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Module 6 · The duty of care and the business judgment rule

The recurring hypothetical architecture: a charismatic but unvetted proposal, one director overselling, one suppressing doubts out of loyalty, one wholly passive. The marks sit in the per-defendant adjustment of the standard and then a raise-and-reject pass through reliance, delegation and the business judgment rule. Be ready to argue the essay in both directions: that s 180(2) protects directors too much, and that it should protect them more, so hold arguments both ways.

Cases at a glance

Case	In a line
AWA	AWA's foreign exchange dealer made unauthorised loans to cover losses and the board was never told. The modern objective minimum emerged
Daniels	The appeal from AWA and the more authoritative statement. Informed, active, financially literate directors, and no sleeping directors
Friedrich	A director needs a general understanding of the business and its risks. The courts impose exacting demands
Healey	Directors signed accounts that misclassified billions of current liabilities as non current. An irreducible accounts responsibility, with no sole reliance on management
ASIC v Adler	HIH's investment subsidiary paid $10 million to a company solely directed by Adler, without board knowledge or controls. Special vigilance where conflict, and the standard tracks circumstances and responsibilities
Maxwell	The factor list for how the corporation's circumstances adjust the standard
Macdonald	Management competence and the responsibilities of other roles held bear on the standard
Rich	The CEO's greater remit, the BJR onus, the judgment definition, the informing factors and rational belief
Vines	Each executive is measured against a reasonably competent person in that position. Negligence principles assist
Morley	Secretaries and general counsel carry compliance and legal risk duties, and may need to disclose the limits of advice
Mitchell (No 2)	Deficient meetings. The chair bears particular procedural responsibility for the board's functioning
Shafron	Responsibilities include statutory ones and those factually performed
Vrisakis	Balance the foreseeable risk against the potential benefit. Reasonable risks that fail are not punished
Cassimatis	The company gave financial advice without a financial basis. Risks include legal and reputational harm, and stepping stones followed
Mariner	No duty of perfection. Ordinary and new business qualify as judgments, and rational belief fails only where no reasonable person could hold it
Wyong SC	The negligence calculus is imported to judge reasonableness
Van Reesema	Care breaches cascade into or from other duty breaches
Agricultural Land	Negligence in taking reasonable steps to ensure compliance grounds stepping stones liability
Sino Australia Oil and Gas	Misleading prospectuses exposed the company. Stepping stones where reasonable steps were not taken
Citrofresh	Reliance factors include actual expertise and honesty of those relied on
Re Property Force Consultants	Reliance stands where nothing put the director on inquiry
Re Barings	Supervision survives delegation and reliance
Fortescue Metals Group	Compliance with the Act is not a business judgment. The onus rests on the director
McGellin	A material personal interest is real or substantial and capable of influencing a vote
Harlowe's Nominees	Courts will not review the merits of bona fide judgments within interest and purpose
Howard Smith	The general law reluctance to second guess business judgments
Wayde	Intervention is possible where no reasonable board could so decide

Attack plan. Conduct first, defences last. 1. Who is bound. Directors and officers, because s 180(1) reaches both on the Module 4 characterisation. 2. Particularise the conduct. Identify precisely the conduct or omission impugned, since the 2023 report made breach particularisation a marker of good answers, and ask whether a risk was taken that needs analysing. 3. Fix the standard. Fix the minimum, then adjust it: the corporation's circumstances, the office held, the responsibilities actually performed, special skills, any conflict of interest. 4. Breach. Balance the foreseeable risk against the benefit. Reasonable failures from reasonable risks are permitted. 5. Defences, in order. Reliance (s 189), delegation (s 190 and s 198D), the business judgment rule (s 180(2)). Raise each that the facts make arguable, then resolve it, because examiners plant the material for the defence and the fact that defeats it. 6. Consequences. Run them through Module 4's civil penalty pathway, and check involvement liability for the non-director helpers.

The duty and its standard

RULE. compassDirectors and officers must exercise their powers and discharge their duties with the care and diligence of a reasonable person who (a) was a director or officer of a corporation in the corporation's circumstances and (b) occupied the office held by, and had the same responsibilities within the corporation as, that director or officer (s 180(1)). The duty exists at general law in equity, tort and contract and in statute, with the same content in each.

The standard is objective, the reasonable person in a company of that size and complexity, holding those duties and responsibilities. It is a standard of reasonable care, not perfection.

