ASIC V. Rich 2009: NSWSC 1229

ASIC v. Rich [2009] NSWSC 1229- Case Analysis
Background
One.Tel was an Australia based GSM service provider meaning it functioned mainly in the telecom sector and eventually grew to become Australia’s fourth largest telecom service provider before being shrouded in controversy which lead to its eventual downfall. Jodee Rich and other executive directors of the company faced accusations of not discharging their duties as directors effectively with respect to the duty of care they had towards the best interests of the company. This duty is mandated by Section 180 of the Corporations Act, 2001 as well as principles of common law.
Application
Corporations functioning within the jurisdiction of the Australian Commonwealth are governed and regulated by the provisions of the Corporations Act, 2001. Common law principles developed through judicial

pronouncements are also applicable (Stout and Blair 2017).
Section 180 (1) of the Corporations Act, 2001 lays down the statutory duty of care and diligence (Peden 2017). This provision states that when discharging one’s duties as the director of a corporate entity one must observe a certain degree of care and diligence to ensure that they are acting in the best interests of the company. Section 180 (2) of the act lays down the business judgment rule which states that the provisions of Section 180 (1) would be deemed to have been met when acting on behalf of the company if (Bottomley 2016):
• The judgment is made in good faith;
• If the business judgment is free from any personal self interest;
• If the directors have understood and researched the subject matter to the extent that is reasonably possible;
• If the directors reasonably believe the act would be in the best interests of the company.
Additionally, Section 180 (3) states that a business judgment is a decision to act or refrain from acting taken by the administration of the company (Hiller 2013). This applies only in business decisions that a materially relevant to the operations of the corporation.
ASIC’s accusation was that the directors had failed to observe their duties under Section 180 (1) of the act by not sufficiently informing the board of One.Tel about the accurate financial stand of the company (Morley 2016). The Judge when delivering the judgment observed that ASIC had failed to establish their cause of action, exaggerated their claims and quoted pieces of evidence out of context in order to establish their claims (Harris 2013).
The idea of not informing the board of the accurate financial position of the company was a business judgment which had to made by the directors in a situation where the failing financial position of the company would cause alarm and would give rise to reckless administrative measures taken by the board.

This decision was made in good faith and cannot be conspicuously construed to have self-interests veiled in them. Further, the executive directors made an informed decision to refrain from passing this information to the board and they did believe that this would be in the best interests of the company as disclosure would have brought an end to the company’s existence much before the actual downfall. Thus this judgment met all the requisites prescribed under the provisions of Section 180 (2) of the Corporations Act, 2001 (Rawhouser, Cummings and Crane 2015). This case was the first to comprehensively lay down the business judgment defense and apply it to the facts and circumstances of a case. This defense would negate the apparent breach of the duties of the directors as prescribed by the statute and under common

law.
Conclusion
To conclude when the directors of a corporation are in breach of their duties under common law and the provisions of Section 180 (1) of the Corporations Act, 2001 the business judgment defense can be cited (Hanrahan, Ramsay and Stapledon 2013). If the acts of the directors fall within the ambit of the circumstances defined under the subsections to Section 181 (2) of the act. This would thus absolve them of all charges relating to the breach of duty of care. Thus in this case Jodee Rich and the other executive directors had not failed to observe their statutory and common law duties as prescribed for directors of a corporation. They had thus acted reasonably and prudently when they decided not cause alarm within the organizational structure by revealing the company’s true financial position. Moreover, had Packer and Murdoch not removed the financial assistance given to the company One.Tel would have sailed through the financial difficulties through investment funds till they started to generate positive revenue figures. This adequately establishes the reasonableness behind the decision taken by the executive directors to not inform the board of the alarming financial condition as it can be inferred that it was presumed that the company would survive. Thus the ASICs allegations of the directors being in breach of their duty of care in acting on behalf of the company cannot be successfully substantiated on the basis that they refrained from informing the board as this omission was a reasonable business judgment and this would absolve them of all responsibilities arising out of such an act.

Reference list
Bottomley, S., 2016. The constitutional corporation: Rethinking corporate governance. Routledge.
Hanrahan, P.F., Ramsay, I. and Stapledon, G.P., 2013. Commercial applications of company law.
Harris, P., 2013. Corporate tax law: Structure, policy and practice. Cambridge University Press.
Hiller, J.S., 2013. The benefit corporation and corporate social responsibility. Journal of Business Ethics, 118(2), pp.287-301.
Morley, J., 2016. The Common Law Corporation: The Power of the Trust in Anglo-American Business History. Columbia Law Review, pp.2145-2197.
Peden, E., 2017. Civil and criminal liability of directors and officers of sporting clubs. Commercial Law Quarterly: The Journal of the Commercial Law Association of Australia, 31(1), p.12.
Rawhouser, H., Cummings, M. and Crane, A., 2015. Benefit corporation legislation and the emergence of a social hybrid category. California Management Review, 57(3), pp.13-35.
Stout, L.A. and Blair, M.M., 2017. A team production theory of corporate law. In Corporate Governance (pp. 169-250). Gower.