Analysis of Company Law: ASIC v Cassimatis and Koala Pty Ltd Cases

This report provides a comprehensive analysis of two key company law cases: ASIC v Cassimatis and Koala Pty Ltd. Part A focuses on ASIC v Cassimatis, examining the interpretation of Section 180(1) of the Corporations Act 2001 concerning directors' duties of care and diligence. The analysis covers the issues before the court, the applicable law, the submissions of the parties, and the court's decisions, particularly regarding the standard of care required of directors and the scope of their responsibilities. Part B addresses Koala Pty Ltd, analyzing issues related to a share issue, director removal, and the application of the Corporations Act, including Sections 136, 232, 233, and 234. The report assesses Kanye's potential legal action against other directors, considering constitutional provisions, special resolutions, and the conduct of affairs within the company. The report provides a detailed examination of corporate law principles, director responsibilities, and shareholder rights within the context of these cases.

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

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Part A
ISSUE
In the case of Australian Securities and Investment Commission (ASIC) v Cassimatis1
the issue before the high court of Australia was to find out the proper meaning of the duty which
is imposed on the directors of an organization through Section 180(1) of the Corporation Act
2001 which respect to care and diligence2. The court in relation to the case were asked to find out
that the directors of the company who also held the overall share capital of the company can be
prosecuted under section 180(1) for using a self made model to provide advice to the clients to
their company belong to a particular class. The advices in context of the case had been provided
to those people who did not have much assets or source of income and were nearing retirement
or had already retired. The advice was not provided in according to a reasonable director as
alleged by the Australian Securities and Investment Commission. The company in the context of
this case was Storm Financial Limited (the company) and the two sole directors of which were
the defendants. The advice which was provided by the company made them undertake a loan
against the value of their homes and further invest such loans to a specific index fund. The court
had been provided a a specific few issue to which it had to address which are
1. Whether the duty under section 180(1) with respect to care and diligence has been
violated by the directors of the company or not
1 (No. 8) [2016] FCA 1023
2 Corporation Act 2001 (Cth) Section 180(1)

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2. In order to be held for violating section 180(1) of the CA whether it has to be proved that
the directors actually violated the section.
3. Whether the duty which is imposed on the directors through section 180(1) id only
limited to the company and its shareholders or to the society at large
4. Whether the directors who are the only shareholders of the company can be prosecuted
for the violation of section 180(1) or not
The Applicable law
The functions of the directors are to set objectives for the corporation and to form and
supervise plans with respect to the achievement of such objectives. While performing these
functions a duty to act with care and diligence is imposed on the directors.
Although this duty is imposed on the directors through common law, the corporation act
section 180(1) also depicts that the directors of the company must discharge their function and
use their powers which would have been done by a hypothetical reasonable director in case:
The hypothetical director was the director of the same company with respect to the exact
same situation. The director would have been occupying the same office which is actually
occupied by the directors in context and must be having the exact same responsibilities like
them.
In the case of Australian Securities and Investments Commission (ASIC) v Mariner
Corporation Ltd3 the courts used a test similar to that of the objective test, to determine whether
the an imaginary reasonable director would have been more cautious towards the actions taken
by them to avoid unnecessary risk and to ensure the best possible outcome for the corporation.
3 [2015] FCA 589

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In the case of Australian Securities and Investments Commission v Healey4 it had been provided
by the court that whether or not the duties of the directors had been met is determined through
analyzing the nature and size of the company’s business operations. The structure of the board
along with the work allocated to the directors is also taken into account by the court.
The experience and skills which directors have are also used to analyze the breach of
duty if the skills had been used as a criterion for the appointment as directors. Along with civil
penalties which are imposed upon the directors with respect to section 1317E of the CA, a claim
for negligence can also be brought against such directors who contravene the duty of care and
diligence5.
Submissions of the Party
In relation to the breach of section 180(1) of the CA by the directors, a submission had
been made by the directors of the company that the model in context of this case used to
provided advice to the clients was feasible and therefore it was not possible for the directors to
reasonably foresee the contraventions which had been made by them and the same would have
been applicable in relation to a reasonable person. The directors in relation to the particular issue
had made many submissions and one of which was that the model had been used to provided
advice to various eminent professionals such as lawyers and even financial advisors. In addition
submissions had been made by the company which stated that model had been duly reviewed by
the compliance professionals, the non executive directors of thee company and the employees of
ASIC themselves. The directors of the company moreover provided before the court that the
company’s share values had never gone down in the last 10 years indicating that the directors
4 [2011] FCA 717
5 Corporation Act 2001 (Cth) Section 1317E

