The New South Wales Supreme Court although relieved to deliver judgment in ASIC v Rich, was not happy about enduring a trial for almost four years, with 232 hearing days and a 3000 page judgment.
Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 (ASIC v Rich) reflected important outcomes:
- Directors’ duty of care and diligence;
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The business judgment rule and;
- ASIC’s case management
QUICK FACTS:
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ASIC brought an action against Rich, a director at One.Tel, the collapsed company in this case, under Section 180 of the Corporations Act 2001 (the Act).
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This Section imposes a duty on directors to take reasonable care when executing a business decision.
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ASIC also claimed that Rich had not disclosed vital information from One.Tel's board about its true financial position.
FINDINGS:
Statutory duty vs Business Judgment
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Justice Austin clarified the application of the duty by distinguishing it from the “business judgment rule” or simple innocent mistakes made by officers when making decisions.
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Whilst the statutory obligation under Section 180 is crucial, it is not designed to suffocate a legitimate industrial spirit.
- The business judgment rule in section 180(2) is capable of providing a defence for directors whose conduct breaches section 180(1).
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If directors have not intentionally erred in making a legitimate judgment, for a proper purpose, or did not have a personal interest in the matter; and “rationally” believed that the decision was in the best interests of the company, then courts do not consider this to be a breach of their statutory duty.
- However, under Section 180 the concept of “rational belief” does not necessarily lead to the notion of “reasonableness”.
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It is but a balancing act - should a director fail to discharge his basic duties, he cannot claim refuge under this rule.
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On the other hand, where errors are made in judgments relating to planning and budgeting affairs, for instance, directors can seek protection under this rule.
ASIC
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Justice Austin was not won over by ASIC’s evidence against the defendants, which the court considered as weak and insufficient.
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The court was also not pleased about the lack of litigation funding for this enormous trial.
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ASIC’s approach and reasoning were also questioned, particularly when it failed to call key witnesses.
LESSONS:
The judgment in this case, although victorious for directors, should serve as a prudent lesson in knowing when one can avail of the business judgment rule and when one needs to strictly follow his or her statutory obligations.
ASIC has agreed to use this decision as a guiding tool in picking its battles carefully in future. It needs to weigh the likelihood of success and serving justice against the value of resources, including the court’s time and the future of a director’s career.