current concerns and problems associated with the current system implementing DPL in order to ascertain the areas that must be improved. Chapter V attempts to develop a framework to counter many of the problems considered in Chapter IV. Standard models that have been proposed by bodies such as by the ALRC and overseas will also be considered. Finally, a range of potential defences will be examined to determine their potential application, if any, to the new framework of DPL.
Derivative Personal Liability In Australia
A. What Is Derivative Personal Liability?
DPL hold directors liable by virtue of their position rather than their conduct. For example, if a corporation breaches a particular law, the directors may be held to be liable because of their positions as directors of the corporation rather than their actual involvement in the contravention of the particular law. They are deemed to have committed the offence because of their complicity in it. DPL provisions are generally found in companies core operational issues, such as environmental and occupational health and safety issues. They are also commonly found in hazardous goods and fair trading legislation.
For simplicity, the term ‘director' will be used generally throughout this paper, however, the concept of who should be liable on a DPL basis will be discussed fully in chapter V, part B, section 6.
B. Direct, Indirect And Derivative Liability
In order to fully consider the place of derivative liability in Australian law, it is necessary to consider the distinction between direct, indirect and derivative personal liability. Direct liability is where “…individuals have taken part in the prohibited conduct.” Accessorial liability is a form of indirect liability, as the individual must have an actual level of awareness of the contravention. The individual must possess knowledge of the essential facts that constitute the offence or be wilfully blind (not negligent or reckless) and these elements must be proven beyond reasonable doubt by the prosecution to convict on an accessorial basis. This contrasts with DPL where liability arises as a result of an individuals' relationship with the corporation, such as the position they hold or the function they perform in the corporation.
C. What Form Does Derivative Personal Liability Take In Australia?
DPL has no standard form under Australian law. Cowley found that there are over 30 different formulations imposing DPL on directors, which illustrates the extreme variations of laws implementing DPL in Australia. However, in order to make directors liable for their company's corporate wrongdoing on a DPL basis, generally four criteria must be satisfied. CAMAC suggests that these are:
Corporate liability: has the director of the company committed all the physical/fault elements required for it to be found criminally liable under the legislation?
Corporate defences: does the company have any defences available to it?
Individual liability: has the individual committed all of the physical, and any fault, elements of any test of DPL outlined in the legislation?
Individual defences: are there any defences available to the director under the legislation?
1 Threshold Test
Many of the provisions in Australia adopt liability based on the person's position in the corporation or their direct ability to control the management of the corporation, which is referred to as a positional and managerial liability respectively. This is the most common form of DPL in Australian law. Another common form of DPL is responsible officer liability, which imposes liability on an individual within a company who has been given ‘responsibilities in respect of the matters to which the contravention or alleged contravention relates.'
2 Defences To DPL In Australia
Generally the provisions imposing DPL, and especially those without fault elements, provide directors with defences. Generally directors have the legal burden of proving on the balance of probabilities that one of the defences is available to them.
The defences that are currently found in Australian DPL provisions include due diligence, no influence, no knowledge, reasonable steps, the fair trading defence, no reasonable knowledge, reasonable mistake, reasonable reliance on information, the statutory body corporate defence, impractical to comply and no control.
3. Penalties For Contraventions Of DPL Provisions
The penalties that directors convicted of DPL offences may be subjected to vary substantially under the differing legislation. They may range from small fines to large fines and prison terms.
Justifications For Derivative Personal Liability
Although this paper will assume that DPL is a necessary part of the Australian regulatory landscape, it is worth considering the major justifications used to support its presence in Australian law, as it allows for a greater understanding of the aims of DPL. Many of these justifications were considered by CAMAC and are given a brief analysis in this chapter.
A. Ensure Corporate Accountability
The main justification for DPL is to hold companies and their management fully accountable for any corporate wrongs in order to ensure corporate compliance. It has been stated that, “…the extent of compliance with occupational health and safety legislation is strongly influenced by a reasonable apprehension of inspection, prosecution, conviction and meaningful penalties.” Therefore, the rationale behind DPL is that “…if the fate of the individual is linked to the fate of the corporation…the individual has a vested interest in ensuring corporate compliance.” DPL therefore illustrates a ‘zero tolerance' approach for directors who “…use corporate personality to shield themselves…from the consequences of their conduct.” Wheelwright argues that deaths and injuries in the workplace are usually “…attributable to management failures, system breakdowns, and the neglect by organizations, their senior officers and workers to take health and safety as seriously as they should.” Therefore, if the directors were subject to criminal liability they would be likely to take these obligations more seriously and this would deter them from engaging in wrongful conduct.
CAMAC also argues that once directors are found personally liable, they may be motivated to more closely monitor the activities of the company and may act as a continuing “…incentive…[for directors]…to take appropriate steps to ensure compliance.” This is summed up by the following quote: “…managers and directors have a clear and full responsibility for many aspects of a corporation's activities…If they were also… [personally liable]…they would ensure appropriate reporting and procedures were evolved so they could ensure their responsibilities were adhered to.” Therefore, assuming directors are not terminated once found guilty of an offence, it is likely that directors would take more care to reduce the chances of a further criminal conviction, a prison sentence or a substantial fine.
B. Corporate Liability Is Ineffective
It is argued that corporate penalties are ineffective to prevent corporate wrongdoing, and therefore criminal prosecution is “…the backbone of legal enforcement…” in these areas. CAMAC argue that monetary penalties imposed on companies for offences they may have committed may simply be passed onto third parties, either by reducing dividends to their shareholders or by increasing the prices of their products and thereby passing the costs onto the consumers, which reduces their effectiveness as a deterrent. This is supported by Wheelwright, who argues that fines imposed on large corporations are “…not sufficiently punitive and therefore lack the necessary deterrent and retributive effect.” She suggests that the aftermath of the 1998 Esso Longford gas explosion demonstrates this lack of punitive punch. After the explosion in which two people lost their lives, Esso was found guilty of breaching the Occupational Health and Safety Act 1985 (Vic) and was fined $2 million. This would have had little deterrent effect given Esso's parent company earns approximately $14 billion per year. It is argued that by fining a company for an offence simply enshrines these fines as an item in a profit and loss statement. However, it could be argued that the shareholders would then press for compliance to protect their returns, however presumably this ‘ideal world' view faces practical problems such as who to hold accountable. Therefore, monetary penalties appear to be clearly ineffective in ensuring corporate compliance.
C. To Express Public Censure And Punish Personal Fault
DPL also expresses “…public censure or disapproval of the action or inaction of particular corporate officers in relation to a corporate breach…” Furthermore, it is argued that certain individuals within a corporation have a duty to prevent wrongdoing to an extent that it is reasonable and that such individuals should not be able to use the company to shield them from liability from “…socially damaging activities.” The public outrage expressed with regards to recent corporate collapses, such as HIH and One Tel, highlights that public disapproval and a desire to punish directors who were at fault, are major drivers behind DPL.
D. Accessorial Liability Is Inadequate
One of the more contentious justifications for DPL is that accessorial liability is inadequate to deter corporate wrongdoing, as it provides insufficient incentive to be accountable. As discussed above, accessorial liability requires a person to have actual knowledge or be wilfully blind regarding certain corporate conduct.
