Directors’ duties in a crisis

27 April 2020

When a crisis hits, issues arise on multiple fronts in what quickly becomes an unrecognisable business landscape. It can be difficult for directors to sort through the issues, prioritise and make informed decisions quickly. In such times it is helpful for directors to refer to their fundamental duties to guide their decision making.

Part 2D.1 of the Corporations Act 2001 (the Act) deals with the general duties and powers of directors. Section 180 of the Act requires that directors exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would in the company’s circumstances. This section incorporates “the business judgment rule”, which recognises that directors, in making business judgments, are taken to have exercised their powers and discharged their duties with the necessary degree of care and diligence if they have:

  • exercised their judgment in good faith for a proper purpose;

  • do not have a personal interest in the matter;

  • inform themselves to a reasonable extent; and

  • rationally believe that the judgment reached is in the best interests of the company.

Accordingly, in this COVID-19 environment where decisions will have to be made in an unpredictable environment, directors can take some comfort that the company’s circumstances will be taken into account if decisions are later called into question. Directors can best protect themselves by ensuring their decisions and the basis for making them are documented. If information which would ordinarily be desirable to inform a decision is unavailable due to current circumstances, the reasons for the lack of such information should also be documented.

The adage “Never waste a good crisis” highlights that turbulent conditions often allow for companies to take actions which they would not or could not take in more normal times, using the crisis as a shelter. However, directors must remain mindful of enduring obligations under sections 181 to 183 of the Act to act in good faith, in the best interests of the company and for a proper purpose, including the obligation to avoid conflicts of interest.

When companies are in a situation of financial distress and solvency may be in question, the interests of the company as a whole has been found by the courts to include consideration of the interests of creditors. Ultimately, times of crisis provide an expanded scope for what would be considered reasonable care and diligence for a director. However, this does not discharge directors from their fundamental responsibilities, and determining whether courses of action taken during this crisis will be considered to have been reasonable will depend on the documented diligence and analysis behind Board decisions.

In a crisis, Boards arm themselves with legal advisors and specialist restructuring practitioners to consider and plan the journey through and out of the crisis.