Australian Securities and Investments Commission v Vines

[2003] NSWSC 1116

Reported Decision: 48 ACSR 322
(2004) 22 ACLC 37

Supreme Court

CITATION:	ASIC v Vines [2003] NSWSC 1116
HEARING DATE(S):	18, 19 & 20 November 2003
JUDGMENT DATE:	23 December 2003
JURISDICTION:	Equity
JUDGMENT OF:	Austin J
DECISION:	Objection to admissibility of evidence on ground of relevance unsuccessful
CATCHWORDS:	CORPORATIONS - officer's statutory duty of care and diligence - chief financial officer - whether expert's opinion of what a reasonably competent chief financial officer in the defendant's position would do is relevant to the statutory standard and therefore admissible evidence
LEGISLATION CITED:	Companies Act, 1961 (NSW), s 124 Companies Act 1958 (Vic), s 107 Companies (NSW) Code, s 229 Corporations Law, ss 9, 232 Evidence Act 1995 (NSW), s 55
CASES CITED:	ASC v Donovan (1998) 28 ACSR 583 ASIC v Rich (2003) 44 ACSR 341 ASIC v Vines [2003] NSWSC 1095 AWA Ltd v Daniels (1992) 7 ACSR 759 Blair v Curran (1939) 62 CLR 464 Byrne v Baker [1964] VR 443 Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 Daniels v Anderson (1995) 37 NSWLR 438 DCT v Clark (2003) 45 ACSR 332 Deloitte Haskins and Sells v National Mutual Life Nominees (1991) 5 NZCLC 67,418 Dovey v Cory [1901] AC 477 Fletcher v National Mutual Life Nominees Ltd (1990) 3 NZLR 641 Powercell Pty Ltd v Cuzeno Pty Ltd [2003] NSWSC 600 R v Rogers (No 2) (1992) 29 NSWLR 179 Re City Equitable Fire Insurance Co [1925] Ch 407 Vrisakis v ASC (1993) 11 ACSR 162
PARTIES :	Australian Securities and Investments Commission (P) Geoffrey William Vines (D1) Francis Timothy Robertson (D2) Timothy John Henry Fox (D3)
FILE NUMBER(S):	SC 3138/01
COUNSEL:	S D Robb QC with R Beech-Jones & E Collins (P) B Oslington QC with G Seib (D1) D L Williams SC with M Fisher (D2) J W J Stevenson SC with L P Menzies (D3)
SOLICITORS:	Jan Redfern, Solicitor for Australian Securities and Investments Commission (P) Sparke Helmore (D1) Henry Davis York (D2) Gadens (D3)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

TUESDAY 23 DECEMBER 2003

3138/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V GEOFFREY WILLIAM VINES & 2 ORS

JUDGMENT

1 HIS HONOUR: My judgment in ASIC v Vines [2003] NSWSC 1095 (25 November 2003) dealt with two out of three general objections taken by the defendants to the admissibility of affidavits that the plaintiff, ASIC, wished to tender as expert opinion evidence. The other objection, taken by the first defendant to the admissibility of the affidavit of Mr Hogendijk, is that his evidence is irrelevant because it addresses the wrong question. Under s 55(1) of the Evidence Act 1995 (NSW), the evidence that is relevant in a proceeding is evidence that, if it were accepted, could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceeding.

2 On 25 November 2003 I informed the parties that the first defendant's contention was unsuccessful, for reasons to be published. I did so in order to allow the hearing to proceed as expeditiously as practicable. I now publish my reasons for judgment.

3 ASIC asserts against Mr Vines that, in various ways, he breached s 232(4) of what was, at the time of the relevant events, the Corporations Law. That subsection was as follows:

"232(4) In the exercise of his or her powers and the discharge of his or her duties, an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances."

4 The word "corporation" was defined in s 57A(1) to include any body corporate and a company. The word "officer" was defined in s 232(1)(a), in relation to a corporation, to include "a director, secretary or executive officer of the corporation". "Executive officer" was defined in s 9, in relation to a body corporate, to mean "a person, by whatever name called and whether or not a director of the body …, who is concerned, or takes part, in the management of the body …".

