FEDERAL COURT OF AUSTRALIA

Cassimatis v Australian Securities and Investments Commission

[2020] FCAFC 52

ORDERS

THE COURT ORDERS THAT:

1.    The appeal is dismissed.

2.    The appellants pay the respondent’s costs of and incidental to the appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

GREENWOOD J:

Framework considerations

1    This 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.

2    The appellants, Mr and Mrs Cassimatis, are former directors of Storm Financial Pty Ltd (“Storm”). At the time of the contravention of s 180(1) by the appellants as found by the primary judge, Storm was engaged in the business of providing financial services in the form of financial product advice to investors for the purposes of Division 3 of Part 7.7 of Chapter 7 of the Act. It had an Australian Financial Services Licence (“AFSL”) for that purpose. It had many investor clients both retail and wholesale. Shortly before the intense period of the Global Financial Crisis in the second half of 2008, Storm was a highly profitable company with annual revenues of $77M and consolidated gross assets of $120M: primary judge (“PJ”) at [1].

3    In particular, Storm provided financial product advice characterised as “personal advice” to retail investors or retail clients (for the purposes of ss 776B and 944A of the Act) which had the effect of engaging the obligations required to be discharged by Storm under s 945A of the Act. That section of the Act addresses the topic of the requirement cast upon the financial advice provider to have “a reasonable basis for the advice given to the client”. The primary judge found that Storm had failed to discharge the obligations cast upon it by s 945A(1)(b) and s 945A(1)(c).

4    Section 945A(1), at the time of the contraventions, provided that a providing entity (Storm) must only provide financial advice to the client (a retail client) if three elements were satisfied. The first element required the providing entity to “determine” the “relevant personal circumstances” of the client in relation to giving the advice and to make “reasonable enquiries” in relation to those personal circumstances: s 945A(1)(a). The text of the second and third elements was in these terms:

945A    Requirement to have a reasonable basis for the advice

(1)    The providing entity must only provide the advice to the client if:

(a)    …

(b)    having regard to information obtained from the client in relation to those 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; and

(c)    the advice is appropriate to the client, having regard to that consideration and investigation.

Note:    Failure to comply with this subsection is an offence (see subsection 1311(1)).

5    The “relevant personal circumstances” of the client was defined to mean “such of the person’s objectives, financial situation and needs as would reasonably be considered to be relevant to the advice”: s 761A of the Act.

6    The contravention of s 180(1) of the Act by the appellants, as found by the primary judge, involved, put simply, the following findings and reasoning. I will return to aspects of these matters later in these reasons.

7    First, in providing financial advice to clients, the appellants were deeply, directly engaged in managing the provision of financial advice by Storm to clients. At [21], the primary judge described the degree of control over Storm exercised by Mr and Mrs Cassimatis, as directors, as “extraordinary”.

8    Second, in exercising this degree of control over Storm, the appellants required, and thus allowed, Storm to deploy, in the provision of financial advice to retail investors, the Storm financial model (otherwise called the “Storm model”). Although the elements, as found by the primary judge, of the Storm model are explained later in these reasons, it is sufficient for present purposes to note that it involved advising clients to adopt a debt strategy of “double gearing” by obtaining loans secured over the homes of investors and also obtaining a “marginal loan” so as to invest in weighted index funds; to establish a “cash reserve”; and to pay Storm’s fees. The Storm philosophy in providing financial advice, as articulated to prospective clients at education workshops, was that “clients should embrace debt rather than be scared of debt”: PJ at [54]. In particular, the appellants required, and thus allowed, the Storm model to be deployed in the provision of financial advice to a group of investors who were “particularly vulnerable financially”.

9    Third, in doing so, the appellants failed to exercise their powers of management, as directors, and failed to discharge their duties owed to Storm, as directors, in the management of the provision of financial advice by Storm, with the degree of care and diligence that a reasonable person would exercise if they were a director of Storm, in Storm’s circumstances, and if they occupied the office held by, and had the same responsibilities within Storm, as the appellants.

10    The primary judge observed at [21] that Mr and Mrs Cassimatis used their powers as directors to create an environment in which, as they were aware, it was almost inevitable that the Storm model would be applied to people with a “high degree of financial vulnerability”. The investors falling within the class of “relevant investors” (PJ at [17]) for the purposes of the analysis of the contended contraventions were 11 individuals, each of whom exhibited the following characteristics (PJ at [18]):

(i)    they were over 50 years old;

(ii)    they were retired or approaching and planning for retirement;

(iii)    they had little or limited income;

(iv)    they had few assets, generally comprised of their home, limited superannuation, and limited savings; and

(v)    they had little or no prospect of rebuilding their financial position in the event of suffering significant loss.

11    At [18], the primary judge found that although there were other investors who had these five characteristics, ASIC’s case had been proved only in relation to the relevant 11 investors.

12    At [21], the primary judge observes that these five characteristics illustrate a class of people who were, or were amongst, the most vulnerable of Storm’s clients. The primary judge also found that due to the extraordinary degree of control exercised over Storm by the appellants, as directors, they would “reasonably have been aware that the Storm model was applied to financially vulnerable clients including [the 11 relevant investors]”. At [22], the primary judge found that a reasonable director, with the responsibilities of Mr and Mrs Cassimatis, discharging those responsibilities in Storm’s circumstances, would have realised that the application of the Storm model to investors exhibiting the five characteristics of the 11 relevant investors, was likely to involve inappropriate advice, and a reasonable director (with the responsibilities of the appellants and in Storm’s circumstances) would have taken some alleviating precautions to prevent the giving of that advice. The primary judge also observed at [22] that his Honour had reached that conclusion with a “strong awareness” of a contextual understanding that “a director’s powers to act are, of the very nature of corporations, ones which often require risks to be taken”.

13    As to the 11 relevant investors exhibiting the five characteristics described at [10] of these reasons, a feature of particular significance in ASIC’s primary case was that a group of investors called the “Part E investors” and the “Schedule investors” exhibited the characteristic that they were “retired” or “approaching and planning for retirement”. That contention, in relation to each field of investors, was contested and, in the end result, the primary judge found that the appellants had contravened s 180(1) of the Act, and that Storm had contravened provisions of the Act, in respect of the following 11 investors who were retail investors and approaching (or at) retirement. They are:

(a)    Mr Paul Dodson and Mrs Valerie Dodson;

(b)    Mr Robin Herd and Mrs Cecily Herd;

(c)    Mr Raymond Higgs and Mrs Lorna Higgs;

(d)    Ms Carlyn Knight;

(e)    Mr Peter Madden and Mrs Barbara Madden; and

(f)    Mr Malcolm Walker and Mrs Janet Walker.

14    Fourth, in failing to discharge the obligations arising under s 180(1), the appellants caused or permitted Storm to contravene s 945A(1)(b) and s 945A(1)(c). The same conduct of the appellants caused or permitted Storm to contravene s 912A(1)(a) and s 912A(1)(c). Those two sections required Storm to do all things necessary to ensure that the financial services covered by its licence were provided “efficiently, honestly and fairly” and that it complied with the financial services laws as defined.

15    The primary judge found that the contraventions of s 945A(1)(b) occurred because Storm did not give “such consideration” to the subject matter of the advice given to the vulnerable investors, and did not conduct “such investigation” of the subject matter of the advice, “as was reasonable in the circumstances”: PJ at [23]. The contraventions of s 945A(1)(c) were found to have occurred because Storm provided financial advice which was “not appropriate” to those vulnerable investors “having regard to the consideration and investigation of the subject matter of the advice that ought to have been undertaken”: PJ at [23]. I will return to the basis for these findings later in these reasons.

16    It should be noted that ASIC’s contention, in the primary proceeding (PJ at [33]), was that in causing financial advice to be given to the vulnerable investors in a manner which caused Storm to contravene s 945A(1)(b), s 945A(1)(c), s 912A(1)(a), s 912A(1)(c) and s 1041E(1) of the Act (although no convention of s 1041E(1) was established by ASIC), the appellants exposed Storm to a foreseeable risk of the following harm:

(i)    being found guilty of an offence under s 1311 of the Corporations Act;

(ii)    cancellation or suspension of Storm’s AFSL by action under s 915C(1)(a) of the Corporations Act;

(iii)    a banning order by action under s 920A of the Corporations Act;

(iv)    court orders under s 1101B(1)(a)(i) of the Corporations Act; and

(v)    civil proceedings by the [vulnerable] investors.

17    Fifth, the contraventions of ss 945A(1)(b), 945A(1)(c), 912A(1)(a) and 912A(1)(c) exposed Storm to a risk of harm which was a foreseeable consequence of the failure to exercise their powers, and discharge their duties, with the degree of objective care and diligence required by s 180(1) of the Act. The foreseeable risk of harm to Storm arising out of Storm’s contraventions of those sections of the Act mentioned above was found to be twofold. First, the contraventions by Storm “would have (and did have) devastating consequences for many investors in that class [the vulnerable investors exhibiting the five characteristics]” and, second, the discovery of those breaches would have “threatened the continuation of Storm’s [ASFL] and Storm’s very existence”: PJ at [23].

18    The primary judge found that emblematic of the “devastating consequences” confronting each of the 11 vulnerable investors exhibiting the five characteristics described at [10] is the set of circumstances of Mr Paul Dodson and his wife, Mrs Valerie Dodson. The primary judge summarised those circumstances at [11] to [14] of his Honour’s reasons. However, having regard to the consequences, as found, for this group of 11 investors, it is useful to examine the emblematic circumstances of Mr and Mrs Dodson in just a little more detail as set out by the primary judge at [167] to [182] of his Honour’s reasons, as follows (in particular, noting the end position Mr and Mrs Dodson found themselves in as reflected at [182]):

Mr and Mrs Dodson

167    When Mr and Mrs Dodson were advised by a Storm representative their circumstances were as follows. Mr Dodson was 60 years old. His wife was 55 years old. They had a combined total income before tax of $58,996 per annum which included a double orphan pension of $3,640 per annum. They were the guardians of a girl whose parents had died.

168    In 2003, Mr and Mrs Dodson sold the cake shop that they ran for 18 years. Mr Dodson started night shift work in a job doing security and traffic control. Mrs Dodson worked in aged care. They had saved superannuation, and had an investment with a Colonial managed fund, with a combined total of just over $300,000. After expenses plus 10%, they had $9,410 surplus funds each year. They owned their own home which was worth around $460,000. They had lived there for 27 years. Mr Dodson had a heart condition. They wanted to travel in retirement. Storm understood that he and his wife were “preparing for retirement in a few years”.

169    Mr and Mrs Dodson had limited investment experience. They had owned residential property and had units in the Colonial fund but they had never owned shares or investment property and had never had a margin loan.

170    In 2003, Mr and Mrs Dodson met the fund manager for the girl for whom they were guardians, Mr Fullerton-Smith. He had managed the girl’s funds following the death of her father. In the second half of 2007, Mr and Mrs Dodson discussed with Mr Fullerton-Smith the prospect of investing in the Storm model. Mr Fullerton-Smith became their Storm adviser.

171    Mr and Mrs Dodson attended the education workshop. After that, Mr Fullerton-Smith prepared a Confidential Financial Profile which Mr and Mrs Dodson signed. Their Confidential Financial Profile described their objectives as:

To live self-sufficiently and be happy until the day you die.

Travel in retirement.

172    Mrs Dodson also initialled the option on page 22 under the heading “Personal Profile” which said:

I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated.

173    In November 2007, Mr and Mrs Dodson received advice from Storm in an SOA. In internal communications on Phormula, Storm officers had considered advising Mr and Mrs Dodson to take an 80% mortgage over their home but had concluded that:

I am not sure if they will get an 80% lend so have assumed 60% against the home (this can be adjusted if need be) plus some margin lending for an investment of $315K.

174    Mr and Mrs Dodson were advised: (i) to borrow $276,000 from the Bank of Queensland to invest in indexed funds; (ii) to borrow $90,000 against that investment as a margin loan from Colonial Margin Lending, using their existing Colonial managed funds worth approximately $65,000 as security for their margin loan; and (iii) with the debt of $386,000 to obtain an investment of $315,000 in indexed funds, and reserves of approximately $21,000 in the Macquarie Investment Management Limited Cash Management Trust. The remainder, $26,960, was to be paid to Storm for its fees.

175    The investment by the Dodsons in indexed funds was ultimately as follows:

(1)    $222,000 in the Storm Australian Industrials Indexed Trust;

(2)    $105,000 in the Storm Australian Resources Indexed Trust; and

(3)    $18,000 in the Storm Australian Technology Indexed Trust.

176    Mr and Mrs Dodson accepted Storm’s recommendation. They deposited $500 per month into the Macquarie Cash Management Account. All of the interest payments from the loans were paid out of the Macquarie Cash Management Account or the interest was capitalised.

177    On 18 April 2008, Mr and Mrs Dodson received an SOAA from Storm. The SOAA recommended that they borrow an additional $53,994 from their existing margin loan with Colonial Margin Lending and use the borrowed funds to:

(1)    invest $2,000 in the Storm Australian Technology Indexed Trust;

(2)    invest $36,000 in the Storm Australian Industrials Indexed Trust;

(3)    invest $12,000 in the Storm Australian Resources Indexed Trust; and

(4)    pay Storm’s fees of $3,994.

178    They accepted that recommendation and signed the documents provided by Storm.

179    On 5 September 2008, shortly before the full impact of the GFC, Mr and Mrs Dodson received another SOAA from Storm which recommended that they borrow an additional $10,000 from their existing Colonial Margin Loan and deposit the additional borrowed funds into their Macquarie Cash Management Trust Account to build cash reserves. They accepted Storm’s recommendation.

180    On 8 October 2008 and 21 October 2008, Storm wrote to Mr and Mrs Dodson in relation to what Storm described on 21 October 2008 as “what is proving to be unprecedented world events”, namely the GFC. Storm advised them [to] switch up to 100% of their portfolios out of shares and into cash. They accepted Storm’s recommendation.

181    In January 2009 Storm went into voluntary administration.

182    Prior to investing with Storm, Mr and Mrs Dodson owned their own home. They had a Colonial investment and superannuation totalling $300,000. They had no substantial debt. Mr and Mrs Dodson now have a home loan on their house of $287,000 (with an offset of $197,000), a line of credit drawn to $32,000, and no Colonial investment. Neither has been able to retire. Mr Dodson continues to work as a casual security officer and Mrs Dodson continues to work as an aged care worker.

19    The circumstances in which Mr Robin Herd and Mrs Cecily Herd found themselves should also be noted as described by the primary judge at [183] to [201] of the primary judge’s reasons. The circumstances are these.

Mr and Mrs Herd (Part E investors)

183    Mr and Mrs Herd were married for 54 years. Until they retired in 1992, Mr Herd was a school principal, and Mrs Herd was a teacher. For the decade after they retired, Mr and Mrs Herd relied solely on their superannuation funds and part pension as a source of income.

184    Immediately before investing with Storm, Mr and Mrs Herd had a combined income of approximately $39,000 which was their aged pension, investments and dividends. They were debt free. Mr and Mrs Herd had concerns about their declining financial base.

185    In August 2007, Mr and Mrs Herd invested with Storm. In their Confidential Financial Profile, Storm estimated their assets to be $689,879. They had no liabilities.

186    Mr and Mrs Herd had limited borrowing or investment experience prior to becoming clients of Storm. They had owned a residential and investment property (for which they had borrowed money), but had never owned shares or units in a managed fund and had never had a margin loan.

187    In mid-2006, Mr and Mrs Herd were contacted by Mr O’Brien, a Storm representative who invited them to attend a Storm workshop in the Redcliffe area. Mr Herd recalled that the presentation was about how investors could make money from borrowing funds against their assets. Mrs Herd remembered how the speakers had talked about “good debt and bad debt”, about “using money to make money” and that a good way of achieving success was to use the equity in the home to borrow funds. Mrs Herd also remembered being shown lots of facts, figures and graphs.

188    Between mid-2006 and November 2006, Mr and Mrs Herd attended at least two further meetings with Mr O’Brien. They provided him with information for their Confidential Financial Profile which described their objectives as:

To increase my retirement income.

189    They described their risk profile as:

I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated.

190    Mr and Mrs Herd accepted Storm’s SOA recommendations. They signed each of the documents provided by Storm. Storm recommended that Mr and Mrs Herd:

(1)    borrow $222,000 from the ANZ Bank and $240,000 as margin loan from Macquarie;

(2)    cash out $152,000 from existing allocated pension polices;

(3)    use these funds to invest $525,000 in the Storm index funds and to pay Storm’s fees of $41,793; and

(4)    use their home, valued at approximately $480,000, as security for the loan from the ANZ bank and the margin loan from Macquarie Margin Lending.

191    On 20 March 2007, Mr and Mrs Herd were given an SOAA which recommended that they (i) borrow an additional $53,719 from Macquarie, and (ii) use the borrowings to invest $50,000 in the Storm index/trust funds and to pay Storm’s fees of $3,719. They accepted the recommendations.

