The One.Tel case and developments in Directors and Officers’ duties

The One.Tel case and developments in Directors and Officers’ duties

The recent One.Tel case (ASIC v Rich [2009] NSWSC 1229), where ASIC’s allegations against two former directors of One.Tel, Mark Silbermann and Jodee Rich, were rejected by the New South Wales Supreme Court in a 3,000 plus page judgment, has been the subject of intense media interest. The decision by Justice Austin has many significant implications for company directors and officers. It focuses attention on the nature of the duties that managing directors and finance directors owe to companies and the extent to which they are obliged to pass on financial information to company boards. Criticism of ASIC’s handling of the case is also likely to affect the way the regulator approaches future prosecutions of alleged breaches of duties of directors and officers.

ASIC’s claim

ASIC claimed that Messrs Rich and Silbermann had breached their duties as directors and officers by failing to make proper disclosure to the One.Tel board of the poor financial position of the One.Tel group prior to its collapse in May 2001.

In particular, ASIC focused on the reported financial position of the group in each of the months of January, February, March, April and May of 2001 as opposed to the actual position, and the basis on which Messrs Rich and Silbermann made forecasts and reported financial information to the board. 

Evidentiary Issues

Because the ASIC claims covered alleged continuous breaches of duty over such a lengthy period of time, a considerable body of evidence and conduct needed to be examined by the Court in One.Tel in order to ascertain whether there was any breach of duties by Rich and Silbermann.  Ultimately, Justice Austin found that the evidence presented to him (while extensive) was in many cases insufficient to support ASIC’s case. By contrast, in the James Hardie decision (where ASIC was successful), the main evidentiary issue surrounded the release of a press announcement to the market. In light of this, it is widely expected that ASIC will adopt a narrower approach in framing prosecutions for breaches of directors and officers duties in subsequent cases. 

The legal issue – breach of duty

Section 180 of the Corporations Act provides that directors and officers have a basic duty to exercise their powers and discharge their duties with the care and diligence that a reasonable person would exercise, taking into account the corporation’s circumstances, the offices occupied by the person and their responsibilities within the corporation.

There is a statutory defence to an allegation of breach of section 180. This is contained in section 180(2) and is referred to as the “business judgment rule.”  This rule provides that a director or officer will have been taken to have discharged their obligations in accordance with section 180 if he or she:

• makes a ‘business judgment’ in good faith and for a proper purpose;
• does not have a material personal interest in the subject matter the judgment;
• informs himself or herself about the subject matter of the judgment to the extent he or she reasonably believes to be appropriate; and
• rationally believes that the judgment is in the best interests of the corporation.

The One.Tel case concerns itself with the duty of care and diligence of a joint CEO (Jodee Rich) and finance director (Mark Silbermann) respectively. Justice Austin refers significantly to previous case law and, in particular, his own decisions in a number of cases in relation to the similar content matter.  In considering the nature of the duty of care, one key question is the extent to which the standard of conduct expected of a director and officer is objective or subjective and, in particular, how a Court will have regard to the circumstances of the relevant corporation and the responsibilities of that particular director or officer.

The One.Tel decision considers the distinction between the application of section 180 to non-executive and executive directors.  For example, a non-executive director is not involved in day to day management of the company and is entitled to some extent to rely on information provided by the executives and management.  However, non-executives should keep informed about and monitor a company’s affairs and activities and need to have a good understanding and grasp of the financial position of a company so they can form an opinion as to the company’s solvency.  It was noted that both a managing director and finance director need to have a detailed understanding of financial reporting and cash flow issues so that they can appropriately monitor a company’s performance and ensure the company complies with its obligations under the Corporations Act (and the ASX Listing Rules if applicable).  This was at the heart of the decision.

There is also some further guidance in the One.Tel case about the operation of the business judgment rule and the circumstances in which it may apply. For example, it may be applicable to decisions that directors and officers make about planning, budgeting and forecasting but not to duties to monitor a company’s affairs or financial position. 

Conclusion

While the judgment criticises the broad nature of ASIC’s case and the evidence adduced, it is clear from the decision that the standard of care and diligence expected of directors and officers is objective but that a Court will take into account the corporation’s circumstances, the offices occupied by the relevant person and their responsibilities within the corporation. 

Any executive director will be required to have a detailed understanding of their company’s financial performance and position. Although ASIC were ultimately unsuccessful in the One.Tel case, executive directors will need to consider carefully the systems in place for giving financial information about their company to non-executive directors and assess whether or not they are adequate.

Although ASIC had originally indicated its intention to appeal this decision, ASIC has recently announced that it will not appeal the decision. In any event, however, 2010 will be a significant year for Australian directors duties law as a number of other recent directors’ duties cases are also subject to appeals (including the James Hardie case (ASIC v MacDonald), the AWB case (involving Mr Lindberg, former CEO of AWB) and the Fortescue Metals decision).

So where does that leave directors and officers in terms of understanding their risk and liability?

• The Courts have recognised that directors and officers need to be entrepreneurial when making decisions that are in the best interests of a company and this involves risk. 
• How directors and officers are perceived to have accounted for, measured and responded to risk, will determine whether they will have discharged their duty of care and diligence. In this context, it is recommended that executive directors and chairmen review carefully their existing processes regarding the provision of financial information to other board members.
• To the extent that the law allows directors to obtain expert opinions and rely on input of other parties, this will assist in showing their duties have been discharged.