5 The listed holding company of the GIO Group at the material times was GIO Australia Holdings Limited ("GIO Australia"). The reinsurance business, which is the subject of the proceeding, was conducted by a wholly-owned subsidiary called GIO Insurance Limited ("GIO Insurance"). In its second amended statement of claim, paragraph 4, ASIC alleges that Mr Vines was at all material times:

“(a) a director of GIO Insurance;
(b) the Chief Financial Officer of the GIO Group having overall executive responsibility for co-ordinating the financial reporting of GIO Australia and GIO Insurance;
(c) required in the course of his duties to attend meetings of the board of directors of GIO Australia and report to the board on, inter alia, matters concerning the affairs of GIO Australia and GIO Insurance; and
(d) an executive officer of GIO Australia and GIO Insurance within the meaning of ss 9 and 232(1) of the Law (as taken to be included in the Corporations Act 2001 by section 1401 of that Act)".

6 At paragraph 104, ASIC alleges that in contravention of s 232(4), Mr Vines, being an officer of GIO Australia and the GIO Insurance, failed to exercise the degree of care and diligence that a reasonable person in a like position in each of those corporations would exercise in that corporation's circumstances, for the reasons set out in paragraphs 104A to 127 of the pleading.

7 ASIC proposed that Mr Andy Hogendijk, who has been CFO of several large corporate groups, be permitted to give evidence on its behalf in answer to the following "initial" question, which Mr Hogendijk set out in his affidavit:

"On the basis of my experience as a CFO and my knowledge of the practices ordinarily adopted by a competent CFO, and the assumptions set out below, I have been asked to state my opinion as to whether [Mr Vines] failed to act in any way as would a competent CFO in the position of Mr Vines acting reasonably in the circumstances, and to state my reasons. For the sake of simplicity where I use the expression 'competent CFO' below, I mean to refer to the conduct of a competent CFO in the position of Mr Vines acting reasonably in the circumstances."

8 Counsel for Mr Vines drew attention to the fact that s 232(4) referred to "care" and "diligence" only, and omitted the word "skill" and the word "competence". He contended (relying on some observations by me in ASIC v Rich (2003) 44 ACSR 341 at [32]) that the omission of these words is important, and that the subsection should be construed literally and in its context, having regard to the omission (citing DCT v Clark (2003) 45 ACSR 332 at [115]). Properly understood, he submitted, the subsection did not impose on a CFO any legal duty to which an opinion about what a reasonably competent CFO would do could have any relevance. The submission raises the question whether s 232(4) imposed on an officer of a company occupying a position such as chief financial officer, any objective standard of reasonable competence that might be measured by expert evidence as to what a reasonably competent officer of that designation would do in stated circumstances.

9 To understand the scope of s 232(4) it is necessary to put the subsection in its historical context. Although the subsection purported to state the duty of care and diligence of an "officer", its ancestors were directed to the duty of a company director.

10 As Malcolm CJ explained in Vrisakis v ASC (1993) 11 ACSR 162, 169, the duty of a director under the general law was generally expressed as a duty to use a reasonable degree of diligence, skill and care in the discharge of the duties of the office of director. The first of the three famous propositions enunciated by Romer J in Re City Equitable Fire Insurance Co [1925] Ch 407 at 428-9 was that a director "need not exhibit a greater degree of skill than may reasonably be expected of a person with his knowledge and experience". (The second and third propositions, not directly relevant here, related to diligent attention to the affairs of the company and delegation to corporate officers.) His Lordship said, by way of example of the first proposition, that a director of a life insurance company does not guarantee that he has the skill of an actuary or a physician.

11 These remarks led Professor HAJ Ford to say, in the early editions of his work (see Principles of Company Law, 4th edition, 1986, p 417):

"Thus, there was no common law standard of the reasonably competent company director analogous to the reasonably competent member of a particular profession or trade, such as architect, solicitor, physician or builder, against whom the conduct of a defendant can be measured when determining whether reasonable care was used."

12 Section 107 of the Companies Act 1958 (Vic) introduced into the law of that State statutory duties of honesty and diligence for directors. It was the first legislation of its kind in any Australian State. It was adopted by other States in s 124(1) the Uniform Companies Act of 1961, which stated:

"124(1) A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office."

13 It will be noted that s 124(1) was confined to directors and did not purport to apply to other officers of the company, the duties of honesty and diligence were put together in a single provision, there was no reference to "care" or "skill", and contravention gave rise to a criminal offence. The latter aspect of the provision led the Full Court of the Supreme Court of Victoria to hold, in Byrne v Baker [1964] VR 443, 453, that the statutory concept of reasonable diligence had reference to identifiable acts or omissions, rather than any general characterisation of the conduct of a director over a selected period.

