Late last week, the Federal Court of Australia released a significant trial judgment regarding directors’ duties.
The decision1 contains important guidance on a range of matters that are relevant to New Zealand directors.
The judgment is detailed and its implications will be closely considered by lawyers on both sides of the Tasman. In this update, we address several important issues that may provide guidance for New Zealand Boards and Management. These include:
- the roles and responsibilities of Management, executive directors and non-executive directors;
- the application of the business judgement rule; and
- the use of artificial intelligence (AI) by directors.
The decision
The Australian Securities and Investments Commission (ASIC) brought proceedings against Management (including the CEO who was also the Managing Director, GC, CFO, and Chief Casino Officer) and former directors of The Star Entertainment Group Limited (Star).
The defendants were alleged to have breached their duty to exercise their powers with the degree of care and diligence2 expected of reasonable directors and officers in the context of money laundering at Star Casinos. Two of the eleven defendants, the CFO and Chief Casino Officer, settled with ASIC prior to trial.
Following the trial, in a near 500-page judgment, the Court made findings that the Chief Executive/Managing Director3 and Company Secretary of Star had failed to ensure that the Star Board was informed of serious money laundering risks and had provided misleading information to Star’s bank. However, all seven non-executive directors were found not to have contravened their duties. This was principally because they had been entitled to rely on Management to bring significant matters to their attention.
The question of penalties, disqualification orders and the application of statutory relief has been deferred to a further hearing.
The relationship between Management, executive, and non-executive directors
As with the New Zealand Companies Act, the Australian company legislation draws no distinction between the duties of care owed by executive and non-executive directors. Unlike in New Zealand, the Australian company legislation also imposes duties of care on officers, including the CEO, CFO, and Company Secretary.
As a matter of both law and governance reality, there are, of course, very important distinctions between the roles and responsibilities of Management and the Board, as well as between executive and non-executive directors. The Courts in New Zealand and Australia have recognised as much; i.e., what constitutes reasonable care may differ depending on the position of the director and the responsibilities they take on for the company. While this is well-established in theory, there is limited judicial guidance on how this distinction applies in practice. This trial judgment, therefore, provides a useful illustration of the delineation between the expectations across the different roles.
The single executive director (who was the Managing Director and CEO) was found liable for lack of care in failing to recommend to the Board that Star should suspend its business association with certain parties.
In contrast, the Court did not find the non-executive directors liable. The Court found that the non-executive directors were entitled to rely on the information that they received and that, indeed, they were misinformed about certain matters.
Important to these liability findings was the distinction between executive and non-executive directors.
The Court said that the non-executive directors:
- are not required to be involved in the affairs of the company at an operational level;
- may rely on management and other officers to a greater extent than an executive director;
- typically do not engage in the day-to-day management of a company and are not expected to have the same knowledge of the company’s operational activities as executive directors;
- are entitled to rely upon management to bring to their attention any problems or irregularities as to operational issues, unless there is reason to believe that management is not honest, trustworthy or competent; and
- by virtue of their position as non-executives, are generally engaged in a capacity which envisaged less time would be given to the affairs of the company than an executive director.
The Court said that the standard of care expected of executive directors is generally higher: executive directors are involved in the operations of a company. It is ordinarily a term of their employment that they possess the skills of a reasonably competent person in that particular category of employment.
This approach aligns with New Zealand law, to the extent that it illustrates how a higher standard of care might be expected of directors who have particular responsibilities in the company (e.g., being its CEO) or who hold particular skills (e.g., executive or non-executive directors who are appointed because they have a particular qualification, e.g. a Chartered Accountant). Directors in that position can be expected to know more about the business or their area of expertise, and to rely less exclusively on the material provided by management to the Board. However, ultimately the judgment emphasises that there is no absolute rule and the focus of any inquiry must be assessed against the particular circumstances. The fact that a director does not hold an executive position does not excuse them from taking all reasonable steps in that position to inform themselves as to the business of the company, and to exercise the care, diligence, and skill of a reasonable director in that position.
