Assessing criminal liability of directors – the State application of COAG guidelines

Extensive reform of Commonwealth and State legislation conducted over the past 3 years has not achieved any consistency on the matter of personal criminal liability of company directors.  Both NSW and Queensland have audited, reviewed and introduced amendments to relevant legislation, but with differing results – leaving directors and officers of corporations in Queensland with continued cause for concern about potential criminal liability.

This is despite all State and Territories, along with the Commonwealth, signing up to the National Partnership Agreement to Deliver a Seamless National Economy, on 7 December 2010.  The partnership agreement aimed to achieve a nationally consistent approach to the imposition of personal criminal liability for directors and other corporate officers for corporate fault.

At the time, the Council of Australian Governments (COAG), agreed to a set of six principles, along with detailed guidelines.  The principles indicated that personal criminal liability for officers was generally considered inappropriate, except in certain circumstances. 

According to these principles, personal criminal liability on a director for the misconduct of a corporation should be confined to situations where:

• there are compelling public policy reasons for doing so (such as the potential for significant public harm caused by the particular corporate offence)
• liability of the corporation is not likely on its own to sufficiently promote compliance, and
• it is reasonable in all the circumstances for the director to be liable considering:
• clarity of corporate obligations
• the director’s capacity to influence the conduct of the corporation, and
• the steps that a reasonable director might take to assure corporate compliance.

The principles further indicated that liability should occur where the director or officer encouraged or assisted in the offence or was negligent or reckless in relation to the corporation’s offending.  The guidelines specified that reversing the onus of proof should only occur if supported by rigorous and transparent analysis.

Results of the review

In New South Wales, the Miscellaneous Acts Amendment (Directors' Liability) Act No. 2 2011 (NSW) and the Miscellaneous Acts Amendment (Directors' Liability) Act 2012 (NSW) have resulted in the number of provisions imposing personal liability on company directors in NSW legislation being reduced from more than 1,000 to about 150.  NSW now only retains six statutes which require directors or officers to establish that they have not been involved in the contravention which may result in criminal conviction (reversing the onus of proof).

By contrast, the Directors’ Liability Reform Amendment Bill 2012 (Qld) is far less effective in achieving compliance with the COAG principles and guidelines.  The Australian Institute of Company Directors, in response to the Queensland Bill, estimated that after the legislation was passed there would still be in excess of 100 instances where directors or officers would remain criminally liable for a corporation’s fault unless they established their lack of involvement in the contravention.

Clearly, further reform in Queensland is required to address the ongoing situation of company directors and officers being potentially criminal liable in circumstances where their own culpability need not be established by regulatory authorities.

We will keep you posted as changes to Queensland state legislation progress.

Professor Paul von Nessen

A widely published corporate and commercial lawyer, Paul is a Consultant to McCullough Robertson on Corporate Advisory issues.

Continuous disclosure changes

Proposed changes

In October 2012, ASX released a package of proposed changes to the guidance for interpretation of continuous disclosure provisions in the Listing Rules.  Central to the amendments was a substantial expansion and revision of Guidance Note 8, previously updated in June 2005.

The key changes proposed included:

• a comprehensive update to Guidance Note 8
• the creation of a new ‘Abridged Guide’ for directors
• clarification that 'immediately', rather than meaning 'instantaneously', should be interpreted as 'promptly and without delay'
• further guidance on the use of trading halts
• additional specific disclosure requirements in Chapter 3 Listing Rules – e.g. the material terms of any employment, services or consultancy contract for a CEO, director or other related party, and
• further guidance on the Listing Rule 3.1A exception, including moving the reasonable person test to the third and final test in that rule – this change is reflected in the revised flowchart below and attached, replacing the version on page 20 of The Chairman's Red Book. 



Click to view larger



End of consultation process and effective date for changes

The consultation process has now been completed and updated versions of Guidance Note 8, the Abridged Guide and other related amendments to the ASX listing rules were released on 13 March 2013.

The revised version of Guidance Note 8 is scheduled to be published and come into effect on 1 May 2013.

Directors' duties

Shareholders have pooled their funds for a common purpose - to conduct an enterprise that they presumably could not afford to conduct on their own. The role of public company directors is to guide and grow business, observing the duties described below.

Chairman have a particular role to lead the board and to establish an environment in which executive management can successfully execute the strategy set for the company by the board.

As those ultimately responsible for the company's actions and the shareholders' funds invested in the company, directors are subject to a strict set of duties, reflecting the position of trust they hold.

An ability to fulfill these duties while successfully growing the business is the mark of a good company director; a clear understanding of risk versus reward is essential.

In simple terms, being a custodian of other people's money is a duty of the highest order and occasionally directors lose sight of this.

Summary of key duties

Directors must:

• act in good faith in the best interests of the company
• act for a proper purpose
• act with care and diligence
• not misuse information they receive in their role, or misuse their position, for their own or someone else's personal gain
• avoid conflicts of interest, and
• prevent insolvent trading.

Directors' duties have evolved over time. These are now set out in statutes (primarily the Corporations Act), however, a body of case law expands upon the underlying legal and equitable principles. A company's constitution generally also sets out additional duties and obligations of the directors of the company.

As a general rule, directors owe their duties to the company, not the shareholders or creditors of the company. However, there are provisions in the Corporations Act under which a director can be liable to these stakeholders (e.g. liability for insolvent trading).

A brief overview of each duty is set out in the the Chairman's Red Book. Click here to request a copy.