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Commercial And Corporation Law

Question:
Read Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023 (click on the link below)http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2016/1023.html?stem=0&synonyms=0&query=Cassimatis
Answer the following questions:
1. Describe the legal issues relevant to this case.
2. Explain the relevant laws relevant to this case.
3. Discuss the arguments of the parties in this case.
4. State the decision in this case.
 
Koala Pty Ltd (Koala) is a company which operates a business selling koala soft toys to the world market. Khaled, Kanye, Keith, and Kylie are all siblings and the only directors of Koala and each owns 25 ordinary shares. When the siblings first started the company, they thought it would be a great idea for them all to be involved in an enterprise where they worked together and had control over their destiny.

Clause 9K of the constitution of Koala provides that Khaled, Kanye, Keith, and Kylie shall be directors of Koala at all times. Late last year Kanye had personal grievances with the rest of the family over the manner in which the company
was being managed. He proposed to be appointed as the managing director but the other directors voted that proposal down at a director’s meeting. His siblings now won’t speak to him and don’t want him to have anything to do with the company.At a recent board meeting, Khaled, Keith, and Kylie passed the following resolution (Kanye voted against the resolution):
 
An extraordinary general meeting was held in May 2017 where a special resolution was passed removing Clause 9K of the constitution. Thereafter, a second resolution was passed at the meeting removing Kanye as a director.After removing Kanye from the board, Khaled, Keith and Kylie attended a board meeting suspending dividends indefinitely and increasing their directors’ salary.After the May meeting, Keith and Kylie become aware that they could sell Koala
related products such as souvenirs to the world market and make a lot of money. Keith and Kylie registered a new company called Koala2 Pty Ltd (“Koala2”) in which they are the only shareholders and directors. Koala2 buys its products from local sources and sells the products to foreign markets at a massive profit.a. Solve the issues as to whether Kanye would be successful in an action against the other directors/members in relation to the share issue and/or being removed as a director.
b. Solve the issue as to whether Khaled and/or Kanye would be successful in an action against the other directors/members in relation to starting a new company without them.

Sample Answer

Issue:
The issue of the case is whether the company had breached their duty or not.

The issue is whether the company had violated the provision of section 180 of the Corporation Act or not.

The present case is based on the Corporation law of Australia. The issues of the case are attracting the provision of the breach of director’s duty and the responsibility of the director to the shareholders. The provision that is engraved under the law stated that the directors are binding to state all the risk factors regarding the business to the share holders and the grounds where they are investing money. In the present case, a violation regarding the rule had been followed and the issue of the case cropped up as a consequence.

Relevant Laws:
The present case is dealing with the principles laid down under the Corporation Act 2001. A company director bases the present case on the breach of duties (Laing, Douglas & Watt, 2015). Section 180 of the Act prescribes certain rules regarding the duties that a director has to maintain while performing his duties. A term care and diligence are mandatory for a director to show towards the staff as well as the other stakeholders of the company. The Corporation Act restricts the director from doing any arbitrary acts or misuses the power. The main purpose of the Act is to protect the interest of the staff in general. Provision of section 180 is applicable in this case. Ground of section 180(1) is wide and the internal meaning of the same is epidemic in nature (Langford, 2015).

In Australia, there is an institution named Australian Security and Investigation Commission, who deals with the related matters and conducts an investigation if there is any allegation made against a company director. Primarily the provision of section 180(1) of the Act stated that a director of a company must show due diligence regarding the company related matter. Due diligence means that he must take certain reasonable steps that a prudent man takes in certain circumstances.

Another subject that secured by the section is the company director must not hide any facts regarding the company from its shareholders who investing their money to buy the shares of the company. It is stated under the provision of the section that a company director should have to perform his duties in good faith. It is obnoxious if he misemploys his chair with some ulterior motive (Pearson, 2016). Under the Corporation Act, these provisions are engraved that make the Director of a company to perform his duties according to the rules. In Australian Securities and Investment Commission v. Fortescue Metals Group Ltd. [2011] FCAFC 19, it was held by the court that, it is not expected from a Director to violate the norms of section 180 and should not treat the violation as a stepping-stone. The rules of the Act will be applicable upon the sole directors of a company with an intention to establish a clarity regarding the company related matters and to secure the interest of the shareholders (Tills & Wills, 2016).

In Vrisakis v. Australian Securities and Investment Commission [1993] 9 WAR 395, it was held that in case of any risky business, a director should apply his prudent mind and keep a balance regarding the same to restrict the potentiality of the risk. A close interpretation of the rules laid down under the Corporation Act states that in case of contravention of the Act, loss is not mandatory to be proved (Hargovan, 2017). The actual breach holds the enough evidentiary value to hold a director guilty under the same. However, it should be kept in mind that the provisions of section 180 do not support the rule of strict liability. In Shafron v. Australian securities of Investment Commission (2012) 247 CLR 465, it was stated that responsibilities under section 180 of the Corporation Act does not limited up to the statutory duties. The responsibilities are applicable on every directors of the company. Apart from section 180, certain provisions of section 945A of Corporation Act are applicable in this case (Aroney et al., 2015).

