By Andrew Crean, Special Counsel

It is well understood that under the Corporations Act (Cth) 2001 (Corporations Act) and general law principles, a director or officer owes a range of fiduciary duties[1] to his or her company which, if breached, may lead to personal liability. Perhaps less understood is that:

• in some circumstances, a director or officer may become personally liable for breaches of the law by a company they are a director or officer of at the time a contravention occurs[2]; and

• the director or officer will not always have a right of indemnification out of company assets for that personal liability.

The way in which the Fair Work Ombudsman (FWO) is now applying section 550 of the Fair Work Act (Cth) 2009 (Fair Work Act) highlights the personal liability risk assumed by directors and officers when accepting office, and the importance of:

• understanding the scope of any right of indemnity under the company constitution;

• understanding the restrictions on indemnities and insurance under Part 2D.2 of the Corporations Act; and

• considering whether directors and officers should enter a deed of insurance, access & indemnity with the company.

Accessorial liability for contraventions of the Fair Work Act

Under section 550 of the Fair Work Act:

“(1) A person who is involved in a contravention of a civil remedy provision is taken to have contravened that provision.

 (2) A person is involved in a contravention of a civil remedy provision if, and only if, the person:

1. has aided, abetted, counselled or procured the contravention
2. has induced the contravention, whether by threats or promises or otherwise’ or
3. has been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention; or
4. has conspired with others to effect the contravention.”

The section aims to personally expose those who are the controlling hands and minds of an organisation. In principle, it is not controversial – similar provisions in other legislation seek to make decision-makers liable for the consequences of their actions, and remove the opportunity for them to hide behind the corporate veil. However, in recent months, there has been a very real change in the way the FWO is utilising section 550 of the Fair Work Act.  In short, where a company contravenes the Fair Work Act, the FWO is now actively pursuing directors, HR managers, contractors and franchisors and advisors (i.e. accounts and lawyers) as accessories to that contravention.

To provide some context, historically, the FWO used accessorial liability as a useful back-up in situations where an employer was thought to be at risk of insolvency and leaving employee entitlements unpaid. That practice has now changed – in the last financial year the FWO sought orders against accessories in 46 of 50 court proceedings.

This change in the FWO’s approach is highlighted in the following extracts from a recent speech[3]:

“We are pursuing employers who cannot or will not pay, using every lever available to us to ensure wages that should have been paid to workers are put back into their hands. And we are striving to ensure those who breached their workplace obligations don’t get the chance to do that again.

There must be clear consequences for those in trusted positions, those whose advice is relied upon and those with the responsibility to know better who play a part in undermining workplace laws.

We have up until recently confined the orders we sought against accessories to seeking penalties. We had not sought to recover back pay from an accessory. Not anymore…

Our adventurous approach does not end with the range of accessories we are joining to our actions.

My lawyers have been getting creative about the nature of the orders we are seeking.

The Courts have shown a preparedness to make a range of orders – injunctions against future contraventions of the Act, freezing orders to prevent the shifting of assets to defeat employee creditors, and even orders to compel employers and individuals to commission (at their own expense) audits of their entire payroll and training in respect of workplace obligations.”

Is there a right of indemnity?

It is common that the right of indemnity under the company constitution (if it has one) has not been reviewed since the company was incorporated, and does not actually cover the full permitted range of potential costs and liabilities a director or officer may incur in the proper discharge of their duties, or protect the legitimate interests of the company, its directors and officers.

Further, Part 2D.2 of the Corporations Act imposes certain restrictions on:

• indemnification of directors and officers – in summary a company can’t indemnify its directors and officers in respect of:
  • a liability owed to the company or a related body corporate;
  • a liability for a pecuniary penalty order under s1317G[4] of the Corporations Act (or a compensation order under certain provisions of the Corporations Act);
  • a liability that is owed to someone other than the company or a related body corporate and did not arise out of conduct in good faith; or
  • in certain circumstances, legal costs incurred in defending an action for a liability incurred as an officer of the company (for example, if the costs are incurred in defending or resisting proceedings in which the person is found to have a liability for which they could not be indemnified); and
• payment of insurance premiums for certain liabilities – in summary a company can’t pay an insurance premium against a liability (other than one for legal costs) arising out of conduct involving a wilful breach of duty in relation to the company, or a contravention of s182 (use of position) or s183 (use of information) of the Corporations Act.

To address and mitigate the ‘accessorial liability’ risk, directors and officers of larger companies will generally insist on entering a deed of access and indemnity (or a deed of insurance, access and indemnity) with the company before accepting office. That practice is far less common in the case of small to medium companies.

As a consequence, the combination of Corporations Act restrictions, deficiencies in the right of indemnification under the company constitution and the absence of a deed of access and indemnity can give rise to very real problems for directors and officers of small to medium companies. The FWO’s current approach to accessorial liability for contraventions of the Fair Work Act provides a useful example of the potential risk.

These questions and issues can also arise in the industrial relations context – we are increasingly seeing instances where proceedings have been instituted against a company, and the directors are named as the second respondent. In that event, the directors will arguably have a material personal interest in a matter that relates to the affairs of the Company, giving rise to questions around notification of potential conflict of interest, potential claims under any indemnity in the company constitution (or a policy of insurance), and the possibility of divergence between the interests of the company and the personal interests of the named directors.

So what should you do (and how can we help)?

Clearly the starting point is always compliance with the law.  To limit potential exposure to personal liability for company acts, directors & officers should try to take the following steps:

• obtain proper advice in relation to the primary legislation applicable to the activities of the company (which includes the Fair Work Act), and the obligations imposed by that legislation on both the company and its directors and officers; and

• ensure that proper procedures exist and are followed in order to minimise the risk of the company breaching any of its obligations, and the associated risk of the directors and officers being vicariously liable.

In addition, directors and officers should:

• obtain proper advice in relation to their right of indemnification under the company constitution (including whether it is broad enough to cover their legal costs and any other liability arising from company contraventions of the Fair Work Act);

• set up appropriate internal audit processes with regards to pay, conditions and record keeping obligations and, where underpayments or other irregularities are identified, steps to remedy the situation and ensure the business is compliant in the future;

• consider whether a deed of insurance, access and indemnity with the company is necessary / appropriate; and

• to the extent the company has taken out directors and officers insurance, familiarise themselves with the terms and limitations of that policy, and ensure the adequacy of cover is reviewed by the company’s insurance broker on a regular basis (and the premium is paid).

[1] Key fiduciary duties include:

1. Duty to act honestly – this means acting in good faith, in the best interests of the company and for a proper purpose.
2. Duty not to improperly use inside information or position, or to abuse a corporate opportunity – an officer must not make improper use of his or her position or information acquired through that position, to gain advantage for themselves of any other person or to cause detriment to the company.
3. Duty to avoid a conflict of interest and to disclose material personal interests – directors must disclose all material personal interests that they have in relation to the affairs of the company, and notify the board of any identified or potential conflict as soon as they become aware of it.
4. Duty of care and diligence – an officer is required to discharge their duties with the same degree of care and diligence that a reasonable person in a similar position would exercise.
5. Duty not to engage in insolvent trading.

[2] Examples include contraventions of the Competition & Consumer Act, occupational health & safety laws, environmental protection laws, taxation and superannuation laws.

[3] Address to the Australian Human Resources Institute (AHRI) Employee Relations / Industrial Relations Network NSW by Natalie James, Fair Work Ombudsman, 27 July 2016

[4] In essence, this means in circumstances where the court has made a declaration of contravention of a Corporations Act civil penalty provision.