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ASIC v Cassimatis

The directors are appointed in this position to govern, preside over and run the business of the company, for the company’s shareholders. According to section 198(1) of the Corporations Act, 2001 (Cth) puts forward that the business of a company in the nation has to be run by or under the directions of the its directors (Australasian Legal Information Institute, 2017). This section highlights that the directors have a significant responsibility, as they have to run the entire business of the company. And through this very act, certain obligation and responsibilities have been imposed over directors of the company. These duties are also present under the common law. So, a director has, for instance, the duty to use the information of the company in a proper manner (Latimer, 2012).

The duties of the director are designed in a manner which promotes governance, and also makes certain that the company’s interest is kept supreme, instead of the individual’s personal interest. In case a director fails to fulfill the fiduciary duties put on him, the governing act imposes civil penalties, and in some cases, even the criminal penalties are applied (Cassidy, 2006).

In one of the recent cases of ASIC (Australian Securities and Investment Commission) v Cassimatis (No. 8) [2016] FCA 1023, the breach of the directors duties, covered in the Corporations Act, was established by the Federal Court of Australia. The following parts cover this case in detail.

Storm Financial Limited, or Storm, was the holder of the AFSL, or the Australian financial services license. Storm provided financial services as per the model which was developed by Mr. Cassimatis, who was the director of Storm. This model engaged the borrowings by the clients against the equity in their homes, by obtaining a margin loan, and by using these funds as the amount to be invested in the index funds, as well as, for establishing the cash reserve (Australasian Legal Information Institute, 2016).

As long as the clients had the capacity to borrow funds, the model was applied on them. The investors sustained severe losses due to this double gearing model used by Storm, during the global financial crisis. As per the court, Mr. and Mrs. Cassimatis, along with the other directors of Storm, had an extraordinary degree of control over the company (Narushima & Rooy, 2016).

In 2010, the ASIC initiated proceedings against Mr. and Mrs. Cassimatis (ASIC, 2016). This was for the breach of duties stated in section 180(1) of the Corporation Act. These provisions relate to the directors’ duty of care and diligence. The claim of ASIC was that the breach of duties occurred when the company was solvent, and in such circumstances when Mr. and Mrs. Cassimatis were the sole directors, along with the shareholders of Storm. ASIC further contented that there was an absence of dispute regarding the manner in which Storm was managed by the directors, as it was in conformity with the informed wishes of the shareholders (Australasian Legal Information Institute, 2016).

Moreover, the ASIC also contended that Storm had breached the then obligation of the Corporations Act, which required a reasonable base for any financial advice to the retail client. This was due to the financial services which were provided by Strom, as per the model, to such a category of investors, who were vulnerable and close to retirement, had limited income and assets, and had no prospect of recovery of their financial position in case of any loss (Federal Court of Australia, 2016).

Duties breached

According to the ASIC, the directors of Storm had breached Section 180(1) of the Corporations Act, as they caused/ permitted the company to provide the advice to its investors as per the model, which resulted in the contravention of the Corporations Act, and because they caused/ permitted the company to provide the financial advice in such a way, which resulted in the contravention of the Corporations Act. Due to these actions of the directors, the company was exposed to the predictable risk of harm, which included the cancellation of AFSL, civil proceedings by the investors, and the banning order. As per the ASIC, the risk of exposure of Storm was heightened, which would have not been the case if the directors had acted with care and diligence (Federal Court of Australia, 2016).

As per section 180(1) of the Corporations Act, 2001, the directors, and such other officers who are in significant position in a company have the obligation of taking care, in addition to showing diligence when they undertake their work, use their powers and fulfill their responsibilities (Australian Government, 2017). This has to be done in such a manner as would have been done by an individual, who would have held the position of the director or such other officer and would have faced similar situation, and does the work in a reasonable manner as if he occupied the office of the director or such other officer. In case a direct or the officer fails to fulfill the criteria laid down here, they are held to have breached this section and as a result, have to bear the civil penalties contained in section 1317E of this act (ICNL, 2017). This section allows the court to make a declaration of contravention. As soon as the court makes this declaration, pecuniary penalty order can be applied by the ASIC and it can even make an application to the court to disqualify the director for certain time period, through a disqualification order (Federal Register of Legislation, 2017).

Section 180(2) of this act offers a defense in cases where a claim is made against a director for the breach of section 180(1). As per this section, if the director can show that he undertook the decision believing it to be sound business decision in a genuine manner and had reasons to believe the same and he had no material personal interest in the issue at hand, and then even if the decision turns to be unsuccessful, they are not held liable (WIPO, 2015). The rationale behind the business judgment rule is to provide certain freedom to the directors from the risk of liabilities, in undertaking their decisions, just because the same may not be profitable (Cassidy, 2006).

In order to decide whether section 180(1) had been breached in this case, the test covered under this section was applied, which was related to the exercise of a reasonable degree of diligence and care on part o the director, while the discharged their obligations and used their powers. It was noted by the Court that the applicability of this particular test involved a consideration of such situations which could be deemed as foreseeable risk of harm for the company’s interest, along with the potential benefits which accrued from the conduct of the director, the extent of the harm, the burden which was placed over the company and lastly, the actions undertaken to remove the risk of this foreseeable harm (Tills & Wills, 2016).

Decision of the Court

It was clearly held by the court that there had been a breach of the section of the governing act on part of Storm as the financial services were provided based on the model to the susceptible clients, as were identified by the ASIC and there was a breach of the quoted section. The reason for this breach was also stated by the court. They stated that a prudent director of a particular corporation, in the situation of Storm, along with the responsibilities which were imposed over Mr. and Mrs. Cassimatis would have known that there was a high chance of the violation of the governing act, in case the powers given to them were exercised whereby the Storm model was caused or permitted to be applicable over the ASIC identified clients and who were being plead on behalf by the ASIC in the given case, with a special regard to such investors who were near their retirement or had already retired and had limited income and few assets (Tills & Wills, 2016).

