ASIC v Rich: Establishing the Principle of Business Judgment Rule

The case of ASIC v Rich established the principle of business judgment rule and dismissed allegations made by ASIC against the company. This article discusses the provisions of Corporation Act 2001 and director's duties. It also highlights the importance of ASIC in regulating the corporate sector.

Running head: COMPANY LAW
ASIC v RICH
Name of the student:
Name of the university:
Author note

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ISSUE:
The main issue of this case is to determine whether the alleged company One.Tel
has breached the provisions of Corporation Act 2001 or not.
RULE:
The main subject matter of the case is based on certain provisions of Corporation
Act such as director’s duty and business judgment rule. Australia is a business country and all
the rules regarding the processing of a company are very strict. Corporation Act 2001 is the
main legislative approach to deal with the matter related to the company acts. Australian
Securities and Investment Commission is the main regulating body in this case. It works to
inspect the acts of all the companies to inspect whether there are any illegal thing is going on.
The rules provided in the Corporation Act 2001 are mandatorily imposed on the directors of
the companies. According to section 180 of the Act, every director of the company is
required to perform their acts with due care and diligence and they should not act against the
interest of the shareholders. According to the general principle of Company Law, company is
the separate entity from its director; however, the director takes all the important decisions of
the company (Farrar 2016). Therefore, they are regarded as the mind of the company.
Considering their acts in the company, the directors have certain duties towards the
shareholders and to the company. They could not earn illegal profit from the company by
deceive others. They should be loyal and should employ good faith while perform for the
interest of the company. Under the Corporation Act 2001, the directors should have to
maintain all the provisions of the Act and in case of any failure found by the Australian
Securities and Investment Commission, the alleged director has to face penal action. There
are many cases where the directors of companies have to face serious penal action for non-
performing the provisions of the Corporation Act (Huebner and Klein 2015). However, there

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are certain provisions under the Corporation Act, where certain defences have been
mentioned for the directors so that they can defend their position. The case of ASIC v Rich is
an important case in this matter. The principle of business judgment rule has been established
in this case.
The directors of the company play an important role and it is their duty to deal with
all the operational matter in good faith (ANDREW 2016). There are number of cases pending
before the Australian court where the directors have failed to comply with the provisions of
Corporation Law and case like ASIC v Adler and ASIC v Cassimatis are certain examples in
this regard. According to the Act, a director has to consider certain matters while taking
important decisions for the company. They are not expected to think about their personal
interest and should not deceive the shareholders. An allegation has been brought against the
directors of One.Tel by ASIC that they have failed to assess the financial position of the
company and they have taken certain decisions by which the company become insolvent.
Further, they should assure the existence of system to facilitate the flow of financial
information to the board. However, the directors of the company had taken the assistance of
the defence provision of Corporation Act 2001 and the whole onus of proof has been passed
on their buck.
According to the allegation of ASIC, the financial condition of the company was
very bad and without assessing the financial condition the directors of the company has taken
certain steps that affects the shareholders of the company. Further, it has been alleged that the
directors of the company have all the knowledge about the company’s condition and they
have failed to maintain the balance of probabilities. In addition, it has been stated by ASIC
that the directors of the company has failed to discharge their duty with due care and
diligence and therefore, should be charged under section 1317E of the Act. In this perspective
ASIC has shown certain case citations to support their case. In ASIC v Adler, it has been held

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by the court that the directors of the company has contravened section 180, section 181,
section 182 and section 183 of the Corporation Act 2001. Further, the court has cancelled the
licence of the directors and imposed penalties on them. Similar situation has been observed in
ASIC v Cassimatis, where the court has observed that the directors of the company are not
required to feather their own nest through the company and it is their duty to secure the
interest of the shareholders. In this case, ASIC has able to prove that the directors of the
company had the knowledge about the financial condition of the company and still they have
asked the shareholder to invest their money in the company (Engert and Goldlücke 2017).
After the investment, a financial break down happened in the company, all the investments
have been downsized, and the company has become bankrupt. According to section 9 of the
Act, directors are appointed to settle down all the acts of the company. They are required to
do all the acts to protect the interest of the company and should not engage him in certain
illegal acts like fraud and mismanagement. Apart from this, certain sections are involved in
this.
ASIC brings allegation of special responsibilities against the Mr. Greaves, who has
occupied several positions in the company. According to ASIC, being the Chairman of the
company, he has to maintain certain provisions of Corporation Act that he has failed to
perform. Further, being in the position of financial supervisor, he should not take certain
decisions that make the company bankrupted. According to the explanatory memorandum of
Corporate Law Reform Bill 1992, a director should have to do his job with due care and
diligence. Further concentration has been given on section 181 of the Act, where the directors
are required to perform their duties in good faith. They should not earn illegal profit from the
company (Keay 2015). There are certain responsibilities imposed on the Chairman of the
company. The Chairman should have to take certain leadership role and should be
responsible for the conducts of the board. Further direction is required for monitoring the

