Corporation Law and Directors' Duties

This assignment delves into the importance of corporation law in guiding directors' duties and responsibilities. It examines the consequences of breaching duty and care in the business operations of a company. The analysis is based on the ASIC v Cassimatis case, which sets a new rule for breach of duty by directors who are also shareholders. The report concludes that corporation law plays a crucial role in ensuring directors follow legal requirements and take necessary risks to earn profits.

Corporation Law

Table of Contents
INTRODUCTION ..........................................................................................................................1
MAIN BODY...................................................................................................................................1
a) Introduction of the case study.................................................................................................1
b) Duties and responsibilities breached by directors and reasons for such breach.....................2
c) Analysis of court or tribunal's decision in view of the Corporation Act.................................3
d) Relevance of the decision to the development of Australian Corporation law or the impact
of decision on Australian company.............................................................................................5
CONCLUSION................................................................................................................................5
REFRENCES...................................................................................................................................6

INTRODUCTION
Corporation Act is the principal legislation regulating companies in Australia. It regulates
matters such as the formation and operation of companies, duties of officers, takeovers and
fundraising. Australian corporation law has historically borrowed heavily from UK company
law. The legal structure consist of a single, national statute, the Corporation Act, 2001. The
statute is administrated by a single national regulatory authority, the Australian Securities and
Investments Commission (Allen and Kraakman, 2016) . In this report a case law ASIC v
Cassimatis [2016] is discussed to explain regarding duties and responsibilities of officers in
business. Implication of this case law on Australian Corporation law.
MAIN BODY
a) Introduction of the case study
ASIC v Cassimatis [2016]:
Strom Financial Limited was and Australian financial service licence holder and provide
financial services according to a model developed by Mr. Cassimaties one of the director in
Strom. As per this models consumers borrow funds against the equity in their homes, obtaining a
margin loan and using funds to invest in index funds and establishing a cash reserve. Model
developed by director is applied to all the consumers provided that they have the capacity to
borrow. Because of this “double gearing” model inverters serves losses. Mr and Mrs Cassimatis
possess extraordinary control over operations of Strom.
Australian Securities and Investment Commission commenced proceedings in the year
2010 against Mr and Mrs Cassimatis for breach of their duties. As director of the company it was
their duty to take diligence and care of the company (ASIC v Cassimatis, 2016). ASIC alleged
that the directors of the company breached their duties in circumstances when Strom was
solvent. Mr and Mrs Cassimatis were only directors and shareholders of the company. There was
no dispute regarding management of Strom in accordance with there informed wishes of the
shareholders. Allegation by ASIC was to provide financial services according to the model
which is not suitable to its retail consumers. As services are provided to investors who is close to
retirement and possess limited assets and no way to recover any loss. Requirement of providing
best and tested advise to clients were breached as per Corporation Act. ASIC alleged the
directors breached as per section 180(1)by- causing or permitting Strom to provide advise to
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investor according to the model which caused Strom to contravene the Corporation Act.
Providing financial advise in a manner which contravened the Corporations Act. ASIC alleged
that Strom's exposure to risk was greater than that which a director acting with care and diligence
would have allowed. This allegation is imposed because it was directors duty and responsibility
to be reasonably aware regarding contraventions made by company in Corporation Act.
b) Duties and responsibilities breached by directors and reasons for such breach
The Corporations Act, 2001 requires that a director of company or other officer exercise
their power and discharge their duties with care and diligence as per section 180. Directors duty
are a series of statutory, common law and equitable obligations owned primarily by members of
board of directors to the corporation that employs them. Director owe duties to the corporation
not to individual shareholder or employees of the company (Bottomley, 2016). Directors core
duty is to remain loyal to the company with high skill, care and diligence. Act of directors must
be in good faith to promote the success of the company. Conflicts must be avoided by the and
must retain discretion . These are fiduciary duty that director of the company must possess.
Statutory duties of director as per Corporation Act, 2001 are:
 Section 180: To act with care and diligence
 Section 181: To act in good faith and best interest of the company
 Section 182: Not to misuse position to gain advantages
 Section 183: Duty not to misuse any information to gain advantage
The court found that Strom had breached the Corporations Act by providing financial
services according to the model that was not right. Directors had breached duties of care and
diligence because a reasonable director of a company in Strom's circumstances were Mr and Mrs
Cassimatis. It was their responsibility to be aware of a strong likelihood of contravention of the
Corporation Act. Directors of the company was in the power to introduce and apply model that is
used for financing its regular clients. These investors were retired or near retirement with
minimum income and few assets left with them. While involving in the case court found that
breach in law or act made by Strom were not mealy reasonable (Welch and et.al., 2016).
Conformation regarding breach of duty is said on the basis that investors are advised on
the basis of “Strom Model”. This advise is provided in such manner that leads to contravention
of certain sections of Corporation Act including section 945A(1). It is required that financial
advise provided to client as per this model if-
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 Information is obtained from client in relation to their relevant personal circumstances,
the providing entry has given such consideration and conduct such investigation of
subject matter of advise as is reasonable in all the circumstances (Kraakman, 2017).
 Advise provided to client is appropriate to the client in regards to that consideration and
investigation
Strom Model of investment which Mr and Mrs Cassimatis developed in board summary it
involves the concept of borrowing to invest more then investors prepared to invest for a period of
five years or more. This strategy enforces investors to borrow against security of homes, obtain
marginal loan and using funds to invest in the company. Main reason of such breach is
