Issue and facts
In ASIC (Australian Securities and Investment Commission) v Cassimatis (No. 8), the main issue was related to the breach of duties of director by two directors, i.e., Mr. and Mrs. Cassimatis.
The company in which Mr. and Mrs. Cassimatis were the directors was Storm Financial Limited which was a holder of the Australian Financial Services License (AFSL) and was also engaged in financial services on the basis of Storm model, which was central to this case, and which was developed by Mr. Cassimatis, the director of Storm Financial Limited. Storm model provided the borrowing of funds from the clients in exchange for the equity where a margin loan was also obtained. These funds were used by the company for creating cash reserves, along with making investments in the index funds. The model was applicable on the clients only till the time the clients had the capacity of borrowing funds. The company used a double gearing model, due to which, the investors underwent huge losses when the world was facing the 2008 financial crisis. The storm model was used on such individuals, who were not only close to retiring, but were in a vulnerable position, as they had no or negligible source of income and assets. Hence, there prospects of attaining their financial position back, due to the actions of the directors, was next to impossible. The rationale behind holding the violation of director duty on part of Mr. and Mrs. Cassimatis stemmed from the wrong advice given by them to the investors, on the basis of storm model.
In Australia, all the companies are governed under the Corporations Act, 2001, which is an act of the commonwealth. Section 198(1) provides that the company’s business is to be run on behalf of the shareholders under the direction of or by the directors. Part 2D.1 covers the different director duties which have to be strictly adhered.
Under section 180(1), the directors, and the officers of the company, are provided with the duty of making use of their powers and discharging their duties in such a manner which can be stated as diligent and shows care. The standard set for such conduct is the conduct of a reasonable person, who held the same office in similar circumstances as the director or officer in question and had the same powers and duties. When a director of the company or its officer fails to fulfill this requirement, the director or the officer breaches this section and a civil penalty is attracted on such officer or director. The penalties for this violation are covered under section 1317E, which gives the court the authority of making a declaration of contravention. Once this is done, the ASIC can apply for pecuniary penalties pursuant to section 1317G or apply for disqualification order, pursuant to section 206C of this act.
Arguments made by the parties
ASIC was the party which initiated the case against Mr. and Mrs. Cassimatis back in 2010 and made a claim that the directors of the company had an extra ordinary degree of control on the company matters. ASIC claimed that Mr. and Mrs. Cassimatis had breached their duties whilst the company was insolvent. When this happened, these two were the only shareholders and directors of the company. The extraordinary degree of control was established by the absence of disputes in the company management by Mr. and Mrs. Cassimatis and the same was in line with the wishes of the shareholders of the company.
ASIC also stated that the provisions of Corporations Act were breached due to the financial advice which was given to the retail clients on reasonable basis. The rationale behind this was the financial services which were being provided by Storm Financial Limited based on the Storm model, was being given to the vulnerable investors and hence, the advice had to be given on reasonable basis. ASIC claimed that section 180(1) of the Corporations Act, 2001 was contravened as the directors of the company allowed such wrong advice to be provided to a group of vulnerable investors, even when they were aware of the situation in which such investors were.
Due to the actions of the directors, the company was exposed to risks of harm, which were easily foreseeable, and which included the cancellation of the AFSL, the prohibition order being passed and the civil proceedings being initiated by the affected vulnerable investors. ASIC viewed this risk of exposure and the rise in this risk as a result of the acts of the directors, which showed a sheer lack of diligence and care. They highlighted that a reasonable director in place of Mr. and Mrs. Cassimatis would have never let such ill advice to be passed on to such investors and would have protected the company from the foreseeable risk of harm. The responsibilities placed through the Corporations Act regarding the use of position which they held in the company, required care to be shown.
Mr. and Mrs. Cassimatis claimed that section 180(1) was not applied on these two as they were the only shareholders in the company, and also that the company was solvent when they held this position, in addition to being the director of the company. They stated before the court that by allowing the company to undertake a risky venture does not mean that their director duties were breached or that they were doing something illegal. These two relied on the principle that the ramifications had to be implicit when the position of shareholder and director was held commonly by the same person. Mr. and Mrs. Cassimatis also provided that the entire claim of ASIC was based on Storm model, which had been established as a viable model and the contraventions which occurred later one, could not be reasonably foreseen. They also presented that this model had been reviewed by the compliance professionals, ASIC and the non-executive directors of the company. None of these parties raised any claim against this model. Mr. and Mrs. Cassimatis gave the reason for this model failing as the “Black Swab” event, i.e., the global financial crisis. They also stated that the clients had clear knowledge about the possibility of the prices falling due to the movements in share market and placing the entire blame on them was unfair.
