BBAL401 Company Law

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BBAL401 Company Law

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BBAL401 Company Law

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Course Code: BBAL401
University: Victoria University

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Country: Australia

Question:

Discuss About The Second Guess Decisions Of The Directors?

 
Answer:

Introduction
The business has become very risky and troublesome and Courts have stopped to second guess the decisions of the directors, if the directors do their duties and responsibilities properly. The directors are supposed to have acted according to and keeping the best interest of the company. The Courts do not interfere in the decision of the director unless otherwise required and if the directors have acted against the norms and regulations. The directors will then be required to face actions for their negligence in their work. This principle which shields the directors from all is called the business management judgment principle. In Australia, these principles which have been set out in the Act or the statute and it is commonly known as the business judgment rule.
Identify the Facts of the Case
Australian Securities and Investment Commission vs Rich is one of the famous case which was held in the Australian Supreme Court where the ASIC has accused the directors and held them liable for the telecommunication company Rich. One Tel is one of the largest telecommunication companies in Australia and it got calls from one of its shareholders Rich then the company expanded and then the company made a $600 million and committed to build a fourth mobile network. After that the Australian company became one of the largest companies having $1 Billion turnover. The directors failed to do the duties properly and which led the company to collapse. It took almost nine years to generate a resolution (Barnes, 2013).
In 2009, Austin Judge of the Supreme Court of South Wales have handed the decision of ASIC proceedings against the director of One Tel Ltd, Mark. In the case the “defendant must believe that the judgment is in the best interest of the Corporation under section 180(2)(d) of the Act”.
 
Explain the relevant law relating to the case
In New South Wales, the Supreme Court held in the case where the Chairman of the company had special responsibilities. It was held in the Corporation Act, 2001 which imposed care and diligence on the directors of the listed company and this lead to imposition of fines and duties reflecting community expectation. The duty of the director was onerous and this was the reason for which there was a duty charged on the directors. The case came as a warning to the directors as they need to fulfill the additional responsibilities which the law has placed for them which were beyond the duties which they owed according to their experience and expertise (Campbell, 2015).
The telecommunication company which failed applied to the ASIC which was going through the striking procedure of and winding up. As per “section 180(1) of the Corporation Act, 2001″ which states that if an director must do its duties with care and diligence and shall be responsible for any defaults during the time they hold the office and they are acting as behalf as a director of the corporation or the company and is carrying out such responsibilities (Coffee, Sale, and Henderson,  2015).
ASIC according to the section 180(1), tells that Mr Greaves had special responsibility by virtue of the position of the company. ASIC have argued that Mr Greaves was given the responsibility due to his experience or expertise. The word responsibility refers to the delegation of duties of by the Corporation and mentioned in the Articles of Association.
The Court held that the term responsibility means it is not only delegation of duties but also those expectation placed by the company on the shoulders of the director. The evidence of ASIC, which was accepted by the Court and which had reasonable cause of action. ASIC had given affidavit from the two prominent chairmen claiming reasonable and careful evidence where it was show that the director has certain rights and duties towards the company (Drexler, Black and Sparks , 2016).
 ASIC pleaded that Mr Greaves should have taken reasonable steps to ensure that the directors are responsible for their duties. ASIC saw that the responsibilities of the company held by the director are met which had a burden from the company (Kraakman, Armour and Davies, 2017).
Discuss the legal arguments raised by the parties in case
In the course of the litigation ASIC claimed that the defendant Mr Greaves have contravened the provisions of the Corporation Act, 2001 and this requires the director to use the due diligence and care and this helps in exercising and imposing their power in giving their duties. ASIC claimed that few months ago they appointed One Tel and the company had breach of their contract on the following grounds.
The defendant failed to do the duties and ASIC claimed on the following grounds:

Proper assessment of One Tel’s financial condition
To inform the board of directors on the actual and true position of the One Tel
A proper system which helps in proper flow of the information to the board of directors (Welch et al 2016).

 
Justice Austin then reviewed the case and got the evidence that ASIC :
As per” section 180(1) of the Act it is a standard of the conduct and therefore all the directors must adhere to the code of conducts. The business judgment rule as set in section 180(2) sets as a defense to the contravention to the section 180(1)”.As per the Explanatory Memorandum bill that says that the safe harbor provisions are used to protect the directors from taking any advantage of the operations which involves the risk of the company (Lin, 2017).
Summarize the judgment of the case
The business judgment in the case of ASIC V Rich  
“As per section180 (2)(d) which requires a board or the  director to believe that the judgment is done thinking of the best interest of the company”. It further believes that the judgment is a rational one and it. Since the judgment defines rational belief and the reasonable person it is therefore argued that it offers nothing but window dressing (Mitchell et al, 2016).
In the submission made by ASIC which had contended to the “section 180(2)(d) and by the definition of the rational belief and the director’s had believed against the standard for reasonableness” and therefore ASIC told  that there cannot be multiple directors.
The Court His Honor held that,” It is plausible to say that the drafters to the definition of the rationally believe  intended to capture the latter idea where the director’s believe would be a latter one”. It thinks rationally and is based on the reasoning, but it wouldn’t be considered so if there was no arguable reasoning process.
ASIC contention was that it was apparent and superficial appeal but with time it was proved that the case was not persuasive when there was an investigation held of the underlying details of the investigated matter (Pearson, 2016).
Instead they focused the matter on the two specific aspects of the judgments which are made for the interest to Directors going forward, namely:

The criticisms which have been discussed of ASIC’s handling of the case; and
Austin Judge have made the analysis of the business judgment rule

Case Analysis
In the case study Judge decided that AISC failed to prove the above case against the director of the company. AISC have bought the civil proceeding which was initially bought by AISC against the defendants. AISC alleged that the defendants which were the company had failed to disclose about the true financial picture or position of the organization or company to the board of directors of the company (Peden,  2017).
“The focus for the argument above was based on the fact whether ASIC had proved to the Court its true financial position in the January- April 2001 period”.
On conclusion the Judge asked to determine that who is at default and is blamed for the disaster amongst the defendant and the directors and the non executive directors. Even though there was huge amount of effort devoted by those proceedings by all, including the parties and the advisors and the Court (Posner, 2014).
 
