Directors' Duties: Federal Court gives Directors a 'heads up' on s180(1)

Cassimatis v Australian Securities and Investments Commission [2020] FCAFC 52

The Full Federal Court recently heard an appeal by the directors of Storm Financial, Emmanuel and Julie Cassimatis (the Directors). The Court dismissed the appeal and confirmed that the Directors breached their duty of care and diligence when managing Storm Financial.

Guidance from the Court

In its judgment, the Full Court gives a roadmap for interpreting s 180(1) of the Corporations Act 2001 (Cth):

• s 180(1) creates an objective standard for the degree of care and diligence required of directors. Practically, this means that the Court will approach the assessment of a director's conduct by applying an objective test. That objective test dictates that a director is expected to have done what a reasonable director in the shoes of the director would have done;
• a determination of whether a director has breached the standard requires a consideration of the facts as a whole;
• s 180(1) is triggered when a director "exercises a power" or "discharges a duty" and where a director fails to exercise a power or discharge a duty. This case was a clear example of the latter, with the Court saying at [176]-[177]:

The failure of the appellants to act in the way a reasonable director would have acted, with the relevant knowledge, occupying the office, in the corporation's circumstances, with the responsibilities of the appellants, would give rise to a foreseeable risk of contraventions of s 945A(1)(b) and s 945A(1)(c) (and also s 912A(1)(a) and s 912A(1)(b)) which would expose the company to a potential loss of its AFSL and potential harm in the form of a threat to the company’s 'very existence': PJ at [774] to [778]; [102] to [108] of these reasons.

The conduct described at [172] to [176] of these reasons, coupled with the foreseeable risk of harm to the interests of the corporation (by reason of the conduct which rendered Storm in contravention of ss 945A(1)(b), 945A(1)(c), 912A(1)(a) and 912A(1)(b)), was conduct of the appellants engaging a contravention of s 180(1) of the Act: see [89] to [109] of these reasons and the conclusionary finding of the primary judge at [697], at [98] of these reasons.

• the business judgment rule contained in s 180(2) plays a part in the interpretation of s 180(1). Although the Directors did not rely on the business judgment rule in these proceedings, the Court clarified the following at [29]:

"…as to the relationship between the objective standard of care and diligence required of directors by s 180(1) and the duty of care and diligence of directors at common law and in equity, s 180(2) provides that a director who makes a business judgment (in conformity with the integers of the subsection) is taken to meet the requirements of s 180(1) 'and their equivalent duties at common law and in equity'. The section seems to treat the objective standard required by s 180(1) as equivalent to the duties at common law and in equity."

• the "responsibilities" encompassed by s 180(1) are not merely statutory responsibilities, they also include "whatever responsibilities" that rest with the director "within the corporation, regardless of how or why those responsibilities came to be imposed on that [director]".1 As noted in point 3 above, the responsibilities imposed by s 180(1) also operate where a director fails to take an action. Essentially, the duty of due care and diligence imposes a positive obligation on directors to do everything reasonably expected of them to effectively manage the affairs of the company; and
• the Court clearly set out what the consequences of a breach of s 180(1) may entail, given that it is a civil penalty provision. The Court spelled out that where ASIC is seeking that a fine be imposed on a director for a contravention of s (180)1, the Court must make a declaration that the director has contravened s (180)1 and it is being invoked as a civil penalty provision, pursuant to s 1317E(1),

(a) the elements of the declaration are prescribed pursuant to s 1317E(2) (b) a director could face a penalty of up to $1,050,000 for each breach of s 180(1). This means that, theoretically, the Court could impose the maximum fine of $1,050,000 for every instance of a breach of the duty of care and diligence.

The Court also reminded directors that where ASIC makes an application seeking disqualification, the Court can order the disqualification of a director from managing corporations pursuant to s 206C(1).

What does all of this mean?

The main implications of the Court's decision are:

• The "objective standard" under s 180(1) encompasses all things that a "reasonable director" would be "reasonably expected" to do in the position of the particular director;
• The operation of s 180(1) does not preclude the operation of the directors' duties at common law and in equity. This means a director cannot simply look to the Corporations Act for a list of what they need to do to satisfy their duties. The statutory duties sit alongside the long held common law principles; and
• The affairs of a company must be managed directly by or at the direction of the directors. The Court clarified that,

"…the business of the company is to be managed by or under the direction of the directors and the directors may exercise all of the powers of the company except any powers that the Act or the company's Constitution (if any) require the company to exercise in general meeting…"

This is a timely reminder for directors that, although directors may effectively delegate some of their decision-making, directors must ultimately oversee all decisions made on behalf of the company and accept liability for the outcomes of those decisions.

If you would like any further information about this case or directors' duties broadly, please do not hesitate to contact the authors of this article.