Being the Director of an incorporated business is no small feat. While Directors undoubtedly enjoy a position of privilege and power vis-a-vee their workers, they are also subject to very specific obligations, know as Directors duties, under both the common law and statute. One such duty that Directors must adhere to is known as the duty of care and diligence. A breach of the rule not only calls into question the internal management of a company, but also pierces the corporate veil and allows creditors and alike to hold the Director personally liable for any wrongdoing. As such, it is paramount that all Directors and business owners are well acquainted with the scope and breadth of the duty of care and diligence, lest they fall victim to it.
Scope of the Duty
The duty of care and diligence holds that a Director 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 were a Director of the corporation.
What a reasonable Director would do in the circumstances is a question of fact that will ultimately depend upon the contextual surroundings of the situation. Nevertheless, it can be stated that a reasonable person would be one that possesses the same level of knowledge and ability as the Director in question.
Accordingly, there is no single standard of care and diligence, and a higher standard of care may be expected of those who possess special skills, abilities, training, know-how and/or experience.
Discharging the Duty
To discharge the duty of care and diligence, a Director must:
- possess a general understanding of the business;
- possess a general understanding of the effects that changes in the economy may have on the business;
- not shut their eyes to corporate misconduct;
- not engage in an illegal course of action;
- monitor the affairs and policies of the business; and
- take reasonable steps to guide and monitor the management of the company, just to name a few.
What about delegated activities? A Director is certainly entitled to delegate and entrust other officers of the company with the performance of specific tasks and activities. Relying on the advice, judgment and knowledge of others is an integral part of any business. However, Directors must be cautious when delegating work, for the duty of care and diligence may be breached when tasks are allocated to an officer in circumstances where it is unreasonable to rely on the information, judgment and or advice of the delegate. Furthermore, delegation may not be allowed where the company constitution prohibits it.
Piercing the corporate veil
I’m sure you have heard or read that Directors enjoy limited liability. That is that the wrongdoings of a company or its agents cannot be attributed personally to the Director. While this is true in most cases, the law recognises specific instances where the corporate veil may be pierced, and the Director held personally liable. A breach of the duty of care and diligence is one such situation.
Would you like to know more about the Director’s duty of care and diligence, its scope or the availability of defences open to the same? Our friendly team of LegalVision lawyers would be happy to assist you with any question or queries that you may have. Call us today on 1300 544 755 to see how we may help.