Director’s liability

Tim Brown
Tim Brown

The new Companies Act has introduced the “business judgement test” when determining whether directors should be held personally liable for their actions.

A director is expected to act with care, skill and diligence. This duty has an objective and subjective component. Firstly, the director must act in a way that would reasonably be expected of a person in the same position. This is the objective test. Secondly, the director must act in a way that would be reasonably expected of a person within similar knowledge, skill and experience. More would, for example, be expected of a chartered account who is director than of the average layperson.

The business judgement test provides that a director must, when making or supporting a decision of the board, take reasonably diligent steps to become informed about the matter. The director must then make his or her decision in the best interests of the company. In so doing, the director must be able to show that he or she had a rational basis for believing that the decision was in the best interests of the company.

The good news is that directors are entitled to rely on company employees and professionals appointed by the company, provided there are reasonable grounds for supposing that these persons are competent.

Nothing is illegal if one hundred well-placed business men decide to do it.

– Andrew Young