LAWS19032 | Company Law - Assignment

Added on -2020-02-24

In this case, the Australian federal court had to decide how to interpret section 180(1) of the Corporations Act 2001, which imposes a duty of care and diligence on directors toward their corporations. The defendant, in this case, was Storm Financial Limited, and the plaintiff was the Australian Securities and Investment Commission.

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Running head: COMPANY LAWCompany LawName of the StudentName of the UniversityAuthor note
1COMPANY LAWPart AIssue In this case the federal court of Australia had to consider the interpretation of the duty ofcare and diligence which the directors owe toward their companies under the provisions ofsection 180(1) of the Corporation Act 2001 (Cth) (CA). The judges in this case had to determinewhether two directors who were also the only shareholders of the company can be held liable forproviding detrimental financial advice to the clients of the company in relation to section 180(1)of the CA. In this case Storm Financial Limited (Storm) were the defendants and the AustralianSecurities and Investment Commission were the plaintiff. Storm held an Australian financialservices license and indulged in providing financial services to clients on the basis of a modelwhich had been developed by one of its directors. The model provided for borrowing of theclients against the equity they had in their homes, so that they could obtain a margin loan throughthe use of such funds in order to make an investment in index funds along with the establishmentof a cash reserve1. The court had to determine whether such actions indulged into by the directorsaccounted to the breach of duty under Section 180(1) of the CA2. Applicable law The major law which was applicable in relation to this case is Section 180(1) of the CA.According to the section a director or any other officer of the company has to discharge theirduties and use their powers through the application of appropriate level of care and diligencewhich would have been implemented by a reasonable person if they were in the shoes of the1Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 10232 Corporation Act 2001 (Cth) Section 180(1)
2COMPANY LAWdirectors or officers of the company. The section further reads that for the contravention of thissection civil penalties prescribed by section 1317E of the CA are applicable3. Submissions made by the parties 1.The directors of Storm made a submission before the court that the model used by thecompany was viable and the contraventions made by the company could not be foreseenby a reasonable person. The various submission made by them on this issue consisted thatthe company that many professionals which included lawyers and financial advisers hadbeen advised by the company. It was also submitted by the company that they had beensubjected to review by ASIC, Compliance professionals along with its non executivedirectors. Reliance was also made b y the directors to the fact that during the ten years ofits history the financial index off the company had never fallen. It was also submitted bythem that the only real reason for the failure of the model was the “Black Swan” eventnamely GFC. However it was not alleged by the ASIC that there was a flaw in the modelused by the company if it could have been considered as aggressive. The submissionmade by the ASIC related to contravention related to the model only to the extent itincluded a particular class of people. The ASIC submitted that the duty under 180(1) wasbreached by storm. It was provided by the ASIC that the duties had been breached by thedirectors when the company was solvent, the two directors were the only shareholdersand directors of the company and there was no dispute in relation to the management. 2.Other issues which were adjudged by the court in relation to this case are whether anactual breach on the part of the directors was needed to contravene the provisions ofsection 180. The claim made by ASIC was based on the fact that the directors had3Corporation Act 2001 (Cth) Section 1317E
3COMPANY LAWactually breached the provisions of the CA as a “stepping stone” towards section 1801(1).The court expressed that there was serious doubt on the submission that an actual breachwas mandatory to constitute the contravention of section 180(1) however the proceedingsof the courts have been done on this basis. Thus the submission of the ASIC had beenrejected by the court which stated that the actual breach by directors was necessary tocontravene section 180(1) of the CA. 3.It was submitted by the directors of storm that the duties existing under section 180(1)were solely owed to the company. To the contrary it was submitted by the ASIC that thea norm of conduct is prescribed by the s180(1) which is different from the benefit of thecorporation so the duty extends to the world at large. The submissions of the directorshad been accepted by the court, however it noted that the interest of the corporation mustnot be interpreted in a narrow manner and thus must not be restricted to the interest of theshareholders alone and in addition not only financial losses but reputational damages arealso considered as losses for the corporation. 4.It was in addition submitted by the director that a director who is the only owner of thecorporation is not liable to the contravention of section 180(1) of the CA. the basis of thesubmission was that the shareholders and the directors have the sole right to determinethe risk the corporation should take in order to make profits. The directors submitted thatsole directs cannot breach section 180(1) as it is implied that the ratification of the act canbe done by the directors where they are the only shareholders. The submission of thedirectors in relation to this point had been rejected by the court. The court in relation tothe submission ruled that such submission cannot be supported as per the wordings and

Finally, as a result of the bridges in this section, civil penalties are imposed under section 1317 E of the CA. If it is determined that the directors acted fraudulently or recklessly in reaching the section's requirements, criminal sanctions may be imposed.

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