There are over 500 pieces of legislation in Australia which impose personal liability on directors and officers of public companies limited by guarantee, and committee members of incorporated associations.
As a Director1, you should be aware of your legal obligations. While we cannot summarise all of the legislation that imposes obligations on Directors in this article, a good starting point is the directors’ duties which all Directors must comply with.
To help you understand the risk associated with your legal obligations, we have included some commentary on how frequently Directors have been “getting into trouble”. We also have a quick look at defences, indemnities and insurances for Directors to help you to manage that risk.
As a Director of a company or association, you must:
Directors must comply with the company’s governing document – its constitution. The constitution is a legal contract that every Director enters into with the company/association when that Director agrees to sit on the board.
Directors must comply with the ‘Director’s duties’ (these duties are prescribed by legislation and case law and are largely the same whether you are a Director of a company or an association) which are:
(a) be honest and careful in your dealings both with the company/association and on behalf of the company/association;
(b) know what the company/association is doing, including how the company/association is faring financially;
(c) make sure that the company/association can pay all of its debts on time;
(d) ensure that the company/association keeps proper financial records;
(e) always act in the best interests of the company/association, even if this may not be in:
a. your own interests; or
b. the interests of any member organisation that has appointed or elected you onto the Board or employs you; and
(f) do not improperly use your position to gain an advantage or cause detriment to the company/association.
(g) use any information you receive through your position properly and in the best interests of the company/association. Using that information to:
a. gain, directly or indirectly, an advantage for:
ii. the member organisation which elected/appointed you or employs you; or
iii. any other person; or
b. harm the company/association,
may be a crime or may expose you to other claims.
(h) always disclose any material personal interest to other Directors as soon as practicable after any conflict arises.
Directors should be aware of their possible personal liability for breaches of other State or Federal legislation. For example, environmental and work health and safety legislation now often provides that both a corporation and the Directors or persons concerned in its management will be guilty of offences committed by the corporation regardless of any active involvement, for example, section 10 of the Environmental Offences and Penalties Act 1989 (NSW).
Another area in which there may be hidden dangers for Directors is revenue law. Directors should be aware of the potential personal liability for breaches of State and Federal legislation dealing with matters such as: customs and excise, stamp duty, payroll tax and land tax under all of which the persons in control of a corporation may be personally liable in cases where the corporation has failed to pay.
Directors can be personally liable for any unpaid superannuation. Directors must ensure that the organisation either meets its obligations to pay superannuation, or goes promptly into voluntary administration or liquidation. The penalty which could be imposed on a Director is equal to the unpaid amount of the organisation’s liability under its obligation. This duty applies to Directors of incorporated organisations as well as members of a committee of an unincorporated association.2
Directors of registered charities can be personally liable if the charity is found to have committed an offence where the Director aided, abetted, counselled or procured the relevant act or omission and did not take reasonable steps to ensure the charity did not commit the offence.3
The graph below summarises the types of penalties imposed on Directors of companies in the last financial year. The Australian Securities and Investments Commision (ASIC) and the Commonwealth Director of Public Prosecutions achieved 75 enforcement outcomes in the corporate governance area and 640 enforcement outcomes in the small business area. These penalties included criminal, civil and administrative action, enforceable undertakings and negotiated outcomes.
The majority of these penalties have been imposed on the Directors of for-profit companies. Apart from offences relating to shares and the market, the offences are in many cases the same as those that a not-for-profit Director could be charged with.
(For ease of reading the graph, we have grouped the penalties which are most relevant for not-for-profit Directors on the far right of the graph.)
Mr Lindberg, a former managing director of AWB Limited, contravened the Corporations Act 2001 (Cth) by failing to act on information available to him regarding the operation of the AWB Limited overseas. Mr Lindberg was fined $100,000 and disqualified from managing corporations for two years.4
Mr Ingleby, a former CFO of AWB Limited, contravened the Corporations Act by failing to act on information available to him regarding the operation of the AWB Limited overseas. Mr Ingleby was fined $40,000 and disqualified from managing corporations for 15 months.5
Mr Northcoate pleaded guilty to one count of dishonestly withholding information from the Compass Hotel Group Ltd board and using his position to gain financial advantage. Mr Northcoate also pleaded guilty to two counts of submitting misleading documents to ASIC.
