Australian Lawsuit Exposes Threat to Non Exec Directors

Man in Boardroom

Remember the legal drama surrounding the directors of Equitable Life and Barings? In both cases the defence of the directors, and especially the non executive directors, was the following:

  • That they had relied on the advice of the auditors and managers of the company.
  • That they were entitled to delegate some supervisory function.
  • That it would be unreasonable to expect them to have a detailed knowledge of their companies’ financial statements.

The recent Federal Court of Australia’s decision in ASIC v Healey may come as something of a nasty surprise to non execs seeking to advance a similar defence in the future.

Directors Left Holding the Can

The Australian Securities and Investments Commission (ASIC) sued all seven non-executive directors as well as the CEO of Centro Group. The Court found that they had breached their duties in failing to notice a significant error in the company’s financial statements. The collective failure of the directors related to them not spotting the misclassification of short term debt as long term debt and the failure to disclose certain guarantees as post balance sheet events.

The judge drew no distinction between the nature of duties owed by the CEO and those of the non execs nor between the audit committee members and the rest of the board.

In the UK just as in Australia all directors are held to a common standard of care at law. There was no suggestion of any failure by the directors to carry out their responsibilities honestly. Indeed, the judge noted that the directors were “intelligent, experienced and conscientious people.” He nevertheless found that they had failed to exercise the requisite degree of care and skill required of them by law.

Are you Covered for the Really Important Things?

Perhaps one of the most interesting aspects of the judgment (apart from the outcome itself) was the judge’s comment that directors have the power (and therefore implicitly the responsibility) to control the flow of information to them.

In a D&O liability insurance context, I ask myself whether a parallel and pertinent question for directors to ask themselves might be: “To what extent am I covered for the really important things?” Things like no-quibble legal costs for all investigations and enquiries which might give rise to a claim, or the freedom and ability to conduct the defence of any claim without undue insurer control.

Together with leading law firm Allen & Overy, we are conducting a survey of directors at some of the top companies aimed at understanding what they regard as the key liability and coverage issues confronting them.

I will of course share the results of this research with you on the WillisWire by the end of November, but would welcome any feedback you, our readers, may have on this topic.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
Categories: Australasia, Directors & Officers | Tags: , , ,

2 Responses to Australian Lawsuit Exposes Threat to Non Exec Directors

  1. claire nightingale says:

    But was not the litigation against the directors of Equitable Life famously dropped : so while insurance for defence costs are relevant, we need not panic that it is so very easy under English law to pursue NEDs. Or is your proposition that that the legal landscape has changed in English law in a way which is reflected in Australian law? Certainly that would reflect the political landscape

    • Francis Kean says:

      Good point Claire. It’s worth noting though that the case was not dropped before all the non executive directors had failed in their attempt to strike out the claims against them on the basis that they had acted reasonably and ought, in all the circumstances, to be relieved from liability. Since then the landscape for directors’ duties has hardly improved with the codification of directors’ duties under the 2006 Companies Act being just one example.

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