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Director’s Duty Of Care Notes

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Class 10 - Director's Duty of Care S 180; s189-90; 198D Part 2D.1; Division 1 - General Duties 180 - Care and diligence - civil obligation only Care and diligence - directors and other officers (1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they a. Were a director or officer of a corporation in the corporation's circumstances; and b. Occupied the officer held by, and had the same responsibilities within the corporation as, the director or officer Business Judgment Rule (2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of (1) and their equivalent common law/equitable duties, in respect of judgment if they: a. Make the judgment in good faith for a proper purpose; and b. Do not have a material personal interest in the subject matter of the judgment; and c. Inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and d. Rationally believe that the judgment is in the best interests of the corporation The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold (3) [Business judgment defined] In this section; business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation 189 - Reliance on information or advice provided by others If: (a) A director relies on information, or professional/expert advice, given or prepared by a. An employee of the corporation who he/she believes on reasonable grounds to be reliable and competent in relation to the matter's concerned b. A professional adviser/expert IRT matters the directors believes on RG to be within that person's competence c. Another director or officer IRT matters within the director's or officer's authority; or

d. A committee of directors on which the director did not serve IRT matters within the committee's authority (b) The reliance was made a. In good faith; and b. After making an independent assessment of the information or advice, having regard to the director's knowledge of the corporation and the complexity of the structure and operations of the corporations (c) The reasonableness of the director's reliance on the information/advice arises in proceedings brought to determine whether the director has performed a duty under this Part or an equivalent general law duty The director's reliance on the information is taken to be reasonable unless the contrary is proved

190 - Responsibility for actions of delegate (1) [Director responsible for actions of delegate] If directors delegate power under s 198D, a director is responsible for the exercise of the power by the delegate as if the power had been exercised by the directors themselves (2) [Where director not responsible] A director isn't responsible under (1) if a. They believed on RG at all times that the delegate would exercise the power in conformity with the duties imposed on directors of the company by this Act and the company's constitution (if any); and b. The director believed i. On RG; and ii. In good faith; and iii. After making proper inquiry if the circumstances indicated the need for inquiry That the delegate was reliable and competent IRT the power delegated 198D - Delegation (1) [Delegation of powers] Unless the company's constitution provides otherwise, the directors of a company may delegate any of their powers to: a. A committee of directors or b. A director; or c. An employee of the company; or d. Any other person (2) [How powers are exercised] The delegate must exercise the powers delegated in accordance with director's directions (3) [Effect of delegated powers] The exercise of the power by the delegate is as effective as if the directors exercised it

Duties of Care
[7.70] An overview of duties and remedies There are three primary species of legal rules directed towards shirking: I.

II. III.?

An imposition of a duty on directors and senior officers to apply reasonable care in performance of office at both equity (as an incident of the office) and tort (breach of duty) - but this duty is not fiduciary The complementary statutory duty of care and diligence s 180(1) which attracts civil penalty provisions (Pt 9.4B) in addition to other general law/statutory remedies. There is also a business judgment safe-haven provision in s 180(2) (complemented by s 189) Specific obligations on directors to prevent insolvent trading The remedies for breach of these duties are damages to put the company back in the position it would have been had the breach not occurred o But if the case is one of the exceptional ones that amount to a breach of statutory duties, it would be remediable by orders affecting the actual decision taken The duties are distinct but have oberlapping remedies

[7.70] The general law duty of careAt general law directors owe a duty to their company to take reasonable care in performing the functions of their office, the standard of care "measured by the care that an ordinary man might be expected to take in the circumstances upon his own behalf" (Re Brazilian Plantations), having regard to his knowledge and experience (Re Brazilian Plantations) o Various developments have been made at the turn of the 21 st century (with a great deal of inactivity beforehand) with the Daniels v Anderson decision - a statutory presumption of reasonableness was enacted where directors rely on information/advice provided by certain people (s 189) and where directors delegate powers
? Note: Since the director is only responsible for the acts of the delegate within the power as delegated, if the delegate acts fraudulently, negligently or otherwise

