In Australia, directors owe their corporation a duty of care and diligence in exercising their powers and responsibilities. While these duties appear to be easily stated and understood, the reality is that the expectations that courts and regulators place on directors when exercising care and diligence are often shaped by the industry the particular corporation is in.

Given the unique and diverse nature of the fuel distribution, wholesaling and retailing industry in Australia, it is important for directors of ACAPMA member corporations to have a full understanding of their obligations to minimise legal and financial risks (both personally and for the corporation) arising from invalid decisions.

When thinking about the duty of care and diligence, directors should always ask themselves: what is the scope of my duties, and what is the standard of care I owe the company?

Scope of the duty

Both general law and the Corporations Act describe the scope of the duty owed by directors. At general law, directors are expected to (amongst other things):

  • acquire a working knowledge of the company’s fundamentals;
  • take reasonable steps to guide and monitor the company’s management;
  • monitor corporate affairs to assess whether business practices are safe and proper; and
  • read and understand the company’s accounts and frequently review the company’s financial position.

The Corporations Act takes a stronger position, with section 180(1) mandating that a director must exercise their powers and discharge their duties with the degree of care and diligence that a ‘reasonable person’ would exercise if they were in the same position. The reference to a ‘reasonable person’ invites questions as to the required standard of care.

Standard of Care

When reviewing the actions of directors, courts and regulators will assess decisions by reference to the circumstances of the corporation and the director’s position and responsibilities. In particular, a director is expected to make use of their personal background, experience and knowledge when exercising their powers. Thus, if a director has a particular background and experience in the fuel industry, this background is expected to be relied upon. In cases where directors have been appointed from outside the fuel industry, they are still expected to exercise common sense, practical wisdom and informed judgement when making decisions until particular industry experience is gained.

Of course, directors are not expected to make every decision by themselves. Directors necessarily rely on the information of others to assist with decision making. For the fuel industry, this may include information from engineers, chemists and marketing experts. This creates a question as to where this reliance fits within a director’s duty of care and diligence.

Fortunately, section 189 of the Corporations Act provides that where a director relies on information or advice, it is presumed that this reliance is reasonable if it is made in good faith and after making an independent assessment of the information. This assessment is based on the director’s knowledge of the complexity of the structure and operations of their business. Thus, directors cannot blindly rely on ‘experts’ when making key decisions.

Examples of areas that cannot be delegated by directors to others include statutory obligations (such as the requirement to approve financial reports) as well as matters of great significance to the viability of the company. To avoid misunderstandings, directors are advised to ensure that board meetings are conducted using proper procedures, including formal resolutions that are tabled with recorded votes. These provide crucial records demonstrating the directors have complied with their obligations.

While the broad nature of directors’ duties go beyond the scope of this article, at the very least it is important that directors of fuel industry corporations remain focused on the need to act with care and diligence. Built within this is a requirement to reflect on the unique aspects of the industry when making decisions, and not rely on a ‘one size fits all’ approach. Finally, while directors can rely on the advice and skill of others, at the end of the day, it is they who are ultimately responsible for a company’s fortunes, and their signature is on the dotted line.

[This article was written by Michael Joyce, Partner at Norton Rose Fulbright. michael.joyce@nortonrosefulbright.com.]

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