In the latest chapter in the saga concerning the collapse of Storm Financial Ltd, the Federal Court of Australia last week determined what penalties were to be issued to the directors.
Storm was founded by husband and wife Emmanuel and Julie Cassimatis to provide financial advice and services. The primary model it advised the vast majority of its clients to adopt involved taking out loans, secured by their homes, to invest in index funds. As a result of the 2008 financial collapse, many of Storm’s clients lost significant amounts of money.
Protracted litigation, commenced by ASIC, came to a head back in 2016 when Edelman J sitting in the Federal Court found that Mr and Mrs Cassimatis (the sole directors and shareholders of Storm) had breached their duties as directors. The essence of Edelman J’s decision was that, by allowing Storm to breach sections of the Corporations Act (the Act) regarding how financial advice ought be given, Mr and Mrs Cassimatis had breached their duty to Storm to act with care and diligence found in section 180 of the Act. That is, you cannot be said to be acting with care and diligence if you have led the company to commit a breach of the Act.
Critically, his Honour only found civil breaches of the Act, there was no finding that Mr and Mrs Cassimatis committed any criminal wrongdoing. You can read more about his Honour’s reasoning in our previous article on the case here.
What penalties were issued?
Last week the Court had to decide what penalties should flow from Mr and Mrs Cassimatis’ breaches of the Act. As Edelman J had been elevated to the High Court, the matter was passed to Dowsett J of the Federal Court.
ASIC sought that the following orders be made against Mr and Mrs Cassimatis:
- a declaration that Mr and Mrs Cassimatis had breached their duties pursuant to section 180 of the Act;
- a pecuniary penalty of $70,000 each;
- a disqualification from managing a corporation for 7 years each; and
- an injunction from holding an Australian Financial Services Licence (AFSL) for 10 years each.
The declarations were uncontroversial and his Honour made them. The Court then had to turn to the issue of whether the declarations where enough or whether, as ASIC submitted, the further penalties were necessary.
ASIC argued that they were necessary as Mr and Mrs Cassimatis’ conduct was serious, went on for a significant period of time, and it would serve the public policy goal of deterring this kind of conduct in the future. ASIC emphasised that the breaches of the Act that the Cassimatis allowed to occur exposed Storm to the risk of litigation, the loss of its AFSL, and potential penalties.
Mr and Mrs Cassimatis responded by submitting that the conduct was not serious, as no actual litigation was commenced against Storm by the aggrieved investors. His Honour rejected this, finding that “there can be no doubt” that exposing Storm to such risks was serious, and went further to say that leading such a submission showed that Mr and Mrs Cassimatis did not acknowledge the seriousness of their actions.
On the question of the quantum for the pecuniary penalties, the Court noted that the maximum penalty was $200,000. In determining what fine to issue Mr and Mrs Cassimatis, his Honour considered the penalties given in the infamous AWB and James Hardie cases. The Court found that the conduct in the present case was more serious than some of the directors involved in the AWB and Hardie cases:
“[the Cassimatis’ misconduct] continued over a lengthy period of time, was entirely initiated by them and executed under their supervision. I am inclined to think that the penalty sought by ASIC is on the low side, having regard to the cases to which have been referred. However, there are only a handful of them. In those circumstances, it is better that I adopt the figure as suggested by ASIC.”
Accordingly both Mr and Mrs Cassimatis were fined $70,000. Similarly, because of the seriousness of the misconduct, the Court found it appropriate to order that Mr and Mrs Cassimatis be disqualified for seven years from managing a company.
However, the Court declined to order any injunctions concerning Mr and Mrs Cassimatis. His Honour found that there was no basis for ASIC to seek the injunctions, as the statutory provisions in the Act authorised the Court to issue an injunction to restrain unlawful conduct, and there was nothing unlawful in seeking an AFSL.
The eye of the storm: lessons learned
The Storm case is an important reminder as to what penalties a Court can order for a breach of directors’ duties, and the factors the Court will considered in determining the amount of any fine or disqualification.
Perhaps most interesting is the concept, flowing on from Edelman J’s decision in 2016, that the seriousness of the misconduct is not mitigated by the mere fact that the Company itself did not suffer any actual loss as a result of the directors’ action. Rather, exposing the company to risk is enough to be a breach of duty. This emphasises the need for directors to be proactive in their role. McCabes offer expertise in advising directors about their duties and whether a course of action exposes you to risk, please contact us for further advice.