Case Introduction

Discuss about the Duties Of Company Directors To Exercise Care And Skill Fiduciary.

This case is related with collapse of Storm Financial Ltd. this collapse was caused as a result of the global financial crisis of 2008 and attracted considerable attention from the media. Therefore, an inquiry was ordered by the Joint Committee of Parliament regarding the collapse. This company was founded by Emmanuel Cassimatis, and his wife Julia. In the beginning it was a private corporation. However, later on these persons is acting as the only executive directors of the company. They held all the shares in the company. Under these circumstances, it was decided by the ASIC that proceedings should be started against persons in the federal court. In this regard, ASIC made certain allegations against the two executive directors. Therefore it was alleged that these two executive directors were responsible for the breach of duty of care and diligence that has been imposed on the directors by the Corporations Act (s180) (Edmunds and Lowry, 2002). In this regard, he needs to be mentioned that section 180 contains civil penalty provision. Therefore this section requires that the directors or officers are required to complete their duties and use their powers with the same level of care that will be expected from any reasonable person, under similar circumstances (Heydon, 2006). The result was that the court delivered a judgment against these directors. A breach of duty was established, and this judgment serves as a reminder for the directors regarding the duties imposed on them by section 180(1).

Duties and Responsibilities: Regarding the breach of their duties by the executive directors of this company, it was alleged by the ASIC that the directors have violated section 180(1). This violation of the section took place when the directors allowed the company to provide advice to some of the investors on the basis of the “Storm Model” adopted by the company. Consequently, it can be stated that this was the violation of the provisions of Corporations Act. Among these provisions were section 180(1) and also a 295A(1). Even if this section has been repealed in 2012, it was provided by this section at the relevant time that financial service providers like Storm Financial Ltd. had to give advice to the clients by: (i). Keeping in mind the information given to the client regarding their own situation, the entity is providing advice and is considered and inquiries have been made regarding the subject matter of advice that can be treated as reasonable under the circumstances (s945A(1)(b)) and (ii). If there advice is appropriate for the client, concerning the above mentioned consideration and investigation.

Duties and Responsibilities

Under these circumstances, it was held by the court that very high standard has been established by the ASIC regarding the liability and the court had doubt if actual grid should take place for the purpose of claiming that there has been a breach of section 180 (Heydon, 2016). But the court was of the opinion that the case was conducted by the parties in this way. Keeping in mind, certain investors of the company, who were 45 in number, and the case of the ASIC finally rested on them. These persons are either retired or were about to retire soon. As a result, they were particularly vulnerable to the loss on account of the fact that they had little income or other assets apart from their family homes or superannuation money. But in the case of storm model, the concept of borrowing was involved. In this case, the investors are going to invest the amount for a term of five years or even more. The executive directors had themselves developed this model for the clients of the company. It was even stated by one witness that the strategy was called double gearing.

Under the Storm Model, the investors borrowed money and use their homes as security. After they received the margin loan, this amount was used for making investment in index funds, or for creating cash reserves, and for the purpose of paying the fee of the company. The ASIC pointed out that when the employees of the company were asked why it to give advice of such nature, it resulted in the violation of the Corporation Act. The reason was that as a result of the actions of the executive directors, the company had to face the risk that was much significant than the risk that any reasonable director would have allowed its Corporation to incur particularly if the director had exercised reasonable care (Getzler, 2002).

Therefore in this case, the court expressed opinion that the main test that can be applied for the purpose of considering if there has been a breach of duty imposed by section 180 is present in the court’s decision given in Vrisakis v ASIC. In this case, Ipp J. had stated that only account of the reason that the director’s conduct has resulted in a predictable risk of harm to the interests of the Corporation does not mean that there has been failure on part of the related to exercise reasonable care. Hence, for the purpose of deciding the question related to the use of reasonable care what the directors in a particular case, the court asked to see if there is a balance between the probable benefits for the corporation as a result of such conduct and the foreseeable risk of harm that may be caused for the company (Edmunds and Lowry, 2002).

Legal Requirements for Directors

In this context, it also needs to be seen if this balancing exercise has been undertaken by the directors. He deals with the burden of taking alleviating action on part of the directors. Hence, in this context, it has been mentioned by the courts that the foreseeable risk of harm that may be suffered by the corporation, which falls under the scope of section 180 is not limited to financial loss. Therefore such loss can be in the form of the damage suffered by the interests of the company. For instance, it may include the reputation of the corporation and also the interests concerning the compliance of law or the risk of facing sanctions as a result of the breach of law.

