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Company directors’ responsibilities

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Non-compliance and errors of judgement

Company directors have significant obligations in relation to including commercial issues, shareholder matters and financial obligations. All company directors, regardless of the size of the company, must be aware of their responsibilities and obligations.

Our ever changing regulatory environment continues to place added responsibilites on directors in terms of legal compliance. The penalties for non compliance, such as trading whilst insolvent, can have serious consequences for directors.

Recent court decisions send mixed messages to directors.  These cases have involved directors and officers of One.Tel, Fortescue Metals and James Hardie, all of whom ASIC alleged had breached their duty of care and diligence.

Some key lessons to be learned from these cases follow.

Market disclosures and public statements

Directors must exercise caution when approving public statements. The involvement of lawyers and other external advisers may not be adequate to absolve directors of their responsibility.

Financial literacy

ASIC has instigated proceedings against the directors and the chief financial officers of various entities within the Centro Properties Group. The key focus of ASIC’s action is to determine whether information contained in financial reports of the entities is accurate, complies with relevant accounting standards and is not misleading.

Directors:

  • must be financially literate, regardless of prior experience
  • have a duty to maintain an undertstanding of the financial status of the company
  • must have a reasonably informed opinion of the company’s financial capacity.

External advisors

Directors must appreciate that they cannot absolve their responsibility for compliance and errors of judgement with regard to corporate governance matters about the company, particularly insolvency, by relying on external advisors.

For example, in the case of James Hardie the fact that the directors had the benefit of competent professional legal advice did not prevent the directors from being prosecuted by ASIC.

Consequences of an investigation

Investigations are likely to be conducted on the history of the company.  Both the James Hardie and One.Tel proceedings arise from facts occurring in 2001

  • The investigations are intrusive
  • During the conduct of the investigations, company operations can be severely impacted
  • Costs to a company can be crippling
  • There are enormous personal affects on directors and officers

Directors’ defence

There are defences available to directors.  The “business judgment rule” provides a defence for directors who may have breached their duty of care by making a judgment:

  • in good faith
  • for a proper purpose
  • did not have a material personal interest
  • appropriately informed themselves about the subject matter
  • rationally believed that the decision was in the best interests of the company.

Tips for directors

Review the following items and see how you score against this checklist:

  • Are you financially literate? You must have the necessary skills to have a reasonably informed opinion of the financial capacity of the company
  • Do you have an honestly and reasonably held belief that every sentence in a public statement is true and correct and not misleading?
  • Have you turned your mind to the appropriateness of a proposed course of action, and not simply “rubber stamped” the recommendations of company executives?
  • Have you considered whether internal processes (including the company’s disclosure policy) have been complied with?
  • Have you ensured that the board is provided with information in a timely fashion by senior executives?
  • Have you made sure that critical matters are appropriately recorded?  This will assist if legal proceedings are subsequently instituted against you in your capacity as a director.
  • Have you read key documents, including minutes of meetings?
  • Is there clarity as to the roles and responsibilities of officers and executive directors?

Our Corporate Advisory lawyers invite you to contact them if you have any questions regarding your obligations as a company director.

Author:  Susan Reece Jones