Question

The Corporations Act 2001 (Cth) provides defences for director’s conduct that may otherwise breach sections of the Act. Identify these defences for directors and explain how these defences can be applied in relation to that particular breach.                                                   

Answer 1

There are several legal protections or defences available to directors, as set out below: -

Business judgment rule

Directors will meet the requirement to exercise due care and diligence both under the Corporations Act and the common law if, when making a ‘business judgment’ (that is, any decision to take or not take action in respect of matters relevant to the business operations of the company), they:

act in good faith and for a proper purpose;

do not have a material personal interest in the matter;

inform themselves to the extent they reasonably believe to be appropriate; and

rationally believe that the judgment is in the best interests of the company (which will be deemed to be the case unless no reasonable person in the position of the director would hold that belief).

The business judgment rule provides directors with a safe harbour from personal liability in relation to honest, informed and rational business judgments.

Directors will not be able to take advantage of the business judgment rule where they are discharging their general oversight and monitoring duties, as these duties do not involve any decision to take or not take an action. Similarly, failure to consider a matter does not constitute a business judgment.

Reliance on information and advice

In practice, directors will not always be in a position to independently verify and assess every piece of information upon which they must base their decisions.

Accordingly, the law recognises that directors are entitled to rely on information or professional or expert advice from an employee, professional adviser or expert, another director or officer, or a board committee, provided the reliance was made in good faith, and after the director has made an independent assessment of the information or advice having regard to the director’s knowledge of the company and the complexity of the structure and operations of the company. In certain cases, directors’ duties will positively require directors to obtain this type of expert advice.

The key qualifications on the capacity of directors to rely on information and advice of others are where:

the director has knowledge of deficiencies or inaccuracies in the information which has been provided to him or her;

in all the circumstances there are sufficient ‘warning signals’ regarding the reliability of the information such that a reasonable person in the director’s position would take steps to verify or otherwise test the information; or

the information is proved to be unreliable.

Further, directors cannot substitute the advice of management for their own attention and examination of an important matter that falls specifically within the scope of each director’s individual responsibilities (including responsibilities that legislation places on directors personally, such as the approval of the financial reports).