STATUTES AMENDMENT (DIRECTORS' LIABILITY) BILL

Second Reading

Adjourned debate on second reading.

(Continued from 26 July 2011.)

The Hon. S.G. WADE (16:43): I rise to speak on the Statutes Amendment (Directors' Liability) Bill 2011 on behalf of the opposition. The Attorney-General (Hon. John Rau) tabled this bill in the House of Assembly on 23 March 2011. The bill amends some 25 acts which impose personal liability on individual directors for alleged misconduct of corporations of which they are directors.

Directors are subject to a wide range of responsibilities and potential personal liability under state legislation and regulations. In many cases, directors can be found liable simply by virtue of their position, regardless of their actions. Mr John Colvin, Chief Executive Officer of the Australian Institute of Company Directors, has said:

...the existing plethora of liability laws is stifling business, investment and job creation. They are anti-business and a drag on Australia's prosperity now and in the future.

In early 2010, the Australian Institute of Company Directors conducted a survey regarding the impact of legislation on directors. The survey involved 623 directors from a range of sectors. It found that the burden of laws imposing personal liability on directors is having a serious detrimental impact on key aspects of economic performance.

In particular I will highlight the following findings of the survey. More than 90 per cent of those surveyed said that personal liability of directors had an impact on optimal business decision-making or outcomes. Sixty-five per cent said that this risk of personal liability had caused them or their board to take an overly cautious approach to business decision-making either frequently or occasionally. Almost a third said that they had personally declined an offer of a directorship primarily due to the risk of personal liability. More than 64 per cent said that they were seriously concerned about being subject to criminal and civil penalties as a director.

The key findings of the survey show, and I quote the report of the Australian Institute of Company Directors:

The burden of legal risk being confronted by Australian directors is stopping qualified people from taking up board seats and causing others to leave through resignation or retirement. In this environment the balance of risk and reward is so tilted that it is not surprising that many experienced and highly qualified directors are asking, 'Is it worth it?'

The imposition of criminal liability on directors is open to a very wide range of circumstances. More than 700 state and territory laws, including 89 to 99 South Australian laws, hold directors liable simply because of their position, even where they may not have had any personal involvement in a breach. Further, Mr Colvin noted:

There appears to be little recognition by governments that the current liability laws are an economic disincentive and can have a real impact on investment and jobs. They can affect decisions about whether existing operations are expanded, whether new projects go ahead and where they are located.

There is no question that reform in this area is long overdue. This bill is bringing about much needed change to legislation, which is apparently discouraging aspiring directors, our next generation of business leaders. 'This is not just about directors' self-interest,' as Mr Colvin highlighted, 'It is about everyone's prosperity.'

The bill is the next step in the reform of directors' liability provisions. In response to a request from the Council of Australian Governments in November 2009, the Ministerial Council for Corporations agreed on a set of principles by which all jurisdictions will audit their legislative provisions that deal with personal liability on company directors.

In broad terms, the effect of the principles is that statutes should not routinely create criminal liability of directors for the offending of a company. The bill adjusts the liability in light of the council's guidelines.

Within the 25 acts the following types of offences are applied: the first class of offences are where the director is an accessory to the offence. Directors 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 not applicable to the relevant offence and the general law of accessorial liability applies.

The second class of offences are offences of vicarious liability. For more serious offences that directors should be vigilant to prevent, the law holds directors criminally liable subject to a 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 in such cases.

The third class of offences are what are deemed to be moderately serious offences. In a number cases, however, a middle ground has been taken because the offence is of this nature. In those cases, the director will only be criminally liable if the prosecution can prove that the director: firstly, knew or ought reasonably to have known that there was a significant risk that an offence of this type or kind might occur; secondly, was in a position to influence the company's action in relation to this type of behaviour; and, thirdly, failed to exercise due diligence to stop the company from offending. All of these are matters to be proved by the prosecution.

Under this bill, 17 acts remove the liability of directors unless they are an accessory to the offence, while eight acts still maintain personal criminal liability of a corporate officer for the misconduct of the corporation.

The bill proposes to place an onus on individual conduct. Where liability is justified, the principles specify that directors should properly be held liable either where they are a party to the offence or where they have been negligent or reckless in relation to the offending.

In effect, this bill will remove the excessive liability burden imposed on company directors in a number of acts and allow boards to get on with their real job of making good business decisions and generating investment and jobs for Australians. The bill will also help to reduce the fear that is stopping qualified people from taking up board positions. There are no justifications for the current approach which, in our view, puts undue burdens on law-abiding and diligent directors.

The opposition has received representations from the Australian Institute of Company Directors. Following those discussions, the institute has indicated that they will give further consideration to the provisions of the bill. Once the opposition has received further advice from the institute, we may well feel the need to introduce amendments to improve the bill. We certainly intend to do that, giving members plenty of time to understand the implications of those amendments.

Debate adjourned on motion of Hon. J.M. Gazzola.