On 27 March, the Full Federal Court handed down its decision in Cassimatis v Australian Securities and Investments Commission [2020] FCAFC 52.  

Justice Greenwood observed that the 'appeal is said, by the appellants, to present a unique opportunity to examine the content, scope and operation of s 180 of the Corporations Act 2001 (Cth) (the Act) because it is said to be the only case in which the Australian Securities and Investments Commission (ASIC) has alleged that directors acted in contravention of only s 180 of the Act and of no other duty or obligation arising under Chapter 2D.1 of the Act'.  

The key question for the Court to determine was whether the primary judge erred in concluding that directors Mr and Mrs Cassimatis, breached their duties under s180(1) of the Corporations Act 2001 (Cth) (the Act) by exercising their powers as directors in a way that caused inappropriate advice to be given to certain vulnerable investors by their company (in breach of s 945A(1)(b) and (c)). 

Among other issues, the case includes consideration of the application of stepping stone liability.  

Context

The appellants in this case, Mr and Ms Cassimatis were the founders, sole shareholders in, and executive directors of Storm Financial Pty Ltd (Storm). Storm held an Australian Financial Services Licence (AFSL).  

Storm's main activity was advising clients to invest in accordance with the 'Storm model', which was both designed by and very closely overseen by the appellants. The Storm model involved borrowing on the family home and entering into margin loans to invest in index funds. Once initial investments took place, clients would be encouraged to take 'step' investments over time. ASIC alleged that this advice was provided to all clients on a 'one size fits all basis' irrespective of the individual circumstances of the clients.  

According to the Australian Securities and Investments Commission (ASIC), by the time of Storm's collapse in early 2009, approximately 3,000 of its 14,000 clients had been 'Stormified' and some had sustained significant losses. 

ASIC brought proceedings against Mr and Ms Cassimatis centred around the cases of 11 vulnerable customers. The customers in question were each over 50 years old, retired or approaching and planning for retirement, with little or limited income, had few assets (usually their home, limited superannuation and limited savings) and had little or no prospect of rebuilding their financial position in the event of suffering significant loss.

ASIC alleged that: 1) by giving 'inappropriate' financial advice to these vulnerable clients Storm contravened various sections of the Act including s9451A(b) and s9451A(c); and 2) that by permitting/failing to prevent these contraventions, Storm directors Mr and Ms Cassimatis contravened their duties under s180(1).   

In Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023, the Federal Court found in favour of ASIC.  

In appealing the decision, the Appellants contended that: a) the primary judge erred in concluding that there had been contraventions by Storm of s 945A(1)(b) and (c) of the Act because ASIC did not discharge its onus of proof; and b) the primary judge erred in concluding that the Appellants breached s180(1) of the Act.

Full Federal Court's Decision

By a 2:1 majority the Full Federal Court dismissed the appeal. In dissent, Rares J agreed that breaches of s945A had been established, but maintained that ASIC failed to establish that there was any breach of s180(1).  

Contraventions of s945A by the company

Broadly, the primary judge accepted ASIC's case that Storm breached s945A(1)(b) and s 945A(1)(c) of the Act because:

• Storm did not adequately assess what would occur if there was a period of 'negative growth' or a 'negative return';
• Storm did not sufficiently take into account in the cash flows it prepared (and which it used to advise the relevant investors) how those investors could fund the strategy during negative periods; 
• Storm advised certain vulnerable investors to adopt the 'Storm model' to invest, notwithstanding that this advice was inappropriate given their personal circumstances; and 
• the advice to adopt the 'Storm model' was inappropriate even if the investors had been 'balanced investors' rather than 'conservative investors'.  

The Appellant's contended that ASIC failed to discharge its onus of proof.  

Their Honours Justice Thawley, Justice Greenwood and Justice Rares each rejected this, finding no reason to disturb the primary judge's initial findings.  Accordingly, each separately held that this aspect of the appeal should be dismissed.  

Contraventions of s180(1) 

Grounds for the Appeal

 Broadly, the Appellants argued that there was no breach of s180(1) because:

• The breaches of care and diligence are alleged to have occurred while Storm was a solvent company and while Mr and Mrs Cassimatis, as directors, were also the only shareholders. That is, as a solvent company, the Appellants contended that Storm's interests were effectively identical with the interests of its shareholders (Mr and Ms Cassimatis).  
• As the holders of all of the issued shares in the company, they maintained that they were entitled to prioritise their (and Storm’s) interest in operating the Storm model over their (and Storm’s) interest in minimising other risks e.g. the risk of adverse action being taken by ASIC or by dissatisfied investors.  
• The Appellants argued that the primary judge gave excessive weight to the 'risks' posed by the Storm model and the 'foreseeability' of those risks. In their view, the primary judge’s findings of 'catastrophic consequences' for the relevant investors was not supported by the evidence. 
• The Appellants emphasised the findings of the primary judge that they acted that honestly and that they did not attempt to conceal any information about Storm from any regulator or compliance professional.  

Confirmation of the primary judge's finding that the Appellants breached s180(1)

In separate judgements, Justice Thawley and Justice Greenwood rejected the Appellant's case and confirmed the primary judge's assessment that the Appellants' conduct was in breach of s180(1).  

Justice Thawley quotes from the initial judgement:

'…a reasonable director with Mr and Mrs Cassimatis’ responsibilities, and in Storm’s circumstances, would have realised that the application of the model to people in the pleaded circumstances was likely to involve inappropriate advice. The reasonable director would have taken some alleviating precautions to prevent the giving of that advice. I reach this conclusion for the detailed reasons given later, but with a strong awareness that it is made in the context that a director’s powers to act are, of the very nature of corporations, ones which often require risks to be taken.

