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Background

The ALRC has updated its approach (see ALRC slides and this paper) to key proposals following the public consultation on its Discussion Paper released on 15 November 2019. We are pleased to see that the ALRC is no longer proceeding with its original proposals relating to individual liability for corporate misconduct. It has also updated its proposals in relation to the corporate attribution model and proposed regulatory model.  

Notably, the ALRC’s original proposals did not extend to non-executive directors with the ALRC recognising that the legal framework for director liability is not in need of reform.

The ALRC referred to the AICD’s submission (found here) at a number of points in their additional paper.

A summary of the key changes to the ALRC’s recommendations are outlined below.

Updated approach to key proposals

Individual liability for corporate misconduct

The ALRC is no longer intending to recommend the catch-all scheme that proposed individual liability for any corporate misconduct based on the ability to “influence” such conduct. This proposal received strong opposition from stakeholders, including from the AICD.

While the ALRC’s analysis confirms there is an “accountability gap”, the ALRC considers that the Financial Accountability Regime (FAR) (read the AICD’s analysis of the regime here) provides a promising framework for enhanced individual liability. If proven effective, the ALRC suggests that it could be extended to other sectors.

The revised ALRC position does not propose to extend individual criminal or civil liability on directors. However, the ALRC does recommend that the Australian Government consider undertaking a wide-ranging review of the effectiveness of individual accountability mechanisms for corporate misconduct by December 2025, including consideration of accessorial liability provisions and directors’ and officers’ duties.

The ALRC further noted that there may be a need to clarify the application of statutory officers’ duties depending on how the High Court of Australia interprets “officer” in the case of ASIC v King [2020] HCA 4.  ALRC suggested that statutory reform may be needed to ensure executives of parent companies and individuals below top-tier management, including division heads, are captured.

However, subsequent to the release of the ALRC’s revised proposals, the High Court ruled in favour of ASIC in ASIC v King, finding that the Group CEO was an “officer” of the relevant subsidiary. See break out box for a summary of the case. The outcome of the case may mean that further statutory reform is not recommended by the ALRC.

Attribution

The ALRC will not be recommending a proposed model for attributing criminal responsibility to corporations. Instead, it will put forward different attribution models with the pros and cons of each, leaving it to policymakers to determine a way forward.

The Final Report will continue to support a single method for attribution. However, it will acknowledge circumstances where specific attribution may be appropriate (e.g. the failure to prevent model included in the foreign bribery legislation).

Regulatory model:

Having revisited the scope of the ALRC’s inquiry (being corporate criminal responsibility), the ALRC will not be commenting on the civil regulatory model (so no proposals related to civil penalty provisions and civil notice provisions will be included in the Final Report).

Additionally, the escalation mechanism will be reframed to apply in circumstances where a person has engaged in a system of conduct or pattern of behaviour while being reckless as to whether such action will result in a breach of civil penalty provisions. While we believe the mechanism needs further consideration, this reframed proposal is more in line with the principled approach to criminal liability set out in the balance of the ALRC’s Discussion Paper.

Next steps

The ALRC’s Final Report is due by 30 April. We will continue to engage with the ALRC on these revised proposals.

ASIC v King

Facts and question of law

  • Mr King was CEO of a Group of companies, where a subsidiary misappropriated fund money. The directors of the subsidiary were found to be in breach of their directors’ duties and convicted. 
  • The High Court was asked to determine whether Mr King (as CEO of the group and not a director of the subsidiary) was a statutory “officer” of the subsidiary by virtue of him being a person “who has the capacity to affect significantly the corporation’s financial standing”.

Decision

The court unanimously allowed an appeal from a judgment of the Court of Appeal of the Supreme Court of Queensland holding that Mr King (the Group CEO) was an “officer” of a subsidiary defined by s 9(b)(ii) of the Corporations Act 2001 because the provision is not limited to those who hold or occupy a named office in a corporation or a recognised position with rights and duties attached to it. 

The factual findings of the primary judge that Mr King acted as the “overall boss of the Group” and assumed “overall responsibility for [the subsidiary]” were sufficient to establish that Mr King had the capacity to affect significantly the financial standing of [the subsidiary].