Law Path

Australian Transport News - - CONTENTS -

Di­rec­tors’ ig­no­rance of what hap­pens in their com­pa­nies in a breach of duty is no de­fence when things go wrong

D irec­tors are gen­er­ally fa­mil­iar with their duty to act with rea­son­able care and dili­gence. It re­sides in sec­tion 180 of the

Cor­po­ra­tions Act 2001. In con­sid­er­ing this duty, re­gard must be had to the sur­round­ing cir­cum­stances.

How­ever, it is not un­usual for sec­tion 180 to act as a “catch-all” against di­rec­tors. That is, if a di­rec­tor has breached an­other duty, then they have al­most cer­tainly also breached sec­tion 180 by do­ing so, thereby also ex­pos­ing the com­pany to a con­tra­ven­tion of the law.

One species of care and dili­gence breach can be cat­e­gorised as act­ing with ‘ in­for­ma­tion de­fi­ciency’. That is, mak­ing de­ci­sions or act­ing with­out the req­ui­site in­for­ma­tion a rea­son­able per­son in their cir­cum­stances ought to re­quire. So, does a di­rec­tor have a pos­i­tive duty to make en­quiries about their de­ci­sions?

DEL­E­GA­TION

First, com­pany di­rec­tors will be re­lieved to hear that there are spe­cial pro­tec­tions with this duty where re­spon­si­bil­i­ties are del­e­gated. At gen­eral law, be­cause a di­rec­tor acts in a fidu­ciary man­ner to­wards the com­pany, their du­ties can­not be del­e­gated.

How­ever, the law now recog­nises that busi­ness can place huge bur­dens on a di­rec­tor, and com­mer­cial re­al­ity de­mands di­rec­tors rely on oth­ers.

There­fore, the gen­eral law rule is trumped by the op­er­a­tion of sec­tions 198D and 190 of the Act. Bar­ring any­thing con­trary in the con­sti­tu­tion of a pri­vate com­pany, a di­rec­tor can del­e­gate their pow­ers, in­clud­ing to an­other di­rec­tor or em­ployee of the com­pany. The del­e­gat­ing di­rec­tor is then re­spon­si­ble for all of the ac­tions of the del­e­gate, ex­cept where the di­rec­tor, act­ing in good faith and after mak­ing the proper en­quiries, rea­son­ably be­lieves the del­e­gate is com­pe­tent and re­li­able. If the del­e­gat­ing di­rec­tor is able to sat­isfy the court of this, then it acts as a shield.

MAK­ING EN­QUIRIES

Di­rec­tors must take rea­son­able steps to guide and mon­i­tor com­pany man­age­ment. This gen­er­ally means they must be­come fa­mil­iar with the com­pany, keep in­formed of its ac­tiv­i­ties, at­tend board meet­ings, and un­der­stand its fi­nan­cial sta­tus.

How­ever, as the NSW Court of Ap­peal held in Daniels v An­der­son ( 1995), a fur­ther duty to ‘make en­quiries’ can be en­livened: “if … di­rec­tors know, or by ex­er­cise of or­di­nary care should have known, any facts which would awaken sus­pi­cion and put a pru­dent man on his guard, then a de­gree of care com­men­su­rate with the evil to be avoided is re­quired, and want of that care makes them re­spon­si­ble.”

There­fore, there is an ob­jec­tive test for the pos­i­tive duty to make en­quiries.

This test was re­cently con­sid­ered by Robson J in the colour­ful case of ASIC v Flugge & Geary (2016). This case con­sid­ered whether two for­mer di­rec­tors of the Aus­tralian Wheat Board ( AWB) had breached their du­ties re­gard­ing AWB’s con­tra­ven­tions of United Na­tions res­o­lu­tions by pay­ing sham fees to Sad­dam Hus­sein’s Iraq.

Flugge was found to have breached his duty as he was aware of a com­plaint levied by the UN against the AWB, which should have been suf­fi­cient to awaken his sus­pi­cions. He was ul­ti­mately pe­nalised $ 50,000 and was dis­qual­i­fied from manag­ing a cor­po­ra­tion for five years.

IM­PLI­CA­TIONS

Whilst the Flugge case has un­usual fac­tual ma­trix that many Aus­tralian com­pa­nies would rarely find them­selves in, the case stands out as a firm re­minder as to scope of a di­rec­tor’s duty to pos­i­tively make en­quiries.

De­spite Flugge not be­ing aware of any con­tra­ven­tions, he was still in breach of his duty to act with rea­son­able care and dili­gence.

The sentinel must be alert and cu­ri­ous, ready to jump into the trenches and sat­isfy them­selves that noth­ing im­proper is tak­ing place. Any­thing short of this may re­sult in a civil penalty against the di­rec­tor who is asleep at their post.

“There is an ob­jec­tive test for the pos­i­tive duty to make en­quiries.”

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