Company Law 10 Assessment 1: Case Study and Analysis

This Company Law assessment analyzes the case of ASIC v Cassimatis (No. 8), focusing on the breach of director duties by Mr. and Mrs. Cassimatis of Storm Financial Limited. The assessment details the company's use of the 'Storm model' for financial services, the arguments presented by both ASIC and the directors, and the court's decision regarding the contravention of the Corporations Act 2001. The report examines the relevant legal principles, particularly sections 180(1), 181, 182, 183 and 232, and the implications for directors' responsibilities. Part B of the assessment explores the issue of shareholder rights and potential actions against directors, including the concept of oppression of minority shareholders, and the remedies available under the Corporations Act. The assessment provides a comprehensive overview of company law principles and case analysis within the Australian legal context.

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Contents
Part A...............................................................................................................................................4
Issue and facts..............................................................................................................................4
Relevant Law...............................................................................................................................5
Arguments made by the parties...................................................................................................6
Decision given in this case..........................................................................................................8
Part B (a)........................................................................................................................................10
I: Issue........................................................................................................................................10
R: Rule.......................................................................................................................................10
A: Application...........................................................................................................................12
C: Conclusion............................................................................................................................13
Part B (b)........................................................................................................................................13
I: Issue........................................................................................................................................13
R: Rule.......................................................................................................................................13
A: Application...........................................................................................................................15
C: Conclusion............................................................................................................................16
Bibliography..................................................................................................................................17

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A. Articles/ Books/ Reports.....................................................................................................17
B. Cases...................................................................................................................................17
C. Legislations.........................................................................................................................17
D. Others..................................................................................................................................18

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Part A
Issue and facts
In ASIC (Australian Securities and Investment Commission) v Cassimatis (No. 8)1, the
main issue was related to the breach of duties of director by two directors, i.e., Mr. and Mrs.
Cassimatis2.
The company in which Mr. and Mrs. Cassimatis were the directors was Storm Financial
Limited which was a holder of the Australian Financial Services License (AFSL) and was also
engaged in financial services on the basis of Storm model, which was central to this case, and
which was developed by Mr. Cassimatis, the director of Storm Financial Limited. Storm model
provided the borrowing of funds from the clients in exchange for the equity where a margin loan
was also obtained. These funds were used by the company for creating cash reserves, along with
making investments in the index funds. The model was applicable on the clients only till the time
the clients had the capacity of borrowing funds. The company used a double gearing model, due
to which, the investors underwent huge losses when the world was facing the 2008 financial
crisis. The storm model was used on such individuals, who were not only close to retiring, but
were in a vulnerable position, as they had no or negligible source of income and assets. Hence,
there prospects of attaining their financial position back, due to the actions of the directors, was
next to impossible. The rationale behind holding the violation of director duty on part of Mr. and
1 [2016] FCA 1023
2 David Jacobson, Case Note: Storm Financial Directors Liability For Company Conduct (21 September 2016)
<https://www.brightlaw.com.au/case-note-storm-financial-director-liability-for-company-conduct/>

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Mrs. Cassimatis stemmed from the wrong advice given by them to the investors, on the basis of
storm model3.
Relevant Law
In Australia, all the companies are governed under the Corporations Act, 2001, which is
an act of the commonwealth4. Section 198(1) provides that the company’s business is to be run
on behalf of the shareholders under the direction of or by the directors5. Part 2D.1 covers the
different director duties which have to be strictly adhered6.
Under section 180(1), the directors, and the officers of the company, are provided with
the duty of making use of their powers and discharging their duties in such a manner which can
be stated as diligent and shows care. The standard set for such conduct is the conduct of a
reasonable person, who held the same office in similar circumstances as the director or officer in
question and had the same powers and duties7. When a director of the company or its officer fails
to fulfill this requirement, the director or the officer breaches this section and a civil penalty is
attracted on such officer or director. The penalties for this violation are covered under section
1317E, which gives the court the authority of making a declaration of contravention8. Once this
is done, the ASIC can apply for pecuniary penalties pursuant to section 1317G9 or apply for
disqualification order, pursuant to section 206C of this act10.
3 ASIC, 16-277MR Directors of Storm Financial found to have breached their duties under the Corporations Act (26
August 2016) <http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-277mr-directors-
of-storm-financial-found-to-have-breached-their-duties-under-the-corporations-act/>
4 Corporations Act, 2001 (Cth)
5 Corporations Act 2001, s198(1)
6 Corporations Act 2001, pt 2D.1
7 Corporations Act 2001, s180(1)
8 Corporations Act 2001, s1317E
9 Corporations Act 2001, s1317G
10 Corporations Act 2001, s1317G