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have been properly abiding by their responsibilities towards the company. The reason which the
directors pointed out in relation to the failure of the model was an event named “Black Swan”
which is commonly called as GFC. To counter such submission the ASIC provided to the court
that the claim of the regulator is not in relation to the feasibility of the model by the
aggressiveness involved in the use of the model. The claim is only made by them to the use of
the model on the class of people who did not had much financial resources with them and were
nearing or have already retired. The ASIC emphasized that the duty under section 180(1) had
been violated by the company. In relation to the consideration of circumstances of the company
the AISC ruled that the directors were involved in the breach of the duty when they were the
only directors of the company, having no dispute in relation to management and the company
being solvent.
In relation to the second issue where the court had to analyze whether an actual breach is
required to contravene section 180(1) of the act arguments had been provided to both the parties.
The ASIC had submitted before the court that the directors of the company had been indulged in
the actual breach of the duties under section 180(1) in form of a “stepping stone”. It was
provided by the directors of the company that they cannot be held for the actual breach of section
180(1) of the act. However a total different view in relation to the issue had been provided by the
court as discussed in the decision section.
In relation to the issue related to the reach of the duties under section 180(1) it had been
submitted by the ASIC that the duties extend to the society at large. However against such
submissions the directors of the company relied on the wordings of the section to make an
argument that the section only extends to cover up the duties of the directors in relation to the
corporation only and to its shareholders.

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On the last issue to be adjudged by the court related to who can breach section 180(1) of
the CA, contrary evidence was provided by both the parties to the case. It was submitted by the
directors of the company that as they are the only shareholders of the company they can ratify
their actions impliedly and thus there would be no contravention on their part related to section
180(1) of the Act. However the ASIC submitted that the degree of control they had over the
company is sufficient to prove the violation of section 180(1) of the act.
Decisions of the court
The court in their ruling provided that the directors of the company had breached the
provisions of section 180(1). The court added to the decision that through the application of the
test provided under section 180(1) it can be ascertained that a reasonable director would have
had the knowledge that the operations of the company would bring detriment to it. This is
because the financial model in context of the case was used by the company to provide advice to
such vulnerable group of people who had were not strong financially. The court added that the
actions of the directors were not only foresee able to be making a contravention but it was very
likely for a reasonable person to analyze that a contravention would be made if such actions are
carried on.
In relation to the second issue the court ruled that no actual breach is required by the
directors of the company to be liable for the contravention of section 180(1) as even if the
directors recklessly tried to breach the section but were saved because of good fortune they
cannot be exempted by law.

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In relation to the third issue it was provided by the court that the duty under section
180(1) is only limited to the company however it added by stating that not only financial losses
but also loss of reputation can be detrimental for the company.
In relation to the last issue the court ruled that even if the directors are the sole
shareholders of the company the CA does not provided the right to the shareholders to ratify an
act against the legislation even if the business judgment rules allows for risky activities.
Part B
Issue 1
Whether Kanye would succeed in an action against the other directors /members with
respect to the share issue and being removed as a director
Rule
According to Section 136 of the Corporation Act 2001 (cth) may be amended after a
special resolution is passed for the same. As per section 136(3) of the Act states that a special
resolution shall not have any effect, if there is a further requirement in the Constitution, which
must be fulfilled before repealing or making any amendments in the Constitution. Furthermore,
the requirement must be fulfilled in order to make any modification in the Constitution as well6.
Sections 232 to 234 of the Corporations Act 2001 (Cth) lays down the operative conduct
of affairs that is required of the Directors of the company to perform. According to section 232
of the Act, the court has the jurisdiction to make necessary order with respect to section 233
under the following circumstances:
6 Corporation Act 2001 (Cth) section 136(3).

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 the conduct of the affairs of the company; an act or proposed act or a resolution of
members or class of members of a company is inconsistent with the interests of the
members of the company;
 such conduct or act or proposed act or omission is either unfairly prejudicial or
oppressive or discriminatory against the members of the company irrespective of their
capacity;
Section 53 of the Act defines that an actual affair of a corporation refers to the actions that
are conducted with respect to the company. According to section 233 of the Act, the court may
pass any order under section 232 of the Act with respect to the circumstances specified under
section 233 of the Act, which includes:
 winding of the company; modifying the existing Constitution; restraining directors from involving in specified act; requiring a person to perform a specified act;
As per section 234 of the Corporations Act, any member of the company holding shares
becomes eligible for obtaining order under section 233 of the Act irrespective of the fact that
such member has ceased to be the member of the company under certain circumstances.
Application
According to clause 9K of the Constitution of Koala Pty Ltd Kanye, Khalid, Keith and
Kylies shall, at all time, be the directors of the company. In order to make any changes in the
Constitutional provisions of the company, it is necessary that a special resolution is passed by

