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Breach Of Duties By The Directors

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Question:

Write about the Breach of Duties by the Directors.

 

Answer:

Introduction:

The presentation is about the study of the recent case law in which the Federal Court of Australia held director of company liable under Corporation Act 2001 for breach of the duties. In Australian Securities and Investment Commission (ASIC) vs. Cassimatis (2016) FCA 1023, the Australian Combined court had determined that the description of care duties which is to be owed by the directors under section 180(1) of the Corporation Act. The court held that the director of the economy services had violate his duties as director, as it was the responsibility of the director to be cognizant that his company was probably to breach the provisions of the Corporations Act, with the ruinous effect for the company (Aganin, 2016).

 

Facts of the Case:

Storm Financial Limited (in short ‘Storm’) was the Australian economy services licence holder and the company had given the economical services as per the model development by Mr. Cassimatis. He is one of the two directors of the company i.e. Storm. The model of Mr. Cassimatis involved the clients borrowed against the fairness for their homes, also obtained the edge loans and the company used those funds for investing in the index funding and creating a cash reserve. The project was enforced to all of the clients of the company as the only condition is that they have the capability to borrow the funds. As the company i.e. Storm used the double gearing model due to which the investors continued grave losses during the period of the Global Economical Crisis (Anderson and Feist, 2017).

Australian Investment and Securities commission had commenced the proceedings in the year 2010 against both the directors i.e. Mr and Mrs Cassimatis alleging that the duties of care and diligence had been breached as being the director of the company it was their duty under section 180(1) of the corporation act (Bostock, 2012). Australian Investment and Securities commission had alleged that both the directors had made breach of their duties when the company i.e. Storm was financially fit and they both were the directors of the company and shareholders, moreover there was no conflict that the directors had to manage the company i.e. Storm in conformity with the wishes of the shareowners (Burrows, 2010).

Australian Investment and Securities commission had made allegations that the financial services provided as per the model to the class of the vulnerable investors who were very near to their retreat, has very limited assets & income and there was zero anticipation of retrieving the economical position in the condition of loss. By doing this the company had made the breach of the provisions of the corporations act that there was the reasonable basis for the economical advice to the clients. Australian Investment and Securities commission had made allegations that the directors of the company had breach the duties under section 180(1) of the corporation act as following:

  • Both the directors of the company had cause or permit the company i.e. Storm to administer advice to their investors as per the model which results that the Storm had made contravene to the provisions of the Corporations act (Anderson and Feist, 2017).
  • Both the directors of the company had cause or permit the company i.e. Storm to administer the financial advice in the manner as it violate the provisions of the Corporations act, 2001(Cline, 2000).

The allegations of the Australian Investment and Securities commission was that the exposure of the company i.e. Storm to the risk was more than it would have if any director acting with due care and diligence (Grantham, 1991).

 

Section 180(1) of the Corporations Act:

Section 180 of the Corporation act, 2001 had brought the civil obligation which says that the director or the other officer of the company should at all the time perform the reasonable degree of care and diligence in performing their powers and in discharge of their duties. Reasonable in the simple sense means that the degrees of proper care and diligence which the reasonable person in such a situation in the corporation would perform in the same situation (Lim, 2013). The need for the director or the officer of the company to perform the reasonable test of care and diligence would be satisfied in regard to the particular business judgments where the director or the officer could make the judgement in the good faith and for a reasonable determination (Moore, 2016). The director or the officer of the company did not have the personal interest while making the judgment for the company. The director of company should rationally trust that the judgement made by him is in the good interest of the company. In short, from the perusal of the readings of the Section 180 of the corporation act it is clear that the director or any of the officers of the company should take the active interest in the affairs of the company and also get the general understanding of the business of the company.

In the present case, the Federal Court of Australia had analysis under section 180(1) of the corporation act that whether the director of the company i.e. Storm had performed the reasonable test of care and diligence while performing their powers in exonerate of their duties. The court found that the analysis involves the determination of all the circumstances which includes the ascertainable hazard of the damage in the interest of the company, the consequences of that damage, the major welfare which accumulates from the conduct of the director and to the essence to the company of any of the action to allay the ascertainable harm (Nwafor and Nwafor, 2014).

In the present case the court held that the company i.e. Storm had made the breach of provisions of the corporation act which provides the financial services as per the model to the class of the vulnerable clients which are verified by the Australian Investment and Securities commission and the directors of the company had made breach of the duty of the due care and diligence because of the reason that the reasonable director of the company in such circumstances as like in the Storm and the responsibilities of the Mr and Mrs cassimatis will have to became aware of the strong prospect of the breach of the company act and if the directors had performed their actions to cause or to allowing the model of the Storm which was to enforced to the clients who were in the category to be pleaded by the Australian Investment and Securities commission, as the particular investors who would retired or very close to the retirement with the very less asset and few income (OFAC compliance in the securities and investment sector, 2012).

The court held that the breach of the provisions of the corporations act by the company i.e. Storm were not merely accountable but the reasonable director is in the emplacement of the Cassimatis who would have found them as like (Sirignano and Farrell, 2005). The court held that the conduct of the directors of the company was the single breach by each of both of the directors and there were no multiple breaches relates with the no. of the investors who established the category of the vulnerable investors. Australian Investment and Securities commission had accepted that there was only one breach by each of the directors.