Application:
The case of Cassimates is regarded as one of the most important cases in the history of Australia where there is a breach made by the company director regarding his duties. In this case, the provision of section 180 of the Corporation Act is applied vehemently (Rahim, & Alam, 2014). The fact of the case is that Australian Securities and Investment Commission had brought an action against the company Storm where Mr & Mrs. Cassimates was the sole director. The allegation made against them was that they had breached the provision of section 180 of the Corporation Act and misemployed their power (Sealy & Worthington, 2013). It was also alleged that they had cheated the shareholders of the company and misplaced their money.

The company was a reputed company and the directors of the company had misused the name of the company to attract the vision of the shareholders and gained money from them. Mr. Cassimates had developed an investment model called storm model and vowed to provide certain facilities to the investors. It was announced by the company that those who will invest their money to the company will get the opportunity to witness a double gearing investment and they will be eligible to borrow loan for their home and get certain marginal loan. The intention of the Directors was to grab money from the investors and bear the expenses of the storm model.

As per the statement of Australian Securities and Investment Commission, Mr. Cassimates knew that there were certain risks in the investment process but he did not made the investors alert regarding the same. Therefore, it was alleged that he had failed to act in good faith towards the shareholders of the company and breached the provision of section 180 of the Corporation Act.

On the other hand, it was contended by Mr. Cassimatis that the provision s of the section 180 of the Act will not apply on them and the reason behind the same is they are the sole director of the company.  It was stated that there is no provision regarding the Act that can specify the responsibility of the sole directors are to be governed by the section of 180 of the Corporation Act. Another statement made by them was that in case of an investment business, there are risks in general. Therefore, it is not illegal to pursue ventures regarding the same.

The court of law observed certain perspectives of the case and enlightened the provision of section 180 of the Corporation Act 2001.  The observations of the Court can be categorised as under:

The interpretation of the provisions of the Corporation Act provides certain rules regarding the duty of the directors. It is mentioned that a director should abide by the rules while enjoying his chair and he should act with care and diligence. The rule is applicable on every director of a company including the sole director. The presiding officer of the case, Edelman J. observed that there is a risk available in case of investment businesses, but it is the duty of a director to act diligently to make a balance among the risks that may accrue from the company. There should be no excuses regarding the same from the directors. Directors of the Storm Company had failed to perform the same and therefore, held liable.

 The director of the company should have to maintain certain care regarding the shareholders of a company, as they are the most important part of the other stakeholders of a company (Langford, Ramsay & Welsh, 2015). The economic background of a company very much depended on them. Mr. Cassimatis should make them know about the risk factor of Storm model but he did not. As per section 945A of the same Act, the background of the investors should be checked before investing their money. Most of the investors were from the middleclass family. The breakdown of the company made them insolvent and the outcome of the process become detrimental to them. There was a laxity observed regarding Cassimatis to take certain preventive measures to curb the risks.

 Conclusion:
Therefore, from the facts, it can conclude that Mr. & Mrs. Cassimates had breached the provisions of the section 180(1) of the Corporation Act 2001. The directors of Storm were contravening all the rules regarding the director’s liabilities. They had failed to meet all the criteria of that section. The contentions made by the directors had certain loopholes that were pointed out by the Court of law. First of all it was cleared by the observation of the court that the provisions of section 180 of the Corporation Act is applicable on the directors in general.

There was no provision that make the sole directors of a company an exception of the provision. The second thing is Mr. Cassimatis had failed to perform his duties in good faith. He had failed to describe all the risk potentials to the investors and the investors had faced serious loss when the company met with certain breakdown. He is responsible for the matter as there were no necessary steps were taken by them to control the risks. It was held by the court that there was a grave injustice made by the directors and a sheer negligence had been observed in their part. Therefore, they ought not be excused in any manner regarding the misconduct and there is no possibility for the application of section 1317S of the Act, where a director can get relief by Court if he acted honestly.

The directors base the present case on the rules regarding the proprietary company and the provision on the breach of duty. In this case, it has been observed that four siblings had constituted a proprietary company with exact share division and a constitution had been adopted where there were certain provisions regarding the management of the company. Constitutions plays an important role regarding the monitoring a company. Constitution is a kind of contract between company and stakeholders of the company. Constitution obtains certain rules regarding the management of the company and if there is a necessity cropped up regarding any changes, special resolution should be adopted. The primary condition for the special resolution is there should be minimum 75% votes in favour of the resolution.

The provisions of the Corporation Act govern the company related matters in Australia. There are certain rules specified under the Act about the composition of a company. The director of a company is appointed. Certain provisions of the Australian Security and Investigating Commission are also applicable in this case. Under section 201 H of the Corporation Act, it has been stated that a director of a proprietary company must meet the resolution process after his appointment.