192    On 16 July 2007, Storm sent Mr and Mrs Herd a second SOAA making the same recommendations again to borrow an additional $53,719 from Macquarie, and to use the borrowings to invest $50,000 in the Storm index/trust funds and to pay Storm’s fees of $3,719. Again, they accepted the recommendations.

193    On 17 August 2007, Storm sent Mr and Mrs Herd a third SOAA which recommended that they (i) borrow an additional $74,009 from Macquarie; (ii) use $69,000 of the borrowings to invest into existing investment funds; and (iii) use the remainder to pay Storm’s fees of $5,009. Again, they accepted the recommendations.

194    On 20 October 2007, Storm sent Mr and Mrs Herd a fourth SOAA which recommended that they:

(1)    redeem $20,000 of their investment in Storm index/trust funds;

(2)    deposit the funds into their cash reserve; and

(3)    replace the withdrawn funds by borrowing an additional $20,000 from their existing margin loan with Macquarie to invest in Storm index/trust funds.

195    In late 2007, Storm also recommended that Mr and Mrs Herd refinance their home loan from ANZ to NAB and increase the amount of their home loan from the $220,000 to $304,000. They accepted this recommendation.

196    On 29 July 2008, Storm advised Mr and Mrs Herd that their margin loan was in buffer at 81.66%. Storm recommended that they link $25,000 of the funds from their cash reserve to their margin loan. Mr and Mrs Herd accepted Storm’s recommendation.

197    On 8 October 2008, following the GFC, Storm recommended that Mr and Mrs Herd switch up to 100% of their portfolio out of equities and into cash, and obtain a refund of pre-paid interest. In a second letter on the same date, Storm recommended that Mr and Mrs Herd switch up to 50% out of equities and into cash. Mr and Mrs Herd did not speak to anyone from Storm about the letters. They accepted Storm’s recommendations by signing the letters. At no time did Mr Herd receive any advice about a margin call.

198    Mr and Mrs Herd had no specific recollection of closing out their investments in the Storm index funds. Initially they were unaware that most of their Storm index funds were redeemed to cash and deposited in their cash reserve account. In December 2009, they redeemed their remaining investments and deposited the funds in their bank account. They received less than $10,000 for the redemption. When they closed their margin loan account they were charged a break fee of approximately $10,000.

199    Mr and Mrs Herd were unable to meet repayment obligations on their home. They sold their home in around July 2009 for $483,000. The proceeds of the sale went to paying off their NAB home loan debt. The remaining proceeds were deposited in their bank account.

200    Before Mr and Mrs Herd invested with Storm, they had a comfortable life. Subsequently, they relied on the charity of their family, and had had to give away or sell their possessions at well below cost. They moved in to a house in Caboolture which they purchased with their remaining savings. They used their full age pension for day to day living expenses.

201    On 31 October 2014, Mr Herd died from a heart attack. He was 77 years old.

20    I will return to the relationship between the circumstances of the vulnerable investors in the context of the corporation’s circumstances and the responsibilities of the directors within the corporation, later in these reasons. It should be noted that the contravention of s 180(1) of the Act by the appellants, as found by the primary judge, occurred in circumstances where the company was solvent and in circumstances where Mr and Mrs Cassimatis, as directors, were the owners of all of the issued shares in the company: PJ at [2].

Section 180 of the Act

21    It is convenient at this point to set out the text of s 180 of the Act as it was at the time of the conduct in question. Section 180, as enacted as part of the Act in 2001 (although the particular text took this form in March 2000 for reasons relating to the legislative history of s 180) was, and remains, in these terms:

180    Care and diligence – civil obligation only

Care and diligence – directors and other officers

(1)    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:

(a)    were a director or officer of a corporation in the corporation’s circumstances; and

(b)    occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Note:    This subsection is a civil penalty provision (see section 1317E).

Business judgment rule

(2)    A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

(a)    make the judgment in good faith for a proper purpose; and

(b)    do not have a material personal interest in the subject matter of the judgment; and

(c)    inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(d)    rationally believe that the judgment is in the best interests of the corporation.

The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

Note:    This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence) – it does not operate in relation to duties under any other provision of this Act or under any other laws.

(3)    In this section:

business judgment means any decision to take or not to take action in respect of a matter relevant to the business operations of the corporation.

22    I will return to aspects of s 180 later in these reasons, however, for present purposes, these things should be noted.

23    First, the question of whether the appellants engaged in conduct in contravention of s 180 begins and ends with the text of the section as the embodiment of the objective standard of the degree of care and diligence required of directors in the exercise of their powers and the discharge of their duties (taking due account, in construing the text, of the history leading to the adoption of the text), as applied to the facts as found.

24    Second, the inquiry as to whether a director has failed to meet the objective standard required by s 180(1) is a fact-intensive analysis, of the kind undertaken by the primary judge in this case.

25    Third, s 180(1) is engaged when a director (or other officer) “exercises a power” or “discharges a duty” and accordingly it is important to identify the power or the duty being exercised or discharged and the source of the power or duty. Once engaged, the section mandates an objective standard of care and diligence in the exercise of that power or the discharge of that duty. As to the engaged scope of the section, the scope of the definition of the term “officer” in s 9 of the Act should be noted: Australian Securities and Investments Commission v King [2020] HCA 4, 11 March 2020, Kiefel CJ, Gageler and Keane JJ at [34]; Nettle and Gordon JJ at [185] and [186].

26    Fourth, with great respect to the primary judge, it seems to me that the circumstance that the appellants eschewed any reliance on the business judgment rule in s 180(2) as part of their defence does not mean that s 180(2) is to be disregarded in construing the text of the section, in context, to determine whether s 180(2) has any contextual bearing upon the construction of the integers of s 180(1).

27    Fifth, and critically, s 180(1) is normative and its burden is a matter of public concern not just private rights. It is an expression of the Parliament’s intention to establish an objective normative standard of the degree of care and diligence directors must attain or discharge in exercising a power conferred on them or in discharging a duty to be discharged by them. The objective standard is to be measured by the degree of care and diligence that a reasonable person would exercise if they were a director of the corporation “in the corporation’s circumstances” and occupying the particular office held by the director (which, for example, might be as an executive director or as a non-executive director of the corporation), and having the same “responsibilities within the corporation” as the director whose conduct is impugned. Those “responsibilities”, contemplated by s 180(1), are not just statutory responsibilities imposed upon the director by the Act but include “whatever responsibilities” [original emphasis] the director has “within the corporation, regardless of how or why those responsibilities came to be imposed on that [director]”: Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465, French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ at [18]. The primary source of the powers to be exercised by directors and the duties to be discharged by them are to be found in the Memorandum and Articles of Association for the company (the “Constitution”), the Act, any responsibilities of the director within the corporation and the scope, according to the jurisprudence, of the powers and duties of governance to be exercised by the directors. To the extent that any other legislation casts, or purports to cast, statutory obligations on a person holding the office of a director or officer of a corporation, a question will arise of characterisation of the statutory instruments to determine the content and scope of the obligation and the relationship between those obligations so arising and s 180(1). That question does not arise in this case.

28    Sixth, the normative character of the obligation can be seen by recognising that, although it is commonly said that the statutory formulation of the degree of care and diligence required of directors by s 180(1) reflects the degree of care and diligence now required by both the body of law we call equity and the common law, the remedial and regulatory consequences of rendering the obligation a normative standard of Australia’s statutory corporations law is significantly different. A contravention of s 180(1), as a civil penalty provision, requires the Court to make a declaration of contravention: s 1317E(1); the elements of the declaration are set out at s 1317E(2); a pecuniary penalty may be imposed of up to $200,000 taking into account the statutory factors: s 1317G; a compensation order may be made requiring the director to compensate the corporation for damage suffered resulting from the contravention: s 1317H; and, on application by ASIC, the Court may disqualify the director from managing a corporation for a period the Court determines to be appropriate: s 206C(1).

29    Seventh, 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.

30    Eighth, notwithstanding the normative character of s 180(1), the section does not operate to exclude duties arising at common law and in equity (whether equivalent to the objective standard of s 180(1) or otherwise). Section 185 of the Act provides that s 180 (and also ss 181 to 184) have effect in addition to, and not in derogation of, any rule of law relating to the duty or liability of a person because of their office (or employment) in relation to a corporation and the section does not prevent civil proceedings being commenced for breach of such a duty or liability. It seems clear enough that subsections 180(2) and (3) were intended to operate as something akin to safe harbour provisions making clear that a director would not find himself or herself in contravention of s 180(1) or equivalent obligations at common law and in equity if the integers of those subsections were satisfied. Thus, the savings provision in s 185 does not apply to s 180(2) and s 180(3). In any event, s 180(2) and s 180(3) seem to be “of little, if any, practical utility” (The Changing Position and Duties of Company Directors, Nettle J, Melbourne University Law Review (2018), Vol 41, 1402 at 1417) having regard to the observations of Austin J in Australian Securities and Investments Commission v Rich (2009) 236 FLR 1 at [7269] to [7278]. That approach was followed in Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364, 427 at [197] and [198] (“ASIC v Fortescue”), Keane CJ, Emmett J and Finkelstein J agreeing; see also ss 1317S and 1318 of the Act. This probably explains why the appellants abandoned any reliance upon s 180(2) in the primary proceedings. In ASIC v Fortescue at [199], Keane CJ made this observation about the relationship between s 180(1) and s 180(2) in the context of that particular case:

A separate but related answer to Forrest’s attempt to rely upon the business judgment rule is that s 180(2) cannot be construed as affording a ground of exculpation for a breach of s 180(1) where the director’s want of diligence results in a contravention of another provision of the Act and where that other provision contains specific exculpatory provisions enacted for the benefit of the director.

31    Ninth, as to the source of the power being exercised, the appellants were exercising powers as directors in the management and governance of Storm. As a matter of general principle, 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: see also s 198A of the Act. Finally, as to the utility of shorthand phrases such as “stepping stones” to liability on the part of the director, I make observations about that matter at [79] of these reasons.

Some aspects of the findings of the primary judge

32    It is now necessary to return to some of the findings of the primary judge critical to the finding of a contravention of s 180(1) by the appellants.

33    As to the “Storm model”, these aspects of the financial model and the processes surrounding it should be noted. The process adopted by Storm when advising clients had a number of stages which rarely took fewer than three months to complete: PJ at [45] and [46]. The stages of the process included:

(1)    a preliminary appointment or “primer” meeting;

(2)    an education workshop;

(3)    a Confidential Financial Profile meeting and preparation of cash flow;

(4)    a review or reviews of the recommended cash flow with the prospective client and subsequent steps including the preparation of the SOA [Statement of Affairs];

(5)    a presentation of the SOA;

(6)    the signing by the client of the loan documents and investment documentation, and the investment processing;

(7)    further investment “steps”; and

(8)    no exit plan.

34    At the education workshops, which were generally presented by Mr Cassimatis or employees chosen by him (PJ at [48]), prospective clients were told that the fundamental investment method recommended by Storm was to build wealth by using home loans and margin loans to borrow funds to invest in index funds: PJ at [51]. For almost 90% of the clients of Storm, Storm’s advice was to obtain a loan secured over the client’s house, as well as a margin loan, and to use the funds from these loans to invest in “index funds” based on the “ASX300”: PJ at [82]. The ASX300 is a market capitalisation weighted index made up of the 300 largest companies listed on the Australian Securities Exchange (ASX).

35    Storm also encouraged further investments to be made based on movements in the share market. The recommended investment advice was that if the market fell by 10% or more from the date of the initial investment, a further investment should be made using the client’s cash reserves so as to lower the average cost of the total investment. If the share market rose in value by 10% or more from the date of the initial investment, a further investment should be made by increasing the margin loan so that the ratio of the loan to the value of the client’s investment (the “LVR”) was returned to the ratio prevailing at the time of the initial investment: PJ at [51(4)].

36    At the Confidential Financial Profile meeting, prospective clients were asked to read and identify and initial a statement of the degree of volatility and risk they were prepared to accept in making investments. There were four categories of risk identified by Storm: PJ at [61]. Category 3 was: “I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated” [original emphasis]: PJ at [61]. Storm’s adviser was trained to say that Storm is “going to recommend that you invest in a volatile asset, but a safe volatile asset, and that’s why we invest in ‘supershares’” and “that’s what this third statement is all about”: PJ at [62]. The investors were also told that “[w]e’re asking you to take on the risk of a volatile asset but a safe volatile asset”: PJ at [62]. However, the “safety” of that “volatile asset”, that is, the investment in the ASX300 index fund, resided, according to Risk Category 3, in the capacity or willingness of the client to weather volatility over the “medium to long term” so that the risks inherent in volatility might be minimal or eliminated over that term.

37    Once the Confidential Financial Profile was completed and verified by the client, the Storm “data entry team” or “input cell” would enter information from the client into a cash flow spreadsheet. By late 2007, Storm had developed a database called “Phormula” and client information was then entered into that database. Initially, only the appellants had authority to prepare a cash flow. By 2006, the “cash flow committee” or “compliance cell” began to prepare cash flows, although preparation of cash flows remained “tightly controlled”: PJ at [67] and [68].

38    The cash flow was prepared in an Excel spreadsheet which included all of the client’s income and expenditure. Formulas in the spreadsheet modelled a suggested investment plan. Every plan was done over a 17 year period irrespective of the age of the client: PJ at [68].

39    Although the cash flow involved many standardised formulas, different approaches were taken for different classes of client. If a client was not retired, an overall debt ratio of 60% or less (with a home loan of 80%) would be used, and capital growth was not generally the sole source of funding for the recommended borrowings. However, for a client who was retired or nearing retirement age, the overall debt ratio was 50% or less (assuming a home loan of 60%): PJ at [69].

40    A critical component of the cash flow statement was a provision for a client’s “cash reserves”, otherwise called, a “cash dam”, held in a Cash Management Trust. The cash flow statement showed reserves of cash over a 17 year period having regard to the client’s revenue and expenses flowing from the investment recommendations; the client’s contributions and distributions; and an assumed rate of return: PJ at [70]. The primary judge observes that Storm’s practice was to leave a minimum of 12 months of interest servicing in the client’s cash reserves: PJ at [70]. A cash flow would not be approved if the client’s cash reserves were not predicted, by the cash flow statement, to increase over time.

41    However, the primary judge notes at [71] that if the cash reserve was not shown as “growing” (assuming no growth in the value of the investment itself), “the parameters were changed to allow growth in the investment, such as after a period of between two and five years for retirees”: PJ at [71]. However, these adjusted cash flows “did not factor in any period of negative growth (ie any decline in the value of the index funds)”: PJ at [71].

42    The significance of this approach to preparing a cash flow and establishing “cash reserves” for a client was put this way by the primary judge at [72]:

It will be apparent from this discussion that, as Mr McMaster explained [the expert accepted by the primary judge], the “cash flow” was not really a cash flow and that “cash reserves” were not actually cash reserves. The formulas calculated “cash reserves” as a combination of cash and growth in the index funds. The index funds were relatively liquid so that clients could generally sell them when they wanted (at least prior to the GFC) but they were not actually cash. Not only did the spreadsheet treat the growth in index funds together with cash, but it also assumed that the growth would not be liquidated because it was assumed that there would be dividends and further growth; the cash rate would only be applied to the actual cash balance of the cash reserves unless cash reserves became “negative” (because the cash had all been used and the growth had been liquidated).

[original emphasis in italics, emphasis in bold added]

43    For many clients, three cash flows would be prepared. The “recommended cash flow” was called the “viability cash flow”, which reflected the considerations described at [34] to [41] of these reasons. It formed the basis for the SOA to the client. It showed the lowest investment returns of the three cash flows. Mr Cassimatis described it as a plan that could survive under adverse conditions, but that other cash flows were more realistic: PJ at [74]. Once the prospective client was satisfied with the viability cash flow (after presentation of it to the client in a one-on-one meeting with the adviser over a period of two to four hours), a sequence of steps would then be implemented to give effect to the elements reflected in the viability cash flow leading to the final version of the delivered SOA. Consistently with the Storm model, Storm would send Statements of Additional Advice (SOAAs) to advisers for its investor clients or sometimes directly to investors to make additional “step investments” if the market fell or rose by 10% or the client’s circumstances changed: PJ at [10]. For example, Mr and Mrs Herd were given four SOAAs between 20 March 2007 and 20 October 2007. In the case of Mr and Mrs Higgs, they received seven SOAAs between 29 November 2006 and 22 January 2008.

44    In the result, as mentioned at [34] of these reasons, for almost 90% of the clients, Storm’s advice was to obtain a loan secured on the client’s home and a margin loan as well and use the funds from these loans to invest in index funds based on the ASX300. As to the remaining 10% of the clients, the primary judge observes that they were generally young people who did not have an asset base such as a family home and Storm’s advice to them was to obtain a margin loan or a personal loan to invest in indexed share funds: PJ at [82].

45    Ultimately, the primary judge found that a reasonable director with the appellants’ responsibilities, and in Storm’s circumstances, would have realised that the application of Storm’s investment model to the 11 vulnerable investors, exhibiting the five characteristics earlier described, was “likely to involve inappropriate advice” such that a reasonable director with those responsibilities and in Storm’s circumstances, would have taken alleviating precautions to prevent the giving of that advice to those vulnerable investors in order to satisfy the degree of care and diligence required by s 180(1).

