Australian Securities & Investments

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Australian Securities & Investments

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Australian Securities & Investments

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ASIC v Rich [2009], was one of the biggest civil cases in NSW Supreme Court history in which the Australian Securities and Investments Commission charged previous executive directors of One Tel telecommunications company, Jodee Rich and Mark Silbermann of not being able to perform their duty of care during the months leading up to the company’s collapse in the year, May 2001. The decision of the case came out after nine long years. In the year November 2009, the NSW Supreme Court Judge Robert Austin meticulously released ASIC’s case against the directors stating that the corporate controller was unsuccessful in confirming any facet of its implored case alongside each defendant. One Tel was a service provider of GSM mobile and long distance phones formed in the year 1995.
Section 180 And 181 Of The Corporation Act 2001
As per the Corporations Act 2001, all the directors and such other executives are required to perform their duties with due concern and assiduousness as per Section 180. Further to this, Section 181 of the Corporations Act 2001 states that along with ensuring due care and diligence, they are required to act in good faith i.e. to act in a manner that is best for the company and for a fit purpose (Grace, 2010). It is a civil obligation of the directors thus non-adherence to any of these will attract civil penalty as well. As per the Act, it is construed to be a criminal offense conducted by a director if he contravenes Section 181 (Commonwealth Consolidated Acts, 2001).
Asic V Rich-Duties And Responsibilities Breached And Why
As One Tel failed in the year 2001, ASIC firstly filed a case against four of its directors, Joint Chief Executives Jodee Rich and Bradley Keeling, finance director Mark Silbermann and Chairman John Greaves. As per ASIC, they had committed breach of duty of care and conscientiousness under Section 180 (1) of the Corporations Act 2001. ASIC had issued civil penalties banning them to act as the directors in any other company and along with the same compensate up to $92 million. However, Keeling and Greaves had accepted the said ban but the other two did not agree with the charges put forward by ASIC. As per ASIC, the directors failed to comply with their duties of care and diligence by fading to reveal to and preservation from the One Tel board, data about the company’s actual economic situation amid January and May 2001 (Hooper, 2011).
Section 180 of the Corporations Act 2001, clearly positions that the directors owe the performance of fundamental duty to perform their authority and release their duties with care and diligence that a sensible human being would implement, taking into consideration the company’s situation, the positions engaged by the individuals and their errands entrusted (Heath, 2009). Section 180(2) known as the ‘business judgement rule’ states that a director will be considered to have been discharged his duty as per Section 180 if he or she makes a business decision in superior reliance and for a reason which is fit for the company’s future success, does not have any vested interest in the decision being taken, intimates himself with regards the details of the decision to the extent he or she logically thinks it to be apt and with appropriate reasoning trusts the fact that the decision is being taken for the benefit of the company (Jacobson, 2015).
The particular judge named Justice Austin takes a look at the past case laws and in particular cases where he has spelt out decisions in such similar matters. After analysing the present scenario of Rich and Silbermann with regards the nature of care being undertaken while taking a decision, the basic question that he looked at was the degree to which the benchmark of demeanour likely from a director is intentional or prejudiced and, specifically how the court will have observed to the conditions of the appropriate business and the errands of that particular director or officer.
As per Austin J, the constitutional duty of care under Section 180(1) must be defined by orientation to the temperament and degree of the rationally probable peril of damage to the company that might arise from a director’s act or error. The section also pens down the fact that a director does not have the duty to try to safeguard a company from such risks which are not logically predictable. However the said case study fails to examine what kind of risks may be defined under the head ‘reasonably foreseeable’. ASIC v Rich mentions two more principles for guiding whether a breach of section 180(1) has occurred or not. Firstly there lies a difference between a conduct which leads to contravention of Section 180(1) and mere mistakes or wrongdoings. Directors lie at such a position in a company that at times situations seem to be very difficult for them wherein they even end up making gross mistakes, but the same may not be intentional in nature thus not leading to a contravention of Section 180(1). Secondly, as per Austin J, there lies a differentiation between breach of Section 180(1) and a mistake leading to the merits of a business decision (Reza, 2011). Simply because the said section is not tilted towards dampening of the company or punish ineffective capitalist actions.