RULE. checklistThe modern minimum requires every director to inform themselves, be active and be financially literate. That means being able to reach a reasonably informed opinion, attending board meetings, and supervising and monitoring the company's affairs and policy, because ignorance cannot be claimed (AWA; Daniels; Adler).

RULE. arrowA director needs at least a general understanding of the company's business, its risks and its economics, and must take a diligent and intelligent interest in the information available, applying an enquiring mind and making further enquiries where appropriate (Friedrich; Healey).

No dummy, passive or sleeping directors: if you lack the experience, get it or resign (AWA; Daniels; Adler).
Appointment for a special reason does not license ignoring other matters. Attention must go to whatever would reasonably attract inquiry (Adler).
Not having primary control of the decision does not avoid responsibility: a railroaded director should record the objection and do what is necessary to discharge the duty (Adler).
Breach of this duty can cascade into or from other breaches, careless contracting for an improper purpose, or vice versa (Van Reesema; Adler).

Balancing foreseeable risk against benefit

RULE. scalesThe duty is not a duty to be perfect, and reasonable business risks that fail should not be punished. Breach is assessed by balancing the foreseeable risk against the potential benefit, targeting recklessness rather than misfortune (Vrisakis; Mariner; Cassimatis; Vines).

If risks exist, consider how the director dealt with them (Vrisakis). Risks include reputational and legal harm, not just financial (Cassimatis), and negligence principles assist in judging reasonableness (Vines; Wyong SC).
Special vigilance and scrupulous concern are demanded where the transaction invites potential conflict. In ASIC v Adler, a $10 million payment out of HIH's investment subsidiary to a company solely directed by Adler, without board or investment-committee knowledge and with no authorised loan practice or proper systems of control, was the archetype. At minimum, get board approval.

Adjusting the standard

The standard rises with the setting and the seat. Directors are held to the knowledge and experience they have, the skills a reasonably competent person in their position would have (Adler).

Adjustment source	Content	Authority
The corporation's circumstances	Type (proprietary vs public), constitution and functions vested, size and nature, board composition, directors' terms and skills, distribution of responsibilities	Adler; Maxwell
Management quality	Competence of management and advisers	Macdonald
Commercial context	Terms of trade, listing, size and nature of subsidiaries	Rich
Actual responsibilities	Statutory ones, expressly delegated ones, other roles held, and what the person factually performs, which may exceed the position description, especially in smaller, hands-on companies	Shafron; Rich; Macdonald; Adler

Position-specific applications

Managing directors and executive officers. The MD or CEO is management's leader with a greater remit: a detailed understanding of financial position and performance, ensuring the board is accurately updated, and ensuring accounting and information systems work (Rich; Vines). Each executive is measured against a reasonably competent person in that particular position, CEO or CFO (Vines). Company secretaries and general counsel carry heightened duties for regulatory compliance and protection from legal risk, and one giving advice may have to disclose the advice's limitations (Morley).

Chairpersons. The chair has procedural authority and is more responsible for the board's performance than anyone else: ensuring the board is accurately, completely and reliably informed with sufficient time, facilitating the board's working and composition and its connection to management, and ensuring sufficient frequency and length of meetings. The duty may intensify where accuracy is critical to solvency or new business is starting (Mitchell (No 2); Rich; AWA; Daniels). Each chair's individual responsibilities also matter.

Non-executive directors. Day-to-day absence does not lower the minimum standard (AWA; Daniels), and actual responsibilities shape the duty's extent but non-executive status is not a discount (Rich). A non-executive cannot completely or solely rely on the executives: if it is in the board's remit, it is their responsibility to pay attention and not abdicate (Healey).

Stepping stones liability

Stepping stones is the two-step pattern in which the company contravenes the Act and the director's failure of care in exposing the company to that harm becomes a personal s 180(1) breach. The duty is not a general duty to make the company follow the Act, and causing a corporate contravention does not automatically breach s 180. But it can, where the director did not take all reasonable steps to ensure compliance, issued misleading prospectuses, or had the company give financial advice without a financial basis (Agricultural Land; Sino Australia Oil and Gas; Cassimatis). The analytic bridge back to the standard is the risk-benefit balance: exposing the company to legal and reputational risk for little benefit is the breach.

Delegation and reliance

Statutory delegation (s 198D). Unless the constitution provides otherwise, the directors may delegate any of their powers to a committee of directors, a director, an employee, or any other person (s 198D(1)(a) to (d)). The delegate must exercise the power in accordance with any directions of the directors (s 198D(2)), and the exercise of the power is as effective as if the directors had exercised it themselves (s 198D(3)). As a replaceable rule, powers may be conferred on a managing director and varied or revoked (s 198C).

