In brief - Directors cannot avoid liability by relying on advice from experts or advisors
Directors and other decision makers should minimise their risk of personal liability by obtaining insurance, understanding the regulatory environment and being aware of their company's financial position.
Understand where you are at risk of personal liability
It is a reality of doing business that as a decision maker, you can be held personally liable for decisions you make every day.
There is a host of laws and regulations which impose personal liability on decision makers, whether they are sitting in large or small organisations, and whether in the public, private or not-for-profit sector.
If you are a decision maker, it is critical that you understand where you are at risk of personal liability and how to protect against it.
When can personal liability arise?
Personal liability can arise in a suite of different circumstances - through litigation, investigation by a government agency or under a range of Australian laws and regulations which impose direct and accessorial personal liability on directors and managers. That liability includes criminal liability (jail or a fine) as well as civil liability (payment of a penalty or damages).
But I don't make mistakes
Yes you do. People make mistakes. It's really that simple.
You make decisions every day which involve balancing commercial risks, understanding risks associated with compliance with legislative and regulatory requirements and maintaining good corporate governance. Your decisions can impact on your employees, creditors, shareholders, customers and suppliers. Your decisions can also come to the attention of a government agency or regulator with investigative powers.
A few examples:
- If your company has shareholders or has raised funds from investors and things do not go to plan, you (and the company) might be subject to a claim from them.
- If your company becomes insolvent or goes into administration or liquidation, you may face allegations that you breached your directors' duties or engaged in misleading conduct. You might face compulsory examination by ASIC, an investigation or litigation, or liability for the company's debts.
- If an employee is injured at work, you and the company may face prosecution under work health and safety legislation.
- If you or other directors are involved with an industry body along with competitors and you discuss pricing, market share, bids or what output will be available to buyers, you may be investigated by the Australian Competition and Consumer Commission for participation in a cartel and could face up to 10 years in jail or have to pay a hefty fine or penalty.
- If your company works with government or the public sector, you might be drawn into an anti-corruption investigation.
How can you protect yourself?
In some circumstances, your company might be able to indemnify you for personal liability which arises from your work. But in others, it will not be able to assist you. The financial assistance your company can give you is restricted by legislation and there are likely to be limits placed on it by your company constitution or in your director's indemnity agreement. You can fill the gap with directors and officers liability insurance (sometimes called management liability cover).
D&O insurance is an insurance policy which provides decision makers with cover for liabilities which might arise from their decisions and actions. This includes things like legal costs associated with investigations or litigation, fines or penalties which you may have to pay and expenses associated with reputational damage.
You should also make sure that your company has appropriate liability insurance, and if appropriate, professional indemnity cover.
Play by the rules
Understand the rules that govern what you do and how you do it. For example, make sure you are familiar with the regulatory environment, understand legislation that applies to you and if in doubt, ask questions or seek advice.
Understand your company and its business
You must understand your company's financial position and assess financial statements carefully. Make independent inquiries. Ask your financial controller questions. Form your own opinion of your company's financial capacity.
Use your own good judgement
Recent litigation such as Centro and James Hardie has made it clear that directors, including non-executive directors, cannot avoid liability by relying on advice from experts or advisers.
As a director there are some core responsibilities which you cannot delegate. Take advice, but also give your own attention to things. When you do delegate, make sure you delegate to someone reliable and competent.
In practical terms, this means that you need to evaluate critically and understand any reports you approve. Read board papers carefully and think analytically about any advice you receive. Ask questions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.