When a director makes a decision, they have to do so in the best interest of the company. They can’t, for example, do something that benefits themselves at the expense of the company, as to do so would breach their ‘fiduciary duty’. A ‘fiduciary duty’ is a legal obligation a person (in this case, the director) owes another (in this case, the company) to act in a certain way (in this case, the best interests of the company). The duty arises by virtue of their relationship (in this case, their position as a director).
Perhaps more surprising is the fact that a director can also be liable for someone else’s breach of fiduciary duties if they have sufficient knowledge of that breach (known as ‘accessorial liability’). The big question is, how much knowledge is considered sufficient for liability?
Two related NSW Court of Appeal cases have provided useful guidance on the level of knowledge a director must have to be liable for knowingly assisting someone else’s breach of fiduciary duties.[1] The cases applied well-established tests in confirming that someone who is accessorily liable must have sufficient knowledge of the circumstances to indicate the facts to an honest and reasonable person.
In distinguishing between the levels of knowledge, the Court discussed the subtleties involved in determining the level of knowledge required, both under general law and legislation.
Accessorial Liability – general law
Under general law, a person must have ‘knowledge of the breach’ of another in order to be liable as an accessory, and establishing knowledge can be quite difficult. A person will have sufficient knowledge to make them liable if they fall within one (or both) limbs. Either they:[2]
- have knowledge of the breach and received a benefit from the breach (referred to as the ‘knowing receipt’ limb); or
- assisted in the breach with knowledge (referred to as the ‘knowing assistance’ limb).
Both limbs require a certain level of knowledge, requirements which have been discussed in many cases.[3] In the case of Farah Constructions, the Court relied on five categories of knowledge:[4]
- actual knowledge;
- wilfully shutting one’s eyes to the obvious;
- wilfully and recklessly failing to make such inquiries as an honest and reasonable person would;
- knowledge of circumstances that would indicate the facts to an honest and reasonable person; and
- constructive knowledge – namely, knowledge of circumstances that would put an honest and reasonable person on inquiry.
As reiterated in the recent NSW cases, category 5 does not constitute a finding of accessorial liability. A person must fall within one or more of the first four categories to be held to have sufficient knowledge to be accessorily liable. This will come down to an analyses of the facts of each case.
Accessorial Liability – Corporations Act
Under section 79 of the Corporations Act, a person can be liable for another’s breach and will be deemed to be ‘involved in the contravention’ of that other person. The person must have knowledge of the essential matters at a time contemporaneous with the actual contravention.[5] A person can also be held accessorily liable under general law.
It is important to limit potential exposure to liability for the breach of another’s duties. If you are involved in the activities of a company, the commercial team at Mahoneys can provide advice to limit potential liability and pragmatic recommendations to minimize these risks.
If you would like to discuss any of this further, please contact Antony Harrison (aharrison@mahoneys.com.au) or Sabrina Austin (saustin@mahoneys.com.au).
[1] Bluemine Pty Ltd (in liq) and related matters [2022] NSWCA 160; Cassaniti v Ball and related matters [2022] NSWCA 161.
[2] Barnes v Addy at 252.
[3] Farah Constructions Pty Ltd v Say-Dee Pty Ltd(2007) 230 CLR 89.
[4] Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA.
[5] ASIC v Australian Investors Forum Pty Ltd (No 2) (2005) 23 ACLC 929.
Written by Antony Harrison & Sabrina Austin.
Written
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