ASIC Vs Storm Financial Limited Directors: A Breach Of Duty Essay.

Issue

21^st of December 2010, ASIC as an applicant filed a legal suit in the Federal Court of Australia (Brisbane) against the executive directors of Storm Financial Limited. As per the said case, it is understood that two of its executive directors. Emmanuel and Julie Cassimatis were found in breach of their duties as directors under the Australian Corporate laws. The said case is defined as a unique one in the history of Australian Corporation Law. The uniqueness is due to a combination of three main factors i.e. the accusations for the breach against the directors is dependent upon only Section 180(1) of the Corporations Act 2001. Secondly the directors have said to have breached their duties when the company was functioning well and thirdly there does not exist any dispute that the directors managed the Company in good faith and as per the requirements of the shareholders. 

The directors claim that a situation where the director is the only shareholder of a company that is solvent, it is not possible to contravene the provisions of s 180(1). However, ASIC claimed that the directors had not behaved in a reasonable manner within s 180(1) due to which the company was placed in such a scenario wherein it can be concluded that they have breached the provisions of the Act. As per the ASIC, the model offered by Storm Financial Limited infringed its errands to provide its customers an efficient and honest financial services and did not give proper advices as per the situation of the individuals. The storm model failed to alter the advice it gave as per the circumstances of the individuals. It also provided incorrect data which would misled the clients and also lent insignificant financial guidance thus breaching its duties of care and diligence while advising the clients. Thus the main issue here was that the directors failed to work with due care and diligence in providing adequate and correct financial advice to the clients (Tills & Wills, 2016). 

Section 180 (1) of the Corporations Act details about the fact that the directors should exercise their powers and perform their duties with due care and diligence that a reasonable person would exercise if they were a director or such officer of the corporation in the present circumstance and was a part of the office held by and had similar duties within the corporation as the director or the officer (Commonwealth Consolidated Acts., 2001). As per ASIC, the directors of Storm Financial Limited had breached the provisions of the s 180(1) by giving permission to Storm to disseminate advice to some investors as per the ‘Storm Model’ and that too in such a way which would cause the Company to breach some sections and provisions of the Corporations Act which also included s 954A(1). As per the said provision, a financial service corporation should give advice to its clients if the same is being provided basis the circumstances of the client in which he is at present. The corporation giving advice should conduct adequate investigations about the client so as to extend advices as per requirements. Secondly the section also connotes that the advice should be reasonable (Arnold et.al. 2012).

Rule And Breaches

As per the model proposed by the corporation, it had involved the concept of borrowing more money from the clients for investment per se which was much more than they would actually want to. The period of investment was also very long i.e. five years or more. One of the witness of the case in favour of ASIC described the model as ‘double-gearing’ wherein the investors borrowed funds by mortgaging their houses, obtained large amounts of margin loans and the money they got from these loans were used to invest in the index funds to form a cash reserve and pay the fees of Storm Financial Limited. By doing so the directors had exposed the company to a considerable risk of insolvency rather than a reasonable person acting as a director would do (Pwc.com.au., 2008).

Further it is understood that the acts of not performing the duties with due care and diligence is not restricted to only financial losses but also extends to the harm it causes to the interest of the corporation as a whole which comprises of its goodwill, compliance with the various provisions of law and the various risks to the sanctions due to contravention of the law (Legal Services Commission of South Australia. 2015). S 180(1) does not emphasis upon performing the statutory duties only but includes all the responsibilities that the officer or the director has for the corporation irrespective of the reason or the method by which the said responsibility has been imposed (Kobras, 2011).

Edelman J also explored the accusation hoisted by the sufferers as to whether a breach of the obligation as per s 180 with regards exercising of adequate due care and diligence while discharging the duties of a director is both a public as well as private wrong. As per Cassimatis’, the said is a private duty which is owned only towards Storm and for a company which is flushing, the only interest is in the shareholders. However, as per ASIC, s180 formulates a duty which calls for all the corporates and its directors to follow the general code of conduct which extends beyond the interest of the corporate as well (Golding, & MacDonald, 2016).

