Directors’ Duties and Business Judgement

Appointment to a board gives a director access to the company’s authority and information. It also imposes duties that apply whenever those powers are exercised. The duties belong to each director individually even though the board usually acts collectively.

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Good faith, proper purpose and the company’s interests

Section 76 requires directors to act in good faith, for a proper purpose and in the best interests of the company. A power cannot be used to secure an improper advantage, cause harm to the company or pursue an undisclosed objective.

Proper purpose asks why the power was exercised. Directors may believe that a decision will benefit the company and still misuse a power where the true purpose falls outside the reason for which it was granted. An issue of shares may raise this concern if its principal purpose is to dilute a shareholder or preserve control rather than meet a genuine capital need.

The duty is owed to the company. Employees, customers, lenders, regulators and communities may nevertheless be central to the assessment of its long-term interests. Their position affects the company’s ability to operate, meet its obligations and create sustainable value.

The distinction is important. Stakeholder interests form part of responsible judgement where they affect the company. They do not authorise a director to substitute another party’s interests for those of the company.

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Independent judgement

A director may listen to management, shareholders, advisers and fellow board members. Those views may inform the decision, but they cannot replace the director’s own assessment. Consensus within the board does not remove personal responsibility.

Independent judgement does not require routine opposition. It requires proper engagement and a willingness to challenge information, assumptions or authority where the proposal appears incomplete.

A director who remains opposed to a proposal should vote against it and ensure that the dissent is recorded. An abstention may not provide protection where the Act imposes consequences on a director who participated in a decision and failed to vote against conduct known to be unlawful.

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Conflicts and personal financial interests

Directors may hold shares, serve on other boards or have relationships connected to a proposed transaction. The existence of an interest does not always establish misconduct. The legal concern lies in disclosure and the effect of the interest on participation.

Section 75 requires a director with a personal financial interest, or a relevant interest of a related person, to disclose the interest and its general nature before the board considers the matter. The director must then leave the meeting and may not participate in deliberation or voting, subject to the detailed statutory rules.

Standing declarations assist the company, but they do not replace consideration of the particular transaction. The minutes should record the disclosure, departure and any later return to the meeting.

Conflicts can extend beyond an immediate financial benefit. Confidentiality obligations, close relationships or competing appointments may affect objectivity even where the technical definition of a personal financial interest is not met. A board policy should address these broader circumstances.

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Care, skill and diligence

The statutory standard combines an objective assessment with the director’s own knowledge, skill and experience. A director must meet the level reasonably expected from someone performing the same functions. Greater expertise may increase what can reasonably be expected.

The law does not require every director to be an expert in every subject. It does require preparation, an understanding of the company and recognition of the limits of personal knowledge. Further information or specialist advice should be obtained where the board material does not support an informed conclusion.

Advice assists the process but does not transfer the decision. A legal opinion may establish that the company has authority to proceed without deciding whether the proposal is commercially sound. A financial review may confirm the model without deciding whether its assumptions are acceptable.

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The business judgement rule

The business judgement rule recognises that directors make decisions under uncertainty. A sound decision may still produce a poor commercial outcome. The law does not require directors to guarantee success.

The protection applies where the director took reasonably diligent steps to become informed, had no undisclosed material personal financial interest and held an actual and rational belief that the decision served the company’s best interests.

The rule does not validate an improper purpose, a decision outside the board’s authority or conduct that contravenes another provision of the Act. It protects an informed exercise of judgement, not optimism detached from evidence.

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Information and reliance

The appropriate level of investigation depends on the decision. A routine approval will not demand the same process as an acquisition, restructuring or substantial distribution. The value involved, effect on the company and degree of uncertainty should shape the information placed before the board.

Directors may rely on employees, professionals and committees where the reliance is reasonable and the subject falls within their competence. Warning signs, inconsistent information or weak assumptions require further enquiry.

Delegation does not remove board accountability. A committee may undertake detailed work, but the board should understand the reasoning and unresolved risks before approving a matter reserved for it.

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Responsible risk and the solvency and liquidity test

The safest course is not always the correct one. Boards may support a proposal carrying meaningful risk where they understand the exposure and consider it justified by the company’s circumstances. The decision should have a rational connection to the information considered.

Some corporate actions require the specific solvency and liquidity test in section 4. The solvency limb considers whether fairly valued assets equal or exceed fairly valued liabilities, including reasonably foreseeable contingent items. The liquidity limb considers whether the company will be able to pay its debts in the ordinary course for the following 12 months.

The test applies to matters such as distributions, certain forms of financial assistance, specified share repurchases and amalgamations or mergers. Both parts must be satisfied. A valuable asset base does not establish that cash will be available to meet debts, while short-term liquidity does not establish that the company is solvent.

The board should work from current financial information and a properly supported cash-flow forecast. Material events, funding commitments, contingent liabilities and changes occurring before implementation should be considered. A resolution that merely states that the test has been met will provide little support if the underlying work is absent.

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The record supporting judgement

The corporate record should show that the board understood the decision and the authority being exercised. It should identify the principal information, interests disclosed, advice received, conditions attached and resolution adopted.

Minutes need not reproduce every contribution. They should give a fair and intelligible account of the process and any material dissent. The record should reflect the meeting that occurred rather than a stronger process reconstructed after the event.