Article by Natalie Whitby and David Gray
The high profile corporate collapses of HIH, One Tel, Ansett and Harris Scarfe have placed issues about company directors' duties in the spotlight1. In one recent example, the Supreme Court of New South Wales considered whether chairmen of directors have a more extensive duty of care than other directors.
One Tel, a listed company on the Australian Stock Exchange (ASX), was placed into voluntary administration in May 2001 and into liquidation in July 2001.
ASIC commenced proceedings against a number of former executive directors of One Tel and the former non-executive chairman of directors, John Greaves. The proceedings included compensation orders under the civil penalty provisions of the Corporations Act 2001 (Cth) for breach of the statutory duty of care contained in s.180(1) of the Corporations Law. (now replaced in identical terms by s180(1) of the Corporations Act 2001 (Cth))
Greaves was chairman for an aggregate period of over four years, chairman of the finance and audit committee for eight months before the company's collapse, and a qualified chartered accountant with substantial experience as the finance director or chief financial officer of large public companies.
The substance of ASIC's claim against Greaves, as stated by Justice Austin, is that:
'he had special responsibilities beyond those of the other non-executive directors, by reason of his position of chairman of the board and the Finance and Audit Committee, and also by reason of his high qualifications, experience and expertise relative to other directors.'
Greaves applied to the Supreme Court of New South Wales to strike out the action brought against him by ASIC arguing, that 'no reasonable cause of action was disclosed, because the duties to which [he] was alleged to have been subject are not known to law'.
Justice Austin dismissed Greaves' application finding that ASIC had made out a reasonable case to argue.
ASIC's submissions centred on the interpretation of s.180(1).
'180(1) 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 corporations' circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.' (emphasis added)
By virtue of his various positions within One Tel, his professional experience and the particular financial circumstances of One Tel, Greaves had 'responsibilities' above and beyond those of the other directors. Those responsibilities included taking reasonable steps to ensure an adequate flow of information to the Board so that it was fully informed of the company's financial position. Greaves ought to have ensured that the Board:
- was given more information about cash, creditors and debtors
- was supplied with monthly management accounts of One Tel
- had access to all other relevant information
- was convened for substantial meetings at least fortnightly
- understood the financial position of One Tel, and
- had a properly functioning independent audit committee and internal review of One Tel's financial position.
Greaves had the additional responsibility of assessing the quality and promptness of the information supplied to the board.
Greaves argued that the word 'responsibilities' in s.180(1) refers to responsibilities conferred on the relevant director by the company under its constitution, by resolution or otherwise. Accordingly, a chairman has no greater responsibility than any other director and the only manner in which that roles differs was in relation to the 'procedural or ceremonial' role of the chairman.
The NSW Supreme Court's decision
Justice Austin decided that a chairman is, in fact, vested with higher duties (beyond the duties considered 'procedural' in nature) than other directors. He referred to the decisions in Woolworths Ltd v Kelly2 and AWA Ltd v Daniels3.
In AWA v Daniels, Justice Rogers said:
'The third division of function is between the directors and the chairman of the board of directors. The chairman is responsible to a greater extent than any other director for the performance of the board as a whole and each member of it. The chairman has the primary responsibility of selecting matters and documents to be brought to the board's attention, in formulating the policy of the board and in promoting the position of the company.'
ASIC also relied on the expert evidence of Roderick Cameron, chairman of Zurich, and Richard Warburton, chairman of David Jones, as to the responsibilities of chairmen of listed Australian companies and on corporate governance commentary regarding the role of chairmen in listed companies. That evidence supported the submission that chairmen of such companies had greater practical responsibilities than other directors.
Justice Austin concluded that:
'...evidence of corporate practice about the distribution of work between the chairman and other directors is relevant to the establishment of the factual responsibilities of the chairman, if not directly relevant to the establishment of his or her legal duties.'
The practical responsibilities of chairmen translated to legal responsibilities under s.180(1):
'It may appear, at first blush, to be unduly harsh on a person in Greaves' position that evidence of this kind might be relied upon to establish that in 2001 he was subject to responsibilities and, ultimately, legal duties never before set out in a statute or by judicial decision. It should be remembered, however, that the Court's role, in determining the liability of a defendant for his conduct as company chairman, is to articulate and apply a standard of care that reflects contemporary community expectations. It is now commonplace to observe that the standard of care expected of company directors, both by the common law … and under statutory provisions, has been raised over the last century or so. One might correspondingly expect that the standard for company chairmen has also been raised.'
On the basis of the evidence adduced by ASIC, there was a reasonable case to argue that Greaves had additional legal responsibilities as chairman of One Tel.
It is important to note the limiting words of Justice Austin, in the particular circumstances of this case:
'The case that the Commission seeks to make out is not a case about the duties of a company chairman at large, but about the duties of a company chairman who is also a chairman of the audit committee, having regard to the particular circumstances of the company and his special personal qualifications.'
Chairmen may seek to distinguish their responsibilities from those expounded in this decision on the grounds that their factual circumstances are different. But a prudent approach for company chairmen would be to ensure that they are fulfilling all the responsibilities which ASIC claims apply to Greaves.
Chairmen of more than one company must consider whether they have the ability to fulfil these duties in relation to a number of public companies in the light of this decision.
If His Honour Justice Austin is correct in his assessment that the standard of care for company chairmen should reflect contemporary community expectations, the current economic climate and widespread dissatisfaction in the investment community and among ordinary shareholders with the performance of public listed companies and their boards suggest that the legal responsibilities of chairmen can only increase.
1. See for example – Re HIH Insurance Limited; Australian Securities and Investment Commission v Adler (2002) 41 ACSR 72.
2. (1991) 4 ACSR 431 at 445.
3. (1992) 7 ACSR 759 at 867.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.