Directors/Officers duties (Part 2)

Duty of care, skill and diligence

See Ch 17 of Australian Corporate Law
(Harris, Hargovan & Adams 6th ed, 2018)

TABL 2741 (Class 9 Directors 1

Duties Part 2)
 Class 9: Duties of Directors/Officers [Part 2]
• Discuss content and application of directors
duties of:
– care, skill and diligence [both common law and
Corporations Act]
– 7 case studies in Ch 17 [Daniels v Anderson (AWA
Ltd);One-Tel Ltd; James Hardie; Centro, HIH Ltd;
Mariner and Sino Ltd cases]
• Discuss defences [case studies above]
• Discuss consequences of breach [both
common law and Corporations Act]

TABL 2741 (Class 9 Directors 2

Duties Part 2)
 Main Cases on Duty of Care and
Diligence
• Enforcement of directors duties, defences and civil penalties
– AWA Ltd: Daniels v Anderson [1995] [leading case]
– HIH Insurance Ltd: ASIC v Adler [2002] [known as ‘Adler
case’ or the ‘HIH case’]
– One Tel Ltd: ASIC v Rich [2003]; [2009] [known as ‘One-
Tel’ case]
– Centro Ltd : ASIC v Healey [2011][known as ‘Centro case’]
– James Hardie Ltd : Gillfillan & Ors v ASIC [2012] NSWCA 370;
ASIC v Hellicar [2012] HCA 17; Shafron v ASIC [2012] HCA 18; ASIC v
McDonald [2009] [all known as the ‘James Hardie litigation’]
– Mariner Ltd: ASIC v Mariner Corporation Ltd [2015] FCA
589
– Sino Ltd: ASIC v Sino Australia Oil & Gas Ltd; Shao
[2016] FCA 934; [2016] FCA 1488

See Ch17 of Australian Corporate Law (6th ed, 2018)

TABL 2741 (Class 9 Directors 3
Duties Part 2)
Function of Directors Duty of Care

– Prevent directors shirking from their duties of

care and attention
– Make directors pay attention to the co’s affairs
(including its business and financial affairs);
need to monitor and provide oversight
– Make directors accountable for harm or
mismanagement caused to co
• At common law: damages/compensation
• Under CA: civil penalty provisions
TABL 2741 (Class 9 Directors 4
Duties Part 2)
Scope of Duty of Care and Diligence
In ASIC v Mariner Corporation Ltd [2015] FCA
589 at [452], court observed:
“The very nature of commercial activity necessarily involves
uncertainty and risk taking … a failed activity pursued by the
directors which causes loss to the company does not of itself
establish a contravention of s 180.”

Raises three basic, but key, questions:

(1) What is the role of directors? To take calculated risks; to balance
risk (potential harm) and reward (potential benefits)
(2) What is the legal test for director liability for breach of s 180(1)?
(3) In which legal ways can directors avoid liability for breach of s
180(1) [ie. what legal defences do they have]?
TABL 2741 (Class 9 Directors 5
Duties Part 2)
 Sources of duty of care
• Common law
• Contract between director and co
• Sec 180(1) of CA [overlaps with common law]:
‘A director or other officer of the co must exercise
their powers and discharge their duties with the
degree of care and diligence that a reasonable
person would exercise if they:
– Were a director/officer in the co’s circumstances; and
– Occupied the office held by, and had the same
responsibilities within the co as, the director/officer
– Note: Modern case law says s 180(1) incorporates the ‘skill’
requirement; high performance standards set by modern case law
equally applies here
TABL 2741 (Class 9 Directors 6
Duties Part 2)
Legal Test for breach of s 180(1)

– Duty of care under Corporations Act [s 180(1)]

is same as common law
– S 180(1) also uses an objective test to
determine breach( ‘what would a reasonable
person in similar position have done?’)
– ‘would a reasonable director have done the
same thing in that situation?’

TABL 2741 (Class 9 Directors 7

Duties Part 2)
 Legal Test for breach of s 180(1)
How do you apply the objective test?
See Judicial approach to s 180(1) - Daniels v Anderson held:
Whether a director has exercised reasonable care, the
circumstances of the particular co concerned are
relevant to the content of the duty. These include:
– the type of co,
– the size and nature of the co’s business,
– the composition of the board,
– the director’s position and responsibilities within the co,
– the particular function the director is performing, the
experience or skills of the particular director and
– the circumstances of the specific case.