14 As to the content of "reasonable diligence", the Full Court said that the statutory words introduced "one aspect of the concept of negligence, as known and acted upon for many years by the courts on misfeasance summonses against directors" (at 453). They observed (at 450) that the statutory language was "inspired by" the common law as stated by Romer J in the City Equitable case. They said that the omission from the subsection of all reference to "skill" was significant, and therefore "what the legislature by the subsection is demanding of honest directors is diligence only; and the degree of diligence demanded is what is reasonable in the circumstances and no more".

15 During the period 1973-1975 the Commonwealth Government proposed national legislation to govern corporations and the securities industry. The Corporations and Securities Industry Bill was introduced into the Parliament and widely debated, but its sister Bill, the National Companies Bill, was not ready to be proposed until shortly after the Government was dismissed in 1975, and was introduced into the Parliament as a private member's Bill. It was nevertheless influential as a law reform proposal. It proposed "a more objective test of diligence", based on the Ontario Business Corporations Act 1970 s 144 and the Canada Business Corporations Act s 117(1)(b) (Explanatory Memorandum to the National Companies Bill 1975, paragraph 90).

16 The drafting of the National Companies Bill was precisely replicated in the first draft of the Companies Bill 1980, which was part of the proposed national co-operative companies and securities legislation, developed after the proposal to enact Commonwealth legislation had been abandoned upon a change of national government (Explanatory Paper on Proposed New Australian Companies Code, 28 March 1980, p 129). The first version of the Companies Bill 1980 (the March 1980 version) contained the following provision:

"124(2) An officer of a corporation shall at all times exercise, in relation to the business or affairs of the corporation, a degree of care, diligence and skill that is not less than the degree of care, diligence and skill that a reasonably prudent person would exercise in relation to his own business or affairs in comparable circumstances."

17 Like its predecessor, the clause would have established a statutory criminal offence. There were no civil penalty provisions until much later. If enacted, the clause would have:

· extended the statutory duty beyond directors to all officers (defined to include directors and executive officers but not employees);

· imposed an objective test not unlike the standard of care of a trustee; and

· imposed as a statutory standard of "care" and "skill" as well as "diligence".

18 A second version of the Companies Bill was released in August 1980. The clause dealing with the duty of care, renumbered as cl 229(2), abandoned the adventurous formulation of the first draft, reverting to the Uniform Companies Act approach except in two respects. The two changes were that the statutory duty previously confined to directors was expanded to apply to all officers (including directors and executive officers but excluding employees), and the duty to use reasonable diligence became a duty to "exercise a reasonable degree of care and diligence" in the exercise of powers and the discharge of duties. The Explanatory Memorandum accompanying the August Bill noted these two changes but gave no explanation for the abandonment of the earlier draft. Another Bill and Explanatory Memorandum were released in April 1981, in much the same terms in relevant respects, and then the Companies Code was enacted and made applicable in each State.

19 I shall consider the significance of the introduction of the word "care" later in these reasons for judgment. The other change enacted in 1981 is on its face very significant in the present case. The subsection was expanded to become a statutory statement of a duty of care and diligence for all corporate officers, as defined, not merely directors. Thus, for the first time the statutory provision extended to a person such as a non-director chief financial officer or other senior executive, since such persons are concerned in the management of the corporation though not necessarily holding board positions.

20 At the time of this change, it was well recognised that corporate officers engaged as employees of the company under contracts of service are typically subject to express or implied contractual duties of skill and care. Indeed, one finds in the cases on directors' duties at common law a distinction between the members of the board of directors and the executive officers of the company, in the context of an analysis that seems to assume that the executive officers of the company are duty-bound to exercise the degree of skill and care that a person holding such a position would be expected to have.