Although Austin J, stated that ASIC’s claim was incorrect against Rich and Silbermann as they failed to give any evidences of such a breach, His Honour nevertheless accounted for the normal and usual situations in which a director would have been said to have breached the statutory and compulsory duty of care under Section 180(1). As per the judge, had the conduct of the directors fallen below the standards of a reasonable individual as is described in the said section, then it would have been considered that a contravention has occurred. In this case study, the regulator i.e. ASIC could not establish any specific conduct of the key personnel which led to such a breach, rather simply pointed out towards the general conduct of not disclosing financial data.
It is further construed that a director or officer or an executive will not be held responsible for any such contravention with regards performing the duty as a director with care and diligence if he or she can prove that the judgement was purely for the purpose of the company without any personal interest attached to the same, the directors have a self belief with regards the fact that the decision taken is right in all aspects and best for the business and the belief is logical enough basis a series of reasons. However as per Austin J, one important question that should be asked by the directors of a company is whether the officer had applied his brains with regards the particular matter or not. Thus in this case, His Honour had said that the directors had not breached any duty as they had applied their brains to the matters in problem and made decisions accordingly, unlike to what ASIC claims (Baxt, 2005).
Critically Analyse The Court’s Decision
The said case study entails to a brilliant assessment of the duties of a director. His Honour had referred to his preceding judgement in case of Vines V ASIC  in which case he had mentioned that the mandatory duty of care was born out of tort law. Specifically, Austin J hade extrapolated that a company’s situations needs contemplation to be vested with regards the type of the company, the size as well as the industry t which it belongs along with the constitution of the board and how the work is disseminated amongst the executives. Further, His Honour also stated that a reference to similar errands within a company is not restricted to particular jobs circulated amongst the executives formally and lastly, Austin J also stated that there should be a differentiation between the contravention of the duty of care and diligence mentioned in the Act and mere errors and mistakes (Holdingredlich.com 2010).
In the particular case, His Honour also investigated deep into unexplored spheres of the business judgement rule wherein he discovered that the said rule also gives a protection for the directors who may have been alleged of contravening the duty of care if they had taken a decision in good faith, for a particular acceptable purpose, without having any significant interest, properly intimated each other about the said subject matter and logically trusted in their own decision that the same has been taken for the good health of the company.
However as per Justice Robert Austin, the proofs submitted by ASIC failed to form the case in favour of the regulator. Although they had submitted a huge volume of evidence which trued to establish the fact the usual and the normal conduct of the directors were not in line with the Act, thus leading to infringement of the same, but as per Austin J, the regular should have presented such evidences which pointed towards some specific and particular conduct to institute a contravention on the remaining of probabilities (Foglia, & Bassingthwaite, 2009).
As per the final verdict passed, ASIC has been found to make some mistakes which included a disappointment to identify witnesses who could describe unclear certification, the usage of an expert observer with a potential divergence and contending that One Tel’s financial position should be looked upon from an Australian view point. Unfortunately, One Tel’s finances and money related matters could not be taken in an Australian perspective for a simple reason that the treasury was tied up in other countries as well.
The decision in the present case should be looked upon as bringing back to life the business judgement rule as it is present in the Australian corporate law, so that the said rule has the potential to give a defence in certain scenarios which would else be construed as being a breach of duty. The said should be appreciated, even though the disagreement and debate is expected to persist via a secure and decisive reflection of the rightness of reckoning in ASIC v Rich.
However, the decision taken by Justice Austin in favour of directors and against the regulators has brought in a question with regards whether ASIC should ever bring in actions again challenging to institute so much in such a short period of time as in the case of ASIC v Rich. ASIC has accredited the fact that the decision pronounced for the said case has acted as a guidance on how to run cases and matters in future (Cutlers, 2009).
