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
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
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
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
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
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
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
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.
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