Company Law: Analysis of Director's Duties and Shareholder Rights

This report provides a comprehensive analysis of company law, focusing on the landmark Storm Financial case and related legal principles. Part A of the report examines the case of Storm Financial Limited, where the court considered the interpretation of the duty of care and diligence owed by directors under section 180(1) of the Corporations Act 2001 (Cth). The analysis delves into the submissions made by both the plaintiff (ASIC) and the defendants (Storm's directors), the applicable law, and the court's decision, particularly regarding the breach of duty. Part B addresses the legal position of Kanye regarding the issue of shares and removal as a director, referencing relevant sections of the Corporations Act, including sections 136, 232, 233, and 234, and the implications of the company's constitution. The report explores the legal framework for changing a company's constitution, the powers of the court in relation to director's conduct, and the rights of shareholders. The report concludes by highlighting the significance of the case in clarifying the responsibilities of company directors and the importance of adhering to the Corporations Act.

Running head: COMPANY LAW
Company Law
Name of the Student
Name of the University
Author note

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Part A
Issue
In this case the federal court of Australia had to consider the interpretation of the duty of
care and diligence which the directors owe toward their companies under the provisions of
section 180(1) of the Corporation Act 2001 (Cth) (CA). The judges in this case had to determine
whether two directors who were also the only shareholders of the company can be held liable for
providing 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 Australian
Securities and Investment Commission were the plaintiff. Storm held an Australian financial
services license and indulged in providing financial services to clients on the basis of a model
which had been developed by one of its directors. The model provided for borrowing of the
clients against the equity they had in their homes, so that they could obtain a margin loan through
the use of such funds in order to make an investment in index funds along with the establishment
of a cash reserve1. The court had to determine whether such actions indulged into by the directors
accounted 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 their
duties and use their powers through the application of appropriate level of care and diligence
which would have been implemented by a reasonable person if they were in the shoes of the
1Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023
2 Corporation Act 2001 (Cth) Section 180(1)

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directors or officers of the company. The section further reads that for the contravention of this
section 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 the
company was viable and the contraventions made by the company could not be foreseen
by a reasonable person. The various submission made by them on this issue consisted that
the company that many professionals which included lawyers and financial advisers had
been advised by the company. It was also submitted by the company that they had been
subjected to review by ASIC, Compliance professionals along with its non executive
directors. Reliance was also made b y the directors to the fact that during the ten years of
its history the financial index off the company had never fallen. It was also submitted by
them that the only real reason for the failure of the model was the “Black Swan” event
namely GFC. However it was not alleged by the ASIC that there was a flaw in the model
used by the company if it could have been considered as aggressive. The submission
made by the ASIC related to contravention related to the model only to the extent it
included a particular class of people. The ASIC submitted that the duty under 180(1) was
breached by storm. It was provided by the ASIC that the duties had been breached by the
directors when the company was solvent, the two directors were the only shareholders
and 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 an
actual breach on the part of the directors was needed to contravene the provisions of
section 180. The claim made by ASIC was based on the fact that the directors had
3Corporation Act 2001 (Cth) Section 1317E

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actually 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 breach
was mandatory to constitute the contravention of section 180(1) however the proceedings
of the courts have been done on this basis. Thus the submission of the ASIC had been
rejected by the court which stated that the actual breach by directors was necessary to
contravene 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 the
a norm of conduct is prescribed by the s180(1) which is different from the benefit of the
corporation so the duty extends to the world at large. The submissions of the directors
had been accepted by the court, however it noted that the interest of the corporation must
not be interpreted in a narrow manner and thus must not be restricted to the interest of the
shareholders alone and in addition not only financial losses but reputational damages are
also considered as losses for the corporation.
4. It was in addition submitted by the director that a director who is the only owner of the
corporation is not liable to the contravention of section 180(1) of the CA. the basis of the
submission was that the shareholders and the directors have the sole right to determine
the risk the corporation should take in order to make profits. The directors submitted that
sole directs cannot breach section 180(1) as it is implied that the ratification of the act can
be done by the directors where they are the only shareholders. The submission of the
directors in relation to this point had been rejected by the court. The court in relation to
the submission ruled that such submission cannot be supported as per the wordings and

