Report On ASIC V Cassimatis: Breach Of Director’s Duties In A Case Of Storm Financial Limited

Facts Of The Case

The present report deals with the case law of Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023 relating to breach of duties of directors. The report initiates with the introduction and facts of the case and further the decision made by the court is discussed with the reasons behind it. The responsibilities of a director also explained in the report. Further, a critical analysis of decision made by the court is also explained in the report.

Storm Financial Limited, an Australian financial services license holder provides services to its customer in accordance with its model which was developed by Mr Cassimatis, one of the two directors of the company. As per the provision of the model the loan was provided to customers against the equity in their homes and that money was invested in index funds and a cash reserve was established. The model assesses the financial capability of all the clients of Storm to ascertain their capacity of the loan. As the model used “double gearing” a severe loss was suffered during global financial crisis. The court described that Mr and Mrs Cassimatis were having an extraordinary degree of control over the storm.

The proceedings relating to the case were initiated in 2010 against Cassimatis for breaching their duties of care and diligence as director of Storm under s 180(1) of Corporations Act (Storm: Lessons for Financial Service Providers, 2016). ASIC specified that the directors had breached their obligations as in present situation; where the storm is solvent, and Mr And Mrs Cassimatis were only shareholders and directors of the company and directors have managed Storm in accordance of the convenience of shareholders. The other specification which was provided by ASIC was that by offering financial services as per the provisions of the model to those investors who were venerable and close to retirement; the same were having limited access to asset and income. Due to this reason, there were no prospects available through which amount can be recovered in the event of losses. Thus ASIC alleged that the directors had breached section 180(1) by:

• Allowing Storm to offer advice to investors in accordance with the provision of model due to which Storm was alleged contravening Corporation Act
• Providing permission to Storm for offering financial advice in a way which is breaching the laws of Corporations Act.

Directors and other officers should exercise their powers and discharge the duties with the application of care and diligence according to the provisons of section 180(1) of Corporations Act (Legg, 2016.). The powers and orders which they discharge to other management should be in good faith and in the best interest of the company. As per the views of Harris (2013) they are also empowered to delegate there any of the powers to any of committee directors or employee subject to any restriction imposed by the constitution of the company. The same has been provided in section 198 D (Parry, 2014). Potential civil penalties under Corporations Act for the breach of duty which comprises fine, penalties, order to pay compensation and even disqualification from managing bodies corporate. The basic principles that should be followed by the directors are that they should act in the interest of the company and in case their own interest comes in a way that they are also required to give notice to the other directors regarding that matter (Knepper, Eblin and Lane  2016.).

Breach of duties and responsibilities

For concluding on an appropriate decision, the test was applied by the court for assessing that whether a reasonable degree of diligence and care was exercised for accomplishing his duties or not. The Court analysed that application of these test comprises of all the circumstances which were responsible for harm of interest of the company. The test resulted that Storm had breached the Corporations Act as they provided financial services as per the norms of the model to the clients which were found vulnerable by ASIC. As a reasonable director, he would have been aware of strong likelihood relating to the contravening of Corporation Act and applied her powers to permit for applying the model for offering services to those clients who were pleaded by ASIC who were having few assets and limited income. The Court analysed that breaches by Storm were not merely reasonably foreseeable, but the director was in a position of favouring them in continuing their operations (Hanrahan, 2017.). It was also alleged that Mr and Mrs Cassimatis behaved genuinely in the view that capital loss could certainly not occur with index fund investment in Storm model and their operations would be excused under section 1317s of Corporations Act as their obligations and responsibilities were breached by Storm.

ASIC also pleaded that as the directors contravened the responsibility relating to application of diligence and care by “allowing Storm to offer advice to the Investor through application of Storm Model which caused Storm to contravene” section 912 (1) (a), 945 (1) (b), 1041E (1), 912A (1) (c), 945A (1) (c) of Corporations Act. As the directors permitted the company to continue such operations causing a contradiction with the provisions of Corporations Act; Mr and Mrs Cassimatis exposed the company towards foreseeable risk of harm and found guilty as per section 1311 of the specified act. Court alleged provision of section 1101B (1) (a) (i) and banned the operations as per section 920 An as the degree of risk was required more in comparison of the extent to which director applied a degree of care and diligence before exposing Storm.

The requirement for actual breach for the purpose of contravention of section 180(1): The issue comprise assessing whether actual breach by Storm was required for contravening section 180(1) of Corporation Act. Thus it was concluded for the specified issue that it had “serious doubts” that whether actual contravention is required or not but proceeded by taking a base that actual breach was required. The request of ASIC’s was not accepted as the actual contravention was enough for establishing a breach of director’s responsibility under section 180(1).

Are duties specified under section 180(1) are owned solely by company: The directors of the company alleged that duties / responsibilities under section 180(1) were owned solely by the company but according to specification provided by ASIC that norm of conduct separates interest of organisation so that the duty to public is to the directors. It was concluded by the court that the interest of organisation should not be construed limited to the interest of shareholders only and it should also comprise financial loss and reputational damage.

Directors breach in present case

Can directors be made liable for the issue of breach of section 180(1) in case they are only the shareholders?  The directors of the company are present case urged that a director who is the sole shareholder of the company cannot breach the provisions specified in section 180(1) (Maxine and Cassandra, 2016). The issue was resolved considering the base that shareholder and directors ascertain the risk for a company for the purpose of pursuit profits. It was alleged by the directors that they acted with due diligence and cared even in case they were intentionally breaching the provisions of Corporation Act because in case the directors and shareholders are same; ratification of director’s decision is implicit. The submission was refused by the Court, and it was concluded that it was contrary to the principles and not supported by the authorities. It might be possible that shareholders authorise the operations which contradict the provision of Corporations Act, but the same cannot ratify them.

