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Personal Liability for Corporate Fault Reform Bill 2012

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2010-2011-2012

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Personal Liability for Corporate Fault Reform Bill 2012

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the

Parliamentary Secretary to the Treasurer, the Hon Bernie Ripoll MP)

 



T able of contents

Glossary.............................................................................................................. v

General outline and financial impact............................................................ 1

Chapter 1               Council of Australian Governments Directors’ Liability Reform Project   3

Chapter 2               Corporations Act 2001......................................................... 7

Chapter 3               Foreign Acquisitions and Takeovers Act 1975............. 11

Chapter 4               Health Insurance Act 1973............................................... 15

Chapter 5                National Vocational Education and Training Regulator Act 2011 19

Chapter 6               Therapeutic Goods Act 1989............................................ 23

Chapter 7               Other Acts amended.......................................................... 27

Chapter 8               Statement of Compatibility with Human Rights........... 35

Index................................................................................................................. 37

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The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

ASIC

The Australian Securities and Investments Commission

The Bill

Personal Liability for Corporate Fault Reform Bill 2012

CAMAC

Corporations and Markets Advisory Committee

CATSIA

Corporations (Aboriginal and Torres Strait Islander) Act 2006

Child Support Act

Child Support (Registration and Collection) Act

Classification Act

Classification ( Publications, Films and Computer Games) Act 1995

COAG

Council of Australian Government

Corporations Act

Corporations Act 2001

FATA

Foreign Acquisitions and Takeovers Act 1975

HIA

Health Insurance Act 1973

ICA

Insurance Contracts Act 1984

ITAA

Income Tax Assessment Act 1936

MINCO

Ministerial Council for Corporations, now known as the Legislative and Governance Forum

NMA

National Measurement Act 1960

NVETRA

National Vocational Education and Training Regulator Act 2001

PDF Act

Pooled Development Funds Act 1992

SGAA

Superannuation Guarantee (Administration) Act 1992

TAA

Taxation Administration Act 1953

TGA

Therapeutic Goods Act 1989

VEA

Veterans’ Entitlements Act 1986



Outline

This Bill implements the Council of Australian Governments’ (COAG) Directors’ Liability reform, which aims to harmonise the imposition of personal criminal liability for corporate fault across Australian jurisdictions.  The Directors’ Liability reform project forms part of the COAG National Partnership Agreement to Deliver a Seamless National Economy.

The amendments proposed to be made in this Bill apply the Principles agreed as part of the COAG Directors’ Liability reform to Commonwealth legislation across various portfolios, including the Corporations Act 2001 , Corporations (Aboriginal and Torres Strait Islander) Act 2006 , Insurance Contracts Act 1984, Foreign Acquisitions and Takeovers Act 1975, Income Tax Assessment Act 1936, Taxation Administration Act 1953, Superannuation Guarantee (Administration) Act 1992, Pooled Development Funds Act 1992, Therapeutic Goods Act 1989, Health Insurance Act 1973, Veterans’ Entitlements Act 1986, Classification ( Publications, Films and Computer Games) Act 1995, National Measurement Act 1960 , and National Vocational Education and Training Regulator Act 2001.

The Bill amends these Acts to:

•        remove personal criminal liability for corporate fault where such liability is not justified;

•        remove the burden of proof on defendants to establish a defence to a charge;

•        replace personal criminal liability for corporate fault with civil liability where a non-criminal penalty is appropriate; and

•        where personal criminal liability is justified, to make clear the circumstances where such liability would apply.

Date of effect :  The Bill commences on the day following Royal Assent.  The Bill does not have retrospective effect. 

Proposal announced :  These reforms were originally announced as part of the COAG National Partnership Agreement to Deliver a Seamless National Economy on 29 November 2008 .

Financial impact :  The financial impact will be n il.

Compliance cost impact The compliance cost will be nil.

Regulation impact statement

Impact:  A Regulation Impact Statement (RIS) was not required for the amendments. 

Summary of Statement of Compatibility with Human Rights

A Statement of Compatibility with Human Rights has been prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

This Bill is compatible with human rights.  It promotes the right to the presumption of innocence.

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Background

1.1                   The Directors’ Liability reform project is part of the Council of Australian Governments’ National Partnership Agreement to Deliver a Seamless National Economy (SNE NP).  The COAG reform initiative commits all jurisdictions to establishing a nationally consistent and principled approach to the imposition of personal liability on directors and other corporate officers for corporate fault. 

1.2                   The reform initiative aims to remove regulatory burdens on directors and corporate officers that cannot be justified on public policy grounds, and to minimise inconsistency between Australian jurisdictions in the application of personal liability for corporate fault in government laws.

1.3                   In November 2008, COAG agreed to the reform of personal criminal liability for corporate fault across Australian law, other than for laws relating to workplace health and safety and environmental protection (which were then the subject of separate reform processes). 

1.4                   COAG’s decision followed earlier reviews, including by the Australian Law Reform Commission, the Corporations and Markets Advisory Committee (CAMAC) and the Commonwealth Government Taskforce on Reducing the Regulatory Burden on Business (Banks Taskforce), which had recommended reform.

1.5                   In December 2009, COAG agreed to a set of Principles (‘COAG Principles’) proposed by the Ministerial Council for Corporations (MINCO) for national adoption as the basis upon which personal liability for corporate fault should be imposed.  The implementation plan for the SNE NP requires all existing Commonwealth, State and Territory legislation to be audited against the COAG principles and jurisdictions to introduce legislation by the end of 2012 to reform their directors’ liability provisions to ensure consistency with the COAG Principles.  It also commits all jurisdictions to agree to apply the COAG Principles in future legislation.

1.6                   At the request of COAG, the Business Regulation and Competition Working Group (BRCWG), comprising senior officials from Commonwealth, State and Territory governments and chaired by the Commonwealth Minister for Finance and Deregulation and Commonwealth Minister Assisting for Deregulation, developed a set of supplementary Guidelines to assist jurisdictions in auditing their legislation against the COAG Principles.  On 25 July 2012, COAG agreed to apply these Guidelines when drafting future legislation.  The audits do not cover core environmental protection legislation or Acts based on national model legislation. 

