On 27 January 2012, David Bradbury (the Parliamentary Secretary to the Treasurer) released for public consultation the first tranche of proposed amendments to Commonwealth legislation to implement principles approved by the Council of Australian Governments (COAG) to harmonise derivative liability for corporate fault across Australian jurisdictions. The proposed amendments are contained in the Personal Liability for Corporate Fault Reform Bill 2012 (Bill).
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Directors’ liability reform project
At present, there are hundreds of Australian laws that impose personal liability on directors and other corporate officers for contraventions of the law by their companies. Often these laws impose strict liability, making directors and other corporate officers automatically liable if their companies contravene the law, even where they may not be aware of, or have the ability to prevent, the contravention. In many cases, the usual burden of proof is reversed, obliging corporate officers to prove their own innocence. Consequently, there has been growing concern in recent years about the consistency and fairness of these laws, which unnecessarily create significant burdens for corporate officers, particularly their own personal compliance, as well as recurring issues of criminal justice and equality.
Accordingly, the directors’ liability reform project of COAG is designed to harmonise the imposition of personal criminal liability for corporate fault across federal, state and territory legislation by reference to an agreed set of principles which aim to ensure that, where derivative liability is considered appropriate, it is imposed in accordance with principles of good corporate governance and criminal justice and in a manner that will promote responsible entrepreneurialism and economic growth.
The Bill relates only to Treasury (non-taxation) portfolio legislation. In other words, it appears that we are to be drip-fed amendments to Commonwealth legislation, potentially on a portfolio by portfolio basis rather than on a whole-of-government basis, which does not auger well for a harmonious approach within the Commonwealth Government, let alone between the various Australian Governments. At this stage, there has been limited progress by the States and Territories in releasing draft legislation, and it is now over two years since COAG approved the principles (COAG Principles) developed by the Ministerial Council for Corporations.
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The COAG Principles are as follows:
1. Where a corporation contravenes a statutory requirement, the corporation should be held liable in the first instance.
2. Directors should not be liable for corporate fault as a matter of course or by blanket imposition of liability across an entire Act.
3. A ‘designated officer’ approach to liability is not suitable for general application.
4. The imposition of personal criminal liability on a director for the misconduct of a corporation should be confined to situations where:
a) there are compelling public policy reasons for doing so (e.g. in terms of the potential for significant public harm that might be caused by the particular corporate offending);
b) liability of the corporation is not likely on its own to sufficiently promote compliance; and
c) it is reasonable in all the circumstances for the director to be liable having regard to factors including:
i) the obligation on the corporation, and in turn the director, is clear;
ii) the director has the capacity to influence the conduct of the corporation in relation to the offending; and
iii) there are steps that a reasonable director might take to ensure a corporation’s compliance with the legislative obligation.
5. Where principle four is satisfied and directors’ liability is appropriate, directors could be liable where they:
a) have encouraged or assisted in the commission of the offence; or
b) have been negligent or reckless in relation to the corporation’s offending.
6. In addition, in some instances, it may be appropriate to put directors to proof that they have taken reasonable steps to prevent the corporations’ offending if they are not to be personally liable.
Since the COAG Principles were adopted on 29 November 2009, the Business Regulation and Competition Working Group, comprising representatives from Commonwealth, State and Territory Governments, developed supplementary guidelines (BRCWG Guidelines) and then each Government proceeded to separately audit their own legislation against the COAG Principles and BRCWG Guidelines. On 11 February 2011 the Reform Council of COAG published a performance report1 which identified serious concerns about the progress of reforms relating to derivative liability and the failure to implement any inter-governmental process to ensure there will be nationally consistent outcomes relating to those reforms.
Given the long period of gestation, the Bill itself has remarkably little substance.
1Titled “National Partnership Agreement to Deliver a Seamless National Economy”.
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Corporations Act 2001
Proposed amendments include:
1. Responsibilities of the company secretary:
Section 188 designates responsibility to a company secretary for certain administrative functions of the company. It is proposed this section be amended by reducing the liability imposed on company secretaries so that a breach of section 188 is subject to a civil penalty, rather than constituting an offence. Further, the Courts will become entitled to make a declaration of contravention if a company secretary has contravened section 188. However, their ability to order a company secretary to pay a pecuniary penalty will be limited to $3,000 for breaches of these responsibilities.
2. Location of registers:
The responsibilities of a company secretary will be extended under section 188 to purportedly include section 1302, which requires that a register of charges be kept, subject to certain exceptions, at the registered office or at an office at the principle place of business in Australia.
However, section 1302 was repealed by the Personal Property Securities (Corporations and Other Amendments) Act 2010, effective 30 January 2012.
3. Duties of responsible entity:
Section 601FC(1) sets out the considerations of a responsible entity of a registered scheme when exercising its powers and carrying out its duties. Section 601FC(6) currently extends personal liability for intentional or reckless involvement in the breach of these duties – this section will be repealed, although the standard legal principles regarding accessorial liability for those involved in the commission of offences would remain.
Schedule three lists the penalties available for breaches of relevant provisions. Amendments have been proposed to increase the severity of certain penalties listed in the Schedule.
Examples of the proposed increases include:
|Failure by a company to have a registered office in Australia, or to lodge notice of a change of address of its registered office with ASIC not later than 28 days after the date on which the change occurs (sections 142(1), (2))||60 penalty units*|
|Failure of the registered office of a public company to be open to the public within specified hours, or to lodge notice of a change in the opening hours of its registered office with ASIC before the day on which a change occurs (sections 145(1), (3))||60 penalty units*|
|Failure to lodge with ASIC notice of a change of the address of a company’s principle place of business not later than 28 days after the date on which the change occurs (section 146(1))||60 penalty units*|
|Failure to notify ASIC of change to member register or share structure by proprietary company (see sections 178A(1), 178C(1))||60 penalty units*|
|Failure to notify ASIC of the personal details of a director, alternate director or secretary on their appointment, when their personal details change, or when cease acting as a director or secretary within 28 days after the date on which the change occurs. (sections 205B(1), (2), (4), (5))||60 penalty units or imprisonment for one year, or both**|
|Failure to notify ASIC of share issue within 28 days after issuing shares, or attend to additional lodgement requirements for shares issued for non-cash consideration under a contract (sections 254X(1), (2))||60 penalty units*|
|Failure to lodge annual report with ASIC (section 319(1))||60 penalty units or imprisonment for one year, or both***|
* Currently five penalty units.
** Currently 10 penalty units or imprisonment for three months, or both.
*** Currently 25 penalty units or imprisonment for six months, or both.
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Other Commonwealth legislation
The Bill also contains some fairly minor amendments to the Foreign Acquisitions and Takeovers Act 1975,the Insurance Contracts Act 1984 and the Pooled Development Funds Act 1992.
Submissions on the exposure draft of the Bill close on 30 March 2012.
Mr Bradbury’s press release indicated that a further exposure draft bill covering the second tranche of proposed amendments to Commonwealth legislation is expected to be released for public comment in the first quarter of 2012.
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