Therefore, where directors are reckless or negligent in the management of their company and where this leads to the occurrence of an offence, they may argue that they had no knowledge. Given the difficulties of disproving an assertion of ‘no knowledge' this may be sufficient to allow directors to escape liability. Therefore, “…accessorial liability alone may not cause corporate officers to take compliance sufficiently seriously.”
Problems With Dpl In Australia
The main concerns with the current system of DPL in Australia appear to be that it is unclear, unfair and in some instances, difficult to enforce.
A. Unclear As To What Directors Must Comply With
The major criticism of the current legislative regime is that it is inconsistent and therefore too complex or unclear for directors to effectively comply with. Chapter three illustrated the significant number of different legislative tests imposing DPL on directors across Australia. Not only were many of the tests different, they often had different defences available and they often applied to different individuals, which obviously ‘exacerbate[s]' this problem. Not only is there little consistency between tests in the same jurisdiction, but also there is little consistency between tests aimed at similar offences across jurisdictions. For example, environmental legislation may have a different DPL test in New South Wales to that in Western Australia. The problematic effects of these inconsistencies are wide ranging. Cowley illustrates one of the strange occurrences under the current system where ‘…a director's actions may be appropriate to satisfy the requirement standard for one Act, but may attract liability under another relatively similar Act.' The major problems caused by this inconsistency are considered below.
Detracts From Methods Of Corporate Governance
Inconsistencies between laws across jurisdictions create inconsistent compliance burdens. This has been suggested to ‘…detract from current methods of corporate governance…' meaning both directors and companies would find it more difficult to comply with these laws. Furthermore, Howard argues that Australian cases on the liability of corporate officers for environmental crime are relatively scarce, poorly reported and difficult to find. This would obviously pose significant difficulties for directors wishing to determine what level of conduct is required of them. Clearly, the current system makes it quite difficult for directors to understand their ongoing legal obligations. Given what is at stake for directors, fairness requires that they should be able to determine what they must be complying with at any given time. Furthermore, this lack of clarity may lead to increased costs for businesses, especially those that undertake large amounts of multi-jurisdictional commerce. Such businesses would be required to understand their compliance obligations in each jurisdiction, which would require significant resources.
2 Stifles Innovation
It has also been suggested that the Australian replica environment has created a ‘compliance mentality' within corporations. It is argued that odorous compliance obligations leads to business decisions being made with compliance as the major concern, which in turn makes companies more risk averse and may stifle their innovation and creativity. It is common sense that directors, faced with uncertain and sometimes confusing obligations, make err on the side of caution and take less risks in their decision-making. Therefore, it is no surprise that onerous laws such as those imposing DPL may have such an adverse effect.
3 Deter Directors
The office of ‘director' is now much more odorous than it has been in the past due to the complexity and differing compliance burdens of these inconsistent laws. It has therefore been argued that this may deter directors from taking up office. However, it is unclear whether directors actually have been deterred, as there appears to be no empirical data to support such a claim. This suggests that the fears are unfounded.
However, the increasingly onerous nature of the corporate environment in Australia may be reflected in the overall reduced availability of professional indemnity insurance and rising insurance premiums. Directors are an essential part of the successful commercial environment in Australia, and quality directors are critical for the smooth running of companies as their ‘… actions can have a profound effect on the lives of a great number of people…' Therefore, if quality directors are being deterred, it follows that less experienced or new directors will be needed to replace them. An increase in the number of inexperienced directors may potentially lead to more corporate misconduct, given the probability that they would have less knowledge of the standard expected of directors and therefore DPL may, in fact, be facilitating the very thing that it was designed to prevent. Furthermore, in the face of increased liability, directors may demand much higher salaries to compensate for the greater risk that they are taking in becoming directors, which again is undesirable.
4 Deter Business In Australia
Although closely linked with the above section, inconsistency may also deter businesses from engaging in commerce in Australia. The ‘… constant raising the bar…' and imposition of further DPL may discourage ‘… incorporation of bodies within Australia due to a perception, that the possibility of criminal action being levelled at an individual, is… greater than the financial rewards…' Although it is unclear how much harm this would cause to our economy, it is clear that such inconsistencies and perceptually burdensome laws would be unlikely to promote commerce in Australia.
B. Unfair And Onerous Obligations On Company Directors
In criminal law, the general rule is that the prosecution bears the legal burden of proving all elements of the crime and to rebut any defences. Except where otherwise provided by statute, the prosecution also bears the evidential burden in relation to proving the elements of the crime. However, in relation to defences, the evidential burden is placed on the accused. The current trend in Australia in relation to DPL offences has been for ‘… legislators to provide that, when a corporation breaches an Act of Parliament, the directors should automatically… be liable as well, mostly with an opportunity to make out the defence, but with the onus being on the directed to do so'. Generally, the State and Territory provisions only ‘… require the prosecution to prove beyond a reasonable doubt that the defendant came within the relevant category of individuals potentially liable…' and then the directors had the legal burden of establishing a defence on the balance of probabilities, rather than the normal evidential burden of proof. These provisions effectively reverse the burden of proof and place it upon directors to establish their own innocence. This reversal is justified as being necessary to protect important public interest such as the Roman and safety in the workplace. According to Foster, ‘… there is extensive historical precedent for a “reversal of onus” provision in cases dealing with industrial safety.'
This has been one of the major problems with DPL in Australia and has come under intense criticism by commentators. It has been stated that the ‘… predominant pattern of derivative liability in State and Territory legislation is inherently unfair and unreasonable, and strikes at one of the cornerstone principles of democracy, the presumption of innocence.' Stuart describes it as bypassing ‘… fundamental principles of justice to scapegoat corporation executives…' and that working for a company ‘… should not forfeit rights to be protected against unjust punishment.' Furthermore, Fisse describes laws that reverse the burden of proof as ‘… sleeping and radically unprincipled…' these are obviously extreme views and in practice directors are not being prosecuted without any justification, however these laws do seem to infringe on this fundamental protection that the law has historically afforded to defendants. These criticisms are compound by the fact many DPL offences lack a fault element. Hart describes such offences as ‘odious' because they sacrificed the valued principle of blameworthiness.
The effect of reversal of the burden of proof is therefore problematic as it has the potential to produce unfair outcomes for directors. Firstly, it seems that in the desire to seek expedient punishment of corporate offenders a director is afforded less rights than a person charged with offences such as murder or robbery. People charged with those offences are presumed to be innocent until proven guilty by the prosecution. It is therefore argued that the DPL laws are unfair because more is expected of directors to avoid committing offences and they must establish that ‘… their failure to take action to prevent their companies from committing an offence should be excused.' Furthermore, reversing the onus is easier for the prosecution to prosecute and therefore it may allow cases with less legal justification to be brought against directors. If directors are forced to establish their own defence (on the balance of probabilities) they may have to expend significant amounts of resources, which they may not be able to afford. This may cause harm to the directors' livelihoods and as a result they may choose not to challenge a charge. This problem may be exacerbated by the fact that directors' insurance only covers criminal defence costs if they are found innocent. Although it is fair to say that in the face of serious charges, directors would be extremely unlikely to not defend themselves, and therefore this reasoning may only apply to less serious charges.
Therefore, the presumption of innocence is critical in protecting individuals' rights and any law seeking to alter the situation may be tampering with the fairness of Australia's legal system.
