Defences and relief from liability for company directors: widening protection to stimulate innovation

Directors’ concerns about personal liability exposure in Australia have occupied the minds of academics, professionals and government institutions for many years. The introduction of the statutory business judgment rule in s 180(2) of the Corporations Act 2001 (Cth) was welcomed widely and with enthusiasm. However, a closer look at this statutory rule and the few cases where it was used as a defence, reveal that the actual protection it provided for directors against personal liability is negligible. This paper will discuss the various proposals for reform made by academics, government organisations and industry bodies. It will also argue that the current state of affairs in Australia regarding the statutory business judgment rule is one of uncertainty, and that the protection directors hoped would be provided by the safe harbour provision in s 180(2) is illusory. Wider protection for directors against personal liability is proposed in this paper. It is proposed that s 180(2) and (3) are repealed and a new section inserted in Ch 9 (Miscellaneous) of the Corporations Act 2001 (Cth). The new section would provide protection against personal liability beyond mere ‘business judgments’ as currently defined in s 180(3). This means the protection will also be available for alleged breaches and contraventions of other provisions of the Corporations Act 2001 (Cth), thus overcoming one of the most serious limitations of the current statutory business judgment rule — it only provided protection when directors are sued for a breach of their duty of care and diligence under s 180(1). The new proposal is based partly on other proposals already suggested in Australia, but this new proposal is also informed by international perspectives.