Decision given by Austin J in case law Australian Securities and Investments Commission v Rich (2009) 236 FLR 1 (‘ASIC v Rich’), redraw the provisions related to business judgment rule in Australia. This report discusses the business judgment rule and also the decision in ASIC v Rich. This report mainly focus on three main issues which directly relates with the balance between authority and accountability of director’s such as which party bears the burden of proof in raising the defense, requirement to inform director related to the subject matter of the judgment, and standard whether judgment made by director is made in the best interest of the company and whether their judgment is reasonable (Heath, n.d.).
This report mainly focus on these issues and also how to maintain the balance between the accountability and authority of director’s with reference to the historical background of Business Judgment Rule. This report is supported by the decision of this case and point justified by Austin J and his decision is also supported by principles of Corporate Governance.
In this case ASIC alleged two directors of the company Messrs Rich and Silbermann had breached their duties stated under section 180 by failing to make proper disclosure to the One.Tel board related to the poor financial position of the One.Tel group before its collapse in May 2001. For this purpose ASIC mainly focus on the financial reports of the group for the month of January, February, March, April and May of 2001 because they are different from the actual position on the basis of which both Messrs Rich and Silbermann forecasts the financial information of the company and reported to the board.
Because of the allegation made by ASIC in which continuous breach of duty was alleged for such lengthy time of period, it is necessary that Court examined the considerable body of evidence in this case for the purpose of determining whether there was breach of duty on the part of directors of the company. Lastly, Justice Austin found out that evidences provided by ASIC was not sufficient for the purpose of supporting the case. In the case of James hardie ASIC made successful allegations on the basis of evidence that press release in which wrong announcement was made to the market. In light of this it is widely expected that ASIC adopted very narrow approach for framing the prosecutions related to breach of duty of directors and officers in subsequent cases (Hooper, 2011).
In this case defendant breached Section 180(1) of the Corporation Act 2001, and this section states that directors must use reasonable care and diligence in exercising their power and also in discharging their duties. As per the allegation imposed by ASIC, before few months of appointment of administrators to One.Tel in May 2001 defendants breached their duty by failing to access the financial position of One.Tel, fail to inform the board about the true financial position of the company, fail to ensure the efficient system related to flow of financial information to the board.
This case was actually relied on proof that financial position of one tel. between the January and April 2001 was dire as alleged by ASIC and because of this it is the duty of the defendant that he must be aware about the situation of the company and bring it to the board’s attention.
Number of evidences is reviewed by Austin J and on the basis of these evidences he concluded that ASIC had failed to prove its allegation, and on balance of probabilities its pleaded case. Therefore, it is not necessary for Austin J to consider the Business Judgment Rule stated in Section 180(2). However, his honour determined that defendants applied the rule in successful manner so whether they breach section 180 (1), and his honour further determined that evaluation of this rule was applied by him in supporting the conclusion (Holdingredlich, n.d.).
Section 180 of the Corporation Act states that it is necessary that directors and other officers of the Corporation must exercise their power and discharge their duties with due care and diligence that nay reasonable person would exercise if they holds the position of director or officer in the corporation and occupied the office of director and officer and same responsibilities as director and officer.
It must be noted that this section is a civil penalty provision under section 1317E (Corporation act 2001).
Clause 2 of this section further states that if any director or other officer of the company takes any judgment related to business then they must meet the requirement stated under clause 1, and duties equal to that stated under common law and in equity related to the judgment if they take the business judgment in good faith and for proper purpose, directors and officers must not have material personal interest in the judgment, must inform themselves related to the business judgment up to that extent they reasonably believe is appropriate, and they must believe that judgment is in the best interest of the company (Corporation act 2001).
Belief of director and officer that judgment must be in the best interest of the company is rational one unless the belief is one which no reasonable person n their situation would hold.
Clause 3 of this section states the meaning of business judgment rule which states that any decision takes or not to take action related to any matter which is important for the business operations of the company.
Section 180 (1) creates the normative standard of conduct and it is necessary that such conduct must be followed by all the directors of the company, and while following this conduct they must codify the general law. On the other hand, clause 2 in which business judgment rule is stated is considered as defense in case of contravention of clause 1 or also the equivalent duty of care at common law or equity. As per the explanatory memorandum to the bill that introduced the section 180(2), this provision is safe defense for the protection of those directors who take advantage of opportunities which involves responsible risk taking (Jordan & Legg, 2010).