C. Difficult To Enforce DPL Provisions
DPL provisions will only serve their deterrent purpose if they can be enforced. Howard suggests that the enforcement practices in the various jurisdictions to date indicate that the prosecution of directors is infrequent. Furthermore, prosecutions are usually of directors of smaller companies. This may either indicate that directors, especially those in large companies, are consistently complying with their obligations or that there are problems with prosecuting directors under the current system. It is unlikely there is a significant compliance by directors and therefore it may seem that the current system also provides prosecutors had some difficulties in prosecuting this type of corporate offender. Furthermore, the current system leaves prosecutors with little flexibility as offences with differing levels of severity used the same DPL test.
The problems relating to inconsistencies, unfairness and a lack of enforcement in relation to the law of DPL all suggest that the current system of DPL in Australia is in need of significant reform. If these problems are not resolved the business sector in Australia will be likely to lose money on compliance costs, innovation may be stifled and quality individuals may be deterred from taking up office as directors. Furthermore, DPL may not act as an effective deterrent to corporate wrongdoing. Chapter five attempts to develop a framework to counter many of these current problems.
What Form Should Dpl Take?
The problems discussed in chapter four highlight the need for reform of DPL. Firstly, the inconsistency of the law must be removed and secondly, a satisfactory test must be developed that produces fairer outcomes for directors faced with prosecution. Any new template must be practical, fair, suitable and enforceable. Therefore, a balance must be struck between the public interest of ensuring corporate compliance and on the other hand, the rights of directors.
A. Single Framework Under The Corporations Act 2001 (Cth)
Most reasonable people would say, if a person is charged with an offence in Australia, that it is appropriate that the rules governing the prosecution should be the same regardless of whether the trial occurs in Western Australia, Queensland, New South Wales or any other part of the nation.
The most obvious way to prevent many of the problems associated with inconsistent tests is to formulate a standard test to be adopted by the State and Territories or which could be placed within the Corporations Act. Goddard states that the area of criminal liability in relation to corporations and their representatives is an area in which ‘...there is a strong case for consistent and principled formulations...' and this quote is representative of the view of many commentators in this area. The Business Council of Australia (‘BCA') suggested that the Australian Government adopt a single, consistent, national regime in areas of regulation where there is shared responsibility between jurisdictions. It is therefore necessary to consider whether unifying the laws in relation to DPL would produce a better system for directors and businesses in Australia.
The Benefits Of Standardisation
The removal of drafting inconsistencies will be likely to produce many benefits to the Australian business community. The major benefit is that directors will be equal before the law, as they will be tried against the same principles regardless of what State or Territory they are in. This would produce a fairer regime for directors as it would eliminate occurrences that were discussed earlier, where a director whose company engages in business in multiple jurisdictions may be criminally liable in one jurisdiction but not in another. A standard regime would also be fairer as it would clarify the scope of the directors' obligations, as directors would have the same tests and defences available to them. This would allow directors to more clearly know how they must act in all jurisdictions so as not to expose themselves to liability. Greater clarity would obviously translate into greater certainty and legal predictability, which obviously produces a fairer and more desirable system for both directors and prosecutors. An obvious example of how this area would be clarified is that courts will be able to develop a uniform body of case law, which would aid in interpretation of the law. Although compliance should always he on the mind of a director, a standard regime that clearly sets out directors' obligations would ‘...protect conscientious directors by ensuring they adequately understand the roles they are to perform.'
Standardisation will allow companies to develop ‘...uniform strategies to ensure compliance will be implemented.' This would obviously provide benefits to companies, as they would need to spend less time and money on developing different compliance strategies. This is supported by the findings of the Productivity Commission who found that multiple laws increase the costs faced by Australian and overseas companies doing business in Australia. For example, Skilled Engineering estimates that ‘...the annual cost saving from operating under a single set of Occupational Health and Safety and workers' compensation rules would be in excess of $2.5 million, or some 15 percent of the corporation's annual costs of Occupational Health and Safety regime.' This would also promote and facilitate multi- jurisdictional business for both Australian and international companies. It is therefore clear that in many instances a standard test would help reduce the costs of operating a business in Australia.
2 Do Different Types Of Laws Require Different DPL Tests?
It is necessary to consider whether a standard test for DPL would be equally applicable to different areas of regulation, such as that relating to environmental protection as well as fair-trading. The question is whether certain areas of law should be enforced differently to others? There appears to be no consistency between the types of tests used and defences available across the States and Territories regarding similar areas of law. For example, in WA a fault-based test is used in relation to occupational health and safety breaches whereas in NSW a strict form of liability is adopted. Hence, there appears to be no foundation for the drafting differences in the DPL provisions. Howard states that the differences are ‘...capricious and arguably reflect a failure of the respective legislature to consider the advantages of uniformity.' This is not surprising as it is difficult to see how the liability of a director should be any different depending on the area the legislation is regulating. Directors should remain equally vigilant regarding all core aspects of their ongoing business and therefore the level of care should not depend on the area of law being regulated. It therefore appears that a standard test would be able to effectively cover the different areas of DPL.
In accordance with the views of CAMAC and the ALRC, it is submitted that any major reform of this area must take the form of a standard test or tests under the CA or be simultaneously adopted by the States and Territories. There is no doubt that a system by which company directors can clearly understand their obligations and liabilities relating to their role as directors would greatly improve this area of Australian law.
B The Framework
As it has been concluded that a single test of DPL should be standardised, it is necessary to formulate an appropriate test. Many issues arise when considering the form such a test should take and the remainder of this chapter will consider these issues. As touched on earlier this thesis will attempt to develop a test that is fair and equitable for all parties involved in the process.
It is therefore critical to define what ‘fair and equitable' is in this context. A framework will be ‘fair and equitable' if it does not place overly onerous obligations upon directors but does not ‘...set the bar too low' to prevent effective prosecution. For example, the framework should encourage corporate compliance but should not be so onerous that directors are reluctant to defend themselves due to a view that they will be unlikely to succeed or that the costs will outweigh the benefits. Directors should also be able to understand their legal obligations clearly in order for a system implementing DPL to be fair and should be afforded the same protection as regular defendants who commit offences such as murder. It should also take into account the practical aspects of running a business, such as delegation and should not force a party to prove facts that they are unlikely to be able to prove. The framework must take into account that the State may have more power, more resources and can compel people to face trial. However, the application of these principles will be discussed further in relation to the individual elements.
1 Fault Based Or Strict (Automatic) Liability?
When the law begins to permit convictions for serious offences of men who are morally innocent and free from fault...its restraining power becomes undermined. Once it becomes respectable to be convicted, the vitality of the criminal law has been sapped.
Fault based liability is regarded by commentators as ‘...one of the most fundamental protections of criminal law...' and the mental element requirement is considered a hallmark of our criminal justice system. Any legislation departing from this requires strong justification. It is therefore important to consider whether the standard DPL framework should be fault-based or be a form of strict liability. In strict liability offences, the prosecution does not have to prove a guilty mind, however in addition to any statutory defences, the defendant may claim 'an honest and reasonable mistake of fact' as a defence to liability. Fault-based offences require the prosecution to prove beyond reasonable doubt both the act of the accused and also that the accused had a guilty mind and therefore give the defendant more protection than strict liability offences. The current provisions in Australia imposing DPL on directors generally use strict liability, however there are some examples of fault-based liability. The fault-based DPL provisions that are currently in operation in Australia use elements such as ‘consent or connivance' ‘neglect', ‘failing to take reasonable care' and ‘knowingly authorised or permitted.'
