The key issue in the case of ASIC (Australian Securities and Investment Commission) v Cassimatis (No. 8), revolved around the possible breach of director duty by Mr. and Mrs. Cassimatis.
In this case, the company Storm Financial Limited held AFSL, i.e., Australian financial services license and was providing finance services based on the model developed by the director of Storm Financial Limited, Mr. Cassimatis. Under this model, the borrowings of the clients were taken against the equity of their homes, followed by margin loan obtainment. Ultimately, the funds were used for establishing cash reserves and for investing in the index funds. Till the time the clients continued to have the capacity of borrowing funds, the model was continued to be applicable on them. Due to the double gearing model used by the company, the investors had to bear high losses, during the time of global financial crisis. The model was applied on people who were close to retirement and were vulnerable, plus who had limited assets and income. So, they had no chance of recovering their financial position owing to the actions undertaken by the directors. The reason for claiming a breach by directors was that they allowed the company to give wrong advice to the investors based on the model.
Corporations Act, 2001 (Cth) is the governing act for the companies in Australia. The business of the company, as per section 198(1) of this act has to be run by the directors of the company or under their directions. This places different responsibilities on the directors, which have been specifically contained under Part 2D.1 of this act.
Section 180(1) of this act provides the civil obligation on the company directors and officers to take care in using their powers and undergoing their obligations, along with being diligent in this regard. The care and diligence has to be applied in such a manner as would be done by a prudent individual holding the position of a director, in similar circumstances and undertakes the work in a prudent way as the person who occupies the similar office as the director. If there is a failure on part of the director in fulfilling this criterion, the individual is deemed to have contravened the provisions of this section and civil penalties would be imposed on the individual. This penalty is covered under section 1317E where the court has the power of making a declaration of contravention. Once this declaration of contravention is made, the pecuniary penalties can be applied for by the ASIC and can also apply for a disqualification order.
In this case, the matter was initiated by the ASIC against both Mr. and Mrs. Cassimatis in 2010. The claim made by the ASIC was that the directors of the company, which included Mr. and Mrs. Cassimatis and other directors, had an extraordinary degree of control over the company. The director duties had been contravened by Mr. and Mrs. Cassimatis when Storm Financial Limited had been solvent. And at that point of time, Mr. and Mrs. Cassimatis were the only directors of the company, in addition to being its shareholders. The lack of any dispute was highlighted by the ASIC to be the management of the company by these two directors, which was aligned with the informed wishes of the company shareholders.
The ASIC made a claimed that the company had contravened the obligations under the governing act, based on which, the financial advice to the retail client had to be provided on a reasonable basis. The reason for this was the financial services being provided by the company, based on the model to the vulnerable category of investors. The claim was made by the ASIC regarding the contravention of section 180(1) of the governing act based on the fact that they allowed such information/ advice to be provided to the vulnerable investors.
This action of the director exposed the company to foreseeable risks of harm, including the AFSL being cancelled, the banning order being passed and the initiation of the civil proceedings by these vulnerable investors. The risk of exposure, in the view of the ASIC, had been amplified due to the actions of the directors, which showed no care or diligence. They claimed that a prudent director would have no let this happen and would have protected the interests of the company from the foreseeable harm. ASIC stated that Mr. and Mrs. Cassimatis had certain responsibilities under the Corporations Act, which required care on their part and their position in the company was such that they knew there was a high chance of the act being violated by their actions.
It was claimed by Mr. and Mrs. Cassimatis that section 180(1) was not applicable on them due to the fact that they were the sole shareholders of a solvent company along with being its director. Also, they stated that there was nothing unlawful for a director of the solvent company to permit or cause their company to go forward with a venture, just because the same was risky or foolhardy. Reliance was made also made by Mr. and Mrs. Cassimatis over the principle that where the position of directors and shareholders is held by the same people, the ramifications have to be implicit. They also stated that the submission was highly reliant upon the Storm mode, which was a very viable model and the breaches that took place were not foreseeable in a reasonable manner. Compliance professionals had reviewed the company, along with the non-executive directors and ASIC. And no concern was raised regarding this model by any of these. They stated that the failure of the model was a result of the “Black Swan” event known as GFC. The two also made a contention that the clients already had the knowledge that the share market could possibly fall and so, the entire blame could not be imposed only on them.
In this case, the court held that he violations which occurred in the company were clearly predictable in a reasonable way and that any prudent director, who would have been at the position of Mr. and Mrs. Cassimatis would have taken these into consideration and given them the priority on the basis of it being a major possibility. The court also provided that the conduct of Mr. and Mrs. Cassimatis in this case was such that there was a contravention on each of them, i.e., the husband and the wife. They further held that this took place in the matter of different branches for a range of investors who had been classified as vulnerable for this particular case. In reality, there had just been a sole breach by the directors and not numerous.