In this case allegations made by ASIC against the two former directors were rejected by the New South Wales Supreme Court, and they give judgment of almost 3000 plus pages. Decision given by Austin J has number of important implications related to the officers and directors of the company. They mainly focus on the nature of duties of the managing and finance directors own towards the company and also the extent up to which they are liable to pass the financial information related to the company to the board of the company. judge criticize the way of ASIC in which they handle the case and it also affects the way courts consider the subsequent cases related to breach of directors duty and other officers.
This judgment of Austin J criticize the nature of ASIC’s case and also evidences provided by them, from the decision it is clear that standard of care and diligence is expected from directors and officer is objective in nature but it is necessary that Court also consider the circumstances of corporation, offices occupied by relevant person, and their responsibilities in the corporation.
It is necessary that executive directors of the company must have detailed understanding of the financial position and financial performance of their company. However, allegation made by ASIC is not correct in the One.Tel case, but still it is the duty of executive directors to consider whether efficient system is there for informing the non-executive directors of the company, and also assess whether they are adequate or not.
However, ASIC show their intention to file appeal in this case, but later they announced that they will not appeal the decision. Therefore, this decision is considered as important decision for the other directors and officers in Australia from the point of view of considering the duties of directors.
It must be noted that this case concern itself elated to the duty of a joint CEO (Jodee Rich) and finance director (Mark Silbermann) respectively. Austin J considers the previous case law and especially his own decision in previous case laws having similar subject matter. While considering the nature related to duty of care one important question is raised which states whether standard of care expected from directors and officers is objective or subjective in nature and also how will court determine the situations related to company and responsibilities of the particular directors and officers in the company.
Decision of this case consider the difference between the application of section 180 on executive and non-executive directors of the company, and this can be understood through example in which it is stated that non-executive directors of the company are not involved in day-day management of the company and because of this they rely on such information which is provided by the executive directors or mangers of the company. Therefore, it is necessary that non-executive directors of the company must monitor the affairs and activities of the company for the purpose of getting the financial information of the company so that they are able to form the opinion related to company’s solvency. It must be noted that that it is necessary that both finance director and managing director have detailed understanding of financial reporting of the company and also with issues related to cash flow so that they can ensure that company fulfills all the requirements and obligations of Corporations Act and the ASX Listing Rules if applicable, and this statement is considered as the heart of the decision (Jacobson, 2009; McPherson, n.d.).
Conclusion:
The decision made in ASIC v Rich restructure the provision sand understanding of Business judgment rule in the corporation law of Australia, and this rule is considered as safe defense in number of cases in which matter relates with the breach of duty. This development must be applauded, but it also creates the controversy that is long surrounded related to the implementation of business judgment rule in Australia as it like to continue through close and critical consideration and provide correct reasons in this case.
This report mainly focus on these issues and also how to maintain the balance between the accountability and authority of director’s with reference to the historical background of Business Judgment Rule and also concluded that at current stage balance is stuck between the authority and accountability of the director, but it is necessary to manage that balance and works in the best interest of the company.
References:
Heath, W. One.Tel wipe-out — ASIC v Rich. Retrieved on 9th June 2017 from: file:///C:/Users/Manisha%20Bhatia_Absas/Downloads/asic_v_rich_outcomes_december2009.pdf.
Hooper, M. (2011). The Business Judgment Rule: ASIC v Rich and thereasonable-rational divide. Retrieved on 9th June 2017 from: https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1021&context=cgej.
Holdingredlich. The One.Tel case and developments in Director’s and Officers’ duties. Retrieved on 9th June 2017 from: https://www.holdingredlich.com/corporate-commercial/insight-corporate-a-commercial-sp-1124261267.
Legg, M. & Jordan, D. (2010). The Australian Business Judgment Rule After Asic V Rich: Balancing Director Authority And Accountability. Retrieved on 9th June 2017 from: https://www.austlii.edu.au/au/journals/AdelLawRw/2013/21.pdf.
Jacobson, D. (2009). Retrieved on 9th June 2017 from: https://www.brightlaw.com.au/asic-v-rich-asic-onetel-case-against-rich-and-silbermann-dismissed/.
Australian Securities and Investments Commission v Rich (2009) 236 FLR 1.Foglia, M. (2009).
McPherson, K. ‘Directors’ Responsibilities A Regulator’s Perspective’(Address delivered to the Company Directors Seminar, Adelaide, 1 June 1989), quotedin Senate Standing Committee on Legal and Constitutional Affairs, Parliament ofAustralia, Company Directors’ Duties (1989) 27 [3.22] (‘Cooney Report’).
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