Australia: court considers the duties of non-executive directors - a landmark in Australian corporate governance says ASIC

A decision of the New South Wales Supreme Court given last week - Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287 - has been described by the Australian Securities and Investments Commission as a "landmark ... in Australia on corporate governance". The case raised important questions about the duty of care imposed on executive and non-executive directors and the extent to which they were able in the discharge of their duties to rely on information provided by others. Of particular interest is the application of the duty of care to the non-executive directors because, as the trial judge observed, "[the] law has not yet established the extent to which the position of a non-executive director shapes the content of the duty of care" (para. 250).

At issue was the liability of the directors under Section 180(1) of the Corporations Law (now Section 180(1) of the Corporations Act 2001) in respect of their approval in February 2001 of a draft ASX announcement which contained assertions of sufficient funding. ASIC alleged that the directors could not have been satisfied, on the basis of the information before them, that there was a proper basis for the assertions of sufficient funding. Section 180(1) provides:

A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation’s circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.”

ASIC has provided a summary of the judge's findings against the directors: see here. With regard to the extent to which the non-executive directors could rely on others, the trial judge stated (paras. 259-261):

All of the non-executive directors ... knew or should have known that if [the company] made the statements as to the sufficiency of funding ... in the Draft ASX Announcement there was the danger that [the company] would face legal action for publishing false or misleading or misleading or deceptive statements, its reputation would suffer and there would be a market reaction to its listed securities. This was not a matter in which a director was entitled to rely upon those of his co-directors more concerned with communications strategy to consider the Draft ASX Announcement. This was a key statement in relation to a highly significant restructure ... Management having brought the matter to the board, none of them was entitled to abdicate responsibility by delegating his or her duty to a fellow director. Nor was this a case of reliance upon management, a co-director or expert adviser. Management had sought the board’s approval and the task of approving the Draft ASX Announcement involved no more than an understanding of the English language used in the document"

The penalties to be imposed on the directors - and the application of Sections 1317S and 1318 of the Corporations Act 2001, which provide the court with the power to grant relief in respect of liability - will be decided at a later hearing.