The collapse of Storm Financial Limited (Storm), a financial advice company based in Townsville, in the wake of the 2008 Global Financial Crisis garnered significant media attention and led to an inquiry and report by a Parliamentary Joint Committee.

Storm was founded by Emmanuel Cassimatis and his wife Julie Cassimatis as a private company initially. At relevant times, Mr and Mrs Cassimatis were the only executive directors of Storm. They also held all of the shares in Storm.

ASIC commenced proceedings in the Federal Court of Australia against Mr and Mrs Cassimatis alleging that they committed a single breach of their duty of care and diligence under s 180(1) of the Corporations Act 2001 (Cth). Section 180(1) is a civil penalty provision. It provides that:

“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:

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

On 26 August 2016, Edelman J delivered judgment against Mr and Mrs Cassimatis on the issue of liability: Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023.

The judgment provides a useful reminder as to the content of the duty under s 180(1) and the applicable principles.

Nature of ASIC’s case

ASIC presented its case against Mr and Mrs Cassamatis on the basis that they breached s 180(1) by causing and/or permitting Storm to provide advice to particular investors in accordance with the “Storm model” in a manner which caused Storm to actually contravene certain sections of the Corporations Act, including s 945A(1). That provision, which was repealed in 2012, required that a financial services licensee such as Storm must only provide advice to a client if (amongst other things):

  • having regard to information obtained from the client in relation to their relevant personal circumstances, the providing entity has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances: s 945A(1)(b); and
  • the advice is appropriate to the client, having regard to that consideration and investigation: s 945A(1)(c).

Edelman J said that “ASIC set a high bar for itself to establish liability”, to the extent that he had “serious doubt whether an actual breach by a corporation is a necessary requirement for breach of s 180(1)”. His Honour nevertheless proceeded on that basis because it was the way that the parties had conducted their case.

In terms of the particular investors, there were 45 individuals, or 27 individuals or couples, upon whom ASIC ultimately relied. In short, these were persons who were retired, or approaching retirement, and who were particularly vulnerable to losses (on account of them having little income and few assets apart from their family home and limited superannuation).

As for the Storm model of investment advice, which Mr and Mrs Cassimatis developed, in broad summary it involved the concept of borrowing to invest more than the investors would otherwise be prepared to do, for a period (or investment time horizon) of 5 years or longer. The strategy was described by one witness as “double gearing” and involved the investors (i) borrowing against the security of their homes; (ii) obtaining a margin loan; and (iii) using the funds from these loans to invest in index funds, establishing a cash reserve, and paying Storm’s fees.

ASIC further pleaded that in causing or permitting advice to be provided in a manner which caused Storm to contravene the Corporations Act, Mr and Mrs Cassimatis exposed Storm to a foreseeable risk of harm greater than that to which a reasonable director, acting with the required degree of care and diligence, would permit Storm to be exposed.

Applicable legal principles

Edelman J observed that the dominant test for the content of the duty in s 180(1) is the decision of Ipp J in Vrisakis v Australian Securities and Investments Commission (1993) 9 WAR 395, where his Honour stated (at 450) that (underline added):

the mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. … the question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.”

Another crucial matter to be considered in the “balancing” exercise is the burden (i.e. expense, difficulty and/or inconvenience) of alleviating action.

Edelman J further observed (at [483], [540]) that “the foreseeable risk of harm to the corporation which falls to be considered in s 180(1) is not confined to financial harm. It includes harm to all the interests of the corporation. The interests of the corporation, including its reputation, include its interests which relate to compliance with the law”, and the risks of exposure to sanctions from breach of the law (including non-pecuniary).

Edelman J also noted (at [492]) that that although the duty (of care and diligence) remains the same, the standard of care that a director or officer must meet “will depend upon the corporation’s circumstances and the officer’s position and responsibilities including his or her status as an executive or not”. His Honour referred to Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465 where the High Court of Australia said (at 476 [18]), in relation to the element identified in para (b), that “the responsibilities referred to in s 180(1) are not confined to statutory responsibilities; they include whatever responsibilities the officer concerned had within the corporation, regardless of how or why those responsibilities came to be imposed on that officer”. It is for this reason that non-executive directors are not subject to the same (higher) standard as executive directors.

Mr and Mrs Cassimatis submitted that s 180(1) does not apply where the directors are the sole shareholders of a solvent company; or, more specifically, that “there is nothing per se illegal in a director of a solvent company causing or permitting a company to pursue a venture, no matter how risky or even foolhardy”, if this is authorised by the shareholders. That submission was rejected by Edelman J for a number of reasons, including that it had no support in the text of s 180(1). Edelman J concluded at [523] that “the interests of the corporation includes the interests of the shareholders. Hence, where the shareholders acquiesce to a course of conduct then that acquiescence might affect the practical content of the duty. But the acquiescence does not eliminate or relieve the duty where there are other relevant interests of the corporation apart from the interests of the shareholders”.


