Reliance on Others and Delegation

A director may be excused from the consequences of a breach of duty
under s 190(2) of the Corporations Act (2001) if they have acted in good faith
on the advice of others after making an independent assessment.

The defence of reliance on others and delegation may include other directors, employees or professional advisers, but the onus is on the director to prove that the reliance was prudent.

Although delegation is not usually considered a defence, the company director may be able to rely on this if they believed, based on reasonable grounds, that the delegate would exercise the duties in accordance with the law. The director must also have reasonable grounds to believe the person they have delegated their powers to is reliable and competent.

In the James Hardie case, the High Court found that a critically important announcement relating to the company’s future asbestos claims were fully funded was not able to be delegated to management. Also of interest, was the non-resident director who would often wander off to make a cup of coffee when disclosure issues were discussed. It was determined that the resident directors could not rely on management, and the non-resident director could not rely on the other directors.

Some decisions and obligations are so significant that they cannot be abrogated by delegation, which the James Hardie case made very clear. As a company director, delegation is a key part of operating effectively and this is especially so for non-executive directors. Non-executive directors may only attend one meeting every month and still be responsible for the organisation as a whole.

That said, there needs to be sufficient management controls within the organisational governance structure to ensure that the big decisions that affect a company’s ability to exist or function are left to company directors who are ultimately held responsible for the company operating as a going concern.

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