Unfortunately the decision given by Justice Austin has led to many unattended questions with regards the collapse of such a huge corporate house. One of the questions whose answers are still being looked for is whether One Tel would have endured if in the year 2001, PBL/CPH and news had upheld their support for the corporation and executed there to guarantee an acutely inexpensive right issue to raise $132 million. Due to the said evidence presented by the directors, His Honour had to reject the evidences submitted by ASIC with regards the financial figures for the month of February, March and April 2001 and to consider and account for the figures that have been mentioned in Chs 11,13 and 15. Further if these figures are expected to be correct, then a fund raising along with the support of the investors would have led the company survive till November 2001 , as by that time, as per the business plans set out, the company would have been able to fight against the cash problem and would have had a healthy flow of cash. Thus as per Austin J, it was the lack of support from the shareholders and the desertion of the right issues due to which the company toppled down (Legg, & Jordan, 2013).
Thus on analysing the said case study it is understood that the judgement pronounced by Justice Robert Austin is one of its kind and it is not every time that a decision against the regulator is taken. However, the said judgement has given a new face to the directors duty with regards conduct their duty with care and diligence and to the ‘business judgement rule.’ It has explored the said rule in depth which was otherwise never looked upon in the past. ASIC also is required to pull up their socks in case of defending a case with regards the kind of proofs they submit as the court weighs specific evidences above the general ones.
Baxt,B., (2005), Duties and Responsibilities of Directors and Officers, 18th Edition, Southwood Press Pty. Ltd: Australia
Commonwealth Consolidated Acts, (2001), Corporations Act 2001- Sect 180, Available at https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html (Accessed 11th May 2017)
Cutlers, T.P., (2009), ASIC V Rich : Don’t be discouraged : Judicial support for responsible risk taking in a corporate environment is still good law, Available at https://www.tglaw.com.au/wp-content/uploads/awms/Upload/Files/Alert%20-%20D&O%20-%20OneTel%20-%20December%202009.pdf (Accessed 11th May 2017)
Foglia,M., & Bassingthwaite,R., (2009), ASIC unable to reel in the Rich- Australian Securities and Investments Commission v Rich, Available at https://www.wottonkearney.com.au/asic-unable-reel-rich-australian-securities-investments-commission-v-rich/ (Accessed 11th May 2017)
Jacobson,D., (2015), Case Note: Directors Successfully Rely On Business Judgement Rule, Available at https://www.brightlaw.com.au/case-note-directors-successfully-rely-on-business-judgment-rule/ (Accessed 11th May 2017)
Grace,D., (2010), Directors Duties and the business judgement rule: Justice Austin offers some clarification, Available at https://www.cgw.com.au/publication/directors-duties-and-the-business-judgment-rule-justice-austin-offers-some-clarification/ (Accessed 11th May 2017)
Heath,W., (2009), One Tel. Wipe out – ASIC v Rich, Available at file:///C:/Users/E-ZONE/Downloads/asic_v_rich_outcomes_december2009%20(2).pdf (Accessed 11th May 2017)
Holdingredlich.com., (2010), Insight: Corporate and Commercial, Available at https://www.holdingredlich.com/assets/docs/Insight%20-%20Corporate%20Commercial%20-%20March%202010.pdf (Accessed 11th May 2017)
Hooper,M., (2011), The Business Judgement Rule : ASIC v Rich and the reasonable – rational divide, Corporate Governance ejournal, vol 5, Available at https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1021&context=cgej (Accessed 11th May 2017)
Legg,M., & Jordan,D., (2013), The Australian Business Judgement Rule After ASIC V Rich : Balancing Director Authority and Accountability, Adelaide Law Review, vol.34, no.2, Available at https://www.austlii.edu.au/au/journals/AdelLawRw/2013/21.pdf (Accessed 11th May 2017)
Reza,M., (2011), The One Tel. Collapse: Lessons for Corporate Governance, Australian Accounting Review [Online], Available at https://research-repository.griffith.edu.au/bitstream/handle/10072/42673/74746_1.pdf;jsessionid=1154ECE89AE54B605015472CF38EF61C?sequence=1 (Accessed 11th Ma

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