See text at pp 482-483

• Note: S 180(1) can be breached even if there was no actual damage or
actual harm to co – so long if it is reasonably foreseeable that the
relevant conduct might harm the interests of the co [deterrent effect of
duty].

TABL 2741 (Class 9 Directors 8

Duties Part 2)
Legal Defences for breach of s 180(1)
• How can directors avoid liability for breach of duty of care and
diligence [ie. what legal defences do they have]?

(1)Delegation of responsibility: ss198D;

190
(2)Reliance on others: s 189 (Centro Ltd;
James Hardie Ltd; Sino Ltd)
(3)Business judgment rule: ss 180(2);
180(3) –see ASIC v Adler (failure); ASIC v Mariner
Corporation Ltd [2015] FCA 589 (success)
See later slide content for operation of
defences
TABL 2741 (Class 9 Directors 9
Duties Part 2)
 Enforcement of Directors Duty of Care and
Diligence
• Common Law duty (typically enforced by co)
• Statutory duty under s 180(1) of CA – can be
enforced by ASIC or co; can apply to court for:
– A declaration of contravention (breach): s
1317E
– A civil penalty (fine; compensation order;
disqualification order)
Note: But not a criminal offence (s 184
exclusion)

TABL 2741 (Class 9 Directors 10

Duties Part 2)
Content of Duty of Care and
Diligence
Case Studies: Daniels v Anderson [AWA Ltd]
One Tel Ltd
ASIC v Healey [Centro Ltd]
ASIC v Mcdonald [James Hardie Ltd]
ASIC v Adler [HIH Ltd]
ASIC v Mariner Corporation Ltd
ASIC v Sino Ltd
See Ch17 Australian Corporate Law (6th ed, 2018)

TABL 2741 (Class 9 Directors 11

Duties Part 2)
Directors’ Duty to exercise care, skill and diligence
Traditional approach - Romer J in Re City Equitable
Fire Insurance Co Ltd (1925) expressed a lenient (and
now discredited) relaxed view:
“director is not bound to give continuous attention to the affairs of the
company. His duties are of an intermittent nature to be performed at
periodical board meetings … He is not, however, bound to attend all
such [board] meetings,…”

TABL 2741 (Class 9 Directors 12

Duties Part 2)
 Modern approach to duty of care
Higher Standard of Care – case law
shows based on community standards.

TABL 2741 (Class 9 Directors 13

Duties Part 2)
 Diligence
Daniels v Anderson (1995)- leading
case on duty of care, skill and diligence.
▪ “Directors are under a continuing obligation to keep
informed about the activities of a corporation
▪ Directors may not shut their eyes to corporate
misconduct and then claim that because they did
not see the misconduct, they did not have a duty to
look.
▪ [The sentinel asleep at his post contributes nothing to the
enterprise he is charged to protect…]

TABL 2741 (Class 9 Directors 14

Duties Part 2)
 Daniels v Anderson (1995) continued
▪ A director is not an ornament, but an essential
component of corporate governance.
Consequently, a director cannot protect himself behind a
paper shield bearing the motto ‘dummy director’.”
“Directors are charged with keeping abreast of the [co’s]
business and exercising reasonable supervision and
control over the activities of the [co] … a director may not
rely on the judgment on others, especially when there is
notice of mismanagement.
Certainly, when an investment poses an obvious risk, a
director cannot rely blindly on the judgment of others.”

TABL 2741 (Class 9 Directors 15

Duties Part 2)
 Daniels v Anderson
• Sentinel [guard] at the post (of little value
if asleep)

TABL 2741 (Class 9 Directors 16

Duties Part 2)
 Daniels v Anderson
• Duty to keep informed of business
affairs

TABL 2741 (Class 9 Directors 17

Duties Part 2)
Daniels v Anderson held:
• “The modern cases …[show] that the director’s duty
of care is not merely subjective, limited by the
director’s knowledge and experience or ignorance
or inaction.”
• a director cannot safely proceed on the basis of
ignorance;
• a failure to inquire is no protection against liability
for negligence.
• Ch 17 of Australian Corporate Law 6th ed, 2018)
at pp 505-506

