Australia: Section 180(1) of the Corporations Act: a backdoor means of prosecuting company directors for corporate contraventions of environmental law?

Section 180(1) of the Corporations Act: a backdoor means of prosecuting company directors for corporate contraventions of environmental law?

In recent years, ASIC has used what some have described as a 'stepping stone' approach to a directors' statutory duty of care.1 Not surprisingly, the first step involves an action against a company for contravention of the Corporations Act.

Once corporate fault has been found, then the claim steps to a finding ­­ by exposing their company to the risk of criminal prosecution, civil liability or significant reputational damage, the directors contravened one or more of their statutory duties.

As a consequence, directors and officers may face a type of derivative civil liability for corporate fault. But there's no reason the principle should be limited to breaches of the Corporations Act. It can just as easily be applied to directors that allow their companies to breach environmental laws.

In the ASIC v Cassimatis (No 8) (involving alleged breaches of the directors duties of care as directors of Storm Financial Limited) Edelman J offered an example:

For instance, suppose a director makes a decision to commit a serious breach of the law, by intentionally discharging large volumes of toxic waste. Suppose the decision is made on the basis that the financial cost of avoiding the breach would be far greater than the cost of a pecuniary penalty under the relevant environmental regulation. This conduct might nevertheless involve a breach of the director's duty of care and diligence, irrespective of any other breaches.2

The decision in Cassimatis did not concern breaches of environmental law by a company. However, Edelman J's example revisits an open question about whether s 180(1) of the Corporations Act may be a 'stepping stone' to proceedings against the directors of companies which breach environmental laws.

This part of the Act requires company directors or other officers to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if a director or officer in the corporation's circumstances.

Some academics have commented 'there is no reason in principle why a company's breach of non-Corporations Act laws could not also lead to the imposition of directors' liability for breach of their statutory duties'. This is because courts have said that in some circumstances it can be a breach of the director's duty of care to authorise or permit the company to contravene the law.

To date, ASIC has not brought proceedings for breach of s 180(1) against directors on account of their respective companies breaching environmental laws. ASIC is unlikely to be enthusiastic about trespassing on environmental regulators' jurisdiction to prosecute directors, especially where a regulator has elected not to rely on the executive liability provisions in environmental laws to prosecute directors personally. Indeed, 'Information Sheet 151 - ASIC's approach to enforcement' says that the first issue for ASIC to resolve before deciding to prosecute is 'does the potential misconduct fall within our regulatory responsibility?'. But ASIC may not be the only proper plaintiff, the company itself (for example, by action of liquidators or shareholders by way of derivative action) may be bringing proceedings against directors for breach of s 180(1).

That the issue is not entirely hypothetical is demonstrated by Re Centura Global Holdings Pty Ltd3. Black J considered an application for an interlocutory injunction to restrain apprehended contraventions of s 180(1) of the Corporations Act, on the basis that there may be breaches of the Environmental Planning and Assessment Act 1979. The company was operating a café without an interim occupation certificate. The Court observed 'it is well established that not every breach of the law gives rise to a breach of directors' duties'. But his Honour went on to say 'it may, of course, rise to that level at some point in the future, if matters with the Council escalate, or if an interim occupation certificate does not issue promptly'. In the end the Court did not grant the application, noting that in that case the Council and interested persons can properly be left to resolve issues around the interim occupation certificate, if that cannot be done consensually, by bringing appropriate proceedings in the Land and Environment Court.

A further potential barrier to the success of proceedings against directors for breach of s 180(1) is that courts have accepted that skilful and diligent directorial management does not require a detailed inspection of day-to-day activities, but rather a general monitoring of corporate affairs and policies. According to Beach J in ASIC v Mariner Corp4, the duty owed under s 180 does not impose a wide-ranging obligation on directors to ensure that the affairs of a company are conducted in accordance with law. It is not to be used as a back-door means for visiting accessorial liability on directors.

This can be contrasted with the special executive liability offences under s 169 of the Protection of the Environment Operations Act, 1997 (POEO Act), where each person who is a director of the company or who is concerned in the management of the company is deemed to have contravened the same provision as the company, unless the person satisfies the Court that either the person was not in a position to influence the conduct of the company in relation to its contravention or, if they were in such a position, used all due diligence to prevent the contravention by the corporation. Courts have said the due diligence defence requires not only the establishment of a proper system to guard against a contravention, but also adequate supervision to ensure it is properly carried out. Furthermore, the system must cover all material aspects and dimensions of the business and the defence is not satisfied by mere precautions. In the recent case of EPA v Phillip Foxman5, a director of waste disposal company, who was its "directing mind and will", was personally fined $250,000.

Whatever use may be made of s 180(1), the director's duty is not a duty to the environment, or to individual shareholders, but to the company as a whole. Unless proceedings are brought by ASIC, the company must establish loss connected to the breach.6 This means that s 180 is almost certainly not going to be utilised by non-shareholding environmental activists and a reason why some have argued for the introduction of a new duty for directors obliging them to exercise their powers to ensure the company interacts with the environment in a sustainable manner.

Returning to Edelman J's example and remembering in that case he found the directors in breach of their duty in that:

They used their powers as directors to create an environment in which [as they were aware] it was almost inevitable that the Storm model would be applied to people with a high degree of financial vulnerability.

So, a director or officer who knowingly authorises an environmental offence may find themselves exposed in multiple jurisdictions. While s 169 of the POEO Act as well as the EPA's Prosecution Guidelines7 provide an a heavy enforcement response, there remains a theoretically possibility of also being guilty of stepping stone liability.

Footnotes

1 Herzberg, Abe and Anderson, Helen. Stepping stones - from corporate fault to directors' personal civil liability [online]. Federal Law Review, Vol. 40, No. 2, 2012: [181]-205. Availability: < http://search.informit.com.au/documentSummary;dn=804114116386970;res=IELHSS > ISSN: 0067-205X.

2 ASIC v Cassimatis (No 8) [2016] FCA 1023

3 [2015] NSWSC 1744

4 (2015) 327 ALR 95 at [444]

5 [2015] NSWLEC 105

6 Sheahan (as liquidator of SA Service Stations) (in liq) v Verco (2001) 79 SAR 109

7 The EPA will commence proceedings against directors where there is evidence linking a director with the corporation's illegal activity. This is significant since monetary penalties of up to $1 million and/or seven years' imprisonment are available under the POEO Act.

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.

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