5.

Duty to exercise Care, Skill and Diligence

>Common Law Duty

-Tort of Negligence and Reasonable Duty of Care (Donoghue v Stevenson)

>Statutory Duty
-s180(1) – Director or officer must use degree of care and diligence an RP would use if:

a) They were director/officer of corporation in corporation’s circumstances AND

b) They occupied the same office/position and had the same responsibilities
(ASIC v Vines)

Elements of the Duty

-Objective Element: What would an RP do? AND

-Subjective Element: Consider company’s circumstances, person’s office and

responsibilities

Company’s Circumstances (Commonwealth Bank v Friedrich)

-Type of Company
-Size and Nature of Enterprise (What is the company?)
-Composition of Board (Who is on the board?)
-Distribution of responsibilities between board and others

Positions and Responsibilities

Chair – (ASIC v Rich)

CEO – (Daniels v Anderson)
XD – (Daniels, ASIC v Adler)
Non XD – (ibid.)
Directors appointed because of skill/exp: (Gold Ribbon v Shears, Daniels)
-must give Co. benefit of the at skills/experience
-must pay attn to other aspect of company’s business even if outside area of exp.

Minimum Standard
Daniels

-Must be familiar with company’s business

-Must make reasonable enquiries and keep informed about company’s business ops
-Must be familiar with financial position
ASIC v Adler

-Must gain basic understanding of company’s business

-Must monitor financial and general affairs of Co.
-Must attend board meetings unless exceptional circumstances prevent attendance
-s300(1): Public Co. director reports must disclose attendance

Defences

1*Business Judgement Rule – s180(2)*

Defence to breach of s180(1), Duty of care, skill and diligence if:

-Made judgement in Good Faith for Proper Purpose

-No MPI
-Informed about subject matter to reasonably appropriate extent
-Rationally believe judgement is in the Co’s best interests (RP)

2*Reliance on information or advice provided by others –s189*

Director can rely on information or expert advice from:

-reliable & competent employee
-expert on that subject matter
-another Director/Officer on subject matter within their authority
-Committee of Directors on subject matter within their authority

Reliance is reasonable if Bona Fide unless proved otherwise by looking at the facts of the
case (considering the complexity and knowledge of the directors)

Daniels – Board has positive obligation to:

-keep informed about corporate activities
-satisfy themselves person relied on is competent and reliable

Responsibility for actions of delegate

-Lawful delegations of power:

s198C: MD
s198D: Committee, Director, Employee:
s190: Directors remain liable UNLESS:
1-believed on reasonable grounds that delegate would act in accordance with directors’
duties and constitution AND
2-believed on reasonable grounds and in good faith that delegate was reliable and
competent –MUST MAKE ENQUIRY
6. Duty to Prevent Insolvent Trading

s588G(1): Duty Breached if:

-Person is a director of company

AND

-Company incurs a debt: Time when company is exposed to unavoidable liability to pay
(ASIC v Plymin)
-Do not need actual suspicion that co is actually insolvent
-Reasonable, competent, diligent director

AND

-Company is insolvent or debt makes company insolvent

>s95A(1): solvent if able to pay debts as and when they are due
>s95A(2): person that is not solvent is insolvent – LOL!

AND

-“Reasonable grounds” to suspect insolvency (ASIC v Plymin)

s588G(2): Consider:
a) Person aware that there are grounds for suspecting insolvency (subjective) OR
b) RP in that position in Co. in Co.’s circumstances would be aware (Obj.)

Defences to Charge of Insolvent Trading

S588H:

(2) [Reasonable Presumption of Solvency]Reasonable grounds to expect (and did

expect) company solvent and remain solvent

-Examine Co’s circumstances at time debt incurred from the viewpoint of the ordinary
competent director (Southern Cross Interiors v DCT)

-Expectation that Co. is solvent must be more than “mere hope” (Powell v Fryer)

-Cannot rely on ignorance or neglect of duty: (Morley v Statewide Tobacco)

(3) [No General Limits] Reliance on 3rd P Information

-The Director:

a) Had “Reasonable Grounds” to believe and “did believe”

-that a competent and reliable person responsible for providing adequate information
about the company’s solvency AND
-that other person was fulfilling that responsibility AND

b) Expected on information provided that company was solvent and would remain
solvent even if it incurred the debt

-Will not be effective defence if director should have been made suspicious by
circumstances (Metropolitan Fire Systems v Miller)

-Reliance must conform to s189 (see above)

(4) [Defence of Illness] –Illness or some other good reason

(5) (6) [Defence of (All) Reasonable Steps]

-Has:

a) any action been taken to appoint admin

b) when that action was taken
c) the results of that action

-Must do more than just express reservations (Byron v Southern Star Group)
-If cannot stop debt being incurred should resign or have company wound up (Morley v
Statewide Tobacco)
Consequences of Breach of Director’s Duties/Remedies Available

Breach of Common Law Duty

Remedies available to Company

-Damages (Daniels v Anderson)

-Account of profit: (Davies v Davies)

-Rescission: (Transvaal Lands v New Belgium)

-Declaration of Trust (Cook v Deeks)

-Derivative Action by Shareholders

Breach of Statutory Duty

Remedies available to Company

-Statutory compensation order s1317H

-Injunction restraining P from doing conduct in breach of Act or requiring P to do

act/thing s1324

-Derivative Action by shareholders

Remedies available to ASIC (Can conduct on behalf of Co.)

-Management banning order from Court s206C

-Pecuniary/Monetary penalty order (to Cwth) up to $200,000 s1317G
-Statutory Compensation order s1317H and s588J
Re: ASIC v Vizard

 Action available to DPP

-s184(1) Criminal Offence if:

-fail to exercise powers and discharge duties in good faith in best interests of company
for proper purpose AND
-recklessly or intentionally dishonest
-s184(2) Criminal Offence to use position dishonestly

-s184(3) Criminal Offence to use position dishonestly with intention to gain

advantage/cause detriment

-Penalty: Up to $220,000 /5yrs Imprisonment

-s588G(3) If director suspects Co. was insolvent or would be insolvent AND failure to
prevent debt from being incurred was dishonest

-Penalty: Same deal ibid.

Action Available to Other P’s

-Breach of Duty to Avoid Insolvent Trading:

-Compensation Order vs Director by:

Liquidator (588M2), Creditor (588M3), ASIC (588J)

Exoneration and Ratification

Availability:
-Court

-Company