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Arguments made by the parties
ASIC was the party which initiated the case against Mr. and Mrs. Cassimatis back in
201011 and made a claim that the directors of the company had an extra ordinary degree of
control on the company matters. ASIC claimed that Mr. and Mrs. Cassimatis had breached their
duties whilst the company was insolvent. When this happened, these two were the only
shareholders and directors of the company. The extraordinary degree of control was established
by the absence of disputes in the company management by Mr. and Mrs. Cassimatis and the
same was in line with the wishes of the shareholders of the company12.
ASIC also stated that the provisions of Corporations Act were breached due to the
financial advice which was given to the retail clients on reasonable basis. The rationale behind
this was the financial services which were being provided by Storm Financial Limited based on
the Storm model, was being given to the vulnerable investors and hence, the advice had to be
given on reasonable basis. ASIC claimed that section 180(1) of the Corporations Act, 2001 was
contravened as the directors of the company allowed such wrong advice to be provided to a
group of vulnerable investors, even when they were aware of the situation in which such
investors were13.
Due to the actions of the directors, the company was exposed to risks of harm, which
were easily foreseeable, and which included the cancellation of the AFSL, the prohibition order
11 Maxine Tills and Cassandra Wills, Australian directors found guilty of breaching duties following corporation’s
breaches (14 September 2016) <https://www.clydeco.com/insight/article/australian-directors-found-guilty-of-
breaching-duties-following-corporation>
12 Australasian Legal Information Institute, Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023 (26 August 2016) (02 September 2016)
<http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2016/1023.html?
stem=0&synonyms=0&query=Cassimatis>
13 Federal Court of Australia, Australian Securities and Investments Commission v Cassimatis (No 8) (26 August
2016) <http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2016/2016fca1023>

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being passed and the civil proceedings being initiated by the affected vulnerable investors. ASIC
viewed this risk of exposure and the rise in this risk as a result of the acts of the directors, which
showed a sheer lack of diligence and care. They highlighted that a reasonable director in place of
Mr. and Mrs. Cassimatis would have never let such ill advice to be passed on to such investors
and would have protected the company from the foreseeable risk of harm. The responsibilities
placed through the Corporations Act regarding the use of position which they held in the
company, required care to be shown14.
Mr. and Mrs. Cassimatis claimed that section 180(1) was not applied on these two as they
were the only shareholders in the company, and also that the company was solvent when they
held this position, in addition to being the director of the company. They stated before the court
that by allowing the company to undertake a risky venture does not mean that their director
duties were breached or that they were doing something illegal15. These two relied on the
principle that the ramifications had to be implicit when the position of shareholder and director
was held commonly by the same person. Mr. and Mrs. Cassimatis also provided that the entire
claim of ASIC was based on Storm model, which had been established as a viable model and the
contraventions which occurred later one, could not be reasonably foreseen. They also presented
that this model had been reviewed by the compliance professionals, ASIC and the non-executive
directors of the company. None of these parties raised any claim against this model. Mr. and
Mrs. Cassimatis gave the reason for this model failing as the “Black Swab” event, i.e., the global
financial crisis. They also stated that the clients had clear knowledge about the possibility of the
14 Ibid
15 Andrew Lacey, The risk of a director/officer of a corporation assuming vast responsibilities – ASIC v Cassimatis
(No 8) [2016] FCA 1023 (11 October 2016) <http://www.mccabes.com.au/asic-v-cassimatis/>

