Business judgement rule is a defence that only applies to the duty of care and can be found under s 180 (2) of the Corporations Act 2001. It doesn’t operate in relation to any other part of the act or principle of law. The rule has been resurrected so that it is in fact capable of providing a defence in certain cases that would otherwise amount to a breach of director’s duties after the decision in ASIC v Rich. That case substantially redrew the contours of the business judgement rule in this country. For it to apply the director has to have made a business decision as defined by s 180 (3) fulfilling the following requirements: • It must be made in good faith and for proper purpose s. 180 (2) (a) • The director wishing to rely on this defence …show more content…
It means the defendant has met the requirements of statutory duty of care set out in s. 180 (1) or its equivalent common low duties, when it comes to business judgements. The advantage of having the rule is that it provides a certainty for directors as it ought and it encourages informed business judgements in order to stimulate responsible risk taking and innovation by the directors and an environment for them to make commercial decisions on their true merits and the merits of their business judgements would not be the subject of review by the Courts. It is meant to strike a balance between encouraging responsible risk taking and protection of the shareholders. When erected the fundamental purpose of the rule was to protect the authority of directors in the exercise of their duties and not to insulate them from liability. However it has not to date provided a certainty for directors. In the period between its introduction and the Rich case it had not been successfully invoked, even here it was unsuccessful. Following the case there was criticism of the scope of the rule, the Australian Institute of Company Directors for one argued that because of the concerns regarding personal liability the industry was losing out on experienced as well as novice directors who saw the risks as unfairly balanced. I tend to agree and believe the rule needs to be re assessed to ensure a better balance between ensuring directors can take reasonable risks and our economy grows with protection for shareholders and other stakeholders. This is a position supported by Professor Baxt who believes there is need for reforms to relax director duties and encourage entrepreneurial