Compliance with the law

Importance of keeping a close eye on compliance responsibilities and reminds directors that these extend beyond the Corporations Act.

With 2016 now well and truly in full swing, it’s timely to remind directors of the importance of maintaining a close watch on compliance issues. It is the responsibility of directors to be aware of and understand all laws which apply to them. Directors also need to maintain appropriate oversight of the company’s compliance with laws which apply to the company.

This responsibility extends beyond the Corporations Act 2001, which the Australian Securities and Investments Commission (ASIC) regulates, to include laws administered by other regulators relating to, among others, competition, workplace relations, health and safety, environmental issues, and taxation.

ASIC is responsible for administering 11 pieces of legislation, including the Corporations Act, the Australian Securities and Investments Commission Act 2001, the Superannuation Industry (Supervision) Act 1993 and the National Consumer Credit Protection Act 2009.

However, ASIC is not the primary government agency or regulator responsible for administering a range of other laws that also impose significant obligations on company directors and companies. Of course, that raises the question of what interest ASIC has regarding possible breaches of:

• Laws relating to income and other tax obligations and the payment of employee superannuation entitlements – laws relating to these matters are administered by the Australian Taxation Office.
• Laws relating to scams, misleading claims or competition consumer protection for non-financial goods and services are administered by the Australian Competition and Consumer Commission or the Office of Fair Trading or Consumer Affairs in each state or territory.
• Various state or federal criminal codes (not related to financial services or markets) are dealt with by police in each state or territory.
• Laws relating to employee entitlements, awards and agreements are regulated by the Fair Work Ombudsman.
• Prudential regulation is the responsibility of the Australian Prudential Regulation Authority.
• Laws relating to environmental issues – various government agencies in each state or territory hold responsibility for this area.

In cases where ASIC becomes aware of a possible breach of these other laws it will refer these issues to the primary regulator responsible for investigating any alleged breach. In some cases, a breach or alleged breach of another law by a company and/or a director and the events surrounding that breach may also be relevant to ASIC. In deciding whether to take regulatory action, ASIC applies a public interest test including considering what action the primary regulator will take.

An example of a situation where a breach of another law may also be relevant to a breach of the Corporations Act concerns directors’ duties. ASIC enforces Corporations Act obligations relating to directors’ duties which include the requirement for directors to:

• Act in good faith.
• Act in the best interests of the company.
• Avoid conflicts between the interests of the company and your own interests.
• Act honestly.
• Exercise care and diligence.
• Prevent the company trading while it is unable to pay its debts.

In circumstances where a law for which ASIC is not responsible is breached by a company and or its directors, the company directors did so knowingly or negligently and the company suffers loss as a result, the company directors may have also breached their Corporations Act directors’ duties because they may not have acted in good faith and in the best interests of the company. Establishing this type of breach generally only happens if the primary regulator can first show a breach of the law they administer.

Aside from the legal liability that may accompany a material breach of any law, such instances can give rise to a range of adverse consequences for all parties involved, such as damage to the reputation of the company and its directors, and negative consequences for the company’s share price. ASIC has released information sheets with information in this area including Info Sheet 208: When companies break laws that ASIC does not enforce.