This case involves the breach of directors’ duties. Director duties in Australia are provided through the Corporation Act 2001 (cth). The Australian securities and investment Commission has the responsibility under the Act to keep an eye on legal compliance of organisations in Australia. Where the regulatory body get to know that any organisation has acted illegally or unethically it conducts investigation into the matter and brings a legal claim against such organisation. This assignment is related to one of the instances where the regulator report identified breach of law on the part of a company and brought a legal claim against it. This case is important Australian Corporate Law system as it discusses the duty of those directors who are also the only share holders of the company. The facts of this case is discussed in the paper followed by identification of bridges of statutory duties committed by the directors. The paper also sheds light upon the decision of the court with reference to the legal provisions which are applicable to the situation to analyse the decision. The way in which this decision would affect Australian Company Law system is also provided through the paper.
The company in context Storm had been found by the defendant director and his wife form of a private company. The defendant directors are Mr and Mrs Cassimitis. They were the executive director of the company all relevant times. The defendants were also the only shareholders of the company. Proceedings had been brought by the ASIC against both the directors under the provisions of section 180(1) of the Act before the federal court of Australia. The court made a ruling in this case that the defendant directors of the financial service company had Contravened their duties as directors as a reasonable director in the light of the duties to the company in similar circumstances should have been aware reasonably that their actions would breach the provisions of the Corporation Act which would cause detriment to the company.
Stone financial Limited held an Australian financial services licence and it had the purpose of providing Financial Services based on a model developed by one of his directors. According to the model the clients had to take a loan against the equity in the residential property. The fund obtained for the loan was to be invested in index funds and for the development of cash reserves. The company advised about such model to all clients who had the capacity of taking a loan. However as the company used a double gearing model sever losses had been incurred by the investors during the time of global financial crisis. The facts of the case also suggest that the defendant directors had an extraordinary degree of control over the company.
Allegations word made by the ASIC that the breach of the above discussed duty had taken place when the company was solvent and the directors were involved in the management of the company as per the wishes of the shareholders at all relevant times.
Allegations had been made by the ASIC that when the company was providing financial services based upon the model created by the directors vulnerable investors close to retirement who had little income or assets and the ability to recover themselves from financial losses, it violated the provisions of the Corporation Act related to having a reasonable basis for providing financial advice to retail clients. Further allegation of ASIC stated that by permitted or causing the company to give an advice to investors based upon the model which leads to the breach of the Corporation Act the directors has violated section 180(1). In addition the provisions of this section have also been violated when the company was permitted or caused by the directors to give out financial advice which was not legal as per the legislation.
Directors along with other officers have various duties in relation to their companies. One of the primary duties is the Duty of deploying due care and diligence when discharging their functions. Section 180 of the Act is made up of this duty. Under this section art director is mandated to use their powers and discharge their functions which any reasonable person will use where they were the director of the same company in the company’s circumstances and they had occupied the office in the company which was occupied by the director and were imposed with the same Responsibility in relation to the company as a director.
An officer and director has to exercise a degree of divisions and care with a reasonable person will exercise if he or she were a director officer of the same company in the company circumstances and has occupied the same office and was provided the same role as the director or officer in the company.
Many circumstances can be taken into consideration when the issue before the court is to determine whether a director has met with their duty of exercising care and diligence. These circumstances include the size and nature of the business, the type of company, the division of work among the board and the composition of the board
The ASIC had made an allegation that both the defendant directors were in breach of the provisions of section 180(1) as they did not take into consideration the fact that providing advice in a manner which contravenes the provisions of the Corporation Act would cause significant loss to the company in terms of financial penalties (as well as loss of reputation as analysed by the court).
There were a few relevant factors which is the court had took into consideration in order to determine whether the duty of diligence and care has been complied or not by the directors of Storm. The court identified that the directors in this case and utmost control over the company along with its financial affairs. The directors had particularly initiated workshop which had been presented before potential clients and promoted the advantages of having high debt level for the purpose of creating wealth. The directors were also very familiar with the model used by the company to provide financial advice along with its application and promotion more than any other person involved in the business. The directors also created the environment in which almost every client had been advised to abide by the model.
By making a use of this model for the purpose of giving advice to the client the court found that directors of the company have breached the provisions of section 945A(1). This provision has been repealed in the year 2012 and required any company having a financial services licence to provide advice to clients only if the personal circumstances of the client are appropriate and the advice has been based on proper investigation and consideration.
The test under the provisions of section 180 has been applied by the court in order to determine whether Mr and Mrs cassimities have used reasonable diligence and care while exercising the power and discharging their duties. The court also made a note that in order to apply this test successfully all relevant circumstances such as the probability of harm to the interest of the company, the potential benefits which may be bestowed on the company because of the decision, the extent of injury which may be caused because of the decision and the responsibility on the organisation of alleviating the harm.
The court came to finding that the provisions of the legislation had been breached by the organisation as it indulged into giving Financial Services through the use of a model to a class of vulnerable clients. In addition the court held at the directors in this case have not complied with the duty of care and diligence as any reasonable director of a company in the circumstances of storm and having the responsibility which the defendant directors have would have known about the very likely breach of the corporate legislation if he or she used powers and caused the company to apply the model towards clients who had no resources to recover from economic losses and were nearing the retirement age.
It was further analysed by the court that the contraventions of the provisions by the company were not only possible in a reasonably foreseeable way but also would have been regarded as very likely by a reasonable director in the position of the defendant directors. However the court rejected the submission by ASIC which stated that the directors have entered into contravention with every investor they have dealt with separately. In relation to such arguments the court stated that the directors have only made a single breach in the situation.
It was also provided by the court that although a consideration had been made by it with respect to the submission of the defendant directors that they had acted genuinely and honestly had a view that there could be no capital loss with respect to Index funds and investment based on the storm model the actions of the defendant directors cannot be forgiven under the provisions of section 1317s of the Act due to the significant responsibilities and role such directors had in the company as well as the seriousness of the breach.
The court also into consideration the question that would an actual breach of the legislation is required for the directors to be liable under section 180. However this claim made by the ASIC had also been rejected by the court expressing that breach of Corporation Act as a stepping stone for analysing the breach of directors duties and any actual breach been needed the circumstances is a false assumption. The court also decided the issue that the directors solely on duty under section 180 to the company or not. The court in relation to this question stated that duty under this section is only owed to the company and not the public at large however the interest of the company also involve any loss of reputation caused to the company. Another major question with had been addressed by the court in this case is that whether directors who are also the only shareholders of the company can be held liable for the contravention of care and diligence duty. The directors in relation to this question argued that where the directors and the shareholders of a company are same ratification of the actions of the directors is implied in such situation. However this submission made by the directors had also been rejected by the court which stated that although the shareholders have a right to authorise an act which may be against the provisions of the Corporation Act they do not have any right to ratify such actions.
References
Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023
The Corporation Act 2001 (Cth)
Vrisakis v Australian Securities Commission (1993) 9 WAR 395.
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