On 18 November 2009, Justice Austin of the New South Wales Supreme Court ruled in favour of two former directors of failed telecommunications company One.Tel, following an extended trial that lasted for more than 200 days of hearing.

ASIC issued the proceeding against four of One.Tel's directors, alleging breaches of section 180 of the Corporations Act 2001, which imposes a duty of care and diligence upon company directors and officers. It alleged that they withheld information from One.Tel's board about its true financial position. ASIC settled the claims against two of the directors, but continued to pursue the proceeding against Jodee Rich and Mark Silbermann.

The judgment is over 3,000 pages long. In summary, Justice Austin found that ASIC had failed to prove its case and was critical of ASIC's case management.

In the course of his judgment, His Honour clarified the scope and application of the "business judgment rule", which can in certain circumstances afford directors a defence to claims under section 180 of the Corporations Act.

The business judgment rule provides that a director has not breached his or her duty of care and diligence if he or she:

  • makes a judgment in good faith for a proper purpose
  • does not have a material personal interest in the subject matter of the judgment
  • informs himself or herself about the relevant subject matter to the extent reasonably believed to be appropriate, and
  • rationally believes that the judgment is in the best interests of the corporation.

In the course of his judgment, His Honour noted the following:

  • Business judgment considerations are an integral part of the general law duty and are to be taken into account in applying the statutory standard of care and diligence required by directors. However, the statutory business judgment defence is not redundant.
  • The onus of proving the essential criteria of the business judgment rule is borne by the defendants. This onus is appropriate because evidence of the elements necessary to rely upon the defence is within the knowledge of the director or officer.
  • For a director to rely upon the business judgment defence, there must have been a decision to take or not take action, consciously made, so that the judgment has actually been exercised.
  • The failure by directors to discharge their 'oversight' duties, including to monitor the company's affairs and policies and to maintain familiarity with the company's financial position, is not protected by the business judgment rule. By contrast, decisions taken in planning, budgeting and forecasting are capable of receiving the rule's protection.
  • Protection may be available even if a director was not aware of available information material to the decision, provided that there was a reasonable belief by the director that he or she had taken appropriate steps to inform himself or herself about the subject matter.

It appears that the standard of "rational belief" required to satisfy the business judgment defence may not necessarily equate to objective "reasonableness". A director's belief that a judgment is in the best interests of the corporation may be rational if it was based on a reasoning process, whether or not the reasoning process is objectively convincing.

This judgment forms part of a recent trend of courts finding against the corporate regulator. We expect that it may cause the regulator, in future, to be more circumspect in pursuing mega-litigation, and instead where it issues proceedings against directors to focus on more readily identifiable and discreet breaches of duties, rather than conduct extending over larger periods of time.

ASIC announced on 26 February 2010 that it would not appeal against the decision, for reasons including public interest, the effluxion of time and the cost.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.