In some cases, non-executive directors remain passive,
taking no active role in the management of the organisation.
This type of non-executive director is sometimes referred to as
a 'sleeping' director. What is often
misunderstood by non-executive directors, particularly in
smaller or family run organisations, is that regardless of
their status, both executive and non-executive or
'sleeping' directors must comply with the legal
requirements and statutory duties pursuant to the Corporations
The Corporations Act 2001 requires that directors must:
use the care and diligence of a reasonable person in the
corporation's circumstances, in the same position and
with the same responsibilities as the Director (s180);
act in good faith in the best interests of the
corporation and for a proper purpose (s181);
not use their position improperly to gain an advantage
for themselves or someone else or cause detriment to the
corporation (s182); and
not use improperly information obtained as a result of
being a director to gain an advantage for themselves or
someone else or cause detriment to the corporation
From a historical point of view, there was some acceptance
by the Courts for the position of passive non-executive
directors relying on their lack of specific knowledge of the
corporation as a protection against breaches of
This position has changed in the economic fallout of the
recession in the late 1980's with a number of
insolvency cases during the 1990's leading to the
current view on the role of non-executive directors.
In Morley v. Statewide Tobacco Services Ltd  1 VR 451
a husband and wife (both directors) owned a chain of
tobacconists. When the husband died, the wife asked her son to
carry on running the business. Under the son's control
the business rapidly deteriorated and ended up in liquidation.
The wife was sued by the main creditor for allowing the company
to trade while insolvent, breaching her duty to act with care
and diligence. Even though she was a passive or
'sleeping' director having no involvement in
the running of the company, she was found personally liable for
the debt to that creditor.
In Deputy Commissioner of Taxation v Clark  NSWCA 91
the New South Wales Court of Appeal also considered the
position of a housewife 'sleeping' director
attempting to rely on non participation in the management of
the company to avoid liability under the insolvent trading
provisions of the Corporations Act. The Honourable James
Spigelman, AC in his judgement referred to the trend in
legislative development and case law with respect to the
increasing expectation that directors will participate in the
management of a company.
The judgement highlighted the point that the complete
failure to participate in the management of a company,
regardless of the reason, is inconsistent with the basic duty
of a director to share in the management of a company and,
furthermore, cannot be relied upon in defence of liability for
Although, The Honourable James Spigelman acknowledged that
Mrs. Clark became a director of her husband's company
because there had to be two directors and that she relied on
her husband completely to manage the company, he concluded that
'there is no justification for a doctrine, which would
hold sleeping directors to be `de facto non-directors',
who should be relieved of their liabilities'. The Court
of Appeal allowed the appeal against her.
Non-executive directors are reminded that their role is a
serious undertaking with legal responsibilities and
consequences. The Courts have clearly indicated a willingness
to impose high standards on directors' conduct and will
not provide any leniency for non-executive directors or
'sleeping' directors where breaches of
directors' duties occur.
The Courts expect non-executive directors to apply an
independent and enquiring mind to the information provided to
them by executive directors and officers of the
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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