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prices falling due to the movements in share market and placing the entire blame on them was
unfair16.
Decision given in this case
The court was of the view that the breaches which took place in Storm Financial Limited
could have been reasonably predicted and that a reasonable director in place of these two
directors would have considered these risks and would have given the required priority on the
basis of their possibility of occurrence. It was also provided by the court that Mr. and Mrs.
Cassimatis’s conduct was such that each of them, i.e., the husband and the wife individually
breached the provisions of the Corporations Act. All this happened for a different range of
investors which were rightly deemed as vulnerable in the present situation. However, the
contravention in this case was of a single section and a sole breach, instead of being a number of
breaches17.
In the view of the court, to consider that the husband and wife had been honest, it had to
be shown that they had genuinely relied on the absence of the loss of capital to take place, along
with the index fund investment, which was based on the company’s Storm model. The conduct
of the two was not deemed as something where the excuse of section 1317E or the serious
breaches undertaken by the company could be established, owing the responsibilities which they
had and the role which they played18.
The court gave emphasis on its past ruling in the matter of Vrisakis v Australian
Securities Commission19 and deemed as of importance for the present situation. In the view of the
16 At 13
17 Ibid
18 Ibid
19 (1993) 9 WAR 395

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court, there was no need of weighing the common metric and balancing the interest of the
investor in order for the same to be construed literally. The need in this case was just to gain an
understanding of the ruling which had to be taken into consideration, along with the present
circumstances of this case. Hence, all of the responsibilities which are within the duties which
have been imposed on the company had to be taken into consideration20.
Justice Edelman believed that the powers used by Mr. and Mrs. Cassimatis and the duties
discharged by them, on the basis of the position which they held in the company, was without
any doubt, unsuitable and unfortunate. He believed that a reasonable director would have known
that the model was being applied on the vulnerable citizens and the applicability of the Storm
model on such class of citizens was clearly an unsuitable advice21. This resulted in the non-
adoption of precautionary measures for avoiding the applicability of the Storm model. Justice
Edelman went on to state that the foreseeability of the risk of harm was not simply restricted to
the financial harm for the contravention of provisions contained section 180(1). There was a
need to consider the risk of harm in view of the interest of company, which includes the
reputation of the company22.
All this led to the court making the decision that section 180(1) had been breached by the
two directors.
20 At 13
21 MinterEllison, Federal Court Finding That Storm Financial Directors Breached Their Duties (05 September
2016) <http://chqa.minterellison.com/blogcustom.aspx?entry=1470>
22 Bob Baxt, Directors' Counsel (31 October 2016) <http://aicd.companydirectors.com.au/membership/company-
director-magazine/2016-back-editions/november/directors-counsel>

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Part B (a)
I: Issue
The key issue in this case revolves around the possibility of Kanye bringing a successful
action against the other directors of company, for the share issue and for removal as the director
of company.
R: Rule
As has been explained through the discussion in the previous case, certain duties have
been imposed on the directors of the company, when they run the business of the company, on
behalf of the shareholders of the company. The minority shareholders, as the name suggests, are
the shareholder who are in minority and they have little or negligence influence when it comes to
the major decisions of the company as the decisions are passed through majority. However,
where the directors do not give due consideration to the minority shareholders, a claim of
oppression can be made by such minority shareholders. The directors have a duty pursuant to
section 181, to act in the best interest of the company and for proper purpose23; pursuant to
section182, to not use their powers in a manner where an advantage is obtained for them or
someone close to them24; and pursuant to section 183 they have a restriction whereby they cannot
make a misuse of the company information whereby an advantage is obtained for them or
someone close to them25.
Section 232 of this act provides the power to the minority shareholders to prove before
the court that the conduct of the directors is such that it provides to be unfairly discriminatory/
23 Corporations Act 2001, s181
24 Corporations Act 2001, s182
25 Corporations Act 2001, s183

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prejudicial or is oppressive, against such class of shareholders26. It has to be shown that there was
unfairness and a mere disadvantage would not fulfill the conduct as being oppressive pursuant to
section 232.
Once the claims made under section 232 are established before the court, the court
awards the remedies against such conduct pursuant to section 233 of the Corporations Act. some
of the remedies include applying for company to be wound up; modifying the company
constitution; stopping or asking an individual to do a particular task; appointing a receiver or
manager; ordering the purchase of shares of the minority shareholder at a price which is finalized
by the court; and the like27. Hillam v Ample Source International Ltd (No. 2)28 was a case where
the board of directors’ demeanor was considered as being oppressive towards the minority
shareholders. And even though the company was solvent in this case, the court held that it would
be right to wind up the company and to distribute the proceedings from the sale of assets of the
company.
A: Application
The facts given in the case study reveal that a claim of oppressive conduct can be made
by Kanye based on the Corporations Act. The resolution which was passed on 01st Mar, 2017
would be the basis of the oppression. This resolution was passed in order to give the other
directors a shareholding which surpassed the shareholding of Kanye, which would in turn put
him in an unfairly disadvantageous position. This detriment is not only caused to Kanye as his
shareholding was reduced, but also because this led to him being removed from the position of
being the company director, by amending the constitution of the company. As the oppressive
26 Corporations Act 2001, s232
27 Corporations Act 2001, s233
28 (2012) FCAFC 73