46    The primary judge found that there were four essential reasons why Storm acted unreasonably within the terms of s 945A(1)(b) of the Act. The primary judge observes that the conclusions relating to those four reasons were reached in the context of the circumstances concerning Mr and Mrs Dodson, although the conclusions applied equally to the other nine relevant investors: PJ at [250]. The four reasons were these.

47    First, Storm did not give reasonable consideration to, or conduct reasonable investigation of, alternative investment strategies for those investors who were retired or who were approaching retirement: PJ at [251].

48    Second, Storm did not adequately determine the objective of its advice given to these investors, which required measurement and, where possible, quantification: PJ at [261].

49    Third, Storm did not conduct an adequate “sensitivity analysis” before advising the investors: PJ at [274]. The primary judge accepted the expert evidence of Mr McMaster that many financial planners conduct sensitivity analyses (although the practice was not universal) and that a proper sensitivity analysis exhibited these features:

Sensitivity analysis is designed to see how the client is affected if different outcomes occurred – good outcomes as well as poor outcomes – and it’s designed to show the change in equity that would occur in the event that these various outcomes came to pass, and it can be put in front of a client and shown to them,

“Look, the average return of this type of investment over the last 10 years has been X and if we had that average investment return over the [next] year, this is the outcome you would expect.

If, on the other hand, we had a negative return of the same amount, this is the outcome you would expect. If, on the other hand, we had, you know, a significant downturn, this is the outcome you could expect and if we had a significant upturn, this is the outcome you could expect,”

and by doing that, the client very clearly understands the type of risk they’re taking if any of these outcomes occur.

50    Fourth, and closely related to proposition three, Storm did not give reasonable consideration to the income of the investors “in all their circumstances”: PJ at [285]. The primary judge at [286] found that one important respect in which Storm’s consideration of the income of the investors was not reasonable, was that it did not conduct an analysis of the client’s actual cash flow, independently of the proposed investment, to determine whether the client had capacity to fund the costs associated with the borrowings and any margin calls to the extent not covered by income from the investments: PJ at [286].

51    Having considered those matters, the primary judge considered that the advice was not suitable for the relevant investors for the following three reasons.

52    First, Storm inappropriately classified the relevant investors as “Balanced investors” and advised them as such when in truth, they exhibited the characteristics of a “Conservative investor” as each of those terms are explained in the primary judge’s reasons.

53    Second, Storm included the family home of the investors in their asset portfolio for investment purposes. The primary judge notes that the evidence of the experts (about which there was agreement), and which the primary judge accepted, was that generally, the closer a person gets to retirement, the less attractive it will be to borrow against the family home: PJ at [325]. The primary judge observed that the qualification “generally” had been added by Professor Valentine because there are some investors who have the wealth or income to be able to manage a borrowing secured against the family home. However, the primary judge observed that in the case of the relevant investors, all of them “had limited wealth and limited income”: PJ at [325].

54    Third (and the primary judge observes of this consideration that it operated independently of the other two matters), in all the circumstances the advice to the relevant investors to utilise the Storm model was “generally inappropriate”.

55    As to the first of those reasons, the primary judge identifies four further reasons why an adviser could not reasonably have reached the conclusion that the relevant investors were “Balanced investors” rather than “Conservative investors”.

56    As to the second reason, the primary judge observed that without an analysis of the risk of the investment portfolio, independently of the risk to the family home, it would be inappropriate to advise the client to use the family home as part of an investment portfolio: PJ at [327].

57    As to the third reason, the primary judge concluded that the advice was inappropriate because the circumstances of the relevant investors meant that a double-geared investment which was concentrated in the share market was not appropriate for them as it involved high risk. The primary judge accepted the ultimate conclusion reached by Mr McMaster (an expert accepted by the primary judge) that the reason why the investors “suffered so badly” during the GFC was: “the concentration of investment assets in share market investments; the high level of debt relative to investment assets; and the absence of financial capacity to maintain their position during a downturn in markets”: PJ at [329]. At [330], [331] and [332], the primary judge said this:

330    To these reasons must be added the possibility of a significant market fall. The extent of the GFC was not a matter which Storm could reasonably have foreseen at the time of the advice given in the SOAs to investors, although the experts agreed that a fall of up to 10% could have been predicted. Nevertheless, even without the benefit of hindsight, the three matters to which Mr McMaster referred left the investors exposed to significant downturns in the market. A significant downturn, potentially exceeding 10% by a considerable margin, such as 22%, was a possibility [as to which the primary judge had expressed observations at [281]].

331    The experts agreed in their report that “a financial planner should generally not advise a retired person or a person nearing retirement to invest in high risk investments”. They also agreed that generally negative gearing is “high risk within a period of approximately 5 years to retirement”.

332    This point applies to all the relevant investors. …

The degree of control over Storm exercised by Mr and Mrs Cassimatis

58    A further factual matter that needs to be noted which is central to the primary judge’s finding of a contravention by the appellants of s 180(1) is the extent to which the appellants exercised control over Storm.

59    The primary judge observed that the notion that the appellants were responsible for Storm’s operations “at a high level” was not contested, although in order to determine whether their conduct gave rise to a contravention of s 180(1), it remained necessary to examine the extent of their control and the degree to which their control permeated through Storm from the highest levels of executive management to even mundane day to day activities.

60    The primary judge was satisfied that the evidence established that the appellants “had knowledge of and an extraordinary degree of control over every aspect of the Storm model and Storm’s operations including the day to day business of Storm even after the company had acquired more than 2,000 clients”: PJ at [113]. The primary judge also found that the control asserted over Storm by the appellants “was extensive to the point that it substantially stifled much possibility of dissent or contradiction, as they would have been aware”: PJ at [113]. The primary judge then identified eight separate matters going to the extent of the control exercised by the appellants.

61    Those eight matters were these.

62    First, Mr and Mrs Cassimatis controlled the Executive Committee and the Board of Storm. Mrs Cassimatis approved all draft agendas, Board papers and minutes. Mr Cassimatis chaired Board meetings. The primary judge accepted evidence that the independent, non-executive directors of Storm were “passive” at Board meetings.

63    Second, even apart from management level decisions, the appellants asserted “a high level of control over all aspects of Storm’s finances from the most serious to the most mundane”. Mr and Mrs Cassimatis gave instructions that no-one was allowed into the accounting team’s room in the head office without their authority and although Mr Barrett was the Chief Financial Officer, he could not make any payment, no matter how small, without the approval of Mrs Cassimatis when she was available: PJ at [120].

64    Third, the appellants had considerable control over the financial advisers and the process for giving advice concerning the Storm model. The primary judge accepted evidence that the appellants took the position that Storm advisers made no decisions. Rather, Storm’s “specialists” or “financial engineers” would formulate the content of and prepare all advice to clients and the appellants insisted upon approving any advice to a client which did not meet Storm’s mandated investment parameters: PJ at [121].

65    Fourth, the appellants asserted significant control over the education workshops. All changes to slides had to be approved by the appellants: PJ at [124].

66    Fifth, the appellants asserted significant control over the preparation of the cash flows and Mr Cassimatis was the main designer of the spreadsheet and formulae used in those spreadsheets. The primary judge accepted evidence that the appellants set the parameters used in the preparation of cash flows and, for a number of years, nobody other than Mr Cassimatis tested the cash flow modelling. Moreover, even when some control over the cash flows was relinquished and authority delegated to particular individuals, “Mr and Mrs Cassimatis still approved the cash flows”: PJ at [125].

67    Sixth, Mr Cassimatis led the presentations to external parties often in the presence of Mrs Cassimatis. Mrs Cassimatis would contribute to the presentations. The presentations involved education seminars, update meetings, meetings where the content of proposed advice was presented by Mr Cassimatis to the client, presentations of the Storm model to high profile prospective clients and other meetings: PJ at [129].

68    Seventh, the process of giving advice in an SOA was “tightly controlled by Mr and Mrs Cassimatis”. The primary judge accepted evidence that every Authorised Representative of Storm was primarily trained by Mr Cassimatis, with Mrs Cassimatis also providing some training in relation to compliance issues: PJ at [131]. The primary judge observed that the SOAs were prepared centrally based on a template and that Mrs Cassimatis was responsible for the changes to the SOA template. Until about 2006, Mr Cassimatis or Mrs Cassimatis “approved every SOA”. Although some authority was delegated, advisers were not permitted to create or amend an SOA: PJ at [132]. The primary judge accepted evidence that Mr and Mrs Cassimatis frequently said words to the effect that the giving of any advice to Storm clients that was inconsistent with the Storm system of advice would not be countenanced: PJ at [133].

69    Eighth, the appellants developed Storm’s relationship with external bodies.

70    At [136], the primary judge makes this observation:

Despite the extraordinary control that Mr and Mrs Cassimatis had over Storm, and despite the lack of dissent about which they were aware, to a limited extent they did encourage some approachability and transparency, and on some occasions they raised the possibility that others might take responsibility for “some” issues. As I have explained, these broad statements did not have much effect. …

The relationship between the contended contraventions of s 180(1) by the appellants and contraventions by Storm of other provisions of the Act

71    An essential aspect of the finding by the primary judge of failure on the part of the appellants to discharge the degree of care and diligence required by s 180(1), is the finding that the appellants ought to have been reasonably aware that the application of the Storm model to the 11 vulnerable investors involved Storm not giving such consideration to the subject matter of the advice to those clients, as was reasonable in all the circumstances, and not conducting such investigation of the subject matter of the advice, as was reasonable in all the circumstances. Those failures of due care and diligence on their part resulted in a finding of a contravention by the appellants of s 180(1).

72    Moreover, the failure of the appellants to discharge an obligation of due care and diligence as required of them by s 180(1) also finds expression in this way. A reasonable director, with the responsibilities of the appellants, and in Storm’s circumstances, would not have provided advice to the 11 vulnerable investors that was not appropriate to them having regard to the consideration and investigation of the subject matter of the advice that ought to have been undertaken.

73    Although the matters at [71] and [72] have the effect of giving rise to contraventions by Storm of s 945A(1)(b) and s 945A(1)(c) respectively (and in both cases contraventions by Storm of s 912A(1)(a) and s 912A(1)(c) respectively), they are matters that arise for Storm because the appellants, as directors, failed, in terms of the descriptive content of their conduct at [71] and [72], to exercise the degree of due care and diligence required of them by s 180(1) having regard to their position as directors, the degree of control they exercised over Storm and the features of the Storm model they applied to the relevant investors.

74    The conduct at [71] and [72] is the expression of failures on the part of the appellants as directors, in contravention of s 180(1), which had the effect of giving rise to contraventions by Storm. The finding that the appellants should have been reasonably aware that Storm did not give reasonable consideration, in all the circumstances, to the subject matter of the advice given to the vulnerable investors, and that Storm did not conduct an investigation of the subject matter of the advice that was reasonable, in all the circumstances, is the content of their failure to discharge the obligations arising under s 180(1). These failures are primary direct failures on the part of the appellants to discharge the obligation cast upon them by s 180(1) measured by the objective standard of that section as earlier described.

75    Thus, it is critical to keep firmly in mind that although, in the primary proceeding, ASIC contended for contraventions of ss 945A(1)(b), 945A(1)(c), 912A(1)(a) and 912A(1)(c) by Storm (and made good those contentions, leaving aside the contention, which was unsuccessful, of a contravention by Storm of s 1041E(1)), it did not contend that the appellants contravened s 180(1) of the Act because Storm contravened those sections of the Act. That would be to invert the true position. ASIC contended for conduct, on the part of the appellants, that bore the characteristics of the failures described at [71] and [72], as found by the primary judge as already described, and those failures engaged a contravention by them of their obligations under s 180(1) to exercise their powers of management and discharge their duties of management with the degree of care and diligence required of them by the subsection.

76    Mr and Mrs Cassimatis, by their conduct, as described, in contravention of s 180(1), caused Storm to contravene those sections.

77    The finding of contraventions of those sections 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.

78    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).

79    The contraventions of the particular sections of the Act by Storm were, of course, material to the foreseeable risk of serious harm to Storm which the appellants, as a matter of primary obligation on their part, were required to guard against, in the exercise of their powers of management and the discharge of their duties of management, by exercising the required statutory degree of objective care and diligence that a reasonable person would exercise in their position, in the corporation’s circumstances and having the same responsibilities within the corporation as the appellants, particularly having regard to the degree of control the appellants exercised over Storm in the way described at [58] to [70] of these reasons. Had ASIC not been able to establish conduct that engaged contraventions of the sections of the Act by Storm as found, it would have been difficult, if not impossible, to sustain the contention that the appellants engaged in a contravention of s 180(1) by failing to guard against a foreseeable risk of serious harm to Storm which was said to have arisen out of such contraventions. Importantly 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.

Some observations of the primary judge in relation to s 180(1) of the Act

80    It is necessary to note some observations of the primary judge about s 180(1) of the Act.

81    The first thing to note is that at [469], the primary judge accepted that there is a large body of authority which has treated s 180(1) as a duty which is owed only to the company, even when it is enforced by ASIC or when public sanctions are sought.

82    The primary judge accepted the appellants’ contention that the principal proceeding was concerned only with the due care and diligence obligation in relation to the discharge of their duty to manage Storm. The primary judge found that although the discharge of the duty to manage Storm gave rise to a duty to “consider Storm’s interests” [original emphasis], that duty did not “require a narrow construction of Storm’s interests which is limited only to the interests of its shareholders”: PJ at [478]. The primary judge proceeded on the basis that the “public duties” of the appellants as directors in managing Storm, “would only be contravened if they acted contrary to Storm’s interests rather than contrary to any general norm of conduct” [original emphasis] and the notion of “Storm’s interests” should not be construed narrowly: PJ at [478]. That being so, the primary judge identified three “important aspects” of the “dominant test” for the “content of the duty” arising under s 180(1).

83    First, the reference to reasonably foreseeable harm to the corporation at the time of the contended failure to exercise care and diligence (deriving from Ipp J’s formulation in Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 449-450 (“Vrisakis”), in the context of contended contraventions of s 229(2) of the Companies (Western Australia) Code 1961 (WA), is “best understood” as a reference to harm to any of the interests of the corporation and thus all of the corporation’s interests are relevant when undertaking the process of “balancing” the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the impugned conduct: PJ at [480].

84    The primary judge observes that one reason that the concept of harm ought not to be construed narrowly is that the “overarching question” raised by s 180(1) is one of “due care and diligence” in the exercise of powers, and the broad terms of the objective statutory standard do not confine the interests of the corporation which fall for consideration in complying with that standard: PJ at [481].

85    The primary judge considered that no proof of actual loss to the corporation is required by s 180(1) and harm to its interests including “reputation” might also accrue without prospective loss: PJ at [481]. The primary judge observes that harm includes “non-pecuniary consequences” for a corporation: PJ at [482].

86    Moreover, the corporation has “a real and substantial interest in the lawful or legitimate conduct of its activity independently of whether the contended illegality of the conduct will be detected or cause loss” [original emphasis]: PJ at [482]. One reason for “that interest” is the corporation’s reputation and its existence as a vehicle for “lawful activity”: PJ at [482]. At [484], the primary judge says this:

484    Although these non-financial concerns about legality of conduct are relevant considerations, in this case the potential consequences of the alleged failures to comply with the law were also serious financial threats to Storm including a potential threat to its very existence by the loss of its AFSL.

87    Second, the reference to “balancing” in the assessment of due care and skill in Vrisakis is not practically susceptible of any quantitative estimate. The task involves a consideration of the magnitude of the risk and the degree of the probability of its occurrence along with the expense, difficulty and inconvenience of taking alleviating action. It is a forward-looking exercise to try and understand what a reasonable person would have done, not a backward-looking exercise to steps which would have avoided the relevant harm: PJ at [485] to [487].

88    Third, the scope of the duty arising under s 180(1) is to be determined “in the terms of that section”, with the result that the consideration of the foreseeable risk of harm, together with the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question, must take place from the perspective of the corporation’s circumstances and the office and the responsibilities of the director: PJ at [488] and [495]. The primary judge observed that this notion has significance in this case “because of the vast responsibilities assumed by Mr and Mrs Cassimatis, and the strength of control that they asserted over Storm” [emphasis added]: as to which see [58] to [70] of these reasons.

89    At [680], the primary judge, having explained and having made findings concerning the conduct that gave rise to contraventions of s 945A(1)(b) and s 945A(1)(c), finds that “[t]hese breaches were not merely reasonably foreseeable”, rather, “[a]t the time of the breaches, a reasonable director with the responsibilities of Mr and Mrs Cassimatis should have regarded them as likely” [original emphasis].

90    At [681], the primary judge makes this observation:

681    … In particular, having regard to their responsibilities and Storm’s circumstances there was a strong likelihood of one or more breaches such as (i) a lack of reasonable consideration of alternative investment strategies; (ii) inadequately determining the objective of advice given; (iii) inadequate sensitivity analyses being performed; and (iv) a failure to consider a client’s cash flow independently of proposed income to determine the client’s ability to fund interest payments or margin calls.

