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Company Law Essay: Questions Based on Corporations Act 2001

Question

Task: Basing your answers on the set reading for this company law essay (set out in the reading list, which will be attached separately), please address the following questions:

Part 1 (Legal Analysis):The legal analysis aspect of this essay involves addressing both of the following questions:
1. Given the decision of the Full Court of the Federal Court in Cassimatis v ASIC, and given the High Court’s refusal to grant special leave to appeal, does the law now regard companies as having non-financial interests that must be considered, along with their financial interests, when assessing whether a director or officer has breached s 180(1)? In particular, for the purposes of s 180(1) does the law now regard companies as having non-financial interests in maintaining good reputations and in complying with the law?

2. Imagine that the High Court did grant the Cassimatis' application for special leave to appeal and that you are one of the judges on the High Court hearing the case. As a matter of law, are you more persuaded by Rares J's exposition of the legal test regarding how s 180(1) applies to so called 'stepping stone' cases and his application of that test to the facts of this particular case, or by the reasoning in the judgments of the judges in the majority (Greenwood and Thawley JJ)?

Part 2 (Policy Analysis):As a matter of policy, do you think directors and officers should potentially be liable for breaching s 180(1) when they cause, or fail to take reasonable steps to prevent, their companies from breaking the law? If so, what legal test do you think courts should apply to determine liability in such cases?

Answer

Part A
1. The 180 section of the “Corporations Act 2001 (Cth)” provides the provided guidelines for diligence and care of the directors and the officers of the organisations in Australia . The law regards the duty of the directors to apply their capacities and release the duties along with the degree of diligence and care; a reliable individual will exercise provided they had been the director of the organisation in the business's situation or had similar roles and responsibilities within the organisation as an officer . The purpose of the section 180 (1) of the CA 2001 (Cth) is to create the objective standard for the degrees of diligence and care needed of the directors of companies. In the “Japan Abrasive MateriLlls Pty vAustralian Fused MateriLlls Pty Ltd&Drs” case, the section 180 was applied with the aim to clarify the duty of the directors and stakeholders . The case developed based on the true agreement construction between the shareholders within the joint venture organization. As per the agreements, the shareholders could nominate the directors. There evolved the dispute regarding whether the resolutions were to be approved by the directors. The disputes were raised regarding whether it was director’s duty to behave and utilize the power for the best interest of the company or the shareholder appointment. It was a concern that the director’s duty was tempered due to the agreement . It brought several questions regarding the breach of shareholder agreement due to the conduct of the directors, the breach of corporation law and fiduciary duties and director’s act in bad faith. The section 180 outlines the duty of directors- which was applied in the case. Similarly, in the “BCI Finances Pty Limited (in liq) v Binetter (No 4) [2016] FCA 1351” the corporation act was applied.

The court will approach the assessment of the conduct of the director through the implications of the objective test. The Full Federal court of Australia provides the guidance for the duty of care intelligence of the company directors under the section as mentioned above. Though the duty is allocatedtothe corporation, it is the public duty which requires the consideration of intentions and interests of the organisation apart from the wishes and needs of the company shareholders . Avoiding revelation of the company to the civil penalties or another type of liabilities, endangering the Australian Financial Services Licence due to failing in compliance to the company laws are included in the company interest. However, the section 180(1) is not considered as the illegal approach for visiting the accessory liability of the officers and directors of an organisation. In the case of the breach, it is to be substantiated that during the relevant behavior, it was quite foreseeable that the harm is going to be caused due to the company's interests. The court will then considered the way the judiciousindividual in the position of the company's officer or director will have balanced the potential threat against the welfares of the company.

In the case of ASIC versus Cassimatis (No. 8) [2016] FCA 1023, the Australian federal court recognised the nature of duties of care of the directors of the companies as per the provisions of 180 (1) . As found by the court, the directors of the financial service provider organisation breached the duties they have as directors. A sensible director with the errands in the organisation’s circumstances would have been aware of the fact that the organisation was amount to breach the corporation act, with drastic consequences for the organisation. In the considered case scenario, the ASIC allegedly claimed that by offering the financial services as per the model to the group of susceptible investors who were closer to retirement, had very limited income and asset no prospect of addressing their economic position in terms of loss, the company Strom breached the requirements as per the Corporations Act, where there was the basis for financial advice for the client. The ASIC claimed that the directors breached the 180 (1) by the following ways:

  • Allowing Storm for providing advice to the investors as per the model which resulted in Storm to flout the CA
  • Allowing Storm to provide the financial advice in an approach which flouts the CA .

The actions lead Storm to the risk of harm, which included the cancellation of the AFSL, the civil proceedings as well as the banning order by the investors. The court identified that Storm trangressed Corporations Act by offering the financial help and services to the category of the clients that are vulnerable, which were recognized by the ASIC. As per the proceedings, the company's director's were breached their duty of care.

