This case clarifies the obligation of directors to ensure that they exercise their powers and discharge their duties with the degree of care and diligence a reasonable person would. In this case the directors were providing inappropriate financial advice to financially vulnerable investors.
The court held that the directors, Mr and Mrs Cassimatis, breached their duties as directors and prejudiced their company, Storm Financial, by establishing and maintaining a system by which inappropriate investment advice was given to vulnerable people.
The Cassimatis’ refused to accept the seriousness of their misconduct, demonstrating a lack of insight and contrition. Consequently, the court ruled that they needed to be punished severely to ensure they did not reoffend. Both Mr and Mrs Cassimatis were fined $70,000 each on the basis that: the misconduct continued over a lengthy period of time, was entirely initiated by them and executed under their supervision.
Further, the court ordered that each respondent be disqualified from managing corporations for a period of seven years. It considered it necessary and appropriate that the public be protected from exposure to the consequences of any reasonably likely future contraventions by the respondents. The court would have decided on a longer disqualification period if the misconduct had occurred closer to the trial date, but since there was 12 years between the misconduct and the trial, it held that a longer period would be unfair.
The parties in this case had signed a shareholders agreement governing, amongst other things, shareholder funding of the company in which they held shares. One party argued that the provisions concerning how the company obtained funding from shareholders were void. The drafting of those provisions allowed the board a discretion to request shareholder funding, within certain parameters. The specific wording in question was “…the Board may request for Shareholder Loans …” (the court’s emphasis). This discretion was tied in later paragraphs to circumstances where the company required funding.
The court needed to determine whether the discretion of the board to carry out what appears to be a promise amounted to what is known as an “illusory obligation”; in this case the promise was to request shareholder funding.
An illusory obligation is a contract or a term of a contract that allows a party a true discretion or option whether to carry out what appears to be a promise. Such provisions are void. This determination turns on whether or not the party with the discretion has an “unqualified option whether to perform the promise or not”. Even where there is only a “vestige of an objectively ascertainable obligation” the discretion will not result in the contract or terms being void.
The court ruled that there was no illusory obligation on the basis that the discretion concerned must be exercised in the context of:
- the need to secure funding; and
- the parameters of the directors’ obligations to act in good faith and in the best interests of the company.