directors counsel

In our legal system, incarceration is the most serious sanction that can be imposed on a human wrongdoer. Amendments to the Corporations Act 2001 (Cth), which took effect in March this year significantly increased the maximum prison term that can be imposed on individuals for serious Corporations Act offences, from five to 15 years. This includes for contraventions of subsection 184(1), (2) or (3) of the Corporations Act, which criminalise dishonest breaches of company directors’ and officers’ (D&O) duties of loyalty (but not the duty of care).

Subsection 184(1) is concerned with a director’s duty to exercise their powers and discharge their duties in good faith in the best interests of the corporation, and for a proper purpose. A director who fails to do so, and who is reckless or dishonest, commits an offence. Subsections 184(2) and (3) address the dishonest misuse by a director of their position, or of information obtained through their position, to gain an advantage for themselves or another person, or to cause detriment to the corporation.

The significant increase in penalties attached to s 184 followed from the report of the Australian Securities and Investments Commission (ASIC) Enforcement Review Taskforce handed to government in December 2017. For some years, there had been political and community concerns that penalties for wrongdoing by and in corporations were too low to operate as a meaningful deterrent to misconduct or to achieve “just desserts” for dishonesty. Monetary penalties increased commensurately. When Rodney Adler was sentenced in 2005 for contravention of s 184 (among other offences) following the collapse of HIH, the maximum sentence open to the court was five years’ imprisonment or a fine of $20,000, or both. Now, a director who is convicted of an offence under s 184 can also face 15 years’ jail and a maximum fine of the greater of $945,000 or, if the sentencing court can determine the benefit derived and detriment avoided by the offending, three times that amount.

Dishonest breaches of directors’ duties of loyalty have attracted potential criminal sanctions in Australia for many decades. As far back as the late 1950s, the Companies Act 1958 (Vic) required that a director “at all times act honestly and use reasonable diligence in the discharge of the duties of his office” and “not make use of any information acquired by virtue of his position as an officer to gain an improper advantage for himself or to cause detriment to the company”. A director who breached those duties was “guilty of an offence against this Act and… liable to a penalty of not more than five hundred pounds”, in addition to being liable to the company for any profit made or for any damage suffered by the company as a result of the breach.

The significant penalties that can be imposed for offences under section 184 of the Corporations Act put dishonest breaches of directors’ duties squarely in the domain of major financial crimes.

This is unusual. The criminal consequences that attached to breach of s 184 give the Australian directors’ duties a public character — explored by Edelman J in ASIC v Cassimatis (No 8) [2016] FCA 1023 at [432]–[445] — that they do not have elsewhere. Of course, most rule-of-law countries recognise and criminalise a wide range of white-collar offending committed by directors — such as fraud, bribery, market manipulation and insider trading, embezzlement and theft (including from the company) — but few other jurisdictions attach criminal consequences to breaches of directors’ duties per se. While cases based solely on breaches of s 184 are rare, and defendants usually face a range of charges involving other financial crimes, it is possible for an Australian director to be prosecuted for a dishonest breach of their statutory duties of loyalties, even where no other offence is alleged.

The significant penalties that can be imposed for offences against s 184 put dishonest breaches of directors’ duties squarely in the domain of major financial crimes. Unlike civil penalty proceedings against directors, which are instigated and run by ASIC, serious criminal prosecutions are handled by the Commonwealth Director of Public Prosecutions (CDPP). The choice to prosecute is made according to the CDPP’s published prosecutions policy, and takes into account a range of factors including the deterrent impact of any resulting conviction. While involving the CDPP might seem like a practical hurdle to enforcement, a 2016 study of enforcement actions against directors by Melbourne Law School found that in 2005–14, “criminal enforcement of directors’ duties by the CDPP was significantly more prevalent than civil enforcement by ASIC. Comparing directors’ duties that attract both civil and criminal liability, criminal enforcement by the CDPP was responsible for about 81 per cent of all matters in which liability was established and about 61 per cent of all defendants found liable”.

What matters, for any successful prosecution, is proving the “dishonesty” element. In SAJ v R [2012] VSCA 243, a case arising out of the collapse of Opes Prime in 2008, the Victorian Court of Appeal explained that the test of whether someone has behaved dishonestly is objective, and to be judged according to “current standards of ordinary, decent people”. Whether the director subjectively considered the conduct to be dishonest is not relevant. Applying what is referred to as the Peters test (after the High Court’s decision in Peters v R [1998] HCA 7) the Victorian court concluded that “there is no requirement that the [director] must have realised that the acts in question were dishonest” by those standards for the offence to be made out. The amendments made to the Corporations Act in March, in addition to raising the penalties, confirmed the objective nature of the test, by changing the words “intentionally dishonest” in s 184(1) to “dishonest”, and including a generally applicable definition of dishonest as meaning “dishonest according to the standards of ordinary people”.

The March amendments to s 184 of the Corporations Act included a further change that is worth noting. Previously, it was unclear whether a director could be convicted of an offence under s 184(2) or (3) when the corporation was the beneficiary, rather than the victim, of the director’s dishonest conduct. The Act now says, “to avoid doubt, it is not a defence in a proceeding for an offence” that the director uses their position or information dishonestly “with the intention of directly or indirectly gaining an advantage for the corporation, or with the result that the corporation directly or indirectly gained an advantage”.

The significantly increased criminal penalties for directors are not limited to s 184; they also apply to a dishonest failure to take all reasonable steps to comply with, or to secure compliance with, financial record-keeping and financial reporting requirements under s 344.

Combined with ASIC’s new “why not litigate” enforcement posture, its stated intention to explore enforcement actions against individual as well as corporate defendants, and the government’s foreshadowed extension of the Federal Court’s jurisdiction to criminal matters arising under the Corporations Act, they are part of a changing enforcement environment for directors.