Mr and Mrs Cassimatis should have been reasonably aware that the application of the Storm model would be likely to (and did) cause contraventions of s 945A(1)(b) and s 945A(1)(c). The contraventions of s 945A(1)(b) occurred because Storm did not give such consideration to the subject matter of the advice and did not conduct such investigation of the subject matter of the advice as was reasonable in the circumstances. The contraventions of s 945A(1)(c) occurred because Storm provided financial advice which was not appropriate to the investors having regard to the consideration and investigation of the subject matter of the advice that ought to have been undertaken. Those contraventions were not merely likely to occur. They were contraventions which could have (and did have) devastating consequences for many investors in that class and the discovery of those breaches would have threatened the continuation of Storm’s Australian Financial Services Licence (AFSL) licence and Storm’s very existence'.

Justice Greenwood writes:

…'the contraventions by Storm arose out of a primary failure on the part of the appellants, as directors, to act in accordance with the objective standard of care and diligence required of them by s 180(1), and features of that conduct engaged conduct which brought about the contraventions by Storm of the identified sections of the Act. In my view, that reasoning of the primary judge is entirely sound. No error has been demonstrated in the reasoning as to the principles, or the application of the principles, to the facts.'

Discussion of stepping stone liability

Both Thawley J and Greenwood J, emphasised in their respective judgements that establishing the s945A contraventions, was not of itself proof that Mr and Ms Cassimatis had breached their duties under s180(1).  

Justice Greenwood writes,

'…it is critical to keep firmly in mind that…it [ASIC] did not contend that the appellants contravened s 180(1) of the Act because Storm contravened those sections of the Act…The finding of contraventions of those sections [s945A(1)(b) and s945A(1)(c)] of the Act by Storm, and the need for ASIC to make good those contended contraventions, was critical to the case under s 180(1) against the appellants not because the contraventions by Storm of those sections of the Act would give rise to a contravention by the directors of s 180(1) in the form of some sort of dystopian accessorial liability, but rather because the contraventions by Storm, deriving from the conduct of the appellants themselves, as described, contained within it a foreseeable risk of serious harm to Storm’s interests (that is, a potential loss of its AFSL; a threat to Storm’s very existence; and suit by the vulnerable investors to address the consequences of the advice given to them and thus the contraventions by Storm), which reasonable directors, with the responsibilities of Mr and Mrs Cassimatis, standing in Storm’s circumstances, ought to have guarded against. In failing to guard against that foreseeable harm flowing from contraventions by Storm, the directors failed to discharge the degree of care and diligence required of them by s 180(1)'.

Justice Greenwood goes on to observe that, 

'…in this context, shorthand phrases such as stepping stones to liability on the part of a director or officer are unhelpful and apt to throw sand in the eyes of the analysis. The appellants were not found to have contravened s 180 of the Act because the corporation contravened the Act. The contraventions of the Act by Storm were a necessary element of the harm, but not sufficient by themselves to result in a contravention of s 180 by the appellants as directors. The foundation of the liability of the appellants resides entirely in their own conduct in contravention of the objective degree of care and diligence required of them by the statutory standard contained within s 180 of the Act'.  

In a similar vein, Justice Thawley writes,

'Section 180(1) applies according to its terms. It imposes a duty to meet the specified standard of care in exercising powers and discharging duties… A company’s contravention might be a material fact relevant to the question whether a director failed to meet the standard mandated by s 180(1) by exposing a company to risk; but it is not an essential ingredient of liability in the way it is in a case of accessorial liability. The primary judge approached the matter as a question of direct liability of the directors for failing to meet the standard of care and diligence set by s 180(1) and not as a “backdoor method” for visiting accessorial liability upon Mr and Mrs Cassimatis for a proved contravention by Storm'. 

Storm's interests

Their Honours Thawley J and Greenwood J (separately) also rejected the Appellant's contention that Storm’s interests were identical to, and limited to, the interests of its two shareholders (the Appellants).  

Justice Thawley writes,

'It is of course relevant to the degree of care and diligence which s 180(1) requires to have regard to the fact that the corporation’s interests include the interests of the shareholders and that acquiescence on the part of the shareholders might affect the practical content of what s 180(1) requires…But it is step too far to say that 100% shareholders can approve their own contravention of s 180(1) as directors. Shareholders cannot release directors from the statutory duties imposed by ss 180, 181 and 182.'

ASIC's response

Particular relevance for directors of financial services institutions

In a statement welcoming the Court's decision, ASIC emphasised the relevance for directors of financial services institutions.  

Quoting from Justice Greenwood, ASIC directs directors to take note that directors' responsibilities 'included ensuring that investors obtained from Storm (and particularly retail investors exhibiting the five characteristics of vulnerability […]), consideration and investigation of the subject matter of the advice to be given to them (and given to them), as was reasonable in all of the circumstances and that, having regard to those matters, the advice given to those investors was appropriate to each of the 11 investors in question.'

Commissioner John Price said, ‘This important decision reaffirms ASIC’s view of the importance of directors’ duties and the obligations on financial services licensees. We hope that, with this decision, the aftermath of the Storm Financial collapse is now at an end.’

[Sources: Cassimatis v Australian Securities and Investments Commission [2020] FCAFC 52; ASIC media release 27/03/2020]