STATUTES AMENDMENT (DIRECTORS' LIABILITY) BILL

Second Reading

Adjourned debate on second reading.

(Continued from 23 March 2011.)

Ms CHAPMAN (Bragg) (16:57): I rise to speak on the Statutes Amendment (Directors' Liability) Bill 2011 and indicate, as I am sure the Attorney will be pleased to hear, that the opposition will be supporting this bill without amendment. However, I will make a few brief statements in relation to it.

The origin of this bill is essentially a request through the Council of Australian Governments in November 2009 where the Ministerial Council for Corporations agreed on a set of principles for reform of directors' liability provisions against which all jurisdictions would audit and amend their legislative provisions that deal with personal liability on company directors.

This bill, as I understand it, has come subsequent to what I presume to be an exhaustive search of the South Australian statutes that identified some 25 laws in which there are impositions of personal liability on individual directors for corporate misconduct, and they are scheduled in the bill and have been referred to in the Attorney's second reading explanation.

There are, on my understanding, more than 700 state and territory laws, including 89 to 99 South Australian laws, where directors would be held liable simply because they are a director, even where they may not have any personal involvement in a breach. I am further informed that a November 2010 survey by the Australian Institute of Company Directors found that the burden of laws imposing personal liability on directors was stifling business decision-making.

Interesting data from that included, firstly, that more than 90 per cent of those surveyed said that the personal liability of directors had an impact on optimal business decision-making or outcomes; secondly, 65 per cent said that the risk of personal liability caused them or their board to take an overly cautious approach to business decision-making either frequently or occasionally; thirdly, almost a third said that they would personally decline an offer of a directorship primarily due to the risk of personal liability; and fourthly, more than 64 per cent said that they were seriously concerned about being subject to criminal and civil penalties as a director.

There is no question that in our community we want good people to stand to undertake directorships. Sometimes the attractiveness of these depends on the remuneration packages that go with them. However, as this survey suggests, if people are declining the taking up of leadership roles as directors of entities that are statutory boards, etc. in which they incur responsibility and are happy to receive, but which also attract significant penalties when the corporation itself has undertaken some act of misconduct, then if that is a deterrent, we do need to look at it.

This is an issue which I might say in 2004 and 2005 attracted quite a bit of attention when we debated the very significant amendments to the governance of our three universities in South Australia. The university councils, as it was proposed under a bill introduced by former minister for education the Hon. Jane Lomax-Smith, were to have very severe criminal penalties which would be attached to directors arising out of decisions that they might make or particular acts of misconduct, broader than simply being reckless.

We had a circumstance where, during the debate on that bill, I recall pointing out my very grave concern that good people would not come forward and undertake the responsibility of supporting and providing their advice and contribution to the governance of our universities if we were to impose such an obligation. In fact, I recall questioning the minister as to what act of misconduct had occurred preceding the introduction of the bill to amend the governance of our universities and impose what I saw as unwarranted and quite extensive penalties to those who would come forward. She was not able to cite one example of where there had been some act or omission by a director, in her knowledge, that could justify attracting such a pernicious approach to how we might deal with directors and liability.

In the final determination and passing of that legislation, there was a significant backdown from the government in not pressing such an onerous and, I think, quite draconian approach to penalties for directors. On the other hand, we supported the government in ensuring that generally, if a person was carrying out their duties diligently as a director on the university boards and they were carrying out their normal duties, then there should be some covering of them of civil liability; but, if there had been deliberate or reckless misconduct on behalf of that director, then there would be capacity for the university to recover from that director.

I think that all those things are quite acceptable in the chain of events. If you are carrying out your ordinary duties, then you ought to be protected and the entity should take on the responsibility of that. In this case, the 25 organisations we are talking about are largely groups that are appointed by governments, or ministers in particular, and they need to take some of these deterrents away from good people standing for these positions.

I think that this is an important positive step and I hope it will ensure that good people will come forward and accept these responsibilities. Historically, in the private sector, there has been considerable advance, I think, in the development of duties of directors, and in particular the education of people who take up directors' roles, as to what their responsibilities are and a clear understanding of matters such as conflict of interest, the disclosure of any potential conflict of interest, and the like.

Whilst in the statutory world there has been some application of these principles, in the independent private sector this has been a matter which has been important not just for the integrity of the corporation but also for the public respect which those institutions and others wish to develop and maintain. They want their directors to act properly, diligently, with due care, and certainly not recklessly or in some way which is a breach of the criminal law. Much work is done in educating people in those roles.

Perhaps in a lesser, but since a liability situation, because of the small amounts of money they are supervised, but similarly we would say in the public sector that, when the introduction of governing councils in schools became the norm, it was important to provide educational assistance and support to new members of those councils to ensure that they properly understood their responsibilities and matters of disclosure and the like. Each of these areas has also been attracted to, not surprisingly, the obtaining of insurance to protect against liability of entities, and in particular any act of negligence that may occur on the part of one of the directors in some decision they may make or fail to make, or conduct which they carry out.