The imposition of strict liability on DPL offences has been subject to intense criticism recently and in the past. Cowley questions strict liability offences, suggesting it ‘...smacks of directors having to guarantee the performance of the corporation.' In deciding not to implement DPL in Canada it was concluded that directors should ‘...not be subject to criminal liability in the absence of personal fault simply because of their position.' Although, strict liability offences generally provide directors with defences, the directors often must establish their existence and in practice this may be quite difficult due to commercial reasons. Therefore, strict liability offences make it easier for prosecutors to secure a conviction. It is therefore necessary to determine whether fault-based liability can produce fairer outcomes for directors than strict liability.
It appears unreasonable that a prosecutor does not have to establish any fault on behalf of a director faced with a serious offence, such as some DPL offences. The aim of criminal law is to attribute blame to a person and it is therefore reasonable to suggest that DPL should still require some kind of connection between blame and liability above merely holding a position within the company. If a person is merely guilty because of his/her position then the blameworthy circumstances that led to the contravention is unclear. It is arguable that it should not be enough to hold someone liable merely because they occupied a certain position within a company.
Rather, those in a position of authority in a company should only be liable if they acted in a way that is contrary to what the community expects of them. It would seem that this would require directors to act in a way whereby they have neglected or been careless with respect to their responsibilities to the company that committed the offence. This would result in liability being closely associated with the director's responsibilities within a company and would ensure that directors are only liable for conduct over which they had control. Fault-based liability is an effective way of achieving this, as it would mean that the prosecution would need to show that the director had the requisite mental element such as that they had knowledge, were reckless or had the level of awareness of the consequences of their actions that a reasonable director should have had. Furthermore, the use of fault elements may be fairer for directors of smaller companies who may have more limited resources and compliance systems, as the assessment would be based on a ‘reasonable director' operating in a small company.
Apart from the benefits discussed above, fault-based liability clearly provides a director with greater protection, as the prosecution must establish all of the fault elements and would therefore help ensure that directors are only prosecuted when actual fault on behalf on the individual can be established. Fault-based liability would also produce fairer results for directors, as the costs of defending a charge would be smaller given that it will be up to the prosecution to establish the fault elements. Given the imbalance of resources between State and an individual this would seem to be fair, especially since many directors pursued are from smaller companies. The circumstances where liability would result would also be clearer as the fault elements would be set out and would encourage directors to put in place systems to help minimise the chance of corporate wrongdoing. Furthermore, fault-based liability may be less likely to be viewed as onerous by directors and may have less of a deterrent effect for individuals deciding whether or not to take up office as a director for the businesses seeking to operate in Australia. Finally, Street argues that under the Victorian environmental legislation prosecutors tend to only prosecute individuals who exhibit some degree of personal fault, especially for serious offences. This may suggest that for serious offences prosecutors would be reluctant to prosecute less fault is evident and therefore fault-based elements may in fact encourage prosecution.
Although fault-based liability may create greater protection and a fairer system for directors, this must be balanced with the other public policy factors, such as ease of prosecution, which directly translate into likelihood of prosecution. If the fault elements severely inhibit the ability of prosecutors to prosecute, then DPL may no longer serves its purpose as a deterrent. Justice Dawson suggests that strict liability offences do in fact have a role to play. He states that ‘...the [strict] nature of the offence Lane will readily be seen, particularly if proof of intent would be difficult and would present a real impediment to the successful prosecution of offenders.' DPL is clearly an area where directors, in some circumstances, are the only individuals who can prove they are innocent. For example, directors may be the only ones who could produce documents illustrating that they have exercised ‘due diligence'. Therefore, this is an area where the prosecutors may have real difficulties attaining convictions. It has also been suggested that strict liability offences ‘… more fairly distribute the cost and effort involved in litigation between [prosecutor] and defendant.'
A compromise may be to suggest that minor offences have strict liability or is offences that are considered more serious are fault-based test. However, this is considered in the chapter V, part B, section 3. Therefore, it would seem that both strict liability and fault-based tests have a role to play in DPL. It is therefore necessary to determine what level of fault should be employed as well is worth the burdens of proof would lie.
(A) What Level Of Fault?
The ALRC proposed a template where the prosecution must establish that ‘... the individual knew that, all was reckless or negligent as to whether, for contravening conduct would occur…' This formulation is quite similar to provisions found in the Environmental Protection and Biodiversity Conservation Act 1999 (Cth). Negligence and recklessness fine support with many commentators as they do not set the bar too high to make prosecution impossible but also provide directors with a level of protection that can be attained if they act in accordance with what the community expects from them. Recklessness would cover situations where the defendant could have foreseen probable or possible harmful consequences but nevertheless continues with those actions within indifference or disregard for the consequences. Such conduct would obviously be discouraged. The Law Institute of Victoria (‘LIV') suggest that recent cases indicate that a directors proper role in a corporation is to guide and monitor the management of the company and that the ALRC template, is most consistent with this approach and therefore is favourable. Furthermore, various UK and Irish legislation only impose DPL where the offence was ‘…attributable to any neglect on the part of, a director.' The element ‘known or ought to have been known' has also been suggested as being applicable into a fault-based DPL test. This may lend support to implementing an objective test of negligence, as is generally done when negligence is applied to criminal conduct. Another benefit of the terms ‘recklessness and negligence', is that their meanings can be easily ascertained. This is because they are quite common within the Australian law, which may result in greater clarity for directors.
The LIV correctly assert, ‘… in the absence of suspicion of being put on notice of the deficiency, a director is entitled to delegate management tasks and to rely on management in discharge in director responsibilities.' Therefore, the framework that is adopted must recognise that a director has to be able to delegate management style tasks to other individuals within a company. It would seem that a framework using the fault elements of negligence and recklessness would permit a director from being liable if they have reasonably and responsibly delegated tasks to subordinates. Furthermore, Street suggests that by using fault elements such as' reckless or negligence' individuals will be caught for incidents they may describe as ‘accidents' but which were caused by a lack of care and/or a lack of management systems which is in line with the ongoing aims of DPL. Therefore, it will force companies to develop ‘… first class programs of systematic vigilance.'
It has been argued that convicting someone of an offence because they were negligent is ‘… inconsistent with the long established principle at common law that serious offences require intention, knowledge, recklessness, or some other subjectively blameworthy state of mind.' However, as discussed above, a balance must be struck between insuring corporate compliance and fairness to the director and if the standard for criminal liability was in fact set too high, then the prosecution of directors and therefore the deterrent effect of DPL may be reduced. CAMAC and ALRC suggest the use of ‘knowledge' as a fault element.
This is also consistent with the United States ‘responsible officer' doctrine; however it may not be necessary. A director should not be liable merely because they had knowledge of the conduct and presumably a defendant who had knowledge but fails to respond will be even negligent, shooting a responsible director would have acted differently, or reckless if it was clear that failure to act would have caused harm to which the director was ambivalent towards. Recklessness would also seemingly cover situations whereby the director intentionally allowed the conduct to occur, which again should be discouraged.
Therefore, it would seem that the fault elements of ‘negligence and recklessness' should be implemented into the standard framework as they provide adequate protection to directors from unfair punishment but don't set the standard too high to prevent adequate prosecutions.
