Understanding The Duty Of Care And Diligence Of Directors In An Essay.

Discuss about the Intentional Negligence Contradiction Terms.

The Court arrived at the conclusion that the directors of Storm Financial have breached their duties as   directors. It was determined that the duty of care and diligence that has been mentioned in section 180, Corporations Act, 2001 has been breached by these directors when they allowed or failed to prevent the application of storm financial model indiscriminately to the retired clients or who were going to retire shortly and have limited income. This model provided that the investors borrowed money against their homes and obtained margin loans, which were invested in index funds. It was found that any reasonable director would have discovered that strong chances the present that a retired or nearing retired investor would have received in appropriate advice for using their home as the security for the loan.

 While arriving at this conclusion, the court had explored different significant concepts related with the duty of care and diligence of the directors. This verdict confirms that while using care and diligence, the directors ought to consider ahead of the financial consequences related with the particular action or approach. Therefore, they should consider all possible harm that may be the result, which includes harm to the reputation and probably the loss of license as a result of the failure of the corporation comply with the applicable rules.

The case of the ASIC relied on the fact that there has been an actual breach by the corporation which was a stepping stone to discover if there has been a breach of duty imposed by s180 by the directors of the corporation. Although, in fact, an actual breach was established, the question was raised by the court if the ASIC had set an unnecessarily high bar which expresses some doubt regarding the fact if a contravention by the corporation was required to be established in order to claim a breach of duty by the director. If it were a necessary requirement, this may result in the unusual result according to which the director may escape the liability for a particularly that was highly likely to involve a serious breach of law, only due to the reason that as a result of some good fortune, there was no actual breach.

Relevant Law:  In this case, the court had discarded the view that s180 can be used to create directors’ liability only due to reason that another provisions of the Corporations Act have been breached by the company, or in other words, "back door" accessory liability. Hence the court rejected the submission of the ASIC that a general duty was present on part of the directors which required them to make sure that the company fulfills its statutory obligations. The conclusions made by the court in ASIC v Mariner Corporation[1] was confirmed by the court in this case. It was stated to be wrong to claim that if the director caused its company to breach a provision of Corporations Act, then it can be said that the director has also breached section 180.

Arguments of the Parties

However, the court approved that the contraventions or the risk of contraventions or the circumstances that need to be considered by evaluating if the director ordered the officer had exercised the necessary care and diligence but they are not the only circumstances and similarly they are not the conditions necessary for creating liability.[2] The court had considered the concept, which provides that a breach of s180 days to be based on jeopardy to the interests of the company.[3] This expression was used by the court, while deciding ASIC v Maxwell[4] and had also been mentioned in other decisions given later on. In the present case, this expression was described by the court as “short-hand” for the notion that in case the interests of the company are not at risk or (likely to be harmed), in such a case, there cannot be a breach. Concerning the breach of law, the relevant jeopardy can be described as the threat of harm to the interests of the company including the risk of sanctions. The risk of raising liability of sanctions should be clearly visible to the directors and the countervailing probable benefits should be insignificant.

The test applied by the court under s180 was to see if a reasonable level of care and diligence has been exercised by the directors, while using their powers and discharging their duties. It was noted by the court that in order to provide this test, all the circumstances need to be considered, including the foreseeable risk of harm that may be suffered by the interests of the corporation, the magnitude of such harm, the likely benefits of the conduct of the directors and the burden for the company of taking action in order to alleviate the foreseeable harm. It was discovered by the court that there was a breach of Corporations Act by Storm when it provided financial services on the basis of the model to the category of vulnerable clients that have been identified by the ASIC. The court stated that their duties of care and diligence have been breached by the directors due to the reason that any other reasonable director under the circumstances of Storm and the responsibilities held by Mr. and Mrs. Cassimatis was bound to be aware of the strong chances of a contravention of Corporations Act if such director would have used his powers to cause or allow the application of Storm model to the category of clients pleaded by the ASIC, especially the investors who had been retired or were going to retire soon and had little income and few assets.

