Posted: Dec 17, 2019 05 min. read

Company Directors and Senior Executives could potentially face jail time for failure to prevent criminal corporate conduct

The ALRC recommendations have the potential to significantly change the liability landscape for company directors and senior executives when it comes to corporate misconduct. Directors and senior executives really need to get ahead of the game and take stock of their conduct oversight arrangements. How are you influencing good conduct?

The Australian Law Reform Commission (ALRC) has released a Discussion Paper focused on “seeking to reduce corporate misconduct and increase individual accountability for wrongdoing”. The ALRC is recommending that a new and separate offence be established (by amending the Corporations Act) for failure by an individual company director or senior executive to prevent the misconduct of the corporation. The ALRC proposes that it would not be necessary to secure a conviction against the corporation before prosecuting an individual for such failure. These developments are squarely focused on what those at the helm of the corporation are doing to ensure good conduct and to prevent misconduct, and they seek to cast a wider net of which individuals are personally accountable.

Liability would be based on the individuals ‘capacity to influence’ the conduct of the corporation. The ALRC describes this in the following terms; “Influence, in this sense, refers to the capacity of an individual to make decisions and direct behaviours in the course of their role in the business”.

Civil liability would be attributed to an individual company director or senior executive for failing to prevent the misconduct of the corporation where a relevant contravention or offence has been committed by the corporation and the director or senior executive was in a ‘position to influence the conduct of the corporation’ in relation to the contravention and failed to prevent it. The ALRC proposes that this liability extends to senior executives having responsibility for the area of the corporations business where the conduct occurs unless they are able to demonstrate that they took reasonable measures to ‘prevent’ the contravention or offence. 

Criminal liability would be attributed to an individual company director or senior executive where the conduct is the subject of a civil penalty provision and is engaged in intentionally, knowingly or recklessly.   

These developments are significant, as individuals can now be liable. The current statutory regime provides that senior officers will only be liable for conduct to which they were accessories or where they have personally contravened a director’s duty. The proposed model for attributing civil and criminal liability to an individual officer for corporate misconduct also moves away from the current attribution model in Part 2.5 of the Commonwealth criminal Code based on ‘corporate culture’.

The ALRC review was commissioned by the Attorney General with terms of reference that required it to review and consider whether reforms are necessary or desirable to improve Australia’s existing corporate criminal liability regime (Part 2.5 of the Commonwealth Criminal Code). The ALRC remit included consideration of mechanisms for holding individuals responsible for criminal corporate conduct. 

Other key recommendations of the ALRC include:

  • A principles-based approach to regulation: The ALRC has proposed a new model for corporate regulation which recognises the need for a principled distinction between criminal and civil liability. The primary form of regulation would be civil, ensuring that only egregious conduct, deserving of denunciation and condemnation by the community, is deemed criminal. 
  • Recognition of Board oversight role: The ALRC has acknowledged that directors may not be the most appropriate target for responsibility in relation to misconduct arising from the day-to-day management of the corporation. Indeed, the ALRC has been deliberate in focusing on managerial liability, given the ability of senior officers to more directly influence the conduct of a corporation. The ALRC has also acknowledged that the legal framework for director liability is generally not in need of reform. 

The ALRC recommendations have the potential to significantly change the liability landscape for company directors and senior executives when it comes to corporate misconduct. Now is the time to take a look at how conduct is overseen. What corporate governance and related accountability structures are in place that ensure there is an ability to influence conduct and, in particular, to prevent misconduct? Undertaking a review to identify gaps and improvement opportunities and implementing changes now will put you in a good position.

For more information, please contact

Deb Latimer – Partner, Governance, Regulation and Conduct Solutions

Karen Den-Toll – Partner, Governance, Regulation and Conduct Solutions  

 

 

Meet our authors

Deborah Latimer

Deborah Latimer

Partner, Audit & Assurance

Deborah is a Partner in our Governance, Regulation and Conduct Practice. She is a lawyer and has over 25 years’ experience within the financial services sector in Australia including regulatory, indus

Karen Den-Toll

Karen Den-Toll

Partner, Audit & Assurance

Karen is a partner in Deloitte’s Sydney office in the Governance, Regulation and Conduct practice. She has over 20 years’ experience in the financial services industry and has a breadth of experience