Directors Duty to Act with Due Care, Diligence and Skill

Under section 180 of the Corporations Act (2001) company directors have an
obligation to “discharge their duties with a degree of care and diligence that a
reasonable person would exercise” if they were in such a position.

Due to the standard of reasonableness being applied, a director cannot rely on their own failings or incompetence as a defence against due diligence, care and skill. Essentially, a company director will be held to the expected ability of all directors, and not their own abilities.

A company director will also be held to a higher standard of due care, diligence and skill if their particular role within an organisation warrants it. For example, in ASIC v MacDonald (No 11) the court found that a company secretary who was also in-house counsel was had more responsibilities and was therefore held to a higher standard.

The law requires company directors to have an effective system to monitor a company’s financial management. In ASIC v Adler, the directors allowed the company to enter into non-commercial transaction which were not to the benefit of the company and were thus found to be in breach of section 180.

In ASIC v Macdonald (No 11) ten directors of James Hardie were all found to be liable for breaching section 180 for not correcting a misleading draft media statement relating to the company’s funding of future asbestos claims.

Company directors can become personally liable for debts if they do not act with due care, diligence and care. In SA State Bank v Clark the CEO was held personally liable for $81 million in debts due to his breach of section 180.

There are some defences against the requirement to act with due care, diligence and skill. These include an accepted reliance on others and delegation, or the business judgement rule.

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