Just to place on the record an example of what is proposed to be remedied here, I turn to the ANZAC act. One of the bills to be amended is the ANZAC Day Commemoration Act 2005. In this instance the proposal is to delete subsection (8) of section 18 of the act. This paragraph is similar to a number of the others that have been deleted in other acts and it reads:

If a body corporate is guilty of an offence against this section, each member of the governing body and the manager of the body corporate are guilty of an offence and liable to the same penalty as may be imposed for the principal offence, unless it is proved that the person could not, by the exercise of reasonable care, have prevented the commission of the offence by the body corporate.

In that instance it relates to actions by the body corporate in allowing for a public sporting or entertainment event to be held before 12 noon on ANZAC Day, which ordinarily is prohibited because of the sanctity of the importance of that day. There are significant penalties for a party or an organiser who carries out a function or an entertainment event that is in breach of that without having received permission. There are certain penalties surrounding contraventions of applications and that instance is where directors of the governing body take on this liability.

What this bill does in removing subsection (8) of that act, and similar provisions in these other 25 acts, is change a system from where there is a liability that simply translates to the director upon proof of the company having offended. The only way out of it is for the director to have a defence that there was some due diligence, and the onus is on the director to prove that, so that they have a defence to that liability.

Having got rid of that, in the new provisions, in line with the council's guideline, as I understand it, the following types of offences are applied: firstly, there is the accessory to the offence—a director should only be criminally liable if the director was an accessory to the offence, even if the director failed in due diligence. In that case, the liability provision is removed from the act or is disapplied to the relevant offence and the general law of accessorial liability applies.

The second is a vicarious relationship: for more serious offences the director should be vigilant to prevent, the law holds directors criminally liable, subject to the defence of due diligence which the director must prove, as is the case now; to hold directors liable helps to deter offending by the company.

The third is that in a number of cases, however, a middle ground has been taken because the offence is moderately serious. In those cases, the directors will only be criminally liable if the prosecution can prove that the director knew or could reasonably have known that there was a significant risk that the offence of this type or kind might occur or was in a position to influence the company's action in relation to this type of behaviour and failed to exercise due diligence to stop the company from offending—all these matters to be proven by the prosecution.

Under the bill we are currently considering, 17 acts would only maintain liability where a director is an accessory to an offence. Eight acts provide three offences, and I am advised that, as agreed by the Council of Australian Governments, the following classes of acts containing directors' liability are not amended by this bill: 18 statutes under environmental protection, four statutes under occupational health and safety, 16 statutes subject to other reviews, and 26 statutes where the present standard of liability is justified.

Apparently, I am informed, the Law Society has not made any comment on this bill. There was general consultation by the Hon. Stephen Wade with the Australian Institute of Company Directors. They confirmed that there had been some frustration at the burden of directors' liability and their disappointment that harmonisation was not being pursued and at the lack of progress in the Mimico process. While it was clear that the AICD was urging the federal government to use its financial levers to drive reform, it did not reiterate its view in its press release earlier this year.

The institute, as I understand it, had not advanced any specific suggestions to enhance the bill but I think acknowledged some recognition of at least putting the issue on the agenda as the first legislating state. I assume that is still the case because this bill was introduced only relatively recently—a few months ago. With that, I indicate the opposition's support of the bill and I will not be seeking to go into committee.

The Hon. J.R. RAU (Enfield—Deputy Premier, Attorney-General, Minister for Justice, Minister for Urban Development, Planning and the City of Adelaide, Minister for Tourism, Minister for Food Marketing) (17:15): I thank the member for Bragg for her contribution in this matter. It is an important thing that was raised with me by the Institute of Company Directors shortly after I got this position. I agree wholly with the remarks that the honourable member has made about the importance of people being comfortable to be able to perform important public or civic duties, and duties in companies which are performing economic activities for our community, without being overly fearful of personal liability crippling their capacity to do anything.

This is quite a progressive piece of legislation, although some people, perhaps, who do not turn their minds to it properly may not appreciate that. Through the member for Bragg, I very much appreciate the opposition's support for this. I think, as obviously the opposition does, that this is a worthy measure.

Bill read a second time.

Third Reading

The Hon. J.R. RAU (Enfield—Deputy Premier, Attorney-General, Minister for Justice, Minister for Urban Development, Planning and the City of Adelaide, Minister for Tourism, Minister for Food Marketing) (17:18): I move:

That this bill be now read a third time.

I think we have a historic event where the long title of the bill is longer than the second reading contributions on both sides, which is a first.

Bill read a third time and passed.