Another factor mentioned by the court was that the duty of care does not change, only the standard of care that is applicable in each case, depends on the circumstances as well as the position of the directors and their responsibilities in the corporation. Therefore these factors include the status of the director as executive director of the corporation. For the purpose of explaining this repair, the court relied on the verdict of Shafron v ASIC. Therefore,this decision can be used for deciding the present issue. In this case also the conclusion of the high court regarding the factors mentioned above was that the responsibilities imposed by section 180 are not to be treated as being restricted to statutory duties only. Therefore, the other duties that have been imposed on the directors and officers of the company are also included in it, irrespective of the way in which these responsibilities were conferred to such director or officer. Consequently, it can be stated that in case of nonexecutive directors the same (higher) standard is not applicable that applies in case of executive directors.

In their defense, the executive directors of the Corporation, Mr. and Mrs. Cassimatis tried to rely on the fact that section 180 is not applicable with the director is also the sole shareholder of the corporation. In this way, they wanted to establish that it was not illegal regarding the director of a solvent company if the directive also allowed the company to go for a venture. Even if it was highly risky, if such action has been approved by the shareholders. However, the court did not agreed with this claim due to several reasons. Among these reasons, there was the fact that the claim mentioned above was not hit by provisions of section 180. Regarding this issue, the court stated that the interests of the company have to be considered as a part of the shareholders interests. Therefore, when a particular conduct is approved by the shareholders, such work can have an impact on the political content of duty of care. But it needs to be noted that the approval of the shareholders does not relieve the duty of the directors if other interests of the corporation are present, other than the interests of the shareholders.

The Role of Shareholders in Corporate Governance

Analysis: After going through the evidence that was present before the board in this case, it can be stated that the executive directors, Mr. and Mrs. Cassimatis had their control over nearly every aspect of the corporation. Therefore, they have significant control on the corporation. Similarly, they also have significant control on the advisers and the way they gave advice to clients by using the storm model. In the code, there was one witness who had stated that the board meetings of the company were merely information sessions. Mr. and Mrs. Cassimatis had total control over these meetings. The other independent, non-executive directors of the company really remained inactive. Therefore, keeping in mind these circumstances, the court stated that even if there was evidence present with suggested that the executive directors wanted to encourage new ideas or suggestions, due to their control on the company, there was really no chance of dissent or contradiction, and it is sure that the directors were also aware of this fact.

As a result of these circumstances, and also keeping in mind the responsibilities held by the executive directors the court had stated that a breach of s945A(1)(b) & (c) had taken place. Similarly, the court was also of the opinion that the violation was reasonably predictable, but when the violation took place, any other reasonable director would have been aware of the clients and demographic of the company. Due to this reason, any other reasonable director would have been aware of the high chances of such breach. The court stated that particularly in the reasonable director under similar circumstances would have known that significant chances are present that inappropriate advice may be given to the clients of the company which resulted in the breach of section 945A. It was necessary that the directors should have use their powers to prevent the use of storm model in such an indiscriminate way, particularly regarding the use of the model for especially vulnerable clients.

Regarding the breach of duty of care, the conclusion of the court was that although many relevant investors had to suffered major losses as a result of the global financial crisis, but they were not sufficient for the breach of section 295A.. Any other reasonable director, having the same position in the company as Mr. and Mrs. Cassimatis and under the circumstances of the corporation, would have known that at least they were sitting in chances of a breach taking place. As a result of the fact that it posed major threat to the very presence of the company, the court was of the opinion that such chances should have been taken seriously by any reasonable director.

Under these circumstances, the verdict delivered by the court was that there has been a breach of section 180 by the executive directors of the corporation. As a result of this situation, it was held that the directors have breached the duty of care that had been imposed on them by section 180. A resource ability as been imposed on the directors are going to which they should maintain a balance between the probable chances of harm being caused to the corporation as a result of adopting a particular course of action and the burden related the need for taking alleviating action.

References

Edmunds R and Lowry J, 2002 “Excuses” in P Birks and Pretto A (eds), Breach of Trust (Hart Publishing)

Heydon JD, 2006, “Are the Duties of Company Directors to Exercise Care and Skill Fiduciary?” in Degeling S and Edelman J (eds), Equity in Commercial Law, Thomson, Sydney

Heydon JD, 2016, “Equity and Statute” in Turner PG (ed), Equity and Administration Cambridge University Press, Cambridge

Getzler J, 2002, “Duty of Care” in Birks P and Pretto A (eds), Breach of Trust (Hart Publishing, Oxford

Edmunds R and Lowry J, 2002 “Excuses” in P Birks and Pretto A (eds), Breach of Trust (Hart Publishing

Case Law

Vrisakis v Australian Securities Commission (1993) 9 WAR 395

Shafron V Australian Securities And Investments. Commission. [2012] HCA 18