In today’s fast-paced business world, company directors are facing increasing scrutiny over their governance practices and their legal responsibilities. The recent ASIC v Ryan [2024] FCA 1267 decision, combined with the Australian Institute of Company Directors (‘AICD’) Practice Statement (October 2024), has placed a renewed focus on director compliance obligations. Our commercial team explores the duty of care and diligence in light of these developments.

 

Director’s Duty to Act with Care and Diligence

At the heart of every director’s legal obligations is the duty to act with care and diligence. This requirement is enshrined in the Corporations Act 2001 and has been central to Australian corporate governance principles for decades. Directors must make decisions that are informed, consider all relevant information, and ensure they understand the risks and opportunities associated with their decisions.

 

AICD’s Practice Statement on Director’s Responsibilities

Through its Practice Statement, the AICD provides practical guidance for directors, emphasising the critical importance of compliance with the legal and ethical standards expected of them. Key focus areas include:

• Governance & Accountability: Directors must ensure strong governance and accurate financial reporting.
• Compliance & Awareness: Directors must stay informed about relevant laws and regulations.
• Financial Oversight & Risk Management: Directors must manage risks and set the company’s risk appetite.
• Ethical Leadership: Directors should promote a culture of ethical conduct.

 

ASIC v Ryan [2024] FCA 1267: Implications for Directors

In ASIC v Ryan, the Federal Court ruled that a director may rely on expert advice in discharging their duties, so long as they act with reasonable care in doing so. Specifically, the case reaffirmed that directors are not expected to have expertise in every aspect of the business, but they must ensure that they act on reasonable and reliable advice from professionals when making decisions. However, this reliance does not absolve them of their oversight responsibilities—directors must still exercise their own judgment and ensure that the advice they receive is sound and appropriate to the circumstances.

This ruling highlights the importance of directors maintaining an active role in overseeing the affairs of the company, even when they delegate certain responsibilities to experts. While directors can rely on expert advice, they must continue to monitor and engage with the company’s performance, ensuring proper risk management systems are in place. Critical insights from this decision include:

• Reliance on Expert Advice: Directors can rely on expert advice, but must ensure it is reliable and relevant.
• Increased Accountability: Directors are personally liable for decisions, even when relying on experts.
• Ongoing Oversight: Delegating tasks does not absolve directors from overall responsibility.
• Risk Management: Directors must ensure effective risk management practices.
• Comprehensive Knowledge: Directors must remain informed about both financial and non-financial operations.

 

Key Takeaways for Company Directors

Based on the ASIC v Ryan decision and the AICD’s guidance, company directors must ensure they meet the following compliance obligations:

• Stay informed and engaged in company affairs.
• Maintain strong governance and compliance practices.
• Implement effective risk management systems.
• Exercise care and diligence in decision-making.
• Rely on expert advice when appropriate, ensuring it aligns with the company’s best interests.

 

Conclusion

Company directors face a complex web of legal and ethical obligations in today’s business landscape. The ASIC v Ryan decision highlights the importance of directors engaging in active oversight and exercising care and diligence. The court’s recognition of the ability to rely on expert advice, as long as it is done reasonably, provides directors with a degree of flexibility in fulfilling their duties. Combined with the guidance provided by the AICD Practice Statement, directors must remain vigilant in ensuring compliance with the law, overseeing risk management processes, and actively participating in the governance of their companies. By doing so, they can protect both their personal interests and the company’s long-term success.

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