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context of s180 (1) of the CA, and thus could not be authorized. Acts which are not
consistence with the CA may be authorized by the shareholders but they have no power
to ratify them.
Decision of the court:
It was found by the court that directors of storm had contravened the duty owed by them
under section 180(1) of the CA. The assertion of the court was based on the fact that a reasonable
director in the same circumstances would have been aware that the sections of the CA would be
contravened in the given situation and would bring detrimental consequences for the company.
The test as provided by section 180 (1) of CA was applied by the court to determine
whether reasonable care had been exercised by the directors in relation to the discharge of their
duties. it was provided by the court that in order to properly implement the test all circumstances
related to the cases have to be taken into consideration which included the foresee ability of the
risk of harm with respect to the interest of the company, the degree of the harm the benefits
arising out of the directors conduct and the burden imposed on the company to mitigate the
foreseeable harm.
It was found by the court that the Corporation Act had been breached by the directors of
storm as they provided financial services in accordance to the model in context to clients of a
vulnerable category which had been highlighted by the ASIC and this can be said because:
A director who would have acted reasonably in the same circumstances which the
company was in, along with considering the duties of the existing directors of storm would have
had the knowledge that it is very likely that the sections of the CA would be breached if he or she
used his or her powers to permit or cause the model provided by storm to be made applicable on

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the clients who were pleaded in class by the ASIC and specifically those investors who neared
retirement or retired with limited assets and income.
It was provided by the court that the breach which the company was alleged with was not
only foreseeable but any reasonable director in the place of the existing directors would have
considered them as most likely. It was further analyzed by the court that the conduct which the
directors indulged in was a singular breach of each of their duties and not many breaches
consistent with the count of investors who made up the classes of vulnerable investors. It was
further conceded by the ASIC that only one breach had been made by both the directors.
It was considered by the court that although the directors acted honestly, and had a
genuine views that “genuinely held the view that capital loss could never occur with index fund
investment in the Storm model”, it would not be possible for them to evade the liability under
section 1317s of the CA as they had significant roles to play in the company along with
seriousness of contraventions of the storms.
The issue of liability had only been dealt with so far by the judges in relation to this case
and further proceedings would be held in order to determine the liabilities of the directors. The
case signified that the directors of the company which is solvent and where they are only
shareholders are liable to breach the duty of care and diligence if their actions contravene the
provisions of CA.

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Part B
Issue 1
Legal position of Kanye with respect to the issue of shares and removal as a direct
Rules
The corporation act section 136 provides that the constitution of a company may be
changed through the passing of a special resolution4.
It is further provided by section 136(3) that a special resolution would not have any effect
if the constitution of the company has a further requirement which has to be satisfied in order to
modify or repeal the term.
In addition section 136(3) states that the further requirement as described in 136(3) can
also be modified but only if the requirement is complied with5.
Section 232 to 234 of the CA deal with operative conduct of affairs directors of the
company. As provided by section 232 the court has authority to provide any order with respect to
Section 233 in case the activities in relation to the company or a proposed or actual actor
omission or a proposed or actual resolution by the company members is either detrimental to the
benefits of the members of the company as a whole or unfairly prejudicial oppressive or
discriminatory with respect to a member or members within any capacity6.
4Corporation Act 2001 (Cth) Section 136
5Corporation Act 2001 (Cth) Section 136(3)
6Corporation Act 2001 (Cth) Section 232

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What is actually an affair of a body corporate is defined in section 53 of the CA. The
section can be summarized by stating that any actions taken in relation to the company can be
deemed as affair of the company7.
Section 233 of the CA states that any order can be made by the court in relation to
circumstances provided under section 232 which may include the winding of a company,
modification for repairing the existing constitution of the company, restraining and director from
engaging a specified act, on providing orders requiring a person to do a specified act8.
As provided by section 234 of the CA any member of the company holding in shares is
eligible to obtain order under section 233 even if such member in certain circumstances have
ceased to be the member of the company9.
Application:
The constitution of Koala through its close 9k provides that Kenny, Keith, Khalid and
Kylie has to be the directors of the company at all times.
A provision of the Constitution of a company can only be changed through the passing of
the special resolution. A special resolution is passed by two third majority of the total members.
In this particular case where there are four directors the directors other than Kanye have the
power to pass a special resolution.
In addition, according to the provisions of section 136(3)of the CA even a special
resolution is not valid if an existing provision of the Constitution is not complied with. Therefore
as the constitution of Kuala provides that all for directors have to be the directors of the company
7Corporation Act 2001 (Cth) Section 35
8Corporation Act 2001 (Cth) Section 233
9Corporation Act 2001 (Cth) Section 234

