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Care and diligence of a director
Updated: 7 December 2019
Care and diligence is a requirement for directors per section 180 of the Corporations Act 2001 (Cth).
And this section also applies to agents acting on behalf of directors.
Why is the duty of care and diligence important for directors?
Because there are legal consequences if directors don't exercise care and diligence.
First, let's start with the performance standard of directors.
Care and diligence performance standard
What’s the care and diligence performance standard for directors?
Well, the standard is how a reasonable person would exercise their powers and carry out their duties if they held the same role.
The section does clarify that this standard has to do with business judgments.
So, directors need to exercise care and diligence in their business judgments.
This leads us to the business judgment rule, let's take a look at this next.
Business judgment rule
The business judgment rule is the belief held by a reasonable person acting in the same position of the director.
Now, the business judgment rule in section 180 has to do with any decision to take or not take action in the business of the company.
For example, should I or should I not make this purchase on behalf of the company knowing that there may not be enough in the business bank account to pay the invoice at the end of the month?
And the good news is section 180 gives us some guidance about the meaning of good business judgement.
So, to break down the meaning further for you, based on section 180 of the Corporations Act, good business judgment means the director must:
- make the judgment in good faith for a proper purpose; and
- not have a material personal interest; and
- inform themselves about the subject matter of the judgment; and
- rationally believe the judgment is in the best interests of the company.
Below is a real life example of how a breach of section 180 can occur.
ASIC v Cassimatis (2016)
A director's breach of a duty of care and diligence was found in the case of Australian Securities and Investments Commission v Cassimatis (No 8) .
And below are the reasons why a breach was found:
- directors Mr and Mrs Cassimatis allowed inappropriate advice being given to investors that were retired or close to retirement, had few assets, little income and little or no prospects of building their financial position if they lost money.
- a reasonable director with the responsibilities of Mr and Mrs Cassimatis would have know that their business model would apply to clients in this class and its application would lead to inappropriate advice; and
- it would have been simple to take measures to avoid applying the business model to this class of clients.
The reasonable person test applies for a director's duty of care and diligence and their business judgments. Broadly, business judgement has to do with the action or inaction of directors in running the business of the company.
Do you have questions or comments about the care and diligence of a director? Be sure to leave them below.