Corporations are non-individual body, which cannot act with it is own mind , so for this reason there are some directors and officers in every corporation who deals with people and take various decision in the course of running a corporation successfully. It is the duty of such appointed directors and officers to work in the best interest of the organization. Success of a corporate depends on the fact that how wisely it is directors take decisions, how they respond to different problems in day to day business activities. To regulate any business there is always a law. Similarly to control to activities of a corporation, there is a law named Corporations Act, 2001 (Cth). This is the basic act which defines the roles, responsibilities of directors and expectation of society from them. Here society refers to it is stakeholders. Whenever an officer is appointed in a corporate it is expected from him/her that the same will work in the best interest of entity. But if such person fails to do so, there are some provision related to penalties and persecution on Corporations Act, 2001 (Queensland Government, 2018).
Background of the case
The mentioned case is related to director’s duty and the result of their breaches. This is a very well-known case in Australia, where the lead argument held in between Australian Securities and Investments (herein after indicate as ASIC) and Rich. These both are the major parties of the case. Here Rich was a director of One.Tel, a corporation. Where ASIC is an independent government body which regulates deeds and conduct of corporates in Australia (ASIC, 2018).
Section 180(1) defines the duties of director along with the manner to follow these duties. According to this section a person who held position of director or officer in a corporation must perform his/her duties like a reasonable and answerable person. It means it is expected from every director and officer of the corporation whether executive or non-executive that he/she will perform his/her duty with full of their attentive mind (Australian Government, 2018). Here in the given case, Rich being a director was liable to perform his duties with due care and responsibilities as per section 180(1) of Corporations act, 2001 but he has failed to do so. By this reason ASIC brought an action against him.
Facts of the case
In the given case, Mr. Rich was the founder and director of One.Tel, which was a corporation providing services of GSM mobile in addition to services of long distance calls. One.Tel was doing well and in the year 1998 & 1999 expanded it is business activities overseas. Two investors named as Packer’s publishing and Broadcasting and News Corporation brought an investment worth $600 Million to One.Tel. Soon this corporation cherished and became Australia’s fourth largest telecommunication provider.
In May 2001, both of the said investors withdrew their investment back as they were updated with the fact that One.Tel needs $300 million further to survive. They have given an instruction to Ernst and Young, an auditor for preparing a report to test the claim. While considering this report in a meeting later on, it has come into notice that there was no such requirement to introduce $300 million to One.Tel and this corporation could continue it is business activities with the earlier investment worth $600 million (Jade, 2018).
As soon as both the investors have pulled out their investment, One.Tel goes into process of liquidation as it was not supposed to carry out it is business activities without sufficient capital funds. One.Tel ceased to continue it is business in June 2001 in Australia. Subsequently the Australian business of this corporation which was already in liquidation sold out to other telecommunication corporations at very little value.
ASIC being the regulators over corporations, has claimed that if former directors (Rich and ors) of One.Tel would present the true and fair financial position in the meeting, Packer’s publishing and Broadcasting and News Corporation would never withdrew their investments, and One.Tel could continue it is business. Due to the negligence of directors, One.Tel went into liquidation.
Duties Breached/Rules
Sections 180 of Corporations Act 2001 define that an officer and director of every corporation must discharge their duties with proper care and amount of diligence (austlli, 2018). According to this section when a person held position of director or officer in a corporation, it is assume that the same will perform his/her duties and responsibility with due care and will meet with the requirements mentioned under Corporations Act, 2001 in respect of directors duties. Further section 180(2) explains the concept of Business Judgment Rule. As per this rule the directors who make business decisions will supposed to meet the requirements of section 180(1), if they take such business decision for the interest of the corporation, if they do not have their any personal interest in a particular transaction and if they have a believe that whatever decision they are taking will bring a positive result to corporation (William Roberts, 2018).
It was held in the case Fodare Pty Ltd v Shearn (2011) NSWSC 479 that a director must set aside his/her personal interest while taking business decision in a corporate and it is advisable for him/her to do the acts in the best interests of the corporation.
In the case Asden Develpoments Pty Ltd(in liq) v Dinos (No 3) [2016] FCA 788, it was held that an officer must take all the steps in order to secure corporation’s interest in a particular transaction.
It is the duty of director and officers of the company to work in a manner which is justifiable. One who is designated on such position should not act carelessly, as decision of such persons affect thousands of other. In corporations, it is very general that the more ethically it is director behaves, the more it goes to way of success. Here it is important to mention that irrespective of intension of the directors, this is also important to check how wisely they take their decisions.
According to Corporation Act, 2001, a person who held position of a director or an officer of the company contravenes the provision of this act can be held liable for the penalties mentioned under section 1317G of this Act (Wolters Kluwer, 2018).
Reason for what the mentioned duties have breached?
In the Studied case, being the director of the company it was the duty of Rich along with other directors of One.Tel to present fair and correct view of financial statements (Legal Services Commission of South Australia, 2018). But these directors have failed to do so. They have presented the financial statements before board in a manner which brought a reason to believe that corporation needs more funds to continue it is business, which was not true. Due to this act of directors of One.Tel, investor of this corporation came into believe that the same is not in good condition and instead introducing new funds to One.Tel, they have taken back their presented funds too.
Due to this corporation One.Tel into liquidation and business of the same has sold out for almost no value. Here, Rich has breached his duty of care (Foglia and Bassingthwaite, 2018).
According to the case Asden Develpoments Pty Ltd(in liq) v Dinos, every director and officer should remain aware about financials statements of a corporations. In the reviewed case Rich must cross examine the financial statement before presenting the same before board.
