Boardroom Briefing | May 2020

Boardroom Briefing May
The operation and scope of a director’s duty to act with care and diligence has been clarified recently by the Full Federal Court in the long running Storm Financial litigation.

DIRECTORS’ DUTIES – A STORM FRONT OF PENALTIES, PESTILENCE AND POLICIES

In these extraordinary days, it's beneficial to reconnect with the principles underpinning how directors and officers should go about their business as well as coming to grips with recent virus challenges.

THE BACK STORY: Financial product provider, Storm, came unstuck a decade ago providing advice to financially vulnerable customers. After its collapse, ASIC brought proceedings against the directors for failing to act with the degree of care and diligence that a reasonable person would exercise as a director, in breach of s. 180 of the Corporations Act (the Act).

THE APPEAL ARGUMENT: The trial judge found that the directors had: breached sec 180 of the Act, caused  contraventions by Storm for failing to ensure financial services were provided “efficiently, honestly and fairly”, and exposed the company to a foreseeable risk of harm as a consequence of the directors’ failure to discharge their duty. The directors, as sole shareholders, appealed and argued that Storm’s interests were the same as their interests because companies “do not have any desires or interests beyond those of its shareholders”.

THE APPEAL DECISION: The Full Court rejected the directors’ argument that their duty of care and diligence was, in effect, a duty owed to themselves. The standard demanded by s. 180 is an objective one, meaning it is the degree of care a reasonable person would exercise as a director in those circumstances. It is not relevant that shareholders consent to the conduct which gives rise to the contravention. Further s.180 will capture breaches of responsibilities however those responsibilities are imposed on the director including breaches that arise at common law or in equity; the Act is not a stand-alone prescriptive list of duties A breach of s.180 attracts a civil penalty of up to $1.05M for each and every breach.

IN BRIEF: In brief. In extraordinary times, it is natural for directors to be diverted by emerging responses to the virus. Take for example the existing Safe Harbour legislation, which is challenging enough, that now has additional temporary measures to relieve a director from their duty to prevent insolvent trading. Continuous disclosure obligations have been recently re-examined by the ASX. Shifting sands of uncertainty could lead to potential claims by shareholders, employees, creditors or other third-party stakeholders. Your Lockton broker can advise on whether your director or company actions or inactions should be notified to your D&O or PI insurer and the adequacy of your cover for any costs, investigations or penalties.

  • For the latest on the scope of directors’ duties, see Cassimatis v ASIC [2020] FCAFC 52.
  • For recent extensions to Safe Harbour provisions, see the Coronavirus Economic Response Package Omnibus Act 2020.
  • For guidance on continuous disclosure guidance from the ASX, see Listed @ASX Compliance Update for 31 March 2020.


 

 

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