Stepping Stones — from Corporate Fault to Directors' Personal Civil Liability

AuthorAbe Herzberg,Helen Anderson
Publication Date01 June 2012
DOI10.22145/flr.40.2.3
SubjectArticle
STEPPING STONES FROM CORPORATE FAULT TO
DIRECTORS' PERSONAL CIVIL LIABILITY
Abe Herzberg* and Helen Anderson**
ABSTRACT
Several recent cases have seen the courts approving ASIC's employment of a 'ste pping
stone' approach that applies directors' statutory duty of care as well as their other
statutory duties in a novel context. The first 'stepping stone' involves an action against
a company f or contravention of the Corporations Act 2001 (Cth). The establishment of
corporate fault may then step stone to a finding that by exposing their company to the
risk of criminal prosecution, civil liability or significant reputational damage, directors
contravened one or more of their statutory duties in ss 1802 of the Corporations Act,
particularly their statutory duty of care, with the attendant civil penalty consequences.
The effect of the 'stepping stone' approach is that directors may face a type of
derivative civil liability for corporate fault. In this paper we ana lyse the stepping stone
approach and assess the ju stification for i mposing civ il liability on directors for their
company's misbehaviour. This paper also examines whether an extension of the
stepping stone approach could make directors liable for their company's
contraventions of n on-Corporations Act laws as well as open the floodgates to make
directors personally liable to shareholders, creditors, employees, or others affected by
corporate fault.
I INTRODUCTION
Directors' criminal liability for corporate fault has been the subject of extensive analysis
by the Corporations and Markets Advisory Committee ( 'CAMAC').
1
By way of
contrast, this paper considers their civil liability for corporate misbehaviour. Several
recent cases
2
have seen the courts approving ASIC's employment of a 'stepping stone'
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* Senior Lecturer, Department of Business Law & Taxation, Monash University.
** Associate Professor, Melbourne Law School, University of Melbourne; Senior Research
Fellow, Department of Business Law and Taxation, Monash University. We express our
thanks to the anonymous referees for their useful comments and suggestions.
1
Corporations and Markets Advisory Committee, Personal Liability for Corporate Fault, Report
(2006) ('Personal Liability Report').
2
ASIC v Elm Financial Services Pty Ltd (2005) 55 ACSR 533 ('Elm Financial Services'); ASIC v
Maxwell (2006) 59 ACSR 373 ('Maxwell'); ASIC v Warrenmang Ltd (2007) 63 ACSR 623
('Warrenmang'); ASIC v Sydney Investment House Equities Pty Ltd (2008) 69 ACSR 1 ('Sydney
Investment House Equities'); ASIC v Macdonald [No 11] (2009) 256 ALR 199 ('Macdonald [No
182 Federal Law Review Volume 40
____________________________________________________________________________________
approach
3
that applies directors' duties in a novel context. The first stepping stone
involves an action against a company for contravention of the Corporations Act 2001
(Cth) ('Corporations Act'). The establishment of corporate fault then leads to the second
stepping stone: a finding that by exposing their c ompany to the risk of criminal
prosecution, civil liability or significant reputational damage, directors contravened
their statutory duty of care
4
with t he attendant civil penalty consequences. In some of
the ca ses, the courts a lso applied the stepping stone approach to dir ectors'
contraventions of ss 181 and 182 of the Corporations Act as well as contraventions of s
180(1).
5
The effect of the 'ste pping stone' approach is that directors may face a type of
derivative civil liability for corpora te fault, but one which nonetheless is based on their
own inadequate conduct.
There are four parts to this paper. In Part II we consider the various stepping stone
cases. In this part we provide an overview of the nature of the various corporate
contraventions, the nature of directors' involvement in the corporate contraventions
and what conduct triggers their contravention of ss 180(1), 181 and 182. In relation to
their statutory duty of care we also discuss whether directors can rely on the business
judgment rule
6
and the delegation and reliance provisions in the Corporations Act .
7
Part III examines the theoretical underpinnings of both directorial criminal and civil
liability for corporate fault and the various ways it is imposed. This part also assesses
the justification for imposing civil liability on directors for their company's
misbehaviour and evaluates whether the stepping stone approach is a superior way to
make directors civilly liable for corporate fault.
In Part IV we discuss severa l possible future extensions of the stepping stone
approach. Even though a company's contravention of one or more provisions of the
Corporations Act was the first stepping stone in the decided cases, this part explores
whether the first stepping stone might also include a company's contravention of other
laws, such as income tax legislation or occupational health and safety laws. It also
explores whether third parties other than ASIC, such as corporate credito rs or
employees who a re affected by the company 's contravention of the la w, could employ
the stepping stone approach to make directors personally liable.
II STEPPING STONE CASES
A The first stepping stone company's contravention of the law
This part considers the stepping stone cases a nd highlights the nature of the corporate
misconduct that led to the conclusion that directors breached their statutory duties. All
the dec ided cases involved the company's contravention of various provisions of the
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11]'); Morley v ASIC (2010) 274 ALR 205 ('Morley'); ASIC v Citrofresh International Ltd [No 2]
(2010) 77 ACSR 69 ('Citrofresh [No 2]'); ASIC v Fortescue Metals Group Ltd (2011) 190 FCR 364
('Fortescue Metals Group').
3
The term 'stepping stone' stems from Keane CJ's description of ASIC's proceedings in
Fortescue Metals Group (2011) 190 FCR 364, 370 [10].
4
Corporations Act s 180(1).
5
Elm Financial Services (2005) 55 ACSR 533; Maxwell (2006) 59 ACSR 373; Warrenmang (2007)
63 ACSR 623; Sydney Investment House Equities (2008) 69 ACSR 1.
6
Corporations Act s 180(2).
7
Ibid ss 189 and 190 respectively.

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