Mr Northcoate was sentenced to a total effective sentence of two years imprisonment to be served by way of an Intensive Correction Order.6
Ms Baranov, former director of Bar Um Pty Ltd and MIB Systems Pty Ltd, failed to take an active part in the management of Bar Um and MIB Systems, failed to inform herself of all the activities of these companies and failed to take reasonable care to act diligently and in the best interests of the companies. Ms Baranov was disqualified from managing corporations for 18 months.7
Mr Plymin, Mr Elliott and Mr Harrison were the former directors of Water Wheel Holdings Limited and Water Wheel Mills Pty Ltd. Each of the directors had contravened the insolvent trading provisions of the Corporations Act and they were penalised as follows:
– In relation to Mr Plymin, the Court ordered that he:
o be banned from managing a corporation for 10 years;
o pay compensation of $1,428,000 to the companies (jointly with Mr Elliott);
o pay pecuniary penalties of $25,000; and
o pay ASIC’s taxed costs jointly with Mr Elliott, but neither was obliged to pay more than 80% of the total.
– In relation to Mr Elliott, the Court ordered that he:
o be banned from managing a corporation for four years;
o pay compensation of $1,428,000 to the companies (jointly with Mr Plymin);
o pay pecuniary penalties of $15,000; and
o pay ASIC’s taxed costs (jointly with Mr Plymin, but neither was obliged to pay more than 80% of the total).
– In relation to Mr Harrison, the Court ordered that he:
o be banned from managing a corporation for seven years; and
o pay compensation of $300,000 to the companies.8
Mr Baranov, former director of Bar Um Pty Ltd and MIB Systems Pty Ltd, failed to assist the liquidator to locate items, failed to take reasonable steps to ensure that financial records were maintained and failed to act with the reasonable care and diligence to allow Bar Um to trade in circumstances where its expenses exceeded its income. Mr Baranov was disqualified from managing corporations for 2 years.9
Mr Loiterton, Mr Hall and Mr Sapier, the former directors of Clifford Corporation Limited and a director of a subsidiary, Signature Group Australia Limited, each committed in excess of 11 acts of dishonesty with regard to their financial records, in contravention of the Corporations Act. These breaches resulted in the following penalties:
– Mr Barrie Loiterton was banned from managing a corporation for 17 years and fined $400,000.
– Mr Hall was banned from managing a corporation for 14 years and fined $285,000.
– Mr Sapier was banned from managing a corporation for eight years and fined $120,000.10
Mr Vizard, the former director of Telstra, used confidential information obtained while he was a director for an improper purpose. Mr Vizard was disqualified from managing corporations for 10 years and ordered to pay pecuniary penalties of $390,000.11
Seven directors and former Chief Financial Officer of Centro Properties Group and Centro Retail Group, received penalties for breaching their disclosure duties when they signed off on financial reports that failed to disclose significant matters. The Court fined Mr Scott $30,000, and disqualified Mr Nenna from managing corporations for two years. The Court ordered the defendants to pay ASIC’s costs of the action.12
Mr Durant managed a company while disqualified.
Mr Durant was prevented from managing a corporation for a further two years, in addition to his initial two year disqualification.13
Given the amount of legislation imposing personal liability on Directors, it is not surprising that there are also numerous defences available to Directors.
The main defence available to a Director is where the Director reasonably relied on information or expert advice. Generally, it is reasonable for a Director to rely on expert advice where the Director believes on reasonable grounds that the person who gave the advice was an expert in that area and the Director relied on that advice in good faith and after making an independent assessment of the information. We note that the independent assessment criterion is an important one – the Director must still understand the advice and assess that advice in the context of the Director’s knowledge of the organisation, and the complexity of the structure and operations of the organisation.
