Commonwealth Bank of Australia v Friedrich [1991] is an important Australian case that highlights the duties of directors—especially in not-for-profit organisations—and the serious consequences when these duties are breached.
| Citation: [1991] 5 ACSR 115; (1991) 9 ACLC 946 |
| Judicial Body: Supreme Court of Victoria – Tadgell J |
| Area of Law: Directors’ duties, Insolvent trading, corporate governance |
Facts – Commonwealth Bank of Australia v Friedrich
The case involved The National Safety Council of Australia (Victorian Division), a not-for-profit company. Its CEO, Mr. Friedrich, committed massive fraud. He created false financial records to make the company look rich and successful when in reality, it was deeply insolvent. Major banks, including the Commonwealth Bank of Australia (CBA), were misled and gave large loans to the company.
CBA sued the directors of the company for failing to prevent this financial disaster. The action was brought under the precursor to section 588G of the Corporations Act, which prohibits insolvent trading.
Most directors settled out of court. Only one director, Mr. Eise, defended the case in court.
Key Legal Issues
The court looked at whether Mr. Eise, as a director, had fulfilled his duties of care and diligence. The court found he did not understand the company’s financial reports. He failed to ask questions or investigate strange activities (like sudden growth and huge assets appearing). He completely relied on Mr. Friedrich, the CEO, without checking the facts.
Court’s Judgment
Despite being empathetic towards him, the judge ruled that Mr. Eise was personally liable for nearly $97 million, because he had failed in his legal duty as a director. He failed to prevent the NSCA from trading while insolvent.
He had access to accounts and auditor’s reports but ignored them, improperly relying on assurances from the CEO. That was insufficient to avoid liability.
Significance (Commonwealth Bank of Australia v Friedrich)
The case signifies that directors must understand financial matters—you can’t just rely on others. Directors can be personally liable for company debts if they allow the company to incur debts while knowing (or if they should have known) it was insolvent.
List of references:
- https://www.emilford.com.au/imagesDB/wysiwyg/DutiesofGovernorsofNFPsandCharities.pdf
- https://s3.studentvip.com.au/notes/38383-sample.pdf
- https://www.austlii.edu.au/au/journals/JlLawFinMgmt/2013/6.pdf
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Ruchi is a legal research writer with an academic background in CA, MBA (Finance), and M.Com. She specializes in digesting and summarizing complex judicial decisions into clear and structured case notes for students and legal professionals.