directors counsel

During the previous decade, public trust in institutions — including non-government organisations (NGOs) and business — fell significantly. Part of the problem was a perceived lack of personal accountability within those institutions, particularly among senior management, when unlawful or unethical practices come to light. Responding to this concern, the current law reform inquiry into corporate criminal responsibility focuses closely on the issue of individual liability for corporate conduct. The discussion paper released by the Australian Law Reform Commission (ALRC) in November 2019 includes Proposal 9, to amend the Corporations Act 2001 (Cth) so that when a body corporate commits a relevant criminal offence or engages in conduct covered by a relevant offence provision, “any officer who was in a position to influence the conduct of the body corporate in relation to the contravention is subject to a civil penalty, unless the officer proves that the officer took reasonable measures to prevent the contravention”.

Proposal 9 is flawed and dangerous — and not just because it attacks a fundamental legal protection afforded to all citizens by reversing the burden of proof in favour of the state.

As the law stands, there are two main ways in which a corporate officer can be held to account in connection with an offence committed by his or her corporation. The first is as an accessory. Under general principles of criminal law, any person who aids, abets, counsels or procures the commission of an offence by another person — including a corporation — is taken to have committed that offence and is punishable accordingly. The prosecution must prove that the corporation committed the offence and that the person’s conduct in fact aided, abetted, counselled or procured the commission of the offence. It must also prove that the person had the requisite intention to assist, which creates a high evidentiary burden.

The other main way is to show that the officer’s conduct concerning the corporate offending fell short of his or her duty of care. All corporate officers have a statutory duty to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were an officer of a corporation in the corporation’s circumstances and occupied the office held by the officer, and which had the same responsibilities within the corporation as the officer.

Breach of the duty of care can attract a substantial civil penalty even if the failure to take care did not cause a loss to the corporation itself. Australian courts have consistently interpreted the duty as requiring officers to take reasonable care to avoid exposing their corporation to a foreseeable risk of harm, such as the harm that would result from a criminal conviction. Their duty to protect the corporation’s interests is not limited to its financial interests — as Justice Edelman pointed out in ASIC v Cassimatis (No 8) [2016] FCA 1023, they include “its reputation and interests which relate to compliance with the law”.

Officers of authorised deposit-taking institutions (ADIs), including banks, have a further layer of accountability through the Banking Executive Accountability Regime, known as the BEAR. If they are identified by the bank as an “accountable person”, they are required to take “reasonable steps” in conducting their identified responsibilities “to prevent matters from arising that would adversely affect the prudential standing or prudential reputation of the ADI”. Failure to do so can result in them being disqualified by the regulator. The recommendations of the banking Royal Commission included extending BEAR-type accountability more widely through the financial sector and to financial regulators.

The ALRC’s Proposal 9 goes far beyond the existing accountability framework. If adopted, it would apply even where the relevant officer had done nothing to further the corporation’s wrongful act or omission and had no statutory duty to take reasonable steps to address the risk of it occurring. Simply being a person that the regulator can show “was in a position to influence the conduct of the body corporate” in relation to its contravention would be enough to trigger a substantial personal (and uninsurable) civil penalty liability. The proposal does not require the regulator to show that the person was in a position to prevent the contravention. It is left to the individual officer to prove, if they can, that they “took reasonable measures to prevent the contravention”.

As with section 8Y of the Taxation Administration Act 1953 (Cth), Proposal 9 reverses the burden of proof in favour of the state. It is therefore worth noting that in 2015, the ALRC said: “Offences that reverse the legal burden of proof on an issue essential to culpability arguably provide the greatest interference with the presumption of innocence, and their necessity requires the strongest justification. This is particularly important when regulators have failed to test the limits of the existing accountability framework.

But attempts to justify such a fundamental attack on any citizen’s rights on the basis that it simplifies the law or makes it easier for regulators to produce heads on sticks is wholly inadequate. A person who, among many others, is in a position to influence the behaviour of a corporation, but cannot prove they took reasonable measures to prevent the contravention, is hardly abusing the corporate vehicle.

Nothing in the criminology or regulatory theory literature supports the assertion that Proposal 9 would promote and reward efforts at genuine compliance. Unlike the BEAR, it does not require the corporation itself to map functional responsibilities, clarify reporting and decision lines, and make hard decisions about how best to achieve lawful, ethical and sustainable corporate behaviour. Unlike an officer affected by the BEAR, a person covered by Proposal 9 may have had no explicit discussion with their employer about the scope of responsibilities or how far their authority extends. Instead, the ALRC has proposed a form of “functional managerial liability, in which any senior officer who was in a position to influence misconduct in practice may be civilly liable unless they can prove that they took reasonable measures to prevent the misconduct”.

Of course, ensuring proper individual accountability for corporate misconduct is necessary to address the expanding trust deficit and because it is inherently just. The question is what form that individual accountability should take.

In making its recommendations to government later this year, the ALRC is required to aim at ensuring they “do not trespass unduly on personal rights and liberties”. Proposal 9 clearly does.