Specifically, the ALRC has been asked to consider reforms that ‘are necessary or desirable to improve Australia's corporate criminal liability regime’ including:
- the efficacy of the Criminal Code as a mechanism for attributing corporate criminal liability;
- the availability of other mechanisms for attributing corporate criminal responsibility and their effectiveness, including mechanisms which could be used to hold individuals liable for corporate misconduct; and
- options for reforming the Code or other relevant legislation to strengthen and simplify the Commonwealth corporate criminal responsibility regime.
These are core issues for the AICD and we will be an active participant over the course of the inquiry, seeking an evidence-based approach to policy recommendations.
The ALRC is set to report by 30 April 2020, with a discussion paper expected to be released on 15 November 2018.
Director liability environment
The ALRC inquiry comes on the back of a number of recent developments that go directly to the heart of director liability issues.
In particular, over 2018 and 2019 we have seen legislation passed that dramatically lifts corporate and financial services penalties, and an independent review into the model work health and safety laws which recommended creating new avenues for prosecution of directors.
When combined with ASIC’s newly-adopted ‘why not litigate’ approach, it is clear that the liability landscape for directors is shifting. Directors are more likely to have actions brought against them for alleged breaches of the law, while the penalties should they be found at fault, have risen significantly.
The Hayne Royal Commission also highlighted community concerns that corporate misconduct has gone unchecked in recent times, with a strong push for greater accountability – both at the corporate and individual levels, as well as from the regulators. The calling of the ALRC inquiry can be seen as part of the Government’s response to such concerns.
In this environment, it will be important that our legal framework has in place appropriate safeguards to prevent honest directors who have appropriately discharged their duty of care and diligence from being held liable for corporate crime – a core message that we will be reinforcing throughout the ALRC’s current inquiry.
While we have clearly seen poor customer outcomes in a range of sectors over recent years, the AICD believes that the need for greater accountability should not lead to a framework that derogates from well-established principles of criminal justice and corporate governance.
Key issues for the inquiry
Following the ALRC’s call for submissions on the scope of the current inquiry, the AICD put forward an initial submission highlighting the importance of the issue to directors and the need to have a well-balanced framework that has adequate regard to the both the civil and criminal liability framework for directors that currently exists (full submission available here).
In particular, we emphasised that a distinction must be drawn between an individual’s criminal liability for his or her own misconduct in a corporate context, and an individual’s criminal liability arising out of misconduct by a company of which they are a director (see further below).
Of course the issue of personal liability for corporate fault is a longstanding one and has been the subject of numerous comprehensive examinations, most notably through the Council of Australian Government (COAG) process.
As we made clear in our submission, the ALRC will need to have close regard to the extensive work already done in this area, particularly the COAG principles and guidelines on personal criminal liability for corporate fault which were agreed to by the Ministerial Council for Corporations (MINCO) in 2009.
Some of the fundamental principles agreed by COAG included:
- Where a corporation contravenes a statutory requirement, the corporation should be held liable in the first instance;
- Directors should not be liable for corporate fault as a matter of course or by blanket imposition of liability across an entire Act; and
- Personal criminal liability for corporate misconduct should be confined to situations where:
- There are compelling public policy reasons;
- Liability of the corporation is not likely, on its own, to sufficiently promote compliance; and
- It is reasonable in all the circumstances for the director to be liable having regard to factors such as clarity of the corporate obligation, the director’s ability to influence the relevant conduct, and there are steps that a reasonable director might take to ensure corporate compliance with a legislative obligation.
This COAG framework (including the 2012 supplementary guidelines) was the product of years of work between Commonwealth and State and Territory Governments, with the clear objective of creating a nationally consistent and principles-based approach to the imposition of personal criminal liability of directors or other corporate officers for corporate fault.
It also came on the back of a Corporations and Markets Advisory Committee (CAMAC) report on personal liability for corporate fault issued in September 2006 that made clear that “as a general principle, individuals should not be made criminally liable for misconduct by a company except where it can be shown that they have personally helped in or been privy to that misconduct, that is, where they were accessories”.
In the AICD’s view, this voluminous work should be the starting point for the ALRC’s current review as the COAG principles establish important safeguards to prevent individuals being unjustly held liable for criminal offences.
An important issue that we have also highlighted in our submission is that the ALRC will need to critically examine the various ways in which directors can currently be held liable (both criminally and civilly) for corporate fault before determining whether there are any significant gaps.
For example, directors can be held liable for corporate misconduct when they are deemed to be an accessory to a corporate crime (including in circumstances where they are aware of the relevant conduct, but do not know it is illegal), as well as “stepping stone” liability for alleged breaches of statutory directors’ duties (where the company has broken the law or otherwise exposed itself to a risk of prosecution or liability).
An important area that will be examined by the ALRC is the current operation of Part 2.5 of the Commonwealth Criminal Code which applies to certain offences including most under the Corporations Act. Under the Code, a company will be liable where both the physical and mental elements of the offence are established beyond reasonable doubt.
What remains unclear though is how a poor “corporate culture” of compliance can be used to establish the requisite mental element of a criminal offence. Thus far, we have yet to see an Australian case where the prosecution has successfully relied on the culture limb.
Such a criminal offence could then be used to seek to attribute either accessorial or stepping stone liability to individual directors.
The challenge facing the ALRC
What is challenging policy-makers is that the current legal framework has been rarely tested, meaning the precise bounds of the law remain unclear.
A core question for the ALRC to answer then will be whether the current regime contains structural weaknesses and/or has been poorly enforced due to regulators being unwilling (or appropriately resourced) to pursue criminal prosecutions.
Over the coming months, as part of its “why not litigate approach”, we can expect to see ASIC launch more criminal proceedings against corporations and their senior officers – a step which will likely, over time, bring some clarity to the current law.
We will remain engaged throughout the ALRC’s inquiry and keep members informed.