Decision

Arguments of the Parties: In this case, the submission made by the ASIC was rejected by the court according to which a real breach by Storm was enough to moving the court that there has been a breach of the provisions of s180 by the directors of the company. The case of the ASIC was based on the fact that Storm had made an actual breach of the provisions of Corporations Act as a “stepping stone” for breaching the provisions of s180 by the directors of the corporation. In this regard, it was held by the court that serious doubts were present if a real breach was necessary in order to establish a breach of s180 by the directors but it proceeded on the fact that real breach was necessary[5]. On the other hand, a submission was made by the directors of the corporation according to which the duties mentioned in s180 were owed by the directors only towards the company. But the ASIC claim that a norm of conduct as being prescribed by s180 that is different from the interests of the company therefore, it argued that the directors owe a duty towards the public at large.

Decision: Hence, in this case the court rejected the notion that s180 can be used for the purpose of creating liability of the directors only due to the reason that the company had breached some other provision of Corporations Act or in other words, a back door liability. The court also rejected the submission of the ASIC that a general duty is present on part of the directors to make sure that the company fulfills its statutory obligations. And there is no strict liability duty, which requires the directors to ensure compliance.[6] According to s180, the issue if due to the care and diligence has been used by the director can be answer only by maintaining a balance between the foreseeable risk of harm and the likely benefits that can be reasonably expected from such conduct.[7]

While evaluating the components of the duty mentioned in section 180, it was noted by the court that the harm is not only confined to monetary damage. Consequently, such damage also incorporates the interests of the corporation, which includes the reputation and the interests concerning compliance with law. For instance, the possible loss of a license. Hence the court stated that it will be difficult to imagine the examples where can be in the interests of the company that the company should be involved in serious illegal behavior, even if it was very gainful and the directors reasonably held that it was almost untraceable.[8] The court also held that the balancing act that needs to be undertaken by deciding if there has been a breach of duty is not a literal weighing of costs against profits. It is not necessary that the director may avoid liability only by establishing that the probable financial cost of penalty for the breach of law exceeded the probable profit from such breach.[9]

The issue that needs to be decided in this part, is if a successful action can be initiated by Kanye against the directors and the members of Koala Pty Ltd. for the issuance of shares or the fact that he has been removed as the director of the corporation. In order to have a successful action, it needs to be established by Kanye that he was facing minority oppression at the ends of the majority.

Corporations Act, 2001 contains the provisions that deal with minority oppression. It has been found in many cases that when the majority members of the corporation conducting the affairs of the company, sometimes they tried to use their influence for the purpose of achieving a benefit for themselves as against the advantage for their corporation.[10] In this regard, the law that this type of conduct is illegal and at the same time, it may also diminish the shareholding value and may result in internal damage to the company.[11] Generally the conduct that has been mentioned in s232 is known as minority oppression. This type of conduct includes any conduct that is contrary to the interests of the shareholders as a whole or if the conduct has been oppressive, discriminatory or unfairly prejudicial for particular shareholder/s. The courts are required to decide if particular conduct can be described as aggressive by using an objective test. Under this test, the court considers the issue if any reasonable words and would also have treated the conduct as unfair.[12] However, it is not sufficient to establish in the court that there is some discrimination or prejudice. At the same time, it is also required by law that there should be some unfairness present that if goes beyond mere disadvantage for a particular member or members.

As a shareholder is a part of many shareholders, sometimes it is possible that the person may feel powerless or a lack of influence regarding the decisions made by the corporation. Usually, such a situation may arise when the majority members of the company conducting the affairs of the company in such a way that proves to be beneficial for the majority and is disadvantageous for the minority members.[13]

Hence, there are certain circumstances where the minority shareholders are allowed by the law to seek a remedy against such conduct if they can establish that the conduct is oppressive and unfair. But by providing this protection to the minority members of the corporation by the law, it does not mean that every decision that has been taken by the majority and with which the minority shareholders do not agree, can be considered as oppressive conduct. The law provides that minority oppression can take place only in cases where the majority is conducting the affairs of the corporation or if the actions of the majority are against the interests of the shareholders as a whole or if the conduct can be described as oppressive and unfair.

