Directors’ Duties – the duty to act with care and diligence

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Director Duties – Part 3

As part of Aintree Group Legal’s ongoing look at Directors’ Duties, this week we examine the duty to act with care and diligence.

ASIC v Australian Mines Limited

Breaches of this duty can arise in complicated and unexpected ways.

Consider the case of Australian Mines Limited. Its Managing Director, Benjamin Bell, attended some overseas conferences, during which he made false public comments regarding the company’s next key project as well as its prospects of securing finance for that project.

Even though these comments were made outside Australia, they still formed the basis for liability under Australian law for both the company and Mr Bell alike.

Firstly, Australian Mines Limited was held to be in breach of its continuous disclosure obligations for failing to publicly correct Mr Bell’s inaccurate statements.

Secondly, Mr Bell was separately and personally held to have breached his duties as a director by making the false comments. He then further breached his duty by failing to have the company publicly correct those statements in a timely manner.

Care and Diligence

How does making an inaccurate statement amount to a breach of a director’s duties?

A director must act with the same degree of care and diligence that a reasonable person would exercise if they were in that director’s position. Broadly, this requires balancing the foreseeable harm against the benefits that are likely to flow from the director’s actions.

Business Judgment Rule

This duty is targeted towards negligence rather than honest mistakes or errors of judgment. Unique among the directors’ duties regime, the duty includes a statutory safe harbour.

A director will automatically be deemed to have satisfied this duty if they can show that they satisfied the ‘Business Judgment Rule’, which requires that the director can show that they were well-informed and acted in good faith, free of personal interest and in the best interests of the company.

A Heavy Personal Price

By making the false statements, Mr Bell acted without care and skill. The severity of his false comments was made worse in light of ongoing discussions between ASIC and the company regarding previous inaccurate disclosures made by the company about the project.

All told, he incurred significant personal and financial penalties. Not only was Mr Bell fined and required to pay ASIC’s legal costs, but he was barred from acting as a company director for two years. His employment and equity in the company were also terminated.

And therein lies the lesson.

Considering Shareholder and Employment Agreements will generally treat a breach of legal duties as grounds for termination, the consequences for Mr Bell in lost wages and dividends will end up being far more severe than fines and penalties.

Contact Aintree Group Legal today to discuss your commercial law needs.