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Published: Fri, 02 Feb 2018
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 DP
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