Decision given in this case
The court was of the view that the breaches which took place in Storm Financial Limited could have been reasonably predicted and that a reasonable director in place of these two directors would have considered these risks and would have given the required priority on the basis of their possibility of occurrence. It was also provided by the court that Mr. and Mrs. Cassimatis’s conduct was such that each of them, i.e., the husband and the wife individually breached the provisions of the Corporations Act. All this happened for a different range of investors which were rightly deemed as vulnerable in the present situation. However, the contravention in this case was of a single section and a sole breach, instead of being a number of breaches.
In the view of the court, to consider that the husband and wife had been honest, it had to be shown that they had genuinely relied on the absence of the loss of capital to take place, along with the index fund investment, which was based on the company’s Storm model. The conduct of the two was not deemed as something where the excuse of section 1317E or the serious breaches undertaken by the company could be established, owing the responsibilities which they had and the role which they played.
The court gave emphasis on its past ruling in the matter of Vrisakis v Australian Securities Commission and deemed as of importance for the present situation. In the view of the court, there was no need of weighing the common metric and balancing the interest of the investor in order for the same to be construed literally. The need in this case was just to gain an understanding of the ruling which had to be taken into consideration, along with the present circumstances of this case. Hence, all of the responsibilities which are within the duties which have been imposed on the company had to be taken into consideration.
Justice Edelman believed that the powers used by Mr. and Mrs. Cassimatis and the duties discharged by them, on the basis of the position which they held in the company, was without any doubt, unsuitable and unfortunate. He believed that a reasonable director would have known that the model was being applied on the vulnerable citizens and the applicability of the Storm model on such class of citizens was clearly an unsuitable advice. This resulted in the non-adoption of precautionary measures for avoiding the applicability of the Storm model. Justice Edelman went on to state that the foreseeability of the risk of harm was not simply restricted to the financial harm for the contravention of provisions contained section 180(1). There was a need to consider the risk of harm in view of the interest of company, which includes the reputation of the company.
All this led to the court making the decision that section 180(1) had been breached by the two directors.
Part B (a)
The key issue in this case revolves around the possibility of Kanye bringing a successful action against the other directors of company, for the share issue and for removal as the director of company.
As has been explained through the discussion in the previous case, certain duties have been imposed on the directors of the company, when they run the business of the company, on behalf of the shareholders of the company. The minority shareholders, as the name suggests, are the shareholder who are in minority and they have little or negligence influence when it comes to the major decisions of the company as the decisions are passed through majority. However, where the directors do not give due consideration to the minority shareholders, a claim of oppression can be made by such minority shareholders. The directors have a duty pursuant to section 181, to act in the best interest of the company and for proper purpose; pursuant to section182, to not use their powers in a manner where an advantage is obtained for them or someone close to them; and pursuant to section 183 they have a restriction whereby they cannot make a misuse of the company information whereby an advantage is obtained for them or someone close to them.
Section 232 of this act provides the power to the minority shareholders to prove before the court that the conduct of the directors is such that it provides to be unfairly discriminatory/ prejudicial or is oppressive, against such class of shareholders. It has to be shown that there was unfairness and a mere disadvantage would not fulfill the conduct as being oppressive pursuant to section 232.
Once the claims made under section 232 are established before the court, the court awards the remedies against such conduct pursuant to section 233 of the Corporations Act. some of the remedies include applying for company to be wound up; modifying the company constitution; stopping or asking an individual to do a particular task; appointing a receiver or manager; ordering the purchase of shares of the minority shareholder at a price which is finalized by the court; and the like. Hillam v Ample Source International Ltd (No. 2) was a case where the board of directors’ demeanor was considered as being oppressive towards the minority shareholders. And even though the company was solvent in this case, the court held that it would be right to wind up the company and to distribute the proceedings from the sale of assets of the company.
The facts given in the case study reveal that a claim of oppressive conduct can be made by Kanye based on the Corporations Act. The resolution which was passed on 01st Mar, 2017 would be the basis of the oppression. This resolution was passed in order to give the other directors a shareholding which surpassed the shareholding of Kanye, which would in turn put him in an unfairly disadvantageous position. This detriment is not only caused to Kanye as his shareholding was reduced, but also because this led to him being removed from the position of being the company director, by amending the constitution of the company. As the oppressive conduct has been established pursuant to section 232, Kanye can apply for remedies pursuant to section 233 against the remaining three directors, i.e., Khaled, Keith and Kylie.