Scope of reform

1.7                   The Guidelines clarify the scope of matters to be covered by the jurisdictional audits as only applying to provisions where a director is held criminally liable for an offence that was committed by the corporation.  The Guidelines make clear that the COAG Principles do not extent to situations where a director may have committed an offence personally, or where a director might be held liable as an ‘accessory’ to an offence (where the director aided, abetted, counselled or procured the corporation’s offence, or was knowingly concerned in the corporation’s offence).

1.8                   To give effect to the COAG reform, jurisdictions were required to implement the audit outcomes by introducing legislation to make the necessary amendments by the end of 2012 and to continue to apply the COAG principles and guidelines when drafting future legislation.

1.9                   The amendments in this Bill represent those directors’ liability provisions in Commonwealth legislation recommended for repeal or amendment in line with the COAG Principles and Guidelines. 

COAG Principles for the imposition of personal liability for criminal fault

1.10               The following are the agreed COAG Principles:

•        W here a corporation contravenes a statutory requirement, the corporation should be held liable in the first instance.

•        Directors should not be liable for corporate fault as a matter of course or by blanket imposition of liability across an entire Act.

•        A ‘designated officer’ approach to liability is not suitable for general application.

•        The imposition of personal criminal liability on a director for the misconduct of a corporation should be confined to situations where:

-       there are compelling public policy reasons for doing so (for example, in terms of the potential for significant public harm that might be caused by the particular corporate offending);

-       liability of the corporation is not likely on its own to sufficiently promote compliance; and

-       it is reasonable in all the circumstances for the director to be liable having regard to factors including:

:    the obligation on the corporation, and in turn the director, is clear;

:    the director has the capacity to influence the conduct of the corporation in relation to the offending; and

:    there are steps that a reasonable director might take to ensure a corporation’s compliance with the legislative obligation.

•        Where principle 4 is satisfied and directors’ liability is appropriate, directors could be liable where they:

-       have encouraged or assisted in the commission of the offence; or

-       have been negligent or reckless in relation to the corporation’s offending.

•        In addition, in some instances, it may be appropriate to put directors to proof that they have taken reasonable steps to prevent the corporation’s offending if they are not to be personally liable.



Chapter 2          

Corporations Act 2001

Outline of chapter

2.1                   The Bill amends the Corporations Act 2001 (Corporations Act) to:

•        reform certain provisions that impose personal criminal liability for corporate fault in line with the COAG Principles; and

•        make clear those circumstances in which corporate officers can be held personally criminally liable for corporate fault. 

Context of amendments

2.2                   There are numerous provisions in the Corporations Act that impose personal criminal liability on company officers for breaches of that Act by the corporation.  The audit of Commonwealth legislation conducted as part of the COAG Directors’ Liability Reform project identified a number of those provisions as inappropriately applying personal criminal liability on officers in a manner that did not accord with the COAG Principles. 

Summary of new law

2.3                   The Bill amends the Corporations Act to repeal the imposition of personal liability for corporate fault to bring the Act into alignment with the COAG Principles. 

2.4                   A company secretary is an officer designated by a company as being responsible for certain administrative functions within the company.  Where a company breaches one of the listed statutory functions for which a company secretary is delegated responsibility, the company secretary is criminally liable for the breach.  If the company does not have a secretary, each director of the company is instead responsible for the breach.

2.5                   The Bill also amends the Corporations Act to

•        replace the current criminal liability imposed on company secretaries and directors under that provision of the Corporations Act with a civil liability;



•         

•        impose a penalty for the breach of the civil liability; and

•        improve the readability and clarity of the provision of that Act which imposes the liability. 

2.6                   The Bill adjusts the penalties associated with offences for which a company secretary is taken to be responsible to accord with general Commonwealth penalty principles. 

Comparison of key features of new law and current law

New law

Current law

Company secretaries and company directors where a secretary has not been appointed, are liable for a civil penalty of up to $3,000 for a breach of section 188, or $200,000 if such a breach materially prejudices the interests of the corporation or scheme, or materially prejudices the corporation’s ability to pay its creditors, or is serious. 

Company secretaries and company directors where a secretary has not been appointed are liable for a criminal penalty of 5 penalty units for a breach of section 188.

Where offences specifically apply personal criminal liability for corporate fault, notes in the Corporations Act draw attention to this fact.

Provisions in the Corporations Act do not explicitly highlight where personal criminal liability is imposed for corporate fault. 

A company is guilty of an offence if it fails to:

·          offer forfeited shares for sale by public auction, or

·          advertise such a sale in the manner described in subsection 254Q(3).

A company officer is guilty of an offence if they are involved in a company’s failure to:

·          offer forfeited shares for sale by public auction, or

·          advertise such a sale in the manner described in subsection 254Q(3).

Detailed explanation of new law

2.7                   Section 188 of the Corporations Act currently makes company secretaries criminally liable for certain breaches of the Corporations Act by a company. 

2.8                   The Bill amends the Corporations Act to remove the personal criminal liability of company secretaries for offences listed within section 188.  The offences generally relate to administrative defects for which criminal penalties are not justified under the COAG principles.  [Schedule 1, Items 1 and 21]

2.9                   While it is inappropriate to impose criminal liability on company secretaries in the situations listed in section 188, there remains a strong public interest in requiring a company secretary to turn their mind to the need for a company to comply with the law.  The Bill replaces the criminal liability for company secretaries with liability under the civil penalty framework of the Corporations Act.  [Schedule 1, Items 18 and 19]

2.10               The penalties for the underlying offences listed under section 188 are stated in Schedule 3 of the Corporations Act.  A number of these penalties are inconsistent with the Guide to Framing Commonwealth Offences, Infringement Notices, and Enforcement Powers (Commonwealth Guide to framing offences), which describes appropriate levels of penalties, and relationships between the number of penalty units and the length of imprisonment terms appropriate for an offence.  The Bill amends Schedule 3 of the Corporations Act to bring the offences to which section 188 applies into alignment with the Commonwealth Guide to framing offences.  [Schedule 1, Items 20, 22, 23, 24 and 25]

