Directors face longer jail terms under new corporate liability laws

Company directors face longer jail terms and stricter board penalties under new laws that renege on promised national reforms originally meant to ease burdens on directors. 

The Australian Institute of Company Directors (AICD) has criticised the Personal Liability for Corporate Fault Reform Bill for continuing to impose “outrageous” personal liability on Australian directors. 

AICD chief executive John Colvin spoke out against the bill at the launch of the latest Director Sentiment Index.

The index, which surveys over 500 Australian chairmen and directors, found global economic uncertainty was the chief challenge faced by Australian business while industrial relations was a number one concern for 20% of respondents.

“Overall the director sentiment is slightly pessimistic, but directors remain optimistic about the Asian economy and less pessimistic about the Australian and US economy,” Colvin says.   

However, at the launch of the survey it was the Federal bill which had Colvin’s attention. 

“It is outrageous in a country like Australia that we treat business in such a fashion.

“Can you tell me another jurisdiction which has this many pieces of legislation making directors personally liable rather than just the company?”

The AICD wants provisions imposing personal liability on directors to be confined to the Corporations Act, which already sets out the duties and responsibilities of directors. 

“Under the Corporations Act is the only area where directors should become liable,” Colvin says.   

“When you do have personal liability for directors you have to put into place the normal human rights safeguards that you have in every other area of society.”

Colvin claims the extent of directors’ personal liability in Australia is having a real impact on business.

“We know that people are less and less likely to want to be directors or stay directors and that is a real drag on productivity and a turn off on people investing in Australia.”   

Rebecca Maslen-Stannage, partner at the law firm Freehills, concedes the bill is “pretty disappointing” for directors.

“What the reforms are saying is that there does seem to be an acceptance from the legislators that maybe some of the personal liability on directors has gone too far,” Maslen-Stannage says.

“What we have seen over a number of years now is a lot of legislation which, as well as imposing liability on a company, makes the director personally liable.” 

Maslen-Stannage says the reforms should be good for small companies and medium enterprises and sounded like they were heading in the right direction but argues the reforms do not go far enough. 

“The law still makes directors prove that they should not be liable, which is contrary to a basic principle of law that the burden of proof should still be on the prosecution.

“That is the bit that a number of directors are rightly upset about.

“The classic example is when a company issues a prospectus; if there is something misleading in a prospectus the director is liable unless they can persuade a court they took all reasonable steps in the circumstances.”

She says the bill continues a “disappointing” theme in failing to reform the directors’ duties area. 

“For good reasons directors out there are pretty disappointed that there seems to be an appetite for putting further responsibility on them, but no appetite for taking unreasonable responsibility off them.”