A recent report by the Corporations and Markets Advisory Committee (CAMAC)1 reinforces Owen J's recommendations in the HIH Royal Commission.
CAMAC has recommended that the duties of care and diligence, good faith and proper purpose – which apply under the Corporations Act to directors and other officers of corporations - now be extended to include 'any other person who takes part, or is concerned, in the management of that corporation'.
CAMAC also recommended the extension of the business judgement rule in the Corporations Act which provides a defence against non-compliance with a duty to act in good faith and for a proper purpose to persons who take part or are concerned in the management of a corporation.
CAMAC's rationale is that a wider group of individuals than just company directors now perform important managerial tasks within modern corporations. Companies use a broad array of personnel agreements, not confined to traditional employment contracts. By extending the scope of the duties under the Corporations Act to encompass those who take part or are concerned in the corporation's management, or who perform functions or act on behalf of the corporation, CAMAC envisages a 'more functional approach' to corporate liability. It believes that an individual's practical function within the corporation, rather than their formal title, should determine whether the duties imposed on directors and officers apply to them.
The term 'insured person' is typically defined in D&O policies by reference to the Corporations Act . Should CAMAC's recommendations be adopted, as seems likely, it will broaden the scope of application of statutory corporate duties. D&O policies which define the term'insured person' by reference to the Corporations Act will extend to cover, in addition to directors and officers, 'any person who takes part or is concerned, in the management of that corporation'. D&O policies which do not define 'insured person' by reference to the Corporations Act however may not extend to cover those individuals.
If CAMAC's recommendations are implemented, insurers and their insured will be well advised to review the extent of cover available under D&O wordings for 'any other person who takes part, or is concerned, in the management of that corporation'.
Insurers who sit on their hands and continue to offer existing wordings may find themselves exposed to paying claims against middle managers, consultants, corporate advisors and other individuals below board level.
One positive outcome for insurers is the potential to significantly increase the pool of individuals seeking D&O insurance.
Footnote
1 CAMAC is an advisory board which reports to the Australian Government on issues regarding corporations and financial markets law and practice.
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