21 Thus, for example, in Dovey v Cory [1901] AC 477 the Earl of Halsbury LC observed (at 486) that a director could not be expected to be watching the inferior officers of the company, for "the business of life could not go if people could not trust those who are put in a position of trust for the express purpose of attending to details of management". Similarly, Lord Davey said (at 492) that a director was entitled to "rely upon the judgment, information and advice of the chairman and general manager, as to whose integrity, skill and competence he had no reason for suspicion". If the managers and officers in question were not subject to an objective duty to exercise the skill appropriate to their various offices it is hard to see how their Lordships could have concluded that the directors were entitled to trust and rely on them. Similarly, in the City Equitable case ([1925] Ch at 426-7), Romer J referred to matters that must of necessity be left to managers and accountants, implying that they would be expected deal with those matters according to the standards applicable to the performance of tasks by competent managers and competent accountants. And in AWA Ltd v Daniels (1992) 7 ACSR 759, Rogers CJ Comm Div said (at 868) that a director is "entitled to rely on management to go carefully through relevant financial and other information of the corporation and draw to the board's attention any matter requiring the board's consideration"[emphasis added]. The Court of Appeal gave a more qualified statement of the extent to which the directors of the company may rely on executive officers (Daniels v Anderson (1995) 37 NSWLR 438, at 502-505), but still their reasoning appears to assume that the officers to be relied upon are subject to an objective standard of skill.

22 The significance of extending the statutory duty to officers generally was not much debated in the subsequent cases and academic literature. By and large, the focus of attention was on the position of the non-executive director, and the difficulty of prescribing any objective standard of skill given the wide range of commercial undertakings organised in corporate form (some of the literature was reviewed by Rogers CJ Comm Div in AWA Ltd v Daniels, at 865-6).

23 In November 1989 the Senate Standing Committee on Legal & Constitutional Affairs, under the chairmanship of Senator Barney Cooney, published a report entitled "Company Directors' Duties: Report on the Social and Fiduciary Duties & Obligations of Company Directors". The Report recommended the enactment of an objective duty of care for directors. However, the Corporations Law, which commenced in January 1991, preserved the substance of the wording of the Companies Code. The relevant section was as follows:

"232(2) An officer of a corporation shall at all times exercise a reasonable degree of care and diligence in the exercise of his or her powers and the discharge of his or her duties."

24 Although the Corporations Law preserved the wording of the Companies Code provision, the case law was developing, particularly in the context of applying the statutory provisions concerning insolvent trading. There were several cases, most notably Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 (for other cases, see Daniels v Anderson (1995) 37 NSWLR 438 at 497-500), which suggested that a company director has a duty to understand the financial position of the company, regardless of his or her financial sophistication and training in accountancy. The cases suggested that a basic standard of competence for company directors might be emerging. The former s 229(2) was considered, in light of these case law developments, in AWA Ltd v Daniels (1992) 7 ACSR 759 (Rogers CJ Comm Div), and on appeal, Daniels v Anderson (1995) 37 NSWLR 438.

25 Speaking of the common law, Rogers CJ Comm Div said (864-5):

"Conventional wisdom held that a director need not exhibit, in the performance of his duties, a greater degree of care, skill and diligence than may reasonably be expected from a person of his or her knowledge or experience ( Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 at 428); when the opportunity presented itself to reassess this approach it was declined: Byrne v Baker [1964] VR 443 at 450. More recent wisdom has suggested that it is of the essence of the responsibilities of directors that they take reasonable steps to place themselves in a position to guide and monitor the management of the company: cf Commonwealth Bank v Friedrich (1991) 5 ACSR 115 at 117. A director is obliged to obtain at least a general understanding of the business of the company and the effect that a changing economy may have on the business. Directors should bring an informed and independent judgment to bear on the various matters that come to the board for decision: cf Sir Douglas Menzies, "Company Directors" (1959) 33 ALJ 156 at 164."

26 As expressed by Rogers CJ Comm Div, the duty of a director to put himself or herself in a position to guide and monitor the management of the company appears to be an aspect of the duty of diligence. It is therefore part of the duty imposed on a director by the statutory standard of care and diligence, and not merely by the common law. If his Honour's account of the law is correct, it follows that an objective component of competence had become part of the statutory standard by 1992, when the AWA case was decided at first instance.

27 Later in his judgment, his Honour drew sharp distinctions between the board and management, and between the position of the managing director and the position of non-executive directors (at 866-7), saying:

"The evidence of the non-executive directors developed in quite some detail their understanding and experience of the division of functions between the board and management. The directors rely on management to manage the corporation. The board does not expect to be informed of the details of how the corporation is managed. They would expect to be informed of anything untoward or anything appropriate for consideration by the board. In the context of the present case directors rely on management:
(a) to carry out the day to day control of the corporation's business affairs;
(b) to establish proper internal controls, management information systems and accounting records;
(c) reduce to writing if appropriate and communicate policies and strategies adopted by the board;
(d) implement the policies and strategies adopted by the board;
(e) have a knowledge of and review detailed figures, contracts and other information about the corporation's affairs and financial position and summarise such information for the board where appropriate;
(f) prepare proposals and submission[s] for consideration by the board;
(g) prepare a budget;
(h) attend to personnel matters including hiring and firing of staff and their terms of employment.

