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TalkingPoint: Implications Of Recent Legal Decisions On Director Duties In Australia « Back
July 2012
FW moderates an online discussion on recent legal decisions affecting director duties in Australia between Keith Bethlehem and David Miller, partners at Colin Biggers & Paisley.

FW: From a legal standpoint, what has been the impact of recent cases such as James Hardie, Centro and Bridgecorp on the duties and liabilities of directors in Australia, including the implication for in-house counsel?

Bethlehem: The Hardie and Centro decisions highlight that directors are accountable for decisions made by the board. Hardie emphasised the importance of each director taking responsibility for the accuracy of company statements to the market. Similarly, Centro clarified directors’ obligations with respect to financial matters such as financial reports. Both cases propound the need for directors to understand company documents and the representations they make even where accounting standards or financial structures are complex. In our view that approach by the Courts is uncontroversial and does not create new law. It is not enough for a director to fulfil his or her duties by solely relying on the judgment and approval of fellow directors or expert advisers. In Centro directors were expected to have sufficient knowledge of accounting principles to enable them to objectively assess the company’s accounts and, the Court held, cannot simply rely on auditors. Hardie presents specific challenges for those general counsel who also act as company secretary – an ‘officer’ for the purpose of the relevant legislation. The dual role is common, being held in more than 40 percent of Australian public companies. The High Court held that the two roles cannot be separated to avoid liability as an officer of the company under the Corporations Act by arguing that a task was being performed as general counsel and not as an officer. Bridgecorp, a NZ decision, has caused significant concern in the Australian D&O insurance space because the relevant legislation is mirrored in three Australian States, including NSW. The decision could mean that, in NSW at least, under a D&O policy with a combined defence costs and loss limit, the policy limit should be preserved for the benefit of paying loss to plaintiffs under the statutory charge, not the directors’ defence costs. The decision renders directors uninsured and personally exposed to large defence costs where claims exceed the policy. We are already seeing some insurers in Australia being proactive and creating new products to try to overcome the potential exposures a Bridgecorp-style decision could have for Australian directors. We also expect legislative reform shortly.

Miller: The James Hardie and Centro decisions have had a significant impact in focusing attention on directors’ duties. The Courts are demonstrating a consistent view that directors should be held to high standards in carrying out their duties. It is in this context of increased potential liability that the Bridgecorp decision, currently on appeal to the New Zealand Court of Appeal (and I understand the appeal will be heard in September and October this year), finds its significance. By way of background and put very simply – following the collapse of the company, civil and criminal proceedings were commenced against the directors who called on their D&O policy to fund their defence costs. However, the Receiver asserted a charge over the policy on the basis that it intended to commence proceedings against the directors. In effect, the Bridgecorp decision means that some D&O policies may not operate intended and provide directors with funding for defence costs in certain circumstances.

FW: What kind of prosecution and penalties might be issued to directors who breach their duties?

Miller: The matters for which a director can be prosecuted range from failure to comply with the regulations preventing those directors, and related parties, whose remuneration is disclosed in the remuneration report from voting on that report to dishonestly using one’s position to gain an advantage or cause a detriment. In early June Treasury released the second tranche exposure draft of the Personal Liability for Corporate Fault Bill 2012. The first tranche was released earlier this year. This is worth mentioning because the Bill sets out proposed amendments to director’s liability legislation and, if enacted, will see directors held criminally liable for the company’s breach of certain legislation, such as the Corporations Act, Insurance Contracts Act, Foreign Acquisitions and Takeovers Act and Pooled Development Funds Act, Classification Act, Health Insurance Act and Therapeutic Goods Act. Penalties will range from imprisonment to a fine or banning orders. A significant consequence of a director breaching his or her duties is the damage to that person’s reputation, not to mention potential financial consequences.

Bethlehem: In terms of prosecution and criminal penalties, Australia’s corporate regulator, ASIC, can prosecute directors for breaching certain of their duties under the Corporations Act. For example, a director commits an offence and can be subject to prosecution and criminal penalties if they are reckless or intentionally dishonest and fail to act in good faith in the best interests of the company or for a proper purpose. A director who commits an offence under the Corporations Act may be fined up to $220,000, or imprisoned for up to five years, or both. Regarding civil penalties, Sections 180 to 183 of the Corporations Act impose upon directors general duties of care and diligence, good faith, avoiding a conflict of interest, and to not improperly use information. Section 588G of the Corporations Act imposes a duty on directors to prevent companies from trading whilst insolvent. A breach of any of these duties can result in civil penalties for directors and officers, namely, a pecuniary penalty order of up to $200,000, a declaration of contravention, a disqualification order for a period of time which the court considers as appropriate, or a compensation order.
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