2.11               Subsection 254Q (13) applies personal liability in relation to a failure by a company to offer forfeited shares for sale by public auction, or to advertise such sales in accordance with the subsection.  This provision has been identified as being in breach of the COAG Principles as the type of harm that this subsection aims to prevent is not significant enough to warrant strict personal criminal liability for the corporate fault.  The Bill therefore removes the extension of liability to any officer of the company who is involved in the contravention.  [Schedule 1, Item 8]

2.12               Subsection 319(5A) mistakenly provides an offence for breach of a previously repealed section.  The Bill removes this offence.  [Schedule 1, Item 14]

2.13               Section 601FC sets out the primary duties of a responsible entity of a managed investment scheme.  Subsection 601FC (5) makes the breach of those duties by the responsible entity a civil penalty provision under Part 9.4B of the Corporations Act.  A person who is involved in the responsible entity’s contravention is also subject to a civil penalty.  Currently, subsection 601FC(6) makes a person involved in the contravention of a responsible entity’s duties personally criminally liable where the person’s involvement was reckless or intentional.  This provision has been identified as being in breach of the COAG Principles.  The Bill therefore repeals subsection 601FC(6) and the related penalty item in Schedule 3 of the Corporations Act.  [Schedule 1, Items 17 and 26]

2.14               A number of sections in the Corporations Act apply personal criminal liability to a person who is involved in a contravention of the section.  The Bill annotates the Corporations Act to make clear upon the reading of those offence provisions that personal liability will apply, and that ‘involved’ is defined in section 79 of the Act.  [Schedule 1, Items 2, 3, 4, 5, 6, 7, 9, 10, 11, 12, 13, 15 and 16]

Application and transitional provisions

2.15               These amendments apply from the day after Royal Assent.  [Section 2]

2.16               The amendments apply only in relation to acts or omissions occurring on or after the day the Bill commences.  [Schedule 7, Item 1]

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Chapter 3          

Foreign Acquisitions and Takeovers Act 1975

Outline of chapter

3.1                   The Bill amends the Foreign Acquisitions and Takeovers Act 1975 (FATA) to assist officers of a corporation to be aware of the situations in which personal liability may be imposed by making it clear on the face of the legislation.

Context of amendments

3.2                   Section 30 is potentially a blanket liability provision.  Blanket liability provisions are referred to in the COAG Principles and Guidelines as provisions that create personal liability which applies to contraventions of all relevant offences located within the Act.  In conjunction with section 31, section 30 creates personal liability for breaches of a number of provisions in the FATA.  The COAG Principles do not consider blanket liability provisions to be appropriate because they result in personal criminal liability being applied by default to the rest of an Act, and make the full extent of potential liability for the company breaching a requirement difficult to ascertain.  In turn, this may make it more difficult for company officers to ascertain exactly what their legal obligations and the required standard of conduct are.

Summary of new law

3.3                   The Bill amends the FATA to clarify that subsection 31(1) will only make an officer of the corporation who authorised or permitted the commission of an offence by a corporation personally liable for the breach of the law.



 

Comparison of key features of new law and current law

New law

Current law

Where an offence against the FATA is committed by a corporation, only an officer of a corporation who authorised or permitted the commission of the offence is guilty of an offence.

Where an offence against the FATA is committed by a corporation, an officer of a corporation who is in default is guilty of an offence.  An officer who is in default includes an officer who authorises or permits the commission of the offence. 

Where offences specifically apply personal criminal liability for corporate fault, notes in the FATA draw attention to this fact.

Provisions in the FATA do not explicitly highlight where personal criminal liability is imposed for corporate fault. 

Detailed explanation of new law

3.4                   Subsection 30(1) of the FATA provides that a person who contravenes or fails to comply with an order under Part II of the FATA is guilty of an offence.  Subsection 30(2) makes it an offence to continue to fail to comply with an order under Part II of the FATA after conviction for the initial offence. 

3.5                   Under the existing section 31 of the FATA, where an offence against the Act is committed by a corporation, an officer of the corporation who is in default is guilty of an offence.  A reference to an officer who is in default is defined to include a reference to an officer who authorises or permits the commission of the offence. 

3.6                   The current wording in section 31 is ambiguous, providing the potential for an officer who did not authorise or permit the commission of the offence to nonetheless be liable in some situations.  The Bill therefore amends Section 31 to clearly apply personal liability only to an officer who authorised or permitted the commission of the offence.  [Schedule 2, Items 2, 3 and 4]

3.7                   The Bill amends the heading of section 30 to include a reference to orders under Part II.  [Schedule 2, Item 1]

3.8                   A number of sections in the FATA apply personal liability to a person who is involved in a contravention of the section.  The Bill annotates the FATA to make clear upon the reading of those offence provisions that personal liability will apply.  [Schedule 2, Items 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16 and 17]

Application and transitional provisions

3.9                   These amendments apply from the day after Royal Assent.  [Section 2]

3.10               The amendments apply only in relation to acts or omissions occurring on or after the day the Bill commences.  [Schedule 7, Item 1]

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Chapter 4          

Health Insurance Act 1973

Outline of chapter

4.1                   The Bill amends the Health Insurance Act 1973 (HIA) to reform certain provisions involving personal criminal liability for corporate fault in line with the COAG Principles; and make clear those circumstances in which corporate officers can be held personally criminally liable for corporate fault.

Context of amendments

4.2                   The HIA imposes personal liability for corporate fault on company officers in a range of circumstances. 

4.3                   In particular, the HIA makes it an offence for a practitioner or medical entrepreneur to receive or obtain a bribe from a proprietor of a private hospital in return for enabling a person to be admitted as a patient, and for the proprietor of a private hospital to offer such a bribe.  The audit of Commonwealth legislation identified this as a provision that applied personal criminal liability on officers in a manner that was not consistent with the COAG Principles.

4.4                   The HIA also makes executive officers of companies providing certain health services personally criminally liable for breaches of that Act by the company where the company engages in conduct that is intended to induce a person to request pathology or diagnostic imaging services from a provider. 

