Australian Securities and Investments Commission v Rich

Facts

ASIC brought civil penalty proceedings against former directors and officers of One.Tel Limited following its collapse in 2001, alleging contraventions of the duty of care and diligence under s 232(4) of the Corporations Law (now s 180 of the Corporations Act 2001 (Cth)). The defendants included both executive and non-executive directors who, ASIC alleged, failed to properly monitor the company's deteriorating financial position and take appropriate remedial action. Austin J conducted an extensive trial examining the information available to the board and the steps taken by the directors in the period leading up to One.Tel's insolvency.

Issues

1. What standard of care and diligence is required of directors, and in particular non-executive directors, under s 232(4) of the Corporations Law (equivalent to s 180(1) of the Corporations Act 2001 (Cth))? 2. Whether the defendant directors breached that duty by failing to inform themselves adequately of the company's financial position and failing to take steps to prevent the company trading while insolvent. 3. Whether the business judgment rule defence was available to the defendants.

Holding

Austin J dismissed ASIC's claims against the non-executive directors, finding that they had not contravened their duty of care and diligence in the circumstances, while delivering extensive analysis of the applicable standard. The court found that the non-executive directors had acted reasonably given the information available to them and the systems in place at the time.

Ratio decidendi

The standard of care and diligence required of a director under s 180(1) of the Corporations Act 2001 (Cth) is an objective one — that of a reasonable person in the director's position with the director's responsibilities within the corporation — and it demands that directors take reasonable steps to inform themselves of the company's financial position; however, non-executive directors are entitled to rely on management and executive directors to provide accurate information, and will not be held liable where they acted reasonably on the information provided to them and the inadequacy of that information was not apparent.

Obiter dicta

Austin J made extensive observations regarding the evolving expectations of non-executive directors in modern corporate governance, noting that heightened community expectations and regulatory developments since the 1990s had progressively increased the responsibilities of non-executive directors to scrutinise management and financial reporting, even if those expectations had not yet fully crystallised into legal obligations at the relevant time.

Significance

This decision is a leading Australian authority on the content of the director's duty of care and diligence under s 180 of the Corporations Act 2001 (Cth) as it applies to non-executive directors, providing detailed guidance on the circumstances in which reliance on management information is reasonable and on the interplay between objective standards and a director's particular role and responsibilities within the company.

Key authorities

• ASIC v Adler Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80applied
• AWA Ltd v Daniels AWA Ltd v Daniels (1992) 7 ACSR 759considered
• Daniels v Anderson Daniels v Anderson (1995) 37 NSWLR 438applied
• ASIC v Healey Australian Securities and Investments Commission v Healey (2011) 196 FCR 291cited
• Re City Equitable Fire Insurance Co Re City Equitable Fire Insurance Co [1925] Ch 407considered