(B) Are Defences Necessary For A Fault Based Regime?
Another relevant consideration is whether a fault-based test still requires defences. The fault almonds aim to protect the director from prosecution where they were not blameworthy, however nefarious commentators have suggested that defences should be applied to a fault-based test. For example, Cowley suggests that ‘failing to take (all) reasonable steps to prevent the contravention' or ‘failing to exercise due diligence to ensure that the contravention did not occur' may be useful to include in the fault elements which would act as quasi-defences. The ALRC proposed in their standard model that before an individual can be found guilty it must be established by the prosecution that the ‘… individual failed to take all reasonable steps to prevent the contravening conduct.' This is similar to a due diligence defence and therefore may act as a quasi-defence built into the framework as a fault element. However, CAMAC propose to the ALRC provision as a defence with the evidential burden of proof being placed on the defendant to show that they ‘… took all reasonable steps to prevent the contravening conduct.' Similarly section 188 of the Corporations Act 2001 (Cth) relieves a company secretary of deemed liability ‘… if they show that they took all reasonable steps to ensure that the company complied with the section.' Adding this protection would relieve directors of liability where they have tried to prevent the company's offending conduct from occurring.
However, it could be strongly argued that where a director has taken reasonable steps to prevent conduct occurring they would neither be negligent nor reckless and that this extra protection is therefore unnecessary. It is extremely difficult to see a situation where a director has taken reasonable steps to prevent conduct occurring but at the same time has been negligent or reckless. Furthermore, the use of defences in a fault-based test may make prosecutions significantly more difficult as it is yet another obstacle for the prosecution to avoid. Therefore, it may be strongly argued that no actual defences should be provided for the fault-based test of liability, as they would serve no extra purpose. The reasonable steps defence is therefore not necessary and would merely be acting as a backup for directors and should not be implemented into the standard test.
2 Guidance As To Fault Elements
It is clear that courts have had some difficulty interpreting the concept of fault elements such as ‘negligence' in relation to offences and it has been suggested that this lack of clarity has made it more difficult for the prosecution to achieve convictions. Therefore, if a system of fault-based liability is implemented it may be useful to provide guidance as to the requirements of the fault-based test. Many pieces of modern legislation provide guidance with respect to the interpretation of their sections. For example, the Criminal Code Act 1995 (Cth) (‘CCA') provides guidance as to what will constitute some of the fault elements within the Act. Other pieces of legislation that implement DPL also provide guidance on what sort of conduct will contravene their fault provisions. Such guidance may be invaluable to both dried directors as to what they must comply with and to allow them and their companies to develop more effective compliance strategies which may in turn help reduce the chance of a ‘ compliance mentality' being developed by directors. As directors will be able to more clearly understand their obligations, it may also lead to less risk adverse business and may encourage innovation. It would also provide a better reference for future prosecutions and will help overcome any of the difficulties directors face with interpreting the meaning of the ‘fault-based' elements. By giving guidance as to the elements meaning, directors will be able to determine the conduct that would constitute an infringement of a DPL provision in the conduct that would not, which would allow them to modify their behaviour accordingly.
The CCA may be used to determine the form such guidance may take. According to section 5.4 of the CCA, a person is reckless with respect to a circumstance/result if they are aware of a substantial risk that the circumstance/result exists or will exist; and having regard to the circumstances known to him or her, it is unjustifiable to take the risk. Section 5.5 of the CCA states that a person is negligent with respect to a physical element of an offence if his or her conduct involves such a great falling short of the standard of care that a reasonable person would exercise in the circumstances; and such a high risk that the physical element exists or will exist that the conduct merits criminal punishment for the offence. These definitions are consistent with the standards stated by the ALRC, who suggests that with a ‘… negligence offence the accused is judged by a hypothetical standard based on the state of mind of a reasonable person confronted with the same set of circumstances, an objective test…' and that ‘… a person is reckless where he or she is indifferent whether a substantial and foreseeable risk will eventuate.'
Therefore, sections 5.4 and 5.5 of the CCA could clearly be used in relation to DPL to provide guidance under the uniform DPL framework and therefore it is strongly advisable that guidance should be provided in the framework.
3 Two-Tiered Test
As touched upon in chapter V, part B, section 1, another way a DPL test could be structured is by having a two-tiered form of liability. A two-tiered approach still regards fairness is paramount but recognises that some amount of fairness may need to be sacrificed to ensure compliance, especially with regards to less serious offences. This would mean that different tests would apply for offences with different levels of severity. For example offences that merely carry small monetary penalties may be subject to one test whilst offences that provide for more serious consequences such as prison sentences or large fines would be subject to another. A two-tiered test may be a useful way of striking an appropriate balance between the competing interest relating to DPL, that is, achieving corporate compliance whilst maintaining a fair and equitable approach to imposing liability on directors. It is strongly arguable that offences that attract more severe punishment are more likely to need more stringent safeguards against prosecution, as there is obviously much more at stake, namely the director's livelihood and in some cases their freedom. Therefore, it is in these more serious cases that the defendant should be given the greatest level of protection from the law. Also, for minor offences such as section 188 of the Corporations Act 2001 (Cth), which has a penalty of $550, it is argued that a fault-based test would be too burdensome.
On the other hand, where the offence is only relatively minor, there is a stronger case to suggest that the defendant may be entitled to less protection from the law as it would encourage compliance in an area where the penalties are relatively low. The ALRC suggest ‘… where the penalty level is very low and the risk of unfairness is diminished and there may be no need for the protection of a fault element.' The benefits of this would be two-fold as prosecutions may be easier to achieve and, as a result, more likely to be issued by the relevant revelatory body and therefore compliance would be better maintained. Also, as the strict liability test would only apply to relatively minor offences you will be less likely to be seen as onerous by directors and will be less likely to deter directors from office as well is likely to produce unfair results. Such an approach is also hinted at as acceptable by various bodies as they suggest that strict liability should not be imposed where offences can lead to prison sentences. Anderson and Welsh also approve of a tiered approach to liability as they have suggested a three tiered approach for directors personal liability, with more serious offences providing greater protection from the law for directors. Furthermore, by providing the prosecution with more options, this may aid in ‘… effectively targeting those who choose not to act responsibly' and so prosecutors may also be more willing to bring actions against directors for more minor offences as they may feel that they will be more likely to secure a fair penalty.
What constitutes a ‘more serious' or ‘less serious' offence could be determined by the referring legislation. Therefore, the standard regime will provide that more serious offences will be subject to a fault-based liability test and less serious offences will be subject to a strict liability offence with defences available to the defendant. This approach will provide directors with sufficient protection when they have much to lose while still encouraging prosecutions and will therefore continue to serve as a deterrent to corporate wrongdoing. The applicable burdens of proof in relation to this matter will be considered in section 4 below.
4 Burden Of Proof
Chapter III highlighted the intense criticism that many of the DPL provisions have faced due to their effective reversal of the burden of proof. It must therefore be considered whether the new framework should revert back to the traditional presumption of innocence in criminal law. As a two tiered test is to be adopted each tier will be considered separately.