??outside the scope of the delegation, then the director escapes responsibility The fact that the director participates in conduct carrying foreseeable risk of harm is not sufficient - such harm must be weighed against potential benefits that could reasonably be expected to accrue (ASIC v Vines) o Contraventions of the Act are just one of the harms that are part of the calculus o For e.g.
? An NED did not breach his duty when leaving the conduct of capital raising to other qualified directors while he supervised construction work (ASIC v Maxwell)
? But a director breached his duty of care when as the sole controlling mind and sole signatory to the company's bank account, exposed it to breaches of the Act by failing to hold capital raised under an undersubscribed fundraising n a separate trust account to return it on request (ASIC v Warrenmang) The CB writers, to demonstrate the difficulty in characterising actions as negligence, distinguish between judgment, information and procedural deficiencies, shirking and tainted interest which except in the last case present difficulties for courts assessing conduct under a tradition which tends to eschew business decisions The CB writers further note two consequences of the relative inactivity of enforcement of the provisions/duties: o An undeveloped sphere of legal liability rules o Civil enforcement largely being confined to action taken on the company's behalf by the liquidator Also, executive directors can be held to higher standards by covenants placed in their service contracts - but regardless of its terms the director will have an implied duty to exercise professional standards of care, skill and diligence (Lister v Romford Ice and Cold Storage)

[7.80] The statutory duty of care?

Is circumscribed by s 180(1) which imposes the same standard of care than that of the general law duty (Vines v ASIC) o Though there is no requirement for harm/detriment to the company under s 180(1), the same balancing of foreseeable risk and benefit applies - perhaps making the possibility of contravention without corporate harm a real possibility The statutory duty is a civil penalty provision without criminal penalties. It is further enforced by obligations on public companies, who are not wholly owned subsidiaries of another company, to include a statement indicating the number of director's meetings etc. and how many directors attended (s 300(10) [irr?]

Daniels v Anderson (1995) 37 NSWLR 438

Facts: The case arose out of AWA's activities in order to hedge itself from FX exposure - at time it's FX manager (Koval) engaged in extremely speculative hedging, paying out losses f loans he took out. AWA was found to have suffered extensive losses. The oversight of the operation was then left to the General and Finance Managers (GFM) who had no experience transactions - no action was commenced against them. The primary judge considered that t 'seeds of disaster' were concealed in the reliance placed on the GFM by Hooke (chair and CE ensure polices on FX were adopted and adequate information flows maintained.

Upon reconstituting the board AWA sued its auditors alleging it had a duty to discover and r to them that the books were inadequate, there were no proper internal controls, and that FX exposure was inconsistent with the limits generally imposed. They alleged that if the deficiencies in record keeping/internal control were communicated to the directors, correctiv measures would have been taken.

The auditors denied breach and alleged contributory negligence and cross-claimed against Hooke and 3 NEDs for neglect of duty which caused the loss suffered - liability for which depended on the directors characterisation as 'tortfeasers'

Held at first instance: The NED had no reason to believe the FX policy set by the board w adhered to and was entitled to trust senior management. He held that DHS was negligent in failing to draw attention to the absence of internal control but that AWA was guilty of contributory negligence and that Hooke was liable for some of the damages

Clarke and Sheller JA noted that this was DHS' cross-claim that AWA was also liable - that directors failed to exercise a reasonable degree of care and diligent in the exercise of their powers and discharge of their duties.?

Their honours began by discussing that at general law the directors duties were pitch a very low level and directors would not be held accountable except in the most extre of circumstances and were entitled to essentially claim ignorance However as the law with respect to insolvent trading slowly developed, ignorance wa long necessarily a defence to proceedings

Their honours hence concluded that:

Even though directors come from vary backgrounds, this does not mean their duties constrained to their experience - it involves becoming familiar with the business of th company and how it is run The responsibilities of directors require that they take reasonable steps to place themselves in a position to guide and monitor the management of the company. They should meet as often as it the board deems necessary to carry out its functions prope o Clearly this did not connote that every director has complete knowledge and experience of all aspects of the companies activities?