The litigations were presented by ASIC against Mr and Mrs Cassimatis for contravening the duties of care and diligence for Storm Financial Limited. The accusations regarding the contravention against the director were relating to the provision of section specified in section 180(1) of Corporations Act 2001 (Ferran and Ho 2014). This specific provision specifies that the directors of the company are required to discharge their duties with care and diligence. The other major point is that the accusation of the breach has come front while Storm was a solvent company and the two directors Mr and Mrs Cassimatis were only the shareholders of the company. Even no dispute exists between Mr and Mrs Cassimatis, and they inform information to the shareholders i.e. to themselves in good faith regarding their actions.

Mr and Mrs Cassimatis alleged that in the present case a director who is the sole shareholder of a solvent company could not contravene the provision of section180(1) by his operations or actions which were likely to breach the specified provisions even in the case he/ she intentionally acted breaching the provisions specified in Corporations Act. The reason provided by the director was not accepted by the Court and director was held liable for contravening the provisions. A high bar was establishing liability was construed by ASIC (Ventoruzzo, 2014.). It comprised accusation on Mr and Mrs Cassimatis that they didn’t act in accordance with provisions of section 180(1) and indulged their company in a situation which it had actually contravened the provisions of Corporation Act. The expression was borrowed from the case of  Keane CJ in Australian Securities and Investment Commission v Fortescue Metals Group Ltd [2011] FCFAC 19; (2011) 190 FCR 364, 370 [10, ASIC.] for reaching a conclusion relating to contravening the provisions of Corporations Act.

Another perspective which has been made clear in this case is that loss is not a required element for contravening the provision of section 180(1) of Corporation Act (FEDERAL COURT OF AUSTRALIA. Australian Securities and Investments Commission v Cassimatis (No 8).[2016] FCA 1023, 2016). If in a case a director unreasonably does an action which involves a breach of a provision of Corporation Act even in the case of threatening the existence of corporation; even in that case, the same would be treated as a contravention of provision (Du Plessis, 2017). The model which was applied by Storm generally evolves customers by preliminary appointment and the same was followed by an education workshop. Further, a meeting was conducted with the investor, and a statement of advice was produced. It was observed that all most all the clients were adopting the strategy and the same was witnessed by Mr Cashel that was “double gearing”. The suggestion was provided to borrow security on their homes; procure a marginal loan and apply the funds attained through it on index funds. A cash reserve was established through it, and Storm fees were paid by the clients. As per the views of Ehrhardt and Brigham (2016), another fact which was evolved in taking the decision was that the investment of clients does not usually end after the first occasion of investment and even the investment was made continuously in accordance with model followed by Storm. As per the views of Gina (2016), it was analysed that the workshop which was conducted emphasise on reliability and lowering risk present in the model applied and the need for people for taking debt. The model which was applied by the Storm was not evolved in the issue, but the application of such model in pleaded circumstances was likely to be inappropriate evidence. As they would have taken alleviating precautions for the purpose of preventing giving this kind of advice as a reasonable director.

Conclusion

• Directors have also breached section 945A (1)(b) of Corporation Act as the directors have taken not assessed reasonable considerations or investigation before providing such advice as  responsible director.
• As per the views of Bruner, (2013) as the financial advice which was provided by the director was not appropriate for the investors relating to the investment which has been made by Storm and the same was contravening the provision of section 945(1) (c) of Corporation’s Act.
• The statements which have been made by the company were deceptive and misleading relating to investors personal circumstances and the same breached the provisions of section 1041E (1) of Corporations Act.

References

Bruner, C.M., 2013. Is the Corporate Director’s Duty of Care a Fiduciary Duty-Does It Matter. Rev., 48, P.1027.

Du Plessis, J.J., 2017. Corporate Social Responsibility and’Contemporary Community Expectations’.

Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage learning.

Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.

Hanrahan, P.F., 2017. Regulating Financial Advice for Retirement–The Recent Australian Reforms.

Harris, P., 2013. Corporate tax law: Structure, policy and practice. Cambridge University Press.

Knepper, W.E., Eblin, R.L. and Lane, R.S., 2016. Duty of Loyalty (Vol. 1). Liability of Corporate Officers and Directors.

Legg, M., 2016. A comparison of regulatory enforcement, class actions and alternative dispute resolution in compensating financial consumers. Australia L. Rev., 38, P.311.

Parry, W.H.C., 2014. The responsibilities of the board of directors in promoting the principles of corporate governance.

Ventoruzzo, M., 2014. The Role of Comparative Law in Shaping Corporate Statutory Reforms. Duq. L. Rev. 52, P.151.

FEDERAL COURT OF AUSTRALIA.Australian Securities and Investments Commission v Cassimatis (No 8).[2016] FCA 1023. (2016). [Online]. Available on < https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2016/ >. [Accessed on 14^th May 2017].

 Gina Bozinovski. Australia: A Storm Warning – Directors duties in tightly held companies. (2016). [Online]. Available on < https://www.mondaq.com/australia/x/527696/Directors+Officers/A+STORM+WARNING+DIRECTORS+DUTIES+IN+TIGHTLY+HELD+COMPANIES>. [Accessed on 14^th May 2017]

Maxine Tiles and Cassandra Wills. Australian directors found guilty of breaching duties following corporation’s breaches. (2016). [Online]. Available on < https://www.clydeco.com/insight/article/australian-directors-found-guilty-of-breaching-duties-following-corporation?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original >. [Accessed on 14^th May 2017]

Storm: Lessons for Financial Service Providers. (2016). [Online]. Available on < https://imaclegal.com.au/storm-lessons-financial-service-providers >. [Accessed on 14^th May 2017]