[emphasis added]

91    Thus, it can be seen, that the primary judge regarded the matter of the breaches as not just “likely” but a “strong likelihood”.

92    Several factors contributed to the primary judge’s finding that a reasonable director, with the responsibilities of Mr and Mrs Cassimatis and in Storm’s circumstances, should have regarded the contraventions of s 945A a strong likelihood.

93    First, no one was more familiar with Storm’s clients, the Storm model and its application than Mr and Mrs Cassimatis: PJ at [684].

94    Second, Mr and Mrs Cassimatis exercised their powers as directors and used their “considerable assumed responsibilities to create circumstances which involved their extremely significant control over Storm and its affairs, and over its advisers”: PJ at [691].

95    Third, Mr and Mrs Cassimatis exercised their powers as directors to create education workshops which involved “strong suggestions” to potential investors “to use greater debt for investing than the investors would otherwise have been prepared to do”, including using their powers as directors to encourage the application of the Storm model “to persons who would include retired, or near-retired investors with limited income, few assets, and little or no prospect of rebuilding their financial position in the event of suffering significant loss”. The primary judge observes that these were investors “who a reasonable director with Mr or Mrs Cassimatis’ responsibilities should have concluded had an appropriately conservative approach to investment”: PJ at [692] and [693].

96    Fourth, Mr and Mrs Cassimatis used their powers as directors to create an environment in which there were few circumstances in which clients of Storm were not advised to invest using the Storm model, and those cases where clients were not advised to invest using the model, were “almost all cases where the client simply had no capacity to borrow necessary funds or where the capacity to borrow was too limited given the client’s needs for income”: PJ at [695].

97    The primary judge’s conclusions on this topic at [696] are set out below:

696    In summary, my ultimate conclusion without relying upon hindsight is that 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 contravention of the Corporations Act if he or she exercised his or her powers to cause or permit the Storm model to be applied to clients who were in the class pleaded by ASIC, particularly investors who were retired or near retirement with few assets and limited income. Or, to put this conclusion in negative terms, 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 contravention 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 clients who were retired or near retirement with few assets and limited income.

98    At [697], the primary judge makes the important observation that each of the contraventions of s 945A(1) as found “was caused or permitted by the exercise by Mr and Mrs Cassimatis of their powers and control over Storm” [emphasis added].

99    As to the unique advantage (and related to the observation at [697]), Mr and Mrs Cassimatis had, within Storm, in understanding the application of the Storm model to the circumstances of investors, because of the office they held and their responsibilities within the corporation, the primary judge made these observations at [700]:

700    … [A] reasonable director with the responsibilities of Mr and Mrs Cassimatis would have been aware that the extent of his or her responsibilities within Storm gave each of them a degree of knowledge and understanding of Storm which no other person came close to approximating. They would have been aware that this knowledge and understanding of the Storm model and its application was apparent to others. The reasonable director in their position might have drawn some comfort for a conclusion that the basic Storm model was not defective in its fundamentals or its application. But, there would have been little comfort that they could have drawn from these matters to conclude that the advice given by advisers to vulnerable clients in the position of the relevant investors was appropriate. In other words, any approval or absence of warning came from others who had far more limited knowledge of, and far more limited access to, the Storm model, Storm’s clients, and the application of the Storm model to its clients than Mr or Mrs Cassimatis.

100    In addressing the topic of “the consequences of contravention and the burden of alleviating action”, the primary judge expressed these important observations at [772]:

772    Mr and Mrs Cassimatis focused heavily upon the alleged lack of foreseeable likelihood of potential or actual breach. But, provided a breach is reasonably foreseeable, the likelihood of breach is only one matter to be considered in an assessment of the duty of care and diligence. Other crucial matters include the consequences of breach and the burden of alleviating action. Even if I had concluded that contraventions of the Corporations Act were reasonably foreseeable but unlikely (rather than my conclusion that they were likely) the consequences of breach were so significant, and the burden of alleviating action so minimal that it is still possible that a contravention by Mr or Mrs Cassimatis might have occurred. The alleviating action could have taken many forms such as for Mr or Mrs Cassimatis to take any steps to put in place any procedures for SOAs not to advise the application of the Storm model to persons in the pleaded class, broadly persons near or at retirement with few assets and limited income.

101    At [773], the primary judge notes that the “extent” of the adverse consequences that occurred for the 11 vulnerable investors was “undoubtedly” a result of the Global Financial Crisis. The primary judge also notes the content of the appellant’s submissions that there were also other contributing causes to the losses suffered by the vulnerable investors. The primary judge then says this at [773]:

773    … Nevertheless, the existence of other possible causes does not detract from the significance of another cause of the relevant investors’ loss, which was the inappropriate advice by Storm. If Storm had not inappropriately advised the relevant investors to mortgage their home and invest using the Storm model then they would not have invested in this way [in] the first place and would not have been exposed.

102    At [774], the primary judge expresses the following observations concerning the “real possibility” of discovery, at some point, of the likely breaches of s 945A; the characterisation of the consequences of such discovery as “catastrophic for Storm”; and the state of realisation a “reasonable director” would have reached, in Storm’s circumstances, with the responsibilities of Mr and Mrs Cassimatis:

774    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 of the Corporations Act. Further, although losses of this nature, whether due to the GFC or any other large market fall, might have been one way that the application of the Storm model to vulnerable investors became clear to many people outside Storm, the discovery of these breaches by Storm was not necessarily dependent upon these losses. It is not necessary to speculate upon the different ways that the breaches might have come to the attention of ASIC, whether by an adviser, a client, a competitor, a bank, or otherwise. The short point is that the likelihood of breaches, and the not insignificant size of the class of potentially vulnerable investors (retirees, with limited income and few assets) was such that the breaches were likely to be discovered at some point. 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 was a real possibility. And the consequences of discovery were catastrophic for Storm.

103    At [775], the primary judge observes that Storm was authorised by its AFSL to provide financial product advice for various classes of financial products including interests in managed investment schemes including index funds. The primary judge observes that the nature and seriousness of the contraventions by Storm were such that an action under s 915C of the Act to suspend or cancel Storm’s AFSL licence was “a real possibility”, and that consequence was not merely one which put Storm’s interests in jeopardy, but rather, “it was a threat to the very existence of Storm because s 911A of the Corporations Act requires a person who carries on a financial services business in Australia to have an AFSL”.

104    The primary judge found that “any reasonable director” would have taken this possibility “extremely seriously”.

105    At [776], the primary judge discusses another consequence of the likely contraventions by Storm. That possibility was a “banning order” being made by ASIC under s 920A(1) of the Act in circumstances of a contravention of s 912A by Storm, or in circumstances where Storm had failed to comply with a financial services law. Section 920A(1) provides that ASIC may make a banning order against a person by giving written notice to the person if any one of 11 identified events occurs, including a contravention of s 912A or a failure to comply with a financial services law. A banning order is a written order than prohibits a person from providing any financial services or specified financial services in specified circumstances or capacities: s 920B(1). A banning order may prohibit a person from providing a financial service permanently or for a specified period: s 920B(2). Section 920C(1) provides that a person against whom a banning order is made cannot be granted an AFSL contrary to a banning order.

106    The primary judge observes at [776] that, in the circumstances of the case, “a very real possibility” that arose from the likely contraventions of s 945A, was a banning order and, in that regard, the primary judge adopted the observations of Bromwich J in Panganiban v Australian Securities and Investments Commission [2016] FCA 510 at [15].

107    At [777], the primary judge accepts that Storm took some steps in an attempt to reduce some of the potential consequences identified by the primary judge arising out of the breaches of the Act as found. However, at [778], the primary judge said this:

778    But although some steps were taken, in light of the likelihood of risk of contravention in relation to the class of investors pleaded by ASIC and the seriousness of the consequences of breach, these steps were nowhere near enough to minimise the reasonably foreseeable risk presented to Storm. A reasonable director with the responsibilities of Mr or Mrs Cassimatis would have exercised his or her powers to take at least some steps to prevent advice being given to persons with all the attributes in the pleaded class (at least). Without taking some steps to address the application of the Storm model to these vulnerable investors then the number of these investors would probably have increased until some major event such as a market crash causing major losses for those in this class, brought this class into focus for those outside Storm such as ASIC.

108    In particular, as to the vulnerable investors exhibiting the five features described at [10] of these reasons, the primary judge found that “there was no, or no substantial, steps taken by Mr or Mrs Cassimatis to prevent (ie not permit) inappropriate advice [being given] to them to invest using the Storm model”: PJ at [779]. Rather, Mr and Mrs Cassimatis exercised their powers as directors in the management of Storm in a way that had the effect of “encouraging” the application of the Storm model to those vulnerable investors: PJ at [779]. The primary judge describes, as “the simple point”, the proposition that Mr and Mrs Cassimatis “omitted to take any action at all to redress the likely breaches of the [Act] which they had caused or permitted by the creation and manner of operation of the Storm model”.

109    In concluding remarks at [831] and [833], the primary judge made these observations:

831    The third element also follows from the findings that I have made. ASIC pleaded that Mr and Mrs Cassimatis failed to take reasonable steps to prevent the contraventions by Storm (which I have found to be contraventions of s 945A(1)(b) and s 945A(1)(c)) because they failed to take any steps to prevent Storm from providing advice in accordance with the Storm model to the relevant investors. ASIC submitted, and I accept, that the same matters which established the breach by Mr and Mrs Cassimatis of their obligations under s 180(1) also established this failure to take reasonable steps. As ASIC submitted, it was Mr and Mrs Cassimatis’ conduct in creating and overseeing the operation of the Storm model which caused it to be applied to clients for whom it was not suitable; Mr and Mrs Cassimatis took no steps to implement any system that would restrict the cash flow team, those preparing the SOAs, or the advisers, from giving advice to clients in the position of the relevant investors to invest in accordance with the Storm model.

833    My conclusion is that Mr and Mrs Cassimatis each contravened s 180(1) of the Corporations Act by exercising their powers in a way which caused or “permitted” (by omission to prevent) inappropriate advice to be given to the relevant investors. Those relevant investors were members of a class of investor, as pleaded by ASIC, who (in summary terms) were retired or close to retirement, had few assets, little income, and little or no prospect of rebuilding their financial position in the event of suffering significant loss. A reasonable director with the responsibilities of Mr or Mrs Cassimatis would have known that the Storm model was being applied to clients such as those who fell within this class and that its application was likely to lead to inappropriate advice. The consequences of that inappropriate advice would be catastrophic for Storm (the entity to whom the directors owed their duties). It would have been simple to take precautionary measures to attempt to avoid the application of the Storm model to this class of persons.

110    The primary proceeding before Edelman J was concerned only with the liability issues. In the result, Dowsett J considered all other subsequent issues. At [837], the primary judge, in the principal proceeding, noted that the subsequent issues included (i) the form of any declarations to be made; (ii) whether the contraventions were serious or materially prejudiced the interests of Storm (s 1317G) and, if so, the amount of any penalties; (iii) any disqualification orders to be made (including the alternative basis upon which such orders were sought under s 206E); (iv) any orders restraining Mr and Mrs Cassimatis from holding an AFSL or providing financial services; and (v) costs.

The orders appealed from by Mr and Mrs Cassimatis

111    Ultimately, Dowsett J made the following declarations and orders.

112    As to the declarations, the Court declared that:

A.    Emmanuel George Cassimatis contravened s 180(1) of the Corporations Act 2001 (Cth) by exercising his powers as a director of Storm Financial Pty Ltd, so as to cause or permit inappropriate financial advice to be given to the persons identified in the schedule to this order, causing [Storm] to contravene s 945A(1)(b), s 945A(1)(c), s 912A(1)(a) and s 912A(1)(c) of the said Act, or by failing to exercise his powers so as to prevent such contraventions; and

B.    Julie Gladys Cassimatis contravened s 180(1) of the Corporations Act 2001 (Cth) by exercising her powers as a director of Storm Financial Pty Ltd, so as to cause or permit inappropriate financial advice to be given to the persons identified in the schedule to this order, causing [Storm] to contravene s 945A(1)(b), s 945A(1)(c), s 912A(1)(a) and s 912A(1)(c) of the said Act, or by failing to exercise her powers so as to prevent such contraventions.

113    The persons identified in the schedule to the declarations are the vulnerable investors set out at [13] of these reasons. As to the orders, the Court made these orders:

…

3.    pursuant to s 1317G(1) of the [Act], each respondent pay to the Commonwealth of Australia a pecuniary penalty of $70,000;

4.    pursuant to ss 206C and 206E of the [Act], each respondent be disqualified from managing corporations for a period of seven years commencing on the date of publication of these reasons;

5.    the respondents pay the applicant’s costs of and incidental to the proceedings [followed by some detail about that matter].

6.    [the applicant pay certain aspects of the costs of the respondents in relation to particular issues].

114    The appellants appeal from all of the declarations and orders made by Dowsett J on the footing that they are predicated on the correctness of the liability judgment which is challenged on the particular grounds identified in the notice of appeal.

The grounds of appeal

115    As to s 180 of the Act, the appellants rely upon these grounds of appeal (Grounds 2 to 6):

2.    The learned primary judge erred in failing to hold that:

(a)    the interests of Storm were co-incidental with, or alternatively predominantly informed by, the wishes of its shareholders (the Appellants); and

(b)    the following considerations were of sufficient weight to negative the conclusion that s 180 was contravened:

(i)    Storm was solvent;

(ii)    the Appellants acted honestly; and

(iii)    the Appellants conducted the affairs of Storm in accordance with the unanimous wishes of its shareholders (the Appellants).

3.    Further or alternatively, the learned primary judge erred in holding (in effect) that s 180 of the Act ought to be construed as applying to the interests of a corporation in complying with the law, including the Act.

4.    Further or alternatively, the learned primary judge failed to carry out any or any adequate balancing exercise between the risks and benefits of the course of conduct by Storm that was found to have breached s 945A of the Act.

5.    As to risks:

(a)    the finding at [774] that “the consequences of discovery [of the likely breaches – being six contraventions of s 945A of the Act] were catastrophic for Storm” was unsupported by the evidence;

(b)    the finding at [833] that “the consequences of that inappropriate advice would be catastrophic for Storm” was unsupported by the evidence;

(c)    the learned primary judge gave excessive weight to Storm’s reputational and non-financial interests in complying with the law, which were not pleaded by ASIC as interests of Storm for the purposes of s 180 of the Act;

(d)    in determining the extent to which the risks would have been apparent to a reasonable director in the position of the Appellants, the learned primary judge failed to give sufficient weight to:

(i)    the fact that each of the impugned SOA and SOAA were provided to clients by financial advisers other than the Appellants;

(ii)    the preponderance of the evidence that the financial advisers employed by Storm took account of its clients’ relevant personal circumstances;

(iii)    the fact that many organisations (including the Respondent) and individuals had reviewed Storm’s practices and its proposed public prospectus without raising concerns;

(iv)    the fact that Storm had thousands of clients yet only received 10 complaints in the period from 2001 (the first complaint recorded in Storm’s register of complaints) to September 2008 (the date of the most recent impugned SOAA);

(v)    the lack of evidence as to the extent or magnitude of the risks pleaded; and

(vi)    the steps taken by the Appellants to avoid or limit the harm to the interests of Storm pleaded by the Respondent.

6.    As to benefits:

(a)    the learned primary judge failed to give any or any sufficient weight to the desirability of Storm being operated in the manner desired by its owners (the Appellants); and

(b)    the learned primary judge failed to give any or any sufficient weight to the financial benefits that accrued to Storm over many years from its approach to providing financial advice.

116    It is convenient to also mention at this point the following grounds of appeal in relation to s 945A of the Act (Grounds 7 and 8).

7.    The learned primary judge erred in construing s 945A of the Act effectively on the basis that advice to a person with the characteristics pleaded [paras 784(a) to (e) of the Statement of Claim], to borrow money to purchase units in the relevant Index Funds, secured in part on his or her residence would always be inappropriate, in contravention of s 945A(1).

8.    The learned primary judge:

(a)    ought to have found that the Respondent had not proved, to the requisite standard, what were the relevant personal circumstances of each Relevant Investor, as the Respondent had not proved their subjective willingness to accept a risk of capital loss;

(b)    consequently, should not have concluded that Storm had contravened:

(i)    subs 945A(1)(b) of the Act; or

(ii)    subs 945A(1)(c) of the Act,

in respect of the Relevant Investors.

The contentions of the appellants in relation to s 180(1) of the Act

117    The appellants say that the “primary basis” for this appeal is that the trial judge “misapplied” s 180 of the Act.

118    The “secondary basis” is said to be that the primary judge erred in finding that Storm contravened s 945A of the Act.