"Another division of functions is between the non-executive directors and the chief executive officer or managing director. Generally a chief executive is a director to whom the board of directors had delegated its powers of management of the corporation's business. Usually the chief executive is employed under a contract of service which will either include an express term or, in the absence of an express term, an implied term, that the chief executive will exercise the care and skill to be expected of a person in that position. The degree of skill required of an executive director is measured objectively. In contrast to the managing director, non-executive directors are not bound to give continuous attention to the affairs of the corporation. There duties are of an intermittent nature to be performed at periodic board meetings, and at meetings of any committee of the board upon which the director happens to be placed. Notwithstanding a small number of professional company directors there is no objective standard of the reasonably competent company director to which they may aspire. The very diversity of companies and the variety of business endeavours do not allow of a uniform standard."

28 Thus, in his Honour's view, all directors whether executive or non-executive have a duty to put themselves in the position to guide and monitor the management of the company, and therefore to obtain a general understanding of the company's business, but this does not amount to imposing on directors the objective standard of the reasonably competent company director. On the other hand, the chief executive and other senior executive officers of the company have an objective contractual duty to exercise the skill to be expected of persons occupying the respective positions they hold. For present purposes, it is important that an executive officer, engaged under a contract of service and concerned in the management of the company, has an objective duty of skill referable to his or her position. Rogers CJ Comm Div does not say that the duty of skill is incorporated into the statutory standard.

29 On appeal, Clarke and Sheller JJA made the following observations (at 500-501):

"The insolvent trading cases demonstrate that ignorance is no longer necessarily a defence to proceedings brought against a director. In some respects, at least, the director must inform himself or herself about the affairs of the company.

"There is no doubt reason for establishing a board which enjoys the varied wisdom of persons drawn from different commercial backgrounds. Even so a director, whatever his or her background, has a duty greater than that of simply representing a particular field of experience. That duty involves becoming familiar with the business of the company and how it is run and ensuring that the board has available means to order the management of the company so that it can satisfy itself that the company is being properly run. The board may be assisted by subcommittees consisting of its members, including non-executive directors: see generally, Seivers, "Farewell to the Sleeping Director" (1993) 21 Australian Business Law Review 111 at 115-117.

"In our opinion the responsibilities of directors require that they take reasonable steps to place themselves in a position to guide and monitor the management of the company. The board of AWA met only once a month for half a day. But to our mind the board should meet as often as it deems necessary to carry out its functions properly. The question is what in the particular case are the duties and responsibilities of the directors and then what time is required of them as a board to carry out these duties and responsibilities. It is not a matter of tailoring the extent of the duty or function to pre-fixed intervals between board meetings."

30 It seems to me that these observations, like the observations of Rogers CJ Comm Div, establish an objective duty, broadly in the region of competence, arising out of the director's duty of diligence. It is therefore a duty capable of being encompassed by the statutory standard of care and diligence.

31 Their Honours made some observations about the standard of skill for company directors (at 501-2). After noting that claims by commentators, that the modern public company director should be treated as having acquired a professional status, should be balanced against difficulties deriving from the variety of businesses with which companies may be concerned, and the tradition that non-executive directors may be appointed for perceived commercial advantage, their Honours noted that in Deloitte Haskins and Sells v National Mutual Life Nominees (1991) 5 NZCLC 67,418 at 67,442-3 (on appeal from Fletcher v National Mutual Life Nominees Ltd (1990) 3 NZLR 641) the New Zealand Court of Appeal rejected an argument that a lower standard of care should be applied to non-executive than to executive directors. They recognised that directors must be allowed to make business judgments in an entrepreneurial spirit, and they are not required to behave like conservative investment trustees. They expressed the opinion that the concept of negligence can be adapted to measure appropriately whether the acts or omissions of entrepreneurs are negligent.