The application of section 233 would allow Kanye to apply for being reinstated as the company director, through the court ordering the company to do so specifically. Kanye could also apply for an order to the board for issuing 25 ordinary shares to him, so that he would be placed in equal position as the other directors. The third option available to Kanye is for amendment to be brought to the company constitution, whereby his original position could be restored. Based on Hillam v Ample Source International Ltd, Kanye could ask the court for the company to be wound up for the acts of the three directors and distributing the assets of the company in an equal manner.
For his removal from the position of company director, Kanye can apply to the court for the improper use of company position by the three directors, in addition to the oppressive conduct of these three, which resulted in their director duties being contravened. And ultimately, he can get reinstated as the company director.
Hence, Kanye can sue the other three directors for oppression and get reinstated as company director.
Part B (b)
The key issue in this case revolves around the possibility of Kanye or Khaled making a claim against Kylie and Keith for incorporating a company.
Under section 181 of this act, the directors have to use their powers and discharge their obligations for a proper purpose, in good faith and for the company’s best inertest. Under section 182, the prohibition has been placed on the directors of the company for improperly using the position held by them in the company. Section 183 imposes the duty on the directors of the company to not use the information of the company in such a way which could be stated as being detrimental for the company, and whereby the director personally gains from it, or someone close to them makes a gain from it. When the provisions contained in these sections are breached, the civil penalties covered under section 1317E of this act become applicable.
Apart from the common law, the statutory law also places similar duties on the directors of the companies. So, the directors are required to always work in the best interest of the company and not use their position where they personally make a gain at the cost of company interest. There is a fiduciary duty placed on the directors to avoid such situations which can give rise to a conflict of interest. This duty has its roots in the duty of utmost good faith and that of trust placed through the common law. This requires the directors to avoid such situations where their personal interest overpowers the company interest, which they are duty bound to protect. Though, such a case would only take place when the possibility of conflict is real.
ASIC v Stephen William Vizard was a case where the court held that the position of the director was being misused as the confidential information of the company was being used for the benefit of the director, resulting in an effective breach of director duties. The court held in ASIC v Adler and 4 Ors that the director used the information of the company in a manner which proved to be of detriment for the company. Not only the director Adler, but the other directors also, had misused their position, which led to the court holding them liable for contravening the provisions of the Corporations Act. In Kinsela v Russell Kinsela Pty Ltd (in liq), the court held that the directors acted in a way where their personal interest was promoted and the best interest of the company was simply ignored.
In the given case study, the action can be made by both Khaled and Kanye against the remaining two directors, Khaled and Kanye; as Khaled and Kanye went on to form a company without Khaled and Kanye. The rationale behind this stems from the fact that Keith and Kylie owed certain fiduciary duties towards the old company, under the common and statutory law, which was blatantly contravened by them. The actions of Keith and Kylie, i.e., the forming a new company was not in the best interest of the old company, as the prospective customers for the old company would move to the new company, thus breaching section 181. Section 182 was breached by using the sensitive and material information of the old company by Keith and Kylie regarding the souvenirs sale, which they knew due to the position held in the old company, thus breaching section 183 also. This situation caused a conflict of inertest, which Keith and Kylie failed to avoid by forming the new company, thus breaching the common law duty.
Based on the case of ASIC v Stephen William Vizard, Keith and Kylie misused the material information of the old company, which would be deemed as a breach of their director duties. Applying the case of ASIC v Adler and 4 Ors, the similar results would be obtained as the new company was formed whereby the corporate opportunities of the old company were issued, which was seriously detrimental for the old company. And the formation of the new company was clearly placing their personal interest before the interest of the old company, which would again be a breach based on Kinsela v Russell Kinsela Pty Ltd.
To conclude, both Kanye and Khaled have the opportunity of initiating a claim against Keith and Kylie for incorporation of a new company, owing to the breach of director duties, by being director in the old company and working towards the detriment of the old company.
A. Articles/ Books/ Reports
Cassidy J, Concise Corporations Law (The Federation Press, 5th ed, 2006)
Latimer P, Australian Business Law 2012 (CCH Australia Limited, 31st ed, 2012)
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461
ASIC (Australian Securities and Investment Commission) v Cassimatis (No. 8)  FCA 1023
ASIC v Adler and 4 Ors  NSWSC 483
ASIC v Stephen William Vizard  FCA 1037
Hillam v Ample Source International Ltd (No. 2) (2012) FCAFC 73
Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722
Phipps v Boardman  2 AC 46
Vrisakis v Australian Securities Commission (1993) 9 WAR 395
Corporations Act, 2001 (Cth)
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