Do directors’ duties in Australia provide adequate scope for risk-taking? An examination of the current law and defence reform proposals

Abstract

Directors must be able to make decisions which inevitably involve some degree of commercial risk if the economy is to be advantaged. Likewise, careless and dishonest director behaviour must be discouraged if shareholder interests are to be adequately protected. Australian corporate law has attempted to strike this balance through the enactment of provisions such as the business judgment rule contained in s180(2) of the federal Corporations Act 2001. This rule was introduced for the purpose of protecting and providing deference to directors in making management decisions. Yet, since its enactment, the rule has seldom been argued and has never been successfully applied in a major case. This article compares and contrasts the Australian business judgment rule with the more successfully argued US business judgment rule, and then examines current law reform proposals to extend the protection offered to directors in carrying out their duties. The article concludes that a general defence should be enacted to provide better protection for directors and prevent the undue restriction of their entrepreneurial activities