Star struck

Important directors’ duties cases come along roughly once in a decade. The case against 11 directors and officers of listed casino operator Star falls into that category, writes Professor Pamela Hanrahan.

Late in December 2022, the Australian Securities and Investments Commission (ASIC) announced it had commenced civil penalty proceedings against the former board and senior management of The Star Entertainment Group Ltd (Star). ASIC’s allegation is that each of the officers breached their statutory duty of care in s 180(1) of the Corporations Act 2001 (Cth). The duty applies in all companies, regardless of their size, and requires all directors and other officers to exercise reasonable care and diligence in carrying out their functions. This includes taking reasonable care to protect the company for the foreseeable risk of harm — such as regulatory action or reputational damage — that might flow from its conduct and compliance failures.

ASIC’s case in Star focuses on specific aspects of the officers’ conduct between 2017–20, which ASIC alleges exposed Star to the risk of harm by “creating or increasing the risks” that Star Group entities would fail to meet their suitability obligations under state casino laws and their obligations under federal laws relating to money laundering. It also alleges the officers’ negligence risked undermining Star’s relationship with its lender, National Australia Bank (NAB) and causing significant reputational damage. ASIC goes on to say that their conduct “exposed Star to investigations by state and federal regulators, and inquiries and legal proceedings resulting from those investigations”.

The proceedings are complex. While they are conducted in parallel, ASIC must make its case individually against each officer — and that includes both non-executive directors and named Star Group executives who were not members of the board. What the reasonable standard of care required of each of them is depends on Star’s circumstances and their individual responsibilities within it at the relevant time. This will involve a careful unpacking of what occurred and when.

The case will likely run for several years. To succeed, ASIC would need to prove — on the balance of probabilities —that the events happened as it alleges and that the conduct fell short of the statutory standard. In making its case, ASIC cannot rely on the findings of the early inquiries conducted for the gaming regulators. It must lead its own admissible evidence, gathered from its investigation of events that occurred within the statutory limitation period for court action of six years.

Regardless of the eventual outcome, the Star proceedings draw attention to aspects of the law that are relevant for all directors. Four things stand out: ASIC’s use of civil penalty proceedings; the nature of the duty of care; the alleged joint responsibility of all members of the board for what occurred; and the weight to be given to the impact of negligent conduct by directors on all their company’s stakeholders.

Duty of care

ASIC’s case against the Star directors and named executives alleges a breach of the officers’ statutory duty of care. There is no allegation that they failed to act in good faith in the interests of Star, or that they behaved dishonestly or were knowingly concerned in the company’s lawbreaking.

ASIC’s ability to bring civil penalty proceedings against directors for conduct that is “only” negligent has always been controversial. In 2019, the maximum pecuniary penalty that can be imposed on a director for each contravention increased from $200,000 to over $1m. These penalties — unlike fines — can be imposed in civil court, where defendants lack some of the procedural and evidentiary protections available in criminal cases. The directors owe their duty of care to the company, but ASIC is given the capacity to enforce the duty to protect the broader public interest in the proper administration of the affairs of companies.

ASIC’s case makes specific allegations concerning events at Star and what the board and executives did — and did not do — in response to them. This is also important. Directors are neither automatically nor presumptively negligent if their company is found to have engaged in misconduct or broken the law. The officers’ duty is to take reasonable care to manage foreseeable risks that, if they eventuate, would harm the company. ASIC’s case is that this includes recognising and actively addressing key risks — for example, the risk of money laundering in casinos — that are specific to the individual business. Legal compliance is not optional and cannot be traded off for improved financial returns. But this does not make directors the guarantors of corporate compliance.

Collective accountability

For non-executive directors, the Star proceedings stand out because the whole board is in the frame. This is different from other recent cases arising out of corporate conduct or compliance failures — such as the cases involving Storm Financial and AWB — where individual directors were singled out, generally on the basis that they knew more, or took on more responsibility, than their colleagues.

In the Star proceedings, ASIC says many of the alleged failures were the joint responsibility of all the directors. In the James Hardie cases, the whole board was held to account for signing off, in the board meeting, on a misleading release to the market about compensating future asbestosis claims. In the Centro case, the whole board approved financial accounts — as is required by the Corporations Act 2001 (Cth) — that contained a material misstatement. These cases each involved an affirmative step taken by each director in relation to a single piece of corporate disclosure. The nature of the Star allegations is different.

Broader interests of stakeholders

Officers’ negligence that exposes a company to risk of adverse regulatory actions — such as the $200m in fines imposed by state casino regulators on Star in 2022 — clearly has the potential to harm the company and, indirectly, its shareholders. This is what the law protects and prioritises, even where the shareholders have benefited over the years from the profits made or protected by the company’s misconduct and have turned a blind eye to their stewardship responsibilities.

But ASIC’s concise statement in the Star proceedings concludes with a paragraph that says, “The role of an officer or director may also have a profound effect on the community. The potential for harm attendant on the contraventions of s 180(1) was aggravated by the fact that the activities of Star, especially its dealings with junkets, were vulnerable to money laundering and exploitation by criminal influences. That conduct, if it occurs, can cause grave harm to the community
more broadly.”

This paragraph invites the court, and us, to think about how the actions (or inaction) of corporate officers impacts a wider group of stakeholders than just the company and its investors. Along with the joint nature of the claim against the whole board, it may flag the broader significance of the Star proceedings in the evolving public jurisprudence of the directors’ duty of care.