RULE. checklisttwistA director is responsible for a power delegated under s 198D as if they had exercised it themselves. The exception requires that the director believed on reasonable grounds at all times that the delegate would exercise the power in conformity with the directors' statutory and constitutional duties. The director must also have believed on reasonable grounds, in good faith and after proper inquiry if the circumstances indicated the need, that the delegate was reliable and competent for that power (s 190(2)).

RULE. twistReliance on information or on professional or expert advice is taken to be reasonable unless the contrary is proved (s 189). The permitted sources are an employee believed on reasonable grounds to be reliable and competent in the matters, a professional adviser or expert in matters believed on reasonable grounds to be within their competence, another director or officer within their authority, and a committee the director did not serve on acting within its authority (s 189(a)(i) to (iv)). The reliance must be made in good faith and after an independent assessment having regard to the director's knowledge of the corporation and the complexity of its structure and operations, and the section operates where the reasonableness of the reliance arises (s 189(b); s 189(c)).

At general law, a director may rely on the judgment of entrusted officers, but reliance becomes unreasonable where the director knew or should have known undermining facts (Adler; Daniels). The factors:

Was that type of function properly delegated to that person.
Was the director on notice of anything contrary.
Honest belief in trustworthiness, reliability and competence.
The transaction's riskiness and nature.
Steps taken to verify trust.
Whether those relied on were actually experts in the matter, or dishonest (Citrofresh).

If nothing put the director on inquiry, the reliance stands (Re Property Force Consultants). Where responsibilities are undertaken elsewhere, as by legal retainer, the scope can shift (Morley; Shafron).

The business judgment rule (s 180(2))

Business judgment (s 180(3)). Any decision to take or not take action in respect of a matter relevant to the business operations of the corporation. It must be a decision: planning, budgeting, forecasting and preparatory decisions qualify if the mind was turned (Rich), and ordinary business and starting a new operation qualify (Mariner). Oversight does not (Rich), compliance with the Act does not (Fortescue Metals Group), and neglecting to implement safeguards without turning the mind to what they should be, or whether to act at all, is not a decision (Rich).

RULE. checklistA director or officer who makes a business judgment is taken to meet s 180(1) and its general law equivalents where they (a) make the judgment in good faith for a proper purpose, (b) do not have a material personal interest in its subject matter, (c) inform themselves about the subject matter to the extent they reasonably believe appropriate, and (d) rationally believe the judgment is in the corporation's best interests (s 180(2)). The belief is rational unless it is one no reasonable person in their position would hold.

RULE. The onus of establishing s 180(2) lies on the director, with some judicial hesitation, and the statutory rule defends the duty of care only (Rich; Adler; Fortescue Metals Group). The general law rule is merely a consideration under which courts will not inquire into the merits of business judgments made within interest, in good faith and for a proper purpose (Rich; Harlowe's Nominees; Howard Smith). Intervention remains possible where no reasonable board could consider the decision within interest or purpose (Wayde).

Element notes:

(a) Good faith and proper purpose track s 181(1) and are subjective, honestly and for a proper reason.
(b) The material personal interest must be in the judgment's subject matter, the decision actually being made (Rich), and must be real or substantial and capable of influencing a vote (McGellin).
(c) Informing is about the decision's subject matter, not general diligence. Reasonableness of the belief turns on the judgment's importance, time available, cost of informing, confidence in whoever is exploring the matter, the company's state, competing demands, and whether material information was reasonably available (Rich). A reasonable belief that enough was done can suffice even if information was missed. This is usually the critical element.
(d) Rational belief must be based on or derived from reasoning, sufficient on the director's information to be rational even if not convincing. It is subjective, failing only where no reasonable person could hold it (Rich; Mariner).

BJR element (s 180(2))	The fact pattern that defeats it
A business judgment at all (s 180(3))	No decision was made: oversight failures, forgetting, never turning the mind, "she forgets to check the wording" (2024), unaddressed agenda items, compliance obligations (Rich; Fortescue)
(a) good faith, proper purpose	A ranked improper motive on the facts. The Module 5 mixed purposes material feeds straight in
(b) no material personal interest	An interest in the very subject matter decided, real and substantial, vote-influencing (McGellin), such as retaining office or a personal stake in the counterparty
(c) informed to the extent reasonably believed appropriate	No survey, no expert advice, "rely on their own judgment" under time pressure (2020), an important, cheap-to-investigate matter left unexplored (the Rich factors)
(d) rational belief in best interests	No reasoning at all, or a belief no reasonable person in the position could hold (Mariner)

Critical pitfalls and counter-arguments

Trap. Reliance protects only the reliance. s 189 makes the act of relying reasonable. It does not immunise the consequences or the rest of the director's conduct.

