Objective assessment of company officers and directors Law Reporter

When Austin J delivered his interesting judgment on certain interlocutory issues thrown up in ASIC v Rich amp; Ors ((2003) 21 ACLC 450) [Early Warner, March 2003] his judgment was met with an extraordinary range of reactions. 

In dismissing the application to strike out ASIC's action against Mr Greaves, the chairman of OneTel, Austin J may have created a new and higher than expected standard of care from chairmen of companies.

Objective assessment of company officers and directors 

Another important statement from Justice Bob Austin

When Austin J delivered his interesting judgment on certain interlocutory issues thrown up in ASIC v Rich & Ors ((2003) 21 ACLC 450) [Early Warner, March 2003] his judgment was met with an extraordinary range of reactions. In dismissing the application to strike out ASIC's action against Mr Greaves, the chairman of OneTel, Austin J may have created a new and higher than expected standard of care from chairmen of companies. Of course, in the relevant case Austin J did not make any specific findings on the factual issues. He simply ruled that on the basis of the issues pleaded by ASIC it did have a reasonable question of law to pursue. But many believe that Austin J was sending out a much stronger and clearer message - a higher standard could be expected of chairmen of companies in appropriate circumstances and especially of public companies.

Now, in ASIC v Vines (No 2) ((2004) 22 ACLC 37) he has again been involved in a case concerning the very important question of how a court should assess the standard of care to be displayed by other officers and directors of companies - in this case a chief financial officer. Again the case turned on interlocutory issues - not actual matters relating to the innocence or guilt of a particular person, but questions of what pleadings or statements could be admitted in a court case. Briefly the facts were these.

ASIC alleged that Vines, who was a director of GIO Insurance Ltd and also its chief financial officer of the company group, had contravened the now replaced section 232(4) of the Corporations Law. That sub-section provided as follows: "In the exercise of his or her powers in the discharge of his or her duties, an officer of a corporation must exercise a degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances."

In other words it imposed an obligation on directors and officers to exercise a degree of care and diligence.

This section has now been repealed and replaced by section 180(1) of the Corporations Act which provides as follows:

"A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation's circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer."

In order to establish the fact that Vines was in breach of his duties as chief financial officer of the company, ASIC wished to use expert evidence of a Mr Hogendijk, provided by way of affidavit. Hogendijk set out what one would normally expect from a competent chief financial officer. (In earlier cases other aspects of the admission of his evidence had been dealt with by the court - it is unnecessary to delve into those matters as they raise technical issues that are not relevant to this particular question). The question before Austin J in this case was whether the evidence that might be given by Hogendijk was relevant in the proceeding. Could it affect the court's assessment of what would be the standard expected of a reasonably competent chief financial officer?

In challenging the evidence Vines argued that section 232(4) (and one assumes the same argument will be laid in relation to section 180(1)) did not impose on a chief financial officer any legal duty, in respect of which an opinion from a third party about what a reasonably competent chief financial officer would do, could have had any relevance. In other words a more objective assessment was not relevant.

Austin J examined the history of the provisions now in the Corporations Act. He noted that when section 232(4) was introduced, there was a clear intention that it should be extended to officers as well as to directors (on whom the original duty of care had been imposed). The debate concerning the duties of care at the turn of the 1990s was largely focussed on the non executive directors of companies. This flowed in particular from the decision of Rogers CJ in AWA Ltd v Daniels (trading as Deloitte Haskins & Sells) ((1992) 7 ACSR 759) in which Rogers CJ had suggested that non-executive directors were able to rely on management in carrying out their duties and could not be expected to have the same standard as executive directors.

The significance of extending the duty to officers has been highlighted by a number of cases during the 1990s. At the same time as the courts had ruled in relation to these matters, they were also noting that passive directors and other relevant company officers did have a duty to understand the financial position of a company regardless of the particular person's sophistication and training in accountancy. Furthermore Austin J noted that when the appeal in the AWA case went to the New South Wales Court of Appeal in 1995 ((1995) 13 ACLC 614) that court was a little more severe in dealing with the distinction between executive and non-executive directors. The majority suggested that non-executive directors might not be able to rely so heavily on others in carrying out their duties. An objective duty existed and the directors had to undertake their obligations by reference to what Austin J described as "what a reasonable man of ordinary prudence would do, enhanced where the directorial appointment is based on special skill by an objective standard of skill referable to the circumstances" . (See Vines' case at para 38)

As a result of this appeal in the AWA case Austin J held that there is now a "standard of skill for executive officers who are appointed to positions requiring the exercise of skill, and that standard is reflected in the statutory formulation of [the words 'care and diligence'] notwithstanding the absence of the word 'skill' in the statutory formula." (See Vines at para 38) Austin J also recognised that there is no universal formulation of a standard of skill for company directors - but where a person is appointed to a designated position then there is a clear chance that the standard will change.

The thrust of Austin J's comments in this case and in ASIC v Rich is that it is no longer appropriate to assess the duties of directors and officer of companies by reference to a subjective standard. He concluded his comments on the position of Vines as the chief financial officer in this case with these very interesting observations:

"Given that the statutory language used before [the relevant statutory amendments] established ... an objective duty of care for directors and other officers, supplemented by an objective duty of skill where the appointment was made to a position requiring skill, it would be surprising if the new language [in section 232(4)] were held to have introduced a more subjective standard. ...

More importantly, the words 'in like position' refer, as a matter of ordinary meaning, to the designated position of an executive officer, in a case where the officer in question has been appointed to a designated position. Thus, whatever may be the position in the case of a non-executive director, the degree of care and diligence that a reasonable person 'in like position' to the chief financial officer of a corporation would exercise in the corporation's circumstances is the objective degree of care and diligence flowing from the position of chief financial officer, encompassing the special skill that is to be brought to such an office. ..." (See paras 46 and 47)

In the context of the current case it would appear that Austin J is saying that a person occupying the position of a chief financial officer of a large public corporation must have an identifiable specialised skill. In his view, unless it emerged in the evidence in this case that a position designated as" chief financial officer" was occupied by a person who for some reason could not be expected to exercise the same skills as other chief financial officers, evidence of what a reasonably competent chief financial officer would do in particular cases was relevant.

Austin J noted that his conclusion was a matter of potential importance for the duties of all executive officers of companies. He added that although he "regarded it as necessary to decide the point in order to reach my conclusion that the expert evidence of Mr Hogendijk is admissible, the determination of the point in order to rule on the admissibility of evidence would not [prevent further evidence being introduced in the eventual hearing]." (Para 49)

This decision is another very important one for directors and officers. It clearly identifies a higher standard for specialist officers (and directors) in companies, whether they are acting directors or simply officers. This is perhaps a different position than was previously thought to be the case. The gradual enhancement of the role of directors and their obligations is being pursued relentlessly not just by the legislature but by the courts. Unless Austin J is later overruled, this decision, together with his decision in ASIC v Rich, will play an important part in laying the framework on how these matters are to be assessed in the future.

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The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.