Business and Corporate Law : Assignment

ASIC v Rich [2009] NSWSC 1229
Running Head: BUSINESS AND CORPORATION LAW 0
Corporation Law
5 / 2 2 / 2 0 1 8
Student’s Name

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Contents
Introduction......................................................................................................................................2
Australian Securities and Investments Commission v Rich............................................................2
Background of the case................................................................................................................2
Facts of the case...........................................................................................................................3
Duties Breached/Rules.....................................................................................................................4
Reason for what the mentioned duties have breached?...................................................................5
Decision of the court........................................................................................................................6
Impact of the decision of the case on the operation of Australian companies................................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

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Introduction
Corporations are non-individual body, which cannot act with it is own mind , so for this reason
there are some directors and officers in every corporation who deals with people and take various
decision in the course of running a corporation successfully. It is the duty of such appointed
directors and officers to work in the best interest of the organization. Success of a corporate
depends on the fact that how wisely it is directors take decisions, how they respond to different
problems in day to day business activities. To regulate any business there is always a law.
Similarly to control to activities of a corporation, there is a law named Corporations Act, 2001
(Cth). This is the basic act which defines the roles, responsibilities of directors and expectation
of society from them. Here society refers to it is stakeholders. Whenever an officer is appointed
in a corporate it is expected from him/her that the same will work in the best interest of entity.
But if such person fails to do so, there are some provision related to penalties and persecution on
Corporations Act, 2001 (Queensland Government, 2018).
Australian Securities and Investments Commission v Rich
Background of the case
The mentioned case is related to director’s duty and the result of their breaches. This is a very
well-known case in Australia, where the lead argument held in between Australian Securities and
Investments (herein after indicate as ASIC) and Rich. These both are the major parties of the
case. Here Rich was a director of One.Tel, a corporation. Where ASIC is an independent
government body which regulates deeds and conduct of corporates in Australia (ASIC, 2018).

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Section 180(1) defines the duties of director along with the manner to follow these duties.
According to this section a person who held position of director or officer in a corporation must
perform his/her duties like a reasonable and answerable person. It means it is expected from
every director and officer of the corporation whether executive or non-executive that he/she will
perform his/her duty with full of their attentive mind (Australian Government, 2018). Here in the
given case, Rich being a director was liable to perform his duties with due care and
responsibilities as per section 180(1) of Corporations act, 2001 but he has failed to do so. By this
reason ASIC brought an action against him.
Facts of the case
In the given case, Mr. Rich was the founder and director of One.Tel, which was a corporation
providing services of GSM mobile in addition to services of long distance calls. One.Tel was
doing well and in the year 1998 & 1999 expanded it is business activities overseas. Two
investors named as Packer’s publishing and Broadcasting and News Corporation brought an
investment worth $600 Million to One.Tel. Soon this corporation cherished and became
Australia’s fourth largest telecommunication provider.
In May 2001, both of the said investors withdrew their investment back as they were updated
with the fact that One.Tel needs $300 million further to survive. They have given an instruction
to Ernst and Young, an auditor for preparing a report to test the claim. While considering this
report in a meeting later on, it has come into notice that there was no such requirement to
introduce $300 million to One.Tel and this corporation could continue it is business activities
with the earlier investment worth $600 million (Jade, 2018).

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As soon as both the investors have pulled out their investment, One.Tel goes into process of
liquidation as it was not supposed to carry out it is business activities without sufficient capital
funds. One.Tel ceased to continue it is business in June 2001 in Australia. Subsequently the
Australian business of this corporation which was already in liquidation sold out to other
telecommunication corporations at very little value.
ASIC being the regulators over corporations, has claimed that if former directors (Rich and ors)
of One.Tel would present the true and fair financial position in the meeting, Packer’s publishing
and Broadcasting and News Corporation would never withdrew their investments, and One.Tel
could continue it is business. Due to the negligence of directors, One.Tel went into liquidation.
Duties Breached/Rules
Sections 180 of Corporations Act 2001 define that an officer and director of every corporation
must discharge their duties with proper care and amount of diligence (austlli, 2018). According
to this section when a person held position of director or officer in a corporation, it is assume that
the same will perform his/her duties and responsibility with due care and will meet with the
requirements mentioned under Corporations Act, 2001 in respect of directors duties. Further
section 180(2) explains the concept of Business Judgment Rule. As per this rule the directors
who make business decisions will supposed to meet the requirements of section 180(1), if they
take such business decision for the interest of the corporation, if they do not have their any
personal interest in a particular transaction and if they have a believe that whatever decision they
are taking will bring a positive result to corporation (William Roberts, 2018).

