All directors have various duties under the Corporations Act 2001 (Cth) (CorporationsAct) to act in the best interests of the company.
Usually, this means acting in the best interests of the shareholders, but these duties can also require directors to take into account the interests of other stakeholders like employees and creditors.
The duties include acting with care and diligence, exercising their powers in good faith and for a proper purpose and preventing the company from trading when insolvent.
The problem is that directors often have to make difficult decisions that involve judgement calls with limited information in circumstances in which the stakeholders have conflicting interests, so it's not always clear whether they have properly discharged all of their duties.
In some cases, directors can be personally liable for breaches of their director's duties.
This can include civil and/or criminal penalties under the Corporations Act, legal costs incurred in defending themselves in regulatory investigations and/or legal proceedings and even being personally liable for debts of the company.
Our Deed of Access and Indemnity is designed to help directors defend themselves from personal liability in the good faith "bona fide" discharge of their duties.
It expands on the statutory rights and powers of directors by giving them access to company books and records and an indemnity against legal costs and liabilities.
It also requires/permits the company to take out, and pay for, directors and officers (often abbreviated to "D&O")insurance on behalf of the director – this is a special type of business insurance policy that insures against such liabilities and costs.
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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).
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.
A Court will not second guess a business decision if it was:
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.
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  VSC 347.
Source: For a more detailed discussion, please read our blog article.
This FAQ was written by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.
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.