The new dishonesty test—directors beware

November 2018

The Federal Government has just introduced a bill which significantly increases the penalties and sanctions applying to a broad range of corporate wrongdoing.

We have previously written in Fundamental  about the Government's plans which follow the recommendations of the ASIC Enforcement Review Taskforce.

While this means a broad range of changes to various legislation, here partner Brit Ibanez focuses on the impact of the proposed new definition of "dishonest" in the Corporations Act (Act) and conduct which will now mean a breach of the duties not to misuse information or misuse your position as a director.

The new dishonest test

The Bill introduces a new "dishonest" test, being "dishonest according to the standards of ordinary people".

This new test means the Act's obligation on directors to act in good faith will be amended to remove the requirement that the director must have been "intentionally" dishonest. Now, a breach will occur if the director was dishonest according to the standards of an ordinary person, regardless of whether they believed they were being dishonest.

Detriment or benefit to the corporation

Currently, a director can be liable for using their position or misusing information dishonestly or recklessly either to gain an advantage for themselves or cause detriment to the corporation.

The Bill extends the Act's provision so it applies even if the corporation did not suffer any detriment or there is a benefit to the corporation. In other words, if a director uses their position dishonestly or recklessly and the corporation benefits, the director can still breach the Act and have committed an offence.

Criminal penalties

The possible maximum term of imprisonment has now increased to 10 years for breaches of a very wide range of offence provisions:

  • Duties and powers of directors and officers – s184(2)
  • Financial reports and audit – s344(2)
  • Officers of responsible entity – s601FD(4)
  • Employees of a registered scheme – s601FE(4)
  • Duties of officers –s601UAA(1)
  • Duties of employers –s601UAB(1)
  • Fund raising – s727(1) and s728(3)
  • Financial services disclosure –s952D(1) and (2), s952F(2), (3) and (4), and s952L(1)
  • Client money – 993B(3)
  • Disclosure document – deliberately giving a defective disclosure document – s1021D(1) and (2).

Civil penalties

These increases in the criminal penalty provisions are reflected in significant increases in the penalties that may apply to individuals and corporations and the increase in the number of provisions which will now become civil penalty provisions in the Act.

Directors and officers beware

This new Bill demonstrates the Government focus on ensuring increased penalties for corporate crime and financial misconduct are a serious deterrent for directors and officers.

We will keep you up to date with further developments. If you have any questions in the meantime about what these changes mean for you please contact a member of our team.