TABL 2741 (Class 9 Directors 18

Duties Part 2)
 What of other types of directors?
Compared to executive directors, is the
same standard of care, skill and diligence
expected of:
• Non-Executive Directors? Yes (Daniels v
Anderson; ASIC v Elliot & Others);
• Chairperson? Yes (ASIC v Rich [2003]);
• Foreign based director of Australian
company? Yes (ASIC v Sino Ltd [2016]
Read Ch 17 Australian Corporate Law 6th ed,
2018) at pp 508-509; 528
TABL 2741 (Class 9 Directors 19
Duties Part 2)
Re: NED -ASIC v Elliot & Others [2003]
Applied Daniels v Anderson and held:
“ both common law and statute [CA] have placed an
increasing onus on non-executive directors to be
alert.
•A non-executive director is expected to take steps to
put himself [sic] in a position to monitor the co
•and to exercise and form an independent judgment
•and to take “a diligent and intelligent interest in the
information either available
or which he [or she] might … demand from the
executives or other employees and agents of the co.”

TABL 2741 (Class 9 Directors 20

Duties Part 2)
Re: Chairperson - ASIC v Rich [2003]
NSWSC 85, Justice Austin observed:
“It should be remembered however, that the Court’s role, in
determining the liability of a [director] for his conduct as a
chairman, is to … apply a standard of care that reflects
contemporary community expectations.
It is now common to observe that the standard of care
expected of company directors … has been raised ….”

Chairperson of One-Tel Ltd failed to take reasonable steps to

ensure adequate and accurate financial info was provided
to the board.”
Disqualified for 4 years; and
Ordered to pay $20 million compensation to One Tel Ltd.
TABL 2741 (Class 9 Directors 21
Duties Part 2)
 What of foreign director of Australian
company?
Case study: ASIC v Sino Australia Oil and Gas Ltd (in
liq), Shao [2016] FCA 934
• Mr Shao - one of 3 directors of Sino Ltd (2 Australian based
directors, Mr Shao lived in China)
• Sino Ltd raised $13.6 m under IPO in Australia
• Original prospectus, followed by replacement and supplementary
prospectus, signed by Mr Shao (director)
• Caused Sino Ltd to issue misleading prospectus (fundraising
document in breach of ss 710, 728 of CA)
• ASIC successfully proved breach of fundraising law by
co under Ch 6D of CA; see topic ]. Prospectus
– Misled investors about the supply contracts it had
– Failed to disclose that it won’t meet profit forecasted
– Failed to disclose loan agreement
TABL 2741 (Class 9 Directors 22
Duties Part 2)
Case Study – Sino Australia case (2016)
Sino Ltd also breached s 674 (continuous disclosure) and 1041H
(misleading conduct financial product/service)

– ASIC successfully sought pecuniary penalty and banning order

in the civil penalty case in [2016] FCA 1488.

– Court made orders against Mr Shao (executive director and

chairman)
Under civil penalty in Corporations Act 2001 (Cth):
– Mr Shao ordered to pay compensation of approx. $5.5
million for loss and damage co will suffer to compensate misled
and deceived investors who relied on defective prospectus
– Mr Shao banned for 20 years as director – breached multiple
laws, including s 180(1) duty of care and diligence
See further pp 291; 516; 528; 627-628 of Australian
th ed, 2018)
Corporate Law (6TABL 2741 (Class 9 Directors 23
Duties Part 2)
 ASIC v Sino Ltd; Shao: breach of duty
• Breaches of s180(1) by Mr Shao
– Did not speak English, but failed to get full
Chinese translation of prospectus before signing
off on the fundraising document;
– Did not acquaint himself with disclosure
requirements for publicly listed companies under
Australian law ;
– Failed to disclose to Board profit downgrade;
– No explanation to Board on why he transferred
AUD7.5m to subsidiary account and why he did
not comply with Chinese law.
TABL 2741 (Class 9 Directors 24
Duties Part 2)
ASIC v Sino Ltd; Shao: breach of duty
Mr Shao’s failure to understand documents - breach of s
180(1) duty of care and diligence because the court held:
… [the director’s] failure to obtain a full translation of the
prospectus documents before signing or authorising them
was a failure to discharge his duties with reasonable care
…
[this duty] required Mr Shao to inform himself fully … about
the content of the prospectus documents to ensure that the
information … was accurate.
The failure by Mr Shao to ensure that he could
understand, even in the most basic sense, the content
of the documents he was signing was a breach of his
director’s duties under Australian company law.
TABL 2741 (Class 9 Directors 25
Duties Part 2)
Lessons from Sino Ltd case: affirms
• all directors in Australia (whether resident or non-
resident) are equal in eyes of Australian company law;
• all directors expected to read and understand disclosure
documents or ensure a proper translation is made;
• courts will not tolerate a superficial or ‘box-ticking’
exercise towards compliance duties under Corporations
Act – due diligence processes must be robust; and
• directors’ who cause/permit corporate contravention and
exposure to penalty can be liable for breach of directors’
duties under s 180(1) of Corporations Act.
• Sino case - evidence of stepping-stone approach to
director liability (adopted by ASIC), seeking to make
director accountable and liable for corporate fault.
TABL 2741 (Class 9 Directors 26
Duties Part 2)
 Basic Skill
Modern directors expected to have basic skills in relation
to financial statements and financial affairs of the co:
Friedrich’s (1991) case held:
“….the community has … come to expect more than [before] from
directors …
… the stage has been reached when a director is expected to be
capable of understanding his company’s affairs to the extent of
actually reaching a reasonably informed opinion of its financial
capacity.”
• Emphasis on financial literacy – to what degree?
•See ASIC v Healey (Centro case) [2011] FCA 717 for application.

