Courts continue to stress importance of directors’ duties – implications from the James Hardie case

September, 2012

We continue to come across a misconception within the not-for-profit sector, that that the duties of a director or a committee member of a not-for-profit organisation, are different to those of any company director of a for profit company. This misconception is a concern because, generally speaking, the duties of a director of a not-for-profit organisation (which includes charities) are equivalent to those of any company director of a for profit company.

It is a serious role which carries significant duties, responsibilities and potential exposures. The fact that directors may be acting in a voluntary capacity and not being paid for their services, makes no difference to their legal duties and obligations.

The recent High Court decision in the James Hardie case highlights how important it is for directors to be aware of their duties and that they comply with those duties.

So what duties does a director have?

Depending on the legal structure of their organisation, directors are subject to all the duties and liabilities placed on them by either the Corporations Act 2001, or applicable governing state legislation if the organisation is an incorporated association, and also the common law.

Some of the main duties include fiduciary duties, a duty of care, skill and diligence and a duty not to improperly use position or information.

What was the court’s take on directors’ duties in the James Hardie case?

The recent 2012 James Hardie case, which follows the 2011 Centro case, shows that the Australian courts take a strict view on the duties of directors. While both of these cases involve for-profit organisations, as mentioned above, the view on directors’ duties also applies to not-for-profit organisations.

In the James Hardie case, the High Court held that the directors had breached their statutory duty of care and diligence when they approved a misleading ASX announcement on a corporate restructure. The Court held that the directors had not discharged their statutory duties with the degree of care and diligence that a reasonable person in their position would have exercised, given their responsibilities.

Practical pointers to take away from James Hardie

The courts have made it clear that from a practical perspective, directors need to:

• Read all of the board papers, even if it is a large board pack;

• Ask questions if they are not sure about something;

• Ask for more information if they do not think they have enough information to make a reasonable decision; and

• Take reasonable steps to make sure the minutes are right and not misleading.

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