Storm is also construed to have breached s 1041E by providing misleading and false statements in the Financial Services Guide and the SOA circulated amongst each investor. The guide had specifically mentioned the fact that the Storm would give a suggestion to an investor for making investment after taking into account the personal needs and the financial position of the client. Further ASIC had also accepted and believed on the SOA which mentioned  that the report has been prepared after paying heed to the requirements of its clients, the proposals had been made to cater to the requirement  as per the assumptions which are spelt out in the SOA, Storm had also suggested a procedure which would help the investors achieve their aims and goals and that it inculcates recommendations in the SOA after taking into account the existing financial position of the client (Bland, 2016).

Decision Of The Court

As per the various proofs submitted it is understood that the two directors were actively involved in every part of the business being conducted by Storm Financial Limited. The kind of control that these two individuals had over the various financial advisors and procedure for giving suggestions with regards the Storm model was also too deep-rooted. As per one of the evidences it was understood that the board meetings which were held were basically simple sessions wherein data about the company was distributed without any discussion and the non-executive directors were submissive. Although the judge had observed that there were proofs which supported the directors that they had welcomes various suggestions and ideas but unfortunately the degree of command that they exercised was so strong that it considerably throttled the possibility of rebel or disagreement. Thus in lieu of this it was construed that Mr and Mrs Cassimatis were solely responsible for the happenings at Storm and thus it is due to this reason that s 180(1) was so prevalent.

Further Edelman J also discovered that the Company had also committed various civil breaches as well under s 945A (1) (b) and s 945A (1) (c) of the Corporations Act. The Honour also concluded that the breaches under the said sections were not merely rationally predictable. But for at the time of such contravention, a person who would have acted as director with such responsibilities similar to the ones of Mr and Mrs Cassimatis would have very well understood their clients requirements and about their financial position very well and thus should have accepted these contraventions as probable (ASIC. 2017). To be more precise, His Honour said that a person being a director of a Company like Storm who is entrusted with the responsibilities similar to its directors would have been well acquainted of the inadequate advice that it was giving to its clients and that his conduct was in contrast to s 945A of the Act. The director has not exercised reasonable care and diligence and neither utilised the enormous powers it had to prevent the application of the said model over such investors who were weak and could not afford.

Due to the same, Strom Financial Limited had to suffer severe consequences which comprised of suspension of Storm’s AFSL. Further in terms of the burden of lessening action, His Honour also said that the applicants also should have taken all cautionary ways so as to stay away from applying to the Storm Model. While the directors were asked to take all precautions while performing their duties as per s 180(1) but they refused to.  The directors even submitted a claim that s 180 and its breaches would not apply to them simply because in this case it is the Corporation who is responsible for the contravention and not them (Ellison, 2016).

As per His Honour one of the most crucial matters of dispute in this scenario was the foreseeability and likelihood. Of the breaches of the Act. The said case was substantially dependent upon the submissions made by the directors claiming that the Storm model was a feasible one and that any breaches were not realistically predictable (Baxt, 2016). Further to this they also re-emphasised upon the fact that its financials and model were thoroughly reviewed by the professionals, ASIC as well as the non-executive directors. According to them the main reason for the model to collapse was the ‘black swan’ event during the Global Financial Crisis of 2008. But unfortunately these acquiescence were discharged because as per Edelman J the same was very restricted to a small domain and failed to resolve the broader perspectives of the case put forward by ASIC (Lacey, 2016). His Honour said that Mr and Mrs Cassimatis specifically concentrated on the suspected need of probable odds of potential or actual breach.  Thus according to Edelman J, the directors were in breach of the duty of conducting the business of Storm with diligence and care.

Thus due to the above mentioned reasons, ASIC was seeking the directors to be penalised for all the instances where they were found guilty of breaching the duties of due care and diligence as per s 180. Further they should be barred from being a part of the management of any company as per the court’s decision with regards the time period and lastly both of them should be prevented from holding an Australian Financial Service License as per the court’s decision with regards the time frame. However all these were accepted by the court and now the hearings are being prepared for determination of penalty which the Cassimatis’ would be bound to pay. Bu the same would not be considered to be a part of investor compensation as the Corporation Act 2001 demands for the same to be paid to the Commonwealth Government.