4.5                   The offence was developed in consultation with the pathology industry, and is aimed at providing fairer bargaining between pathology providers and owners of clinics.  Previous legislation that did not impose personal criminal liability on the officers of these companies was not effective in deterring the prohibited practices in question. 

4.6                   These offences are aimed at preventing inappropriate referrals for pathology and diagnostic services.  The cost of such inappropriate referrals is in part borne by the Commonwealth Government, and by extension taxpayers, through payments made to the service provider as part of the Medicare Benefits Scheme.  The retention of personal criminal liability in relation to this offence is therefore justified on the basis that there are compelling public policy grounds, and that corporate penalties alone are not effective in deterring the prohibited practices.

Summary of new law

4.7                   The Bill amends the HIA to remove the personal criminal liability on company officers of the proprietor of a private hospital who wilfully authorise or permit the bribery of a medical practitioner, midwife or nurse by their corporation, where the officer has not personally been responsible for the offence. 

Comparison of key features of new law and current law

New law

Current law

Where an offence is committed by a corporation in relation to section 129AA, an officer of the corporation who is in default is not guilty of an offence.

Where an offence is committed by a corporation in relation to section 129AA, an officer of the corporation who is in default is guilty of an offence. 

Notes in the Act draw attention to section 23DZZIT, which indicates where personal liability is imposed on an executive officer of a body corporate.

Provisions in the Act do not currently explicitly highlight where personal liability is imposed on an executive officer of a body corporate. 

Detailed explanation of new law

4.8                   Section 129AA of the HIA makes it an offence for a practitioner or medical entrepreneur to receive or obtain a bribe from a proprietor of a private hospital in return for enabling a person to be admitted as a patient, and for the proprietor of a private hospital to offer such a bribe.  Subsections 129AA (2), 129AA (3) and 129AA (6) extend this liability to an officer of the corporation who is in default.  This is defined to include an officer who wilfully authorises or permits the commission of the offence and by implication may extend to officers beyond those with this level of involvement. 

4.9                   The Bill amends the HIA to repeal subsections 129AA (2), 129AA (3) and 129AA (6) and prevent the extension of personal criminal liability to officers of the corporation where those officers were not directly involved in the conduct.  [Schedule 3, Items 1 and 2]

4.10               There are a number of offence provisions in the Act which could be contravened in such a way as to trigger the imposition of personal criminal liability for corporate fault where the company engages in conduct that is intended to induce a person to request pathology or diagnostic imaging services from a provider as provided for under section 23DZZIT.  The Bill amends the HIA to make clear upon the reading of the provisions that trigger liability under section 23DZZIT, that executive officers may incur personal liability for the offence.  [Schedule 3, Items 3, 4, 5 and 6]

4.11               The Bill corrects a typographical error in section 23DZZIO, to correctly refer to offences against the Division.  [Schedule 3, Item 7]

Application and transitional provisions

4.12               These amendments apply from the day after Royal Assent.  [Section 2]

4.13               The amendments apply only in relation to acts or omissions occurring on or after the day the Bill commences.  [Schedule 7, Item 1]

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Outline of chapter

5.1                   The Bill amends the National Vocational Education and Training Regulator Act 2011 (NVETRA) to limit the circumstances when executive officers including directors, can be held personally liable for the offences of the company in the circumstances listed in section 133A of the NVETRA. 

Context of amendments

5.2                   There are numerous provisions in the NVETRA that impose personal criminal liability on executive officers, which includes directors and other officers as defined in section 3 of NVETRA, for breaches of NVETRA by the corporation. 

5.3                   The Report on Corruption in the Provision and Certification of Security Industry Training, by the Independent Commission Against Corruption identified a level of corruption in security industry training where both Registered Training Organisations (RTOs) and students were complicit in deceiving the registering authority.  RTOs were falsely claiming that students had passed examinations and had adequate levels of English. 

5.4                   Australia’s National Vocational Education and Training Regulator, known as the Australian Skills Quality Authority, is delegated broad monitoring and enforcement powers under the Education Services for Overseas Students Act 2000 (the ESOS Act).  A number of submissions to the Baird Review of the ESOS framework alleged instances of gross misconduct by education service providers, who willingly mislead international students with false and misleading information. 

5.5                   Australia has a highly regarded international education sector.  Instances of training providers exploiting international students or offering substandard education threaten Australia’s international reputation. 

5.6                   The retention of personal criminal liability in relation to the NVETRA is justified on the basis that there are compelling public policy grounds in the protection of vulnerable people, and that corporate penalties alone are not likely to be effective in deterring the prohibited practices.

Summary of new law

5.7                   Section 133 of the NVETRA applies personal liability for executive officers to all offences under the NVETRA.  Currently, an offence is committed by an executive officer if their organisation has committed an offence, the officer knew the offence would be committed, could prevent the conduct, and failed to take all reasonable steps to do so.

5.8                   The Bill amends section 133 such that it applies only to offences committed under the sections listed in section 133A rather than to all offences under the NVETRA.

Comparison of key features of new law and current law

New law

Current law

Section 133 of the NVETRA extends derivative liability to offences specified in Section 133A of the Act.

Section 133 of the NVETRA extends derivative liability to all offences under the Act.

Notes in the NVETRA draw attention to section 133, which indicates where personal liability is imposed on an executive officer of a body corporate.

Provisions in the NVETRA do not currently explicitly highlight where personal liability is imposed on an executive officer.

Detailed explanation of new law

5.9                   Section 133 of the NVETRA provides that an executive officer can be personally liable for an offences under the NVETRA where:

•        an organisation commits an offence;

•        the officer knew the offence would be committed;

•        the officer was in a position to influence the relevant conduct; and

•        the officer failed to take all reasonable steps to prevent the commission of the offence.

5.10               The types of offences covered by the NVETRA broadly relate to a registered training organisation acting outside the scope of their registration, or failing to meet duties specific to such registered organisations.  Consequently, in practice these offences apply to only a small set of corporations.

