Directors Liability in Western Australia – its time to reform

The good news for Western Australian company directors and officers is that the Attorney General has announced that the Directors’ Liability Reform Bill 2015 is to be reintroduced into Parliament.

This Bill was first introduced in 2015 by the previous government.  It did not go past the Second Reading Speech.1

The personal criminal liability of directors and officers (who we will collectively refer to as directors) for offences committed by companies is a controversial topic.

Directors have personal criminal liability if they commit an offence themselves, or are accessories to the commission of an offence.

What is more controversial is the  extent to which  personal criminal liability should be imposed on a director for wrongful, and even criminal, acts of a corporation, in respect of which the director had no personal involvement.  Further, there has been an increasing tendency for State parliaments when introducing legislation to impose personal criminal liability and sanctions on directors for the conduct of the corporation.

On 23 July 2012, Coalition of Australian Governments (COAG), agreed to a set of principles and guidelines for the imposition of personal criminal liability on directors for corporate offences.  It was agreed that future legislation in Australia will comply with these principles, and that the states will review and amend the existing legislation with the COAG principles.  

The COAG principles are set out in the Second Reading Speech.  These are that personal criminal liability on a director for the misconduct of a corporation should be confined to situations where:

1. there are compelling public reasons for doing so, for example in terms of the potential for significant public harm that might be caused by the corporate offending;
2. liability of the corporation alone is not likely to sufficiently promote compliance;
3. it is reasonable in all the circumstances for the director to attract liability having regard to factors that include the obligation on the corporation, and in turn the director, is clear, the director; has the capacity to influence the conduct of the corporation; and, there are steps that a reasonable director might have taken to ensure the corporation’s compliance with the legislative obligation.

A central plank of the proposed reform is the concept that where personal criminal liability is to be imposed, the director is only liable if the director has not taken all reasonable steps to prevent the corporation from committing the offence.  The Second Reading Speech refers to this as “derivative liability”. 

What the Bill does

A review of state legislation has identified the Western Australian statutes that impose personal criminal liability on a director. 

In respect of many of the statutes, all personal criminal liability for directors has been removed, a move which should be welcomed by the director community. 

In others, the legislature has decided that some form of personal criminal liability should continue to be imposed on directors. Where this occurs, and in order to have a uniform approach, a new chapter will be inserted into the Criminal Code² that sets out the 3 types of liability: Type 1 (Section 44C), Type 2 (Section 44D) and Type 3 (Section 44E).

The maximum penalty for an offence committed by a director is one fifth of the maximum penalty that could be imposed on the body corporate.

In a Type 1 offence, the prosecution is required to prove every element of the offence, including that the director did not take reasonable steps. In other words, a director will be presumed to have taken reasonable steps to prevent the corporation committing the offence, unless the prosecution proves otherwise. This is consistent with normal principles of criminal responsibility, where the prosecution is required to prove every element of the defence.

In a Type 2 offence, the director is presumed to have committed the offence, unless the director can adduce evidence that suggests that there is a reasonable possibility the director took reasonable steps to prevent the commission of the offence.  In other words, if the director can show some evidence that they did take reasonable steps, then the prosecution bears the onus of proving that the director did not take reasonable steps to prevent the corporation from committing the offence.

In a Type 3 offence, the onus of proof is reversed, and the director is required to prove on the balance on the balance of probabilities that the director took reasonable steps to prevent the corporation committing the offence.

Proposed section 44F provides that these new provisions do not affect the liability of the body corporate for any offence, or affect the liability of a director (or anyone else) for any accessorial liability under other parts of the Criminal Code. 

Amendments to other Acts

The Bill proposes to amend about 60 existing Acts.  In around 22 statutes, derivative criminal liability is removed altogether.  In others, where personal criminal liability is to remain, the current provisions are deleted and replaced with provisions that categorise the offences as Type 1 or Type 3 offences, by direct reference to sections 44C and 44E of the Criminal Code.  There are no offences that have Type 2 liability, although section 44D is retained in the event the legislature decides to apply it to future offences.

Under the Mining Act³ and the Taxation Administration Act,⁴ accessorial liability is replaced with personal criminal liability by reference to the standard provisions in the Criminal Code.  Under the Mining Act, Type 1  liability is imposed for offences under that Act.  Under the Taxation Administration Act, there are offences that are Type 1 and others are Type 3 offences.In most other statutes, liability is categorized as Type 1 liability.  Type 3 liability is imposed in the following statutes, mostly on public interest grounds:

• taxation offences, namely the Stamp Act ⁵  and the Taxation Administration Act;
• Food Act;⁶
• Tobacco Products Control Act;⁷
• Environmental Protection Act;⁸ and
• Medicines and Poisons Act.⁹

Blanket liability for offences is removed, which means that the each statute must specify which offences create personal criminal liability, as well as the type of offence, to be imposed on directors, and what type The exception is the Fair Trading Act 2010, which retains a blanket liability for all offences under that legislation, but categorizes them as Type 1 offences. 

Reasonable steps

The concept of “reasonable steps” is an essential element in determining the liability: did the director take reasonable steps to prevent the commission of the offence by the corporation. 

In determining what are reasonable steps, all three types of liability provide that a court must have regard to:

• what the officer knew or ought to have known about the commission of the offence by the body corporate; and
• whether the officer was in a position to influence the conduct of the body corporate in relation to the commissioned event; and
• any relevant matter.

These provisions appear to allow for a lot of scope for judicial determination.  A criticism of the proposed reforms is that they still allow for uncertainty. They are, however, consistent with the COAG principles.  A more prescriptive approach could result in unintended consequences, and also be inconsistent with a national approach.

For these reforms to be effective, vigilance is required.  There is no statutory impediment to a future parliament introducing legislation that imposes personal criminal liability on a director in circumstances other than those outlined above.  This is, however, inconsistent with the intent of the reforms, and should be resisted.

Many interest groups representing directors, such as the AICD and the Governance Institute, may argue that these reforms do not go far enough, and do not take into account the different roles of directors and management.¹⁰  In all however, the Bill, if enacted, will be an improvement on the existing situation.  It will:

• create harmonisation of laws, at least in the states in which this legislation has been reproduced;
• introduce some certainty with respect to the circumstances in which a director has personal criminal liability; and
• provide a framework, when new legislation is introduced, the legislature must consider, and be able to justify, for the imposition of personal criminal liability for an offence committed by a corporation, and the type of liability that should be imposed.