A Director is responsible for the exercise of a power by a person to whom that Director delegated the power. However, it is a defence for that Director if the Director believed on reasonable grounds that the delegate would exercise the power in accordance with the duties imposed on Directors, and the Director believed on reasonable grounds and after making proper inquires that the delegate was reliable and competent in relation to the power delegated.
Directors of charities will not be liable for an offence committed by the charity if the Director could not take part in the management of the charity at the relevant time due to illness, or the Director took all reasonable steps to ensure that the charity did not commit the offence.
Most Directors have some level of protection from certain personal liabilities through indemnity clauses in the organisation’s governing document which favour the organisation’s Directors and officers. Many organisations are finding that such indemnity clauses are not sufficient, and hence are also protecting their Directors by means of a deed of indemnity in favour of each individual Director.
However, there are important restrictions imposed by statute on the liabilities that may be indemnified by a company. The Corporations Act restricts the liabilities that may be indemnified by a company so that a company cannot indemnify a Director for:
– conduct involving a wilful breach of duty in relation to the company;
– a contravention of sections 182 or 183 of the Corporations Act which prohibit a Director from making improper use of information or improper use of their position; or
– liabilities incurred as a Director including:
o a liability owed to the company;
o a liability for a pecuniary penalty, or a compensation order, resulting from a breach of a civil penalty provision (including the insolvent trading provisions); or
o a liability that is owed to someone other than the company/related company and did not arise out of conduct in good faith.
As well as indemnities provided by an organisation to its Directors, many organisations pay for Directors and officers insurance (D&O Insurance). Generally, D&O Insurance consists of the following components:
– a direct cover component which provides indemnification to Directors where the company itself is unable or unwilling to do so;
– a company reimbursement component, which provides for the company to seek reimbursement for those amounts which it is required (or in some cases allowed), under its constitution, to indemnify the Directors; and
– optional extra protections, for example, providing cover for spouses of Directors.
A company can pay the premiums for an insurance policy that covers certain breaches of duty only. The company cannot pay premiums on policies that seek to protect the Director from a wilful breach of duty, or a breach of sections 182 or 183 of the Corporations Act – the Director would have to take out a policy to protect himself or herself from those breaches.
D&O Insurance generally excludes claims brought by one insured party against another insured party. Therefore, actions brought by the company (which are a significant source of liability for a Director) are excluded.
It is also worth noting that any D&O Insurance policy must not be inconsistent with the indemnities provided in the organisation’s constitution, so that one document does not negate the protections provided by the other.
• Australian Securities and Investments Commission (compliance) – http://www.asic.gov.au/
• NSW Fair Trading (committee obligations) – http://www.fairtrading.nsw.gov.au
• Australian Charities and Not-For-Profits Commission – http://www.acnc.gov.au/
• Office of Liquor, Gaming and Racing (fundraising) – www.olgr.nsw.gov.au/charitable_home.asp
• Anti-Discrimination Board – www.lawlink.nsw.gov.au/adb
• Workcover Authority of NSW (safety) – www.workcover.nsw.gov.au
For more information regarding this article, please contact:
1 Whilst their legal obligations are slightly different, for the purposes of this article, we will collectively refer to directors, officers and committee members as ‘Directors’.
2 Division 269 of the Tax Administration Act 1953 (Cth).
3 Section 180-10 of the Australian Charities and Not-for-profits Commission Act 2012 (Cth).
4 ASIC Report 336, April 2012, publication 12-19MR
5 ASIC Report 336, April 2012, Publication 12-19MR.
6 ASIC Report 336, April 2012, Publication 12-312MR.
7 ASIC Report 336, April 2012, Publication 12-283MR.
8 ASIC Publications, 03-203 Court hands down Water Wheel penalties, 30 June 2003.
9 ASIC Report 336, April 2012, Publication 12-283MR.
10 ASIC Publications, 04-320 Court hands down penalties against Directors of Clifford Group of companies, 30 September 2004.
11 ASIC Publications, 05-215 Steve Vizard banned for 10 years and fined $390,000, 28 July 2005.
12 ASIC Publications, 11-188MR Centro civil penalty proceedings, 31 August 2011.
13 ASIC Report 336, April 2012, Publication 09-174AD.