5.11               The Bill amends the heading of section 133 by adding explicit reference to the personal liability of executive officers in section 133.  [Schedule 4, Item 1]

5.12               The Bill amends section 133 to insert section 133A to limit the offences where directors can be personally liable for the breaches of the corporation to those offences listed in the table contained within the new section 133A.  [Schedule 4, Items 2 and 3].

5.13               The Bill also amends the relevant sections of the NVETRA that will continue to impose liability on executive officers as a result of the amended section 133 and 133A to make this liability clear on the reading of the relevant sections [Schedule 4, Items 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21 and 22]

Application and transitional provisions

5.14               These amendments apply from the day after Royal Assent.  [Section 2]

5.15               The amendments apply only in relation to acts or omissions occurring on or after the day the Bill commences.  [Schedule 7, Item 1]

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Chapter 6          

Therapeutic Goods Act 1989

Outline of chapter

6.1                   The Bill amends the Therapeutic Goods Act 1989 (TGA) to remove derivative liability for relatively minor offences by removing the current blanket application of derivative liability, and to make clear those provisions under the TGA which impose personal liability on executive officers of a body corporate for an offence committed by their company.

Context of amendments

6.2                   There are numerous provisions in the TGA that impose personal criminal liability on company officers for breaches of that Act by the corporation.  The audit of Commonwealth legislation identified a number of those provisions that applied personal criminal liability on officers in a manner that did not accord with the COAG Principles. 

6.3                   Section 54B (1) applies personal liability where:

•        the body corporate commits an offence;

•        the officer knew that the offence would be committed;

•        the officer was in a position to influence the relevant conduct; and

•        the officer failed to take all reasonable steps to prevent the commission of the offence.

6.4                   Section 54B (1) is currently a blanket liability provision.  Blanket liability provisions are referred to in the Principles and Guidelines as provisions that create personal liability which applies to contraventions of all relevant offences located within the Act.  The COAG Principles do not consider blanket liability provisions to be appropriate because they result in personal criminal liability being applied by default to the rest of an Act, and make the full extent of potential liability for the company breaching a requirement difficult to ascertain. 

6.5                   Section 54B was introduced into the TGA by the Therapeutic Goods Amendment Act (No.1) 2006 .  The amendments made by that Act were made because of a succession of serious safety and quality breaches by a major Australian manufacturer of therapeutic goods which necessitated regulatory action to protect the Australian public from medicines manufactured in a way that posed a threat to public health and safety.  Section 54B ensures that executive officers who are in a position to prevent a contravention by the body corporate will be liable for the contravention if they fail to take reasonable steps to do so.

6.6                   The majority of sponsors of therapeutic goods in Australia are body corporates, and a considerable number of those are small body corporates.  Directors and officers of small companies have a greater role to play in the lower level management of the company and have greater influence over its day to day operations.  Therefore, the industry structure makes it more likely that directors and officers will have influence over the companies conduct in relation to many issues dealt with by the TGA.  However, even for larger companies, where directors and officers have high level strategic roles and little, if any, involvement in day to day operational and managerial issues, those directors should ensure that there are systems and policies in place that ensure employees are aware of the laws which apply to them and that the company complies with these laws.

6.7                   Failure to comply with the TGA has criminal consequences that attract an appropriate level of punishment, deterrence, and censure for contraventions which can seriously endanger public health and safety due to problems with the quality, safety and efficacy of therapeutic goods. 

Summary of new law

6.8                   The Bill removes the personal liability of executive officers for the offences of a body corporate in relation to relatively minor offences under the TGA.

6.9                   The Bill removes the automatic application of this derivative liability under the TGA.  Derivative liability will only apply to those sections listed under the new section 54BA, and those regulations that are prescribed for the purpose of section 54BA.  The general application of the Crimes Act 1914 and the Criminal Code (that is in relation to attempt, accessories after the fact, complicity, incitement, and false or misleading statements) continues to apply

6.10               The Bill inserts notes under each offence provision where an executive officer of a body corporate may be personally liable for a breach.



 

Comparison of key features of new law and current law

New law

Current law

Executive Officers may only be personally liable for the offences set out in section 54BA of the Therapeutic Goods Act, and any regulations prescribed for that purpose.

Executive Officers can be personally liability for all offences committed under the Therapeutic Goods Act. 

Notes in the Act draw attention to sections 54B and 54BA, which indicate where personal liability is imposed on an executive officer of a body corporate.

Provisions in the Act do not currently distinguish between minor offences and more serious offences for which a body corporate manager should be held accountable because of the potential serious consequences flowing from a breach of a significant regulatory requirement.

Detailed explanation of new law

6.11               The Bill limits the application of personal criminal liability for corporate fault to serious offences under the TGA, rather than to all offences. 

6.12               The Bill amends the heading of section 54B to make reference to the personal liability of executive officers.  [Schedule 5, Item 1]

6.13               The Bill amends the TGA so that Executive Officers will only be personally criminally liable for offences covered by the new section 54BA.  Section 54B continues to apply to serious offences, being those listed under new section 54BA .  [Schedule 5, Item 2]

6.14               Many of the offences in the TGA are structured such that there are three ‘tiers’ of culpability for conduct that breaches the Act.  The different tiers of culpability in general relate to the likelihood of harm arsing.

6.15               For example, section 32BA of the TGA prescribes different penalties for the same conduct, according to whether:

•        the offence has or would result in harm or injury to any person;

•        the offence would likely result in harm or injury to any person; or

•        the offence had been committed, regardless of harm.

6.16               Where offences follow this above structure, the application of personal liability via section 54B has been removed in relation to the lowest level of culpability (where it is not shown that harm has resulted).

6.17               The Bill inserts the new section 54BA which contains all of the offences to which Subsection 54B (1) applies.  Section 54BA retains the existing power under the TGA to prescribe offences in regulations made under the TGA that will attract personal liability for executive officers, and allows certain provisions under the Crimes Act 1914 and the Criminal Code to continue to apply.  [Schedule 5, Item 3]

6.18               The Bill also amends the offence provisions in the TGA that continue to apply personal criminal liability through the operation of Section 54B by inserting a note to these provisions to signify that subsection 54B (1) and section 54BA apply in relation to the offences.  [Schedule 5, Items 4 to 80]

Application and transitional provisions

6.19               These amendments apply from the day after Royal Assent.  [Section 2]

6.20               The amendments apply only in relation to acts or omissions occurring on or after the day the Bill commences.  [Schedule 7, Item 1]

Do not remove section break.



