Australia: Executive officer due diligence under the HVNL — guidance from ASIC

Last Updated: 21 December 2016
Article by Dilip Ramaswamy (formerly with Holding Redlich)

Most Read Contributor in Australia, September 2018

Under the Heavy Vehicle National Law (HVNL), executive officers face strict penalties for conduct that threatens to affect compliance in relation to mass, dimension, load restraint, fatigue or speed laws. Therefore, it is critical that all parties in the supply chain (particularly those 'higher-ups') exercise due diligence to avoid breaches of the HVNL.

Here, we discuss the recently released report published by the Australian Securities and Investments Commission (ASIC) on general due diligence practices and how executive officers should be conducting due diligence to satisfy their Chain of Responsibility (CoR) obligations.

The importance of conducting due diligence to ensure CoR compliance cannot be overstated, particularly in relation to executive officer positions, such as directors and managers.

Who is an executive officer?

The HVNL defines executive officers of a corporation as either a director of the corporation; or any person, by whatever name called or whether or not the person is a director of the corporation, who is concerned or takes part in the management of the corporation. Therefore, the definition includes the majority of senior management, given they are likely to be 'concerned' in the management of the company.

When can executive officers be found liable?

There are proposed changes to the HVNL that will mean executive officers are subject to a new primary duty of due diligence to ensure that corporations comply with their CoR duties. These proposed changes are intended to mirror the current Work Health & Safety and Rail Safety National Law standards and practices.

The importance of thorough due diligence is underlined by the potential liability faced by executive officers for offences under the HVNL. In short, executive officers can be found liable if an offence is committed under the HVNL, in particular:

  • corporate accessorial liability: where an executive officer knowingly authorises or permits the conduct constituting an offence under the HVNL; and
  • corporate derivative liability: where an executive officer knew or ought reasonably to have known of the conduct constituting an offence, or that there was a substantial risk that the offence would be committed.

ASIC guidance

The issue of due diligence has been the subject of much scrutiny and consideration, particularly by ASIC in recent months.

Between November 2014 and January 2016, ASIC undertook a review of the due diligence practices for 12 Initial Public Offerings (IPOs). The purpose of the review was to "observe the due diligence practices being adopted in the IPO market, and to ascertain the quality of advice being provided to issuers."

Although the review and subsequent findings were related to IPOs, the findings and recommendations are easily relevant across the board, including under the CoR regime, where executive officers are required to exercise due diligence to ensure compliance.

3 best practice due diligence initiatives

In its report, ASIC notes that the current 'best practice' due diligence conducted by businesses includes:

  • a due diligence committee (e.g. for CoR, a safety/compliance committee) that oversees and documents the due diligence process;
  • senior management participating in the process by undertaking certain tasks to ensure the risk awareness and management materials are properly prepared; and
  • the due diligence committee undertaking verification of the risk awareness and management materials to ensure that they are complete.

As a result of the investigations, ASIC uncovered a number of significant deficiencies in the due diligence process, particularly in relation to the role of senior management (executive officers), including:

  1. poor due diligence which led to defective risk awareness and management materials;
  2. a 'form over substance' approach to due diligence (e.g. tick-box approach, rather than substantive risk assessment);
  3. poor oversight of due diligence conducted by the due diligence committee and/or external advisers; and
  4. inconsistent quality of contribution in the due diligence process.

With the exception of (c), the deficiencies appear to be particularly relevant to executive officers within the heavy vehicle and road transport supply chain sectors, especially given that executive officers cannot completely delegate their due diligence obligation.

The recommendations from ASIC were that the due diligence process should be "robust" and conducted in such a way that it promotes oversight of the due diligence process, ensures adequate record-keeping of the key or significant issues and verification of all material statements.

The report helpfully concluded that "the due diligence process should be fashioned to harness the knowledge of the directors, potentially reducing the cost and length of the process."

A copy of the report can be found here.

Exercising reasonable diligence

In summary, the ASIC guidance report provides valuable feedback for all executive officers. It is equally applicable to the exercise of due diligence in relation to CoR. Some key takeaways include:

  • being aware of CoR breach risks faced by the business;
  • ensuring assessments are undertaken to identify CoR risks within the business;
  • understanding the business's CoR activities and performance;
  • implementing, monitoring and evaluating a CoR compliance policy and procedures; and
  • engaging external advisers to review and robustly test the veracity of the risk assessment and policy/procedures designed to address the identified risks.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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