Australia: D&O Developments in 2011: Keeping us on our toes

Last Updated: 29 February 2012
Article by Jacques Jacobs

2011 was another interesting year for directors, officers and their insurers. While the trends identified in recent years continued, some new issues arose both in judicial decisions and regulatory changes. One case, Bridgecorp (see page 43), had underwriters immediately reaching for their pens to enhance existing cover.

The claims environment remained active. In that regard, many long tail claims following the credit crunch and the Global Financial Crisis are still progressing through the system. The various agri-investment class actions are but one example. We have continued to see a rise in employment practices claims against companies and their directors, including for unfair dismissal, harassment and bullying.

The regulatory supervision to which directors are subject continued to increase with the introduction of new legislation and regulations. Regulators are vigilant and willing to investigate and prosecute.

From an insurance perspective, capacity for Directors and Officers (D&O) risks continued to increase and broader cover is being provided at more competitive prices. There have been a number of new entrants into the market.

We have also witnessed the rise and rise of the management liability insurance policy, catering particularly for risks associated with small-to-medium enterprises.


Two particular cases grabbed the headlines, causing ripples across the industry for their potential impact.


Many are still scratching their heads about the New Zealand High Court's decision in Steigrad & Ors v BFSL 2007 Limited & Ors (Bridgecorp decision), not necessarily because of the decision itself but wondering why it has taken so long for this issue to be raised.

The Bridgecorp decision involved the New Zealand equivalent of Section 6 of the Law Reform (Miscellaneous Provisions) Act 1946(NSW) (Section 6). The Australian Capital Territory and Northern Territory have similar sections.

Section 6 provides that a statutory charge attaches to insurance moneys payable in respect of a claim, in practice allowing the third-party claimant to sue the insurer directly in the event that the claimant is unable to pursue the insured (eg if the insured is in liquidation).

In the Bridgecorp decision, the relevant D&O insurer was prevented from advancing defence costs to the directors, on the basis that the various Bridgecorp claimants had asserted a charge over all of the available insurance moneys under the D&O policy. On the basis that their potential claims exceeded the available limit under the policy, nothing was available to advance to the directors by way of defence costs.

The directors relied too heavily and, in fact, completely on the processes in place and their advisers.

The Bridgecorp decision is currently being appealed to the New Zealand Supreme Court. Although it has not yet been considered in an Australian court, it has caused significant concern to directors and their insurers. The Bridgecorp decision has far-reaching implications for directors, given the often significant costs required to defend claims or investigations by regulators.

Insurers have moved quickly to develop solutions to "ring fence" defence costs to avoid the potential implications of the Bridgecorp decision. The industry will be watching the New Zealand Supreme Court appeal closely. For further commentary on the Bridgecorp decision, please see Crossley Gates' article on page 43 or visit out Insurance Flashlight blog at

Centro decision

ASIC v Healy (Centro decision) is about a company's financial reporting and the role and responsibilities of directors in relation to that task.

The case concerned the board's approval of the 2007 financial statements of two companies within the Centro Group. Middleton J found that the financial statements failed to disclose significant matters, in particular:

  • Centro Properties Group failed to disclose $1.5 million of short-term liabilities by classifying them as non-current liabilities instead of current.
  • Centro Properties Group failed to disclose guarantees of short-term liabilities of an associated company of about US$1.75 billion.
  • Centro Retail Group failed to disclose $500 million of short term liabilities that had been classified as non-current.

The issue arose out of a change in reporting standards. The new standards required that short-term debt only be classified as non-current if the company had an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. The significance of this change in reporting standards to a corporate group such as Centro, which relied on bridging finance that would ultimately be rolled into longer term debt, was profound.

The integrity and bona fides of the directors was not in issue and questions of credit did not arise. The central question was the extent to which the directors were entitled to rely on advice given to them by senior managers of the company and its auditors. While Middleton J acknowledged that directors are entitled to rely on others and commented that "there was no suggestion in this proceeding that the reliance on others was not warranted", he found that directors cannot substitute reliance upon the advice of management for their own attention and examination of an important matter that falls specifically within the board's responsibilities as with the reporting obligations. They cannot delegate or abdicate that responsibility to others.

In this case, Middleton J found that the directors relied too heavily and, in fact, completely on the processes in place and their advisers.

This case has and will cause many directors and their insurers some concern. While the principles enunciated in the decision are not new, the circumstances of this case served as a stark warning that directors, at the apex of the company's management structure, have the overarching duty to ensure that a company's financial records are accurately reported. While many of their responsibilities may be delegated, they cannot completely absolve themselves of their obligations.

Ultimately, the penalties awarded were much lighter than those agitated for by the Australian Securities and Investments Commission (ASIC). In his reasons, Middleton J had regard to the fact that the directors were intelligent, experienced, conscientious and honest.

Other cases

Other cases of note include:

  • Smart v Westpac Banking Corporation [2011] FCA 829. This case considered whether the statutory duty of good faith under section 13 of the Insurance Contracts Act 1984 (Cth) extended to an "insured person" under a D&O policy. Jagot J of the Federal Court affirmed that the statutory duty does not extend beyond the parties to the contract.
  • Buzzle Operations Pty Limited (in liq) v Apple Computer Australia Pty Limited [2011] NSWCA 109. This case considered circumstances under which a creditor of a company might be a shadow director.
  • The High Court's granting of special leave to Andrew Forrest to appeal ASIC's successful prosecution of him for misleading and deceptive conduct and breaching the disclosure laws in relation to statements about various contracts between his company, Fortescue Metals, and Chinese entities. Together with the James Hardie appeal, which is also likely to be heard in 2012, the High Court will now consider two cases in 2012 that deal with market disclosure issues. This is anticipated to be agenda-setting.


Some of the major legislative developments impacting on directors and officers that have been introduced in 2011 include the following.

Australian Consumer Law

The Australian Consumer Law commenced earlier this year, revamping consumer and trade practices law in Australia. This law introduced new liabilities for directors and officers, particularly in relation to consumer protection.

ASIC or the Australian Consumer and Competition Commission will now be able to seek orders disqualifying directors and managers if they breach these consumer protection provisions. They also face significant fines if they are "knowingly concerned" in breaches of the legislation.

The Australian Consumer Law introduces new prohibitions against a company indemnifying a director for pecuniary penalties and legal costs if they are found personally liable for contraventions of consumer protection provisions. Nothing prevents an insurer from indemnifying a director for these penalties and costs.

Harmonisation of occupational health and safety

Progress has also been made in the harmonisation of occupational health and safety laws around Australia, including in New South Wales following the election of the Liberal Government earlier this year. With the exception of Western Australia, laws based on the harmonised Model Law will commence around Australia in early 2012.

While the Model Law removes strict liability for directors, it imposes a new positive due diligence obligation and increased penalties on directors.

Carbon emissions trading scheme

The Federal Government has introduced its carbon emissions trading scheme, which was passed in Federal Parliament in 2011. The Clean Energy Act 2011 (Cth) and associated legislation will commence on 1 July 2012. The scheme will cover emissions from the statutory energy, industrial processing, resources and waste sectors.

For directors, this will introduce new liabilities, along with expanded obligations to comply with their existing duties, such as reasonable care and diligence and their duties around disclosure.


The agenda for directors, officers and their insurers in 2012 is likely to be dominated by the fallout from the sovereign debt crisis in Europe and the impact that could have on the availability of capital worldwide. It seems unlikely the claims trend will reduce next year, but it remains to be seen whether global events will cause the D&O insurance market to contract and premiums to finally start to rise.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.

DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions