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Short Answer

The director faces potential liability under ss 180, 181, and 191 of the Corporations Act 2001 (Cth) for breach of the duties of care and diligence, good faith, and disclosure of material personal interests. The business judgment rule in s 180(2) is unlikely to apply because the board did not inform itself to the extent a reasonable person would by obtaining an independent valuation. The director may rely on the defence of reasonable reliance on professional advice under s 189, provided such advice was actually obtained and it was reasonable to rely on it.

Relevant Authorities

• Corporations Act 2001 (Cth) s 180, duty of care and diligence
• Corporations Act 2001 (Cth) s 181, duty of good faith and proper purpose
• Corporations Act 2001 (Cth) s 191, disclosure of material personal interest
• Corporations Act 2001 (Cth) s 180(2), business judgment rule
• Corporations Act 2001 (Cth) s 189, reliance on information from others
• ASIC v Healey [2011] FCA 717, directors must read and understand financial statements; reasonable steps to inform oneself
• ASIC v Rich [2009] NSWSC 1229, scope of CEO duty of care, business judgment rule elements
• ASIC v Adler [2002] NSWSC 171, breach of duties in related-party context, conflicts of interest

Reasoning

Under s 180(1), a director must exercise their powers with the degree of care and diligence that a reasonable person in the same position would exercise. Approving a related-party transaction without an independent valuation raises a direct question of whether the director informed themselves adequately before making the judgment.

The business judgment rule (s 180(2)) requires the director to have: (1) made the judgment in good faith for a proper purpose; (2) not had a material personal interest in the subject matter; (3) informed themselves about the subject matter to the extent they reasonably believed appropriate; and (4) rationally believed the judgment was in the best interests of the corporation.

In ASIC v Healey, the Federal Court held that directors of a large company could not rely on management summaries alone and were required to take reasonable steps to inform themselves. The absence of an independent valuation in a related-party context is likely to be treated as a failure to satisfy element (3).

Under s 181, the director must act in good faith in the best interests of the corporation. If ASIC can establish that the director knew or ought to have known that the transaction was not at arm's length and may not have been in the company's interests, a breach of s 181 may also be established.

Under s 191, the director was required to disclose any material personal interest in the transaction at a board meeting. Failure to do so is a strict liability contravention.

Caveats

The availability of the s 189 reliance defence depends on whether external professional advice was obtained and whether it was reasonable for the director to rely on it without further inquiry. The director's personal involvement in the transaction and the adequacy of board minutes will be relevant to ASIC's assessment. The penalty provisions under s 1317E and civil penalty orders under s 1317G should also be considered.