Defences for Breach of Directors’ Duties

A director of a company has many responsibilities, one of which is a duty towards the company and its members. Under the Corporations Act 2001 (Cth) (the Act) directors and/or officers of a company must exercise their powers and fulfill their duties with a degree of care and diligence that is reasonably expected from a person in such a position.

There are three main sources where a liability may be imposed on a director.

These are:

1. The Corporations Act 2001;

2. Statutory provisions; or

3. Common law and equitable principles.

There are also fiduciary duties imposed on directors to act for a proper purpose, to act in good faith and to act in the best interests of the company. This duty requires the director to avoid conflicts of interest and to not misuse their position in the company to gain an advantage for themselves. So, what defences are available for directors? There are three main defences available to a director for a breach of duty and or fiduciary duty. These are: the business judgement rule; reliance on others; and use of a delegated power.

The business judgement rule requires a director to have:

• made a decision in good faith and for a proper purpose;

• no personal interest in the subject matter of the decision;

• informed themselves with regard to the subject matter of the decision to the extent they reasonably believed to be appropriate; and

• rationally believed the decision was in the best interests of the company.

AVAILABLE DEFENCES FOR DIRECTORS’ BREACH OF DUTY

The reliance on others defence usually involves receiving of advice from an accountant or lawyer in making a decision for the company. To be absolved of wrongdoing, the director must have believed on reasonable grounds, and in good faith, and after making proper enquiries in the circumstances, that the advice given to them was prepared by a reliable and competent person.

In some circumstances, a director can rely on the fact that another person was responsible for the decision and judgement – use of a delegated power. Similarly, the director will need to show that they believed on reasonable grounds and in good faith that the person was reliable and competent for power to be delegated to them.

The above was a brief overview of the defences available to directors for breach of duty. If you or someone you know has any concerns about any breaches of duties owed to a company, please call us to discuss the matter further.

By Oguzhan Sheriff, Partner at RSG Lawyers.

Footnotes available upon request.

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