Case study of director of private company - Myassignmenthelp.Com

Question: Discuss about the Case study of director of the private company. Answer: Introduction The two directors involved in the case had initially founded the company involved as a private company. They were the only executive directors of Storm. All the shares in the storm were also held by them together. Allegation had been brought against the directors by the Australian Investment and Securities Commission that they have provided investment advice to a particular group of investors based on storm model in a way which lead to the violation of certain sect9ons of the Corporation Act (Cth). These sections included s 945 (1) according to which any financial service licensee like storm is only allowed to provide advice to clients by taking into consideration data taken from the client regarding their personal circumstances. In addition according to s 945 (1)(b) a reasonable advice has to be provided in all circumstances upon such consideration. Further section 945(1)(c) states that the advice has to be appropriate in relation to the investigation and consideration. In relation to the particular investors, there were 27 couples and 45 individuals upon whom the ASIC relied upon in relation to the claim. Among these investors there were persons who were approaching retirement or retired or particularly subjected to losses s they have little income, assets and very limited superannuation. The model which has been developed by the directors involved taking loans form making the investment as it was much more than they could afford or were prepared to invest for a five year or more period. One of the witnesses described the strategy as double gearing which included obtaining a marginal loan and using such funds towards investing in index funds, paying storms fee and establishing a cash reserve. The model caused severe losses to the particular group of investors involved in the case. It had been further claimed by the ASIC that through allowing such advice to be provided in a way which made the company to breach the sections of the CA, the directors of the company exposed the organization to a very foreseeable risk of losses which was much greater than what a reasonable director would have done in similar situations and having observed due skill and care towards their activities. The directors of storm have supreme discretion over the management of the company It had been argued by the defendants that as they were the only shareholders and directors of the company they cannot be held liable for the breach of directors duties. However the court held that the directors of the organization have violated section 180(1) of the CA. a few submissions of the defendant were also found correct by the court however it did not lead to any alternation in the decision. Duties breached by the directors In the given situation the directors had violated section 180(1) of the CA which is a civil penalty provision. According to the section any director or officer of the organization must use their powers and go with their duties through observing due degree of diligence and care which would have also been done by another reasonable (imaginary) person in circumstances where They were the officer or director of the company in the situation where the company was and had occupied the office which was originally held by the directors in context and had the exact responsibilities in the organization as the director in context. Thus if the hypothetical person would have indulge in the same actions as the director in context than it would be deemed that the director had complied with the duty under section 180(1) and if not the director would be held to have violated the provision. Analyzes of the court decision The decision provided in the case of Vrisakis v Australian Securities and Investments Commission(1993) 9 WAR 395 had been considered by the court in relation to the case. In the case it had been stated by the judge that the fact that the director indulge in a conduct which is associated with a foreseeable risk of injury to the best interest of the organization will not evidently result in a conclusion that there a failure to comply with 180(1) of the CA. The question can only be answered through balancing the potential benefits which could reasonably arise to accrue to the organization in relation to the conduct in context against the foreseeable risk of harm. It was further stated by the judge that even where the duty remains same, the due care which must be observed by the directors depends upon situation of the company along with the responsibility and position of the directors or officers in context. In the case of shafron v Australian Securities and Investments Commission (2012) 247 CLR 465 it was stated by the court that the responsibilities under section 180(1) are not limited to statutory responsibilities, they consists of any duty the officer had in relation to the company irrespective of how the duties had been imposed. There was a submission made by Mr and Mrs Cassimatis that s 180(1) is not applicable in situation where the sole shareholders of a solvent company are the directors. In addition it had been argued that there is no rule which restricts a director of a solvent company to indulge in a venture however foolhardy or risky it is in case such venture had been authorized by the shareholders. However, the judges did not take into account the submission provided by the defendants by stating that the text of section 180(1) does not provide for such a submission. In addition it had been provided by the judges that the interest of the company included the interest of the shareholders of the organization. Therefore in situation where the shareholders agree to a venture than the agreement may affect the actual content of the responsibility. It was established through evidence that in daily management of the company, the directors were involved in almost all matters of the organization. This means that the directors had an extraordinary degree of control over Storm which includes the process of providing advice in relation to the financial model. One of the witness provided that the meetings were conducted in form of information sessions taken by the directors and where the non executive directors were merely passive. It was therefore rightly held by the judges that although the involvement of directors would have been to encourage suggestions, the control exerted by them raised utmost possibility of contradiction or decent. It was clearly identified by the court that the provisions of s 945A(1)(b) and s 945A(1)(c) of the CA had been violated by the organization. It was further found by the judges that the breach was not only reasonably foreseeable but also when the breach was made the directors were deemed to known that demography and clientele of the company very well and thus must have considered the breach as very likely. In addition a reasonable director would have had the knowledge that the company may be subjected to legal violation of section 945A of the CA if they indulge in providing inappropriate advice to the clients. It has been provided through the case of Australian Securities Investments Commission [ASIC] v Lindberg [2012] VSC 332 that no reasonable director would indulge in an act which is the violation of any legal provisions. In the given situation where the directors of storm indulged in a violation of section 945A of the CA they have violated the provisions of section 180(1) of the CA. There is no defense available to them as a reasonable director would not have breached an existing legal provision. It was further submitted by the defendants that were honest and genuine towards holding that capital would never happen in relation to the index investment provide for through the storm model. The submission was accepted by the court, however it was held even if the actions are considered as an honest mistake or negligence, the conduct of the directors involved a high degree of departure from the care and diligence required by s 180(1) and there role in the company was so important that the breach was adequately serious and therefore cannot be excused fairly. Relevance of the case The most important ruling which have been provided through this case is that directors who are also the only shareholders in a company cannot rectify an act of the company which is illegal and therefore would be liable to the breach of section 180(1) of the CA It has also been provided through the case that although the director own a duty of care towards the company and not its shareholders under section 180(1) of the CA, the duty is not only in relation to financial losses but also extend to the any loss of reputation suffered by the company. The extent of care which needs to be observed in relation to the organization by the directors depends upon the situation of the company along with the position and responsibility which is owed by the directors of the company. The shareholders have no right to release the directors from the duty owed by them under section 180(1) of the CA. References Corporation Act 2001 (Cth) Vrisakis v Australian Securities Commission (1993) 9 WAR 395 Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023 Australian Securities Investments Commission [ASIC] v Lindberg [2012] VSC 332