On 27 March 2020, the Full Court of the Federal Court handed down its decision in Cassimatis v Australian Securities and Investments Commission [2020] FCAFC 52, a significant decision that will serve to clarify the scope, content and operation of section 180 of the Corporations Act 2001 (Cth) (the Act), being the duty of directors and officers of corporations to act with care and diligence.  In a 150-page split decision, the plurality of the Full Court upheld a 2016 decision that the former directors of Storm Financial Pty Ltd (Storm) breached their duties pursuant to the requirements of Section 180 of the Act.

In addition to being directors of Storm, Emmanuel and Julie Cassimatis (the Appellants) were also its sole shareholders, which fact was central to their argument on appeal.  That argument was premised on the basis that as Storm’s sole shareholders, Storm’s interests were the same as their own interests, and that the “real position” is that corporations “do not have any desires or interests beyond those of its stakeholders”.  In other words, the Appellants’ argument sought to emphasize that since they were both the sole directors and sole shareholders of Storm, the duty imposed on them by s180 of the Act to act with care and diligence was a duty effectively owed to themselves. In circumstances where the Appellants had implicitly approved their own conduct, they could not have breached their obligations as directors of Storm in the manner claimed by ASIC.

The Full Court did not agree, dismissing their appeal.

The decision presents a clear warning for directors on the risks of allowing the companies they manage to operate in contravention of the law, even when acting in accordance with the wishes of shareholders.

Section 180 of the Act provides:

A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a)        were a director or officer of a corporation in the corporation's circumstances; and

(b)        occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.”

Prior to the fallout from Global Financial Crisis (GFC) in the second half of 2008, Storm was a highly profitable company providing financial product advice to investors under an Australian Financial Services Licence (AFSL). The “Storm Model” of advice constituted recommending clients adopt “double gearing” debt strategies by taking out investment loans secured against residential property, and obtaining margin loans through which to invest in weighted index funds, establish a cash reserve and to pay Storm’s fees. The Storm Model was rolled out to groups of retail investors including a class of financially vulnerable customers. 

The provision of the financial advice associated with the Storm Model was properly characterised as “personal advice” to retail investors, which engaged the obligation under s945A of the Act cast upon those providing that advice to have a “reasonable basis for the advice”.

Storm collapsed in early 2009, with many of its 14,000 clients left in negative equity.

ASIC commenced civil penalty proceedings in late 2010, although the trial did not take place until May-June 2016. In August 2016, the Federal Court held, per Edelman J (as he was then) inter alia:

  • the Appellants breached s180(1) of the Act by failing to exercise their powers, and failing to discharge their duties owed to Storm, as directors, in the management of the provision of financial advice by Storm with the degree of care and diligence that a reasonable director would have exercised in the circumstances;
  • in failing to discharge their duties arising under s180 of the Act, the Appellants caused a contravention of, or permitted Storm to contravene, s945A and 912A of the Act which provisions in combination required Storm to do all things necessary to ensure the financial services covered by its AFSL were provided “efficiently, honestly and fairly”; and
  • the contraventions of ss945A and 912A exposed Storm to a foreseeable risk of harm which was a foreseeable consequence of the failure of the directors to discharge their duties with the degree of objective care required by s180 of the Act.  

The primary basis of the Appellants’ appeal was that the trial judge “misapplied” s180 of the Act.  As a solvent company, Storm’s interests were those of its shareholders.  Once this is accepted, it follows that the Appellants, as holders of all the issued shares in Storm, were entitled to choose their own priorities and their own level of risk tolerance for the entity.

The Appeal

In rejecting the Appellants appeal, the Full Court looked to the language of s180 of the Act and “the emphatic direction that a director must exercise their powers and discharge their duties with the degree of care and diligence required by the section”.  As the standard is objective and mandated, measured by the degree of care and skill a reasonable person would exercise if they were a director in the company’s circumstances, “the shareholders cannot sanction, ratify or approve, qua themselves as directors, their own conduct in contravention of s180.  Nor can they release themselves from such a contravention”.

Importantly, the Court found that a breach of s180 is to be determined having regard to the director’s conduct not meeting the mandated objective standard. Whether a company contravened a provision of the Act might be a relevant factor to the question of whether a director failed to meet the requisite standard by exposing a company to risk, but it is not an “essential ingredient” of liability.

Key Takeaways from the Full Federal Court

The decision of the Full Federal Court is significant as it clarifies the scope of the obligation imposed on directors to act with care and diligence when carrying out their duties to a company and the lens within which that duty is examined, particularly in circumstances where a company has been found to contravene the law.  It is irrelevant, for the purposes of establishing a breach of s180 of the Act, the degree to which shareholders may have acquiesced, consented to or supported the conduct and circumstances giving rise to the contravention.

Important findings of the Full Court include:

  1. Section 180 of the Act does not impose a general obligation on directors to conduct the corporation in accordance with law generally or the Act specifically. There are however, cases in which it will be a contravention of their duties, owed to the company, for directors to authorise or permit the company to commit contraventions of provisions of the Act, or the law more generally.  
    The degree of care and diligence that is required by s180 includes a duty to exercise the powers of management of the company and its business in a manner which does not jeopardise the company’s interests. Relevant jeopardy to the interests of the company may be found in the actual or potential exposure of the company to civil penalties or other liability under the Act. It may be a breach of a relevant duty for a director to embark on or authorise a course which attracts the risk of that exposure, particularly if the risk is clear and the countervailing potential benefits insignificant.
  2. A company’s interests are not exclusively those of its shareholders, even in circumstances where the shareholders are the directors and vice versa. The standard of care and diligence required by s180 is a normative, objective and mandated standard. The determination of the standard of care involves a consideration of the corporation’s circumstances, the particular responsibilities of the director, and the extent to which a foreseeable risk of harm or jeopardy to the interests of the corporation arises from the director’s conduct. Foreseeable risk of harm that directors must guard against under this section is not confined to financial harm but includes harm to all the interests of the corporation.  Importantly, shareholders cannot release directors from their statutory duties.
  3. The care exhibited toward customers by a corporation (particularly retail customers of a financial advisory business) might be a relevant factor in determining whether a director has met their statutory duty, even where that duty is owed to the company, and not the customer. Section 180 represents a duty owed to the company, but the circumstances in which Storm was providing advice to a class of vulnerable retail investors became matters that were brought into the calculus of determining the care and diligence required by the directors of that company.