Australia is in recession for the first time in 29 years. The strength of investment, retirement income, employment opportunities, government taxes and prosperity will depend on the success of business. The recovery will largely be led by small, medium and large companies, their executives and 2.5 million directors. However, increasingly complex legal compliance requirements are putting opportunities for survival and growth at risk.
Before the pandemic, it was difficult for directors to comply with their professional obligations while managing issues such as volatile markets, the threat of disruptors, cybersecurity risks and climate change, to name a few. One need only look at the aviation industry to see how difficult this task can be in a COVID-19-affected world.
It is critical that companies can act with confidence in a fair regulatory framework. That framework must promote good corporate behaviour and protect the public and shareholders from fraud and corruption. But it must also allow executives and directors to run the business and take commercial risks. The balance between responsibility, accountability and liability mechanisms, and measured risk-taking has been lost. This is concerning, given risk-taking, innovative thinking and problem-solving are needed most in an economic crisis.
Some legal practitioners would remember the Companies Act 1961 (NSW), which was 447 pages in length. The Corporations Act 2001 (Cth) is 3705 pages. Some reports suggest there is more than 1000 pages of further corporate legislation waiting in parliament to be enacted. This should be halted and reconsidered.
Multiple surveys from the Australian Institute of Company Directors show that there is now a greater reluctance on the part of experienced and talented people to accept the personal liability and reputational risk of joining or remaining a director on a board. Regulatory and litigation risks are already causing substantial increases in professional indemnity insurance for company directors and officers — assuming it can be obtained in the first place.
It is very difficult, expensive and time-consuming for well-advised large companies to comply with their regulatory obligations. It is even harder for small and medium-sized businesses that may not have internal or external counsel. These companies are often left to “fly blind” in a complex and sometimes hostile regulatory world. It is unsurprising that the World Economic Forum ranks Australia 80th out of 141 countries for “Burden of government regulation”.
The introduction of temporary relief by the government in the Corporations Act for some breaches of insolvent trading and continuous disclosure requirements is commendable and no doubt appreciated. However, long-term reform is needed. Australia’s sprawling corporate criminal regime is a good place to start.
An avalanche of criminal liability has been imposed on Australian directors and officers. There are too many offences (many of which concern trivial matters) and many of those are vague or excessively complex. Corporate offences are imposed in relation to governance, tax, environment, competition, workplace health and safety and employment. For instance, the Corporations Act contains thousands of highly technical provisions. Penalties are prescribed for 723 sections, and 367 offences carry a term of imprisonment for which a director or officer may be liable directly or indirectly.
In its interim report, the Australian Law Reform Commission (ALRC) identified 2558 corporate criminal offences in Commonwealth legislation. This does not include the hundreds of criminal offences in state legislation (our quick review identified 25 statutes imposing such liability in NSW alone).
Many of these offences undermine the protections of criminal law, such as the presumption of innocence, by allowing conviction on the basis of strict liability or absolute liability. The ALRC identified 160 strict liability offences in Commonwealth legislation applicable to directors that carried a penalty exceeding one year’s imprisonment or a fine of $13,200.
Other offences are imposed on the basis of managerial or positional liability, where an executive or director may be convicted by virtue of their position, even if having had no involvement in or knowledge of the criminal act committed by the company.
Even though a director may in some cases have a due diligence defence, it is often difficult to prove that even clearly bona fide decisions meet the due diligence threshold. There is a real risk that a retrospective investigation, conducted with ample time and resources, will not appreciate the time and information constraints in which the original decision was made. These types of decisions are protected in the US with a workable business judgment rule.
The ALRC found in its interim report that there is an “over-proliferation” of offences in Commonwealth criminal law with respect to corporations and directors. This “creates a significant regulatory burden while diluting the rationale for criminal liability”.
The basic principles of the rule of law are also at stake — one of the bedrocks of our democracy.
Many of these offences undermine the protections of criminal law, such as the presumption of innocence, by allowing conviction on the basis of strict liability or absolute liability.
Reform is required
The scrutiny of directors is completely out of step with the regulation of similar professions and occupations within Australia and regulation of directors in similar jurisdictions around the world. Many professionals are entrusted with great responsibility — government ministers, senior public servants, trade union officials and lawyers. However, these professions are not subject to the same amount of civil or criminal liability imposed on executives and directors.
The AICD commissioned Allens to undertake a study on director liability in Canada, Hong Kong, New Zealand, the UK and US. It found “Australia now has the harshest criminal penalties regime” among the surveyed countries, being the “high water mark” for most areas of regulation considered. Australia was also unusual among these jurisdictions because it facilitates both public (ASIC) and private enforcement of directors’ duties.
There is a clear need for major reform of the civil and criminal sanctions applicable to directors and officers in Australian corporations. It is inconsistent with principle and best practice governance and has created a combative regulatory and business environment.
Some of the difficulties with Australia’s corporate criminal regime are persuasively articulated by the ALRC in its interim report; however, it does not sufficiently address the overregulation and harsh treatment of Australian directors. We will review the treatment of these issues in the ALRC’s recently released final report.
Any future consideration and reform should bear in mind the lessons from the banking Royal Commission — steps should be taken to achieve a “a simpler and more readily understood body of law”. This is particularly apt in the context of criminal director and officer liability. Such reform would be at a relatively small financial cost, but will require a strong political will and perseverance from business and government.
John Colvin FAICD is a consultant at Herbert Smith Freehills and a former managing director at AICD. Brendan Hord is a solicitor at Herbert Smith Freehills.