32 Clark and Sheller JJA continued (at 501-2):

"We are not impressed by this perceived barrier against imposing on directors a duty of care at common law. Nor do we think that the fact that directors come to the task with different backgrounds in terms of training and experience presents any problem. This consideration has given rise to the proposition that a director need not exhibit a greater degree of skill than may reasonably be expected of a person of the director's knowledge and ability. In Fletcher v National Mutual Live Nominees Ltd , Henry J (at 661) expressed reservations about whether the subjective qualities of the particular director are appropriate factors to applied in determining the yardstick for the standard of care to be exercised by a director in today's business world. … The law of negligence can accommodate different degrees of duty owed by people with different skills but that does not mean that a director can safely proceed on the basis that ignorance and the failure to inquire are a protection against liability for negligence."

33 Clarke and Sheller JJA appear to have rejected the concept, advanced by Rogers CJ Comm Div, that different standards of care should be set for executive and non-executive directors. In my opinion, however, nothing in their Honours' judgments is inconsistent with the view that there are different standards for directors qua their directorships, on the one hand, and executive officers qua their executive positions, on the other. Their Honours emphatically agreed with the conclusion of Rogers J that the senior management of AWA had been negligent (at 487-8). They also agreed that the chief executive, Mr Hooke, had been negligent (at 515-524). On the other hand, they agreed (at 505-514) that the non-executive directors were not negligent, though for reasons somewhat different from the reasons given by Rogers CJ Comm Div. These conclusions impliedly recognise that the directorial duty, the same for executive and non-executive directors alike, may be supplemented by an executive duty in the case of an executive director.

34 Their Honours concluded (at 503):

"The modern cases to which we have referred, set in the context of a legislative pattern of imposing greater responsibility upon directors, demonstrate that the director's duty of care is not merely subjective, limited by the director's knowledge and experience or ignorance or inaction. The duties of a director are eloquently explained in the judgment of Pollock J, giving the opinion of the Supreme Court of New Jersey, in Francis v United Jersey Bank 432 A 2d 814 (NJ 1981). The relevant legislative context was different. The description of the duties of directors spoke of 'skill'. The New Jersey Business Corporation Act (1969) required directors to: '… discharge their duties in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions.' But the judgment exposes by reference to other cases what is generally expected of directors not only in the United States but in Australia and elsewhere. In our opinion, this has become what the law requires of directors."

35 Their Honours then quoted extensively from the judgment of Pollock J in the Francis case. Pollock J said that a director:

· should become familiar with the fundamentals of the business in which the corporation is engaged;

· is under a continuing obligation to keep informed about the activities of the corporation;

· is required to monitor corporate affairs and policies;

· is required to maintain familiarity with the financial status of the corporation, by regular reviews of financial statements;

· may need to inquire further into matters revealed by a review of financial statements.

36 It is noteworthy that these matters extend beyond diligence into areas normally encompassed by the word "skill". Writing much later, Spigelman CJ drew from their Honours’ reasoning and the insolvent trading cases a “core, irreducible requirement of skill”, involving an objective test of “ordinary competence” or “reasonable ability”: DCT v Clark (2003) 45 ACSR 332, 355.

37 Clarke and Sheller JJA continued (at 504):

"Although there was no reference to skill in s 229(2) of the Companies (New South Wales) Code - nor is there in s 232(4) of the Corporations Law, Malcolm CJ in Vrisakis (at 407-408) thought that the duties imposed by the section reflected the general concept of negligence at common law. This means conduct ordinarily measured by reference to what the reasonable man of ordinary prudence would do in the circumstances. Skill is that special competence which is not part of the ordinary equipment of the reasonable man but the result of aptitude developed by special training and experience which requires those who undertake work calling for special skill not only to exercise reasonable care but measure up to the standard of proficiency that can be expected from persons undertaking such work: Voli v Inglewood Shy Council (1963) 110 CLR 74. A director may be appointed because of a particular or special skill and may take up the appointment on the basis that he or she will bring that skill to the performance of the office. In Gould and Birbeck and Bacon v Mount Oxide Mines Ltd (in liq) (1916) 22 CLR 490, Isaacs J and Rich J said:
'No rule of universal application can be formulated as to a director's obligation in all the circumstances. The extent of his duty must depend on the particular function he is performing, the circumstances of the specific case, and the terms on which he has undertaken to act as a director.'
…
"We are of opinion that a director owes to the company a duty to take reasonable care in the performance of the office. As the law of negligence has developed no satisfactory policy ground survives for excluding directors from the general requirement that they exercise reasonable care in the performance of the office."