In Australia, the rules regarding the company directors are of strict in nature. A director can be removed for his post as per the provision mentioned in the constitution. In the present case, it is observed that the company has a constitution where there is a rule mentioned under clause 9K that the directors will be the director at all possible times (Barnett, 2017). Therefore, there is no option left to the others directors so that they can remove any of the directors from its management body. According to section 203D of the Corporation Act 2001, a director of a company can be removed from his post by the shareholders if there is a provision mentioned in the constitution. The board of directors can remove another director if there is a provision expressly stated in the constitution of the company. There are certain provisions mentioned under the Act regarding the removal procedure of a director (Sealy & Worthington, 2013).

There should be a meeting to be organised, where all shareholders and/or the Board of Directors will take participation and the alleged director shall be removed from his or her post based on the votes. As per section 249H (1) of the Corporation Act, a notice should be served to the alleged director (Tricker & Tricker, 2015). Section 249A of the said Act provides that the notice should contain the signature of the shareholders and the directors.

However, in the present case, Kanye was removed from his post without following the rules of the constitution and therefore, he has every right to take action against other directors. However, it should be kept in mind that the provision mentioned under section 203C of the Corporation Act is a replaceable rule and if the provision is not removed, the director can be removed from his post by resolution. There is a mandatory provision regarding the removal of director is that ASIC form 484 should be lodged within 28 days. If the same rule had not been maintained in his case, he can take action against him.

It is a common rule in case of company related matters that the director of a proprietary company must have certain shares in the company. Those shares are his right. There is no provision mentioned under any law that if a director of a company getting removed from the post, his shares will be divided accordingly. Shares are his right and he shall not be deprived of it. In case of holding share in a proprietary company, the holders accrue certain rights over the issue of the company. Same question has been cropped up in the present case, where there is an attempt made to take away the share interest of Kanye. Kanye has the right to claim compensation regarding the same.

The director of a company bases the second problem on the breach of duty. Section 180 to 184 of Corporation Act 2001 is dealing with the breach of duties by directors.  There is no specific provision regarding the nature of the director. The provisions are applicable to the director of a proprietary company also. According to the provision of law, it is the utmost duty of the directors of a company to perform his job with due care and diligence. Provision of section 180 of the Corporation Act 2001 is dealing with the director’s duties. Section 181 of the Corporation Act states certain provision regarding the attitude of the directors. It has been mentioned that the director should act in good faith and always try to secure the interest of the company.

The subject matter of the present case is enlightening the provision stated in section 182 and section 183 of the Act. The main objectives of section 182 of the Corporation Act are to provide certain restriction to the director of a company so that he could misuse his position while performing the job. It is the rule that a director should not ill treat the other directors or employees and should not feather their own nest. He shall be restricted from doing any act where there is a risk arises regarding the interest of the corporation. It is the utmost duty of a director to look after the internal as well as the external matters of the company so that the interest of the company may not get harm. Directors and the stakeholders are the part of the company and the interest of the company should be treated as their own interest (Roach, 2016). The interest of the company depends upon the interest of the staff and if there is any breach occur regarding the same, the interest will be dismantled as a whole. Therefore, a director or group of director should maintain the rules of the provision and must not do anything so that the interest of the company gets affected.

     In the present case, there is a situation cropped up where two of the Board of Director of Koala Pty Ltd, Keith and Kylie had decided to start a new business and the nature of the company is similar than that of their present company (Blair, 2015). The name decided by the same is also similar to the present company. The issue of the case is whether both the directors are violating the provision of the Corporation Act 2001 or not.

It is the fact that a company director must disclose all the company related facts to the other directors and this is a well known principle of law on proprietary companies. However, here in the case, it has been observed that the duo directors are decided to start up a similar kind of business as against the present company without let the other two directors know about the fact (Coffee, Sale & Henderson, 2015). This activity is attracting the provision mentioned under section 182 of the Corporation Act. It is a fact of the case that the directors have tried to misuse their powers and position and breached the provision regarding the interest of the company. The aftermath effect of the same could be detrimental in nature. Therefore, it can be stated that the activities of Keith and Kylie attracted the provision of section 182 of the Act.

Under the Corporation Act, there is another provision explained under section 183 regarding the obligation of a director of the company. this section is based on the provision on information-based system of the company director. There is a similarity between section 182 and section 183 observed. The provisions of both the sections are of same nature. Section 182 deals with the position of the directors and section 183 deals with the uses of information by the directors of the company.

In the present case, a query regarding the rights of the other two directors of the company has been cropped up. Under the Corporation Act, there are certain penalty provisions that penalise the directors who take an attempt to violate the provision of the above-mentioned section. It has been stated under the law that the alleged directors have to face civil penalty of the same. Section 1317E of the Act prescribes penalty provisions regarding the same. It has been stated that if an allegation has been brought before the competent court of law against a director/directors on the same provision, and if the court realised that there are sufficient grounds to prove the breach, it will penalise the director or the directors in toto. Therefore, Keith and Kylie can brought action against the other alleged directors under section 182 and 183 of the Corporation Act.

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