Trap. Quantified harm is planted for the risk-benefit balance. Where the paper gives you a dollar figure or a regulatory penalty, it is the risk side of the Vrisakis and Cassimatis balance. Use it expressly.

Trap. The accounts and reporting line. Healey fixes an irreducible responsibility on directors approving financial statements, reading them with an enquiring, financially literate mind. The sympathetic-incompetence bait, "no financial training" and "Serena failed maths three years in a row at high school", invites arguing the standard down. Healey answers that the financial-literacy floor does not move.

Trap. The deficient-meetings line. The 2023 report stated "ASIC v Mitchell was particularly relevant on this set of facts as concerns deficient meetings". The planted words were "a quick chat via zoom each month during which they adopt Linda's decisions" and directors who "rushed off to other commitments, and eventually left the meeting without addressing the matter". Match Mitchell (No 2) to meeting-conduct facts: frequency, time, informing, and the chair's particular procedural responsibility.

Trap. Per-defendant analysis is demanded. A block conclusion for "the directors" loses the adjustment marks. Run the seat-specific standard for each.

Trap. Supervision survives delegation. Delegating or relying never discharges the residual duty to supervise (Re Barings), and a non-executive cannot solely or completely rely on management. There is no substitute for the director's own attention and examination (Healey).

Trap. Match the defence to the delegation route. The s 190(2) defence applies only to delegations under s 198D. If the delegation is constitutional, general law principles govern. And s 190(2) shifts responsibility rather than erasing breach: the delegate's exercise may still be a breach, just not the director's.

Trap. The raise-and-reject structure. The report: "It was also necessary to address reliance/delegation and the business judgment rule." Raise the defence, apply the factors, reject on the facts.

Trap. The BJR needs an actual judgment. It never protects oversight failures. The examiners' report required "s 180 (including the standard of care, the balancing of risk/benefit and business judgment rule)": the expected move is to raise s 180(2), and reject it because forgetting is not a business judgment (s 180(3); Rich). The same disqualifier applies to the 2023 directors' non-decision on the lapsed supply contract.

Trap. The missed accessorial route. In 2023, after the directors' s 180 breaches, the report noted "It was possible that each of Daisy and Linda were involved in the contravention of s 180 and liable on this basis", and "hardly any students mentioned this, despite it being discussed in class." Linda organised the $2 million payment, and Daisy prepared the deficient statements. Where non-director helpers are causally entangled in the breach, run involvement liability through Module 4 (s 79 knowledge of the essential facts) before abandoning them. Daisy failing the officer definition, the Module 4 red herring, closes the primary route, not the accessorial one.

Exam calibration. The recurring hypothetical architecture: a charismatic but unvetted proposal, one director oversells, one suppresses doubts out of loyalty, one is wholly passive. The marks sit in the per-defendant adjustment of the standard, then a raise-and-reject pass through reliance, delegation and the business judgment rule. Be ready to argue the essay in both directions, and hold arguments both ways: the narrow gateway of the rule (s 180(3)) and the director-borne onus, against the policy of not punishing reasonable risks (Vrisakis).

Take it to the practice bank

This module is drilled in the Corporations Law practice bank. Every problem there carries a realistic Pass answer, an H1 model answer, and an examiner's comment explaining the decisive fact and where the marks are lost.

Practice prompts

Take a fact pattern with a chair, a managing director and a CFO, and write the adjusted standard sentence for each defendant separately, naming the seat and the responsibilities actually performed.
Write a breach paragraph that prices the risk: put the quantified harm on one side of the Vrisakis and Cassimatis balance and the potential benefit on the other, then conclude.
Raise reliance and delegation for a director who trusted a diligent, committed delegate, apply the factors, and defeat the defence on abdication facts.
Take an oversight failure and write the two sentences that raise s 180(2) and then reject it because no decision was made (s 180(3); Rich).
Draft both sides of the essay on whether s 180(2) protects directors too much or too little, using the narrow gateway and the director-borne onus against the policy of not punishing reasonable risks.

Check your understanding

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