Stepping stone liability for non-executive chair in Vocation Ltd

  • Company officers are exposed to real risk of liability and penalties following the company’s contravention of law.
  • Uncritical acceptance of information and advice provided to the board by the CEO can attract officer liability for breach of duty of care and diligence.
  • Vocation demonstrates that limitations on the operation of the business judgment rule is of cold comfort to company officers.

The stepping stone approach to company officer liability under the duty of care and diligence provision in s 180(1) of the Corporations Act 2001 gathers pace, despite the controversial nature of this law enforcement strategy.1 The Australian Securities and Investments Commission (ASIC) has embraced this litigation strategy with a large degree of success,2 as also emphasised in the recent Vocation litigation.3 The strategy involves ASIC establishing corporate fault in the first instance, followed by a personal action against individual company officers alleging failure to protect the company from a foreseeable risk of harm and the risk of penalty for contravention of the Corporations Act.4

Not so long ago, before 1993, the stepping stone strategy to enforcement of directors’ and officers’ duties was unknown to corporate law due to procedural obstacles. It required a herculean effort for the prosecution to discharge the then legal standard of proof, beyond a reasonable doubt, to prove breach of the duty of care and diligence. Prior to the decriminalising of this statutory duty and the introduction of the civil penalty regime in 1993 which now facilitates active enforcement of the civil penalty regime on a lower standard of proof, on a balance of probabilities, the statutory equivalent of s 180(1) was moribund — if not a dead letter of the law.5 Unlike the robust enforcement of s 180(1) today with ‘a strong success rate’,6 there was a dearth of cases with little or no regulatory impact on governance.

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