The Judgment Rule was conveyed
“Under section 180(1) of the Act it is the director’s duty of care which is an objective for reasonable standard for a person. According to Judge, the objective for the standard in case is that the officer had knowledge and expertise of the persons in the same way as recognized as the persons was charged with a contravention and therefore recourse is to be held in case of the evidence of the experienced people who have occupied the same offices.
The Judgment in the rule which is contained as per section 180(2) of the Act and which essentially provides for the defense to an alleged contravention as contained under the section 180(1) in circumstances where the director or the officer had made the business judgment and any decision which was to be taken in respect if the matters which were relevant”.
The directors satisfied on following grounds:
1) The judgment which has been made is for the company and it is made for  the people and it is in good faith and for a proper and particular purpose
2)  The director or officer of the company do not have any material or any personal or internal interest in respect of the matter given by the Court of the judgment;
3)  The director or officer or the management of the company has been informed about the matter to which the judgment relates, and (Young and Huo,  2016).
4)  The director or officer or management of the company believes rationally that the judgment which is given by the Court is of the best interest of the of the corporation and it is treated that the directors are able to rationally believe and that the Court’s judgment is given and it is in the best interests of the corporation or the organization.
Thus the Court, “Austin J’s judgment provides a thorough analysis of the above elements and of the rule”.  In particular it is seen that the Court have also high lighten the significance identified by His Honor (Wolfe and Pittenger, 2016)
Onus of Proof of the Case
The Austin Judge has an onus of proof on the following grounds of the business judgment:
The words which are to the extent is reasonable and is to the believe that they convey that protection is available even though the directors are not aware about the decision or information and it is reasonably believed that steps can be taken for decision making for the particular subject matter. Instead, Austin J concluded on a note that the operational belief that the rule is satisfied and that the evidence shows that the defendant is of the belief that the “judgment is of the best interest 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”.
 
Conclusion
In order to conclude in the above case of ASIC vs Rich, the ASIC is not able to provide any correct evidence to win the case. The case concludes and ASIC did not appeal the decision which was given by the Judge. The option for this and that of a modified business judgment rule which would apply to the director’s duty, under section “588G of the Act, to prevent insolvent trading”. Submissions on behalf of several company and this organizations supported that very option. “If the purpose of the statutory business judgment rule is to provide a genuine ?safe harbor? for directors, the words should be removed. A repeal of the definition will achieve greater clarity and certainty for all concerned”.
There has been clear evidence that ASIC took a lesson from the Judgment given by the Court. In future the ASIC will be able to narrow down their scope and in the enforcement of the activities for doing that particular activity. This would cause civil penalty proceedings. The decision of the Court confirms that the directors have the potential to make a commercial decision in the regard of the case and this is coupled with the belief to remain reasonable.
 
References
Barnes, L.R., 2013. The Albatross Around the Neck of Company Directors: A Journey Through Case Law, Legislation and Corporate Governance.
Campbell, J.C., 2015. Corporate Law, the Courts and Corporate Personality.
Coffee Jr, J.C., Sale, H. and Henderson, M.T., 2015. Securities regulation: Cases and materials.
Drexler, D.A., Black Jr, L.S. and Sparks III, A.G., 2016. Dividends (Vol. 1). Delaware business Law and Practice.
Kraakman, R., Armour, J. and Davies, P., 2017. The anatomy of corporate law: a comparative and functional approach. Oxford University Press.
Lin, P., 2017. Rethinking” Contract” and” Corporation” A Comparative Research of Like Cases on Valuation Adjustment Mechanism Between China and US. Peking University Law Journal, 1, p.015.
Mitchell, R.K., Weaver, G.R., Agle, B.R., Bailey, A.D. and Carlson, J., 2016. Stakeholder agency and social welfare: Pluralism and decision making in the multi-objective corporation. Academy of Management Review, 41(2), pp.252-275.
Pearson, G., 2016. Failure in corporate governance: financial planning and greed. Handbook on Corporate Governance in Financial Institutions, p.185.
Peden, E., 2017. Civil and criminal liability of directors and officers of sporting clubs. Commercial Law Quarterly: The Journal of the Commercial Law Association of Australia, 31(1), p.12.
Posner, R.A., 2014. Economic analysis of law. Wolters Kluwer Law & Business.
Welch, E.P., Saunders, R.S., Land, A.L., Turezyn, A.J. and Voss, J.C., 2016. Folk on the Delaware General Corporation Law: Fundamentals. Wolters Kluwer Law & Business.
Welsh, M., 2014. Realising the public potential of corporate law: Twenty years of civil penalty enforcement in Australia. Fed. L. Rev., 42, p.217.
Wolfe Jr, D.J. and Pittenger, M.A., 2016. Appeals and Certification of Questions of Law to the Supreme Court of Delaware (Vol. 1). Corp and Commercial Practice in the Delaware Court of Chancery.
Young, A. and Huo, C., 2016. New Risk Management Requirements in Hong Kong’s Corporate Governance Code. Finance, Rule of Law and Development in Asia: Perspectives from Singapore, Hong Kong and Mainland China, p.261.

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