Director liability issues for 2013: taking reasonable steps to comply

From time to time clients ask us for a list of all the things for which directors can be liable.

When creating a list of all those things that can create liability for directors it’s important to firstly understand that corporate governance consists of improving the performance of the business in the best interests of shareholders as well as managing risks and monitoring compliance. The board’s role is not limited to compliance.

When looking at compliance issues you should distinguish between those things that a director does (or fails to do) personally as well as things that the company does (or fails to do) for which a director is liable.

The first category (liability for personal conduct) includes: don’t steal, don’t lie or cheat, don’t get a personal benefit by misusing confidential information, don’t fail to do your best for the company because you have a competing personal interest.

The second category (personal liability for corporate conduct) includes liability for insolvent trading, misleading statements to investors as well as breaches of environmental and hazardous goods legislation, workplace health and safety laws and consumer protection laws.

Some issues will be regular items on your agenda (eg director disclosures), some will be six-monthly or annual items (eg financial reports, executive remuneration, annual licence renewals) and others will be special matters depending on your activities (eg signing off on fundraising).

If you are prosecuted for a corporate breach, the key issue is whether you took “reasonable steps” to ensure that the company complied with the provision.

Under some laws you are presumed to have taken reasonable steps unless the prosecution proves otherwise. Under other laws you have the burden of proving you took reasonable steps. Background

What are reasonable steps?

The Corporations Act does not define reasonable steps. They vary with the circumstances.

In ASIC v Healey (Centro) Judge Middleton discussed the minimum steps a director needed to take before approving financial statements.

Unfortunately the director liability laws for state-based offences still vary between states.

Section 97 of the Miscellaneous Acts Amendment (Directors’ Liability) Act 2012 NSW defines “reasonable steps” as follows:

reasonable steps, in relation to the commission of an executive liability offence, includes, but is not limited to, such action (if any) of the following kinds as is reasonable in all the circumstances:
(a) action towards:
(i) assessing the corporation’s compliance with the provision creating the executive liability offence, and
(ii) ensuring that the corporation arranged regular professional assessments of its compliance with the provision,
(b) action towards ensuring that the corporation’s employees, agents and contractors are provided with information, training, instruction and supervision appropriate to them to enable them to comply with the provision creating the executive liability offence so far as the provision is relevant to them,
(c) action towards ensuring that:
(i) the plant, equipment and other resources, and
(ii) the structures, work systems and other processes, relevant to compliance with the provision creating the executive liability offence are appropriate in all the circumstances,
(d) action towards creating and maintaining a corporate culture that does not direct, encourage, tolerate or lead to non-compliance with the provision creating the executive
liability offence.

The proof required to show you took reasonable steps varies with the alleged offence.

The starting point is to carry out a risk assessment appropriate to your business.

But don’t forget to spend time growing the business.

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