Recent Cases: Directors Legal Liability for the Wrongs of the Company

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The way that courts are looking at directors’ duties these days, you have to look at the whole situation of the company. Particularly as directors can become personally liable for decisions made in their capacity as a director of an Australian company. This applies to all the directors’ duties outlined in the Corporations Act 2001, but it applies with bells on to the general duty of care and diligence, section 180.

Previous defences to breaches of Director’s duties

Last century there were a lot of cases in front of the courts where directors had been fast asleep, on the take, or even committing crimes. For the sleepy director, his lawyers would often implore the court that it was practically a director’s duty to bend the law as far as possible in the name of shareholder profit.

Sometimes directors got away with stuff that would make the Mafia blush. Sometimes their punishment was just that they became commercially untouchable. And very rarely, somebody would do a year in the most admirable gaol available. Once again, all that is out the window now!

Director’s Duties under section 180 of the Corporations Act 2001

The Australian Securities and Investment Commission (ASIC) regulators are now much better watchdogs, and directors are being held to very high standards of knowledge, understanding, and integrity. The old gentlemen’s club has been turned over on every floor and in every broom cupboard. The rules, which used to be a bit vague, have been clarified in a series of significant cases on the Corporations Act, and the courts have been applying them firmly.

Section 180 of the Corporations Act lays down the duty of ‘care and diligence’ which a director owes to the company. Section 180(1) says that a company director must use their skill and carry out their duties with “the degree of care and diligence that a reasonable person would exercise” if they were in that director’s shoes.

In the second half, s.180(2), the defence is known as the ‘business judgement rule’ is laid out. Essentially, it says that if a director makes a business judgement which is for a good purpose, in good faith, not for personal profit, reasonably well-informed, and which they ‘rationally believe’ in, then they haven’t breached s.180(1) just because the decision ended up being disastrous. The decision can be either doing something or not doing it but beware of arguing that it was not a business judgement. The courts don’t accept that argument. The courts are also stricter on executive directors, who have a Board seat and a management position.

Defence arguments that don’t work anymore

Let’s have a look at some other defence arguments which won’t work anymore:

‘I didn’t know about the whole financial situation the company was in and couldn’t be expected to see as I had delegated that job to an employee.

  • In the FAI Finance case (ASIC v Adler), Rodney Adler made this argument, and the court came down very hard on him. It said that you could only argue delegation of something where you are sure to a reasonable degree that the delegated person is up to the job and doing the job correctly.
  • In the James Hardie cases, The court decided in found ASIC v McDonald and ASIC v Hellicar & Others, the whole Board to be in breach of s.180 over a vote to approve a press release to the ASX, which turned out to misrepresent the company’s financial position regarding asbestos claims seriously.
  • The court found that only one director had actually known that the statement was false but still found the others in breach because they had not adequately looked into the matter. It said that a rational belief was only based on actual knowledge of the circumstances, not just that you believed it or that you believed your fellow directors.
  • The AWA case (Daniels v Anderson), where they lost considerable money having employees play foreign-exchange hedging games, had a similar result. Even non-executive directors with limited knowledge of finance were found in breach because they failed to understand and supervise the high-risk activity properly.
  • In the Centro Property Group case, ASIC v Healey, the court said that a director had to check the correctness of financial statements themselves and that they can’t delegate that duty to anybody else.

‘But I didn’t make any money from my breach of trust’.

  • Steve Vizard said this when he explained his use of inside information from the Telstra board. The court made it clear that the intention to profit from a shady manoeuvre counts, not whether you made money on it. You’re a crook, either way. Just some scammers are better at it than others.

‘I didn’t do anything wrong to the company, and I was only breaking the law to make money for the company’.

  • In ASIC v Cassimatis, the Storm Financial case, Cassimatis argued something along those lines. The court came down very hard on him and compared his actions to deliberately polluting to save money.
  • Amongst other sins, Cassimatis was found to have breached the general duty of care and diligence outlined in s.180(1). Deliberately doing illegal things in the company’s name is a breach of this duty, including failing to consider the company’s interest in maintaining a good reputation.

As discussed in our earlier blog post, there are other directors’ duties and one of due care and diligence.

Although the Corporations Act has firmed up this area of law, assessing your duties as a director is still not straightforward. You have to consider the whole situation that the company is in, and if that situation is complicated, you should get legal advice.

Contact us for an initial obligation-free discussion when you find yourself in a dispute about company directors duties or even earlier.

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