ASIC unable to reel in the Rich – Australian Securities & Investments Commission v RichAuthor : Matt Foglia and Richard Bassingthwaite

Directors and Officers


On 18 November 2009, Austin J delivered his long awaited judgment [1] in the drawn out claim by the Australian Securities and Investments Commission (ASIC) against two directors of the now defunct One.Tel for breaches of their duties of care and diligence as directors.  In a stunning blow to the regulator, his Honour ruled against ASIC on all aspects of its claim.

The facts

In 2001 ASIC brought proceedings against three former directors and the non-executive chairman (the officers) of the now defunct One.Tel Limited and its relevant subsidiaries (the company).  ASIC alleged that the officers had breached their duty of care and due diligence under section 180(1) of the Corporations Act 2001 (Cth) (the Act) by failing to disclose the company’s true financial position to the board and to the market over a five month period from January to May 2001.

The proceedings were previously discontinued in 2003 and 2004 against one of the executives and the chairman following settlement agreements which effectively banned those directors from future directorship for defined periods and held them liable to pay various amounts of compensation to the company.  ASIC maintained the proceedings through a marathon hearing against the joint chief executive and director, Jodee Rich, and finance director, Mark Silbermann (together the defendants).

ASIC’s case

The sole cause of action pleaded by ASIC against the defendants was a breach of the duty of care and diligence under s 180(1) of the Act.  In this regard, ASIC alleged that the defendants contravened s180(1) by, among other things, misleading the board about the true financial position of the company.  ASIC sought the following relief in relation to the alleged contraventions:

  • civil penalties, including banning orders preventing the defendants from holding future company directorships; and
  • compensation in the amount of $92 million on behalf of the company’s creditors for losses alleged to have resulted from the alleged contraventions by the defendants of their duties of due care and diligence.

More particularly, ASIC alleged that the defendants misled the board and the market as to the true financial position of the company across an extended period in 2001.  That meant that the Court was required to consider the financial position of the company, and the group of which it was a part, in order to determine whether the defendants had breached their respective duties.

The defence

The defence focused on ASIC’s failure to prove its case as pleaded.   The defendants also relied heavily on the business judgment rule contained in section 180(2) of the Act. The rule provides a defence where commercial decisions are made as long as there is a rational belief that the business judgment is in the best interests of the company.

The judgment

Austin J found against ASIC on all aspects of its case and granted judgment for the defendants.  In his mammoth written decision, running to more than 3,000 pages, Austin J has painstakingly analysed the relevant facts and the law supporting his decision in favour of the defendants.  We do not propose to go into detail in this paper about the evidentiary basis for the decision, as the basis can be succinctly summarised from the following extract of the judgement:

œASIC’s contentions have a superficial appeal, but time and again they were shown to be unpersuasive when the underlying financial detail was investigated.

Instead, we propose to focus in this paper on two particular aspects of the judgment which are likely to be of interest to Directors & Officers (D&O) insurers going forward, namely:

  • the criticisms of ASIC’s handling of the case; and
  • Austin J’s analysis of the business judgment rule.

Both of these issues may help shape the future direction of ASIC’s enforcement activity.

Criticisms of ASIC

The most significant criticism was that ASIC’s case was far too broad in that ASIC directly put in issue the financial condition of the company over an extended period of time, rather than at a single date.  In the words of Austin J:

œThere is a real question whether ASIC should ever bring civil proceedings seeking to prove so many things over such a period of time as in this case.  A case might have been brought focusing attention on One.Tel’s financial condition at a particular point in time ¦ I do not mean to express an opinion about the likely outcome of such a case ¦ Rather, my point is that such a  case would have established much more limited boundaries of relevance and would have required an assessment of the Group’s financial position at the precise time of publication of the media statement.  Instead, we have had a case which seeks to prove the financial condition of a large multinational corporate group with various businesses, some in start-up mode and some more established, over a period of four months, with a view to establishing not one but many breaches of the statutory duty of care and diligence.  I wonder whether that is beyond the bounds of reasonable scope of civil litigation.

