Not far enough
The announcement on 6 November by the Minister for Corporate Law Chris Bowen that the Ministerial Council for Corporations (MINCO) had finally agreed to respond to the report of the Corporations and Markets Advisory Committee (CAMAC) on Personal Liability for Corporate Fault(a report delivered to the previous Federal Government in September 2006) is obviously a step in the right direction. However, the principles agreed to by MINCO have not gone far enough. In fact, they fail to deal with fundamental questions which must be at the heart of any form of regulation in this country.
As readers of this magazine will know, I have for a number of years been campaigning for the recognition by the Federal, state and territory governments that any form of regulation directed at corporations should not depart from a fundamental principle of our legal system – a person (that is, a director or manager) is innocent until proven guilty. That particular principle was clearly recognised by CAMAC in the broad recommendations it made in the CAMAC report. In its summary of recommendations, it noted:
“The Advisory Committee [of CAMAC] is concerned about the practice in some statutes of treating directors or other corporate officers as personally liable for misconduct by their company unless they can make out a relevant defence. Provisions of this kind are objectionable in principle and unfairly discriminate against corporate personnel compared with the way in which other people are treated under the law.
The encouragement of corporate compliance with applicable laws – which the Committee supports – does not justify a general abrogation of the rights of individuals.”
Unfortunately, while the principles agreed to by MINCO, as announced by Minister Bowen, at least set the legislative process in Australia onto the right track, they are not satisfactory. The result has clearly demonstrated that there is still the fundamental issue to be addressed. In that context, however, it is important to recognise that the Commonwealth is working in this area of regulation with effectively at least one hand tied behind its back. The states and territories must agree with the Commonwealth on a common approach to any form of regulation in the corporate law area and with this hurdle in place progress will be slow.
The fundamental principle of innocence unless proven guilty should be adopted in reviewing all legislation (and there are over 660 pieces of legislation that currently adopt an approach of either reversing the onus of proof or a strict liability regime) affecting companies and directors. In each of these pieces of legislation, if a breach of the relevant legislation occurs, it is usually the senior corporate director who will be made responsible (with the burden switching to the director to prove his or her innocence) of a breach.
Two of the principles agreed to by MINCO (and announced by Minister Bowen) are vitally important in progressing to the next stage of the reform program that has to be developed. These two principles are:
- 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 to cross an entire Act.
The fourth MINCO principle announced states that before any personal liability is imposed on a director (and these liabilities are usually of a criminal nature), there must be an appropriate degree of misconduct on the part of the company and further there must be “compelling public policy reasons for [adopting this personal liability approach]”.
But, in addition, the fourth principle provides that if the corporation is not able on its own to satisfactorily promote compliance, then there may be a need to impose personal liability on directors, especially directors who could have influenced the conduct of the relevant corporation.
If a director breaches the law, and the relevant regulator can establish in a court that the director has breached the law, there is generally no good reason why liability should not be imposed in the appropriate case. But, there should be no presumption that because a breach of the law has occurred on the part of the corporation, that personal liability should be regarded as a presumption which the director must rebut.
At this point in time, as we debate the question of whether Australia should adopt a charter of rights (with growing support for the development of some regime to recognise a charter as a result of a specialist committee report), perhaps there should be written into relevant legislation of all jurisdictions a requirement that before a government wishes to impose a reversal of the onus of proof or a strict liability regime, that government must undertake a positive and transparent review of the reasons for such an approach being adopted.
This is not the same as the fourth MINCO principle. Failure to adopt this approach could well mean that we will pursue a “lowest common denominator” principle in each of the states and territories (and perhaps this is true of the Commonwealth as well), which do not appear to wish to surrender their current regimes for regulating corporate behaviour.
The Commonwealth Government is faced in this regard with a fundamental difficulty in achieving a level of regulation harmonisation of commercial/business law across the states and territories as well as the Commonwealth. While in principle, everyone will cheer the success that the Commonwealth Government has achieved in a small number of areas through the Council of Australian Governments process (we are finally to have after over 40 years of debate, uniform and legislation regulating consumer credit), there are pressing reasons why personal liberty and the principles recognised by the CAMAC report referred to above must be enshrined.
As the Commonwealth Government hopefully moves towards the consideration of the next stage in the current review of director liability – whether an enhanced statutory business judgement rule should be introduced into the Corporations Act (as recommended in the Treasury Discussion Paper on Sanctions in Corporate Law released in 2007) – perhaps the time has now arrived for there to be a more fundamental reassessment of the principles operating in our corporate law regime.
I say this knowing that the principles which have underpinned our corporate/company law regime for the last 150 years do work well. There is a clear understanding of the division of responsibility between boards of directors and shareholders; there is clear recognition of the basic and fundamental duties of directors to act honestly and in the best interests of the company and to avoid conflicts. There is a clear awareness that directors must exercise the appropriate degree of care and diligence – all of these principles have been recently successfully debated and ruled on by our courts.
But we have been fiddling at the edges with some of these principles. Concerns with director remuneration when linked to the performance of directors suggest that there is some disquiet at the performance of our company directors; those questions should be the subject of an appropriate and separate challenge in the courts or at annual or other general meetings. We fiddle with the order of priority for the payment of debts when a company becomes insolvent or finishes in administration; CAMAC has had to deal with that issue in its report on Sons of Gwalia.
There are other issues that CAMAC has been asked to address in the context of directors duties and responsibilities. Rather than us continuing with the stop/start legislative reform program we appear to be pursuing at this time, perhaps a more fundamental reassessment of our corporate law regime would give us an opportunity to reaffirm (as I believe we will) that the general principles underpinning the Corporations Act and the common law in this are sound.
Professor Bob Baxt AO FAICDLife is a partner at Freehills and chairman of AICD’s Law Committee