Question

Hoping to make his flight on time, Tom (the CEO of ABC Pty Ltd) signed a stack of paperwork on his desk without reading what he was signing. Unfortunately, one of the documents he signed authorised a high-risk investment which caused shareholders to lose millions of dollars.

Required:

(a) With reference to CA s 180, how does the court decide whether a director acted with care, skill and diligence?

(b) Analyse whether Tom breached his duty of care to the company.

(c) Analyse whether Tom qualifies for a defence under the business judgment rule. You must refer to relevant law

AUSTRALIAN LAW

Answer 1

(a)

(1) As per Section 180(1) of Corporations Act 2001, a director or other officer of a corporation must exercise their powers and discharge that a reasonable person would exercise, if they:-

(a) were a director or other officer of a corporation in the corporation's circumstances and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

The conduct required to satisfy this duty depends on the company's circumstances and the particulars director's position and responsibilities. Executives directors,and other directors with special skills or experience, are held to a higher standard. However, director's conduct will not necessarily to be excused due to lack of skills or experience. All directors are required to maintain a minimum standard level. For Example:- all directors are required to take reasonable steps to be in a position to guide and monitor the management of the company.

In above case, the court will decide whether the director acts with a due care, skill and diligence with reference to duty of care and diligence.

To benefit from this rule, a director must make a conscious decision, even if it is a decision not to take action. A director who simply fails to turn their mind to a matter has not made a business judgement and is not protected by the rule. A director is expected to act with due care and his skill and not expected the mere performance of director's oversight responsibilities.

(b)

In above case, Tom has breached his duty of care in performance of his acts to the company as he signed the stack of important papers without reading them, which can cause a high risk or loss to stakeholders. Even though he does not intentionally act against the interest of company but he is expected to use his skills with due care while performing his acts.

(c)

In Section 180(1)- According to Business Judgement Rule:- a director or officer of a corporationwho makes a business judgement is taken to meet the requirements of Section 180(1) and their equivalentduties at common law and in equity, in respect to the judgement if they:-

(a) make a judgement in good faith for a proper use

(b) do not have a material personal interest in the subject matter of the judgement

(c) inform themselves about the subject matter of the judgement to the extent they reasonably believe to appropriate and

(d) rationally believe that the judgement is in the best interests of the corporation

This statutory business judgement rule provides a defence in relation to the duty of care and diligence only.

Here, Tom qualifies above conditions as he signed the documents by reasonably considering that these are appropriate and in the best interests of the company.