Criminalisation of Directors' Duties
Updated May 2018
In Australia, directors of a corporation are expected to undertake their duties and responsibilities in accordance with both statutory and common laws (judge-made laws). The Directors’ Duties are designed to promote good governance and ensure that they act in the interests of the company, including putting the company’s interests first. Directors’ Duties include:
Duty to act bona fide (in good faith) in the interests of the company as a whole
Duty not to act for an improper purpose
Duties of care and diligence
Duty to avoid conflicts of interest
Duty not to make improper use of position
Duty not to make improper use of information
Duty not to trade while insolvent
Any director who breaches these duties faces the risk of attracting criminal action.
Statutory Duties - criminal offences
Section 184 of the Corporations Act provides a series of criminal offences which arise when the behaviour of directors falls far short of acceptable standards due to intentional dishonesty or recklessness:
Good faith. A director commits an offence if they are reckless or intentionally dishonest, and fail to exercise their powers and discharge their duties in good faith in the best interests of the corporation or for a proper purpose.
Use of position. A director commits an offence if they use their position with intentional dishonesty or recklessly in order to directly or indirectly gain an advantage for themselves, or someone else,or cause detriment to the corporation.
Use of information. Any person who obtains information because they are, or have been, a director of a corporation commits an offence if they use the information with intentional dishonesty or recklessly in order to directly or indirectly gain an advantage for themselves, or someone else, or cause detriment to the corporation.
The sort of prohibited conduct evidencing recklessness or dishonesty includes:
Making misleading statements in order to induce persons to buy or sell shares
Participating in other conduct (market rigging or insider trading) that could induce people to buy or sell shares
Falsifying records
Failing to prepare accurate company accounts.
Continuing to act as a director when disqualified under the Corporations Act
Insolvent trading
In respect of insolvent trading, a director may be personally liable if he allows the company to incur a debt while the company is insolvent, or the debt causes the company to become insolvent. If the director is aware (or a reasonable person would have been aware) of the effect the director will be civilly liable.
If the director suspected that the company was insolvent (or would become insolvent) and his failure to prevent insolvency was dishonest, the director will be criminally liable.
Although technically not a duty, the practice of insider trading is also considered a criminal offence under s 1043A of the Corporations Act. The prohibition on insider trading does not apply solely to directors; virtually anyone can be an insider, nonetheless it relies on the possession of inside information, a position naturally occupied by directors.
Once a director posses inside information in relation to a particular security, and knows, or ought to reasonably have known that it is insider information; he cannot trade or have anyone trade on their behalf in those securities. Further, this is irrespective of the existence of any other legitimate reason to deal in the securities.
Penalties for Criminal Offences under the Act
Proceedings against directors for criminal offences to deter misconduct and achieve enforcement are initiated by the Australian Securities and Investments Commission (ASIC). The penalties vary depending on the seriousness and consequences of the corporate misconduct, but can be severe:
A director or other officer found guilty of a criminal offence pursuant to s184 will face a financial penalty of up to 2000 units (as of the date of his article valued at $180 pr unit, a price set by the Crime Act 1914 and/or imprisonment for up to five years.
A director found guilty of insider trading will face a financial penalty of 4,500 penalty unit or three times the benefit gained, and/or imprisonment for up to five years.
The director may be personally liable to compensate the company or others for any loss or damage they suffer.
The director may be banned from managing a company.
Example Criminal Cases
In March 2012, the former directors of Australian Capital Reserve Limited were sentenced to terms of imprisonment to be served by way of Intensive Correction Order (ICO) following an ASIC investigation. The charges related to false or misleading statements in the company’s accounts and a prospectus. The directors Samuel Pogson and Murray Lapham were each given two years, and Steven Martin one year and four months.
Later that August, Andrew Alexander Lindberg former Managing Director of AWB Limited, was ordered to pay a penalty of $100,000 and be disqualified from managing corporations until September 2014 after finding that he breached his duties as a director of AWB. The judge accepted that the contraventions did not involve deliberate wrongful acts or dishonesty, but concluded that Mr. Lindberg had “failed to perform his duties as a reasonable director or officer would in his situation”.
In December 2012, Stuart Fysh, a former executive vice-president at British Gas, was sentenced to a total of three and a half years in prison for insider trading involving shares in Queensland Gas Company while it was a takeover target of British Gas.
Can the Company Protect its Directors?
To give directors some protection, the Act does include a defence known as the ‘business judgment rule’. A business judgment is defined as ‘any decision to take or not take action in respect of a matter relevant to the business operations of the corporation’. However, a director’s failure to consider the matter will not bring him within the scope of this statutory protection. In addition, a director will not be able to use the defence where decisions have not been made in good faith or for a proper purpose.
A company may attempt to protect its directors and officers from some aspects of their potential liability by including indemnities in favour those persons in the company constitution. However, the Act restricts the types of liabilities that can be indemnified by a corporation and prohibits indemnification in relation to legal costs incurred in defending an action for liability where the director is found to be guilty in criminal proceedings.
What should I do next?
Contact You Legal for confidential advice on Directors’ Duties and responsibilities in general. If you believe that you may be under investigation, or if you have been charged with an offence, our lawyers will be happy to assist you.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.