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all the time. The other the directors do not have the power to remove Kanye from her position as
Clause 9k clearly states that the four must be the directors of Koala all the time.
In addition the actions which the directors are indulging in to raise the capital of the
company and not Kanye the opportunity to be a part of such raise can be seen as oppressive
action on the part of the other three directors with respect Kanye. This action is set to provide the
other three directors an increased shares in the company which would lead to proving them
increased control over the affairs of the company. They also had the duty to consult Kanye while
such decision was being made as all executive directors of a corporation has the right to be
consulted.
Another operation action which has been identified in this scenario is that the other three
directors have suspended providing dividend on shares and increased their salaries. This action
taken by the directors can bring significant detriment to the position of Kanye as a shareholder of
the company as not only would Kanye be able to receive dividends with respect to the profit
made by the company, the best interest of the company would also not be ensured as the other
three would charge a high remuneration.
Conclusion
Thus, in the given circumstances Kanye has the right to bring and action against the other
three directors for a legal amendment of the constitution in relation to section 136(3), along with
action for oppressive conduct against members under section 233 of the CA.
Issue 2

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The issue has to be determined in relation to the provided scenario is that whether the two
directors usually operate business with respect to a new company named Koala2.
Application
A director is a person who is entrusted to take care of the functions of a corporation. They
are impossible several rights and responsibilities in Australia through the Corporation Act. In
relation to this particular scenario three specific duties of directors as provided to Section 181 to
183 of the CA are discussed in this section along with a few case law examples setting out
actions of directors’in relation to a company.
Section 181 of the CA clearly sets out that the actions of the directors towards the
Corporation must be in good faith and to ensure best interest of the corporation. The duty of best
interest is interpreted by the court in broad aspect. The directors must always be honest towards
organization they are managing and their actions should always be streamlined towards ensuring
the best possible result for the company10.
Section 182 of the CA expressly sets out that no director of the company has right to use
the position they are in in such a way so as to bring detriment to the existing company. Is there is
any conflict of interest it is the duty of the directors to always inform the other directors about
such interest and to give priority to the benefits of the company over personal benefits. The duty
not to use the position in an in proper way can be contravened by the directors even if they did
not have the intention to do so11.
10Corporation Act 2001 (Cth) Section 181
11Corporation Act 2001 (Cth) Section 182

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As provided by section 183 of the CA any information which the directors of the company can
access and relation to that company should not be used by them to give any personal benefit at
the cost of the company12.
As provided by the case of ASIC v Vizard13 the director who used the confidential information
obtained from the organization managed by him Contravened section 183, 182 and 181 of the
CA. This was because the information was used improperly to gain personal benefits at the cost
of the company.
In the case of Cassegrain v Gerard Cassegrain & Co Pty Ltd14it was found by the Court that the
directors of the company violated the duty to act in its best interest and not to use position
information in in in proper way by selling the shares of the company at a low cost to their wife
and daughter respectively.
Application
It has been provided by the scenario that two out of four directors of Koala namely Keith
and Kylie have taken the initiative to form a new company named Koala 2. The new company is
dealing with one of the same products which is dealt by Koala. They decided to sell souvenirs
which was also sold by Koala into the foreign markets by purchasing it from the local and
making massive profits.
As the directors of Koala it was the duty of Keith and Kylie to acting the best interest of
Koala. In the circumstances the best interest of Koala would have been insured is both the
directors would have taken the initiatives to sell the souvenirs in the foreign market under the
12Corporation Act 2001 (Cth) Section 182
13[2005] FCA 1037
14[2015] HCA 2

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name of Koala. However such actions were not taken by them and therefore the duty to act in the
best interest of the company provided to Section 181 of the CA was violated by them.
In addition they also used the position and information they gained access to as the
directors of Koala. If they would not have been the directors of Koala they would not have had
the information about selling such souvenirs which was related to the business of Koala into the
foreign markets. Thus it can be provided that Keith and Kylie have violated section 182 and 183
of the CA by making improper use of position and information of the company
As discussed in the cases above under no circumstances can the directors’ act in such a
way which would bring detriment to the company for personal benefits. The actions which have
been indulged into by Keith and Kylie of opening a new company under the name of Koala 2 is
deemed to bring detriment to Koala as it would not be able to make the profit it is entitled to.
Therefore Kanye or Khalid can bring actions against Keith and Kylie for the breach of
section 181 to 183 of the CA. The bridges of this section results in civil penalties as provided
under section 1317 E of the CA. Criminal penalties are also applicable to these sections if it is
found that the directors were fraudulent or reckless towards reaching the provisions of section.