In the recent case of Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023 the Federal Court of Australia considered the nature of the duties of care and diligence owed by directors under section 180(1) of the Corporations Act 2001 (Cth) (Corporations Act). The Court found that directors of a financial services company had breached their duties as directors, because a reasonable director with their responsibilities and in the company's circumstances should have been reasonably aware that the company was likely to contravene the Corporations Act, with catastrophic consequences for the company.


Storm Financial Limited (Storm) was an Australian financial services licence holder (AFSL) and provided financial services according to a model developed by Mr Cassimatis, one of the two directors of Storm. The model involved clients borrowing against the equity in their homes, obtaining a margin loan, using those funds to invest in index funds and establishing a cash reserve. The model was applied to all Storm clients provided they had the capacity to borrow funds. Because of the "double gearing" model used by Storm, investors sustained severe losses during the Global Financial Crisis (GFC). Mr and Mrs Cassimatis (the other director of Storm) had what the Court described as "an extraordinary degree of control over Storm".[1]

ASIC commenced proceedings in 2010 against Mr and Mrs Cassimatis for alleged breaches of their duties of care and diligence as directors of Storm under s180(1) of the Corporations Act. ASIC alleged the directors breached their duties in circumstances where Storm was solvent, Mr and Mrs Cassimatis were the only directors and shareholders and there was no dispute the directors had managed Storm in accordance with the informed wishes of the shareholders (Mr and Mrs Cassimatis). These were unique features of this case.

ASIC alleged that by providing financial services according to the model to a category of vulnerable investors who were close to retirement, had limited assets and income and no prospect of recovering their financial position in the event of loss, Storm breached the then requirement under the Corporations Act that there be a reasonable basis for financial advice to retail clients.[2] ASIC alleged the directors breached s180(1) by:

  • causing or permitting Storm to provide advice to investors according to the model which caused Storm to contravene the Corporations Act; and
  • causing or permitting Storm to provide financial advice in a manner which contravened the Corporations Act.

These actions exposed Storm to a foreseeable risk of harm including cancellation of its AFSL, a banning order and civil proceedings by investors.

ASIC alleged that Storm's exposure to risk was greater than that which a director acting with care and diligence would have allowed.

Directors' breach of s180(1)

The Court applied the test under s180(1) of whether the director had exercised a reasonable degree of care and diligence in the exercise of his powers in the discharge of his duties[3]. The Court noted that the application of the test involves a consideration of all circumstances including the foreseeable risk of harm to the interests of the company, the magnitude of that harm, the potential benefits accruing from the director's conduct and the burden to the company of any action to alleviate the foreseeable harm.

The Court found that Storm had breached the Corporations Act by providing financial services according to the model to the category of vulnerable clients identified by ASIC and the directors had breached their duties of care and diligence because:

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.[4]

The Court found that the breaches by Storm were not merely reasonably foreseeable but that a reasonable director in the position of Mr and Mrs Cassimatis would have regarded them as likely. The Court found that the course of conduct by the directors was a single contravention by each of Mr and Mrs Cassimatis and not multiple contraventions consistent with the number of investors who constituted the class of vulnerable investors. ASIC conceded that there had been only one contravention by each of the directors.

The Court also found that, while it considered Mr and Mrs Cassimatis acted honestly and "genuinely held the view that capital loss could never occur with index fund investment in the Storm model"[5], their conduct would not be excused under s1317S of the Corporations Act because of their significant roles and responsibilities and the seriousness of the contraventions by Storm.

Other issues regarding the application of s180(1)

The judgment also involved a discussion of the following issues:

  • Whether an actual breach by Storm was required for the directors to breach s180(1)

ASIC ran its case on the basis that Storm had actually breached the Corporations Act as a "stepping stone" to a breach by the directors of s180(1). The Court commented that it had "serious doubts"[1] whether an actual contravention was a requirement for a breach by a director of s180(1) but proceeded on the basis that actual contravention was required.

The Court rejected ASIC's submission that an actual breach by Storm was sufficient to establish a breach of s180(1) by the directors.

  • Whether the duties under s180(1) are owed solely to the company

The directors submitted that the duties owed under s180(1) were owed solely to the company while ASIC submitted that s180(1) prescribes a norm of conduct separate from the interests of the corporation so that a duty to the public at large is owed by directors.

The Court accepted the directors' submission but noted that the interests of the corporation should not be construed narrowly and should not be limited to the interests only of the shareholders. Nor were the interests of the corporation limited to financial loss but could also include reputational damage.

  • Whether directors can be liable for a breach of s180(1) where they are the only shareholders of a solvent company

The directors submitted that a director who is a sole shareholder of a solvent company could not breach s180(1) by conduct likely to contravene the Corporations Act. The submission was put on the basis that it is for the directors and shareholders to determine the risk a company is prepared to assume in the pursuit of profits. The directors submitted a director would be acting with care and diligence even if he or she acts intentionally in contravention of the Corporations Act because where directors and shareholders are the same, ratification of the directors' acts is implicit.

The Court rejected the submission on the basis it was not supported by the wording or context of s180(1), was contrary to principle and was not supported by authorities. Shareholders may be able to authorise acts which are breaches of the Corporations Act but cannot ratify them.

The judgment dealt with liability issues only. A hearing with respect to penalties will take place in the future.

Takeaway points

  • Directors of a solvent company in which they are the only shareholders may breach their duties of care and diligence if their conduct as directors causes the corporation to contravene the law.
  • The case indicates ASIC has a willingness to pursue proceedings in these circumstances, particularly where the breaches of the corporation adversely impact the corporation's clients.
  • Where a director of an AFSL adopts a course of conduct by way of a model investment strategy to a group or class of client investors, any contravention of the Corporations Act arising out of the course of conduct may be limited to a single breach of duty.