LAWS2014 Corps - Duty of Care, Skill and Diligence Flashcards
Directors have a duty of care, skill and diligence.
What is the content of the DOC?
The duty varies according to the particular company and the special skills that the director held himself out in support of his appointment.
As a starting point, [Daniels v Anderson] states that directors must place themselves in a position to guide and monitor the company, have a continuing obligation (as opposed to intermittent duties) to regularly inform themselves of the company’s activities, review financial statements, and ask proactively questions for matters that call for inquiry.
Most basic duty of all - Directors expected to attend all meetings unless exceptional circumstances preventing (e.g. illness, out of country) [Vrisakis v ASIC]
Think of it as rungs of a ladder :)
Test for whether director has breached the DOC?
Whether a reasonable director / officer in like company in like circumstances could have made the same decision [Daniels v Anderson]
Significance of exec / non-excutive director? (e.g. chairman)
Historic distinction no longer applies
Rather, courts will focus on the particular company and the special skills that the director held himself out in support of his appointment
e.g. [ASIC v Rich] Very experienced chairman - functionally more important than any other director in the company
Appointed MD?
[PBS v Wheeler]
Appointed MDs’ have special skills, duty requires them to guide the company in the circumstance of new / unusual transactions where no other directors have expertise
CFOs?
[ASIC v Vines]
CFO’s (though not even directors) have a duty to ensure the quality of financial information – it is a proactive duty, not reactive
Directors with Specialiast Skills?
[ASIC v Healey]
Directors with specialist skills will be held to a higher standard of care for decisions within the scope of their expertise
However, directors appointed due to special skills must still pay attention to other aspects of the business. All directors have a basic duty to read and understand financial statements, and ask questions for matters that call for inquiry (i.e. have a questioning mind)
How does a conflict of interest affect the DOC?
[ASIC v Adler]
If there is a conflict of duty present, the duty of care requires a “special vigilance”
What if the company is in breach?
[ASIC v Cassimatis]
If a court finds a company in breach, then directors are also prima facie in breach of their duty of care simply by the fact of allowing the company to breach
What is the remedy to a breach of the DOC?
to compensate the loss
(1) EQ compensation for breach of EQ duty
(2) damages for breach of CL fiduciary duty
Defences to a breach of DOC?
(1) Effective delegation where risk has shifted
(2) Reliance on information
(3) Business judgement rule
How does delegation work?
How can risk be shifted?
Under [s198D], board can delegate a broad range of powers. However, the director is still responsible for breaches by the delegate [s190(1)] unless director can demonstrate a shifting of risk [s190(2)].
Director must prove that they believed released on reasonable grounds, in good faith, after making proper inquiries that the delegate is reliable and competent.
What are some non-delegable functions?
(1) proactive assumption of duty [ASIC v Vines]
(2) duties under [s295(4)] to read and understand financial statements, and ask questions for matters that call for inquiry (i.e. have a questioning mind) [ASIC v Healey]
(3) new / unusual transaction [PBS v Wheeler]
Business Judgement Rule?
[s180(2)] (a) made the judgement in good faith for a proper prupose, (b) did not have a material personal interest, (c) informed themselves about the subject matter for judgement, (d) rationally believed that the judgement is in the best interests of the corporation (reasonable person test)
- for operational decisions such as planning, budgeting, forcasting (not insolvent trading, misstatements in documents)
- cannot rely on if there has been a breach of [s181, 182, 183]
How does reliance on information work?
[s189] director’s reliance on information is reasonable unless the contrary is proved – i.e. there are facts which suggest reliance was not made in good faith, and making an independent assessment.
