From Stepping-Stones to Throwing Stones: Officers’ Liability for Corporate Compliance Failures after Cassimatis

Published date01 September 2021
AuthorPamela Hanrahan,Tim Bednall
Date01 September 2021
DOI10.1177/0067205X211016573
Subject MatterArticles
Article
From Stepping-Stones to
Throwing Stones: Officers’
Liability for Corporate
Compliance Failures after
Cassimatis
Pamela Hanrahan* and Tim Bednall**
Abstract
Australian corporate law allows for significant civil penalties to be imposed by a court on negligent
corporate officers, including directors. For more than a decade, Australian Securities and
Investments Commission used civil prosecutions for negligence exclusively in situations where an
officer is alleged to have exposed their corporation to foreseeable risk of harm that would flow
from a contravention by the corporation of a regulatory or disclosure obligation. This enforcement
strategy—known as ‘stepping-stones’—has been strongly criticised, including by Rares J in his 2020
dissenting opinion in the Cassimatis appeal. This article explains how stepping-stones works as an
enforcement strategy in the context of corporate compliance failures, explores the various cri-
ticisms of it, and argues for reform. It proposes a legislative alternative that rebalances individual
officer liability, to reflect contemporary governance practices and encourage better management
and oversight of non-financial risk in corporations.
I Introduction
For years, Australian corporate law has struggled to articulate the proper basis upon which direc-
tors and other corporate officers ought to be liable to the state when their behaviour risks—by
action or inaction—their corporation contravening the law.
1
In the absence of a positive duty on
* Pamela Hanrahan BA(Hons) LLB(Hons)(Melb) LLM(Hons)(CWRU) SJD(M elb) is Profe ssor of Comm ercial Law an d
Regulation at the UNSW Business School, a member of the Centre for Law Markets and Regulation at UNSW Sydney
and an associate of the Centre for Corporate Law at the University of Melbourne. The author may be contacted at p.
hanrahan@unsw.edu.au.
** Tim Bednall LLB(Hons)(Adel) is a Partner of King & Wood Mallesons, Sydney. The authors acknowledge the assistance of
Miriam Kleiner, Special Counsel, and Trishala Shah, Solicitor, at King & Wood Mallesons in the research for this article.
1. For example, in 2016 Langford described the issue as ‘contentious’: Rosemary Teele Langford, ‘Corporate Culpability,
Stepping Stones and Mariner: Contention Surrounding Directors’ Duties Where the Company Breaches the Law’ (2016)
Federal Law Review
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2021, Vol. 49(3) 380 –409
Hanrahan and Bednall 381
corporate officers to take re asonable steps to ensure their corporat ion conducts its affairs in
accordance with all or specified regulatory requirements,
2
the Australian Securities and
Investments Commission (‘ASIC’) has adopted a civil enforcement strategy—commonly
referred to as ‘stepping-stones’
3
—that utilises s 180(1) of the Corporations Act 2001 (Cth)
(‘Corporations Act’) in this context. ASIC’s line of stepping-stones cases concerned with
regulatory (as distinct from disclosure) failures includes the 2020 decision of the F ull Federal
Court in Cassimatis v Australian Securities and Investments Commission (‘Cassimatis
Appeal’), which arose out of the failure by the licensed financial advice firm Storm Financial
Limited (‘Storm’) to comply with financial advice laws in the years before the 2008 global
financial crisis (‘GFC’).
4
Section 180(1) of the Corporations Act imposes a statutory duty of care and diligence on
corporate officers,
5
the content of which overlaps with their duties of care owed to the
corporation in contract, equity and tort. It is a civil penalty provision for the purposes of
pt 9.4B;
6
contravention carries a potential maximum pecuniary penalty of 5000 Common-
wealth penalty units (currently AUD $1,110,000) along with the possibility of relinquishment
orders and the likelihood of temporary disqualification from holding corporate o ffice.
7
These
consequences can be ordered by a court even when the corporation itself may have no
compensable claim against the officer for breach of duty, for example, because the corpora-
tion has ratified the officer’s conduct or has not suffered any act ual loss or damage as result
of the officer’s negligence.
8
In devoting scarce public resources to running stepping-stones cases, it is likely that ASIC is
seeking to protect or vindicate the public interest in the proper management of corporations, rather
than to safeguard the private interests of an individual corporation and its shareholders and
34(1) Company and Securities Law Journal 75. See also Tim Bednall and Pamela Hanrahan, ‘Officers’ Liability for
Mandatory Corporate Disclosure: Two Paths, Two Destinations?’ (2013) 31(8) Company and Securities Law Journal
474; Justice Ashley Black, ‘Directors’ Statutory and General Law Accessory Liability for Corporate Wrongdoing’
(2013) 31(8) Company and Securities Law Journal 511; Maeve McGregor, ‘Stepping-Stone Liability and the
Directors’ Statutory Duty of C are and Diligence’ (2018) 36(3) Company a nd Securities Law Journal 245; Chief
Justice TF Bathurst and Naomi A Wootton, ‘Directors’ and Officers’ Duties in the Age of Regulation’ in Pamela
Hanrahan and Justice Ashley Black (eds), Contemporary Issues in Corporate and Competition Law: Essays in
Honour of Professor Robert Baxt AO (LexisNexis Butterworths, 2019) 3; Claudia Carr and Robert Cunningham, ‘A
Step Too Far? The “Stepping Stone” Approach and s 180(1) of the Corporations Act 2001 (Cth)’ (2019) 34(1) Australian
Journal of Corporate Law 58; Rosemary Teele Langford, ‘Cassimatis v Australian Securities and Investments
Commission [2020] FCAFC 52: “Dystopian Accessorial Liability” or the End of “Stepping-Stones” as We Know It?’
(2020) 37(5) Company and Securities Law Journal 362.
2. Cf Corporations Act 2001 (Cth) ss 344 and 601FD (‘Corporations Act’).
3. That is, bringing civil penalty proceedings against individual officers for breach of their statutory duty of care where it is
alleged that their negligence caused or contributed to their corporati on contravening the law. The stepping-stones
strategy is described in Part 2 below ; see generally Abe Herzberg and Helen And erson, ‘Stepping Stones: From
Corporate Fault to Directors’ Personal Civil Liability’ (2012) 40(2) Federal Law Review 181.
4. (2020) 275 FCR 533 (‘Cassimatis Appeal’). Appeal from Australian Securities and Investments Commission v
Cassimatis [No 8] (2016) 336 ALR 209 (‘Cassimatis [No 8]’).
5. Defined in Corporations Act (n 2) s 9. See Australian Securities and Investments Commission v King (2020) 376 ALR 1
(‘King’).
6. Corporations Act (n 2) s 1317E(3).
7. Corporations Act (n 2) ss 1317G(3), 1317GAB and 206C.
8. ‘[Section] 181(1) does not require any proof of actual loss to the company’: Cassimatis [No 8] (n 4) 301 [481]
(Edelman J).
2Federal Law Review XX(X)

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