Directors are responsible for the management and control of a Company. They are the controlling minds of the Company.
Under common law principles the fiduciary duties of a director can be summarised as follows:
- To act in good faith and for a proper purpose;
- To exercise care, skill and diligence;
- To exercise the powers for the purpose for which they were conferred; and
- Avoid conflicts of interest.
In addition to the fiduciary duties owed by directors at common law as outlined above, the Corporations Act imposes extra statutory duties which to a large extent restate and reinforce the common law duties imposed on directors. What is not widely known is the existence in our law of the so-called “business judgment rule” which is contained in section 180(2) of the Corporations Act. The business judgment rule states, as a general rule, that if a director acts with care and diligence which is reasonably expected of a person with their knowledge and experience and if they act in good faith and for the benefit of the Company, then they will be exercising their duties and obligations to the Company correctly.
More to the point, a director of a Company will have met the requirements under the business judgment rule if they:
- Make the particular business judgment in good faith and for a proper purpose;
- Do not have a material personal interest in the subject matter of that judgment;
- Inform themselves about the subject matter of the judgment to extent they reasonably believe to be appropriate; and
- Rationally believe that the judgment is in the best interest of the Company.
While the purpose of the business judgment rule is to provide directors with an indemnity from personal liability for breaches of their statutory and general law duties of care and diligence, this defence will only apply if the decision making process is not flawed. However, if a director departs from the principles of the business judgement rule, he or she will not have the protection afforded by the legislation and could be exposed to personal liability via litigation where it is alleged there has been a failure in the decision making process and the Company has suffered loss or damage as a result.
The potential ramifications that result from a director not meeting their obligations to their Company can be dire. If the Company enters into a business transaction which sours or fails and the director did not conduct a proper and careful due diligence, that director may be held liable for damages sustained by the Company due to the imprudence of that director.
Caution should therefore always be exercised by a director of a Company before exercising their business judgment or embarking on a transaction which may affect the Company.