119    The appellants observe that the primary judge proceeded on the basis that the appellants’ duties as directors could only be contravened if they acted contrary to the interests of Storm. The criticism is that the primary judge identified the interests of Storm in “an abstract manner, divorced from the wishes of its shareholders”. The appellants say that, as a solvent company, Storm’s interests were effectively those of its shareholders (the appellants) and the appellants were entitled to risk their capital as they saw fit, even if this exposed Storm to a risk of financial loss or other detriment that might have been excessive, viewed objectively. They say that Storm had no “innate interest” in being profitable or being “a good corporate citizen” or even “being in existence”. They say that once it is recognised that Storm’s interests were “co-incidental with, or at least predominantly informed by, the wishes of the appellants”, it follows that the appellants were entitled to choose their own priorities and their own level of tolerance for risk. They say that so far as the reach of s 180 is concerned, the appellants were entitled, as the holders of all of the issued shares in the company, to prioritise their (and Storm’s) interest in operating the Storm model over their (and Storm’s) interest in minimising the risk of adverse action being taken by ASIC or disgruntled investors.

120    They also say that if Storm had interests which are “separate” to those of the appellants, the primary judge gave insufficient weight to the desire of the appellants, as the owners of the shares, to operate the Storm model in the way in which it was deployed by Storm, and to the historic success and profitability of that model. They also say that the primary judge gave excessive weight to the “risks” posed by the Storm model and the “foreseeability” of those risks. They say that the primary judge’s findings of “catastrophic consequences” for the relevant investors was not supported by the evidence, and indeed contrary to the evidence. They say that a reasonable director in the position of the appellants, in the circumstances of Storm, would not have foreseen catastrophic consequences flowing from applying the Storm model to investors such as those described as the relevant investors.

121    The appellants say that the primary judge identified Storm’s interests as including an interest in acting lawfully and an interest in having a good reputation. They say that no evidence is identified to support these observations and they rise no higher than “general statements of principle”.

122    The appellants then say that the “real position” is that corporations “do not have any desires or interests beyond those of its stakeholders” and in the case of a solvent company, those stakeholders, at least for practical purposes, are the shareholders as a general body who act in a plenary way.

123    Thus, emphasis is given by the appellants to the proposition that, conversely to the primary judge’s findings, a key interest of Storm was “to give effect to the wishes of its shareholders”. The primary judge is said to have identified, in large measure, the interests of Storm in a “theoretical” rather than in a “subjective and factual” manner. They also say that his Honour overstated the risks of applying the Storm model to the relevant investors and the foreseeability of the risks of doing so.

124    The appellants say that the consequences of applying the Storm model to the relevant investors was not that it brought about a catastrophic result. Rather, what proved catastrophic for Storm was the intervention of the Global Finance Crisis.

125    The appellants emphasise the findings of the primary judge at [814] that Mr and Mrs Cassimatis acted honestly and that they did not attempt to conceal any information about Storm from any regulator or compliance professional.

Considerations concerning the contentions of the appellants in relation to s 180(1)

126    It is necessary to briefly say something about the history of the statutory text of s 180 before returning to the all-important text, informed, as it is, by general law antecedents.

127    In 1872, the Lord Chancellor, Lord Hatherley, in The Overend & Gurney Co v Gibb (1872) LR 5 HL 480 at 486-487 (“Overend”) observed that, assuming directors had not stepped beyond the scope of the powers conferred upon them, the question of whether they had breached their duty of care in the exercise of their powers and the discharge of their functions was one of whether “they were cognisant of circumstances of such a character, so plain, so manifest, and so simple of appreciation, that no men [or women] with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into” [emphasis added]. Lord Hatherley LC concluded these remarks with this question: “Was there casa negligentia on their part which, … is, … shewn by the facts, so that they should be fixed with the loss of the fund entrusted to their hands …?”

128    In 1895, a Committee of the United Kingdom, chaired by Lord Davey, recommended the enactment of an amendment to the Companies Acts to adopt a provision in these terms (at clause 10(2) of the Bill): “Every director shall be under an obligation to the company to use all reasonable care and prudence in the exercise of his powers, and shall be liable to compensate the company for any damage incurred by reason of neglect to use such care and prudence”.

129    The Committee, at para 32 of its Report, observed that: “[i]t may also be thought [that such a clause in those terms] … goes beyond any actual decision of the courts” and added, also at para 32, “[b]ut your Committee think it is right in principle”.

130    That recommendation was a bridge too far beyond Lord Hatherley LC’s formulation in Overend of the limits of the duty and, in the result, the Committee’s recommendation was not enacted.

131    It was also a bridge too far for the Victorian legislators a year later in 1896 although they went halfway towards the Davey recommendation. Section 116(2) of the Companies Act 1896 (Vic) was in these terms: “Every director shall be under an obligation to the company to use reasonable care and prudence in the exercise of his powers and duties, and shall be liable to compensate the company for any damage incurred by reason of culpable neglect to use such care and prudence” [emphasis added]. That provision established, with one hand, a standard or obligation owed, to the company, by directors to use reasonable care and diligence in the exercise of powers and the discharge of duties, but, with the other hand, limited the remedial compensation obligation owed to the company, to damage incurred by reason of “culpable neglect”. Nevertheless, the statutory intervention into the duty of a director to “use reasonable care and prudence” in the exercise of powers and duties was significant in making that matter a matter of statutory “public concern”: The Origins of Company Directors’ Statutory Duty of Care (2015) 37 Sydney Law Review 489 at 490-492, Rosemary Teele Langford, Ian Ramsay and Michelle Welsh; The Changing Position and Duties of Company Directors (2018) 41 MULR 1402 at 1408, Nettle J.

132    However the provision was repealed in 1910 in order to align the company law of Victoria with that of the United Kingdom.

133    As to the company law of the United Kingdom, the observations of Romer J in 1925 in In re City Equitable Fire Insurance Company Limited [1925] 1 Ch 407 at 428-429 proved fundamental. In that case, the liquidator of the company sought to make the respondent directors, all of whom acted honestly (but for the managing director), liable for negligence in respect of the substantial losses suffered by the company due to the decisions and conduct of the managing director. At 427, Romer J confessed to some “difficulty of understanding” about the distinction or difference between negligence and gross negligence, in this context, but said, of the duty to exercise “some degree of both skill and diligence” (at 427), that a director does not owe a duty to his company, “to take all possible care”: at 428. The director must act honestly, and the duty was one of reasonable care “measured by” the care an ordinary man or woman might be expected to take, in the circumstances, on his or her own behalf: at 428. That observation, however, was seen by Romer J as simply restating the remarks derived from Overend, quoting, at 428, the passage quoted at [127] of these reasons (leaving aside, however, the final question of whether there was evident casa negligentia): at 428. However, four other observations became part of the Romer J “principles”.

134    First, a director need not exhibit, in the performance of his or her duties, “a greater degree of skill than may reasonably be expected from a person of [the director’s] knowledge and experience”: at 428.

135    Second, directors are not liable for mere errors of judgment: at 429.

136    Third, a director is not bound to give continuous attention to the affairs of the company: at 429.

137    Fourth, due to the “intermittent nature” of his or her duties, the director is justified (having taken into account the Articles of Association and the exigencies of the business), in the absence of grounds for suspicion, in entrusting a company official to perform some aspects of the duty: at 429.

138    These observations of Romer J coupled with the comments in Overend represent the high watermark of a subjective standard of the degree of skill, care, prudence and diligence a director would need to bring to the exercise of powers and the discharge of his or her duties.

139    In Australia, statutory intervention occurred again in the form of s 107(1) of the Companies Act 1958 (Vic) which cast an obligation on a director “at all times, to act honestly and use reasonable diligence in the discharge of the duties of his [or her] office”. In introducing the Bill, the Victorian Attorney-General described clause 107 as “new and so far as is known, is not to be found in any other legislation relating to companies in the English-speaking world”. A breach of s 107(1) rendered the director guilty of an offence and liable to a penalty of not more than £500. Moreover, the director would be liable, to the company, for “any profit made” by him, as a result of a breach of any of the obligations arising under s 107, consistent with the fiduciary nature of the obligations owed by the director to the company, and liable for any “damage suffered” by the company as a result of the breach: s 107(3). Further, nothing in s 107 was to prejudice any other “rule of law” relating to the duty or liability of directors (or officers): s 107(4).

140    The Explanatory Memorandum described s 107 as “declaratory” of the “existing law” which, as Gummow and Hayne JJ note in Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507 at [62] (“Angas Law”), “meant the civil law” as “the joinder of civil and criminal remedies meant that the section could not be described as simply declaratory of the law as a whole”. Section 107, however, like s 116(2) of the Companies Act 1896 (Vic), encompassed again a recognition that the duty to be discharged by a director was a matter of “public concern” and properly to be regarded as a matter of public law, not just a matter of the law of private rights and obligations between directors and the company inter se.

141    Section 107 was re-enacted as s 124 of the various Uniform Companies Acts of 1961.

142    Various reform proposals emerged resulting ultimately in a national cooperative companies and securities legislative scheme based on model Commonwealth legislation for the Australian Capital Territory in the form of the Companies Act 1981 (Cth), with adopting legislation in each State jurisdiction. Section 229(1) cast a statutory duty on an officer of the corporation to act “honestly in the exercise of his [or her] powers and the discharge of the duties of his [or her] office”. The section imposed a penalty of up to $5,000. Where a director acted with an intention to deceive or defraud the company, members or creditors, a penalty of $20,000 or imprisonment for five years or both would apply. As to “care and diligence”, s 229(2) provided that an officer of the corporation must “at all times exercise a reasonable degree of care and diligence in the exercise of his [or her] powers and the discharge of his [or her] duties”. A penalty of $5,000 applied. Where a director was convicted of an offence under s 229 and the Court was satisfied that the corporation had suffered loss or damage as a result of the acts or omissions constituting the offence, the Court was conferred with power to order the director to pay compensation to the corporation: s 229(6). Section 229(2), so far as a standard of care and diligence was concerned, ushered in an objective standard of “care” and “diligence” which probably carried with it such a standard, in relation to notions of “skill” and “prudence”. Against that statutory background, Tadgell J in Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 126 (at lns 15-22) said this:

… the parliaments and the courts have found it necessary in legislation and litigation to refer to the demands made on directors in more exacting terms than formerly; and the standard of capability required of them has correspondingly increased. In particular, the stage has been reached when a director is expected to be capable of understanding his company’s affairs to the extent of actually reaching a reasonably informed opinion of its financial capacity.

143    In the Companies and Securities Law Review Committee’s Discussion Paper, No 9, of April 1989, the observation is made that there is “no clear indication that [s 229 of the 1981 Act] changes the standard of care to be achieved by [directors]”. The Corporations Act 1989 (Cth) was assented to on 14 July 1989. Section 232 commenced on 1 January 1991. Sections 232(2), 232(4) and 232(7) were in the same terms as ss 229(1), 229(2) and 229(6), respectively.

144    Doubts about whether the legislation adopted an objective standard of care and diligence continued: Report on the Social and Fiduciary Duties and Obligations of Company Directors, Senate Standing Committee on Legal and Constitutional Affairs, November 1989, para 3.28 (the “Cooney Report”). The Corporations Legislation Amendment Act 1990 (Cth) had amended the Corporations Act 1989 (Cth) to establish, by s 82, a body of law called the Corporations Law.

145    Having regard to the concerns referred to in the Cooney Report and similar other concerns about the adequacy of the objectivity of the standard, The Corporate Law Reform Act 1992 (Cth) amended the Corporations Law to insert, by s 11, a new formulation of s 232(4) in these more familiar and contemporary terms: “In the exercise of his or her powers and the discharge of his or her duties, an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation’s circumstances”. In the Explanatory Memorandum for the Bill, the observation is made at para 82 that the amendment to s 232(4) is made “to reinforce that the duty of care is an objective one” and, at para 84, “[t]he inclusion of the expression ‘a reasonable person’ is intended to confirm that the required standard of care and diligence is to be determined objectively”.

146    Notwithstanding those earlier concerns about whether s 229 had achieved an objective standard of care, Clarke JA and Sheller JA were able to express these views about the duty of care of directors at common law set against the legislative background, in Daniels (formerly practising as Deloitte Haskins & Sells) v Anderson (1995) 37 NSWLR 438 at 503 (“Daniels”):

The modern cases to which we have referred, set in the context of a legislative pattern of imposing greater responsibility upon directors, demonstrate that the director’s duty of care is not merely subjective, limited by the director’s knowledge and experience or ignorance or inaction. The duties of a director are eloquently explained in the judgment of Pollock J, giving the opinion of the Supreme Court of New Jersey, in Francis v United Jersey Bank 432 A 2d 814 (NJ 1981). [Although the] legislative context was different … the judgment exposes … what is generally expected of directors not only in the United States but in Australia and elsewhere.

147    As to those elements, their Honours accepted (at 503-504) that the duty of care comprehended these things: a director should acquire at least a rudimentary understanding of the business of the corporation and should become familiar with the fundamentals of the business in which the corporation is engaged; directors are under a continuing obligation to keep informed about the activities of the corporation; directors may not shut their eyes to corporate misconduct; directorial management does not require a detailed inspection of day-to-day activities, but rather a general monitoring of corporate affairs and policies; directors should maintain familiarity with the financial status of the corporation by a regular review of financial statements; and a director is an essential component of corporate governance.

148    More fundamentally, their Honours observed that although there is no reference to “skill” in s 229(2) nor any such reference in s 232(4) as it became, their Honours nevertheless noted the observations of Malcolm CJ in Vrisakis ((1993) 9 WAR 395 at 407-408) that the duties imposed by the section reflected the general concept of negligence at common law which means, “conduct ordinarily measured by reference to what the reasonable man [or woman] of ordinary prudence would do in the circumstances”. As to “skill”, it was said to be “that special competence which is not part of the ordinary equipment of the reasonable man but the result of aptitude developed by special training and experience which requires those who undertake work calling for special skill not only to exercise reasonable care but measure up to the standard of proficiency that can be expected from persons undertaking such work”: at 504.

149    The relevant events in Daniels concerned conduct in July 1987 giving rise to substantial losses in AWA Ltd which engaged s 229 of the State Code based on the Commonwealth ACT Model for the Act described at [142] of these reasons. At 505, their Honours said this:

We are of opinion that a director owes to the company a duty to take reasonable care in the performance of the office. As the law of negligence has developed no satisfactory policy ground survives for excluding directors from the general requirement that they exercise reasonable care in the performance of their office. A director’s fiduciary obligations do not preclude the common law duty of care. Modern statutory company law points to the existence of the duty. In some circumstances the duty will require action. The concept of a sleeping or passive director has not survived and is inconsistent with the requirements of current company legislation such as, at the relevant time, s 229 … of the Companies (New South Wales) Code. …

150    The new statutory formulation of s 232(4) (quoted at [145] of these reasons), deriving from the amendments made by the Corporate Law Reform Act 1992 (Cth), commenced on 1 February 1993. The Corporate Law Economic Reform Program Act 1999 (Cth) amended the Corporations Law set out in s 82 of the Corporations Act 1989 (Cth) so as to introduce into that Act s 180, commencing on 13 March 2000, in the same terms as the text ultimately enacted in the Corporations Act 2001 (Cth). The Corporations Act 1989 (Cth) proved not to be a valid law of the Commonwealth for reasons which do not need to be examined here. In the result, a referral of power from the States to the Commonwealth occurred and the Corporations Act 2001 (Cth) was enacted.

151    In Vrisakis, Ipp J, as his Honour then was (Malcolm CJ agreeing), was concerned with conduct said to fail the care and diligence standard of s 229(2) of the Companies Code, which the Code rendered a criminal offence. Because s 229(2) made no reference to damage suffered by the company, an offence might “notionally be committed” under the section without any damage having been sustained by the company, if it could be shown that the director had failed to exercise a “reasonable degree of care and diligence” in the exercise of his or her powers or the discharge of his or her duties.

152    Importantly, Ipp J held at 449 that “[n]o act of commission or omission is capable of constituting a failure to exercise care and diligence under s 229(2) unless at the time thereof it was reasonably foreseeable that harm to the interests of the company might be caused by [the impugned conduct of the director]” [emphasis added]. This was said to follow from the statutory text of s 229(2), properly construed, “because the duty of a director to exercise a reasonable degree of care and diligence cannot be defined without reference to the nature and extent of the foreseeable risk of harm to the company that would otherwise arise” [emphasis added].

153    At 449 and 450, Ipp J also considered, in the context of the observations just quoted, the implications of a director’s “participation in conduct” that “carries with it” a foreseeable risk of harm to the interests of the company. Ipp J observed that such “mere participation” will not “necessarily mean” that the director has failed to exercise a reasonable degree of care and diligence in the exercise of powers or the discharge of duties. Ipp J then said this at 449:

The management and direction of companies [and thus the powers being exercised] involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry and commerce. The legislature undoubtedly did not intend by s 229(2) to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity.

154    His Honour then said at 449 and 450 that, accordingly, the question of whether a director has exercised a reasonable degree of care and diligence “can only be answered” by “balancing the foreseeable risk of harm to the interests of the company against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question”.

