#10834 - Director’s Duty Of Care - Business Associations 1

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

   1. Were a director or officer of a corporation in the corporation’s circumstances; and

   2. 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:

   1. Make the judgment in good faith for a proper purpose; and

   2. Do not have a material personal interest in the subject matter of the judgment; and

   3. Inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

   4. 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:

1. A director relies on information, or professional/expert advice, given or prepared by

   1. An employee of the corporation who he/she believes on reasonable grounds to be reliable and competent in relation to the matter’s concerned

   2. A professional adviser/expert IRT matters the directors believes on RG to be within that person’s competence

   3. Another director or officer IRT matters within the director’s or officer’s authority; or

   4. A committee of directors on which the director did not serve IRT matters within the committee’s authority

2. The reliance was made

   1. In good faith; and

   2. 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

3. 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

   1. 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

   2. The director believed

      1. On RG; and

      2. In good faith; and

      3. 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:

   1. A committee of directors or

   2. A director; or

   3. An employee of the company; or

   4. 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

[7.70] An overview of duties and remedies

There are three primary species of legal rules directed towards shirking:

1. 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

2. 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)

3. 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

  • 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 care

• At 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)

  • 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)

  • Contraventions of the Act are just one of the harms that are part of the calculus

  • 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:

  • An undeveloped sphere of legal liability rules

  • 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)

  • 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?]