TABL 2741 (Class 9 Directors 27

Duties Part 2)
• Basic skill: financial literacy

TABL 2741 (Class 9 Directors 28

Duties Part 2)
 Case Study
ASIC v Healey [2011] FCA 717
Centro Case: Directors duty of care
when approving financial reports
Ch 17 Australian Corporate Law
6th ed, 2018) at p 529

TABL 2741 (Class 9 Directors 29

Duties Part 2)
 Facts: Centro case
• Directors failed to disclose in 2007 annual reports of the
Centro Properties Group (CPG):
– the correct amount of current liabilities; understated
by $1.5 billion by classifying them as non-current
liabilities
– Guarantees of short-term liabilities of an associated
co of about US $1.75 billion
In 2008, CPG announced to ASX discovery of error and
reclassification of liabilities as current.

Centro Case involves taking responsibility for financial

documents effectively signed-off by, approved, or
adopted by directors.
TABL 2741 (Class 9 Directors 30
Duties Part 2)
 Legal issues: Centro case
• Was the board’s error so obvious?
• Was failure to detect the short-term
liabilities liable to result in breach of
directors duty of care and diligence under
s 180(1) when signing off on the co’s
accounts?
• If so, could the directors depend on the
reliance defence?
– Could they rely on others [such as senior
finance management personnel or the
external auditors to escape liability?]
TABL 2741 (Class 9 Directors 31
Duties Part 2)
 Court held:
‘All directors must carefully read and
understand financial statements before
they form the opinions ...required by s
295(4)
Such a reading and understanding would
require the director to consider whether
the financial statements were consistent
with [their] own knowledge of the co’s
financial position.

TABL 2741 (Class 9 Directors 32

Duties Part 2)
Directors’ Duties include the following: (at [17]):
• a [basic] understanding of the business ...and
become familiar with the fundamentals of the
business in which the co is engaged
• Keep informed about the activities of the co
• monitor the corporate affairs and policies (not
required to have detailed awareness of day-to-day
activities)
• [Be familiar] with financial status of the co by a
regular review and understanding of financial
statements
• Directors should have a questioning mind (not
required to be an auditor)
TABL 2741 (Class 9 Directors 33
Duties Part 2)
 Decision: Court held -
‘the basic concepts and financial literacy required
by the directors ... to properly question the
apparent errors in the financial statements were
not complicated’ (at [23]).
‘...the objective duty of competence requires that
the directors have the ability to read and
understand financial statements, including th[at]
[such documents] classify assets and liabilities
as current and non-current, and what those
concepts mean.
– Need for financial literacy reinforced
– For what purposes are financial reports read by directors?
TABL 2741 (Class 9 Directors 34
Duties Part 2)
 Decision: Court held:
‘[it] is not merely [done] for the purposes of correcting
typographical or grammatical errors or ...errors of
arithmetic.
[Done] for a more important purpose: to ensure, as far as
reasonable, that the information included therein is
accurate.
The scrutiny by the directors of the financial statements
involves understanding their content.