155    His Honour, oddly enough in the context of the observations just quoted at [152] to [154] of these reasons, considered at 450 that the “proper test” to be applied in determining whether directors have exercised “a reasonable degree of care and diligence” to the “requisite standard” is to be found in the observations of Hatherley LC in Overend at 428 (quoted at [127] of these reasons apart from the final question quoted at [127]). To the extent that Ipp J took the view that Lord Hatherley’s observation from 1872 (as quoted at [127] of these reasons) could be found residing in the statutory standard of due care and diligence in the text of s 229(2), I would respectfully suggest that those observations of his Honour (to that extent), are wrongly decided for all the reasons discussed in considering the history of the march towards an objective standard of due care and diligence for directors and officers.

156    As to the scope of the notion of “the interests of the company”, to be weighed in the balancing exercise described by Ipp J, his Honour considered that those interests comprehended “the corporate entity itself, the shareholders, and, where the financial position of the company is precarious, the creditors of the company”: at 450.

157    Ipp J’s observations quoted at [152] to [154] of these reasons were adopted and applied in Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373 at [102] (“Maxwell”) by Brereton J. In Vines v Australian Securities and Investments Commission (2007) 73 NSWLR 451 (“Vines”), Ipp JA applied his previous observations as quoted at [152] to [154] of these reasons to s 232(4) of the Corporations Law, which was a civil penalty provision only. Santow JA, as to matters of legal principle (but taking a different view as to the application of the principles to the facts), also applied, at [595] to [600], Ipp J’s observations from Vrisakis (as quoted at [152] to [154] of these reasons) to s 232(4). Those observations of Ipp JA and Santow JA in Vines, together with the remarks of Spigelman CJ in Vines at [68] to [87], were thought by Austin J in Australian Securities and Investments Commission v Rich (2009) 236 FLR 1 at [7195] and [7196] (“Rich”), to provide a “rationale” for concluding that the tests as applied to s 232(4) would also apply to s 180 of the Corporations Law of 13 March 2000 (and thus, s 180 of the 2001 Act), which “hypothesises that the reasonable person is a director or officer of a corporation in the corporation’s circumstances and occupies the office held by, with the same responsibilities within the corporation as, the defendant director or officer”. Austin J also observed at [7196] in Rich that the change in the text from s 232(4) to s 180(1) did not alter the proposition that while a contravention of s 180(1) could be established without proving damage to the corporation, a “necessary element” of the statutory standard of care and diligence in s 180 is that it is “reasonably foreseeable” that “harm to the interests of the company might be caused by the director’s act or omission” and thus “foreseeability of damage to the interests of the corporation … is an ingredient of the concept of care and diligence …” [emphasis added]: at [7197].

The application of s 180 of the Act

158    The integers of the objective standard of care and diligence reflected in the text of s 180(1) of the Act are clear enough.

159    A director must exercise his or her powers and discharge his or her duties with the degree of care and diligence that a reasonable person would exercise if they were a director of the corporation in the corporation’s circumstances, and occupied the office held by the director whose conduct is impugned, and had the same responsibilities within the corporation as that director.

160    The powers exercised by the appellants at the time of the provision by Storm of financial advice to the 11 vulnerable retail investors were the powers of management of Storm’s undertaking as a financial services provider as described in these reasons. The corporation’s circumstances engaged many things, but important among them were that the corporation had conceived a financial model described in very great detail by the primary judge, the elements of which are not challenged. It was a model that embraced debt through “double gearing” using a borrower’s house as security coupled with a margin loan to aggregate funds for investment in weighted index funds: see [33] to [44] of these reasons. Storm had been successful over time in deploying that model, central as it was, to its financial services undertaking: see [2] of these reasons.

161    A second aspect of the corporation’s circumstances were that it was engaging with a range of retail and wholesale investors and, of particular relevance to these proceedings, it was engaging with the 11 retail investors, all of whom were persons who exhibited the five characteristics of financial vulnerability described at [10] of these reasons.

162    The primary proceeding, of course, was not concerned with an action against the appellants to recover losses suffered by the 11 vulnerable investors on whatever grounds that might have been advanced.

163    However, the circumstance that the corporation, in the conduct of its undertaking and the deployment of its centrally important double gearing financial model, was engaging with retail investors exhibiting the characteristics of financial vulnerability described at [10] of these reasons, forms, for the purposes of the primary proceeding, an important element of “the corporation’s circumstances” having regard to which the postulated reasonable person would exercise care and diligence when exercising powers and discharging duties of management and governance of the corporation so far as s 180(1)(a) is concerned.

164    That is why the particular circumstances of the 11 vulnerable investors must not be overlooked and why the illustrative detail of those circumstances is set out at [18] and [19] of these reasons, so far as Mr and Mrs Dodson and Mr and Mrs Herd are concerned.

165    However, the degree of care and diligence required of the appellants by reference to the normative objective statutory standard of s 180(1) is measured by taking into account not only the matters at s 180(1)(a), but also by the reasonable person taking into account both the office occupied by the appellants and the same responsibilities within Storm, as the responsibilities of the appellants within Storm.

166    Critically for this case, those responsibilities included responsibility for Storm’s operations “at a high level” which engaged knowledge of every aspect of the Storm model. It engaged an “extraordinary degree of control over every aspect of the model and Storm’s operations”. There is no need to repeat here the matters at [59] to [70] of these reasons. At [691], the primary judge also observed that Mr and Mrs Cassimatis exercised their powers, as directors, and used their “considerable assumed responsibilities to create circumstances which involved their extremely significant control over Storm and its affairs, and over its advisers” [emphasis added]. That degree of engagement meant that it fell to the appellants to discharge the responsibilities, within the corporation, they had assumed, so far as the 11 vulnerable investors were concerned, of ensuring that Storm gave such consideration to, and conducted such investigation of, the subject matter of the advice given to those investors as was reasonable in all of the circumstances, and that the advice given to them, having regard to the consideration and investigation of the subject matter of the advice, was appropriate. In Rich (2009) 236 FLR 1 at [7202], Austin J observed that the word “responsibilities … encompasses the tasks that fall within [the director’s] bailiwick” and “directs attention to the factual arrangements operating within the company and affecting the director or officer in question”. It includes “arrangements flowing from the experience and skills that he or she brings to bear to the office, and also any arrangements within the board or between the person and the executive management affecting the work that the person is expected to carry out”.

167    Thus, the two critical “responsibilities” of the appellants “within the corporation” for the purposes of s 180(1)(b), as directors of Storm, were these.

168    First, the responsibilities which came with the extraordinary degree of control they exercised over Storm: the formulation of the model; the deployment of the double gearing model in the provision of advice to investors; supervision of the risk profiling of the investors; the control of the day-to-day affairs of Storm; and all aspects of the supervision of the undertaking in the granular way described in the reasons of the primary judge and as identified, in synthesis, in these reasons (without repeating the content of those matters here).

169    Second, the responsibilities included ensuring that investors obtained from Storm (and particularly retail investors exhibiting the five characteristics of vulnerability described at [10] of these reasons), 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.

170    Even though the weight of authority and the antecedents to s 180(1) as described earlier in these reasons, make plain that the objective degree of statutory care and diligence as framed by the section, and at law, is a duty owed to the company (Maxwell, 59 ACSR 373 at [102] and [104], Brereton J; Australian Securities and Investments Commission v Warrenmang Ltd (2007) 63 ACSR 623, Gordon J at [22]), the circumstances within which Storm was providing advice to its 11 vulnerable retail investors required Storm to engage with the circumstances of those investors, and those engagements were matters or circumstances brought into the statutory calculus of the degree of care and diligence required of the appellants measured against the standard of the reasonable person, acting as a director, in those circumstances, and occupying the office held by the directors, and having the same responsibilities within the corporation as the appellants.

171    As to the “necessary element” or “ingredient” in the “concept” of “care and diligence” of a foreseeable risk of harm or jeopardy (to adopt the terms used by Austin J in Rich at [7196] and [7197]), for the purposes of the statutory standard in s 180(1) of the Act, the following reasoning of the primary judge needs to be recalled.

172    Because of the extraordinary degree of control over Storm exercised by Mr and Mrs Cassimatis, the appellants, according to the findings of the primary judge, would reasonably have been aware that the Storm Financial model was used in formulating and giving advice to the financially vulnerable 11 retail investors.

173    The primary judge concluded that a reasonable director, with that knowledge, with the responsibilities of Mr and Mrs Cassimatis (as earlier described), occupying the office occupied by them and in the corporation’s circumstances (as earlier described), would have realised that the application of the double gearing model to the 11 vulnerable investors was likely to involve “inappropriate advice”: PJ at [22], and the matters discussed at [80] to [109] of these reasons.

174    A reasonable director, in Storm’s circumstances and having the responsibilities of the appellants, would have taken “some alleviating precautions to prevent the giving of that advice” (PJ at [22] and the matters discussed at [80] to [109] of these reasons), so as to guard against the devastating consequences for investors in the vulnerable class (those exhibiting the five characteristics at [10] of these reasons).

175    Those consequences arose out of the appellants’ failure to be “reasonably aware” (as they should have been, as found) that Storm did not give such consideration to the subject matter of the advice to the vulnerable investors, and nor did it conduct such investigation of the subject matter of the advice given to them, as was reasonable in all the circumstances; and also because the financial advice given to the 11 vulnerable investors was not appropriate (and could not have been appropriate “having regard to” the consideration and investigation that ought to have been carried out), as a consideration and investigation of the subject matter of the advice, as was reasonable in all the circumstances, did not occur.

176    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.

177    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.

178    The conduct failures of the appellants constituting the contravention of s 180(1) were conduct failures which gave rise to the contraventions by Storm of those sections just described: PJ at [697]; [98] of these reasons. The contravention by Storm of those sections was relevant and material to the character of the foreseeable risk of harm or jeopardy to the interests of the corporation as an element or ingredient of s 180(1), but the contravention of s 180(1), by the appellants, did not arise simply because the corporation contravened those sections. 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.

179    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. I will return to some specific matters shortly. The primary judge did not conclude, and nor did ASIC contend before the primary judge or on appeal, that because Storm contravened ss 945A(1)(b), 945A(1)(c), 912A(1)(a) and 912A(1)(b), and the appellants participated in conduct giving rise to those contraventions by Storm, the appellants therefore necessarily engaged in a contravention of s 180(1). Characterising the reasoning in that way inverts the process of reasoning; fails to recognise the analysis of the direct conduct of the appellants in contravention of s 180(1) that exposed the corporation to contravention of the identified sections of the Act; and has the effect of incorrectly characterising the contravention of s 180(1) by the appellants as a “backdoor form of accessorial liability” operating outside the proper boundaries of s 79 of the Act, which has its own very particular integers.

180    In Maxwell, Brereton J said the following, on this topic at [104] and [110]:

[104]    There are cases in which it will be a contravention of their duties, owed to the company, for directors to authorise or permit the company to commit contraventions of provisions of the Corporations Act. Relevant jeopardy to the interests of the company may be found in the actual or potential exposure of the company to civil penalties or other liability under the Act, and it may no doubt be a breach of a relevant duty for a director to embark on or authorise a course which attracts the risk of that exposure, at least if the risk is clear and the countervailing potential benefits insignificant. But it is a mistake to think that ss 180, 181 and 182 are concerned with any general obligation owed by directors at large to conduct the affairs of the company in accordance with the law generally or the Corporations Act in particular; they are not. They are concerned with duties owed to the company.

[110]    Generally speaking, therefore, ss 180, 181 and 182 do not provide a backdoor method for visiting, on company directors, accessorial civil liability for contraventions of the Corporations Act in respect of which provision is not otherwise made. This is all the moreso since the Corporations Act makes provision for the circumstances in which there is to be accessorial civil liability. Whether there were in this case breaches of directors’ duties – and, in particular, of their duty of care and diligence – depends upon an analysis of whether and to what extent the corporation’s interests were jeopardised, and if they were, whether the risks obviously outweighed any potential countervailing benefits, and whether there were reasonable steps which could have been taken to avoid them.

[emphasis added]

181    In this case, the primary judge conducted an analysis of the conduct of the appellants to determine whether they had exercised the degree of care and diligence in the exercise of their powers as directors required of them, measured against the objective statutory standard of s 180(1). The primary judge evaluated the scope of the jeopardy to Storm’s interests in preserving, and not placing at risk, its lawful right to conduct its financial services undertaking (through the critical need to preserve its AFSL) and the way in which that jeopardy might foreseeably, reasonably arise by reason of the conduct described at [172] to [176] and as otherwise described in these reasons. The countervailing benefit to the corporation of continuing to derive fees from the 11 vulnerable investors did not outweigh the risks to the corporation of engaging in the conduct described at [172] to [176] and as otherwise described in these reasons.

182    As to reasonable steps that might have been taken, plainly enough the directors could have taken steps to ensure that the subject matter of the advice was properly considered and investigated, reasonable in all the circumstances relevant to each of the individual 11 vulnerable investors, and appropriate to each of them having regard to the consideration and investigation which ought to have occurred but did not.

183    Although it is plainly correct to say that it is a mistake to think that s 180 is concerned with any “general obligation owed by directors at large to conduct the affairs of the company in accordance with law generally or the Corporations Act in particular” (as a contrary view would be inconsistent with the text of s 180, the context, the purpose of the provision, and the history of the section defining the objective statutory boundaries of the duty of care and diligence), it is also a mistake to think that conduct of directors, otherwise in contravention of the normative objective standard reflected in s 180(1), is immunised from contravention because the liability of a director for his or her conduct falling short of the degree of care and diligence required by the section must necessarily be found only in the integers of s 79 of the Act. Section 79 of the Act has a very different role to play in the scheme of the Act.

184    Section 180(1) has its own proper field of operation, as is manifestly evident in this case having regard to the matters at [160] to [176] of these reasons.

185    As already mentioned (at [117] to [125] of these reasons), the appellants’ primary ground of appeal is this. They say that as a solvent company, Storm’s interests were those of its shareholders. They say that once it is recognised that Storm’s interests were coincidental with, or at least predominantly informed by, the wishes of the appellants as the holders of all of the issued shares in Storm, it follows that the appellants were entitled to choose their own priorities and their own level of risk tolerance for the entity. They say that the primary judge gave insufficient weight to the interests of the appellants as the owners of all issued shares and insufficient weight to the historical success and profitability of the Storm financial model.

186    As to the significance of the relationship between the duty arising under s 180, where the directors, said to have contravened the section, are the shareholders, these observations of Brereton J in Maxwell at [103] should be noted:

… [W]here there is an identity of interest between the directors and the shareholders, so that in effect the directors are the shareholders, the requirement to prevent self-interested dealing, constrain management and strengthen shareholder control – which is the fundamental purpose and rationale of these duties – is much less acute. That is a circumstance which can impact considerably on the content of the duties. The significance of a correspondence between the identity of the directors and the shareholders is illustrated by the circumstance that, at general law, a fully informed general meeting can prospectively or retrospectively ratify the actions of directors of the company, though they involve negligence, breach of fiduciary duty or the exercise of the directors’ powers for an improper purpose: North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589; Furs Ltd v Tomkies (1936) 54 CLR 583; Hogg v Cramphorn [1967] Ch 254 at 265-6; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666. Where the directors and the shareholders are one and the same, ratification is implicit. Although the shareholders of a company cannot release the directors from their statutory duties imposed by ss 180, 181 and 182 (Forge v ASIC (2004) 213 ALR 574 at 654-5; [ASIC] v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305 at 314-15; Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 215 ALR 110 at [32]), their acquiescence in a course of conduct can affect the practical content of those duties, including any question of whether directors acted with a reasonable degree of care and diligence, and whether they made improper use of their position: Angas Law Services Pty Ltd (in liq) v Carabelas at [29]-[32].

187    These observations of Brereton J were accepted as correct statements of principle by Austin J in Rich at [7210], although his Honour cautioned against applying these principles in circumstances where there is no precise coincidence between the shareholders and directors.

188    In the above quote, Brereton J refers to aspects of observations by their Honours in Angas Law. In Angas Law (2005) 226 CLR 507, Mr Carabelas and his wife were the holders of the two issued shares in Angas Law and they were the only directors of the company. Mr Carabelas was a legal practitioner. Mrs Carabelas took no active part in the affairs of Angas Law. The transaction which was said to involve a contravention by the directors of the duty of reasonable care and diligence in s 229(2) of the Companies (South Australia) Code involved these matters.

189    Angas Law owed a financier $435,040. In July 1988, the Commonwealth Bank advanced $1.75 million to Mr Carabelas. Of that advance, $435,040 was used to repay the debt owed by Angas Law to the financier. Angas Law granted an “all moneys mortgage” to the bank to secure the indebtedness of Mr Carabelas to the bank. There was no commercial advantage to Angas Law in granting the mortgage except to the extent of the amount used to repay the entity’s debt to the financier. In October 1989, the Angas Street property, owned by the entity, was sold for $910,000 and the entire proceeds went to the bank with the result that Mr Carabelas then became indebted to Angas Law in the sum of $474,960 (being $910,000 less the debt paid of $435,040). The liquidator brought proceedings against the directors for compensation under s 229(7) of the Code based upon a contended contravention by the directors of s 229(2). The contention was that the directors, by causing Angas Law to enter into the mortgage transaction, contravened s 229(2).