The court stated that for considering the manner in which Mr. and Mrs. Cassimatis as being honest, there was a need to establish that they had relied upon, in a genuine manner, on the lack of possibility of the capital loss to take place, in addition to the index fund investment based on the model adopted by the company. The court still stated that the conduct of Mr. and Mrs. Cassimatis was not something which required the excuse of section 1317S owing to the responsibility they had and the key role played by them, along with the serious of the contraventions undertaken by the company.
The case of Vrisakis v Australian Securities Commission is something which is of key significance in this case. The court believed that the balancing of investor interest could not be literally construed and there was no requirement of weighing it in a common metric. The requirement was here to understand the judgment, based on which, the basis of the circumstances had to be considered. It was also held by the court that the directors’ duties and responsibilities cannot be limited by the statute. So, all the responsibilities in the ambit of obligations put on the company had to be considered.
In the views of Justice Edelman, the use of powers and discharge of duties by Mr. and Mrs. Cassimatis, based on the position which they had in the company, was clearly inappropriate. Edelman J stated that any prudent director would have had the knowledge that the model was applicable on vulnerable clients; and by applying this model on these clients, it would be an inappropriate advice. The catastrophic results of this were such that no precautionary measures were adopted to avoid the applicability of this model. And he also stated that foreseeability of risk of harm is not limited to financial harm, in order for section 180(1) to be contravened. The interests of the company had to be taken into consideration for such harm, which includes the reputation of the company and its interests.
Owing to these reasons, the court held that there had been a clear violation of section 180(1) by Mr. and Mrs. Cassimatis.
Whether Kanye can bring a successful action against the other directors of the company regarding the issuance of share and being removed as a director of the company, or not?
The Corporations Act imposes a duty on the directors to exercise care when they manage the company regarding the interests of the shareholders. Even though the minority shareholders have little influence over the affairs of the company, the directors have to take care that the minority shareholders are not oppressed or they can be liable for far reaching remedies. The duties of directors regarding this aspect are contained in section 181, 182 and 183. So, the directors are required to act in a manner which is in the best interest of the company as a whole; they are restricting from using their powers for gaining advantage for themselves or for someone else; and lastly, they should not misuse the information of the company for gaining advantage for themselves or for someone else.
The provisions regarding minority oppression are covered under section 232 of the Corporations Act, 2001. Under this section, wide ranging powers are granted for the relief of shareholders in case the conduct of the affairs of the company is contrary to the shareholders’ interest as a whole; or is such which can be deemed as oppressive, unfairly prejudicial or discriminatory against the shareholders. For a case of oppression to be made, it has to be shown that an element of unfairness was present, which is more than just a disadvantage.
The remedies, in case an oppressive conduct is established, are covered under section 233 of this act. These remedies include the purchase of shares of the minority by the other shareholders at the price which is finalized by the court; the purchase of shares of the minority by the company; appointment of manager or receiver; ordering an individual to do a particular act; stopping any individual or company from doing a particular thing; amendment of the constitution of the company; and even applying for the winding of the company. In the case of Hillam v Ample Source International Ltd (No. 2), the demeanor of the board of directors was such that the minority shareholders were oppressed. And so, even though the company was solvent, the court ordered that the company should be wound up and the assets of the company should be distributed to the shareholders owing to oppression of minority shareholders.
In the given case study, Kanye can seek remedies under the oppression provisions of the Corporations Act. The resolution which was passed in this case on March 01st, 2017 was something which could be deemed as oppressive. This is due to the fact that the resolution was passed in such a manner so as to give a higher shareholding to the directors other than Kanye and to bring the shareholding of Khaled, Keith and Kylie higher. This was not just a disadvantage for Kanye but was also unfair as he became a minority shareholder and was untimely removed from the position of being a director in the company, through amendment of the company’s constitution. Based on section 232 of the Corporations Act, 2001, Kanye would have an option of claiming remedies for the oppressive conduct of the directors of the company, i.e., against Khaled, Keith and Kylie.
Applying section 233 of this act, Kanye can apply for him being reinstated as the director of the company. Another option available with Kanye under this section is to apply for the board to give him 25 ordinary shares so that the shareholding of each member becomes equal. He can also apply for the constitution of the company to be amended again brought to the position where it was earlier. Lastly, on the basis of Hillam v Ample Source International Ltd, he can apply for the company to be wound up, as the other directors and shareholders of the company are indulged in oppressive conduct and equally distribute the assets of the company, as a remedy to this conduct.
Regarding taking the action for being removed as the director of the company, Kanye can make an application to the court for the misuse of company position by the three directors, i.e., Khaled, Keith and Kylie, along with their oppressive conduct, which would be a breach of the director duties of the three. And as a remedy, he can apply for being reinstated as the director of the company.