The evidence established that in their day to day management of Storm, Mr and Mrs Cassamatis were both “integrally involved in almost every aspect of Storm’s business”. Further, they exerted “an extraordinary degree of control over Storm”, including over the financial advisers and the process for giving advice concerning the Storm model. One witness described board meetings as “information sessions” conducted by Mr and Mrs Cassimatis, at which the independent non-executive directors were passive. Edelman J observed that “Although there was some evidence of a desire by Mr and Mrs Cassimatis to encourage suggestions, communication, or new ideas, the control that they asserted was extensive to the point that it substantially stifled much possibility of dissent or contradiction, as they would have been aware”.

It was against this backdrop, of the responsibilities that Mr and Mrs Cassimatis actually had within Storm, that the s 180(1) assessment fell to be made.

Edelman J found that Storm had committed civil contraventions of s 945A(1)(b) and s 945A(1)(c) of the Corporations Act. His Honour further found that these breaches were not merely reasonably foreseeable. Rather, at the time of the breaches, a reasonable director with the responsibilities of Mr and Mrs Cassimatis would have known Storm’s clientele and demographic very well (better than anyone else in Storm, and far better informed than anyone outside Storm), and therefore should have regarded the breaches as likely. More specifically, a reasonable director of a company in Storm’s circumstances and with Mr or Mrs Cassimatis’ responsibilities would have been aware of a strong likelihood of inappropriate advice being given, in contravention of s 945A of the Corporations Act, if he or she did not exercise his or her powers to prevent or prohibit the Storm model from being applied in such indiscriminate circumstances, which included application to the vulnerable clients in the class pleaded by ASIC.

In terms of the consequences of breach, Edelman J found that although many of the relevant investors suffered significant, life-altering, losses after the GFC, these losses were neither necessary nor sufficient for Storm’s breach of s 945A. At the very least, a reasonable director with Mr and Mrs Cassimatis’ responsibilities, and in Storm’s circumstances, should have realised that discovery of the likely breaches at some point was, if not likely, at the very least a real possibility. The consequences of discovery included suspension or cancellation of Storm’s AFSL . On account of this being “a threat to the very existence of Storm”, Edelman J found that “[a]ny reasonable director would have taken this possibility extremely seriously”.

In terms of the burden of alleviating action, Edelman J found that “[i]t would have been simple to take precautionary measures to attempt to avoid the application of the Storm model” to the pleaded class of persons. Mr and Mrs Cassimatis were required, by the application of s 180(1), to take alleviating precautions which were sufficient in all the circumstances. However, they omitted to take any steps at all.

Accordingly breaches of s 180(1) by Mr and Mrs Cassimatis were found to have been established.

Edelman J also held that Mr and Mrs Cassimatis ought not fairly be excused from these contraventions under s 1317S. That provision enables a Court to relieve a person who has contravened a civil penalty provision either wholly or partly from liability if (i) the person has acted honestly and (ii) having regard to all the circumstances of the case, the person ought fairly be excused for the contravention.

Edelman J accepted that 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. However, his Honour concluded that even if explained as negligence and an honest mistake, Mr and Mrs Cassimatis’ conduct “involved a high degree of departure from the care and diligence required by s 180(1)”, and that their role and responsibilities in Storm were so significant, and the contraventions were sufficiently serious, that their conduct ought not fairly be excused.

All issues concerning remedies sought by ASIC against Mr and Mrs Cassimatis were deferred to a separate hearing.

Take-home points

  • The duty under section 180(1) requires a director or officer to balance the foreseeable risk of harm to the corporation (the magnitude of the risk and the likelihood of its occurrence) by a certain course of action or non-action, along with the burden (expense, difficulty and/or inconvenience) of taking alleviating action.
  • “harm” refers to harm to anyof the interests of the corporation. Section 180(1) does not require proof of actual or prospective loss (or financial harm) to the corporation.
  • The standard of care required to discharge the duty will depend upon the corporation’s circumstances, the director’s/officer’s position and whatever responsibilities they have.
  • Where the directors are the shareholders, that can impact considerably on the content of the duties owed to the corporation. However, the corporation is a separate legal entity and the shareholders cannot release directors/officers from their duty to the corporation under s 180(1), which has a public aspect.
  • A director or officer who assumes vast responsibilities and exercises a very high degree of control within a corporation, as opposed to devolving functions and responsibilities to suitably experienced and qualified staff and allowing others to take an active role in participating in making decisions, will necessarily increase their level of exposure to a potential breach of s 180(1).