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management and ensures accuracy in the financial section of the company. Every director of
the company should have to inspect the financial condition of the company before making
any decisions and failure to do so will lead great dilemma for the company. According to the
allegations made by ASIC, the alleged director of the company is required to perform all the
special responsibilities and make reasonable steps to secure the interest of the company and
the shareholders. According to section 182 of the Corporation Act, a director of the company
is restricted to make any irresponsible decision regarding the financial position of the
company. ASIC brings allegation against the director of the company that he has failed to
perform either of the duties and he could not able to make rational decision.
On the other hand, the directors of the company have taken the plea of section
180(2) of the Corporation Act 2001 that deals with the business judgment rule. According to
this rule, if the directors of the company could prove that all the decisions made by him is for
the interest of the company and he does not all the decisions made by him is for the interest
of the company and he does not gain any illegal interest or profit from the same, the director
will not be held guilty under the Corporation Act. This provision is one of the great defences
that secure the responsibilities of the director. If any director of the company has been
charged under section 180 of the Corporation Act 2001, the business judgment rule will
protect the interest of the directors. However, the directors of the companies are required to
submit all the reasonable facts in their favour.
Application:
The case of ASIC v Rich (2009) is a historical case regarding the corporate sector
and the principle of business judgment rule has been established in this case. In this case, the
NSW Supreme Court has dismissed the allegations made by ASIC against the company by
stating that ASIC has failed to prove all the facts of their allegation and failed to prove that

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the directors of the company has taken irresponsible decisions to make certain personal gain
from the company. ASIC plays an important role in Australia, as it inspects the works of the
company and in case they have certain proves that the directors of any of the company have
failed to perform their acts according to the provision of Corporation Act, ASIC could filed
case against the company and if all the allegations could be proved, court will impose
penalties against the director of the company and may cancel his licence for the offence.
There are many cases where the institution (ASIC) has played a significant role and able to
prove their capabilities in the corporate sector and create a strong implication against the
white collar crime.
However, in this present case, similar allegation has been made against the director
of the company. It has been alleged that one of the directors of the company has failed to
make all proper inspections and the company has to suffer detrimental effects due to it.
However, ASIC has failed to prove the basis of the allegation and the Supreme Court of
NSW has freed the directors of the company from all the charges by establishing the principle
of business judgment rule mentioned under section 180(2) of the Corporation Act 2001.
The directors of the company have able to establish the fact that they have taken all
the decisions for the interest of the company and they have not earned any illegal gain from
this. Further, all the witnesses are not examined by ASIC and they have failed to produce any
strong evidence against the company to verify their allegations. Further, the director of the
company has able to prove their innocence by submitting relevant facts and proves all the
essentials. It is quite clear to consider that the alleged director could not take any step that can
lead against the corporate rule. The Court has declared that the directors are able to maintain
all the special responsibilities and no irresponsible steps are taken by the alleged director cum
Chairman of the company.

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Conclusion:
The court has set aside the allegations of ASIC against the company by
establishing the principle of business judgment rule.

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Reference:
ANDREW. KEAY, L.L.B., 2016. DIRECTORS'DUTIES. JORDAN PUBLISHING Limited.
Australian Securities and Investments Commission v Adler [2002] NSWC 171
Australian Securities and Investments Commission v Cassimatis [2016] FCA 1023
Australian Securities and Investments Commission v Rich [2009] NSWSC 1229
Engert, A. and Goldlücke, S., 2017. Why agents need discretion: The business judgment rule
as optimal standard of care. Review of Law & Economics, 13(1).
Farrar, J., 2016. Book Review: Directors' duties: Principles and application.
Huebner, M.S. and Klein, D.S., 2015. The Fiduciary Duties of Directors of Troubled
Companies. American Bankruptcy Institute Journal, 34(2), p.18.
Keay, A., 2015. The shifting of directors' duties in the vicinity of insolvency. International
Insolvency Review, 24(2), pp.140-164.
Schnell, B.B. and Gardner Jr, R.K., 2015. Battle over the Franchisor Business Judgment Rule
and the Path to Peace. Franchise Law Journal, 35(2), p.167.
Smith, D.G., 2015. The Modern Business Judgment Rule.

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