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TalkingPoint: Personal Risks Facing Board Members Of Australian Companies « Back
February 2012
 
John Colvin, CEO and managing director of the Australian Institute of Company Directors, moderates a discussion focusing on the personal risks that face board members of Australian companies between Rehana Box at Blake Dawson, Michael Pryce at Chartis, and Stuart Davies at Gallagher Australia.



Colvin: In addition to the Corporations Act and other Commonwealth statutes, there are more than 700 State or Territory statutes that hold directors liable for breaches of the corporation, in many cases even when they have no personal involvement in those breaches. Can you tell us about some of the specific legal and regulatory changes in Australia which affect the personal risks to D&Os?
 
Davies: One legislative change which stands out at present is the implementation of the national OH&S laws in all states and territories throughout Australia. With effect from 1 January 2012, all states and territories have agreed to enact new, nationally consistent workplace health and safety laws. These changes now mean that directors and officers have firm duties to ensure their organisations comply with the obligations of the new health and safety laws in all states and reliance upon management to ensure compliance is not enough. Although the new law is very much still in its infancy, and therefore no known matters are in the public arena at present, the new laws do now expose directors and officers to possible liability resulting from a technical breach rather than where an incident or accident has actually occurred. Potential fines of up to $600,000 per individual or up to 5 years imprisonment may result in directors and officers reviewing their practices and undertaking additional training to ensure they meet the new requirements. Another topical issue for directors & officers at present relates to a recent decision in the Auckland High Court, Steigrad v BFSL 2007 Ltd – the Bridgecorp case – whereby it was ruled that a statutory charge be imposed on the D&O policy of Bridgecorp directors by virtue of secton 9 of the Law Reform Act 1936 (NZ). This in effect prevented the insurer from advancing directors defence costs. The civil claim was brought by the receivers against those directors for an amount greater than the combined defence costs and civil liability cover provided by the policy.

Pryce: Indeed, whilst directors face a plethora of legislation in Australia, new legislation has been relatively minimal.. Curiously we are seeing issues arise out of the more innovative reading of neglected legislation. One particular case being in New Zealand against the directors of Bridgecorp. In this case, the court found under Section 9, Law Reform Act 1936, that the proceeds of the D&O insurance that they purchased could not be used to meet the legal costs to defend the directors in the Bridgecorp claim. There is scope for an Australian court to come to a similar conclusion in New South Wales (NSW) (Section 6, Law Reform (Miscellaneous Provisions) Act, 1946), the Australian Capital Territory (ACT), and the Northern Territory. As in New Zealand, statutes in these Australian jurisdictions place a charge over the policy thus preventing the D&Os from accessing the defence costs. If D&O insurance is unable to fund an adequate defence of D&Os, this means that directors will have to fund the defence of any claim themselves, whether legitimate or spurious. Given the complexity of the matters involved and that the expense of a defence that can run into millions of dollars, it may well mean that executives will be shy in taking board positions. However, insurance is now available to provide interim defence cost protection to directors. Though directors should be mindful to ensure that the same carrier provides the defence and loss covers.
 
Box: Last month the Commonwealth government released the first tranche of long awaited proposed reforms to directors' liability laws. State and territory governments are yet to release any draft legislation. Accordingly it is premature to comment on the specific legal and regulatory changes ahead. The purpose of the reforms, once introduced, will be to implement a consistent approach to the imposition of criminal liability for corporate fault across all Australian jurisdictions. The principles upon which the reforms will be based seek to confine personal criminal liability of D&Os for corporate misconduct to situations where there are compelling public policy reasons for doing so, the liability of the corporation alone is not likely to sufficiently promote compliance and it is reasonable for the director to be liable in all the circumstances. Such circumstances would include where a director or officer has assisted in the commission of an offence or has been negligent or reckless in relation to an offence committed by the company.

Colvin: What kinds of prosecutions, settlements and penalties have you seen imposed upon D&Os in Australia? Are there any particular aspects of Centro, James Hardie or other cases worth highlighting?
 
Pryce: The Australian Securities & Investment Commission (ASIC) continues to be aggressive in its pursuit of D&Os. Since 2002-03, the number of public complaints received and reviewed has increased by 44 percent, according to ASIC. ASIC has had supervision of the Australian Stock Exchange since August 2010, and is using this expanded remit to pursue D&Os. As an example, ASIC pursued the directors of Centro for incorrectly classifying debt as non-current, when in actual fact it was current. In the case, the judge found that the directors were “intelligent, experienced and conscientious people”, and went so far as to query the vigour with which ASIC pursued the directors. While the judge was sympathetic in the case and awarded a single fine of $30,000, the legal costs that directors would have likely incurred were in the many millions of dollars.
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