Care And Diligence Towards His Company

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Care And Diligence Towards His Company

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Care And Diligence Towards His Company

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Question:

Discuss About The Care And Diligence Towards His Company?

Answer:

Introduction
The case, which is researched for in this task, is based on the Director’s breach of duty under the Corporations Act. The aim of the task is to throw a light upon the facts, which led to the breaching of a director’s duty of care and diligence towards his company. The act specifies certain conditions in which the directors are bound to exercise due care and diligence. The violation of which can cause the director to be legally answerable to the court. Thus, the conditions in which the directors of the company acted were in controversy with the provisions in the Corporations Act and therefore, the court’s decision is important in light of the case[1].
Storm Financial Limited was a financial service provider company who provided financial advice to the investors. Mr. and Mrs. Cassimatis the, directors of the company were the sole shareholders of the company too. Whilst, they were involved in the various activities of the company, Mr. Cassimatis generated a model to be invested upon. The investors of the company who were retired or near to retirement made the investments. These investors had assets and resources of their investment in limited quantity. The investment entailed the investors to borrow the money against their homes. This would happen when the investors would borrow the money against their homes to invest in the index funds. This was held under contemplation in the court where, it was thought to have been an incompetent step by the directors who ought to be more responsible.
The court further claimed that a reasonable director would have had thought about the conditions this model would bring the investors in. A reasonable director in his right mind would think about the likelihood of the retired or near to retirement investors who would be prone to high risks involving their houses mortgaged against their investment. This was thought to have been inappropriately advised by the directors. In conclusion, the court discussed about the director’s duties and the breach of the same in this case. The judge purported that the duty of care and diligence must have been the priority in this case and not the financial decision on the advice. This could eventually lead to the reputational harm or by an extent a loss of license due to failure of complying with the laws.

Breach of the duties by the director
The main allegation which had been brought by the ASIC against the directors in this case was that they have breached section 180(1) of the Corporation Act (CA). The section provides that as an officer or a director of a company a person must act in the best possible interest of the company and in good faith. The section extends to stating that the actions of the directors of officers of a specific company would not be taken as directed towards the company’s best interest if a reasonable person in the same position of such director or officer would not have taken such actions in similar circumstances[2].
Thus the AISC alleged that Mr and Mrs Cassimatis did not direct their actions to the best interest of the company as they were involved in providing advice to disadvantaged old people through a financial model created by them[3].
Section 945A and 1041E of the CA had been breached by the directors or not also had to be determined by the case. Section 945 provides that there must be a reasonable basis to provide advice to the clients by the corporation[4]. Section 1041E deals with misleading or false statement made during the course of business. The court had to determine the definition of the “subject matter of the advice” in relation to section 945A and the meaning of “likely to induce” according to section 1041E of the CA[5]

Analysis of the case
In this case the main allegation which had been brought by the ASIC was that the directors of storm had breached section 180(1) of the CA. This was because they had not complied with the provisions of the CA in relation to section 945A and section 1041E of the legislation.
The judge in this case provided that it agreed to the fact that the directors have breached the provisions of section 945A of the CA in relation to various investors by not having a reasonable basis in relation to the subject matter of the advice[6].
The judge in this case provided that the plaintiff was not able to establish that the directors of the company had breached section 1041E of the CA as few of the investors who had been provided advice were not retail investors and there was also lack of evidence that some of the investors had retired or were about to retire[7].
The court coming to the main issue of the case provided applied the test provided by section 180(1) in order to determine whether such section had been breached by the directors or not. The allegations were that the directors had breached section 180(1) of the CA by allowing the company to give advice to the investors based on the model developed by them. In addition the section was alleged to be breached as section 1041E and 945A were violated while providing the advice. Through the application of the test the court had to find out whether a prudent extent of care and diligence were observed by the directors of the company towards discharging their duties. it was provided by the court that for the purpose of determining the question of breach all circumstances such as the magnitude of harm, the benefits accruing to the shareholders, the burden to mitigate the risk and the foreeablity of the harm have to be considered. It was found by the court upon the analysis of the factors that the directors as alleged by the ASIC have violated the provisions of section 180(1) of the CA. This was based on the fact that the breach of section 945A of the CA was reasonably foreseeable by the directors and thus they have breached section 180(1) of thee legislation. The actions would have also predictably caused significant harm to the consumers and most importantly a reasonable person in the same situation would have not violated any provisions of the CA. the violation of law cannot be held reasonable under the business judgment rule as it can never be in the best interest of the company.
The court also stated that the circumstances for determining a breach of section 180(1) includes the skills and experiences, the terms and conditions which they had accepted to work as directors of the company. The way in which the responsibilities of the organization were allocated to directors along with the reporting system and information flow within the company was also considered by the court[8]. in addition it was statd by the judge that the directors would not have required any expert advice for the purpose of concluding that the model was not relevant to provide advice to the investors. The most relevant reason provided for this purpose by the court was that the unnecessarily including family home in form of investment asset was not appropriate by the directors[9].
In addition it was also provided by the court that even taking into account that the directors of storm acted in a honest manner “genuinely held the view that capital loss could never occur with index fund investment in the Storm model” 815 the actions were not eligible to be excused in relation to section 1317s of the CA as they had important roles and responsibilities in relation to the company and also the contravention made by them was very serious.

