Alert | Second step in reforming personal liability for corporate fault

12 June 2012

On Friday 1 June, the Parliamentary Secretary to the Treasurer, the Hon Bernie Ripoll MP, announced the release of the second tranche exposure draft of the Personal Liability for Corporate Fault Reform Bill 2012 (Liability Reform Bill). This release is the next step in the Government's response to the Directors' Liability Reform Project, a Council of Australian Governments (COAG) initiative.

In this Alert, we look at the amendments proposed in the second tranche exposure draft, and the Government's timetable for introduction of a consolidated Bill to effect the legislative reforms.

Background

An exposure draft of proposed amendments to non-tax legislation within the Treasury portfolio was released in January 2012 for public comment. For a summary of the amendments proposed in that exposure draft (and the COAG principles for legislative review), please see our Alert "Draft bill first step in reforming personal liability for corporate fault". This tranche relates to Commonwealth legislation other than Treasury legislation.

Amendments proposed in the second tranche

The Liability Reform Bill proposes amendments to the pieces of Commonwealth legislation listed below.

Classification (Publications, Films and Computer Games) Act 1995

This Act provides for special temporary measures for protection of children living in Northern Territory indigenous communities from exposure to prohibited material, including sexually explicit and violent material (Part 10). If a body corporate breaches these measures, section 104 imposes liability on body corporate managers, subject to a defence that they did not know of the circumstances constituting the offence or took all reasonable steps to prevent its being committed. The Liability Reform Bill retains personal liability, given the seriousness of the offence; but transfers the burden of proving all the elements of the offence onto the prosecution, having added the following elements to the offence:

  • the manager knew that the offence would be committed;

  • the manager was in a position to influence the conduct constituting the offence; and

  • the manager failed to take reasonable steps to prevent the offence being committed.

Part 10 ceases to have effect on 18 August 2012, due to a sunset clause (section 115). However, the amendment clarifies the application of derivative liability if the operation of the Part is extended by future reforms.

Corporations (Aboriginal and Torres Strait Islander) Act 2006

The exposure draft of the first tranche of the Liability Reform Bill proposed various amendments to section 188 of the Corporations Act, and related provisions imposing personal liability for breach of the administrative and reporting requirements on the company secretary. Relevantly, the effect of the amendments was to make breach of the requirements of section 188(1) a civil penalty provision, rather than a criminal offence. The second tranche exposure draft proposes amendments that will bring this Act into line with the proposed amendments to the Corporations Act.

Health Insurance Act 1973

It is an offence under section 129AA of this Act for a private hospital proprietor to offer, or accept, a bribe for a patient to be admitted to the hospital under specified circumstances. If the corporation has committed an offence, section 129AA(2) makes an officer of a corporation guilty of an offence. (This includes, but is not limited to an officer that wilfully authorises or permits the offence to be committed.)

The Liability Reform Bill will abolish personal liability of officers for a contravention of this section by a corporation, as it is inconsistent with the COAG principles.  

Sections 23DZZIQ-23DZZIS impose offences relating to bribery or threats that would prevent fair competition between providers of pathology and diagnostic imagery services. The sections were introduced following industry consultation that concludes regulation without personal liability was ineffective as a way of preventing anticompetitive practices. Section 23DZZIT provides that an executive officer (defined as a person who is concerned in, or takes part in, the management of the body, whether or not they are called a director) commits an offence against those sections if:

  • the body corporate commits an offence against the Division;

  • the officer knew that the offence would be committed;

  • the officer was in a position to influence the body in relation to the commission of the offence; and

  • the officer failed to take all reasonable steps to prevent the commission of the offence.

The Liability Reform Bill will insert notes to make it clear that personal liability will apply.

Therapeutic Goods Act 1989

An executive officer (defined as a person who is concerned in, or takes part in, the management of the body, whether or not they are called a director) commits an offence under section 54B of this Act if:

  • the company commits an offence under the Act;

  • the executive officer knew that the offence would be committed;

  • the executive officer was in a position to influence the conduct constituting the offence; and

  • the executive officer failed to take reasonable steps to prevent the offence being committed.

Consequently, there are a large number of offences under the Act subject to personal liability.  The explanatory material for the second tranche exposure draft argues that the retention of personal liability for offences at the upper levels of seriousness is justified on public policy grounds, given the Act's fundamental role in regulating the supply of healthcare to the Australian public.

However, personal liability will generally be removed for offences at the lower levels of seriousness. The Liability Reform Bill will also remove blanket application of personal liability, inserting a new section 54BA to clarify that only prescribed provisions are subject to personal liability. This means that if new offences are introduced into the Act, a positive policy decision will be necessary for personal liability to apply to the executive officers of a body corporate.

Veterans' Entitlements Act 1986

Sections 93D and 93E of this Act impose liability on directors and other company officers for bribery and other anticompetitive behaviour in relation to the provision of pathology and other medical services where a corporation is 'in default'. The term 'in default' is defined to include accessorial liability.  The Liability Reform Bill will, for greater certainty, expressly restrict the application of personal liability to circumstances where the officer intentionally authorised or permitted the offence to be committed.

National Vocational Education and Training Regulator Act 2011

The types of offences under this Act relate to a registered training organisation failing to meet its duties or acting outside the scope of its registration.  If an organisation commits an offence under the Act, section 133 of this Act imposes personal liability for executive officers if the officer:

  • knew that the offence would be committed;

  • was in a position to influence the conduct leading to the offence; and

  • failed to take all reasonable steps to prevent the offence being committed.

The relevant offences under the Act were introduced to address activities in the market for international students, that were designed to subvert immigration laws. The explanatory material for the second tranche exposure draft argues that the retention of personal liability for these offences is justified because confining penalties to corporations would be ineffective (as companies may use liquidation to thwart prosecution). However, the Bill will insert notes into the relevant offence provisions to clarify its application. 

National Measurement Act 1960

Under section 19G of this Act, personal liability extends to directors of a company where the company has performed the physical elements of an offence under the Act (as well as to other officers in more narrow circumstances). The Liability Reform Bill will repeal section 19G, on the basis that there are more effective mechanisms for the regulation of trade measurement in other Commonwealth legislation, that remove any public policy justification for the retention of personal liability in this Act.

Next steps

Interested parties are invited to comment on the consultation papers by 29 June 2012. If you would like your views on the Liability Reform Bill to be communicated to Treasury, please speak to any of the contacts listed for this Alert.

The explanatory material released with the second tranche exposure draft notes that the Government intends to introduce a consolidated Liability Reform Bill, composed of the amendments proposed in the two exposure draft tranches, by the end of 2012.

Author(s) Robert Austin, Bruce Cowley