38 I take this to be an expression of opinion by their Honours that the statutory formulations in ss 229(2) and 232(4) encompass an objective standard measured by reference to what a reasonable man of ordinary prudence would do, enhanced where the directorial appointment is based on special skill by an objective standard of skill referable to the circumstances. This goes considerably further, as to the standard of skill, than Rogers CJ Comm Div felt able to go at first instance. When their Honours' observations on this point are combined with the proposition, considered earlier, that a director's duties qua director may be enhanced by his or her duties qua executive officer, the result is that there is now a standard of skill for executive officers who are appointed to positions requiring the exercise of skill, and that standard is reflected in the statutory formulation of "care and diligence" notwithstanding the absence of the word "skill" in the statutory formula. According to their Honours, there is no universal formulation of a standard of skill for company directors - but of course the position is quite different when one is concerned with a designated position the incumbent on which is appointed because of special skill, such as the position of chief financial officer.

39 Clarke and Sheller JJA referred to the judgment of Malcolm CJ in the Vrisakis case, 11 ACSR 162. That was a case decided after the judgment of Rogers CJ Comm Div in the AWA case, but before the judgment on appeal. The other member of the majority in the Full Court of the Supreme Court of Western Australia, Ipp J, observed (at 205) that s 229(2) was "substantially in the same terms" as s 107 of the Victorian Act of 1958, and that the reasoning in Byrne v Baker was therefore apposite to s 229(2), notwithstanding the introduction of the word “care” in s 229(2). The issue in Vrisakis was whether, in a criminal prosecution for failure to discharge the duty of diligence, the Crown had to charge the defendant with a specific act or omission rather than a general course of conduct. The Full Court followed Byrne v Baker in holding that unless the charge was based on a specific act or omission it was duplex and bad. In that respect, it can be said that there was no difference in effect between s 107 of the Victorian Act and s 229(2). However, to the extent that the observations of Ipp J (at 205 and at 211-13) might be taken to assert that there was no statutory standard of skill implied in s 229(2), just as there had been no statutory standard of skill under the Victorian Act and the Uniform Companies Act, those observations appear to be inconsistent with the observations of Clarke and Sheller JJA and therefore not to represent the present law of New South Wales.

40 Section 232(2) was altered upon the enactment of the Corporate Law Reform Act 1992, to become s 232(4), the provision at issue in the present case. Subsequently the law was changed again by the Corporate Law Economic Reform Program Act 1999 (Cth) which took effect in March 2000, after the happening of the events at issue in the present case. The latter change is therefore not relevant.

41 I traced the history of s 232(4) in ASIC v Rich (2003) 44 ACSR 341, 348-351. For present purposes, it is relevant to note that the public exposure draft of the Bill proposed a duty to exercise the degree of care and diligence "that a reasonable person would exercise in exercising those powers, and discharging those duties, as an officer of a corporation in the corporation's circumstances"; and it proposed the inclusion of a list of factors to which the court would be required to have regard in determining whether a contravention had occurred. According to the Explanatory Paper that accompanied the public exposure draft (paragraph 94, echoing the Cooney Report in this respect), there was concern that the duty of care under the previous provision may have been measured by reference to the particular director's knowledge and experience, a "subjective standard" that was too low. The purpose of the amendment, therefore, was to provide "guidance and clarity" and a more "useful description" of what was required of company officers, and to "reinforce" that the duty of care was an objective one (Explanatory Paper, paragraph 98).

42 I note in passing that the concern that the standard of care was too subjective and low appears to have been misplaced, having regard to the statement of the effect of s 229(2) subsequently made by Clarke and Sheller JJA in Daniels v Anderson, analysed above.

43 When the Corporate Law Reform Bill was introduced into Parliament in 1992, the list of factors had been removed, and while the Bill persisted with the reference to a "reasonable person" in "the corporation's circumstances", the standard was qualified by requiring that the reasonable person be "in a like position". The new wording was enacted without further change, to become the provision at issue in the present case.