In addition the court had to determine the question that whether an actual breach is necessary for the directors for being liable under section 180(1) of the CA. The ASIC had made an allegation that the directors have actually breached section 180(1) of the act as a “stepping stone” in relation to the violation of the provision. It was provided by the court that it did not have reasonable cause to believe that an actual violation was necessary requirement for non compliance with s180 (1) by a director and proceeded based on the fact that such a breach was not necessary.
The court also had to decide that whether the duty arising under section 180(1) of the Act was in relation the company. It was submitted by the directors of storm that according to section 180(1) of the Act the duty arising out of the provisions is only in relation to the company and not to the public. Whereas to the contrary AISC had provided that the duties are not only extended to the company but also to the public.
The court in this case did not accept the submission of the AISC in relation to the question. It was provided by the court that with respect to the clear wordings present in the legislation in relation to section 180(1) the duty of the directors is only limited to that of the company. However it was also provided by the court that although a duty under the section does not extend beyond the company, the duty includes not only financial losses but also the loss of goodwill incurred by the company. Thus if the company gets a bad name in the society the duty under section 180(1) of the CA is said to be violated by the directors.
Moreover the court had to determine the question that can section 180(1) be violated by directors who are also the only owners and shareholders of the organization. it was submitted to the court by the directors that directors who are the only owners and shareholders of an organization cannot be held liable for the violation of section 180(1) of the CA. In order to support their submission the directors provided that the risk in relation to an operation has to be determined by the directors and shareholders of the company and whether the organization is ready to take such risk for the purpose of making profits. It was in addition given by the directors that it should be considered that the directors have not violated the duty of care and diligence even if the directors have contravened any section of the CA as they are the only shareholders as in such case there would be implied ratification of the actions of the directors[10]. However such a submission was rejected by the court stating that the wordings of section 181(1) are not in accordance to the submission made by the directors. Although the shareholders may allow actions which are not in accordance to law but they do not have to power to ratify such actions[11].

Relevance of the decision
The main points which can be derived from this case are that the directors of the company cannot be forgiven under section 1317s of the CA if it is found by the court that they have a significant role to play in the organization and the contravention made by them are very serious even if they had acted honestly.
The case signifies that the directors of a company who are also its only shareholders can authorize an act which is contrary to that of law, but they do not have the power to ratify such acts as the section 180(1) does not provide for any ratification.
The duty which is owed by the directors of the company under section 180(1) although extending only to the company includes not only financial losses but also the loss of goodwill incurred by the company. Thus if the company gets a bad name in the society the duty under section 180(1) of the CA is said to be violated by the directors.
An actual breach of section 180(1) is not required for its violation and thus even if actual loss is not caused the directors can be held liable. In addition it was also signified by the court that the breach of any law is always a contravention of section 180(1) of the CA.

References
Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023
[1] Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023 at [1]
[2] Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023 at [2]
[3] Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023 at [3]
[4] Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023 at [17]
[5] Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023 at [16]
[6] Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023 at [668]
[7] Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023 at [836]
[8] Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023 at [676]
[9] Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023 at [682]
[10] Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023 at [496]
[11] Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023 at [499]

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