Australia Had To Consider Interpretation

Australia Had To Consider Interpretation

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Australia Had To Consider Interpretation

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Australia Had To Consider Interpretation

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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 reserve[1]. 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 CA[2].
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 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 applicable[3].
Submissions made by the parties
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.
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 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.
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.
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 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 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.
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 with[5].
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 capacity[6].
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 company[7].
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 act[8].
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 company[9].
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 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.
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
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 company[10].
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 so[11].
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 company[12].
As provided by the case of ASIC v Vizard[13]  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 Ltd[14]it 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.
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 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 discussSubmissions made by the partiesed 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
ASIC v Stephen William Vizard [2005] FCA 1037
Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023
Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2
Corporation Act 2001 (Cth)

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