The duty of the directors to avoid the conflicts of interests is availed from the statutory provisions as well as the general law as per the Corporations Act 2001. The section 180 depicts that the directors are required to utilize the power with the effective degree of duty of care. The next section, section 181, provides the guidelines for the act in good faith for the optimum interest of the organization or a justifiable purpose. The directors are not allowed to exploit their power and position for the achievement of advantage for them or even for a third party for causing detriment to the organization. In the considered case, the court found that the magnitude of harm to the company, the probable benefits, the potential risks to the company's interest due to the director's conduct would create the burden to the organisation. The violations by Storm were not reasonably predictable; however, the reasonable officer in place of Mr and MrsCassimatis will have respected them likewise. The conduct shown by the company’s directors was merely single contravention by both Mr and MrsCassimatis. The ASIC did show concern that there was just one contravention by either director. Though the behaviour of Mr and MrsCassimatis could be considered, to be honest, it was found to be not excused by the guidelines of s1317S of Corporations Act. It was because of the impactful roles and responsibilities of Mr and MrsCassimatis in the scenario and the severity of the Storm’s contraventions. In response to the application of the 180(1), the potential factors which become noteworthy are:

The rejection of the court regarding ASIC's submission, which stated that the actual breach committed by Strom was rather adequate in establishing a breach of s180 (1) by the company's directors
The court noted that the company's interest should not be interpreted narrowly and not be limited to the shareholder's interest . The interest of the company is not limited to financial loss. The company's interest could also include the reputation of the company.

There should be a different conflict of interest arising to the director, for instance, the perceived conflict, actual conflict or the potential conflict. In terms of perceived conflict, where other persons might perceive a conflict reasonably, and the perception is likely to result in the risk to financial asset or reputation is prohibited by the law . As per the provisions of the law, the non-financial interest of the organisation is also required to be examined. It is often required to examine whether the non-financial interest would be promoted by partaking in the activity. It is also required to be considered whether the non-financial interests of the organisation would damage the reputation of the company through any affiliation or action or inaction. The relation between the company and the director is fiduciary; hence the high standard loyalty is set for the duty. If the non-financial interest are the interest of the directors and officers of an organization, it should be avoided- which is the duty as per the law. The company can have non-financial interest to maintain a good reputation in the market. The Australian courts provide specific endorsement. In case of “BCI Finances Pty Limited (in liq) v Binetter (No 4) [2016] FCA 1351” the primary judge did not considered that Gary’s knowledge of the scheme can be inferred due to his participation in the similar scheme. The primary’s judge’s conclusion was supported by the Honours. Without proper evidence, the breach of director’s duties could not be breached. Thereby, the section 180 (1) regards the companies to have the non-financial interest for maintaining a good reputation as well as in complying with the Corporations Act 2001 (Cth).

2. According to the description of ‘stepping stone’ presented by Herzberg and Anderson, involves the action implemented by the court against any organization that has been involved in the contravention of Corporations Act 2001 (Cth) . the case of Rares J’s motivated the three judges who were engaged in deciding for Emmanuel and Julie Cassimatis to reconsider the breaching of s945A. Even though the case was upheld, Greenwood and Thawley JJ who directly breached s180(1). While understanding the persuasion objective of Rares J's exposition of the legal test regarding application s180(1) along with focusing on ‘stepping stone’ cases or whether to consider the reasoning of the other judges regarding majority judgment, it is necessary to understand the legal situation specifically focusing on what can be considered as important. The full federal court provides norms for understanding the duty of care along with the diligence owned by any organization and its management team in the section 180(1) of the Corporation Act . It is owed by any company is a public duty which influences the organization to consider the interest of the company itself along with the shareholders. The interest of the organization involves reducing the exposure of the company from the perspective of liability and the civil penalties, presenting with might jeopardized the license received by the company from the Australian financial service because of failing to follow the Australian trade regulation. The common perception regarding the interest of the organization and the shareholders ratifies the interest of the director of the company which generates an opportunity for breaching s180, civil penalty provision.

Emmanuel and Julie Cassimatis received an objection from the court however sought appeal for special leave in the high court. The special leave was not provided by two judges Gageler and Keane JJ in August 2020 based on the ground of insufficient reason for doubting the appropriateness of the reasoning presented by the majority of the federal court of Australia, mentioning that the grant of special leave is denied. The comment of the Full Court regarding the ‘stepping stone’ approach implied the liability of the directors and the officers regarding the breaching of statutory duty of care as a result of the breaching of law by the company. It is necessary to inform the company that on majority approach the breaching of law by a company can lead to the liability of the director and place them in front of the legal bodies and questions regarding liability. The director can be held liable for failing to take necessary action for preventing the detrimental breaching of the law. It is the responsibility of the director of the company to comply with s180(1) and it cannot be consulted for the visiting assessorial liability imposed on the directors. The director must attempt to establish that the action that has been booked as breaching of law was not reasonably foreseeable as harm which could have been used for developing interest by the organization.