Business judgement rule
The Court rejected the CEO’s defence based on the “business judgement rule” which protects directors who make good faith, rational business judgements. That is because the Court found that the CEO had not consciously turned his mind to make a decision on key matters.
We note that, unlike New Zealand, Australian company legislation has codified the requirements of the “business judgement rule”. The New Zealand Supreme Court has held that the rule requires a conscious turning of the mind to a matter, and that irrationality (a high bar) may deprive a director of the benefit of the rule. It remains to be seen whether Australian case law under the Australian statutory test will be treated by the New Zealand courts as relevant to the concept under New Zealand law.
Artificial Intelligence (AI)
The decision also provides relevant guidance on the use of AI by directors and board members.
The Court noted that AI is increasingly being used by Australian boards as a governance support tool, including to assist directors in the discharge of their duties and by management in the creation of board packs.
However, while AI can be a useful tool, the Court considered that summaries generated by AI are not a substitute for careful reading and interrogation of board materials. While material prepared by AI may assist directors in fulfilling their duties, the Court emphasised that directors must ensure that they have analysed and understood information provided by management. The Court rejected the proposition that directors could rely on an inability to cope with the volume of material they receive. The Court said that all directors are required “to take reasonable steps to place themselves in a position to guide and monitor the management of the company, and [are] expected to take a diligent and intelligent interest in the information available to them, understand that information, and apply an enquiring mind to their responsibilities.”
As to how AI may be utilised by directors and boards, the Judge said that the use of AI should be controlled and transparent, and that boards should discuss any use of AI by the formal adoption of policies, rather than informal use.4 The Judge held that it is the responsibility of directors to ensure that AI use occurs in a responsible way.
For New Zealand boards, AI offers both real opportunities but also risks. Responsible use of AI may provide opportunities to distil and manage information flows and empower directors to bring their judgement and focus to bear on key matters. At the same time, however, the Australian case is a reminder that AI is not a substitute for the independent thought required of directors. Directors must analyse, understand and challenge the material provided by management. AI can be a helpful tool, but is no substitute for, this exercise.
TakeawayS
The judgment highlights how a breach of directors’ duties may be actionable even when it does not lead to the company’s insolvency. In New Zealand, the highest profile directors’ duties cases have tended to arise either in the company’s insolvency, or as a result of some active misfeasance by a former director (e.g., diverting corporate opportunities from the company). This case highlights the prospect for a different type of claim; claims against former directors for failing to take reasonable care to minimise regulatory and reputational risks during their tenure as directors.
Important takeaways from this judgment:
- Directors' duties are owed personally, not collectively. The standard of care expected of a director under section 137 of the Companies Act will differ depending on the director’s particular role, and executive directors are likely to owe a higher standard of care.
- Regardless of a director’s role, courts expect all directors to:
a. have a good knowledge of a company’s business and, in particular, its risk areas;
b. keep themselves informed of the company’s activities and its operational and financial status;
c. take a diligent and intelligent interest and understand the information available;
d. apply an independent and inquiring mind to the responsibilities placed upon him or her. - Directors must make sure they have sufficient information, but that they are not overburdened with material.
- Artificial intelligence can assist, but cannot substitute, a director exercising their duties.
- It may be prudent for Boards to adopt formal artificial intelligence policies, rather than allowing informal and undisclosed use.
- In the event of litigation, Courts may scrutinise in detail what each director did to read, question and consider information provided by Management and the conscious business judgements that each director made.
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1Australian Securities and Investments Commission v Bekier (Liability Judgment) [2026] FCA 196.
2The Australian equivalent to section 137 (directors’ duty of care) of the New Zealand Companies Act 1993.
3Mr Bekier, referred to in this article for convenience as the CEO.
4The Court referred with approval to an article by the Australian Institute of Company Directors entitled “AI use by directors and boards”.
Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