(A) Fault Based Tier
It is clear that the legal burden of proof should fall on the prosecution to prove all of the fault elements in accordance with the general principles of criminal law. The framework proposed by the ALRC clearly supports this approach is that provides that ‘… the prosecution must prove the following physical and fault elements…' Furthermore, the United Kingdom and Ireland models also place the burden of proof upon the prosecution to establish the fault and physical elements. Although, a ‘reasonable steps' defence/fault element should not be implemented it should be noted that if it was in fact included, the evidential burden of proof should be cleverly placed upon directors to establish that they have taken all reasonable steps. This is supported by CAMAC and given that it is a quasi-defence, this would also be consistent with the general practice in criminal law of the evidentiary burden being placed on the defendant to establish a defence.
(B) Strict Tier
With respect to the strict liability test it seems clear that the prosecution must prove the physical element, which is whether the individual falls within the category of people that the provision applies to. However, what is not as clear is where the burden of proof should lie in relation to the establishment of the defences.
As considered above the presumption of innocence is effectively sacrificed in many of the DPL provisions to achieve expedient and efficient prosecution of directors engaging in corporate misconduct. This is summarised in the United Kingdom case of Davies v Health and Safety Executive, where the Court ruled that such provisions were justified, because occupational health and safety was an important area of social policy, and because of the difficulties the prosecution faced with having to prove matters within the knowledge of the accused. The Court stated that given the complexity of corporate decision-making, where many decisions might be poorly documented, if at all, it is reasonable to ask directors to produce evidence demonstrating a lack of influence or their diligence, rather than forcing the prosecution to put the non-existence of these elements beyond reasonable doubt.
Therefore, by placing the legal burden of proof on the prosecution to do is prove beyond reasonable doubt that every defence did not exist it may make it extremely difficult to secure convictions as directors are obviously in a much better position to establish such information. As long as the strict liability test only applies to relatively minor offences, this reversal would only be sacrificing small amounts of fairness to increase the ease of prosecution. Furthermore, if a defendant knows that one day he they may be forced to produce documentation establishing that they had, for example, exercise due diligence, it may encourage them to put systems in place to ensure corporate compliance. Given that ‘… harshness of the penalty and the impact on the segment of the regulated community…' is loaded with regard to two tier offences, it would seem that the strict liability test should place the legal burden of proof upon the directors to establish a defence on the balance of probabilities.
5 What Court Should It Be Heard In?
According to Howard, ‘… as in the case in all jurisdictions where such cases are heard in magistrate's courts, it is difficult for the lawyer to properly inform a director what has happened to those directors who have already been there and to impart lessons from any coherent legal principles in the decided cases.' Therefore, if DPL cases were heard in a forum in which cases are reported it would result in the law being clearer as judgements would be able to be factored into company compliance procedures. Furthermore, directors would more readily be able to understand their obligations and this would therefore promote compliance. However, more serious offences are generally heard in forums where cases are reported. As the serious DPL offences are a fault-based test, which is the test that needs the greatest clarity due to the presence of fault elements, it would seem those cases would in fact generally be reported as they would be heard in a forum that reports cases. Therefore, direction to a specific forum is unnecessary.
6 Who Should Be Liable?
Critical to achieving any kind of certainty in this area is achieving certainty regarding which individuals may attract liability. As discussed above, DPL provisions in Australia are extremely inconsistent with regards to whom they apply. It is therefore necessary to consider whether the scope of these provisions can be rationalised.
One thing that is clear is that directors, as the ‘directing mind and will' of the company, should be subject to DPL. However, it is not as clear with regards to who else should be liable. The ALRC suggest that those liable should include ‘… the individual, by whatever name called on whether or not the individual as an officer of the corporation, is concerned, or takes part, in the management of the corporation.' This is modified by CAMAC who suggest ‘ the individual, by whatever name called, was a director or other officer of the corporation or otherwise took part, all was otherwise concerned…' This definition has many benefits, as it is not merely limit liability to individuals with formal roles within the company. It would prevent individuals such as de facto directors hiding behind their lack of official position within the company and would also recognise that directors of large companies must be able to delegate responsibilities without fear of liability.
However, it could be argued that this definition is uncertain as it is not clear what ‘management of the corporation' embodies. Given that one of the major aims of this reform is to clarify the area for directors such uncertainty is undesirable. However, the Courts could easily result this given it would be standard across Australia. Furthermore, it has been argued that liability should not extend beyond directors and officers to other managers or employees as this may have a substantial impact on the efficiency and effectiveness of business and compliance programs. Such fears seem to have little basis as business compliance programs would merely have to factor in an extra group of people. Furthermore, as long as individuals have contributed to the conduct, they should not be shielded merely because they have no formal role in the company.
The definition of officers in section 9 of the Corporations Act 2001 (Cth) has also been suggested as having potential application to DPL. It provides that an ‘officer' includes a person who either makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the entity or has the capacity to affect the entity's financial standing. This definition also has some positive aspects, as it is not limit those individuals liable to only those in formal roles. However, it may be described as being too wide as it potentially catches anyone who merely affects the ‘entity's financial standing' which could be an unlimited amount of individuals within a company. Financial influence is also an unsuitable criterion for determining liability, as a person who can affect the financial standing of a company is not necessarily in control of company decision-making. Furthermore, it may also fail to catch individuals who are given responsibility on a one-off basis. A balance maybe to use part (c)(i) of the Corporations Act 2001 (Cth) definition of ‘ officer', which can be closely aligned with the definition supported by CAMAC and ALRC.
It has also been suggested that a type of responsible or designated officer liability may be adopted whereby the DPL provisions would only apply to designated employees who have management responsibilities in respect of the matters to which the contravention relates. For example, an individual can be placed in charge of all environmental aspects of the company and would therefore be liable for any catch and is arising out of this area. This type of liability may encourage individuals to take greater responsibility for their designated areas and therefore ensure a greater level of compliance. Such an approach may however be problematic, as an individual who is designated to be a ‘responsible officer' May not be adequately trained or have appropriate skills, be starved of funds, may not have recommendations acted upon or may not have direct line responsibility for the breach concerned and therefore may be unfairly held to be liable as a result. Therefore, imposing liability on a ‘responsible officer' May not be practical, as it may not fully comprehend how companies operate. This would obviously defeat the purpose of the DPL legislation. However, adequate defences or fault elements would prevent these individuals from being liable. Another major concern is that such an approach may promote the use of corporate ‘scapegoats' or create a ‘vice president for going to jail' whereby individuals are merely used for the purpose of shielding blame from the real culprits within the company. This may be a workable reality for unethical directors and would obviously be undesirable given the aims of DPL.
Furthermore, it has been argued that DPL could potentially impose criminal liability on individuals who have dissented to that course of action that causes the offence, which would be undesirable. The ALRC suggests that personal liability should depend on whether they were in a ‘position to influence the conduct that resulted in the offence'. This formulation is extremely desirable as it solves the problem where a dissenting director could be held liable. It also protects people who don't have functional authority within a company or with regards to the conduct in question. Also, a non-executive director of a large company can not be expected to contribute much more than decisions on questions of policy and therefore should not be liable for all decisions made by management. Such a provision would protect these types of individuals. On the other hand, it could be argued that directors should remain fully informed and in control of their companies as that is what the community expects from them. Therefore, if a ‘position to influence' element was introduced into the DPL test, it may provide a director with an ‘out' from liability as they may simply argue that they were too far removed from the offending conduct. However, as considered above, the reality is that in large corporations directors may not be able to keep on top of every decision that is made and inevitably have to delegate their duties, therefore removing themselves from decision-making. Therefore, by having this ‘position of influence' requirement, directors would be able to delegate tasks or dissent without fear of prosecution. This would generate fairer outcomes for directors and promote the efficient operation of business and therefore should be adopted.