Their honours went on to note that historically business judgments have been immun judicial intervention thus making it difficult to assess director's duties according to standards of negligence - however this did not preclude an appropriate adaptation of law of negligence to accommodate for the degrees of duties owed by people with diff skills Their honours also noted that the directors have historically been able to rely on othe officers of the corporation except in the most extreme of circumstances - however th held that this view did not accurately state the extent of directors duties at common law

? Their honours then considered the US position in regards to the duties imposed on directors; they relied heavily on the judgment of Pollock J in Francis v United Jersey who gave a good indication of the scope of this duty: o IT requires directors to have a rudimentary understanding of the business and become familiar with the fundamentals of the business - a lack of knowledge is a defence to not exercising care o Directors are under a continuing obligation to keep informed about the corporations activities; they cannot shut their eyes to corporate misconduct an claim they did not see it - they have a duty to look o Directorial management doesn't require a detailed inspection of day-to-day activities but a general monitoring of corporate affairs and polices o Directors are not required to audit corporate books but must be familiar with th financial status of the company - the status of the financial statements may g rise to a duty to inquire further o Directors are not ornaments, they are essential components to corporate governance

(As an side their honours noted the idea of skill - in reflecting the general concept of neglig at common law, directors appointed because of a particular skill may take an appointment o basis of the skill they bring to the office)

They concluded in principle [369] :?

"We are of opinion that a director owes to the company a duty to take reasonable car the performance of the office. As the law of negligence has developed no satisfacto policy ground survives for excluding directors from the general requiremen that they exercise reasonable care in the performance of their office" "A person who accepts the office of director of a particular company undertakes the responsibility of ensuring that he or she understands the nature of the duty a director

called upon to perform. That duty will vary according to the size and business the particular company and the experience or skills that the director held himself or herself out in support of appointment to the office" Thus negligent directors were within the meaning of tortfeasors

As to the result it was not unreasonable for the NEDs to accept the assurances received from DHS as to the genuineness of reported profits. However Hooke, having received information reliable sources which he did not communicate to the board, should have called for satisfac explanation as to what was going on. The primary finding of negligence against DHS was up but the apportionment was changed to 1/3 AWA and 2/3 DHS on the basis that the conduct went to Hook's notional liability to AWA was already taken into account in DHS's favour.

Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187

Facts: PBS sued its former directors for compensation for breach of their duties as directors failing to exercise reasonable care, diligence and skill. The context was the purchase by PBS Tower of the 'Vickers Hadwa' land for redevelopment, subdivision and sale. PBS had no experience in property development. At the same time Tower was negotiating to acquire the capital of JCLD from CHL (who held two-thirds of the capital in PBS and to whom PBS' Charim (Wheeler) had a controlling interest). PBS' liquidator claimed that Wheeler and two other directors (Holdings and Nizzola) caused PBS to purchase land so that Tower could purchase

Hamilton was an MD of both PBS and JCLD but had no shares in JCLD or CHL - he attended t board meetings of PBS where decisions were taken to purchase land - he declared his intere JCLD and didn't take part in voting. He had nothing to do with the negotiations with tower; Nizzola took care of them.

Ipp JA began his judgment by noting the relevant duties of care - the director's duty of care skill and the equitable duty of a trustee to its beneficiary, he noted that neither of these w to be equated with the fiduciary duty

Hamilton: Did he exercise reasonable care and skill

? His honour noted that this question involved a balancing act, considering the foresee risk of harm against potential benefits - the question being "what an ordinary person the knowledge and experience of the defendant might be expected to have done in t circumstances if he was acting on his own behalf"

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