TABL 2741 (Class 9 Directors 35

Duties Part 2)
ASIC v Healey (No 2) [2011] FCA 1003 (civil
penalty decision)
• Refused to grant judicial forgiveness to the 6
NED’s and 2 officers despite finding they all
acted with honesty; influenced by
seriousness of contraventions and need for
general deterrence
• Recorded declarations of contraventions of
law for all – significance?
• No further penalties for NEDs (considered
reputational loss and shaming as adequate)
• CEO (Scott) – pecuniary penalty of $30,000
• CFO (Nenna) – 2 year banning order
TABL 2741 (Class 9 Directors 36
Duties Part 2)
 Implications of Centro case
• CA places upon on the board and each
director the specific task of approving co’s
financial statements.
• Key message: all directors expected to
read the financial statements, notes and
directors' report for themselves – and read
them carefully;
• check to see if there is anything there that
doesn't align [match] with what the
individual director knows about the co.
TABL 2741 (Class 9 Directors 37
Duties Part 2)
 Implications of Centro case
• Wake-up call to say 'don't skim the accounts and
don't rely on the assurances of others. Need to
exercise judgement and use an inquiring mind
(as director).
• Case is consistent with legal principals -
directors must be pro-active when it comes to
understanding co affairs (Daniels v Anderson)
including its financial affairs (as in Friedrich’s
case)
• Lesson: For financially illiterate directors- take
an appropriate course to improve their financial
literacy skills or resign!.
TABL 2741 (Class 9 Directors 38
Duties Part 2)
 Statutory remedies: CA
• Civil penalty provisions in Pt9.4B (S
1317) – consequences of breach?
– (1) disqualification order (banned from
management);
– (2) compensation order;
– (3) pecuniary penalty (fine)
Criminal penalties? – No; s 180 duty of
care excluded from s 184)

TABL 2741 (Class 9 Directors 39

Duties Part 2)
 James Hardie Litigation

Case study
Read Ch 17 Australian Corporate Law 6th ed,
2018) at pp 510-513; 518-520; 524-527

TABL 2741 (Class 9 Directors 40

Duties Part 2)
Issues arising from James Hardie Litigation
Mammoth case which dealt with:
◼ Duty of care and diligence [High Court Appeal]
◼ Duty to act in good faith
◼ Continuous disclosure laws
◼ Misleading and deceptive laws
◼ Minutes of company meetings
◼ Corporate governance
◼ Role of corporate regulator as “model litigant” and standards of
fairness [High Court Appeal]
◼ James Hardie case also raises (but did not decide) wider issues
on
◼ Legal treatment of corporate groups (separate legal entity rule and its
limits)
◼ Corporate social responsibility issues
◼ Ethical and moral issues
TABL 2741 (Class 9 Directors 41
Duties Part 2)
 James Hardie: Litigation History (Overview:
2009-2012)

2011:
Morley v
ASIC
15 Feb 2009: ASIC (No 2) 2012:
2001: Sep v Macdonald [2011] Gilfillan v
JHIL 2004: (No 12) NSWCA ASIC (civil
board Jackson NSWSC (civil (civil penalty)
meeting report penalty) penalty) NSWCA

16 Feb 2009: 2010: 2012:

2001: ASIC v Morley v ASIC v
ASX Macdonald ASIC Hellicar;
release (No 11) NSWCA Shafron
NSWSC 331 v ASIC;
(liability) (appeal) High
Court

TABL 2741 (Class 9 Directors 42

Duties Part 2)
 James Hardie Case: Directors and Officers civil
penalties
Gillfillan & Ors v ASIC [2012] NSWCA 370 (Civil Penalty Decision for
breach of s180(1) duty of care) impacting on 7 non-executive
directors of James Hardie Ltd
(1) 5 Australian based non-executive directors banned for 2 years and
3 months and fined $25,000;
(2) 2 US based non-executive directors – banned for 1 year and 11
months and fined $20,000 ;
(3) Secretary and General Counsel (Peter Shafron): banned for 7
years and fined $75,000.

Based on earlier James Hardie litigation (same facts):

• CEO (Peter McDonald) banned for 15 years; fined $350,000 by trial
judge.
• CFO (Philip Morley)) banned for 2 years; fined $20,000.