44 In ASIC v Rich, 44 ACSR at 350-351, I made the following observations about the explanatory memorandum to the Bill:

“The explanation for the new wording, given in the Explanatory Memorandum accompanying the Bill, was less than lucid. The new wording would maintain ‘the endorsement of a more objective test … while at the same time ensuring that our courts have complete freedom to take into account all relevant considerations in applying the test’ (paragraph 39). Subsection (4) would ‘reinforce that the duty of care is an objective one’ (paragraph 82), the use of the words ‘a reasonable person’ being intended to ‘confirm that the required standard of care and diligence is to be determined objectively’.
“Paragraph 39 of the Explanatory Memorandum stated that the addition of the phrase ‘in a like position’ would enable the court to look both at any special expertise held by individual directors and the distribution of functions within the corporation. Paragraph 85 of the Explanatory Memorandum returned to the question:
‘Australian law recognises the special background, qualifications and management responsibilities of the particular officer may be relevant in evaluating his or her compliance with the standard of care. At the same time, Australian law also recognises that decisions must be made on the basis of the circumstances at the time and without the benefit of hindsight.’
“In my opinion, while the Explanatory Memorandum makes it clear that the words ‘in a like position’ were intended to bring into account any special expertise, experience or knowledge of the defendant director, so as to raise the standard of care in the particular case, it leaves open the question whether those words were intended to authorise the Court to take into account any lack of expertise, experience or knowledge, so as to lower the standard of care in the particular case.”

45 In that case it was unnecessary for me to decide the question left open by the explanatory memorandum, namely whether the words "in like position" set an objective standard so as to prevent the court from exonerating an officer by reference to that person's lack of expertise, experience or knowledge. It is necessary to do so now, in order to determine the admissibility of Mr Hogendijk's evidence.

46 Given that the statutory language used before the amendment established, according to the majority of the Court of Appeal of New South Wales in Daniels v Anderson, an objective duty of care for directors and other officers, supplemented by an objective duty of skill where the appointment was made to a position requiring skill, it would be surprising if the new language (though formulated before the Court of Appeal's decision) were held to have introduced a more subjective standard. The Explanatory Memorandum, conversely, expressly declared an intention to "reinforce" that the duty of care is objective. Further, the Explanatory Memorandum (written before the Court of Appeal's judgment) stated that the Government considered that the new s 232(4) would not change the law, but would merely confirm the present position (paragraph 83).

47 Most importantly, the words "in like position" refer, as a matter of ordinary meaning, to the designated position of an executive officer, in a case where the officer in question has been appointed to the designated position. Thus, whatever may be the position in the case of a non-executive director, the degree of care and diligence that a reasonable person "in like position" to the chief financial officer of a corporation would exercise in the corporation's circumstances is the objective degree of care and diligence flowing from the position of chief financial officer, encompassing the special skill that is to be brought to such an office. This conclusion is consistent with the analysis of the case law by Cooper J in ASC v Donovan (1998) 28 ACSR 583, 597-601, though his Honour was not required to deal with the position of a non-director executive officer.

48 In the present case there is evidence that the position of chief financial officer is a recognised position in large corporations, such that there is identifiable specialised skill attaching to that office: see ASIC v Vines [2003] NSWSC 1095 (25 November 2003), paragraphs 50-54. Unless it emerges at the conclusion of the hearing that Mr Vines, though occupying a position designated "chief financial officer", in fact occupied an idiosyncratic position not comparable with the usual or typical role of a chief financial officer, evidence of what a reasonably competent chief financial officer would do on stated assumptions is evidence relevant to the determination of the question whether Mr Vines breached his statutory duty of care and diligence under s 232(4).

49 My conclusion, expressed in the last paragraph, is a matter of potential importance for the duties of executive officers of companies. I should conclude by noting that, although I have regarded it as necessary to decide the point in order to reach my conclusion that the expert evidence of Mr Hogendijk is admissible, the determination of the point in order to rule on the admissibility of evidence will not create any issue estoppel preventing any party from contending in final submissions on liability that my analysis here of the content of the statutory duty of care and diligence under s 232(4) is wrong. Even if a decision on a point of law made for the purpose of ruling on the admissibility of evidence is capable of creating an issue estoppel (compare R v Rogers (No 2) (1992) 29 NSWLR 179, 182 with Cross on Evidence (6th edition, 2000 by JD Heydon), page 153), a decision that expert evidence about what a reasonably competent chief financial officer would do in stated circumstances is relevant to facts in issue concerning ASIC’s case against Mr Vines for breach of s 232(4) cannot estop Mr Vines or anyone else from addressing a different question at the conclusion of the hearing – namely the content of the statutory standard and its application to the facts on a final basis: see Blair v Curran (1939) 62 CLR 464, 532 per Dixon J; and generally Powercell Pty Ltd v Cuzeno Pty Ltd [2003] NSWSC 600; Spencer Bower, Turner and Handley on Res Judicata (3rd edition, 1996 by KR Handley), page 198-203.

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Last Modified: 12/30/2003