COAG Report on reform of directors’ personal liability

Proposed directors’ liability reform

The Report states that the objective of this reform is to achieve a nationally consistent approach to the imposition of personal criminal liability for directors and other corporate officers in circumstances of corporate fault. In particular, to ensure that there is greater certainty for companies, their corporate officers and the public as to when a corporate officer may be personally criminally liable because of a company’s conduct. There are three key steps which the Council sets out for achieving this reform:

• agreement on principles for the imposition of personal liability for corporate fault;
• audits of Commonwealth, State and Territory laws against the agreed principles; and
• amendment of the legislative provisions which do not accord with the agreed principles, to bring them in line with the agreed principles.

Personal liability for corporate fault

Directors and other corporate officers are subject to a range of personal duties and obligations that impose criminal and/or civil liability on them in event of a breach of those duties. The Corporations Act 2001 (Cth) imposes criminal liability in a number of different ways. Section 184, for example, imposes criminal liability if a director or other officer is reckless or intentionally dishonest and fails to act in good faith in the best interests of the company or for a proper purpose.

Other offences may require conduct by another party as well as personal default by the individual. For instance, a director is criminally liable under section 588G of the Corporations Act if the company incurs a debt while insolvent and the director is also at fault, according to the tests of personal culpability under subsections (2) and (3) of section 588G.

State legislation also deals with personal criminal liability for company directors and officers. For example, in NSW under section 192H of the Crimes Act 1900 (NSW), an officeholder commits an offence where he or she makes a false or misleading statement with the intention to deceive members or creditors of the company. Another example is section 34 of the Occupational Health and Safety Act 2000 (NSW), which imposes criminal liability on individuals whose conduct causes a workplace death.

Progress of the reform

One of the concerns highlighted by the Report is that there has been no process at a multi-jurisdictional level to consider whether the reforms proposed by individual jurisdictions will lead to a nationally consistent, principles-based approach to the imposition of personal criminal liability of directors.

The Australian Institute of Company Directors (AICD) has expressed concern that the current process for reform has failed and that the current principles have left open the imposition of criminal liability in a potentially very wide range of circumstances (AICD Media Release, 11 February 2011). For example, one of the COAG agreed principles for directors’ liability for corporate fault is for the imposition of criminal liability where there are compelling public policy reasons for doing so. The AICD contends that this provides a loophole for imposing liability and has been an impediment to the States implementing genuine reform.

In conclusion, the speed of implementation of the reforms is unlikely to proceed quickly and as a result, the law in relation to directors’ personal liability is likely to remain fragmented for some time.

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