What are the new penalties for directors?
Directors need to be aware that having the ‘best of intentions’ will often not be enough to avoid liability for a breach of the duty under the new penalties.
- On the 18th of February 2019, the new Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Amendment Act) became law.
- The Amendment Act strengthened penalties for misconduct or duty breach by those who govern, manage and are employed by corporations in Australia.
- This includes penalties for officers, directors, employees and corporations themselves.
Rationale for changes
In 2014 the Financial System Inquiry (FSI) looked at the overall robustness of Australia’s financial system. Significant regulatory gaps were identified and the FSI recommended a special ASIC Enforcement Review Taskforce be set up. That Taskforce itself made a range of recommendations including:
- increased civil penalties;
- increased criminal penalties;
- a new dishonesty test;
- changes to the penalties for strict and absolute liability offences;
- expanding the power of the Australian Securities and Investments Commission (ASIC) to ban individuals from performing roles in financial services and credit businesses.
Many of these recommendations have been captured in the Amendment Act.
The Taskforce was concerned with a range of misconduct in relation to corporations, including illegal ‘phoenix’ activity; the activities of transferring assets from a struggling company into another one in order to ‘re-birth’ the enterprise under a new banner. This activity can have the effect of depriving creditors of what they are owed. The Taskforce recommended, among other things that phoenix-related activity be included as a basis for banning individuals from being Directors. Read more about this practice here.
The new civil and criminal penalties for directors
The Amendment Act contains a significant range of changes to the criminal offence and civil penalty provisions across multiple pieces of legislation.
The table below summarises some, but by no means all, of the changes in the Amendment Act. Our emphasis is on those changes that may have a significant impact on directors.
|Area of change||New Provision|
|Increase in maximum penalties for certain criminal offences (e.g. section 908DC of the Corporations Act 2001 and schedule 3 of the Amendment Act)||Increase in maximum terms of imprisonment from five years to 15 years for a variety of criminal offences including recklessly, dishonestly or knowingly: |
|Financial penalties for criminal offences and civil penalty provisions
|A new formula applies for criminal offences, depending on the maximum term of imprisonment, requiring either multiplying that maximum term by 10 for individuals (10 more for bodies corporate) or the benefit provided (or detriment avoided) multiplied by 3 (e.g. new sections 1311B- F of the Corporations Act 2001). |
For civil penalty provisions, a new maximum financial penalty applies for individuals of the greater of either 5,000 penalty units or the benefit provided (or detriment avoided), multiplied by three.For corporations, the new maximum financial penalty for civil penalty provisions is either 50,000 penalty units or the benefit provided (or detriment avoided) multiplied by three, or 10 per cent of the annual turnover of the body corporate. The latter test has a cap of 2.5 million penalty units (section 1317G of the Corporations Act 2001).
|Strict Liability Offences||Reforms in relation to strict liability include: |
|New Civil Penalties Provisions||Some non-penalty provisions have now been made civil penalty provisions in the Corporations Act 2001, National Consumer Credit Protection Act 2009, National Credit Code and Insurance Contracts Act 1984, including provisions those relating to, for example: |
|Dishonesty definition||A new definition of Dishonesty has come into force, see below.|
|Relinquishment||This new remedy means that the courts are required to prioritise compensating victims over ordering financial penalties|
The new ‘objective’ test for dishonesty
Prior to the Amendment Act there was no consistent test for dishonesty in the Corporations Act 2001. In some sections of the Corporations Act 2001, there was an essential ‘subjective’ element to dishonesty. That is, it was required that an individual have a certain mental state of belief in order to be in contravention of that Act. For example, section 184(1)(b) required that an individual be “intentionally dishonest” in failing to exercise their powers and discharge their duties in good faith or for a proper purpose.
The Amendment Act introduces a single definition of ‘dishonest’ into section 9 of the Corporations Act 2001 as “dishonest according to the standards of ordinary people”. This is consistent with the decision of the High Court of Australia in Peters v R (1998) 192 CLR 493.
In light of this new definition, directors need to be aware that the ‘best of intentions’ will often not be enough to avoid liability for a breach of duty.
Potential future law changes
As part of a range of legislative measures designed to prevent and punish illegal phoenix activity, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 was considered in Parliament earlier this year. Thus far, the bill has yet to pass into law. That Bill proposes:
- Criminal offences for officers of a corporation that recklessly engage in conduct resulting in a ‘prohibited creditor-defeating disposition’. The latter is prohibited conduct where the officer has acted to transfer assets to deprive creditors of their entitlements.
- A civil penalty provision for officers that engage in conduct resulting in a prohibited creditor-defeating disposition where a reasonable person would have known the disposition was so prohibited.
- A criminal offence for a person to procure, incite, induce or encourage a company to make a prohibited creditor-defeating disposition.
Directors should recognise, in particular, the potentially wide application of the last proposal. Even if a director is not themselves engaging in illegal phoenix activity, they could be liable if they could be seen as encouraging others to do so.
For more on this Bill, click here.
Over the next year, it will be important to watch out for the outcome of the Review into Australia’s Corporate Criminal Responsibility Regime. For more information about this review, see here.
The Review will consider:
- How foreign jurisdictions deal with corporate criminal responsibility;
- whether there should be new provisions enabling senior corporate officers to be held liable for misconduct by corporations.
With a substantial increase in their enforcement budget over the last year we should also expect to see strict scrutiny of the provisions in the Amendment Act from ASIC.