Criminal liability should attach to individuals ‘… both vertically within corporate hierarchies and laterally across a broad spectrum of those with responsibility for preventing harm' and therefore the approach modified by CAMAC seems to best achieve this. Therefore, the most appropriate test would apply to an ‘ individual, by whatever name called, there was a director or other officer of the corporation or otherwise took part, always otherwise concerned, in the management of the corporation,' who was in a position of influence with regards to the offending conduct. This formulation is extremely desirable as it strikes an appropriate balance by capturing a wide range of people who can affect the company's conduct, whilst relieving individuals who are unable to influence the conduct of the company that resulted in the offence being committed from liability.
7 Sliding Scale Of Liability For The Individual
Directors and officers have differing roles and responsibilities in relation to running of their companies and therefore, it could be argued that it is unfair that officers or other individuals are subjected to the same penalties as directors. This seems to fit with the object of criminal law, which is to punish individuals according to how blameworthy they are. If an individual deserves greater blame, then that person should be more liable. In a DPL sense, this could mean that directors, by virtue of their position as directors, would be deemed to be more responsible than offices or other individuals of the corporation and should be subject to harsher penalties. It seems sensible that directors' failures to live up to their obligations would be more serious than other individuals with lesser positions within the company. Therefore, a provision may be inserted specifically directing the court to reduce the penalties and sentencing depending on the level of responsibility the individual holds within the company. However, this fails to consider that, as discussed earlier, large companies must have the ability to delegate and therefore offices or other individuals, if given the responsibility arguably should be subject to the same responsibilities as directors. Furthermore, the Court will factor the directors level of culpability into sentencing. In Page v Walco Hoists Rentals Pty Ltd (No 2), Justice Wright stated that the accused's degree of culpability was not always to be equated to that of the company and that an assessment of the culpability of the manager would involve consideration of the role of the defendant in the management of the corporation, the gravity of the offence committed by the company and the role played in that offence by the manager.
Alternatively, if a two-tier test is in fact adopted, it could be argued that individuals other than directors and officers should not be subject to strict liability test for minor offences. This is because as ‘…many minor offences are concerned with administrative matters…it will often be more appropriate to place liability on one person, such as a director or secretary rather than dividing responsibility among a range of persons according to the functional test it out in the template.' This may act as an extra incentive for directors and officers to maintain control over the ongoing operations of the company. It may also make it easier for revelatory bodies to prosecute given they won't have to undertake an examination of who was responsible for the offence. Furthermore, it has been shown that it is less likely that individuals other than directors will be prosecuted for minor offences. However, it would seem more appropriate if the determination of culpability of an individual is left to the Court during sentencing, as they would be able to make a more detail assessment on a case-by-case basis.
C. Possible Defences
The following section considers whether some of the commonly used offences to DPL would be appropriate under the new framework. It should be noted that all of the standard criminal offences would apply to an individual charged with a DPL offence. Any defences used must be realistic, in that they must not be so hard for the defendant to satisfy that they act as a deterrent for directors to develop and implement systems or practices to ensure corporate compliance. However, the defences must not be too wide to allow individuals to avoid liability through their ‘inactivity or acquiescence'.
1 Due Diligence
It is arguable that a due diligence defence may be highly desirable in regards to DPL is the term ‘due diligence' is ‘…better known and understood by directors…' This is because this defence is already found in the Corporations Act 2001 (Cth) and is also common in many of the DPL provisions. Therefore, directors will be more likely to be able to know how to effectively comply with it. The term ‘due diligence' implies that a high level of precautionary conduct is required, therefore a director must be able to show that they have taken ‘active steps and practical measures to ensure that [their] corporation is undertaking best industry practices…' in order to have the defence available to them. As the default elements, ideally guidance, such as that provided in Commonwealth legislation could be used, however this will not be considered in this research paper.
A defence of due diligence would encourage directors to create and implement policies and procedures within their corporation to point to if they are charged with a DPL offence. Such procedures would ensure that the company is effectively monitored and would prevent a director from becoming liable in circumstances such as where an employee is dishonest and causes the corporation to commit an offence. Therefore, the due diligence defence should be used in the strict liability test.
2 No Control And/Or Influence
It has been argued that ‘… fundamental concerns of justice require that a person not be convicted where they could not alter the activity to ensure that it is not breached the legislation.' Such an argument seems unfair as criminal law seeks to attribute and punish blameworthy parties and there is a no control / influence defence seemed critical to achieving a fair strict liability test. This defence is also quite common under the various DPL provisions throughout Australia and therefore may be useful for the new framework. To establish this defence, the person must be able to give evidence of such inability in order to discharge the burden on the balance of probabilities. This defence is quite clear to the ‘powerless to prevent or correct the violation' defence under the United States RCO doctrine discussed above, and also the ‘no influence' fault element in the CAMAC model, which again highlights its relevance. Therefore, the defence of no control or influence should be implemented under the new test.
3 Other Defences
The reasonable steps to defence are another defence that is seen in provisions implementing DPL in Australia. However, this defence is effectively part of the due diligence defence, as it is hard to see where a person has exercise due diligence but not taken reasonable steps and therefore should not be included as a separate defence.
The ‘no knowledge' defence is another potential defence that could be used in the DPL provision is a defence to the strict liability test. Knowledge of the conduct that led to the wrongdoing is an essential part of criminal activity; therefore a director who has no knowledge should not be a party to the offence. However, if no knowledge is a result of a lack of care on behalf of the defendant, they should not be relieved of liability. Furthermore, it may be too easy for directors to establish that they had no knowledge and therefore may provide an easy escape from liability of the directors, which would be undesirable. Therefore, the ‘no knowledge' defence should not be implemented under the strict test.
It has also been suggested that a defence based on ‘reasonable reliance on information provided by others' is necessary. This defence is used in the Corporations Act 2001 (Cth) and therefore directors will have knowledge of how it operates. Furthermore, it recognises that corporations can be extremely complex structures and directors cannot review every piece of information that is made available to them. However, directors must not unreasonably rely on any information. Therefore, this would be an appropriate defence to include in the strict liability test.
This research paper has illustrated the importance of DPL in ensuring corporate compliance in Australia's business sector. In attempting to develop a standard test of DPL, it is recognised that although CAMAC has indicated that DPL may be unnecessary, it is possible that directors may have to live with this type of liability for years to come. The standard framework attempts to strike a balance between what is fair for directors and what is fair for the other parties with interests in this area, the environment, the consumer, the employee, the prosecutor and Australia as a whole. This new framework will hopefully provide for a fairer system of DPL whereby conscientious directors are protected from prosecution but those whose fail to act in accordance with the standards expected of them will be punished accordingly.
The standard framework will take the form of a two-tier test and can be viewed fully in Appendix One of this research paper. Both tests will apply to an individual, by whatever name called, who was a director or other officer of the corporation or otherwise took part, or was otherwise concerned in the management of the corporation.
