Removal of the reference to acting "reasonably"
23 Until 1982 the provision was not available unless it appeared to the court that the person concerned had acted reasonably as well as honestly. The word "reasonably" was dropped upon the commencement of the Companies Act and Codes in 1982, although it had been retained in the National Companies Bill 1975. The Explanatory Memorandum to the 1980/1981 Bill drew attention to the change but did not explain it (see para 830). It was later suggested that the deletion of the word "reasonably" was in response to a passing comment by North P in Dimond Manufacturing Co Ltd v Hamilton [1969] NZLR 609 at 645, where his Honour said he found it "difficult to understand how a negligent officer or auditor could nevertheless be held to have acted 'reasonably'": Companies and Securities Law Review Committee, Discussion Paper No 9, paras [114]-[115]. The idea that the amendment had been made in order to avoid an implication that the same conduct would be both negligent and reasonable was adopted by Olsson J in Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (1989) 7 ACLC 1232 at 1250, a case involving the duty of care of the liquidator.
24 In Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464, the directors of a listed company had authorised telephone soliciting of shareholders by the use of material that was not, according to the trial judge, the sort of information to which shareholders were entitled; and they authorised a chairman's letter and soliciting script which were found by the trial judge to contain information that was irrelevant, prejudicial and misleading, and did not contain countervailing information which directors would place before the shareholders if they were properly discharging their duty. Although it was found that the directors acted honestly and in good faith and substantially upon legal advice, their conduct was an abuse of their authority as directors, for the primary purpose of securing the re-election of the retiring directors, as Kirby P noted (at 491). It was not a case of failure to exercise due care or diligence.
25 The directors appealed against the trial judge's refusal to make orders under the exoneration provision. Kirby P (with whom Glass JA generally agreed) said (at 490) that the removal of the requirement that the person should have acted reasonably "serves to focus the attention of the Court primarily on the honesty of the directors". It is not clear from the judgment whether his Honour was intending, by that statement, to express his own opinion or merely to give an account of the appellants' submission. In the next paragraph of his judgment, Kirby P said that the difficulty of "this argument" was that it had overlooked the fact that, for relief to be provided, "honesty is a requirement but it is not alone sufficient".
26 In Commonwealth Bank v Friedrich (1991) 5 ACSR 115 at 196, an insolvent trading case under the pre-1993 legislation, Tadgell J noted the removal of the word "reasonably" but said that "in having regard to all the circumstances of the case, it will be permissible and appropriate, and usually necessary, to consider whether the defendant has acted reasonably". He decided that although Mr Eise's conduct might have been honest, it was conduct of the "utmost folly; and it involved clear and flagrant breaches of both the letter and intent of the Code" (at 198).
27 The same approach was taken, though with a fuller analysis, by Olsson J in Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (1989) 7 ACLC 1232 at 1250-3.
28 The observations in those cases were applied in Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577 at 1598. In that case it was held that the managing director of Circle had breached his general law duty of care and skill by allowing the level of debt owed by a commercial customer to grow, notwithstanding that the board of directors had reached a consensus that no additional credit should be extended to the customer. Muir J held, citing the two authorities just mentioned, that it was relevant to consider whether the defendant's conduct had been reasonable. He found that it was not reasonable. The defendant had deliberately and persistently failed to observe a direction of the board of directors. He had knowingly caused the company to assume a high degree of risk, by allowing the customer to incur an unusually large debt in the hope that the customer would be able to re-finance, without being in a position to make an informed assessment of the prospect of re-financing. He had failed to provide the board of directors or the court with a satisfactory explanation of his conduct.
29 In Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430, a case under the post-1993 insolvent trading provisions, Bergin J referred to Kirby P's observations and treated them as an expression of opinion rather than a summary of argument. She expressed the view (at [159]) that "the removal of the requirement serves to focus the attention of the court primarily on the honesty of the director", although she noted that honesty alone is not sufficient to ground the proper exercise of the discretion under the section. Bergin J said (at [160]) that the reasonableness of conduct is a relevant consideration in the exercise of the discretion as to whether the relevant party ought "fairly" to be excused from liability.
30 In ASIC v Plymin (No 2) (2003) 21 ACLC 1237, also a case under the post-1993 insolvent trading provisions, Mandie J refused to excuse Mr Plymin under s 1317JA on the ground that his contravening conduct was in all the circumstances "unreasonable and inexcusable" and "reckless and grossly negligent", showing no regard to the position of those who dealt with the company (at [101]).
31 In Wall v Timbertown Community Enterprises Ltd (in liq) (2002) 42 ACSR 1, a case involving the statutory duty of care and diligence under s 232(4), Heydon JA (with whom the other members of the Court of Appeal of New South Wales agreed) held that the trial judge was "unquestionably correct in holding that the appellant had not acted reasonably", and said that "those findings make the trial judge's refusal to exclude the appellant invulnerable". There was no express analysis of the relationship between negligence and failure to meet the statutory standard of care and diligence.
32 Senior counsel for the first and second defendants placed emphasis on the statements by Kirby P and Bergin J that the amended section focused the court's attention "primarily" on the honesty of the director, a submission implying that once honesty was established, there would be some kind of presumption or pre-disposition to apply the section. But that would be inconsistent with the statutory wording, which sets out, relevantly, two requirements for the exercise of the jurisdiction, as both judges recognised: namely honesty and that having regard to all the circumstances the person concerned ought fairly to be excused.
