Company directors are presented with a wide range of documents to be signed on a regular basis. It is now becoming more evident how important it is to know and understand what you are signing in your capacity as a director.
Recent court cases have provided examples of where directors have not exercised proper care and consideration before putting their signature to a document. These cases also highlight the serious consequences for directors who are in this position.
Directors duties generally
The laws governing directors’ duties and responsibilities come from three areas:
- the common law (judge-made law);
- statute law, under the Corporations Act 2001 (Cth); and
- a company’s constitution.
It is often the case a person is not fully informed of his or her duties as a director when appointed and this can lead to difficulties down the track.
In some cases it is difficult for directors to determine whether they are exercising their duties in such a way that they are fulfilling their obligations
Some of the more common duties include:
- duty to act in good faith in the interests of the company as a whole;
- duty not to act for an improper purpose;
- duties of care and diligence;
- duty to avoid conflicts of interest;
- duty not to make improper use of position or information; and
- duty not to trade while insolvent.
The failure by a director to comply with his or her duties as a director can have serious monetary and/or criminal consequences for that director.
Some recent cases highlight the consequences where directors have acted in a manner which they thought was appropriate in the circumstances, rather than considered whether it was appropriate in light of their duties as directors.
The Centro case – care and diligence
This is a recent case from June 2011 which involved the directors of the Centro Properties Group and Centro Retail Group.
In September 2007 the directors approved financial statements which indicated that the company in question had no short term debt. The reality was that the company was obliged to repay billions of dollars of debt within 12 months, including a $1.1 billion facility in December 2007.
There was an oversight in preliminary accounts released in August 2007 which arose because of a misinterpretation of the accounting standards. However, the oversight was corrected in the September 2007 accounts that were approved by the directors.
ASIC argued that the directors had breached their duties in overlooking the error in the financial accounts. Also, ASIC claimed that there was a minimum level of boardroom participation required by the directors and that the directors in this case had fallen short of the minimum standard.
The directors argued that, whilst they had made a mistake, they were entitled to rely upon specialist knowledge and advice that was provided to them, in particular by the company’s auditors.
The Federal Court found that the directors had failed to apply their minds to the financial statements, otherwise they would have picked up the errors.
The directors are yet to be sentenced for this matter but they do face potential bans as directors as well as financial penalties.
James Hardie case
The James Hardie case has received media and community attention because of the contentious issues involved in the restructure of the James Hardie Group and the separation of asbestos liabilities from trading companies.
This was one of the first cases where ASIC has sued both executives and non-executives alleging coexisting obligations and breaches in relation to business decisions and conduct.
The key issues in the case related to disclosures to the market and shareholders.
The case reminds directors that they are not able to rely upon the advice of management in place of their own examination of a matter where the matter falls within the board’s responsibilities (which, in this case included considering strategic matters and approving significant disclosures to the market).
There is also a warning for non-executive directors that, despite not being involved in the day to day running of the business, they are officers of the company and will be liable as such where they fail to meet the standard of care and diligence expected of a person in their position.
Vizard case – improper use of information
Steve Vizard was a director of Telstra and obtained confidential information by reason of his position as a director.
Vizard made improper use of that information by basing his decision to purchase or sell shares on the information, in order to obtain an advantage for himself, a company he established, and a trustee company in which he and his family beneficially held shares.
It was held that he had contravened the duty of a director to refrain from using confidential information obtained during the course of a directorship for an improper purpose.
In this case, the court ordered pecuniary penalties and a disqualification order against Vizard.
What do directors need to do?
In short, directors need to be aware of their duties at common law, under statute and under the company’s constitution.
When making decisions or exercising their powers directors should:
- take care to closely read and critically consider information provided to them;
- closely read board minutes to ensure that they accurately reflect business discussed, reasoning for decisions and outcomes of meetings;
- if they are attending meetings by phone, ensure that they have all the relevant board papers and other information including, for example, any slides that will be presented;
- for listed companies, recognise the importance of media communications, particularly ASX announcements, as being significant investor communications requiring their supervision;
- review company communications policies and procedures to ensure that the board considers significant announcements; and
- re-assess their indemnities and D&O cover.
If you are a director of a company and unsure of your duties and obligations, we can provide you with information regarding these matters.
Also, if you concerned as to whether an action that you are proposing to undertake might result in a breach of your duties as a director, we can provide you with guidance and advice so as to ensure that you are not exposed to penalties or prosecution.