The Honest and Reasonable Director Defence: A proposal for reform

  • Date:07 Aug 2014
  • Type:Policy Paper

Australia is no longer in a position to rest on its previous successes. As the nation tries to increase productivity and international competitiveness, directors and the companies they represent will be key drivers of its success.

Australia has over 2.3 million company directors. The majority of these directors serve on companies that are regulated by the Corporations Act - they can include small businesses, family enterprises, public companies, not-for-profits and listed public companies. All directors of charities are also anticipated to shortly return to being regulated by the Corporations Act regime.  

Australia’s system of regulation needs to actively create an environment where directors that act with integrity and commitment are free to pursue and harness new opportunities, drive performance and create jobs without being overly focussed on personal liability concerns.  Australia’s system of regulation also needs to encourage innovation and accept that not all risks can be mitigated in the pursuit of business opportunity. Honest directors acting carefully will sometimes make the wrong decision in hindsight.

One way to improve the regulatory environment is to insert the Honest & Reasonable Director Defence into the Corporations Act. The proposed Defence, which was developed by Company Directors, would be available in circumstances where a director conducts him or herself honestly, for a proper purpose and with the degree of care and diligence that the director rationally believes to be reasonable in the circumstances.

The defence would apply to all directors of companies regulated by the Corporations Act (from small business owners through to directors of publicly listed entities).  Importantly, the proposed defence would not lower the standards for directors.

Click here to view our detailed proposal. (304 KB)

Click here to view answers to frequently asked questions about the proposal (64 KB)