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two third majority of the total members of the company. In the given case, there are four
directors and all the directors except Kanye are empowered to pass a special resolution.
In addition, section 136(3) of the Corporations act 2001 (cth) stipulates that a special
resolution shall not have any effect unless there is a compliance with the existing provision of the
Constitution of the company7. Therefore, in this case, clause 9k of the Constitution of Koala Pty
Ltd requires that the above-mentioned four directors are required to remain as directors for all
time which cannot be changed even with the passing of any special resolution. Hence, Kanye
cannot be removed from the position of the director and the remaining three directors are not
empowered to remove him from his position.
Further, the directors were not giving Kanye an opportunity to take part in the activities,
which the other directors were involved in, for raising the capital of the company. This signifies
an oppressive conduct on part of the other three directors towards Kanye. The actions or
activities that the other three directors were engaged in would endow them with increased shares
in the company, which in turn, would confer upon them an increased control over the affairs of
the company. The directors were under statutory obligation to consult with each other including
Kanye, while making such decision owing to the right of every director to be consulted before
making any such decisions.
Furthermore, in the given case, another instance of oppressive conduct can be inferred
from the conduct of the three directors where they attend a board meeting regarding suspension
if dividends indefinitely and increasing the salary of the directors and the meeting was held after
removal of Kanye from his position. This conduct of the directors is deemed to be detriment to
7 Corporation Act 2001 (Cth) section 136.

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the interests of Kanye as being a shareholder of the company, he would not be able to receive
any dividends from the profits earned by the company. Moreover, the other three directors would
be charging high remuneration which is in contrary to the best interest if the company.
Conclusion
Therefore, under the above circumstances, Kanye is entitled to bring legal action against
the other three directors for making statutory amendments in the Company constitution in
contravention of section 136(3) and exhibiting oppressive conduct against the members of the
conduct under section 233 of the Act8.
Issue 2
Whether Khaled and Kanye would commence new company without other directors/members
Rule
A director of a company is under statutory obligation to act in the best interest of the
company and exercise due care and diligence while discharging its responsibilities. The
Corporations Act 2001 (Cth) lays down several rights and obligations that the directors in
Australia are obligated to discharge diligently. In the given scenario, the directorial duties in
question include the duties stipulated under sections 181 to 183 of the Corporations Act 2001.
According to section 181 of the Act, the directors are obligated to act in good faith and
ensure that their actions are in the best interest of the company. The court has provided a
broader aspect while interpreting the duty of the directors to act in the best interest of the
8 Corporation Act 2001 (Cth) section 233.

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company. The directors are required to be exhibit honest conduct towards the company and that
the outcomes of their actions ensure positive results of the company.
As per section 182 of the Act prevents the directors from using their position to act in a
manner that is detrimental to the company. In case any conflict of interest arises, the directors are
obligated to acknowledge the other directors about the same and ensure that the interests of the
company prevail over the personal interest of the directors.
Section 183 of the Act stipulates that the directors must not be share or misuse any
information available to them or any information that the directors have access to at the cost of
the company for their own benefit. In ASIC v Vizard9, the directors were held liable for
contravening section 183,182 and 181 of the Act for using the confidential information of the
company10.
In Cassegrain v Gerard Cassegrain & Co Pty Ltd, the court held that the director
violated his duty to act in the best interest of the company and misused his directorial position by
selling shares of the company at low cost to his wife and daughter respectively11.
Application
In the given scenario, two of the four directors of Koala namely, Keith and Kylie have
commenced a new company named as Koala 2. The new company deals with one of the products
that is used by the company Koala. They decided to sell souvenirs that were bought by the Koala
company from local markets and sold in the foreign markets, thus, making huge profits. Being
9 [2005] FCA 1037
10 Corporation Act 2001 (Cth) section 182.
11 [2015] HCA 2

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the directors of the Koala company, Kylie and Keith were obligated to act in the best interest of
the company. ‘
In the given the circumstances, the nest interest of Koala should have been to ensure that
both the directors sell the souvenirs in the foreign markets in the name of the Koala company.
However, both the directors have failed to act in the best interest of the company as was required
of them under section 181 of the Act, hence, they have acted in contravention of the provision of
the statute.
In addition, both the directors have misused the position and the information they gained
while acting as directors of the Koala Company. This is evident from the fact that had they not
been directors of the Koala Company, they would not have gained information about selling the
souvenirs in the foreign market for their new company Koala 2. This idea was similar to the
business idea practiced by Koala. Hence, both Kylie and Keith have acted in contravention of
section 182 and section 183 of the Corporations Act 2001 (Cth) by using the information
available to them while they were directors of Koala, thus, misusing their position as directors of
the company12.
As discussed earlier, under the given circumstances, the directors were not supposed to
act in a manner where they can earn profits and cause damage to the company. The conduct
exhibited by the Keith and Kylie while opening a new company under the name of Koala 2 is
consider to be detrimental for Koala as it would prevent the company to earn the profits, it is
entitled to earn.
Conclusion
12 Corporation Act 2001 (Cth) section 182,183.

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Therefore, Kanye and Khalid is entitled to bring legal actions against Kylie and Keith for
contravening section 181 and 183 of the Act. The directors shall be liable to civil penalties under
section 1317 E of the Act for committing the breach of sections 181 to 183 of the Act 13. They
shall be entitled to criminal liabilities if they acted fraudulently while contravening the section.
13 Corporation Act 2001 (Cth) section 1317.

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