The role of a director is to set goals for a company, to oversee plans of the business to meet its goals and to review progress. In exercising their role, directors of companies owe a duty to the company to exercise care and diligence.
Although directors owe a duty under the general law, section 180(1) of the Corporations Act 2001 also provides that a director is required to exercise their powers and discharge their duties which a reasonable person would exercise if they:
- were a director of a company in the company’s circumstances;
- occupied the office within the company held by the director and had the same responsibilities within the company as director.
What counts as Care and Diligence?
In considering whether a director has met their duties in exercising care and diligence, various circumstances may be considered including the type of company, the size and nature of its business, the composition of its board and the distribution of the work between the board.
The duties of a director will also vary depending on the experience or skills that the directors held themselves out to have in order to secure their appointment as director.
The courts have found that where a director breaches the duty of care and diligence in the performance of their duties, an action can be brought under the tort of negligence.
Business Judgment Rule
Section 180(2) of the Corporations Act provides that a director of a company who makes a business judgment will be taken to meet the requirements of the duty of care and diligence in certain circumstances. Business judgment is considered in section 180(3) of the Corporations Act as any decision to take or not take action in respect of a matter relevant to the business operations of the company.
The director must satisfy certain criteria in respect of the business judgment rule as follows:
- the director must make the judgment in good faith for a proper purpose;
- the director must not have a material personal interest in the subject matter of the judgment;
- the director must inform themselves about the subject matter of the judgment to the extent that they reasonably believe to be appropriate;
- the director must rationally believe that the judgment is in the best interests of the company.
There are various circumstances to consider where a director informs themselves of a particular matter, including the time that they have available to obtain information, the director’s confidence in considering the matter, the company’s business and the nature of demands requiring attention and whether the relevant information is reasonably available.
Delegation and reliance
Directors can, of course, delegate various tasks to others, such as the preparation of accounts and the day-to-day management of the company. However, directors are expected to take an active interest in the information available to them or what they might reasonably demand from executives or employees of the company. Directors cannot simply rely on the advice of executives or employees without attending to and examining important matters that fall within their responsibilities.
Directors must act with care and diligence in carrying out their duties. If you are a director, about to be appointed as a director or know a director who has fallen shy of satisfying this duty, get in touch with LegalVision on 1300 544 755. Our lawyers will provide you with a fixed-fee quote for any non-litigious matters.