Day 128 Reasonable care and diligence

Reasonable care and diligence

As the actual controller of the company’s operation, the directors are expected to carry out their duties with reasonable care and diligence. In fact, the standard of care may be testified on four parts corresponding to the statutory requirement, where are the care, diligence, skills and delegation/ reliance.

According to S.180(1) Corporations Act(2001) (Cth), the ‘director of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise.’ Therefore, the objective test must be performed when judging whether the director is acting with care and diligence or not. The test involves the assumption of a reasonable person’s decision that is holding the same position as director and experiencing the same circumstances. The Daniels v Anderson(1995) indicated several examples fundamental standard of care as a director. To illustrate, the director is expected to understand the company’s business, monitor the business’ operation, be aware of the financial status of the company, and maintained a proper level of acknowledgement on the company’s business.

Besides the provision of reasonable care and diligence, corporations’ directors may also breach the duty if they failed to support the company with their skills, delegated their power to wrong trustee or relied on the false information. Sometimes board appoints directors due to their special knowledge or expertise. Hence that particular skill will need to pass the objective test, where other people with the same skill and knowledge are compared with their conduct. In addition, the director may delegate his power to other people or groups.( S.198D) However, the director will be held liable for any activity done by the delegate as if the power has been exercised by himself, unless on reasonable grounds, the director believes the delegate would act in accordingly to director's duties. Similarly, the director may rely on information provided by others. S. 189. But only the reliance was made on good faith, and the director has made independent assessment of the advice.