The first tier will be a form of fault-based liability and will only apply to more serious offences. The burden of proof will be clearly placed on the prosecution to establish both the physical and fault elements of the test. Individuals will only liable if they were reckless or negligent, as to whether the contravening conduct would occur. They must also have been in a position to influence the conduct which the led to the commission of the offence in order to face liability. However, a defence that the individual took all reasonable steps will not be available to directors. Finally, guidance, from the CCA will be provided in relation to what constitutes ‘reckless' and ‘negligent' conduct. The second tier test will be a form of strict liability and will only apply to less serious offences, being those offences with no prison sentences and smaller fines. The defences that directors will be able to use will be ‘due diligence', ‘no influence' and ‘reasonable reliance on information provided by others'. However, the defendant will have the legal burden of proof to establish each defence on the balance of probabilities.
Appendix 1 - The Framework
Derivative personal liability
A law that seeks to impose derivative personal liability upon an individual of a corporation may do so only if one of the following tests are satisfied:
(1) Where a corporation contravenes relevant provisions, the prosecution must prove the following physical and fault elements in any action against an individual based on that individual's position in the company in relation to that contravening conduct:
(a) the offence committed by the body corporate was a serious offence;
(b) the individual, by whatever name called, was a director or other
officer of the corporation or otherwise took part, or was otherwise
concerned, in the management of the corporation;
(c) the individual was in a position to influence the conduct of the body corporate in relation to the contravening conduct; and
(d) the individual was reckless or negligent as to whether, the contravening conduct would occur.
(2) An offence is serious if it imposes a prison sentence or fine greater than $50,000.
(3) In determining whether a director has been reckless guidance should be sought from section 5.4 of the Criminal Code Act 1995 (Cth).
(4) In determining whether a director has been negligent guidance should be sought from section 5.5 of the Criminal Code Act 1995 (Cth).
(1) Where a body corporate commits a minor offence under the relevant provisions, any individual, by whatever name called, who was a director or other officer of the corporation or otherwise took part, or was otherwise concerned, in the management of the corporation is taken to have committed the same offence.
(2) It is a defence to a charge brought under sub-section (1) against an individual, by whatever name called, who was a director or other officer of the corporation or otherwise took part, or was otherwise concerned, in the management of the corporation if that individual proves that:
(a) they, being in such a position, used all due diligence to prevent the commission of the offence;
(b) they were not in a position to influence the conduct of the body
corporate in relation to the commission of the offence; or
(c) the commission of the offence was due to reasonable reliance on
information supplied by another person.
(3) An offence is serious if it does not impose a prison sentence or fine greater than $50,000.
AWA Ltd v Daniels (trading as Deloitte Haskins & Sells) (1992) 10 ACLC 933; (1992) 7 ACSR 664.
Charlton v Baber  NSWSC 745.
Chan Kau v The Queen  AC 206.
Chamberlain v The Queen (No 2) (1984) 153 CLR 521.
Daniels v Anderson (1995) 16 ACSR 607; 13 ACLC 14.
Davies v Health and Safety Executive  EWCA Crim 2949.
Department of Environmental Protection v Memories (WA) Pty Ltd and Michael George Donnes (Unreported, Magistrate Micheledes, October 1998).
Davey v Corey  AC 477, 486.
DPP v Esso  VSC 263.
DPP v Morgan  AC 182.
Giorgianai v R (1985) 156 CLR 473.
He Kaw Teh v R (1985) 157 CLR 523.
HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd  1 QB 159. Hoch v The Queen (1988) 165 CLR 292.
Hookham v The Queen (1994) 181 CLR 450.
Inspector Glass v Arides Nolasco (unreported, CIMC(NSW), Staunton IM, 97/1729, 18 December 1998).
Johnson v R (1976) 136 CLR 619; 11 ALR 23; 51 ALJR 57.
La Fontaine v The Queen (1976) 135 CLR 62.
Mancini v DPP  AC 1.
May v O'Sullivan (1955) 92 CLR 654;  ALR 671; (1955) 29 ALJ 375. Mistmorn Pty Ltd (in liq) v Yasseen (1996) 21 ACSR 173.
Page v Walco Hoist Rentals Pty Ltd (No 2) (2000) 99 IR 163.
Proudman v Dayman (1941) 67 CLR 536 at 540; He Kaw Teh v R (1985) 157 CLR 523.
Re HIH Insurance Ltd v Adler (2002) 41 ACSR 72.
Rich v CGU Insurance Limited; Silbermann v CGU Insurance Limited  HCA 16.
R v Edwards  QB 27.
R v Falconer (1990) 171 CLR 30; 96 ALR 545.
R v Null  VR 641; (1990) 49 A Crim R 253.
R v Mullen (1938) 59 CLR 124.
Salomon v Salomon & Co Ltd  AC 22.
State Pollution Control Commission v Kelly (1991) 5 ACSR 607.
Thomas v The Queen (1960) 102 CLR 584.
Tesco Supermarkets Ltd v Nattras  AC 153;  2 All ER 127.
Trevor Ivory Ltd v Anderson  2 NZLR 517.
Tsang Ping-Nam v The Queen  1 WLR 1462.
Thomas v The Queen (1960) 102 CLR 584.
United States v Park 421 US 658 (1975).
Van Leeuwen v The Queen (1981) 36 ALR 591.
Woolmington v DPP  AC 462;  All ER Rep 1.
WorkCover Authority (Insp Dowling) v Caster  NSWIRComm 154.
Corporations Act 2001 (Cth).
Criminal Code Act 1995 (Cth).
Environmental Protection and Biodiversity Conservation Act 1999 (Cth).
Hazardous Waste (Regulation of Exports and Imports) Act 1989 (Cth).
Income Tax Assessment Act 1936 (Cth).
State and Territory Legislation
Dangerous Substances Act 1979 (SA).
Dangerous Goods Act 1998 (Tas).
Dangerous Goods (Transport) Act 1998 (WA).
Dangerous Goods Safety Management Act 2001 (Qld).
Dangerous Goods Act 1985 (Vic).
Environmental Protection Act 1993 (SA).
Environmental Management and Pollution Control Act 1994 (Tas).
Environmental Protection Act 1997 (ACT).
Environmental Protection Act 1970 (Vic).
Environmental Protection Act 1994 (Qld).
Environmental Protection Act 1986 (WA).
Fair Trading Act 1987 (SA).
Fair Trading Act 1970 (Vic).
Fair Trading Act 1987 (WA).
Fair Trading Act 1999 (Vic).
Occupational Health and Safety Act 2000 (NSW).
Occupational Health, Safety and Welfare Act 1986 (SA).
Occupational Safety and Health Act 1984 (WA).
Occupational Health and Safety Act 2004 (Vic).
Protection of the Environmental Operations Act 1997 (NSW).
Road and Rail Transport (Dangerous Goods) Act 1997 (NSW).
Waste Management and Pollution Control Act 1998 (NT).
Workplace Health and Safety Act 1995 (Tas).
Workplace Health and Safety Act 1995 (Qld).
Transport and Works Act 1992 (UK).
Environmental Act 1995 (UK).
Disability Discrimination Act 1995 (UK).
Plant Varieties Act 1997 (UK).
Antarctic Act 1994 (UK).
Criminal Justice Act 1994 (Irish).
Animal Remedies Act 1993 (Irish).
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