Conclusion:
On the basis of the discussion carried above, Kanye can make a claim against Khaled, Keith and Kylie for their oppressive conduct and for being reinstated as the director of the company.
Whether Kanye and/or Khaled can make a claim against Keith and Kylie for starting a company without them or not?
Section 181 of the Corporations Act, 2001 requires the directors to discharge their duties and use their powers for the best interest of the company and in good faith. Section 182 of this act provides that a director is prohibited from making an improper use of the position which they hold in the company. Under section 183 of the Corporations Act, 2001, the officers and the directors of the company have been given the duty of not using the information of the company in such a manner which proves to be detrimental for the company, or through which the person gains an advantage for themselves or for someone they know. The breach of this section results in civil penalties being imposed over the director or the officer.
Under the common law also, the directors have been given similar duties. So, the directors have the duty to work in the interest of the company and not act for an improper purpose. The directors have a fiduciary duty under the common law to avoid any situation where there is a conflict of interest. This duty is born out of the duty of utmost good faith and trust. And so, the directors cannot out themselves in such a situation where they might have a personal interest which is conflicting with the company interest, which is their duty to protect. Such incident would take place only when there is a possibility of real conflict.
ASIC v Adler and 4 Ors was a case where the court held that the information of the company had been used in a manner which was detrimental for the company. The information of the company in this case had been misused by directors of the company, including Adler, due to which, the directors were held to be in breach of the provisions of this section. Kinsela v Russell Kinsela Pty Ltd (in liq) was a case where the court was of the view that the act done by the director was such, where their own interests were promoted and the best interest of the company was ignored. In the matter of ASIC v Stephen William Vizard, it was held by the court that the position in the company was misused by the director, by misusing the confidential information of the company and so, the direct duties were breached.
Applying the discussed laws to the facts of the case given in the case study, both Khaled and Kanye can take action against Keith and Kylie for starting a company without them. This is because by taking this action, the director duties placed on Keith and Kylie, through both statutory law and common law were breached. The actions of Keith and Kylie were such that they were not in the best interest of the company, based on section 181. Keith and Kylie had the company information regarding the sale of souvenirs, which they attained by being the director of the company, and due to this, both section 182 and 183 were contravened. The common law specifically required conflict of interest but by forming a new company, Keith and Kylie breached this duty.
Applying the case of ASIC v Adler and 4 Ors, the company information was used by Keith and Kylie and they formed a new company. This means that the old company would suffer as the new company would take on its opportunities, thus proving detrimental for Koala. By forming the new company, Keith and Kylie promoted their personal interest and ignored the interest of Koala on the basis of Kinsela v Russell Kinsela Pty Ltd. And lastly, applying ASIC v Stephen William Vizard, the confidential information of Koala were misused by these two, which would result in them being in contravention of the director duties of both Keith and Kylie. And this would give Khaled and Kanye the opportunity to initiate legal action against Keith and Kylie for beach of director duties.
Conclusion:
On the basis of the discussion carried above, it becomes clear that Kanye and Khaled can make a claim against Keith and Kylie for starting a company without them in terms of beach of director duties by being the directors of Koala.
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461
ASIC (Australian Securities and Investment Commission) v Cassimatis (No. 8) [2016] FCA 1023
ASIC v Adler and 4 Ors [2002] NSWSC 483
ASIC v Stephen William Vizard [2005] FCA 1037
Hillam v Ample Source International Ltd (No. 2) (2012) FCAFC 73
Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722
Phipps v Boardman [1967] 2 AC 46
Vrisakis v Australian Securities Commission (1993) 9 WAR 395
Corporations Act, 2001 (Cth)
ASIC, 16-277MR Directors of Storm Financial found to have breached their duties under the Corporations Act (26 August 2016) <https://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-277mr-directors-of-storm-financial-found-to-have-breached-their-duties-under-the-corporations-act/>
Australasian Legal Information Institute, Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023 (26 August 2016) (02 September 2016) <https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2016/1023.html?stem=0&synonyms=0&query=Cassimatis>
Baxt B, Directors’ Counsel (31 October 2016) <https://aicd.companydirectors.com.au/membership/company-director-magazine/2016-back-editions/november/directors-counsel>
Federal Court of Australia, Australian Securities and Investments Commission v Cassimatis (No 8) (26 August 2016) <https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2016/2016fca1023>
Jacobson D, Case Note: Storm Financial Directors Liability for Company conduct (21 September 2016) <https://www.brightlaw.com.au/case-note-storm-financial-director-liability-for-company-conduct/>
Lacey A, The risk of a director/officer of a corporation assuming vast responsibilities – ASIC v Cassimatis (No 8) [2016] FCA 1023 (11 October 2016) <https://www.mccabes.com.au/asic-v-cassimatis/>
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