General obligations of directors of business corporations

The specific content of the obligation of due care of directors in the performance of their obligations in a business corporation - the obligation of loyalty and due diligence.

According to the Civil Code, each member of an elected body of a legal entity undertakes to perform their duties with due care, i.e. with loyalty, knowledge, and diligence. The obligation of loyalty can be understood in terms of the loyalty of a member of the elected body to the interests of the legal entity over other competing interests, e.g. personal interests or the interests of close associates and family. Due diligence means that a member of the elected body should act with due care and knowledge in the performance of their duties.

What constitutes due care in the performance of functions and roles of a member of the elected body of a business corporation is specified in the Corporations Act. Within the definition of the ‘business judgment rule’, this Act suggests that a person who acts with due diligence in making business decisions, acts in an informed manner, in good faith, and in the defensible interest of the corporation. What is important is the actual decision-making process, not its potentially negative outcome.

When examining whether a particular decision has breached the obligation of due care, we will always take into consideration the due care that another reasonably diligent person would have exercised in a similar situation had they been a member of a similar body of the business corporation. This creates a certain objective standard of a ‘reasonable manager’; however, this is only a consideration, not an exclusive criterion. If, for example, a member of the elected body has certain special knowledge or skills, they undertake to apply them in the performance of their obligations. We will also take into account the characteristics of a particular person through a certain subjective standard.

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