Chapter 7          

Other Acts amended

Outline of chapter

7.1                   The Bill amends a number of Acts that provide personal criminal liability for corporate fault.  The Acts amended are the:

•        Child Support (Registration and Collection) Act 1988 (the Child Support Act;

•        Classification (Publications, Films and Computer Games) Act 1995 (the Classification Act);

•        Corporations (Aboriginal and Torres Strait Islander) Act 2006 (the CATSIA);

•        Income Tax Assessment Act 1936 (the ITAA);

•        Insurance Contracts Act 1984 (the ICA);

•        National Measurement Act 1960 (the NMA);

•        Pooled Development Funds Act 1992 (the PDF Act);

•        Superannuation Guarantee (Administration) Act 1992 (the SGAA);

•        Taxation Administration Act 1953 (the TAA); and

•        Veterans’ Entitlements Act 1986 (the VEA).

7.2                   Schedule 6 of the Bill reforms the application of personal criminal liability for corporate fault in relation to the Acts listed above, such that the Acts comply with the COAG Principles where appropriate on public policy grounds.  To that extent the amendments include:

•        the repeal of provisions;

•        the reform of provisions to apply civil liability instead of criminal liability;

•        the reform of provisions to remove burdens of proof from defendants;

•        the reform of provisions to clarify the level of fault or involvement necessary to trigger personal criminal liability;

•        the insertion of notes signifying the imposition of personal criminal liability for corporate fault to provisions where such liability is not immediately evident on a reading of the provision; and

•        other minor and incidental amendments necessary to support these amendments.

Context of amendments

7.3                   Section 104 of the Classification Act deems a body corporate manager liable where the body corporate commits an offence against sections 101, 102 and 103 of the Act.  A corporate manager may defend this offence by showing that they did not know of the circumstances that constituted the offence, or that they took all reasonable steps to prevent the commission of the offence.  These underlying offences relate to the possession, control or supply of prohibited material (such as pornography and violent material) in prescribed areas.  Section 104 was put in place as part of the Northern Territory National Emergency Response.  The main objective of Part 10 of the Classification Act, in which section 104 is contained, is to enable special measures to be taken to protect children living in Indigenous communities in the Northern Territory from being exposed to prohibited material.  

7.4                   The CATSIA substantially mirrors the Corporations Act by establishing a parallel regulatory regime directed towards Indigenous corporations.  Consequently, many sections in the CATSIA (including those amended by the Bill) essentially replicate provisions in the Corporations Act. 

7.5                   Section 76A of the ICA is a blanket liability provision.  This section applies to a number of offences, including offences in relation to the provision of documents to ASIC, and offences surrounding interactions between insurers and insured parties.  The provision is in contravention of the COAG Principles as it creates personal liability which applies to breaches of all relevant offences located elsewhere in the Act.  The COAG Principles do not consider blanket liability provisions to be appropriate because they result in personal criminal liability being applied by default to the rest of an Act, and make the full extent of potential liability for the company breaching a requirement difficult to ascertain.  In turn, this may make it more difficult for company officers to ascertain exactly what their legal obligations and the required standard of conduct are.

7.6                   Section 19G of the NMA operates as a blanket liability provision.  It applies personal criminal liability to directors of a company where the company has committed an offence under the Act, as well as to an employee, agent or officer of the body corporate with duties of such responsibility that their conduct may fairly be assumed to represent the body corporate’s policy. 

7.7                   Section 50 of the PDF Act provides that where a pooled development fund contravenes a provision specified in the section, it is not guilty of an offence, but any officer or investment manager involved in the contravention is guilty of an offence.  The offences specified relate to conduct of a pooled development fund in relation to the making of investments, capital structure and activities, compliance with board directions, compliance issues, and registration. 

7.8                   Where a notice, process or proceeding may be given to, served upon or taken against a company or its public officer under the ITAA, paragraph 252 (1)(j) of the ITAA allows the Commissioner of Taxation to give, serve or take the same against any director, secretary or other officer of the company.  That director, secretary or other officer will then have the same liability as the company or its public officer in relation to that notice, process or proceeding.  Although this provision reads as a form of absolute liability, in Reynolds v Deputy Federal Commissioner of Taxation (ACT) (1984) 55 ALR 653 ( Reynolds) the Full Federal Court determined that the relevant director, secretary or other officer must first be put on notice that they must perform a particular act or fulfil a particular obligation, before they can be impugned with the same liability as the company under paragraph 252(1)(j) of the ITAA. 

7.9                   Section 444-15 of Schedule 1 to the TAA, subsection 57(7) of the SGAA, and subsection 62(7) of the Child Support Act also allow relevant regulators to give a notice to, serve a process on or take a proceeding against a company director, secretary or other company officer, and impose the same liability on this person as would have been imposed on the company or its public officer.  These three provisions are drafted in substantially the same manner as paragraph 252(1)(j) of the ITAA, and therefore would probably also be interpreted in light of the decision in Reynolds .

7.10               Sections 93D and 93E of the VEA state that where an offence against the Act is committed by a corporation, an officer of the corporation who is in default is guilty of an offence.  A reference to an officer who is in default is defined to include a reference to an officer who authorises or permits the commission of the offence.  As with the FATA, this wording is ambiguous, in that it suggests that an officer who did not authorise or permit the commission of the offence could nonetheless be liable in some situations.

Summary of new law

7.11               The amendments remove the defence available under section 104 of the Classification Act, and instead require the prosecution to prove that a body corporate manager knew that an offence would be committed, was in a position to influence the conduct of the body corporate in relation to the offence, and failed to take all reasonable steps to prevent the offence.  Notes will be inserted to highlight the offences to which section 104 of the Act applies. 

7.12               Section 265-40 of the CATSIA will be amended to replace the criminal liability of a secretary of an Aboriginal and Torres Strait Islander corporation with a civil penalty, in a manner analogous to the amendments to section 188 of the Corporations Act.  Notes will be inserted into the provisions to which section 265-40 extends liability. 