It was held by the court that the contraventions which took place in Storm were not just foreseeable in a reasonable manner, but that a prudent director in Mr. and Mrs. Cassimatis’ position would them considered them as being quite a significant possibility. It was stated by the court that the course of conduct of the directors in this case was a sole breach on each of the husband and the wife and there was an absence of a range of breaches regarding the range of investors who have been deemed as and form a class of the vulnerable investors in this case. It was conceded by the ASIC that in reality there had been only a single contravention by all of the directors (Lacey, 2016).

It was also held by the court that in order to consider if Mr. and Mrs. Cassimatis had acted in a manner which could be deemed as honest it had to be shown that they genuinely believed that the capital loss would never have taken place along with the index fund investment in the Storm model. Even though this was found by the court, they held that the conduct of Mr. and Mrs. Cassimatis was such that it could not be excused by using section 1317S of the Corporations Act due to the substantial role, and responsibility, which they both had, coupled with the seriousness of the breaches undertaken by Storm (Federal Court of Australia, 2016).

The test given in Vrisakis v Australian Securities Commission (1993) 9 WAR 395 was also applied to decide upon the breach of directors’ duties. With regards to the balancing of the interests of the investors, the court stated that the term was not to be construed in a literal manner. They were not required to be weighed in a common metric. Instead, the reasonableness of the judgment had to be understood, which could not be calculated in exact manner and hence, would only be decided on the basis of the circumstances present. The court also stated that the duties and responsibilities of the directors are not limited to the statute and they include any and all responsibilities which have been put on the director by the corporation, irrespective of the reasons for the imposition of such duties over the director or the officer. The test regarding duties would have to be construed on the basis of the perspective of a prudent person who would have been the director in Storm and had Mr. and Mrs. Cassimatis’ position (Minter Ellison, 2016).

Justice Edelman considered that the directors had exercised in a manner where the advice given by them, related to the position of the investors was inappropriate (Baxt, 2016). A reasonable director, as per Justice Edelman, would have known that model was being applied over such clients who were in a vulnerable class and that the application of this model over such class would be an inappropriate advice. The result of this advice was catastrophic for the company as no precautionary measures were undertaken to avoid the application of this model over the vulnerable class. He stated that the foreseeable risk of harm was not something which was confined to financial harm, for breaching the section 180(1) provisions. It had to include all the interests of a company, which could be harmed, including its reputation, and interests (Jacobson, 2016).

Conclusion

The recent case of ASIC v Cassimatis highlighted an important lesson for the directors and the companies running their business in Australia. This lesson dictates that even when the directors act in an honest manner and had genuine belief that by undertaking the steps, the investors could be protected, if their actions are such that the investors face major losses and where there was a scope to take more steps for alleviating the possible financial collapse, then in such cases, the directors’ would be held liable for a breach of duty of care. In the circumstances that were present in this case, the blend of situations made it quite clear that the investors in Storm had been put in a vulnerable position and so, the directors had breached their duty contained in the governing act.

References

ASIC. (2016). 16-277MR Directors of Storm Financial found to have breached their duties under the Corporations Act. Retrieved from:

https://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-277mr-directors-of-storm-financial-found-to-have-breached-their-duties-under-the-corporations-act/

Australasian Legal Information Institute. (2016). Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023 (26 August 2016). Retrieved from:

https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2016/1023.html?stem=0&synonyms=0&query=Cassimatis

Australasian Legal Information Institute. (2017). Corporations Act 2001. Retrieved from:

https://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions

Australian Government. (2017). Corporations Act 2001. Retrieved from: https://www.legislation.gov.au/Details/C2013C00605

Baxt, B. (2016). Professor Bob Baxt outlines a recent case that illustrates the difficulty in persuading courts to exonerate breaches of duty. Retrieved from:

https://aicd.companydirectors.com.au/membership/company-director-magazine/2016-back-editions/november/directors-counsel

Cassidy, J. (2006). Concise Corporations Law (5th ed.). NSW: The Federation Press.

Federal Court of Australia. (2016). Australian Securities and Investments Commission v Cassimatis (No 8). Retrieved from:

https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2016/2016fca1023

Federal Register of Legislation. (2017). Corporations Act 2001. Retrieved from: https://www.legislation.gov.au/Details/C2013C00605

ICNL. (2017). Corporations Act 2001. Retrieved from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf

Jacobson, D. (2016). Case Note: Storm Financial Directors Liability For Company Conduct. Retrieved from:

https://www.brightlaw.com.au/case-note-storm-financial-director-liability-for-company-conduct/

Lacey, A. (2016). The risk of a director/officer of a corporation assuming vast responsibilities – ASIC v Cassimatis (No 8) [2016] FCA 1023. Retrieved from: https://www.mccabes.com.au/asic-v-cassimatis/

Latimer, P. (2012). Australian Business Law 2012 (31st ed.). Sydney, NSW: CCH Australia Limited.

Minter Ellison. (2016). Federal Court Finding That Storm Financial Directors Breached Their Duties. Retrieved from:

https://chqa.minterellison.com/blogcustom.aspx?entry=1470

Narushima, H., & Rooy, J.V. (2016). Corporate Advisory Update - September and October 2016. Retrieved from:

https://www.gtlaw.com.au/insights/corporate-advisory-update-september-and-october-2016

Tills, M., & Wills, C. (2016). Australian directors found guilty of breaching duties following corporation’s breaches. Retrieved from:

https://www.clydeco.com/insight/article/australian-directors-found-guilty-of-breaching-duties-following-corporation

WIPO. (2015). Corporations Act 2001. Retrieved from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817

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