As the judge of the high court, it was observed that the Cassimatis have two bases for the appeal, which was later denied by Justice Rares. The first base of Cassimatis was that Edelman J misapplied the s180 of Corporation Act while focusing on the particular section regarding abstract manner and the separation from the interest from the shareholder for the company. The Cassimatis submitted their perspective while considering Storm and its interest as the solvent company and attempted to present the interest of the Storm as that of the shareholders, the Cassimatis themselves. The second base of the legal case was the inappropriate approach towards s945A which broadly focused on retail investors and the advice provided to them. The previous prevention of s945A has currently being replaced by the Australian future of Financial Advice, which provides information regarding duty provision of best interest. Based on the particular description and basis, Justice Greenwood and Thawley withheld the decision and Rares J disagreed by focusing on s180 while allowing the appeal. Justice Greenwood noticed that, from the perspective of approach to s180, it was observed that the objective standard necessary for s180(1) is very much similar to duties mentioned in common law and the equity . The practical utility in s180(2) regarding safe harbor business Judgement Rule seems to be very little. Storm presented itself as the solvent specifically in the period of the impugned conduct. The case of ‘stepping stone’ has been considered as an unhelpful liability because the approach focused on the duty of care rather than exercising the care as well as diligence with the intention to avoid any foreseeable harm which might create a breach of the law.

The exposition of Justice Rares regarding the legal test and comparing it with the reasoning provided by Justice Greenwood and Thawley implied that the appeal of Cassimati can be persuaded legally by the high court in the hearing. The judgment presented by Greenwood and Thawley is more reasonable because the majority judgment s180(1) was based on the term of the section which provided legal guidance regarding the imposed duties for meeting the specific standard of care and practicing power to discharge duties. The study of the Storm model explains the significance risk involve from the perspective of law and could be intensively detrimental for the company that might generate the risk of losing AFSL license. The failure to meet the standards specified under s180(1) can expose the company to risk regarding assessorial liability . It can be concluded that the argument presented by Justice Rares can be encountered by the evidence and statement mentioned by Greenwood while explaining s180 and s180(1). The final decision of the appeal presented by Cassimatis is yet to be resolved and is in the hand of the judges of Full Federal Court. The judgment would be an interesting one because of the increased disagreement upon a single section 180. The company involved in the case had an important license on stake and would highly be influenced by the decision.

PART-B
180 (1) incorporates a significant duty owed to the company. It is different from the unanimous will of the shareholders. It is known that 180 (1) incorporates objective, normative and irreducible standards of diligence and care . It moves beyond the shareholders' interest. While holding a significant office by the company's director, he/she needs to understand their responsibility not only rests with the shareholder's interest but also with the public interest. The directors for this reason cannot approve, ratify, or sanction as per the shareholder's decision and demand.

The controversy lies in the fact that the director is chosen by the company, and they are supposed to function for the interest of the company, but they are also bound to serve the public interest and need to balance the action between the organization and the public interest. While serving the organization, the director is not entitled to ignore the public and shareholders' interests. If the director is found to have breached the law, he is seen to have failed in understanding the diligence and care and avoided the harm which is foreseeable in the context. The directors, in the event of bringing the company at risk, are directly liable to the company for the digressed function. The directors misleading decisions for the company or shareholders are a breach to the 180(1) . Placing the company at such a risk invites the accessorial liability.

The directors as a part of the organization and the public contribution need to generate equilibrium and prevent the company to undertake some unlawful decisions that will harm the interest of the shareholders, company, or the public . The directors under the influence of the growth and performance need to stay unbiased and take decisions accordingly. The directors need to take a neutral and unbiased action and formed a decision considering the flawless neutrality, though, in the court judgment, it was depicted that the managers are not liable if the company breaches the law and takes an unlawful step.

The court needs to enquire about the entire process and use the prudence to understand where the negligence lies. It is to be judged reasonably the situation of where the negligence of the duty of the director has taken place. The analysis of the negligence will help to determine the breaching. The judge needs to follow the breaching and find the harm that has been inflicted to the organization or the public . The harm to the public interest or the organizational interest is to be realized o understand the impact on the organization. The judges also need to be careful about the duty of care to the director. In case of breach of duty of care on the part of the director, the judges need to enquire further regarding mismanagement. The judges need to determine the liability of directors through proper inquiry. As the director exercises his power, authority is to prevent the organization from a foreseeable risk. The liability of the director is to be determined using the majority and finding discrepancies in the duty of care the directors of the company missed in allowing the company to make unlawful decisions and prevent the company from extreme risk.

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