The recently completed parliamentary inquiries into the performance of Australia’s major trading banks, the continued call for a Royal Commission into banking, and the continued assertions that there is a problem with the culture of directors and managers of many of our companies, raises a central issue for Australian corporate law reform.
A question I continue to ask, is why there has been no major litigation brought by the Australian Securities and Investments Commission (ASIC) against the directors and managers who have not displayed the relevant and appropriate culture in carrying out their activities as the head of these important companies? Is it not time for ASIC to challenge more matters in the courts, rather than keep complaining about lack of culture and suggesting that other initiatives should be taken in this area?
Under current Australian corporate law, directors of companies (and managers) must act in the best interests of the company. The best interests of the company has been “defined” most recently by the High Court of Australia in Spies v R  HCA 43 (Spies) as a duty that is owed to the shareholders. This is despite calls from various sources in the community for the law to be changed, and for rules of corporate governance to be given higher recognition such as those given in the UK to its Companies Act 2006 (see in particular section 172). The current position is that the duty owed by directors (and managers) is to the company. Whether the corporate governance movement, which has been gaining continued momentum in recent years, will finally succeed in seeing a review of this particular approach is an important question that may need be addressed.
This question may have been dealt with conclusively by the High Court of Australia in the Bell Group case [Westpac Banking Corporation v Bell Group Limited (in liq) [No 3]  44 WAR 1]. The majority of the specially constituted Court of Appeal had ruled that the directors of the banks involved in rescuing the Bell Group were not supported by evidence that they were acting in the best interests of the corporation. The majority of the court held that the directors had to take into account not only the interests of the major banks that had lent considerable sums of money to rescue the Bell Group but also of other creditors. This raised the question of to whom do directors of companies owe their duties at law? The High Court had granted leave to appeal the majority decision of the Western Australian Court of Appeal. In my respectful view, the High Court would have overturned the majority Western Australian Court of Appeal decision and ruled that the standards that are expected of directors are those set out in common law and other statements.
The emphasis on corporate governance has become a key feature in the examination of bank managers and directors, and other commercial leaders in recent times, complemented by recent aggressive litigation strategies, which have been adopted by ASIC. More cases are being brought, and enforceable undertakings have been extracted by ASIC from some leading companies including banks for alleged breaches of the law. But more needs to done. This mood for change in our fundamental law is not one I support; but it is important to consider it.
Associated with this campaign to broaden the corporate governance initiatives, is the desire to ensure that we have a more efficient and effective use of funds that are currently being garnished by various sections of our significantly comfortable business and social community.
The Federal Government in January 2017 issued an important paper, namely Social Impact Investing Discussion Paper, under the auspices of the Minister for Social Services, the Hon. Christian Porter. The paper encourages investment in broader activities on behalf of Australian companies. It also raises the question of the ancillary impact that this may have on director liability rules and the way in which the relevant legislation operates. Submissions are currently being considered by the government. There is likely to be a variety of views towards this particular question among key stakeholders.
However, until the High Court of Australia, or the parliament in its wisdom, rule on this question, by either evaluating a case in which is it is alleged that the directors have breached their duties by not acting in interests other than the shareholders – i.e. outside the traditional scope of the decision in Spies and the statutory background to this case – or passing a new law, we should not be second-guessing what the duties of directors are.
It would be inappropriate, in my view, for parliamentary inquiries into banking conduct, and the alleged breaches that may have occurred in these banks, to suddenly impose a new set of rules upon us.
Directors are too often made liable, usually by way of strict liability or a reversal of onus of proof, for breaches of the law. The now defunct Corporations and Markets Advisory Committee (CAMAC) in its report on The Social Responsibility of Corporations (December 2006) strongly discouraged the continued use of this strategy. However, it is sad to say, from my perspective, that this strategy has been continually refreshed and used in other legislation rather than being cut back as was suggested by CAMAC and supported by the Council of Australian Governments (COAG).
While Greg Medcraft, the chairman of ASIC, and other commissioners may well be frustrated by the apparent inappropriate culture being displayed by senior leaders of our corporate community, rather than continuing to make these complaints to parliament, in the media, or elsewhere, it is more appropriate for them to bring appropriate litigation in which the particular inappropriate or illegal activity of the directors can be examined in line with the duties they owe at law.
There have been a number of recent cases in which our courts have shown a willingness to look very closely at the duties of care, and broader duties of directors to act in the best interests of the corporation. The decision by Justice Edelman, while sitting on the Federal Court (Edelman is now a Justice of the High Court of Australia), in Cassimatis v ASIC  FCA 131 indicated clearly that our courts are very capable of dealing with these issues.
It may well be that there are at least two sets of questions that need to be considered here. The first is to determine whether the directors have breached any duties at law – either under the statutes, or at common law. The second set of issues is to see whether some leeway can be given to directors who conduct the affairs of the company in such a way so as to create opportunities, not just for the shareholders of the company, but also for other interests that are involved in the company’s prosperity. If there is no damage being created on the shareholders (or investors), and others benefit from this creative activity as suggested in the Christian Porter paper referred to earlier, there may be no harm in the company pursuing these activities in an efficient and effective way. No one begrudges the entrepreneurialism and developments that we can create in this country to establish a more prosperous and successful community and economy.
As noted earlier, ASIC is currently engaging in much more strategic litigation involving alleged breaches of directors’ duties. The recent litigation against Westpac Corporation suggested that a test case is being run now under the Future of Financial Advice legislation. I have not yet seen the pleadings.
In addition, the article by Adele Ferguson discussing the recent ASIC report on financial planning (The Age, 18 March 2017) is an excellent example of an area where more litigation would be appropriate. The continued push for a broader set of rules to evaluate the duties of directors, to expand on the possible level of approach to their obligations by directors beyond the current and traditional corporate law rules will result in further statements being made at large by regulators, politicians and the media.
There is no need for a Royal Commission into banking in my respectful view. Some leading cases to tackle the questions of whether the law has been broken need to be brought and argued and perhaps the question of broad rules of corporate governance being extended into rules of law may be an appropriate next step through the necessary parliamentary and community discussions that such important questions should generate.