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The new Companies Act explicitly requires a director to act with care, skill and diligence

A director's duty to act with care

The new Companies Act 2008 now contains a codified statement of directors' duties.

One of those duties, set out in section 76(3)(c), is to carry out their duties with care, skill and diligence.

The common law also imposed on directors a duty to act with care, but there have been few reported decisions in which a director has been held not to have breached the duty because the standard, imposed by the common law in this regard, was low and easily satisfied.

A recent decision of the Australian High Court in Australian Securities and Investments Commission v Hellicar [2012] HCA 17, in which judgment was handed down on 3 May 2012 has attracted much comment in Australia and elsewhere.

Directors and a company secretary made a misleading statement to the Australian stock exchange

In essence, the High Court ruled in this case that seven directors of James Hardie Industries Ltd, a listed Australian company that manufactures fibre-cement building materials, had breached their duties by approving the company's release of a misleading statement to the stock exchange.

The court also held that the company secretary had similarly failed to discharge his duties with care and diligence in relation to the actuarial data that underpinned the statement that a compensation fund for asbestos disease victims, established by the Hardie group, was ''fully funded'' in relation to notified and prospective claims.

The company had established a dedicated trust to meet its liabilities

The background to the case was that, some eleven years ago, the James Hardie group of companies set up a dedicated trust to fund compensation claims for asbestos-related illnesses caused by its products and had said, in a statement to the Australian stock exchange, that the trust was 'fully funded' to meet such claims.

That statement turned out to be untrue. Indeed, within three years of its establishment, the trust was running short of money. Australian newspapers, described the setting up and underfunding of the foundation as an act of 'corporate bastardry'.

In the meantime, the James Hardie companies had relocated to the Netherlands, leaving a rapidly dwindling fund for the victims of asbestos-related disease, and it turned out that the trust was underfunded by some A$1.5 billion.

A civil claim against the directors

The Australian Securities and Investments Commission launched a civil case against seven James Hardie directors and other officers in 2007. The long saga finally reached the Australian High Court which has now handed down its judgment.

Three years ago, the New South Wales Supreme Court found that James Hardie's chairman and six of its non-executive directors had breached their legal duty in approving a misleading public statement, and they were barred from being directors for five years and were fined A$30 000 each.

That judgment was overturned by the New South Wales court of appeal, but the latter judgment, in turn, has now been reversed by the Australian High Court, which has remitted the matter back to the New South Wales court of appeal for further argument on possible relief from legal liability.

A spokesman for the asbestos victims is reported as saying, ''James Hardie misled the community about how much money had been set aside for asbestos compensation and this caused enormous stress and confusion for many of our asbestos clients. It is good news that the company has finally been held to account for its poor corporate governance."

The applicable provisions of South Africa's Companies Act 2008

If such directorial misconduct were to occur in South Africa, it is significant that the Companies Act 2008 not only provides a codified statement of directors' duties, but also provides in s 218(2) that

'any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as result of that contravention.'

This effectively gives a statutory right of action to anyone to sue a director for loss occasioned by the latter's breach of any of his statutory duties. The Act also preserves a director's common law liability, with the result that a plaintiff can base his claim on a breach of either a common law duty or a statutory duty, or both.

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