The Australian Institute of Company Directors (AICD) has called for the introduction of an “honest and reasonable” defence for directors who face legal action.

It wants the defence added to the Corporations Act to protect directors “who perform their roles with integrity and commitment, but who now operate in an increasingly complex and compliance-focused regulatory environment”.

The AICD says concerns about personal liability are discouraging directors from joining boards and taking reasonable risks.

The defence would be a “catch-all”, applying more widely than the current “business judgement” rule, which protects directors and officers who make decisions in good faith for a proper purpose.

The AICD says this rule applies to “breach of duty of care and diligence” charges only, and has not been used successfully since it was introduced in 2000.

However, Sparke Helmore partner Mark Doepel says a better solution might be to widen the business judgement rule, rather than adding further complication with an additional defence.

Mr Doepel, who specialises in professional indemnity and directors’ and officers’ insurance, says with shareholder class actions increasing, directors worry about defence costs being paid and damage to their reputations. They need greater clarity about what is permissible.

“It is sometimes very hard to know where positive behaviour ends and negative behaviour starts,” he told insuranceNEWS.com.au.

“There is a lack of recognised and prescribed defences for directors.”

The AICD’s draft proposal says class actions often accuse directors of breaching continuous disclosure obligations and engaging in misleading and deceptive conduct, yet disclosure issues “often involve difficult and complex questions of judgement for directors”.

Courts can review them with the benefit of hindsight, but directors must make decisions in real time, often with incomplete information.

Directors may put companies into liquidation unnecessarily because they fear being held personally liable for trading while insolvent.

The AICD says directors are being urged to include forward-looking information in company disclosures, but will be reluctant to do so unless they have an effective defence against being sued.