TABL 2741 (Class 9 Directors 43

Duties Part 2)
 About James Hardie
◼ Leading international building materials manufacturer
◼ Employs over 2,500 people
◼ Generates revenue of more than A$ 1.55 billion a year
◼ Founded in 1888; Listed on the ASX in 1951
◼ Until 1970’s - manufactured asbestos products [harmful to health;
deadly; employee exposure]
◼ Restructured in 2001 (tax reasons?)
◼ New parent company (JHINV) incorporated in Netherlands
◼ Established Medical and Research Compensation Foundation
(MRCF) in Australia to compensate injured employees [shifted
liabilities from JH onto MRCF]
◼ Exploited separate legal entity rule (lawfully; no reason to lift
corporate veil due to restructuring for legitimate business reason
– for tax benefits)

TABL 2741 (Class 9 Directors 44

Duties Part 2)
 James Hardie case
Litigation arose from following basic facts:
• After forming MRCF, James Hardie Board
approved defective draft ASX media release
[prepared by management] which said that MRCF
was fully funded and would meet all claims;
provided assurance to marketplace
• Media release to ASX was misleading [due to shortfall
in compensation funds in MRCF of nearly $1 billion]
• ASIC successfully argued directors and co officers
were negligent in approving defective ASX media
release:
– breached duty of care and diligence owed to the co
(both at common law and under s 180(1) of CA)
TABL 2741 (Class 9 Directors 45
Duties Part 2)
 Cause of legal action
• Media release to ASX included following statements
which ASIC successfully alleged to be:
– false or misleading and
– the basis of the directors and officers breach of duty of care and
diligence under s 180(1) of the CA:

The Foundation has sufficient funds to meet all

legitimate compensation claims … Mr Peter Macdonald
said that the establishment of a fully-funded Foundation
provided certainty for both claimants and shareholders
… In establishing the Foundation, James Hardie sought
expert advice … James Hardie is satisfied that the
Foundation has sufficient funds to meet anticipated
future claims …

• Note: no hint of any qualification to emphatic claims

made in draft and final ASX announcement.
TABL 2741 (Class 9 Directors 46
Duties Part 2)
 ASIC v Macdonald (2009)
• Held NEDs knew [or should have known] of
negative impact of defective draft ASX
announcement on co upon its public release.
• Was a reasonably foreseeable danger that:
– JH would face legal action for publishing a
false or misleading and deceptive statement;
– its reputation would suffer; and
– there would be negative/adverse market
reaction to its listed shares.

TABL 2741 (Class 9 Directors 47

Duties Part 2)
HIH Insurance Ltd: ASIC v Adler

Case study
Read Australian Corporate Law 6th ed, 2018)
Ch 15 at pp 448-449; 458-459; Ch 16 at pp 488-
489; Ch 17 at pp 528; 531-532

TABL 2741 (Class 9 Directors 48

Duties Part 2)
 Case Study: ASIC v Adler (2002) NSWSC 171
‘HIH Ltd case’ shows operation of:
1. S 181: duty to act in co’s best interests
(breached)
2. S 180(1) duty of care (breached)
3. S 180 (2) business judgment rule
defence (unsuccessful)
4. S 182 no conflict rule (breached)
5. Related party transactions under Ch 2E
(breached)
6. Civil penalty provisions: s 1317E (under
Pt. 9.4B)
TABL 2741 (Class 9 Directors 49
Duties Part 2)
 ASIC v Adler (2002)
Under civil penalty provisions (s 1317):
Adler (director)
• Banned for 20 years;
• Pay pecuniary penalty of $450,000;
• Pay $ 7 million compensation (jointly with
Ray Williams)
Williams (director)
• Banned for 10 years;
• Pecuniary penalty of $250,000;
• Pay $7,000.000 compensation (jointly with
Rodney Adler)
TABL 2741 (Class 9 Directors 50
Duties Part 2)
 ASIC v Adler (2002): Facts
3 directors of HIH Ltd (Adler, Williams, Fodera)
involved in many breaches of CA;
Adler (via his personal co) took an unsecured,
undocumented and interest free loan (of $10
million) from HIH:
• $4 m used to buy HIH shares (later sold at a
$2 m loss); aim to give stock market false
impression that Adler was supporting HIH’s
falling share price by personally buying its
shares
TABL 2741 (Class 9 Directors 51
Duties Part 2)
 ASIC v Adler (2002)
• $4 m used to buy shares in unlisted hi-tech co’s from
Adler Corp; no indep assessment made of value; total
loss; $2 m was loaned to Adler.
Held: Both directors (Adler and Williams) breached s
180(1)- applied objective test and held:
– a reasonably careful and diligent director of HIH
would not have caused the $10m loan for purposes
used;
– both directors failed to ensure that HIH followed
authorised investment practices;
– their failure to safeguard HIH interests also fell short
of the standard of a reasonably competent person in
their position
TABL 2741 (Class 9 Directors 52
Duties Part 2)
 ASIC v Adler: No conflict rule
Held: Adler breached s 182 (improper use
of his position to gain advantage for his
private co - Adler Corp).
Held: Williams (CEO/founder of HIH)
breached s 182 (improper use of his
position;
– caused harm to HIH in authorising $10m loan
without proper approval from HIH’s
Investment Committee;
– sought to benefit from use of co funds in
belief that HIH share price will increase
TABL 2741 (Class 9 Directors 53
Duties Part 2)
 ASIC v Adler (2002)

