Defences for Breaches of Directors' Duties

Should there be more defences available to directors for breaches of
the directors’ duties regime or are the current defences sufficient?
In relation to a corporation, the Directors have the role of monitoring and oversight as well as a
strategic role. On the other hand, the managers and executives have the responsibility regarding
the routine operations of the corporation and also to implement the strategy that has been decided
by the board of directors. Under the circumstances,. It can be stated that the directors are the
“hearts and minds” of the companies and the managers are the “arms and legs” because they
provide the “doing” of the company and also implement the decisions that have been taken by
the directors. However, this delineation is not well understood by the general public and the
media. In many cases, this distinction is not reflected in the way related with the application of
the law in Australia.1 The result is that there is some blurring and misunderstanding regarding the
appropriate division of the roles and responsibilities of the directors and management. The result
is that there are several persons who are of the opinion that the directors of corporations
(including the non-executive directors) are closely associated with the management of the affairs
of the company that they can make sure that nothing goes wrong. However, this view is not
correct both in law and in practice. This view has resulted in unrealistic expectations regarding
what should be done by the directors in areas that fall under the responsibility of the managers.
Therefore, if these expectations have to be fulfilled, all the directors will be required to become
in effect the full-time employees of the corporation. Such a situation will undermine the
1 Sally Ann Burrows, "Directors' Duties (1St Edition)20102Andrew Keay. Directors' Duties (1St Edition). Jordan
Publishing Limited, 2009. 476Pp." (2010) 52(6) International Journal of Law and Management.

independence of outlook and the objectivity of non-executive directors, which are very essential
for effective corporate governance.2
For example in the Centro decision, it was discovered by the court that the directors have
breached the provisions of the Corporations Act when they identified the fact that the
management representation letter given to the board was not compliant with the requirements of
section 295A. This was that even if the letter had been prepared by the professional advisors of
the company in order to comply with requirements.3 It was argued by the non-executive directors
that effect of such findings will be that there will be required to “look up s295A themselves and
examine its terms and compare and construe the contents of the top management representation
letters that are placed before them. It was further mentioned that the idea of undertaking such a
process by the nonexecutive directors was not very real and this type of work falls under the
domain of financial accountants and the general counsel who have been employed by the
company to make sure that the material presented by them to the board is correct. However, the
court was of the opinion that the requirements prescribed by section 295A were succinct and
clear. Therefore, the simple reading of this provision would have indicated its requirements. The
court mentioned the fact that none of the directors of the company have looked up section 295A.
There is a real concern present integrates the shift is taking place in the role of the board of
directors, from governance, performance and strategy to technical compliance and conformance.
It has been stated in this regard that good corporate governance includes clear and distinct duties
that have to be performed by the board of the company and senior management.4 In this regard,
2 Vivien Chen, "Enforcement Of Directors’ Duties In Malaysia And Australia: The Implications Of Context" [2019]
Oxford University Commonwealth Law Journal.
3 Martin Gelter and Geneviive Helleringer, "Constituency Directors And Corporate Fiduciary Duties" [2013] SSRN
Electronic Journal.
4 Andrew Keay, "The Shifting Of Directors' Duties In The Vicinity Of Insolvency" (2015) 24(2) International
Insolvency Review.

the obligations of the board can be described as overseeing, monitoring and directing the
performance of the corporation, overseeing and approving strategic policies, including the
policies, related risk management and making sure that these policies and frameworks proved to
be efficient. On the other hand, the management has a responsibility for day-to-day operations
and to implement the strategic policies and frameworks. Generally it is overseen by the board
bodies being implemented by the management.
Even from the perspective of small businesses, the expectation proves to be unrealistic that the
directors will be in a position to supervise every action at all times. While the owners of small
businesses are likely to be much more involved in the routine operations of the business as
compared to the directors of large corporations, the directors of small businesses may also
become liable for the breach or an offense that has been carried out by an employee on behalf of
the corporation without the knowledge of the directors. Regarding the nonexecutive directors of
larger corporations, they should make decisions and judgments on behalf of the company, within
the prescribed time limit, without the availability of all the relevant information and being aware
that future circumstances and events cannot be predicted accurately and therefore current risks
are present in the delivery of anticipated outcome, that is relevant for the decision taken by
them.5 As compared with the performance of corporations and their boards, the decisions taken
by nonexecutive directors in course of the role are generally evaluated and judged by the
regulators, ports and the media and also general public with the benefit of hindsight, without any
time constraints and having access to all relevant information as well as its likely consequences.
In Lewis v Doran6 this commercial reality has been recognized by the court in context of
insolvency. The court had referred to its “inestimable benefit of the wisdom of hindsight”. There
5 Wasima Khan, "Towards Context-Specific Directors' Duties And Enforcement Mechanisms In The Banking Sector?"
[2013] Erasmus Law Review.
6 Lewis v Doran (2004) 50 ACSR 175