negligence of duty which enforces director to take care and diligence while performing any
activity. Introduction of the model was not advised to be used in the organisation but it was not
considered and taken into consideration.
c) Analysis of court or tribunal's decision in view of the Corporation Act
When this issue is filled in the court and judgement is passed by the judges before that
discussion of the following issues are considered to make decision. These issues are as follows-
 Whether there is an actual breach of duty by Strom requires directors of the company to
breach section 180(1)
Australian Securities and Investment Commission file its case on the basis that Strom had
actually breached Corporations Act as a “stepping stone” to breach by directors of section
180(1). Court possess doubts if actual contravention was a requirement for a breach by a director
of section 180 but proceeded on the basis that actual resistance was required (Rutledge, 2014).
 Whether the duties under section are owned solely to the company
The directors of the company submitted that duties under section 180(1) were owned
solely to the company. The court accepted the directors submission but noted that interests of the
corporation should not be construed narrowly and should not be limited to the interests only of
the shareholders.
 Whether directors can be liable for a breach of section 180(1) where they are the only
shareholders of a solvent company
The directors submitted that director who is a sole shareholder of a solvent company
could not breach section 180(1) by conduct likely to contravene the Corporations Act. As
directors of the company it is responsibility of Mr and Mrs Cassimatis to take every possible
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step that takes company towards profitability. Approval to directors decision is given by
shareholders of the company and in the given case Mr and Mrs Cassimatis are only shareholders
of the company. Any risk that results in profits for company is taken by shareholders and
directors. Directors plead on the basis that even if contravention of Corporations Act is done
initially then also performance of director is in care and diligence. As in the present case scenario
directors and shareholders are same so rectification of the directors act is implicit (McQueen,
2016).
Edelman J who decided the this case found that Mr and Mrs Cassimatis were both
integrally involved in almost every aspect of Storm's business. Further they exerted an
extraordinary degree of control over Strom including over the financial advisers and the process
for giving advise concerning the Strom model. It was observed by the judge that although there
was a desire to encourage suggestions, communication or view idea. It was found that Strom had
committed civil contraventions of Corporations Act. In terms of consequence of breach it is
discovered that although many of the relevant investors suffered significant life altering, losses
and these were neither necessary nor sufficient for Strom's breach of section 945A. In terms of
the burden of alleviating action it would have been simple to take precautionary measures to
attempt or to avoid this model. As per provisions of the law if a person who has contravened a
civil penalty must be reviled on the basis of acting honestly and possess a fair excuse for any
contravention (Rawhouser, Cummings and Crane, 2015) .
As the the Corporations Act directors of a solvent company in which they are the only
shareholders may breach their duties of care and diligence if their conduct as director causes the
corporation to contravene the law. ASIC will pursue proceedings in this circumstances
particularly when the breach of the corporation adversely impact the corporation's clients. In
ASIC v Cassimatis directors breach only one duty and they are the sole directors and
shareholders of the company. So breach of duty by directors is forgive by the court.
d) Relevance of the decision to the development of Australian Corporation law or the impact of
decision on Australian company
When any law suit is filled and decision of the case is held by the judges with keeping
different laws and previous related to the case that has held earlier. Decision of the case that is
decided by judges helps in development of Corporation Law. Development takes place as law is
defined and prescribed earlier and day by day different cases regarding breach of the law takes
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place. Decision of the cases helps Australian Corporation Law to modify its sections or rules that
are pre defined (Means, 2017). As the case involves breach of directors duty and responsibility
of care and diligence. This helps Corporation law to develop as per new scenario to deal with
latest issues that are developing day-by-day. As corporate sector is growing more rapidly and
companies are biggest part of this development. Decision held in ASIC v Cassimatis case law
defines that board of directors can breach duty of care and diligence if they are the only
shareholders of the company. This was a new rule or decision added to corporation that help it to
be more reliable as it possess all the latest updates.
This decision possess impact on other Australian company as decision was for breach of
duty that was neglected as per law. This makes company to be aware regarding any breach in the
law made by nay officer or director of the company. Breach that is allowed as per law in a
particular circumstances can be avoided by the companies. Other breach must be taken into
consideration and decision brings attention of other company towards Corporation Law.
Companies are now more aware regarding rules and regulations that needs to be followed by
them to avoid any legal contravention.
CONCLUSION
From the above report it is concluded that Corporation Act plays important role in
guiding directors or officers of the to perform their duties and responsibilities as per law.
Directors of the company takes decision regarding operations of the business and all the legal
requirements must be followed by the them while performing their duties. When any breach of
duty and responsibility is done by directors than punishments will be provided to them for the
breach. As per Corporation law it is the directors duty to follow all the legal regulations and take
required risk on behalf of the company to earn more profits.
REFRENCES
Books and Journals
Allen, W. T. and Kraakman, R., 2016. Commentaries and cases on the law of business
organization. Wolters Kluwer law & business.
Bottomley, S., 2016. The constitutional corporation: Rethinking corporate governance.
Routledge.
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Kraakman, R., 2017. The anatomy of corporate law: A comparative and functional approach.
Oxford University Press.
McQueen, R., 2016. A Social History of Company Law: Great Britain and the Australian
Colonies 1854–1920. Routledge.
Means, G., 2017. The modern corporation and private property. Routledge.
Rawhouser, H., Cummings, M. and Crane, A., 2015. Benefit corporation legislation and the
emergence of a social hybrid category. California Management Review. 57(3). pp.13-
35.
Rutledge, T. E., 2014. A Corporation Has No Soul-The Business Entity Law Response to
Challenges to the PPACA Contraceptive Mandate. Wm. & Mary Bus. L. Rev.. 5. p.1.
Welch, E. P. and et.al., 2016. Folk on the Delaware General Corporation Law: Fundamentals.
Wolters Kluwer Law & Business.
Online
ASIC v Cassimatis. 2016. [Online]. Available through:<https://mccabecurwood.com.au/asic-v-
cassimatis/>
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