The law provides that when minority oppression has been established, the powers granted to the court include an ordered by the court which provides that one or more majority members are required to purchase the shares of the minority shareholder at the price determined by the court. It may also be ordered that the company should purchase the shares of the minority shareholder. Other orders include appointing a receiver and manager and also an order directing the winding up of the company.[14] Similarly, the court may also grant an injunction against the company which restricts the company or a directive from particular action.[15]

Therefore in the over these provisions, in this case, also it can be said that successful action can be brought by Kanye against Koala Pty Ltd only if he is in a position to establish that the majority members of the company were conducting the affairs of the company in such a way that is contrary to the interests of the company or its members as a whole or if the conductor was oppressive and harmful for him.

Kanye can give an example of actions like the issuance of shares were the members for the purpose of diluting the voting power of Kanye and also the fact that he was removed from his position as director. Such conduct can be described as discriminatory and prejudicial for Kanye.

In this part of the assignment, the issue arises if the other two directors of Koala Pty Ltd., Keith and Kylie were liable for contravening the duty which requires them to avoid conflicts of interest between their personal interests and their company's interests. The law provides that, while acting as a director of the corporation, a person may receive information that is capable of being used for the purpose of making a profit by such person.[16] As a result that a significant position is held by a director in the company, it is provided by this duty that the directors are prohibited from using their position in order to achieve personal benefit. In some cases, the directors have used the information received by them due to their position in the company for making a personal benefit. They were in such cases, the court considers the profit made by the director as the profit made by the corporation.[17] At the same time, this duty, prohibiting the directors from making the personal benefit also includes the benefits made by using unlawful means like commission or a bribe or in return of the favor.[18]

Under these circumstances, it has been provided by the law that there are certain fiduciary duties owed by the directors towards the corporation. On the other hand, they can be a conflict of interest in is the director of the corporation is willing to provide a commercial opportunity personally or for the purpose of providing a benefit to some other business or person, other than their own company. The law provides that in such cases, the fiduciary relationship serves the interests of some other party and as a result, the fiduciaries should not place themselves in any situation where they may have to give preference to their personal interests or to further the interests of some other person, apart from their principal. Hence, a fiduciary may pursue any such opportunity only after the principle has given fully informed consent.

There is nothing unusual if a director of the company goes on to meet with members of their company. In the same way, the directors are not presented by the law from involving in such activities. On the other hand, it may be a problem if the director enters into contact with a companywide acting as the director or a member of such company. Hence, when it is discovered by the director that there can be a probable conflict of interest, due to which they can be a breach of duty by the director, such a director is required by the law to completely disclose the circumstances concerning the contract to the company. In the same way, the directors of the company can also be allowed by the constitution of the company to enter into a contract with their own company. But in such a case, the director may decline to take part in voting on such a matter. Another relevant issue is when the director is required to protect the interests of the company. Therefore in such cases, the law requires that the director should take all necessary steps for the purpose of protecting the interests of the corporation.[19]

But if it has been discovered by the court there has been a breach of their duties by the director, the court may choose civil or criminal penalties on such a director. According to the corporations law, a criminal breach of duty may take place by the director if it is found that the director acted recklessly or with intentional dishonesty.[20] Due to the high threshold is present in case of criminal standard of proof, the company is also allowed by the law to take civil action against the directors for the breach of their duties. The law also allows the company to seek damages under common law or the recession of contract, as well as equitable intentions and compensation. In this way, there is a significant duty present on part of the directors provide a conflicts of interest. It has been clearly demonstrated by the court in cases like Rich v ASIC that there is a constant need to remain vigilant in order to uphold the fiduciary duties imposed on the directors.

Under these circumstances, in this case also, it can be said that a successful action can be brought by Khaled and Kanye against the other directors are members of Koala Pty Ltd if it can be established that these directors were liable for the breach of their duties.

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ASIC v Mariner Corporation Limited [2015] FCA 

ASIC v Maxwell & Ors [2006] NSWSC