7.13               Section 76A of the ICA will be repealed, thereby removing the blanket liability imposed for all offences under the ICA.  This will be replaced by a new section 11DA, which applies personal liability in relation to subsections 11C (2), 11D (2) and 11D (3).  This preserves personal liability in relation to ASIC’s ability to obtain documents, and the supplying of false or misleading information to ASIC.

7.14               Section 19G of the NMA will be repealed, removing blanket liability from the Act. 

7.15               Section 50 of the PDF Act will be repealed, removing personal criminal liability for corporate fault from offences in the Act.

7.16               Section 252 of the ITAA, section 444-15 of the TAA, section 57 of the SGAA and section 62 of the Child Support Act will be amended to remove the potential for directors to be made personally liable for corporate fault.  However, the ability of the relevant regulators to still give a notice or serve a process on a company, by giving it or serving it on a director or other particular company officers, will be preserved. 

7.17               Sections 93D and 93 E of the VEA will be amended to clearly apply personal liability only to company officers who intentionally authorised or permitted the commission of an offence.

Comparison of key features of new law and current law

New law

Current law

A body corporate manager will be liable under section 104 of the Classification Act if the prosecution can show that the manager:

·          knew that an offence would be committed;

·          was in a position to influence the conduct of the body corporate in relation to the offence; and

·          failed to take all reasonable steps to prevent the offence.

Section 104 of the Classification Act deems a body corporate manager liable where the body corporate commits an offence against specified sections.  A manager may defend this by showing that they did not know of the circumstances constituting the offence, or that they took all reasonable steps to prevent the offence.

Secretaries of Aboriginal and Torres Strait Islander corporations are liable for a civil penalty of up to $3,000 for a breach of section 265-40, or $200,000 if such a breach material prejudices the interests of the corporation, materially prejudices the corporation’s ability to pay its creditors, or is serious. 

Secretaries of Aboriginal and Torres Strait Islander corporations are liable for a criminal penalty of 5 penalty units for a breach of section 265-40 of the CATSIA.

Personal criminal liability for corporate fault in relation to the ICA will apply only in relation to subsections 11C(2), 11D(2), and 11D(3), which relate to the ability of ASIC to obtain documents, and the supplying of false or misleading information to ASIC.

Section 76A of the ICA applies personal criminal liability for corporate fault in relation to all offences against the Act. 

Personal criminal liability for corporate fault will not apply in the NMA. 

Section 19G of the NMA applies personal criminal liability for corporate fault in relation to all offences against the Act.

Personal criminal liability for corporate fault will not apply in the PDF Act.

Section 50 of the PDF Act applies personal criminal liability for corporate fault in relation to specified offences relating to the conduct of a pooled development fund in relation to the making of investments, capital structure and activities, compliance with board directions, compliance issues, and registration.

Relevant regulators can continue to give a notice to or serve a process on directors or other particular company officers.  However, these directors and particular company officers cannot be personally impugned with the same liability as that would be attributable to the company. 

Paragraph 252(1)(j) of the ITAA, section 444-15 of the TAA, subsection 57(7) of the SGAA and subsection 62(7) of the Child Support Act allow relevant regulators to give a notice to, serve a process on, or take a proceeding against a company by giving to, serving on or taking the same against directors or other particular company officers.  This has the potential to impose the same liability as would be attributable to the company, on these directors or other particular company officers. 

Where an offence is committed against the VEA by a corporation, only an officer of a corporation who authorised or permitted the commission of the offence is guilty of an offence.

Where an offence against the VEA is committed by a corporation, an officer of a corporation who is in default is guilty of an offence.  An officer who is in default includes an officer who authorises or permits the commission of the offence. 

Where offences apply personal criminal liability for corporate fault, notes will draw attention to this fact.

Provisions in the various Acts listed above do not explicitly highlight where personal criminal liability is imposed for corporate fault. 

Detailed explanation of new law

7.18               Section 104 of the Classification Act aims to protect children living in Indigenous communities in the Northern Territory from being exposed to prohibited material.  Due to the significant public harm being addressed, the retention of personal liability for corporate fault is considered appropriate.  However, in accordance with ordinary principles of criminal law, the Bill amends section 104 to place the burden of proof on the prosecution to show that a defendant was in a position to influence the conduct of the body corporate in relation to the offence, and failed to take all reasonable steps to prevent the offence from occurring.  Redrafting will also clarify the penalties that apply in relation to individuals, taking into account the Commonwealth Guide to framing offence s.  [Schedule 6, Item 6]

7.19               The Bill also amends the offence provisions in the Classification Act that continue to apply personal criminal liability through the operation of Section 104.  The Bill inserts a note to these provisions to signify that section 104 applies in relation to the offences.  [Schedule 6, Items 4 and 5]

7.20               Section 265-40 of the CATSIA substantially replicates the operation of section 188 of the Corporations Act.  For the purpose of consistency, sections in the CATSIA are kept as similar as possible to their equivalent sections in the Corporations Act.  The offences in section 265-40 of the CATSIA generally relate to administrative defects for which criminal penalties are not justified under the COAG Principles.  The Bill therefore amends section 265-40 to maintain consistency with section 188 of the Corporations Act.  [Schedule 6, Item 11]

7.21               The Bill amends the CATSIA to apply civil penalty provisions in place of the existing criminal penalties for section 265-40.  This ensures that adequate incentives are in place to deter the conduct that section 265-40 aims to prevent.  [Schedule 6, Items 15 and 16]

7.22               The Bill also amends the provisions in the CATSIA that apply liability to company secretaries through the operation of section 265-40.  The Bill inserts a note to these provisions to make clear that section 265-40 applies.  [Schedule 6, Items 7, 8, 9, 10, 12, 13 and 14]

7.23               The Bill repeals section 76A of the ICA, thereby removing the blanket liability imposed for all offences under the ICA.  With the exceptions of subsections 11C(2), 11D(2), and 11D(3), the policy objectives of these offences are generally sufficiently protected by the ability of ASIC to cancel or place conditions on the financial services licence of an insurer.  [Schedule 6, Items 22]

