Can Directors' rely on the BJR in Australia v. U.S.A?

Reliance on Professional Advisors v. Duty of Diligence

It is important to compare and contrast the major difference between the standard of the legal duty imposed on Directors in Australia versus the U.S.A.

Reliance on the work of professional advisors is available as a defense in the U.S.A so long as Directors can show they had a sufficient basis to reasonably believe their Professional Advisors are both reliable + competent.

In Australia, Directors are held to a much higher standard!

Under the Corporations Act, Directors have a mandatory Duty of Diligence to take additional steps and to make further inquiries to satisfy themselves with regard to the information and advice provided (even if it is provided by professional advisors they reasonably believe are reliable + competent).

Elliot J. at para [610-612]:

The Business Judgment Rule (BJR)

The Business Judgment Rule (BJR) defence/defense is available to Directors in both the U.S.A + Australia.

It appears that the above distinction between the reliance on professional advisors v. Duty of Diligence has been incorporated into each countries application of the BJR.

In the Australian version of the BJR, the third element states:

3️⃣ Informs her or himself about the subject matter of the judgment to the extent she or he reasonably believes to be appropriate …

In the U.S.A version of the BJR (refer below), Director's need to make an informed decision, but in doing so they can rely upon professional advisors they reasonably believe to be reliable + competent.

Once advice has been obtained from professional advisors, in the U.S.A. there is no duty to make any further inquiry beyond this point.

Elliot J. at para [620-626]

The Business Judgment Rule (BJR) in the U.S.A.

A Court will not second guess a business decision if it was:

1️⃣ Informed;

2️⃣ Made in Good Faith;

3️⃣ Without Conflicts of Interest; and

4️⃣ Had a Rational Basis.

So, whether Directors' will be held liable for breach of their duty of care depend on the facts …

✅ Was the Board reasonably informed?

✅ Did it do appropriate homework before making the decision (analyze information, deliberate)?

✅ Did it act in good faith, free of self-interest, and with the belief that the decision was in the best interest of the Corporation?

If so, the Directors' are not liable, despite the poor substantive outcome of the decision, because the BJR recognizes that a Director is not a guarantor of success.

Reliance on others: It is not unreasonable for a director to rely on information from officers, legal counsel, committees, etc. the director reasonably believes to be reliable and competent.

Directors' Duties in Australia

The article Directors duties: care & diligence, business judgment rule, good faith, use of position & information by the Commercial Law Barrister: Jonathan Wilkinson provides a useful summary of the Directors' Duties required under the Corporations Act in Australia as set out by Elliot J. in the recent Victorian Supreme Court decision United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 347.

Source: For a more detailed discussion, please read our blog article.

Credits:

This FAQ was written by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

What are the criminal + civil penalties if you fail to have a DIrector's Identification Number?

Criminal Offence + Civil Penalties Apply to the failure to obtain & misuse of a Director ID.

Source: ASIC website

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

When do you need to apply for your Director ID?

What is a Director ID?

A Director ID is a unique identifier that a director will apply for once and keep forever.

The intended purpose of Director ID's is to help prevent the use of false or fraudulent director identities.

All Directors + Alternate Directors (acting in that capacity regardless of the title used for example: Power of Attorney) of a company, registered Australian body, registered foreign company or Aboriginal and Torres Strait Islander corporation will need a Director ID.

ASIC is responsible for enforcing Director ID offences set out in the Corporations Act (Cth) 2001.

It is a criminal offence if Directors or Alternate Directors do not apply on time and penalties may apply.

When do you need to apply to avoid committing a criminal offence?

When you MUST APPLY for your Director ID depends on when you first become a Director or Alternate Director/Power of Attorney to act in the capacity of a Director.

For Directors + Alternate Directors/Power of Attorney of companies regulated by ASIC and registered under the Corporations Act 2001:

✅ Intending new Directors or Alternate Directors/Powers of Attorney must apply before being appointed.

✅ Directors or Alternate Directors/Powers of Attorney appointed on or before 31 October 2021 have until 30 November 2022 to apply.

✅ New Directors or Alternate Directors/Powers of Attorney appointed for the first time between 1 November 2021 and 4 April 2022 had 28 days from their appointment to apply.

Directors (and possibly Alternate Directors/Powers of Attorney) of companies regulated by the Office of the Registrar of Indigenous Corporations and registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 have a different time frame in which to apply. If this applies to you, please visit the ABRS website for more information on when you need to apply.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

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