Directors Liable for their Company’s Breach of the Law
In our experience many directors consider that because they act through a corporate entity, they have no personal liability for the actions of their companies. This is not the case, as exemplified in the following case.
In Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8), the Court found that directors of Storm Financial Limited (Storm) had breached their duty of care under the Corporations Act by permitting, or failing to prevent, Storm from providing inappropriate investment advice.
Storm was an Australian financial services licence holder that provided financial services to investors.
In providing financial services to investors, Storm used a model developed by the director Mr Cassimatis that focused on double gearing. This involved investors borrowing against the security of their homes, obtaining a margin loan and using the funds from these loans to invest in index funds, establishing a cash reserve and paying Storm’s fees.
The investors were generally close to retirement, had limited assets and income and no prospect of recovering their financial position in the event of loss.
The investors ultimately sustained severe losses when the scheme fell apart.
ASIC commenced proceedings against Mr and Mrs Cassimatis for alleged breaches of their duties of care and diligence as directors of Storm Financial Limited under section 180(1) of the Corporations Act. Section 180(1) provides that a director must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
The Court found that Mr and Mrs Cassimatis each contravened section 180(1) of the Corporations Act by exercising their powers in a way which caused or permitted inappropriate advice to be given to the vulnerable investors. The Court held that a reasonable director with the responsibilities of Mr or Mrs Cassimatis would have known that the scheme was likely to lead to inappropriate advice, the consequences of which would be catastrophic for Storm when investors claimed against it.
The Court held that the foreseeable risk of harm to the corporation which falls to be considered in the test for the content of the duty under section 180(1) is not confined to financial harm but includes harm to all interests of the corporation. Section 180(1) does not require any proof of actual loss to the company.
The Court held that an actual breach by a corporation may not be required in order for a director to be in breach of section 180(1), however in any event the Court considered that Storm had breached various obligations under the Corporations Act.
The Court held that: “A reasonable director of a company in Storm’s circumstances and with Mr and Mrs Cassimatis’ responsibilities would have been aware of a strong likelihood of a contravention of the Corporations Act if he or she exercised his or her powers to cause or permit the Storm model to be applied to clients who were in a class pleaded by ASIC, particularly investors who were retired or near retirement with few assets and limited income.”
Directors have numerous obligations to their companies, including obligations to act with due care and diligence, act for a proper purpose and not to misuse information or their position for their own self gain.
Most commonly we see directors prosecuted for permitting their companies to trade whilst insolvent, however this case shows that ASIC will seek to prosecute directors for breaches of other obligations under the Corporations Act. Directors can also be personally liable for their companies breach of its workplace health and safety obligations.
Beck Legal provides corporate governance training to directors and senior managers. If your company is interested in a refresher course in governance, please contact our corporate team today.