Update

The Trade Practices Amendment Bill (No 1) 2005 (2005 Dawson Bill) contains a new provision which, if passed, will expressly prevent corporations from indemnifying an officer for liability to pay pecuniary penalties resulting from any breach of Part IV of the Trade Practices Act 1974 (TPA) and for legal costs incurred in defending or resisting proceedings in which such liability is found.

The prohibition extends beyond the original recommendations of the Dawson Committee, which were confined to a prohibition indemnifying officers for pecuniary penalties. However, the proposed legislation is consistent with similar provisions under the Corporations Act 2001. The proposed section only relates to an "officer" of a corporation, rather than "officers, employees or agents" as under the previous version of the 2005 Dawson Bill.

The proposed amendment

Specifically, the proposed section 77A prohibits a body corporate or a related body corporate from indemnifying an officer against:

• liability to pay a pecuniary penalty under section 76 for a contravention of a provision of Part IV (proposed section 77A(1)(a)) or
• legal costs incurred in defending or resisting proceedings in which the person is found to have such a liability (proposed section 77A(1)(b)).

Part IV of the TPA sets out the prohibitions against restrictive trade practices, such as the prohibitions against misuse of market power, price fixing, exclusive dealing and resale price maintenance.

Section 76 imposes pecuniary penalties for breaches of Part IV. As indicated in our previous alerts and updates, those pecuniary penalties will significantly increase as a result of other amendments contained in the 2005 Dawson Bill.

What the changes will mean

If enacted, the proposed section will prohibit corporations from paying pecuniary penalties imposed in respect of an officer's Part IV contravention, or the legal costs of defending or resisting proceedings, where an officer is found to be liable to pay a pecuniary penalty.

The section may leave open the possibility for corporations, for example, to make a conditional loan to an officer to defend legal proceedings. However, the loan would need to be repaid if the officer were found to have breached Part IV of the TPA and therefore incurred a liability to pay a pecuniary penalty.

The proposed changes may impact on a corporation's risk profile for vicarious liability for actions of its officers. Faced with the prospect of substantial legal costs for which they may be personally liable, officers may be more willing to admit liability and settle the proceedings. There could therefore be a potential higher likelihood of divergence between the interests of a corporation and its officers in defending any Part IV action taken against the corporation and named officers.

In some instances, corporations may have already adopted a policy of not indemnifying officers where the officer is ultimately found in breach of Part IV on the basis that this encourages greater individual responsibility regarding legal compliance.

Status of the 2005 Dawson Bill

For an update on the status of the 2005 Dawson Bill at the time of publication see the In Brief section of this update.

Jacqueline Cremer
Solicitor
T +61 2 9296 2789
jacqueline.cremer@mallesons.com