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It was held in the case Fodare Pty Ltd v Shearn (2011) NSWSC 479 that a director must set
aside his/her personal interest while taking business decision in a corporate and it is advisable for
him/her to do the acts in the best interests of the corporation.
In the case Asden Develpoments Pty Ltd(in liq) v Dinos (No 3) [2016] FCA 788, it was held that
an officer must take all the steps in order to secure corporation’s interest in a particular
transaction.
It is the duty of director and officers of the company to work in a manner which is justifiable.
One who is designated on such position should not act carelessly, as decision of such persons
affect thousands of other. In corporations, it is very general that the more ethically it is director
behaves, the more it goes to way of success. Here it is important to mention that irrespective of
intension of the directors, this is also important to check how wisely they take their decisions.
According to Corporation Act, 2001, a person who held position of a director or an officer of the
company contravenes the provision of this act can be held liable for the penalties mentioned
under section 1317G of this Act (Wolters Kluwer, 2018).
Reason for what the mentioned duties have breached?
In the Studied case, being the director of the company it was the duty of Rich along with other
directors of One.Tel to present fair and correct view of financial statements (Legal Services
Commission of South Australia, 2018). But these directors have failed to do so. They have
presented the financial statements before board in a manner which brought a reason to believe
that corporation needs more funds to continue it is business, which was not true. Due to this act

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of directors of One.Tel, investor of this corporation came into believe that the same is not in
good condition and instead introducing new funds to One.Tel, they have taken back their
presented funds too.
Due to this corporation One.Tel into liquidation and business of the same has sold out for almost
no value. Here, Rich has breached his duty of care (Foglia and Bassingthwaite, 2018).
According to the case Asden Develpoments Pty Ltd(in liq) v Dinos, every director and officer
should remain aware about financials statements of a corporations. In the reviewed case Rich
must cross examine the financial statement before presenting the same before board.
As per the case Fodare Pty Ltd v Shearn, it is the responsibility of director and officers of the
corporation to perform their duties in it are the best interest. In the given case, Rich must look
into the accuracy of financial statements.
Decision of the court
In this case, ASIC made a claim that Rich along with other director named Silbermann did not
perform their duty of care and due to this deed; investors has withdrew their investment from the
One.Tel. According to ASIC it was the duty of former directors of One.Tel to update and inform
to board of the said corporation with the true view of financial position. But they have made
default in doing so and for this reason are liable for penalty of $92 million as damages and
lifetime ban from holding directorship in any other corporation.
Later on in this case, many of the sittings of trial court have happened and in 2009, Justice
Robert Austin has declared claim of ASIC invalid. Justice declared that rule of business
judgment will apply to this case. It was held that all the former directors of One.Tel made best

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judgment according to them and for this reason they are meant to comply with provision
stipulated with section 180(1) of Corporations Act, 2001 (Thomas Reuters, 2016).
On 26 February, 2010 ASIC declared that the same will not make any appeal in against the
decision of lower court (Tesarsch, and Tiller, 2010).
Impact of the decision of the case on the operation of Australian
companies
Although this case attracts the duties mentioned in section 180(1) of Corporations Act, 2001 and
their breaches, yet the directors were not held liable as they have made the business judgment in
the best interest of the company. This case attracts the provision of section 180(2) as well, in
which it is mention that if a director or officer take a decision in the due course of his/her duty
and has reason to believe that they are doing so in best interest of the corporation, cannot held
liable to breach their duty under section 180(1) of Corporations.
Section 180(2) of Corporations Act, 2001 is a defense which director and officer can take when
they take best business judgment according to them and have some reasonable grounds to prove
the same. This case brought a positive impact on the operations of Australian companies as the
same has concluded that a director and officer of the corporations will not held liable for any
type of penalties if such person has performed his/her duty according to the provision of section
180(2) of Corporations Act, 2001(Lumsden, 2010).
There is a saying that Courts always secure the genuine persons. This case made this statement
true. After the required study of cited case, it may state here that this case a significant impact in
itself. It motivates to that person who have bonafide intention while working and who does not