190    At [29] to [32], Gleeson CJ and Heydon J note that there was no suggestion of any lack of validity in the grant of the mortgage nor any failure to comply with the Articles of Association of Angas Law. The company was solvent. The transaction did not render the company insolvent. Although Mr Carabelas gained an advantage for himself, the issue was whether the transaction was improper, or involved a lack of reasonable care. Their Honours said this at [29]:

The question [of] whether corporate transactions of guarantee or third party mortgages involve breaches of directors’ duties, or the particular kinds of breach referred to in s 229(2) or s 229(4), usually turn upon a close examination of the commercial context in which they occur. … The unanimous informed consent of the shareholders of ALS, the solvency of ALS and Mr Carabelas, and the absence of any adverse effect on the interests of third parties, were facts relevant to the propriety of the mortgage transaction. As to other aspects of the commercial context, the evidence was thin, but the Full Court’s conclusion that, in July 1988, there was no impropriety, and no want of reasonable care, has not been shown to be in error.

191    At [32], their Honours observe that had the directors engaged in conduct in contravention of s 229(2) or s 229(4), the shareholders of Angas Law could not release the directors from the performance of those statutory duties. Their Honours also observe, however, that in a particular case the acquiescence of the shareholders in a course of conduct by directors, “might affect the practical content of those duties” (that is arising under s 229(2) or (4)). Their Honours also observe that while, in some circumstances, the informed assent of all the shareholders to a transaction might be a fact relevant to a question of impropriety, “the provisions of s 229 creating offences operate according to their terms” [emphasis added]: at [32].

192    The terms of s 180(1) are critical.

193    The section begins with the emphatic direction that a director or officer of the corporation must exercise their powers and discharge their duties with the degree of care and diligence required by the section.

194    The requirements of the section are not expressed to be “subject to the will of the shareholders unanimously expressed”. The standard is objective and mandated. The objective standard is measured by the degree of care and diligence that a reasonable person would exercise if they were a director, in the corporation’s circumstances, occupying the office held by the appellants and having the same responsibilities as the appellants. Once it is clear that the calculus engages: (a)  the corporation’s circumstances (including, the character of its business; the interactions it has with, in this case, retail investors; and the use of the financial model in framing financial advice to vulnerable retail investors); (b)  the responsibilities of the appellants within the corporation; and (c)  the extent to which a foreseeable risk of harm or jeopardy to the interests of the corporation arises, by reason of the conduct said to fall short of the standard, it is also clear that the text of s 180(1) adopts a normative objective standard of care and diligence, which goes beyond simply the interests of the shareholders.

195    Thus, conduct falling short of the standard cannot be sanctioned or ratified.

196    In other words, the shareholders cannot sanction, ratify or approve, qua themselves as directors, their own conduct in contravention of s 180. Nor can they release themselves from such a contravention. That follows because of the normative, objective, irreducible standard of care and diligence directors must live up to, as adopted by the Parliament according to the text of the section, subject to, when engaged, s 180(2), having regard to the utility of that provision in light of the jurisprudence on that topic mentioned earlier.

197    Accordingly, the circumstance that, at all material times during the period of the impugned conduct, Storm was solvent and that the appellants acted, at all times, with their own approval in their capacity as the holders of 100% of the issued shares in Storm, of their own conduct, as directors, is not an answer to the question of whether, in their capacity as directors, they failed to discharge the irreducible minimum standard required of them by s 180(1).

198    As to specific matters, the appellants contend that the finding that the consequences of discovery of the likely contraventions of s 945A(1) of the Act, “were catastrophic for Storm”, was unsupported by the evidence and that the “consequences of inappropriate advice” would be catastrophic for Storm was unsupported by the evidence.

199    The primary judge found, after a careful and lengthy assessment of the evidence going to the contended conduct of the directors engaging s 180(1) and the other sections of the Act said to have been contravened by Storm, that the breaches by Storm were not merely “reasonably foreseeable” but “likely” and a “strong likelihood”. The factors informing that view are identified in detail: see a discussion of the factors at [89] to [97] of these reasons. The primary judge at [774] addresses the real possibility of discovery of the likely breaches and says that the short point is that the likelihood of the breaches (and the not insignificant class of vulnerable investors affected by the conduct) was such that the breaches were “likely to be discovered at some point” and the likelihood of discovery was “a real possibility”. The primary judge regarded the likelihood of discovery as something that carried with it a likely consequence of catastrophe for Storm for the reasons identified at [103] to [107] of these reasons.

200    The primary judge concluded that any reasonable director, in Storm’s circumstances, occupying the office of the appellants and having the same responsibilities as the appellants, would have taken “a real possibility” of discovery of the strongly likely breaches of the Act by Storm, “extremely seriously”. That follows because the foreseeable risk of harm or jeopardy to Storm, to be guarded against by the appellants, engaged the possibility of loss or suspension of the company’s AFSL and a banning order. Whether the likely consequences for Storm identified as discussed at [103] to [107] of these reasons bears the character of “catastrophic consequences” for Storm or matters characterised as “extremely serious” are evaluative matters. The point is that commission of the breaches was not just reasonably foreseeable but likely and also a strong likelihood. The risk to Storm was that should ASIC discover the conduct (since it would be unlikely to be reported by the appellants), and act on it, a range of consequences might arise.

201    Those consequences would be likely to be extremely serious.

202    Discovery of the likely breaches was itself likely and a real possibility.

203    That forward-looking assessment meant that the likely consequences were very serious and should Storm lose its AFSL, potentially catastrophic.

204    Would a reasonable director, in Storm’s circumstances, occupying the office of the appellants and having the same responsibilities as the appellants, run the risk of such harm or jeopardy to the company and its interests? The primary judge thought not. There was a proper basis in the evidence to reach that conclusion. It was correctly reached. The evidence of Storm’s undertaking, the features of its model, its engagement with investors, the circumstances of the vulnerable investors, the assessment of the risk profiles of the investors, the role, powers, duties and responsibilities of the appellants and other matters relating to Storm’s circumstances, and the position of the appellants as directors within the corporation, were comprehensively analysed by the primary judge.

205    The appellants also say that the primary judge failed to give “sufficient weight” to the following matters: first, that each of the impugned SOAs and SOAAs were provided to clients by financial advisers other than the appellants; second, the preponderance of the evidence that the financial advisers employed by Storm took into account the relevant personal circumstances of the clients; third, that Storm’s practices had been reviewed by many organisations and individuals without raising concerns; fourth, that Storm had thousands of clients yet received only 10 complaints in the period from 2001 to September 2008; fifth, that there was a lack of evidence as to the extent or magnitude of the risks asserted; and sixth, the steps taken by the appellants to avoid or limit the harm to the interests of Storm contended for by ASIC.

206    As to the first matter, the primary judge took into account that financial advisers, other than the appellants, did prepare SOAs and SOAAs. However, the primary judge examined the very particular circumstances in which the appellants exercised a high degree of authority and control over Storm’s activities, control over the financial plans and related matters including the control exercised over the final SOAs and SOAAs and the methodology to be deployed, in conjunction with the Storm model, in the formulation of those SOAs and SOAAs.

207    As to the second matter, the evidence in relation to the 11 vulnerable investors was that there was a failure to give such consideration to the subject matter of the advice to those investors as was reasonable in all the circumstances, and a failure to investigate the subject matter of the advice as was reasonable in all the circumstances, and also a failure to determine whether the advice was appropriate for each individual vulnerable investor having regard to a proper consideration and investigation of the subject matter of the advice, which did not occur. All of the evidence on these questions was examined. No error on the part of the primary judge is demonstrated.

208    As to the third matter, the primary judge took into account the circumstance that organisations and individuals had reviewed Storm’s practices: PJ at [700] to [771]. However, as earlier indicated in these reasons, the primary judge observed that those considerations would have provided “little comfort” to conclude that the advice given by advisers to vulnerable investors in the position of the 11 investors exhibiting the characteristics described at [10] of these reasons, was appropriate. Fundamentally, that conclusion of “little comfort” from reviews by others of the model, followed because “any approval or absence of warning [from such persons] came from others who had far more limited knowledge of, and far more limited access to, the Storm model, Storm’s clients, and the application of the Storm model to its clients than Mr or Mrs Cassimatis”: PJ at [700].

209    As to the fourth matter, the primary judge took into account the circumstance, over time, that there had been relatively few complaints about the provision of financial advice by Storm having regard to the use of the Storm model.

210    As to the fifth matter, the question for the primary judge was the question already discussed extensively in these reasons. That is, whether the conduct giving rise to the contraventions was likely; whether that conduct gave rise to a foreseeable risk of harm or jeopardy to be guarded against by a reasonable director, in Storm’s circumstances, occupying the office of the appellants and having the same responsibilities of the appellants; whether there was a likelihood of the likely breaches being discovered; and the character of the consequences should likely discovery, of the strong likelihood of the breaches, occur.

211    As to the sixth matter, the primary judge expressly addresses the steps the appellants took to avoid or limit the risk of harm to the interests of Storm as contended for by ASIC, as to which see the discussion at [107] and [108] of these reasons, and the references to the observations of the primary judge.

212    No error on the part of the primary judge is demonstrated as to these grounds.

213    For all of these reasons, grounds 2 to 6 of the appeal must be dismissed.

214    As to grounds 7 and 8, I have had the benefit of reading the judgment of Thawley J and I agree with the conclusions his Honour reaches about those grounds.

215    Accordingly, it follows that the appeal must be dismissed with costs.

Associate:

Dated:    27 March 2020

REASONS FOR JUDGMENT

RARES J:

216    I have had the benefit of reading the reasons of Greenwood J and Thawley J. I have adopted Thawley J’s abbreviations and summary of the facts. I agree with Thawley J’s reasons for finding that the grounds of appeal challenging the primary judge’s findings that Storm committed civil contraventions of s 945A(1)(b) and (c) of the Corporations Act 2001 (Cth) should be dismissed. However, I have reached a different conclusion on the question whether the primary judge was correct in finding that Mr and Mrs Cassimatis contravened s 180(1) of the Act by exercising their powers in a way which caused or “permitted” (by omission to prevent) inappropriate advice to be given to the relevant investors (Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209 at 370 [833]).

217    At trial and on appeal, ASIC presented their case on the basis that a precondition to finding that Mr and Mrs Cassimatis had contravened s 180(1) was that Storm had actually contravened s 945A(1) (the stepping stone approach). The primary judge did not necessarily agree that that was such a precondition or “stepping stone”, but proceeded to decide the case on the basis on which ASIC had put it (336 ALR at 339 [679] and at 370 [834]). The primary judge reasoned that the assessment of the reasonable foreseeability and likelihood of a contravention occurring in the future, for the purposes of determining whether s 180(1) had been breached, “should take place at a higher level of generality” than by assessing whether it was reasonably foreseeable that the actual contravention, as found, would occur. In other words, his Honour reasoned that (336 ALR at 342 [698]):

a director of a company in Storm’s circumstances and with Mr or Mrs Cassimatis’ responsibilities, and exercising his or her powers, would have considered that it was likely that persons in the position of the relevant investors would be given inappropriate advice in breach of s 945A.

218    For the reasons that follow, I am of opinion that ASIC failed to prove that Mr and Mrs Cassimatis contravened s 180(1) of the Act in the way in which ASIC alleged and, accordingly, their appeal should be allowed.

The statutory context

219    Relevantly, s 180(1) created a statutory duty of a director or officer to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if that person was in the director’s or officer’s place in the corporation’s circumstances.

220    If the Court was satisfied that a person had contravened a civil remedy provision listed in s 1317E(1), that section required the Court to make a declaration of contravention. Section 1317E(1) provided that s 180(1) was a civil penalty provision. The Court also had power under s 1317H(1) to order such a contravenor to compensate a corporation for damage that it suffered resulting from the contravention. However, a contravention of s 945A, unlike a corporation’s obligation under s 674(2) of continuous disclosure of material information not generally available, was not a civil penalty provision, nor was any other provision of Pts 7.6 or 7.7 of the Act (in which ss 912A and 945A appeared). Rather, a contravention of s 945A(1)(b) or (c) created a criminal offence.

221    A difficulty with the stepping stone approach on which ASIC relied before the primary judge is that it seeks to enlist s 180(1) to prescribe a duty to prevent a substantive contravention by the corporation of another provision in the Act, that is not a civil penalty provision, on the basis that ASIC would then be likely to invoke regulatory or curial remedies against the corporation.

222    As his Honour noted, his findings against Mr and Mrs Cassimatis were based only upon civil, not criminal, contraventions of s 945A (Cassimatis 336 ALR at 371 [836]). Relevantly, a contravention of s 945A was a criminal offence but did not give rise directly to any civil liability for the corporation or an authorised representative. Thus, the primary judge found that ASIC’s case alleged that Mr and Mrs Cassimatis had contravened a particular duty under s 180(1). His Honour summarised his conclusion as follows: (Cassimatis 336 ALR at 370 [833]):

My conclusion is that Mr and Mrs Cassimatis each contravened s 180(1) of the Corporations Act by exercising their powers in a way which caused or “permitted” (by omission to prevent) inappropriate advice to be given to the relevant investors. Those relevant investors were members of a class of investor, as pleaded by ASIC, who (in summary terms) were retired or close to retirement, had few assets, little income, and little or no prospect of rebuilding their financial position in the event of suffering significant loss. A reasonable director with the responsibilities of Mr or Mrs Cassimatis would have known that the Storm model was being applied to clients such as those who fell within this class and that its application was likely to lead to inappropriate advice. The consequences of that inappropriate advice would be catastrophic for Storm (the entity to whom the directors owed their duties). It would have been simple to take precautionary measures to attempt to avoid the application of the Storm model to this class of persons.

(emphasis added)

223    The obligation imposed by s 180(1) is in general terms and, as s 185 confirms, the Parliament intended that it operate in addition to, and not in derogation of, any rule of law at common law or in equity. A duty or obligation imposed by statute is not a “rule of law”; it is a law that imposes a statutory norm of conduct. And, s 180(1), as a norm of conduct, must be construed having regard to the Act as a whole, which creates various mechanisms for the imposition of liability on directors, officers and other persons, for example by:

    creating powers and imposing specific duties on directors and officers in a multitude of instances;

    imposing liability on the part of persons who  are “involved” (within the meaning of s 79) in a company’s contravention of select provisions of the Act;

    imposing civil liability under Pt 9.4B of the Act (in which ss 1317E and 1317H are found) on persons who contravene a civil penalty provision;

    imposing criminal liability under s 1311(1) of the Act and s 11.2(1) of the Criminal Code in the Schedule to the Criminal Code Act 1995 (Cth) on persons who commit offences under the Act as a principal or an accessory. Section 11.2(1) of the Criminal Code provides that “a person who aids, abets, counsels or procures the commission of an offence by another person is taken to have committed that offence and is punishable accordingly”;

    conferring powers on courts exercising jurisdiction under Pt 9.5 of the Act to enjoin, or make orders against, a person who has engaged, or is engaging, or purporting to engage, in conduct that, in effect, makes the person an accessory to a contravention of the Act (s 1324); and

    imposing duties on persons with specific roles, for example under s 945A(1) by requiring financial services licensees and their “authorised representatives” to provide advice to clients only where that advice was appropriate and they had made reasonable inquiries in relation to the client’s personal circumstances.

224    Relevantly, s 945A(2) gave an authorised representative a defence where the licensee had provided the representative with information or instructions about the requirements he or she had to, and the representative did, use in providing the advice and it was reasonable for the representative to have relied on the information or instructions. If a corporation contravened s 945A(1), a director or officer could be found liable as an accessory to the contravention by force of s 1311(1) of the Act and s 11.2(1) of the Criminal Code.

225    Moreover, directors and some officers have powers and are subject to duties imposed by a corporation’s constitution as well as, in the case of an executive officer of the corporation, his or her contract of employment on which s 180(1) will operate. And, by reason of the definition of “officer” in s 9 of the Act, s 180(1) is not confined in its operation to a person who holds an office formally recognised in the corporation: Australian Securities and Investments Commission v King [2020] HCA 4 at [34] per Kiefel CJ, Gageler and Keane JJ and [185]–[186] per Nettle and Gordon JJ.

What is the content of a duty of care and diligence?

