Daniels (formerly practising as Deloitte, Haskins & Sells) v Anderson; Hooke v Daniels; Daniels v AWA Ltd (1995) 37 NSWLR 438
Company law; duties of directors; common law duties; duty of care owed to the company by directors; liability of directors in negligence.
Facts: AWA Ltd suffered a $49 million loss because of unauthorised foreign exchange dealings entered into by an employee. The company's auditor (Deloitte Haskins & Sells) had failed to notice the foreign exchange dealings, and had not reported them to the board of directors. Nor had the auditor pointed out weaknesses of the company's internal controls and records of foreign exchange dealing. The trial court held both the auditor and the executive directors of AWA Ltd liable for the losses that were caused by these failures. The case was appealed, the directors denying that they were in breach of any duty owed to AWA Ltd.
Issues: What duty of care is owed to a company by the directors of that company? Does the common law impose a duty of care on directors in relation to their company?
Decision: In addition to duties imposed on directors by legislation, the directors of a company owe a common law duty to their company to take reasonable care in the performance of their duties. A breach of this duty of care renders the executive directors liable to the company in negligence.
Reason: In a majority judgment, Clarke JA and Sheller JA said (at 505):
"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 their office. A director's fiduciary obligations do not preclude the common law duty of care. Modern statutory company law points to the existence of the duty. In some circumstances, the duty will require action. The concept of a sleeping or passive director has not survived and is inconsistent with the requirements of current company legislation….
A person who accepts the office of director of a particular company undertakes the responsibility of ensuring that he or she understands the nature of the duty a director is called upon to perform. That duty will vary according to the size and business of the particular company and the experience or skills that the director held himself or herself out to have in support of appointment to the office. … The duty is a common law duty to take reasonable care owed severally by persons who are fiduciary agents bound not to exercise the powers conferred upon them for private purpose or for any purpose foreign to the power and placed … at the apex of the structure of direction and management. The duty includes that of acting collectively to manage the company. Breach of duty will found an action for negligence at the suit of the company..."