Held: Adler breached s 181 due to acting

improperly [personal interest before co
interest];
– normal investment safeguards put in place by
HIH, such as establishment of Investment
Committee, were by-passed;
– loan terms were unreasonable and not
approved by shareholders [related party
transaction]

TABL 2741 (Class 9 Directors 54

Duties Part 2)
Defences to liability for breach
of s 180(1)
(1) Delegation of responsibility: ss 198D; 190
(2) Reliance on others: s 189 ( Centro Ltd; James
Hardie Ltd; Sino Ltd)
(3) Business judgment rule: ss 180(2);(3)
see ASIC v Adler (failure); ASIC v Mariner
Corporation Ltd [2015] FCA 589 (success)
Ch 17 Australian Corporate Law 6th ed, 2018) at pp 524-533

TABL 2741 (Class 9 Directors 55

Duties Part 2)
• Relief from liability

TABL 2741 (Class 9 Directors 56

Duties Part 2)
 Delegation of powers: s 190
• S 198D allows directors to delegate
powers/functions to others
• If director delegate their powers, note:
each director is responsible for the
exercise of the power by the delegate –
unless (s 190) if:
– The director believed:
• On reasonable grounds, and
• In good faith, and
• After making proper enquiry
That the delegate was reliable and competent
TABL 2741 (Class 9 Directors 57
Duties Part 2)
• Can directors rely on others?

TABL 2741 (Class 9 Directors 58

Duties Part 2)
 Can directors rely on others?
Yes – under common law and statute law (s 189)
ASIC v Adler [2002] “a director is entitled to rely
without verification on the judgment, information and
advice of management and other officers
appropriately so entrusted.
However, reliance would be unreasonable where
directors know, or … should have known, any facts
that would deny reliance on others.”
• As a general rule, directors can rely on
professional or experts
• Yes, But what are the limits to reliance? See Centro
case; James Hardie case and Sino Ltd case [Ch 17 of
prescribed text] TABL 2741 (Class 9 Directors 59
Duties Part 2)
 ASIC v Healey (Centro case)
• Reliance defence failed

“I accept that directors may rely on others to assist them ...

To a degree, the directors can rely upon the processes they
have put in place.

However, this is not exclusively the situation in the case of

[approval and signing off on] financial accounts ...

...a reasonable step would be to delegate various tasks to

others, but this does not discharge [end] the entire
obligation upon directors’ (at [240]).
TABL 2741 (Class 9 Directors 60
Duties Part 2)
 ASIC v Macdonald (2009)
James Hardie litigation: Reliance Defence failed;
reason for court’s intolerance of reliance defence
(on experts):

◼ …it is the emphatic nature of the draft ASX

announcement [with use of the term “fully
funded”] that is at fault. And that is not a matter
for reliance upon management or outside experts

◼ Task involved no more than an understanding of

the English language used in the media release.