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conduct has been established pursuant to section 232, Kanye can apply for remedies pursuant to
section 233 against the remaining three directors, i.e., Khaled, Keith and Kylie.
The application of section 233 would allow Kanye to apply for being reinstated as the
company director, through the court ordering the company to do so specifically. Kanye could
also apply for an order to the board for issuing 25 ordinary shares to him, so that he would be
placed in equal position as the other directors. The third option available to Kanye is for
amendment to be brought to the company constitution, whereby his original position could be
restored. Based on Hillam v Ample Source International Ltd, Kanye could ask the court for the
company to be wound up for the acts of the three directors and distributing the assets of the
company in an equal manner.
For his removal from the position of company director, Kanye can apply to the court for
the improper use of company position by the three directors, in addition to the oppressive
conduct of these three, which resulted in their director duties being contravened. And ultimately,
he can get reinstated as the company director.
C: Conclusion
Hence, Kanye can sue the other three directors for oppression and get reinstated as
company director.

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Part B (b)
I: Issue
The key issue in this case revolves around the possibility of Kanye or Khaled making a
claim against Kylie and Keith for incorporating a company.
R: Rule
Under section 181 of this act, the directors have to use their powers and discharge their
obligations for a proper purpose, in good faith and for the company’s best inertest29. Under
section 182, the prohibition has been placed on the directors of the company for improperly
using the position held by them in the company30. Section 183 imposes the duty on the directors
of the company to not use the information of the company in such a way which could be stated
as being detrimental for the company, and whereby the director personally gains from it, or
someone close to them makes a gain from it31. When the provisions contained in these sections
are breached, the civil penalties covered under section 1317E of this act become applicable32.
Apart from the common law, the statutory law also places similar duties on the directors
of the companies33. So, the directors are required to always work in the best interest of the
company and not use their position where they personally make a gain at the cost of company
interest34. There is a fiduciary duty placed on the directors to avoid such situations which can
give rise to a conflict of interest. This duty has its roots in the duty of utmost good faith and that
29 Corporations Act 2001, s181
30 Corporations Act 2001, s182
31 Corporations Act 2001, s183
32 Corporations Act 2001, s1317E
33 Paul Latimer, Australian Business Law 2012 (CCH Australia Limited, 31st ed, 2012)
34 Julie Cassidy, Concise Corporations Law (The Federation Press, 5th ed, 2006)

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of trust placed through the common law35. This requires the directors to avoid such situations
where their personal interest overpowers the company interest, which they are duty bound to
protect36. Though, such a case would only take place when the possibility of conflict is real37.
ASIC v Stephen William Vizard38 was a case where the court held that the position of the
director was being misused as the confidential information of the company was being used for
the benefit of the director, resulting in an effective breach of director duties. The court held in
ASIC v Adler and 4 Ors39 that the director used the information of the company in a manner
which proved to be of detriment for the company. Not only the director Adler, but the other
directors also, had misused their position, which led to the court holding them liable for
contravening the provisions of the Corporations Act. In Kinsela v Russell Kinsela Pty Ltd (in
liq)40, the court held that the directors acted in a way where their personal interest was promoted
and the best interest of the company was simply ignored.
A: Application
In the given case study, the action can be made by both Khaled and Kanye against the
remaining two directors, Khaled and Kanye; as Khaled and Kanye went on to form a company
without Khaled and Kanye. The rationale behind this stems from the fact that Keith and Kylie
owed certain fiduciary duties towards the old company, under the common and statutory law,
which was blatantly contravened by them. The actions of Keith and Kylie, i.e., the forming a
35 PwC, A guide to directors’ duties and responsibilities for non-listed public companies and proprietary companies
in Australia (2008) <http://etraining.communitydoor.org.au/pluginfile.php/608/course/section/95/
GuideDirectors_Apr08.pdf >
36 Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 at 471.
37 Phipps v Boardman [1967] 2 AC 46 at 124.
38 [2005] FCA 1037
39 [2002] NSWSC 483
40 (1986) 4 NSWLR 722