33 It seems to me that, in using the word "primarily", Bergin J (and Kirby P, if his observation was a statement of opinion rather than a summary of argument) simply intended to contrast the absolute requirement of honesty with the relegation of reasonableness from the status of a requirement to a mere factor. It is clear from the cases I have cited that reasonableness remains a relevant consideration under s 1318, in cases other than duty of care cases. In my view, the honesty of a defendant does not of itself contribute to the court's determination of the second requirement, except in the sense that unless honesty is present the second requirement need not arise for consideration (although in Duke Group Ltd (in liq) v Pilmer (1998) 16 ACLC 567, Mullighan J, who had found that the directors acted dishonestly and personally benefited from their conduct, nevertheless thought it appropriate to make an additional finding (at 686) to the effect that they did not act reasonably).
34 What does it mean to say, as most of the cases do, that the reasonableness of contravening conduct may be taken into account under the exoneration provision, where the case is one of negligence?
35 The Reid Committee evidently did not see any "conceptual dilemma" (see Maelor Jones Investments, 7 ACLC at 1252) in finding that a person had acted both negligently and reasonably. But a finding that a person has failed to discharge his or her statutory duty of care and diligence under s 232(4) is necessarily a finding of unreasonable conduct or omission. This is because s 232(4) expresses the statutory standard as the degree of care and diligence that a reasonable person in a like position in the corporation would exercise in the corporation's circumstances, and so a finding of departure from the standard is necessarily a finding of failure to act as a reasonable person would act in a like position.
36 The problem was adverted to by Moffitt J in Pacific Acceptance Corporation Ltd v Forsyth (1970) 92 WN (NSW) 29 at 80, 119. He observed that the exoneration provision allowed the court to consider the reasonableness of conduct occurring after the contravention, and it was therefore open to the court to find both negligence (and therefore failure to meet the relevant standard of reasonableness at the point of contravention) and reasonableness in subsequent conduct. In Maelor Jones Investments, 7 ACLC at 1253, Olsson J agreed with Moffitt J's analysis. But the other cases I have cited indicate that the degree of unreasonableness of contravening conduct itself, not merely subsequent conduct, is relevant to be taken into account, even in a duty of care case.
37 Moffitt J also recorded some submissions giving examples that were designed to show that certain kinds of contravening conduct might be both in breach of an auditor's duty of care and also reasonable, but he expressly reserved his opinion on the point. In Maelor Jones Investments, 7 ACLC at 1253, a case involving the duty of care of a liquidator, Olsson J cited Moffitt J's judgment and said that the section was wider in scope, as well as in time frame, than the law of negligence, and he accepted that the examples were apt illustrations of the issues involved.
38 Two examples of "reasonable negligence" were noted by Moffitt J: first an auditor forming an honest judgment in accordance with prevailing practice, subsequently held by the court to have been erroneous and negligent; and secondly, an auditor whose negligence was casual or minor. In my opinion, these examples could not be used as examples of conduct that is both reasonable and in contravention of the statutory duty of care in its post-1993 formulation (s 232(4)), having regard to the statutory language. If an officer is found to have contravened his or her statutory duty of care by following some prevailing practice, that finding is made precisely because a reasonable person in a like position in the corporation's circumstances would not have followed the prevailing practice. Similarly, casual and minor departures from the statutory standard are departures precisely because they fail to meet the standard of reasonableness. In my respectful opinion, notwithstanding the observations of Moffitt and Olsson JJ, a finding that a defendant's conduct has contravened the statutory duty of care and diligence under s 232(4) implies that the conduct was not reasonable.
39 However, "reasonableness" is not black and white concept. It seems to me sensible, and relevant to the exercise of the statutory discretion, to consider the degree to which the defendants' conduct has fallen short of the statutory standard of reasonable care and diligence. In that sense reasonableness (more precisely, the degree of unreasonableness) is a relevant consideration for the court when considering whether to relieve a defendant from contravention of the statutory duty of care and diligence. That, it seems to me, is the concept underlying the judicial pronouncements that reasonableness is still a factor to be considered in applying the exoneration provision, notwithstanding the removal of the word "reasonably".
40 The observation of Heydon JA in Wall v Timbertown, that the trial judge's finding of unreasonableness made his refusal to excuse the defendant "invulnerable", might seem to be at odds with this analysis, or even to suggest that any finding of failure to meet the statutory standard of care and diligence would prevent the application of s 1318 because such a finding would always involve unreasonableness. But Heydon JA's comments were in response to his detailed explication of the trial judge's findings. The appellant had represented, during the course of negotiations for a lease, that the company had obtained subscriptions for shares in the sum of $700,000 after issuing a prospectus. One of his fellow directors wrote to the lessor, asserting that he held more than $700,000 in his trust account when in fact he had less than $200,000. The trial judge's finding that the defendant was "involved" in the writing of that letter was upheld on appeal. Heydon JA observed (at [43]) that an investor had suddenly dropped out and the directors "scrambled around to obtain various companies of no or little apparent substance to subscribe for the shares", including one company associated with the appellant which, like the others, did not advance the appropriate subscription moneys. He said it was unreasonable of the defendant not to tell the lessor and the shareholders of the problem, in the hope that the company's development project could somehow proceed. In my opinion his Honour's conclusion was not that a finding of unreasonableness necessarily excludes the application of s 1318; but that the trial judge's specific findings, which were accepted by the Court of Appeal, and which had the effect that there was a high degree of unreasonableness, made the judge's discretionary refusal to excuse the appellant invulnerable on the facts.
41 This reasoning leads to the conclusion that a person may be excused from liability even though the contravening conduct has been found to have been unreasonable. It is impracticable and probably undesirable to attempt to define "unreasonableness" for present purposes. A relevant consideration may be, in some circumstances, whether competent expert advice was sought and obtained (Maelor Jones Investments, 7 ACLC at 1252). It appears that unreasonableness in post-contravention conduct is relevant to be taken into account (Pacific Acceptance Corporation Ltd v Forsyth, 92 WN (NSW) at 119 per Moffitt J).