The business judgment rule

A director’s duty of care under section 180(1) of the Act is an objective œreasonable person standard.  According to Austin J

œthe objective standard in the case of an executive officer or executive director has regard to the knowledge and expertise of persons in the same recognised calling as the person charged with contravention, and therefore recourse may be had to the evidence of experienced people who have occupied similar offices

The business judgment rule, contained in s 180(2) of the Act, essentially provides a defence to an alleged contravention of section 180(1) in circumstances where the director or officer has made a business judgment (ie. any decision to take or not take action in respect of a matter relevant to the business operations of the corporation) in relation to which the director or officer has satisfied the following four elements:

1)  the judgment has been made in good faith for a proper purpose;

2)  the director or officer does not have a material personal interest in the subject matter of the judgment;

3)  the director or officer has informed themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

4)  the director or officer rationally believes that the judgment is in the best interests of the corporation (the director’s or officer’s belief being treated as rational unless it is one that no reasonable person in their position would hold).

Austin J’s judgment provides a thorough analysis of the above elements of the rule.  In particular, we highlight three areas of significance identified by his Honour.

Onus of Proof

Austin J concluded that the onus of proving the four elements of the business judgment rule rests on the defendant.

Informing oneself about the subject matter

In relation to this element of the rule, Austin J made the following comments:

The qualifying words, œto the extent they reasonably believe to be appropriate, convey the idea that protection may be available even if the director was not aware of available information material to the decision, if he reasonably believed he had taken appropriate steps on the decision-making occasion to inform himself about the subject matter. 

Rational belief as to the best interests of the corporation

ASIC contended that the terminology of a œrational belief should be equated to œa reasonable belief.  Austin J rejected that submission as such an interpretation would render the business judgment rule useless as the œrational belief element would only be satisfied in circumstances where there was a œreasonable belief, in which case there would be no contravention of the s 180(1) reasonable person duty of care and diligence.  Instead, Austin J concluded that the œrational belief element of the rule is satisfied œif the evidence shows that the defendant believed that his or her judgment was in the best interests of the corporation, and that belief was supported by a reasoning process sufficient to warrant describing it as a rational belief, as defined, whether or not the reasoning process is objectively a convincing one.

In other words, the rule has real work to do in that the œrational belief standard is a lower standard than the objective œreasonable person standard of the duty of care and diligence.


It is too soon to tell whether ASIC intends to appeal the judgment.  Nevertheless, there are clear lessons which ASIC will likely take away from this case.  In particular, we would expect that ASIC will in the future try to narrow the scope of its enforcement activities to a particular contravention at a particular point in time in order to avoid the significant evidentiary problems it encountered as a result of the breadth of this case.  Such a development would no doubt be welcomed by D&O insurers as this could result in lower litigation costs in civil penalty proceedings such as this.

D&O insurers and their insureds may also find some comfort in Austin J’s expansive analysis of the business judgment rule.  The decision confirms that directors and officers have the potential to argue that commercial decisions, coupled with a œrational belief, remain reasonable.

Finally, we would expect to see ASIC continuing the trend of pursuing enforceable undertakings as an alternative to costly (and, as this case has demonstrated, risky) civil penalty proceedings.

An end to the One.Tel saga?

Not yet.  Apart from a potential appeal of this decision by ASIC, there also remains a filed, but as yet un-served, claim by the company’s special purpose liquidator.  That claim includes allegations against Publishing & Broadcasting Ltd and News Ltd regarding a decision to cancel a $132 million rights issue which may have contributed to the company going into voluntary administration on 29 May 2001.

In his judgment, Austin J commented:

œOne of the unanswered questions is whether One.Tel would have survived if, in May 2001, PBL/CPH and News had maintained their support for the company and implemented their plan to underwrite a deeply discounted rights issue to raise $132 million¦The withdrawal of that support, and the abandonment of the rights issue, may well have ensured that the company could not survive.

The liquidators of the company must make a call on whether the cause of the collapse can be attributed directly to those associated with the withdrawal of support for the rights issue, or whether those decisions were based on misleading information from the company itself.

For more information please contact Matt Foglia on 8273 9905 or Richard Bassingthwaighte on 8273 9955.

[1] Australian Securities & Investments Commission v Rich [2009] NSWSC 1229