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new company was not in the best interest of the old company, as the prospective customers for
the old company would move to the new company, thus breaching section 181. Section 182 was
breached by using the sensitive and material information of the old company by Keith and Kylie
regarding the souvenirs sale, which they knew due to the position held in the old company, thus
breaching section 183 also. This situation caused a conflict of inertest, which Keith and Kylie
failed to avoid by forming the new company, thus breaching the common law duty.
Based on the case of ASIC v Stephen William Vizard, Keith and Kylie misused the
material information of the old company, which would be deemed as a breach of their director
duties. Applying the case of ASIC v Adler and 4 Ors, the similar results would be obtained as the
new company was formed whereby the corporate opportunities of the old company were issued,
which was seriously detrimental for the old company. And the formation of the new company
was clearly placing their personal interest before the interest of the old company, which would
again be a breach based on Kinsela v Russell Kinsela Pty Ltd.
C: Conclusion
To conclude, both Kanye and Khaled have the opportunity of initiating a claim against
Keith and Kylie for incorporation of a new company, owing to the breach of director duties, by
being director in the old company and working towards the detriment of the old company.

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Bibliography
A. Articles/ Books/ Reports
Cassidy J, Concise Corporations Law (The Federation Press, 5th ed, 2006)
Latimer P, Australian Business Law 2012 (CCH Australia Limited, 31st ed, 2012)
B. Cases
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461
ASIC (Australian Securities and Investment Commission) v Cassimatis (No. 8) [2016] FCA 1023
ASIC v Adler and 4 Ors [2002] NSWSC 483
ASIC v Stephen William Vizard [2005] FCA 1037
Hillam v Ample Source International Ltd (No. 2) (2012) FCAFC 73
Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722
Phipps v Boardman [1967] 2 AC 46
Vrisakis v Australian Securities Commission (1993) 9 WAR 395
C. Legislations
Corporations Act, 2001 (Cth)

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D. Others
ASIC, 16-277MR Directors of Storm Financial found to have breached their duties under the
Corporations Act (26 August 2016) <http://asic.gov.au/about-asic/media-centre/find-a-media-
release/2016-releases/16-277mr-directors-of-storm-financial-found-to-have-breached-their-
duties-under-the-corporations-act/>
Australasian Legal Information Institute, Australian Securities and Investments Commission v
Cassimatis (No 8) [2016] FCA 1023 (26 August 2016) (02 September 2016)
<http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2016/1023.html?
stem=0&synonyms=0&query=Cassimatis>
Baxt B, Directors' Counsel (31 October 2016)
<http://aicd.companydirectors.com.au/membership/company-director-magazine/2016-back-
editions/november/directors-counsel>
Federal Court of Australia, Australian Securities and Investments Commission v Cassimatis (No
8) (26 August 2016) <http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/
2016/2016fca1023>
Jacobson D, Case Note: Storm Financial Directors Liability for Company conduct (21
September 2016) <https://www.brightlaw.com.au/case-note-storm-financial-director-liability-
for-company-conduct/>
Lacey A, The risk of a director/officer of a corporation assuming vast responsibilities – ASIC v
Cassimatis (No 8) [2016] FCA 1023 (11 October 2016) <http://www.mccabes.com.au/asic-v-
cassimatis/>

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MinterEllison, Federal Court Finding That Storm Financial Directors Breached Their Duties
(05 September 2016) <http://chqa.minterellison.com/blogcustom.aspx?entry=1470>
PwC, A guide to directors’ duties and responsibilities for non-listed public companies and
proprietary companies in Australia (2008)
<http://etraining.communitydoor.org.au/pluginfile.php/608/course/section/95/
GuideDirectors_Apr08.pdf >
Tills M, and Wills C, Australian directors found guilty of breaching duties Following
Corporation’s breaches (14 September 2016)
<https://www.clydeco.com/insight/article/australian-directors-found-guilty-of-breaching-duties-
following-corporation>