Conclusion

Thus on a concluding note, this is one case which is rightly called as a ‘stepping stone’ in the history of the Corporations Act 2001. The decision taken was a turning point as it highlighted the importance of the directors’ duty and that the same should be conducted ina  manner which would ensure that the companies which are within their control do not contravene the law. Lastly the decision also focuses upon the fact that the financial service companies are bound to give such financial advices only that is as per the appropriateness of the individuals to whom it is being given. Although penalties are still be decided upon, but the decision made is said to be a stepping stone wherein the ASIC is said to have set a very high level bar for itself since an actual contravention by a company is necessarily not construed as a breach by the director of performing his duties with care and diligence. But ASIC was able to ensure that the final verdict be in his favour. Ultimately the said verdict has bought in good luck of an unexpected type for the directors in the face of ASIC wherein they are demanding to take regulatory actions against the directors personally as well for any breach being conducted by the company as whole.

References:

ASIC., (2017), Cassimatis civil penalty proceeding, Available at https://storm.asic.gov.au/proceedings/cassimatis-civil-penalty-proceeding/ (Accessed 14^th March 2017)

Arnold,M., Wright,G., Knipping,A., Duffield ,S., & Gill,P., (2012), The Advisor /Client Relationship in Financial Advice, Available at file:///C:/Users/E-ZONE/Downloads/conference-2012-presentation-advisor-client-relationship.pdf (Accessed 14th March 2017)

Baxt,B., (2016), Professor Bob Baxt outlines a recent case that illustrates the difficulty in persuading courts to exonerate breaches of duty, Available at https://aicd.companydirectors.com.au/membership/company-director-magazine/2016-back-editions/november/directors-counsel (Accessed 14th March 2017)

Bland,M., (2016), Directors! ASIC v Cassimatis is “your good fortune”, Available at https://www.linkedin.com/pulse/directors-asic-v-cassimatis-your-good-fortune-mark-bland (Accessed 14th March 2017)

Commonwealth Consolidated Acts., (2001), Corporations Act 2001- Sect 180, Available at https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html (Accessed 14th March 2017)

Ellison, M., (2016), Federal Court Finding That Storm Financial Directors Breached Their Duties, Available at https://chqa.minterellison.com/blogcustom.aspx?entry=1470 (Accessed 14^th April 2017)

Golding,G., & MacDonald,T., (2016), Directors Duties Update- ASIC track record in civil penalty proceedings continues to be impressive, Available at https://www.kwm.com/en/au/knowledge/insights/directors-duties-asic-track-record-civil-penalty-proceedings-20161108 (Accessed 14th March 2017)

Kobras,S., (2011), Directors’ Duties and Obligations, Available at https://www.schweizer.com.au/articles/Directors_Duties_and_Obligations_(SK00154651).pdf (Accessed 14^th April 2017)

Lacey,A., (2016), The risk of a director/ officer of a corporation assuming vast responsibilities – ASIC v Cassimatis [No 8] [2016] FCA 1023, Available at https://www.mccabes.com.au/asic-v-cassimatis/ (Accessed 14^th April 2017)

Legal Services Commission of South Australia., (2015), General Duties of Directors – Corporations Act 2001 (Cth), Available at https://www.lawhandbook.sa.gov.au/ch05s01s03s02.php (Accessed 14th April 2017)

Pwc.com.au., (2008), A guide to directors’ duties and responsibilities for non-listed public companies and proprietary companies in Australia, Available at https://etraining.communitydoor.org.au/pluginfile.php/608/course/section/95/GuideDirectors_Apr08.pdf, (Accessed 14^th April 2017)

Tills,M., & Wills, C., (2016), Australian Directors found guilty of breaching duties following corporation’s breaches, Available at https://www.clydeco.com/insight/article/australian-directors-found-guilty-of-breaching-duties-following-corporation (Accessed 14th March 2017)