As per the case Fodare Pty Ltd v Shearn, it is the responsibility of director and officers of the corporation to perform their duties in it are the best interest. In the given case, Rich must look into the accuracy of financial statements.
Decision of the court
In this case, ASIC made a claim that Rich along with other director named Silbermann did not perform their duty of care and due to this deed; investors has withdrew their investment from the One.Tel. According to ASIC it was the duty of former directors of One.Tel to update and inform to board of the said corporation with the true view of financial position. But they have made default in doing so and for this reason are liable for penalty of $92 million as damages and lifetime ban from holding directorship in any other corporation.
Later on in this case, many of the sittings of trial court have happened and in 2009, Justice Robert Austin has declared claim of ASIC invalid. Justice declared that rule of business judgment will apply to this case. It was held that all the former directors of One.Tel made best judgment according to them and for this reason they are meant to comply with provision stipulated with section 180(1) of Corporations Act, 2001 (Thomas Reuters, 2016).
On 26 February, 2010 ASIC declared that the same will not make any appeal in against the decision of lower court (Tesarsch, and Tiller, 2010).
Impact of the decision of the case on the operation of Australian companies
Although this case attracts the duties mentioned in section 180(1) of Corporations Act, 2001 and their breaches, yet the directors were not held liable as they have made the business judgment in the best interest of the company. This case attracts the provision of section 180(2) as well, in which it is mention that if a director or officer take a decision in the due course of his/her duty and has reason to believe that they are doing so in best interest of the corporation, cannot held liable to breach their duty under section 180(1) of Corporations.
Section 180(2) of Corporations Act, 2001 is a defense which director and officer can take when they take best business judgment according to them and have some reasonable grounds to prove the same. This case brought a positive impact on the operations of Australian companies as the same has concluded that a director and officer of the corporations will not held liable for any type of penalties if such person has performed his/her duty according to the provision of section 180(2) of Corporations Act, 2001(Lumsden, 2010).
There is a saying that Courts always secure the genuine persons. This case made this statement true. After the required study of cited case, it may state here that this case a significant impact in itself. It motivates to that person who have bonafide intention while working and who does not bring their personal interest while performing their duties. Further, decision of the case ensures the applicability of section 180(2) of Corporations Act, 2001. This case also gives lesson to regulator that the same must be more careful and clear in it is views before initiating any action in against to corporates or of it is directors and officers.
Conclusion
In the analyzed case, directors of One.Tel without any malafide intention presented some financial statements to board, which was not showing the true and correct view of corporation’s financial and working condition, and for this reason investors has withdrew their investments from said corporation. Due to this, corporation started to face lack of capital and soon went into liquidation.
Here although it was the duty of Rich, one of the director and party of the case to show proper care in presentation of financial statements but as he was genuinely taking business decision for One.Tel without his personal interest, he did not held liable by court for any penalties or prosecution. This case can be concluded as that if a directors and officers follow their duties in best interest of corporation, the only they can take defense of Business judgment rule, as per section 180(2) of Corporations Act, 2001 but for taking such defense a director or officer of corporation must take their personal interest set aside . In conjunction to this they are also advised to take the business decision in the best interest of the corporation.
References
Asden Develpoments Pty Ltd(in liq) v Dinos (No 3) [2016] FCA 788
ASIC (2018) Our role [online] Available from: https://asic.gov.au/about-asic/what-we-do/our-role/#what [Accessed on 22/05/18]
ASIC v Rich [2009] NSWSC 1229
Australian Government (2018) Duties of directors and other officers [online] Available from: https://www.oric.gov.au/publications/catsi-fact-sheet/duties-directors%20and-other-officers [Accessed on 22/05/18]
Corporations Act, 2001 (Cth)
Fodare Pty Ltd v Shearn (2011) NSWSC 479
Foglia M. and Bassingthwaite, R. (2018) ASIC Unable to reel in the Rich-Australian Securities & Investments Commission v Rich Available from: https://www.wottonkearney.com.au/asic-unable-reel-rich-australian-securities-investments-commission-v-rich/ [Accessed on 22/05/18]
Jade (2018) Australian Securities and Investments Commission v Rich [online] Available from: https://www.jade.world/case/2009NSWSC1229#! [Accessed on 22/05/18]
Legal Services Commission of South Australia (2018) General Duties of Directors-Corporations Act 2001 (Cth) [online] Available from: https://www.lawhandbook.sa.gov.au/ch05s01s03s02.php [Accessed on 22/05/18]
Lumsden A., (2010) The Business Judgement Defence – Insights from ASIC v. Rich. Companies and Securities Law Journal, 28(3)
Queensland Government (2018) Corporations Act 2001 (Cth) (the Corporations Act) [online] Available from: https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx [Accessed on 22/05/18]
Tesarsch, J. and Tiller J., (2010) Corporate Regulator Fails Against One.Tel Directors: ASIC v Rich [online] Available from: https://www.mondaq.com/australia/x/106686/Corporate+Governance/Corporate+Regulator+Fails+Against+OneTel+Directors+ASIC+v+Rich [Accessed on 22/05/18]
Thomas Reuters (2016) Company and Securities Law Journal Update [online] Available from: https://sites.thomsonreuters.com.au/journals/2016/09/19/company-and-securities-law-journal-update-september-2016/ [Accessed on 22/05/18]
William Roberts. (2018) Directors’ Duties [online] Available from: https://www.williamroberts.com.au/News-and-Resources/News/Articles/Directors–Duties [Accessed on 22/05/18]
Wolters Kluwer. (2018) Corporations Act 2001, section 1317E declarations of contravention [online] Available from: https://iknow.cch.com.au/document/atagUio488235sl14527583/section-1317e-declarations-of-contravention [Accessed on 22/05/18]
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