HA3021-Breaching Of Duties And Responsibilities

Introduction

A corporation is a statutory body, which works with the minds and bodies of some individuals that are known as directors and officers of the company. It was held in the case of king V. A king & co. (1897) 14 TLR 98 that such officer and directors are expected to work in an exceedingly affordable manner that should bring positive results to the corporation. As presently, many of the companies are being registered these days, it has seen that in many of the cases, the board of a company performed their duties in a disproportionate manner.

To control such cases, provisions are mentioned under the Corporations Act, 2001(Cth). This section defines the method in which administrators of a company (officers and directors thereof) need to satisfy out their responsibilities and whenever a director or officer of a company contravened to the provisions of aforesaid sections, necessary actions may be taken against them below the view of cited law.

Issue

Case Introduction

In the referred case, two of the directors of the company named Storm Financial Limited were involved. The company engaged in the business of providing financial services to it is clients. Mr. and Mrs. Cassimatis were the directors of this company (Dwfoxtucker lawyers, 2017). Mr. Cassimatis has developed a financial model for his company under which the company was expected to grant financial services and borrowings power to it is clients and customers. The model was not developed properly and was not expected to work in all the possible circumstances. This model was focused on the borrowings of a client against the equality in their homes, taking a margin loan (Tills and Wills, 2016). Further, the model was required the loan amount to invest in index funds and to develop and maintain cash reserves accordingly. This was the whole model, which was applicable to all those clients and customers of the company, who had a fund borrowing and repaying capacity. The model was not proved successful because of “double gearing” specification. Cause of this specification, investors had to face many losses during the Global Financial Crisis (Smith, 2016). In the year 2010, the Australian Securities and Investments Commission (hereinafter referred as ASIC) initiated a case against both of the mentioned directors such as Mr. and Mrs. Cassimatis. While initiated the subjective case, ASIC alleged that directors failed to perform their duties mentioned under the Corporations Act, 2001.

The Duties/Responsibilities Breached

Corporations Act 2001 (hereinafter mentioned as an act) is the legislation that provides the roles, powers, and responsibilities of directors and officers of the company. Part 1 of chapter 2D of the act is there to guide these people the way in which they should behave while performing their duties (AUDA, 2018).

Section 180(1) of the act requires every director and officer of a company should do the acts with proper care and diligence. The section demands that officers and director must remain careful while their conduct (Austlii, 2018).

Section 181 of the act is one of the most significant sections in this area. The section says that it is required on the part of every director and other officers of the company to act in a manner that is in good faith and best interest of the company (Austrian Institute of Company Directors, 2018). Clause b of section 181 (1) further ads that directors and officers must perform their duties for a proper and suitable purpose. Now the issue is that what is in the best interest of the company refers here (Tomasic, 2016). This is to be stated that companies are a separate legal entity from it is management and shareholder as well.

In addition to this, the same is also an artificial person that cannot act for itself and requires some natural persons to act on behalf of the same (Shepherd and Ridley, 2015). In such circumstances, directors and officers are the persons who take decisions on behalf of the company but they do not held personally liable cause of separate legal identity of the company. However it was held in the case of Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22 that directors can be held personally liable in those cases where they do act outside of the boundary of law and in an unethical manner. Section 181 of the act focuses on the factor that while performing the delegated duties, every director and officer of the company thinks that which act is in the best interest of the company and they must act their conduct in the good faith of the company (Wolters Kluwer, 2018).

It was held in the case of Diakyne Pty Ltd v Ralph [2009] FCA 721; 72 ACSR 450 that in those situations where director/officer acts in the good faith and best interest of the company according to then, but their act puts a negative impact on the affairs of the company, then also they will be held liable. Such persons shall be liable for all the applicable penalties and civil prosecution as per the provisions of the act. By reviewing this decision, it can understand that how strictly the section 181 is applicable to the managerial personnel of a company.

It was held in the case Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2 that the liability to at according to prescribed manner cannot be overturned by personal benefits or advantages. No matter whether a company involves the interest of the public or not, an officer/director of the company will be held responsible to conduct as per manner prescribed under Corporations Act, 2001.  When defining the duties of directors, this is also necessary to know that the directors and officers of a company carry a fiduciary relationship with the company and for this reason too, this is required on their part to act in a reasonable manner. No matter what a director of the company always required to keep the possible consequences of an act in mind. One easy step of a director can bring huge positive as well as negative impact on the financial status of a company. This is the reason that these people are advised to perform very carefully while dealing on behalf of the company.

Reason For The Breach Of Duties/Responsibilities

As discussed above, it is a duty of the directors and officers to act in the best interest of the company, in the studied case Mr. and Mrs. Cassimatis became fail to do so. Mr. and Mrs. Cassimatis were the directors of Storm Financial Limited, which was an Australian financial service license holder (AFSL). Both of the said people were acting as director of the company and were used to take every decision on behalf of the same. They have developed a financial model that proven fails later on.

In this case, being the director of the company, it was the duty of both of these directors to make the model that works in every situation and for every client. Mr. Cassimatis has prepared a model that was double gearing system. Some of the clients of the company were old age people who had not many of the assets and they have trusted on the company while seeking financial services. Regardless of the other facts, both of the directors were advising their customers to adopt the model developed by Mr. Cassimatis. According to the provisions of section 181 of the act, being the directors of the company, it was the duty of Mr. and Mrs. Cassimatis to consider the future possible consequences of this model. They have not developed any counter financial model that could save the customers of the company in the situation of a Global Financial Crisis.