TABL 2741 (Class 9 Directors 61

Duties Part 2)
 ASIC v Sino Ltd; Shao: Reliance
Defence
In the Sino Ltd case, Mr Shao told the court:
I was completely dependent on the 2
Australian directors … and I don’t really
know the Australian policies about
disclosure (company law)… if our company
didn’t do a perfect job please understand I
am not a master of the Australian legal
system, the [English] language or the
[Australian] culture ….
Question: Is this reasonable reliance? 62
TABL 2741 (Class 9 Directors
Duties Part 2)
 ASIC v Sino Ltd; Shao: Reliance
Defence
• No; Reliance defence FAILED:
The fact that Mr Shao was not an English speaker or
writer and did not understand Australian legal
requirements did not mean that he could just leave it
all to others and did not excuse him from performing
his own duties with reasonable care and diligence
(Davies J)
• Court held:
The [facts] required Mr Shao to have an active
participation in the drafting [of the prospectus] and to
exercise a considerable amount of skill and care as
the responsible Managing Director and [CEO]
TABL 2741 (Class 9 Directors 63
Duties Part 2)
S 180(2):Business judgment rule defence
• BJR only applies to duty of care, skill and diligence [both
common law and s 180(1)]
• Rationale – safe harbour for director’s decision making;
facilitates risk-taking [but with emphasis on responsible,
as opposed to reckless, risk-taking]
• Content; Application ASIC v Adler (failure); ASIC v
Mariner Corporation Ltd [2015] FCA 589 (success)

TABL 2741 (Class 9 Directors 64

Duties Part 2)
 Section 180(2): BJR defence
To succeed, director must prove:
(a) Business judgment was made in good faith and
for proper purpose;
(b) they did not have a material personal interest;
(c) They informed themselves; and
(d) They had rational belief that the decision was in
co’s best interests.
Important to note s 180(3) which defines ‘business
judgment’ (essential pre-requisite for access to
BJR defence)
See: Ch 17 Australian Corporate Law (6th ed, 2018) at
pp 530-533
TABL 2741 (Class 9 Directors 65
Duties Part 2)
Business judgment rule: s 180(2)
• Reasons for failure of BJR defence in Adler
• Operation
ASIC v Adler [2002] NSWSC 171 [see earlier facts] :
Williams failed to prove s 180(2)(b) criteria
“Given that the purpose of Adler was to maintain or
stabilise the HIH share price …, Williams, as a
major shareholder in HIH, had a “material personal
interest” … [this prevents] reliance on s 180(2) …
he very clearly had a material personal interest in
encouraging share purchases by … Adler.”
TABL 2741 (Class 9 Directors 66
Duties Part 2)
Business judgment rule: s 180(2)
• Operation
ASIC v Adler [2002] NSWSC 171 [see earlier facts] :
Williams failed to prove s 180(2)(c) criteria

“There is no [reason to infer] that Mr Williams

[director] properly informed himself about the
subject matter of any judgment he made - for
example - by having proper independent advice …
[before HIH lend money to Adler].”

TABL 2741 (Class 9 Directors 67

Duties Part 2)
 Business judgment rule: s 180(2)
• Success of BJR defence in ASIC v Mariner
Corporation Ltd [2015] FCA 589
Facts: ASIC alleged directors of Mariner Ltd were
reckless when they made a takeover bid (on behalf
of co) without securing funding, in breach of s
180(1).
Decision: directors satisfied the BJR, thus were
not reckless and entitled to BJR protection.
Judicial Reasoning – held: directors decision to
initiate a takeover bid is a “business judgment”
under s 180(3) TABL 2741 (Class 9 Directors 68
Duties Part 2)
 ASIC v Mariner Corporation Ltd [2015] FCA 589: BJR

• Judgment was made in good faith and for proper

purpose – potential for co to make significant profit
• There was no material personal interest
• Directors did inform themselves to the extent they
believed appropriate
• Directors belief that judgment was in co’s best interest
was a rational one
Held: Potential rewards (from the proposed takeover bid)
outweighed potential risk of harm to co.
• Court could not fault the directors – held they made a
balanced commercial judgment.

TABL 2741 (Class 9 Directors 69

Duties Part 2)
 ASIC Stepping Stone Approach to
Enforcement
From corporate fault to director’s personal civil
liability
• Involves legal action against co for breach of
law [establish corporate fault]; then leads to
the second stepping stone of finding director
liability for breach of:
– s 180(1) duty of care and diligence; attract civil
penalty consequences.
• See, for example, ASIC v Macdonald (2009)
= James Hardie litigation; Sino Ltd (2016)
TABL 2741 (Class 9 Directors 70
Duties Part 2)