[EP 018] What does climate change have to do with a director’s risk of personal liability?

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A new legal opinion in Australia warned that directors who don't properly consider climate related risks could be found liable for breaching their duty of care and diligence. This reminds us of how important it is for directors to be acutely aware of how far their director's duties can potentially extend.

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Many directors I speak to have little understanding of the personal risk of liability they are running in managing a business.

I recently came across a new legal opinion in Australia that warned that directors who don’t properly consider climate related risks could be found liable for breaching their duty of care and diligence. This reminded me how it important it is for directors to be acutely aware of how far their director’s duties can potentially extend

So lets back up a bit and start with the basics

Who is a director?

  • Someone validly appointed as a director or an alternate director;
  • Someone who acts in the position of a director even though they haven’t been formally appointed (de facto director)
  • Someone who regularly gives instructions to the directors of the company, and the directors act on that instructions – i.e. someone who tells the directors what to do (shadow director)

What are the basic director’s duties?

As director, you have the duty to:

  1. Exercise your powers and duties with care and diligence. This includes:
    1. being financially informed: actively being informed about the ongoing financial position of the company. It is not enough to be aware of the financial position of the company only at the time that you sign off the accounts;
    2. not trading when the company is insolvent i.e. ensuring that the company is able to pay all its debts when they are due;
    3. keeping adequate financial records. If an action for insolvent trading is taken against you as director and the company has failed to keep adequate financial records, then it will generally be assumed that the company has been trading while insolvent;
  1. Take care when handling other people’s money.
  2. Exercise your powers and duties in good faith in the best interests of the company. This means acting fairly and honestly, and being careful in your dealings;
  1. Exercise your powers only for the purpose for which they were conferred and not for any ancillary or improper purpose. This includes:
    1. not improperly using your position to gain an advantage for yourself or another person, or to cause detriment to the company;
    2. not improperly using information obtained through your position as director to gain an advantage for yourself or another person, or to cause detriment to the company;
    3. not applying company property for your personal benefit or for the benefit of another person without the authority of the company;
  1. Avoid conflicts of interest with the company. This means that if you have any material personal interest in a matter that relates to the affairs of the company, you must disclose this (usually at a directors’ meeting).
  2. Ensure the company files and meets its PAYG and superannuation contribution liabilities on time. You will become personally liable for the liability if it is more than three months old and the debt has not been reported to the ATO. You will no longer be able to absolve your personal liability by placing the company into liquidation or into voluntary administration. In addition, your family members and associates who were either partly responsible for the non-compliance or were treated more favourably than other employees as a result of the non-compliance may also become personally liable.

What are the penalties for breach of a duty?

The Corporations Act 2001 imposes penalties for breaches of certain duties. These include fines (of up to $200k), imprisonment and disqualification as a director.

There is risk of personal liability for certain debts of the company to the ATO if BAS’s haven’t been lodged on time, or super paid on time.

And personal actions against a director can be taken by:

  • the shareholders (collectively)
  • the board of directors
  • a liquidator of the company
  • another director
  • an employee
  • a competitor or the ACCC (for restrictive trade practices)
  • the government (for breach of legislation, such as environmental protection legislation)
    ASIC
  • a third party (for negligent actions leading to loss)
  • and potentially: creditors

 

So the list is long!

So now we’ve done the basics – let’s get back to what the hell climate change has to do with this murky area of directors duties.

As I said in the beginning, my interest in this topic was raised again recently when I came across. A new legal opinion in Australia, that warned that directors who don’t properly consider climate related risks could be found liable for breaching their duty of applying care and diligence in considering all the risks that might apply to their company.

It’s interesting because this opinion warned that it is irrelevant whether or not directors believe in the science of climate change. The reality is that the market indicates that it sees a risk in the types of decisions made by organisations that might be most impacted by climate change. So directors of companies whose value might be greatly impacted by climate change, could be seen to be failing to meet the test of care and diligence if they fail to consider the risks and/or opportunities presented by climate change. Quoting directly from the legal opinion “it is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate related risk that can be demonstrated to have caused harm to a company (including perhaps reputational harm)”.

Now I’m not suggesting that climate change risks are likely to be seen as harmful enough to cause a risk of litigation, for businesses that you are directors of. Indeed the only company I can find so far globally where this has turned into actual litigation is a class action lawsuit in the US against the oil giant Exxon. This was a class action file by investors, for Exxon’s failure to disclose climate change risks and their potential impact on the value of the business. As far as I can see, this is the word’s first lawsuit of this kind. But of course, it’s only just the beginning.

And when tied together with the legal opinion in Australia that I’ve spoken about, it really highlights how risks for directors can lurk in unusual places.

The opinion advised that directors should at least consider the possible effect of climate change risks on their business. Directors must become familiar with the fundamentals of the business, and must keep informed about its activities and the effect that a changing economy may have on the business.

So directors should consider risks (like for example climate change risks) and whether they will impact the business negatively or positively and whether anything can be done to alter the risk.

So, given most of you probably aren’t directors of companies like Exxon, what’s the real take home lessons?

I’ve summarised them into a few action steps.

So here we go.

8 Action steps:

  1. Due diligence. If you take on a role as director of a company, make sure you are aware of the financial and legal position of the business. Do some due diligence.
  2. Lodge on time. During your period as a director make sure your BAS’s are lodged and paid on time and superannuation is paid on time. If cash is tight in the business, don’t simply stop lodging – enter into formal arrangements. But just be careful about whether those arrangements are triggering personal liability, as I talked about earlier.
  3. Keep educated. Understand your duties, and the risks. Don’t bury your head in the sand. You need to ask questions, get advice and then sensibly weigh up that advice and make a decision about your company’s action or inaction.Keep close to professional advisors, like your lawyers, to ensure you are getting support in identifying and dealing with risks in the business. Directors are allowed to rely on advice or information from experts, so taking this advice from people like your lawyers will help you to get access to that business judgement rule that will help to protect you if indeed anyone does try to take action against you.
  4. Put compliance plans in place, to ensure that the company complies with all relevant legislation – to reduce the risk of issues occurring.
  5. Protect your assets. Think about what asset protection strategies you might be able to take to properly protect your assets. There are a whole bunch of strategies that can be used – so just make sure you have properly considered them and whether they might be applicable to you.
  6. Consider things like deeds of indemnity from the company, in which the company indemnifies the director against liabilities and costs incurred through their position as a director. And directors and officers insurance.
  7. If you become aware of a problem, convene a board meeting immediately to discuss the matter and if necessary get some legal advice!
  8. If you don’t have control over the management of a company, then seriously consider resigning as a director. Don’t keep yourself on the hook if you don’t need to be. I know often people like to continue to hold directorships in businesses they have equity in to keep some sense of control – but you just need to be extremely careful in these situations that. And remember to have ASIC records updated when you leave, so it’s clear that you are no longer a director.