Further, as clause b of Section 181 (1) demands that directors and officers must act for the proper purpose, Mr. and Mrs. Cassimatis again proven fails to do so. The must-have performed their duties wisely. While making a financial model and suggesting the same to the customers of the company they must have been careful about the fact that to who they are suggesting the model. Every customer who seeks for financial advise has some different financial condition, in such a scenario, it becomes the responsibility of financial advisors that to suggest the best possible option. However, in this case, Mr. and Mrs. Cassimatis did not do anything like this and cause of them, several customers overcame with losses (Price, 2018).

As required by section 180 (1), Mr. and Mrs. Cassimatis has not shown any care or diligence in their action as there decision proven wrong later on. For this reason, this can be stated that directors, in this case, have breached their duties.

Further, Applying the ruling of Diakyne Pty Ltd v Ralph Mr. and Mrs. Cassimatis are seems to be liable as no matter what they have thought, but their conduct brought an adverse impact to the customers of the company (financial) and to the company itself as it diminishes the reputation of the company.

Decision Of The Court

The decision given by the court is far significant to study. While hearings, the guilt directors of the case i.e. Mr. and Mrs. Cassimatis claimed that

1. Section 180 (1) states that a director owed a duty to act in the best mode in respect of a company but not a shareholder or client or customers.
2. In those cases where directors are the only shareholders of a company, no case of breach of director duty will be there as ratification of director’s act is very obvious. They submitted that in such a scenario, directors could do any act even outside of the provisions of the act (Lacey, 2016).

The court while giving decision has rejected both of arguments made by directors as under

1. Court decided that the term “interest of company” is not a narrow one and is not limited upto the interest of shareholders. The further court has also stated that while considering such interest, only financial loss should not be taken into account but the same also involves loss of reputation damages.
2. For the second submission of the directors, the court has stated that in shareholder can authorize the director to act anything even out of the area of the act, however, they cannot ratify such acts and therefore the risk of liability of directors cannot be prevented in such cases.

In the decision, Mr. and Mrs. Cassimatis was held liable for breach of duty under section 180(1) for not performing their duties with due diligence and care (Lewis Holdway Lawyers, 2017).

Impact Of The Decision On The Operation Of Companies In Australia

In the decision of the cited case, some important takeaway point has brought into the light. As mentioned above, that court while giving the decision of the case has stated that applicability of section 180 (1) is not only limited to the interest of company but also considers the interest of customers of a company, now the directors and officers are more careful and aware. Companies in Australia is now taking care of law more significantly. It was given in the decision that shareholder of a company cannot waive off the liabilities of officers or directors by ratification. Therefore the directors who are also the sole members of the company are now becoming more aware of the compliance. In a summaries way, this can be stated that the decision of the case has opened up the eyes of management of the companies in Australia and brought positive results in the field of compliances.

Conclusion

This case was related to the duties of directors and officers of the company. In the studied case, two of the directors of the company have breached their duties. This case is an important one to study while looking after director duty cases. The decision given in the case is also significant, as the same has brought positives results to the compliances area of under Corporations Act, 200

References

ASIC v Cassimatis (No 8) [2016] FCA 1023

AUDA. (2018) Summary Of Directors’ Duties. [online] Available from: https://www.auda.org.au/pdf/board-directors-duties.pdf [Accessed on 10/09/2018]

Austlii. (2018) Corporations Act 2001 – SECT 180. [online] Available from: https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s180.html [Accessed on 10/09/2018]

Austrian Institute of Company Directors. (2018) What are the duties of directors? [online] Available from: https://www.awlnsw.com.au/assets/Latest%20news/Duties%20of%20Directors.pdf [Accessed on 10/09/2018]

Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2

Diakyne Pty Ltd v Ralph [2009] FCA 721; 72 ACSR 450

Dwfoxtucker Lawyers. (2017) The ‘Stepping Stone’ Doctrine. [online] Available from: https://www.dwfoxtucker.com.au/2017/06/stepping-stone-doctrine/ [Accessed on 10/09/2018]

king V. A king & co. (1897) 14 TLR 98

Lacey, A., (2016) The risk of a director/officer of a corporation assuming vast responsibilities- ASIC v Classimatis (No 8) [2016] FCA 1023. [online] Available from: https://mccabecurwood.com.au/asic-v-cassimatis/ [Accessed on 10/09/2018]

Lewis Holdway Lawyers. (2017) Directors Duties: Duty of Care and Diligence. [online] Available from: https://www.lewisholdway.com.au/directors-duties-duty-of-care/ [Accessed on 10/09/2018]

Price, J. (2018) When are directors liable for breaches by the company? [online] Available from: https://asic.gov.au/regulatory-resources/corporate-governance/corporate-governance-articles/when-are-directors-liable-for-breaches-by-the-company/ [Accessed on 10/09/2018]

Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22

Shepherd, C., & Ridley, A. (2015). Company Law. Oxon: Routledge.

Smith, L., H. (2016) Storm Financial former directors breached law, federal court finds. [online] Available from: https://www.abc.net.au/news/2016-08-26/storm-financial-former-directors-breach-law-justice-finds/7790366 [Accessed on 10/09/2018]

Tills, M., and Wills, C. (2016) Australian directors found guilty of breaching duties following corporation’s breaches. [online] Available from: https://www.clydeco.com/insight/article/australian-directors-found-guilty-of-breaching-duties-following-corporation [Accessed on 10s/09/2018]

Tomasic, R. (2016) Insolvency Law in East Asia. Oxon: Routledge.

Wolters Kluwer. (2018) Corporations Act 2001, Section 181 Good Faith — Civil Obligations. [online] Available from: https://iknow.cch.com.au/document/atagUio485897sl14504551/corporations-act-2001-section-181-good-faith-civil-obligations [Accessed on 10/09/2018