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bring their personal interest while performing their duties. Further, decision of the case ensures
the applicability of section 180(2) of Corporations Act, 2001. This case also gives lesson to
regulator that the same must be more careful and clear in it is views before initiating any action
in against to corporates or of it is directors and officers.
Conclusion
In the analyzed case, directors of One.Tel without any malafide intention presented some
financial statements to board, which was not showing the true and correct view of corporation’s
financial and working condition, and for this reason investors has withdrew their investments
from said corporation. Due to this, corporation started to face lack of capital and soon went into
liquidation.
Here although it was the duty of Rich, one of the director and party of the case to show proper
care in presentation of financial statements but as he was genuinely taking business decision for
One.Tel without his personal interest, he did not held liable by court for any penalties or
prosecution. This case can be concluded as that if a directors and officers follow their duties in
best interest of corporation, the only they can take defense of Business judgment rule, as per
section 180(2) of Corporations Act, 2001 but for taking such defense a director or officer of
corporation must take their personal interest set aside . In conjunction to this they are also
advised to take the business decision in the best interest of the corporation.

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References
Asden Develpoments Pty Ltd(in liq) v Dinos (No 3) [2016] FCA 788
ASIC (2018) Our role [online] Available from: http://asic.gov.au/about-asic/what-we-do/our-
role/#what [Accessed on 22/05/18]
ASIC v Rich [2009] NSWSC 1229
Australian Government (2018) Duties of directors and other officers [online] Available from:
http://www.oric.gov.au/publications/catsi-fact-sheet/duties-directors%20and-other-officers
[Accessed on 22/05/18]
Corporations Act, 2001 (Cth)
Fodare Pty Ltd v Shearn (2011) NSWSC 479
Foglia M. and Bassingthwaite, R. (2018) ASIC Unable to reel in the Rich-Australian Securities
& Investments Commission v Rich Available from: http://www.wottonkearney.com.au/asic-
unable-reel-rich-australian-securities-investments-commission-v-rich/ [Accessed on 22/05/18]
Jade (2018) Australian Securities and Investments Commission v Rich [online] Available from:
https://www.jade.world/case/2009NSWSC1229#! [Accessed on 22/05/18]
Legal Services Commission of South Australia (2018) General Duties of Directors-Corporations
Act 2001 (Cth) [online] Available from: https://www.lawhandbook.sa.gov.au/ch05s01s03s02.php
[Accessed on 22/05/18]

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Lumsden A., (2010) The Business Judgement Defence - Insights from ASIC v. Rich. Companies
and Securities Law Journal, 28(3)
Queensland Government (2018) Corporations Act 2001 (Cth) (the Corporations Act) [online]
Available from: https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/
handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx [Accessed on 22/05/18]
Tesarsch, J. and Tiller J., (2010) Corporate Regulator Fails Against One.Tel Directors: ASIC v
Rich [online] Available from:
http://www.mondaq.com/australia/x/106686/Corporate+Governance/Corporate+Regulator+Fails
+Against+OneTel+Directors+ASIC+v+Rich [Accessed on 22/05/18]
Thomas Reuters (2016) Company and Securities Law Journal Update [online] Available from:
http://sites.thomsonreuters.com.au/journals/2016/09/19/company-and-securities-law-journal-
update-september-2016/ [Accessed on 22/05/18]
William Roberts. (2018) Directors' Duties [online] Available from:
https://www.williamroberts.com.au/News-and-Resources/News/Articles/Directors--Duties
[Accessed on 22/05/18]
Wolters Kluwer. (2018) Corporations Act 2001, section 1317E declarations of contravention
[online] Available from: https://iknow.cch.com.au/document/atagUio488235sl14527583/section-
1317e-declarations-of-contravention [Accessed on 22/05/18]