In the exercise of their duties, company directors often rely on both internal and external sources of advice. However, directors may be liable if their reliance on the advice of others is “unreasonable”.
What does the Corporations Act say?
Section 189 of the Corporations Act states that a director may rely on information, or professional or expert advice, given or prepared by:
- an employee of the company whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned
- a professional adviser or expert in relation to matters that the director believes on reasonable grounds to be within the person’s professional or expert competence
- another director or officer in relation to matters within the director’s or officer’s authority
- a committee of directors on which the director did not serve in relation to matters within the committee’s authority
- the reliance was made in good faith and after making an independent assessment of the information or advice, having regard to the director’s knowledge of the company and the complexity of the structure and operations of the company
- the reasonableness of the director’s reliance on the information or advice arises in proceedings brought to determine whether a director has performed a duty under the relevant part of the Corporations Act or an equivalent general law duty
If the above are satisfied then the director’s reliance on the information or advice is taken to be reasonable unless the contrary is proved.
What about a director’s financial reporting obligations?
- all public companies and ‘large’ proprietary companies are required to prepare and lodge financial reports
- ‘small’ proprietary companies may also prepare and lodge financial reports if ASIC, or shareholders holding at least 5% of voting shares, direct the company to do so
Warning from the Courts
When it comes to preparing financial reports and statements, the Federal Court in ASIC v Healey held that directors should:
- “have the ability to read and understand financial statements”
- “acquire at least a rudimentary understanding of the business of the corporation”
- “keep informed about the activities of the corporation”
- “maintain familiarity with the financial status of the corporation by a regular review and understanding of financial statements”
- “have a questioning mind”
In that case the Federal Court found the directors liable for misstatements in the company’s financial reports because the directors relied “exclusively” on their advisors and did not “turn their minds” to the issues at hand.
How should directors conduct board meetings?
- carefully review the board papers and tabled documents in advance of meetings
- familiarise themselves with the financial accounts of the company
- actively participate in board discussions
- ensure the minutes of meetings reflect the discussion and analysis undertaken by the board, not just a record of resolutions
The board minutes should show that the directors exercised independent judgment and turned their minds to important issues affecting the company.
Please contact our commercial law team at Matthews Folbigg Lawyers on 9635 7966 if you require legal advice on directors’ duties, corporate governance matters or any other commercial issue relating to your business.