7.24               The Bill inserts a new section 11DA into the ICA to retain personal criminal liability for corporate fault in relation to breaches of subsections 11C(2), 11D(2) and 11D(3), which relate to the ability of ASIC to obtain documents, and the supplying of false or misleading information to ASIC.  Section 11DA will only apply where a person permits or authorises the conduct that constitutes an offence under these subsections.  [Schedule 6, Item 21]

7.25               The Bill also inserts a note to subsections 11C (2), 11D (2) and 11D (3) of the ICA to make clear that section 11DA applies.  [Schedule 6, Item 20]

7.26               The Bill repeals section 19G of the NMA.  This section is no longer necessary to achieve the objectives of the Act.  [Schedule 6, Item 23]

7.27               Section 50 of the PDF Act will be repealed thereby removing personal criminal liability for corporate fault from offences in the Act.  Section 50 requires the involvement of the relevant corporate officer and is therefore not technically covered by the COAG Principles.  This section is no longer necessary to achieve the objectives of the Act.  A redundant reference in section 51 is also removed.  [Schedule 6, Items 24, 25 and 26]

7.28               The Bill amends section 252 of the ITAA, section 444-15 of the TAA, section 57 of the SGAA and section 62 of the Child Support Act to ensure that directors and particular company officers cannot be held personally liable for corporate fault through the operation of these sections.  This is no longer necessary to achieve the objectives of the respective Acts.  The ability of the relevant regulator to give a notice or serve a process on a company by giving it or serving it on a director (or other relevant company officer) has been preserved.  [Schedule 6, Items 2, 3, 18, 19, 28, 29 and 31]

7.29               The Bill also adds notes to the ITAA, TAA, SGAA and the Child Support Act to make clear that notwithstanding the amendments detailed above, the relevant regulators retain the ability to serve documents on a company by serving them on a specified officer or representative of the company.  [Schedule 6, Items 1, 17, 27 and 30]

7.30               The Bill amends sections 93D and 93E of the VEA to make clear that these sections apply personal liability only to an officer who intentionally authorised or permitted the commission of the offence.  [Schedule 6, Items 32, 33, 34 and 35]

Application and transitional provisions

7.31               These amendments apply from the day after Royal Assent.  [Section 2]

7.32               The amendments apply only in relation to acts or omissions occurring on or after the day the Bill commences.  [Schedule 7, Item 1]

Do not remove section break.



Chapter 8          

Statement of Compatibility with Human Rights

Prepared in accord ance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Personal Liability for Corporate Fault Reform Bill 2012

8.1                   This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview of the Bill

8.2                   Under the Council of Australian Governments (COAG) National Partnership Agreement to Deliver a Seamless National Economy, personal criminal liability for corporate fault should be imposed only where it is fair and principled to do so, and not as a matter of course.  COAG has endorsed a set of Principles (the COAG Principles) which provide factors to be considered in determining whether such personal liability is justified.  The Personal Liability for Corporate Fault Reform Bill 2012 amends a number of Acts to:

•        remove personal criminal liability for corporate fault where such liability is not justified;

•        remove the burden of proof on defendants to establish a defence to a charge;

•        replace personal criminal liability for corporate fault with civil liability where a non-criminal penalty is appropriate; and

•        where personal criminal liability is justified, insert notes to make clear the circumstances where such liability would apply.



8.3                    

8.4                   This reform will ensure that under Commonwealth law, company directors are not held personally criminally liable for corporate fault as a matter of course.  Such liability will be imposed only where:

•        there are compelling public policy reasons;

•        liability of the corporation is not likely on its own to sufficiently promote compliance; and

•        it is reasonable in all the circumstances for the director to be liable.

Human rights implications

8.5                   This Bill engages and promotes the right to the presumption of innocence in Article 12 of the International Covenant on Civil and Political Rights.  The Bill amends provisions to remove obligations on defendants to show an applicable defence.  Removing this obligation promotes the presumption of innocence.

Conclusion

8.6                   This Bill is compatible with human rights.  It promotes the right to the presumption of innocence.

Parliamentary Secretary to the Treasurer, the Hon Bernie Ripoll MP

 



Schedule 1:  Council of Australian Governments Directors’ Liability Reform Project

Bill reference

Paragraph number

Items 1 and 21

2.8

Items 2, 3, 4, 5, 6, 7, 9, 10, 11, 12, 13, 15 and 16

2.14

Item 8

2.11

Item 14

2.12

Items 17 and 26

2.13

Items 18 and 19

2.9

Items 20, 22, 23, 24 and 25

2.10

Schedule 2:  Corporations Act 2001

Bill reference

Paragraph number

Item 1

3.7

Items 2, 3 and 4

3.6

Items 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16 and 17

3.8

Schedule 3:  Foreign Acquisitions and Takeovers Act 1975

Bill reference

Paragraph number

Items 1 and 2

4.9

Items 3, 4, 5 and 6

4.10

Item 7

4.11

Schedule 4:  Health Insurance Act 1973

Bill reference

Paragraph number

Item 1

5.11

Items 2 and 3

5.12

Items 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21 and 22

5.13

Schedule 5:  National Vocational Education and Training Regulator Act 2011

Bill reference

Paragraph number

Item 1

6.12

Item 2

6.13

Item 3

6.17

Items 4 to 80

6.18

Schedule 6:  Therapeutic Goods Act 1989

Bill reference

Paragraph number

Items 1, 17, 27 and 30

7.29

Items 2, 3, 18, 19, 28, 29 and 31

7.28

Items 4 and 5

7.19

Item 6

7.18

Items 7, 8, 9, 10, 12, 13 and 14

7.22

Item 11

7.20

Items 15 and 16

7.21

Item 20

7.25

Item 21

7.24

Items 22

7.23

Item 23

7.26

Items 24, 25 and 26

7.27

Items 32, 33, 34 and 35

7.30

Schedule 7:  Other Acts amended

Bill reference

Paragraph number

Item 1

2.16, 3.10, 4.13, 5.15, 6.20, 7.32