A Step Too Far? Rethinking the Stepping Stone Approach to Officers’ Liability
| Date | 01 March 2019 |
| Published date | 01 March 2019 |
| DOI | 10.1177/0067205X18816241 |
| Author | Alice Zhou |
| Subject Matter | Articles |
Article
A Step Too Far? Rethinking
the Stepping Stone Approach
to Officers’ Liability
Alice Zhou*
Abstract
In recent years, the Australian Securities and Investments Commission has placed considerable
emphasis on the stepping stone approach as a device to establish officers’ liability in respect of
corporate contraventions of the law. The approach represents a novel interpretation of the
general duties of officers under the Corporations Act 2001 (Cth) (‘CA’). Despite the seriousness of
the consequences for an officer that may follow from a finding of liability, the content and
boundaries of the approach remain undefined. Critically, the courts’ heightened receptiveness to
the approach and the judicial expansion of its scope departs from earlier judicial statements of
caution sounded against using the general statutory duties as a mechanism to secure corporate
compliance with the law. At a more fundamental level, it is doubtful whether the approach rep-
resents a legitimate interpretation of the general statutory duties, to the extent that it subverts
several existing routes to officers’ liability and remedies under the CA. It is incumbent on the
legislature to correct these inconsistencies by recalibrating the role envisaged for officers under
the CA in line with contemporary expectations.
Introduction
Storm Financial Ltd (‘Storm’) lived up to its name in the aftermath of its collapse in 2009, causing
a turbulent period of increased regulatory scrutiny. At the same time as the introduction of the
Future of Financial Advice reforms — the product of a parliamentary inquiry into financial
products and services in Australia, including the issues associated with Storm’s collapse
1
—the
Federal Court was faced with a ‘unique [case] in Australian corporate history’.
2
The proceedings,
brought by the Australian Securities and Investments Commission (‘ASIC’) against Storm’s direc-
tors, revived the contentious question of the proper scope of officers’ liability in respect of
corporate contraventions of the law.
An emerging approach to the issue that warrants closer examination is the imposition of
officers’ liability using ‘stepping stones’. This formed the basis of ASIC’s case against Storm’s
directors.
3
Borrowing Keane CJ’s description of the proceedings in ASIC v Forte scue Metals
Group Ltd,
4
Herzberg and Anderson coined this term to describe a novel application of the general
* BSc (Adv), LLB (Hons I) (Syd). I would like to thank Professor Jennifer Hill for her guidance and supervision of this
research, as well as the anonymous reviewers for their thoughtful feedback.
Federal Law Review
2019, Vol. 47(1) 151–174
ªThe Author(s) 2019
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DOI: 10.1177/0067205X18816241
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duties of officers under the Corporations Act 2001 (Cth) (‘CA’) (hereafter, the ‘general statutory
duties’).
5
Broadly, the approach is a two-step device by which liability may be imposed on officers
for failing to prevent corporate contraventions of the law.
6
Although the approach has only recently
gained traction in Australia, a closely analogous duty of oversight has long been recognised in the
United States,
7
although enforcement has proven weak.
8
In recent years, ASIC has placed considerable emphasis on this ‘controversial’
9
approach in its
corporate governance enforcement activities.
10
While ASIC has been met with success, celebration
may be premature. The courts’ heightened receptiveness to the approach, marked by a judicial
expansion of its scope, departs from earlier judicial statements of caution sounded against using the
general statutory duties as a mechanism to secure corporate compliance. However, it is also clear
that the courts are likely to continue applying the approach. Accordingly, it is both timely and
necessary to ask: is the stepping stone approach to officers’ liability a step too far?
This question falls to be answered not only considering the standard of conduct that is
expected of officers, but also the coherence of the officers’ liability regime under the CA.This
article argues that if the continued application of the stepping stone approach is to be defended, at
minimum, its content and boundaries must be defined with greater clarity. This is paramount
considering the seriousness of the consequences for an offi cer that may follow from a finding of
liability, including pecuniary penalty and disqualification orders.
11
However, to the extent that
the approach undermines the coherence of the CA, it is doubtful whether it is a legitimate
interpretation of the general statutory duties. This uncertainty is likely to persist until the
legislature recalibrates the role envisaged for officers under the CA in line with contemporary
expectations.
This argument is advanced in three parts. The first part of this article provides a brief
overview of the stepping stone approach and its place in the existing framework of officers’
liability. The second part undertakes a detailed analysis of the decided cases to elucidate the
judicial approach to stepping stone liability. This consideration reveals several unresolved
issues as to the content and boundaries of the approach. This part o ffers some guidance as to
these difficulties. To the extent that the legitimacy of the approach has not been subjected to
strict scrutiny, the third part of this article closely examines several existing routes to officers’
liability and remedies under the CA that are subverted by the stepping stone approach and
challenges whether the courts’ interpretation of the general statutory duties in line with the
approach is sound.
What is Stepping Stone Liability?
Officers may incur liability for corporate misconduct on three bases. First, officers may be subject
to direct liability where their own conduct amounts to a contravention of the law.
12
Secondly,
officers may be subject to accessorial liability where they are involved (within the meaning of s 79
of the CA) in a corporate contravention.
13
For the purposes of this article, the widest conception of
involvement is significant: officers are involved if they ‘ha[ve] been in any way, by act or omis-
sion, directly or indirectly, knowingly concerned in, or party to, the contravention’.
14
This requires
officers to be ‘intentional participant[s]’;
15
that is, they must possess actual knowledge of the
essential elements which constitute the contravention and actively participate in the contraven-
tion.
16
Thirdly, officers may be subject to derivative liability without establishing that they either
breached the law personally or were accessories.
17
The stepping stone approach falls within this
third basis of liability.
18
152 Federal Law Review 47(1)
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