The court had also held that if it is determined that Mr and Mrs Cassimatis had performed their act honestly and fairly with regard to the capital loss would never take place with the index find investiture in the model prepared by the Storm. The court found that the conduct of the directors cannot be relieved under Section 1317 of the corporations act as they have very important role and responsibilities and also the seriousness of the breaches of the provisions of the act made by the Storm (Worthington, 2001).

 

Issues in the Case:

The Judgement of the Federal Court of Australia involves the discussion on the many issues like as:

  • Whether the breach by the Strom was mandatory for the directors to contravene section 180(1)?

Australian Investment and Securities commission proceeded its case on the basis that the company i.e. Storm had actually contravene the provisions of the company act as the stepping stone of the contraventions by the directors under section 180(1). The court had suggested that the court had serious doubts on the conduct of the directors. Whether the actual breach was needed for the contravention by the directors under section 180(1) but it ran on the ground that the actual breach was required (Lim, 2013).

The court had rejected the submission made by the Australian Investment and Securities commission that the actual contravention by the company was sufficient to create a contravene of section 180(1) by the directors of the company.

  • Whether the duties prescribed under section 180(1) of the corporation act are owed by the company alone?

Upon this issue the directors of the company had submitted that the duties prescribed under section 180(1) of the corporation act were owed by the company alone while Australian Investment and Securities commission had submitted that Section 180(1) of the corporation act gives a rules of conduct which is different from the interest of the company and the reason behind that the public’s duty at large is owed by the directors (Grantham, 1991).

The court had admitted the submissions made by the shareowners but also noted down that the interest of the company must not be seen narrowly and must not limited to the interest which was only for the shareholders. The interest of the company was not limited to the economical loss but also includes the damage made to reputation.

  • Whether the directors could be liable for the breach of section 180(1) of the corporation act where the directors are the only share holders of the solvent company?

The directors had made the submissions that the director is the sole share holder of the solvent company and it would not amount to violation of section 180(1) of the corporation act. The compliance was made on the ground that it is the duty of the director as well as the shareholders to assume the avocation of the profit. The directors had made submission that they had acted with due care and diligence even if they had contravened the provisions of the corporation act because they were the directors as well as the shareholders of the company (Anderson and Feist, 2017).

The court had rejected the submissions and held that the submissions were not supported by the wordings of the section 180(1) of the corporation act. The shareholders might be able authorize the acts which are the contraventions under the corporation act but could not ratify them.

 

Conclusion:

In the end it is to be concluded that the stakeholders of the company had to perform their duties with due care and application. From the study of the present case law it has also been considered that the stakeholders of the financial fit company where they are the only share holders might violate their duties of the care and application and if the conduct as the director makes the company to violate the law, then the directors are liable. Furthermore it has also been considered that Australian Investment and Securities commission has shown their willingness to continue the proceedings in this situation, particularly when the violation of the provision of the corporation act had made an impact on the clients of the company. Where the directors adopts the course of the conduct as the model investiture strategy for the group or the class of the client investor, any violation of the corporation act which arise from the conduct and limited to the single breach of the duty.

 

References

Aganin, A. (2016). Review of securities class action filings in 2015. Journal of Investment Compliance, 17(3), pp.1-27.

Anderson, B. and Feist, G. (2017). Transformative science: a new index and the impact of non-funding, private funding, and public funding. Social Epistemology, 31(2), pp.130-151.

Bostock, T. (2012). The Corporations Act 2001. Amicus Curiae, 2002(39).

Burrows, S. (2010). Directors' Duties (1st edition)20102Andrew Keay. Directors' Duties (1st edition). Jordan Publishing Limited, 2009. 476pp. International Journal of Law and Management, 52(6), pp.482-483.

Cline, W. (2000). Challenges Facing Global Financial Markets. Brookings-Wharton Papers on Financial Services, 2000(1), pp.467-475.

Grantham, R. (1991). Directors' Duties and Insolvent Companies. The Modern Law Review, 54(4), pp.576-581.

Lim, E. (2013). Directors' duties: improper purposes or implied terms?. Legal Studies, 34(3), pp.395-418.

Moore, C. (2016). Obligations in the shade: the application of fiduciary directors' duties to shadow directors. Legal Studies, 36(2), pp.326-353.

Nwafor, A. and Nwafor, G. (2014). Breach of duty: power of shareholders to ratify directors fraudulent dealings. Corporate Board: role, duties and composition, 10(2).

Nwafor, A. and Nwafor, G. (2014). Breach of duty: power of shareholders to ratify directors fraudulent dealings. Corporate Board: role, duties and composition, 10(2).

OFAC compliance in the securities and investment sector. (2012). Journal of Investment Compliance, 13(3), pp.21-26.

Sirignano, D. and Farrell, S. (2005). Securities offering reform proposal. Journal of Investment Compliance, 6(2), pp.44-47.

Worthington, S. (2001). Reforming Directors’ Duties. Modern Law Review, 64(3), pp.413-438.

Burrows, S. (2010). Directors' Duties (1st edition)20102Andrew Keay. Directors' Duties (1st edition). Jordan Publishing Limited, 2009. 476pp. International Journal of Law and Management, 52(6), pp.482-483.

Cline, W. (2000). Challenges Facing Global Financial Markets. Brookings-Wharton Papers on Financial Services, 2000(1), pp.467-475.

Grantham, R. (1991). Directors' Duties and Insolvent Companies. The Modern Law Review, 54(4), pp.576-581.

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