226    In Sullivan v Moody (2001) 207 CLR 562 at 581–583 [52]–[64], Gleeson CJ, Gaudron, Gummow, McHugh, Hayne and Callinan JJ discussed circumstances in which the general law might recognise a particular relationship as involving a duty of one person to exercise reasonable care where other legal rights and remedies, such as those for defamation, already exist. They discussed the position “where to find a duty of care would so cut across other legal principles so as to impair their proper application and thus lead to the conclusion that there is no duty of care of the kind asserted” (at 580 [53]). In order to resolve such an issue, they looked to the coherence of the law and said that: “A duty of the kind alleged should not be found if that duty would not be compatible with other duties which the respondents owed” (at 581 [55]). They said (at 582 [60]–[61]):

The circumstance that a defendant owes a duty of care to a third party, or is subject to statutory obligations which constrain the manner in which powers or discretions may be exercised, does not of itself rule out the possibility that a duty of care is owed to a plaintiff. People may be subject to a number of duties, at least provided they are not irreconcilable. A medical practitioner who examines, and reports upon the condition of, an individual, might owe a duty of care to more than one person. But if a suggested duty of care would give rise to inconsistent obligations, that would ordinarily be a reason for denying that the duty exists. Similarly, when public authorities, or their officers, are charged with the responsibility of conducting investigations, or exercising powers, in the public interest, or in the interests of a specified class of persons, the law would not ordinarily subject them to a duty to have regard to the interests of another class of persons where that would impose upon them conflicting claims or obligations.

There is also a question as to the extent, and potential indeterminacy, of liability. In the case of a medical practitioner, the range of people who might foreseeably (in the sense earlier mentioned) suffer some kind of harm, as a consequence of careless diagnosis or treatment of a patient, is extensive.

(emphasis added)

227    In Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486 at 494, senior counsel for ASIC argued that “conduct by a director that exposes a company to prejudice or jeopardy, actual or potential, may breach the director’s duties and the relevant jeopardy may consist of the jeopardy arising from breaches of other provisions of the Corporations Act”. He cited in support Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373 and Australian Securities and Investments Commission v Citrofresh International Ltd [No 2] (2010) 77 ACSR 69. However, as French CJ, Gummow, Hayne and Kiefel JJ said (247 CLR at 514 [67], and similarly, Heydon J at 529 [115]):

ASIC's allegations that Mr Forrest breached the duties imposed by s 180(1) of the Corporations Act on directors and officers depended upon it demonstrating that Fortescue had contravened s 1041H or s 674. Having failed to do that, ASIC's claim of contravention of s 180(1) also fails.

(emphasis added)

228    In Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465 at 476 [18]–[19], French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ said:

The degree of care and diligence that is required by s 180(1) is fixed as an objective standard identified by reference to two relevant elements – the element identified in para (a): “the corporation's circumstances”, and the element identified in para (b): the office and the responsibilities within the corporation that the officer in question occupied and had. No doubt, those responsibilities include any responsibility that is imposed on the officer by the applicable corporations legislation. But 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.

… The effect of para (b) of s 180(1) is to require analysis of what a “reasonable person” in the same position as the officer in question would do. His or her position is not adequately described unless regard is had both to the office held and to the responsibilities that the person has.

(emphasis in bold added)

229    The interlinking of an actual (as opposed to potential) corporate contravention of a statutory provision with a breach of the duty of a director under s 180(1) may be coherent and just. The Act, other statutes and the general law impose liability on a director for his or her acts or omissions that render the director an accessory to (or “involved in”) a contravention by the corporation. However, there is a lack of coherence and justice in a construction of s 180(1) that would render a director liable simply because his or her act or omission created the potential for a possible or probable contravention that, as things turned out, did not happen.

230    Corporate activity is about risk taking and the making of judgments as to whether or not to undertake a particular activity. If a director takes a wrong turn or misjudges a situation causing the corporation actually to contravene a statutory norm or provision, there is a coherent reason on which a court may be able to make a finding that he or she failed to exercise the degree of care and diligence that a reasonable person in that position would exercise. As Beach J observed in Australian Securities and Investments Commission v Mariner Corporation Limited (2015) 241 FCR 502 at 584 [452]:

After all, one expects management including the directors to take calculated risks. The very nature of commercial activity necessarily involves uncertainty and risk taking. The pursuit of an activity that might entail a foreseeable risk of harm does not of itself establish a contravention of s 180. Moreover, a failed activity pursued by the directors which causes loss to the company does not of itself establish a contravention of s 180. 

(original emphasis)

231    It may be that the exercise by a director of a degree of care and diligence that causes a corporation to contravene a provision of a statute will fall short of the care and diligence that a reasonable person in the director’s position would have exercised, in the event that the corporation’s contravention caused damage to it or its members, customers or creditors. But this analysis directly connects the actual breach of the duty with some identifiable act or omission that relevantly caused damage. Likewise, the accessorial liability provisions of the Act connect, directly, the acts or omissions of a director to the relevant contravention of the corporation.

232    In Woods v Multi-Sport Holdings Pty Ltd (2002) 208 CLR 460 at 473 [41], Gleeson CJ said that where “it is claimed that reasonableness requires one person to provide protection, or warning, to another, the relationship between the parties, and the context in which they entered into that relationship, may be significant”. And in Abalos v Australian Postal Commission (1990) 171 CLR 167 at 180, McHugh J (with whom Mason CJ, Deane, Dawson and Gaudron JJ agreed) said:

As Mason J. said in Wyong Shire Council v Shirt [(1980) 146 CLR 40 at 47–48]:

“In deciding whether there has been a breach of the duty of care the tribunal of fact must first ask itself whether a reasonable man in the defendant's position would have foreseen that his conduct involved a risk of injury to the plaintiff or to a class of persons including the plaintiff. If the answer be in the affirmative, it is then for the tribunal of fact to determine what a reasonable man would do by way of response to the risk. The perception of the reasonable man's response calls for a consideration of the magnitude of the risk and the degree of the probability of its occurrence, along with the expense, difficulty and inconvenience of taking alleviating action and any other conflicting responsibilities which the defendant may have. It is only when these matters are balanced out that the tribunal of fact can confidently assert what is the standard of response to be ascribed to the reasonable man placed in the defendant's position.”

The question on the foreseeability issue was not whether the omission to provide proper supervision gave rise to a foreseeable risk of injury. It was whether the conduct of the defendant in requiring the plaintiff to work in this system gave rise to a reasonably foreseeable risk of injury. If it did, the plaintiff was exposed to an unnecessary risk of injury if the injury was reasonably avoidable and in all the circumstances the failure of the defendant to eliminate the risk was unreasonable.

(emphasis added)

233    It is important to distinguish between a common law duty to exercise reasonable care and a putative obligation to prevent harm occurring to others, as Gummow J explained in Roads and Traffic Authority of New South Wales v Dederer (2007) 234 CLR 330 at 348 [51], where he said (Heydon J agreed with him on this point at 415 [295]; and see too at 406–407 [272]–[274] per Callinan J):

The former, not the latter, is the requirement of the law. In Modbury Triangle Shopping Centre Pty Ltd v Anzil [(2000) 205 CLR 254 at 266 [28]], Gleeson CJ pointed to the remarks of Brennan J in Sutherland Shire Council v Heyman [(1985) 157 CLR 424] and observed that “the common law distinguishes between an act affecting another person, and an omission to prevent harm to another. If people were under a legal duty to prevent foreseeable harm to others, the burden imposed would be intolerable.” In Heyman [(1985) 157 CLR 424 at 478], Brennan J had emphasised that the common law recognises “a duty to take reasonable care to avoid doing what might cause injury to another, not a duty to act to prevent injury being done to another by that other, by a third person, or by circumstances for which nobody is responsible”.

(emphasis added)

234    It is unlikely that the Parliament intended that s 180(1), as a general provision, would displace, modify or affect a specific statutory duty or power conferred on a director or officer, including a duty to obey, or not to contravene or be involved (within the meaning of s 79) in a contravention of, a specific provision of the Act: cf: Anthony Hordern & Sons Ltd v Amalgamated Clothing and Allied Trades Union of Australia (1932) 47 CLR 1 at 7 per Gavan Duffy CJ and Dixon J; David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 at 276 per Gummow J (with whom Brennan CJ, Dawson, Gaudron and McHugh JJ agreed).

235    As Beach J held in Mariner 241 FCR at 582 [444] (applying the caution expressed in Maxwell 59 ACSR at 399 [104] and 402 [110] per Brereton J; Australian Securities and Investments Commission v Warrenburg Pty Ltd (2007) 63 ACSR 623 at 628–629 [22]–[23] per Gordon J; and Australian Securities and Investments Commission v Rich (2009) 236 FLR 1 at 140 [7238] per Austin J):

The duty owed under s 180 does not impose a wide-ranging obligation on directors to ensure that the affairs of a company are conducted in accordance with law. It is not to be used as a back-door means for visiting accessorial liability on directors. Further, it is not to be used in a contrived way in an attempt to empower the Court to make a disqualification order under s 206C by the artificial invocation of s 180 (a civil penalty provision), when such a route is not otherwise available directly.

(emphasis added)

236    Moreover, ordinarily s 180(1) should be construed so that it does not operate upon express statutory duties imposed directly on a director or officer in other parts of the Act or other statutes such as s 48 of the Life Insurance Act 1995 (Cth) because of the principle in Anthony Hordern 47 CLR at 7.

237    And, because s 180(1) is a civil penalty provision by force of s 1317E, any alleged contravention must be identified with some precision. The objective standard of the duty of care and diligence of a director or officer of a corporation that an individual must exercise in their office, is a legislative norm of conduct. The objective standard seeks to avoid the anomalous results of the pre-existing common or general law duty that focused on the individual’s subjective or idiosyncratic characteristics, including his or her intelligence and experience in discharging such an office: cf: In re City Equitable Fire Insurance Co Ltd [1925] Ch 407 at 426–429 per Romer J; Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 448–449 per Ipp J with whom Malcolm CJ agreed at 419. Ipp J drew attention to the circumstance that, like s 180(1), its statutory predecessor made no reference to loss or damage being suffered by the corporation. He observed that “an offence may notionally be committed under that section without any damages having been sustained” (9 WAR at 449). He said (9 WAR at 449–450):

The question is merely whether the defendant director has exercised a reasonable degree of care and diligence in the exercise of his powers in the discharge of his duties. Nevertheless, a criminal offence will not have been committed if an omission to take care did not carry with it a foreseeable risk of harm to the company. No act of commission or omission is capable of constituting a failure to exercise care and diligence under s 229(2) unless at the time thereof it was reasonably foreseeable that harm to the interests of the company might be caused thereby. That is because the duty of a director to exercise a reasonable degree of care and diligence cannot be defined without reference to the nature and extent of the foreseeable risk of harm to the company that would otherwise arise.

Further, 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 management and direction of companies involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry and commerce. The legislature undoubtedly did not intend by s 229(2) to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity. Accordingly, 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.

(emphasis added)

238    In contrast, the primary judge here expressed “serious doubt whether an actual breach by a corporation is a necessary requirement for breach of s 180(1) by an officer” (Cassimatis 336 ALR at 218 [5]), although his Honour proceeded on the basis that, as ASIC had propounded, it would seek to establish that Storm committed a contravention of the Act. However, the primary judge was also mindful that the officer’s duty was not strict or one requiring him or her to ensure that the corporation did not contravene or breach its duties under the Act (336 ALR at 218 [7]).

239    In Angas Law Services Pty Ltd (in Liq) v Carabelas (2005) 226 CLR 507 at 523 [32], Gleeson CJ and Heydon J, with whom Gummow and Hayne JJ at 525 [43] and Kirby J at 533 [70] agreed, said that the shareholders of a company could not release directors from their statutory duty in the section that was the predecessor of s 180(1) (namely, s 229(2) of the Companies (South Australia) Code).

240    It follows that the duty under s 180(1) was a norm of conduct of a public character to which ss 1317E(1) and 1317G(1) attached public sanctions (a declaration and a pecuniary penalty) and s 1317H(1) a private remedy (compensation). The availability of both public and private law remedies for a contravention of s 180(1) suggests that the duty that the section created was owed to the class of persons to whom ss 1317G(1) and 1317H afforded remedies, namely the public, through the Commonwealth, and persons (including the corporation) who suffered damage from a contravention of s 180(1). However, that does not elucidate the precise content of the statutory duty in s 180(1), which is necessarily related to the particular powers and duties of the director or officer and the circumstances of that individual and the corporation itself.

241    That raises the question of how a director has some superadded obligation or duty, by force of s 180(1), that is different from any personal or accessorial obligation or duty under s 945A to take reasonable care to ensure that he, she, or the corporation or an authorised representative had a reasonable basis for advice that the corporation gave.

242    The difficulty with using s 180(1) to impose a superadded duty can be seen in the following example. Suppose a surgeon performs an operation negligently while and because she is drunk, causing an injury to her patient who is a child. She would have a concurrent common law liability for the injury because she owed a duty to take reasonable care in both contract (with the child’s parent) and tort (to the parent and, also, directly to the child): Astley v Austrust Ltd (1999) 197 CLR 1 at 22–23 [47]–[48] per Gleeson CJ, McHugh, Gummow and Hayne JJ. As they recognised, the contractual relationship could regulate and limit the rights of the contracting parties in both contract and tort. However, because the injured child was not a party to the contract, the surgeon’s common law duty of care owed to the child in tort would not be affected by her contract with the child’s parent. Their Honours explained (197 CLR at 22–23 [47]):

The implied term of reasonable care in a contract of professional services arises by operation of law. It is one of those terms that the law attaches as an incident of contracts of that class [In Lanphier v Phipos (1838) 8 Car & P 475 at 479 [173 ER 581 at 583], Tindal CJ said: “Every person who enters into a learned profession undertakes to bring to the exercise of it a reasonable degree of care and skill.”]. It is part of the consideration that the promisor pays in return for the express or implied agreement of the promisee to pay for the services of the person giving the promise. Unlike the duty of care arising under the law of tort, the promisee in contract always gives consideration for the implied term. And it is a term that the parties can, and often do, bargain away or limit as they choose. Rather than ask why the law should imply such a term in a contract for professional services, it might be more appropriate to ask why should the law of negligence have any say at all in regulating the relationship of the parties to the contract? The contract defines the relationship of the parties. Statute, criminal law and public policy apart, there is no reason why the contract should not declare completely and exclusively what are the legal rights and obligations of the parties in relation to their contractual dealings. The proposition that, in the absence of express agreement, tort and not contract regulates the duty of care owed by a professional person to a person hiring the professional services is inconsistent with the historical evolution of professional duties of care which, until recently, could be the subject of action only in contract. Moreover, the conceptual and practical differences between the two causes of action remain of “considerable importance” [Aluminium Products (Qld) Pty Ltd v Hill  [1981] Qd R 33 at 52]. The two causes of action have different elements, different limitation periods, different tests for remoteness of damage and, as will appear, different apportionment rules.

(emphasis added)

243    Now suppose the surgeon operates her practice through a company, and so the parties to the contract were the patient (or his or her parent) and the company. The above analysis then invites consideration of how a statutory duty of care under s 180(1) would apply between the surgeon (as director) and her company. If the patient were not a child but an adult of full capacity, the corporation’s duty of care and liability could be affected by the terms of its contract with the patient for the provision of the services of the surgeon. If the contract contained an exclusion clause that prevented the company being found liable in damages for any negligence of the surgeon, that raises the question whether 180(1) could be called in aid of either the patient or the company.

244    If s 180(1) availed the patient, the content of the surgeon’s statutory duty of care and diligence, as a director in the corporation’s circumstances, would be different depending on who the other contracting party was. If the other party was the patient (in which case the contract would exclude any liability for the surgeon’s negligence and thus protect the corporation from any consequence flowing from the breach of the statutory duty) the director would not be in breach of her duty under s 180(1) by operating while inebriated, because the corporation would be protected from liability by its contract. If that contractual party was the patient’s parent (in which case the corporation, as the supplier of the surgeon’s services, would be liable to the child in tort because the surgeon was not in a condition, when inebriated, to exercise reasonable skill and care: cf: Astley 197 CLR at 37 [48], [80]–[81], [86]–[87]), the director would be in breach of her common law duty and statutory duty under s 180(1).

245    Alternatively, if the primary judge’s inward analysis were to apply (ie. by looking to her duty to the corporation as opposed to a third party), the surgeon may owe her company a duty of care that she would exercise her powers and duties as its sole director to prevent herself operating while inebriated. That would be so if each of the following conditions existed: first, there was a likelihood or real risk that she could cause injury to the patient (which would have the same consequences as set out above) and, secondly, if that occurred, she might cause the corporation to suffer reputational damage and the risk that professional disciplinary proceedings might be taken that could result in her being suspended or struck off as a medical practitioner or specialist, which would deprive the corporation of its future ability to conduct its business of offering her professional services as a surgeon.

246    This analysis suggests that the surgeon would be in breach of her duty to the company under s 180(1) by rendering her services while inebriated, regardless of whether she knew that its contract had a valid exclusion clause protecting it from the possibility of liability in contract or tort if the patient were the contracting party. That is because the duty would be to prevent the company suffering harm or a loss of her future ability to generate income for it, even though she was under no duty to the company that prevented her deciding to retire or trade in a different way that would have the same result. This suggests that such a duty is indeterminate.

247    If s 180(1) were to work in the way that the stepping stone approach suggests, a director would contravene s 180(1) and be exposed to liability for a civil penalty where the director’s company had taken the commercially usual precaution of including in a contract for its services a clause limiting or excluding its liability, and sometimes too using a Himalaya clause to exclude the liability of its servants or agents, including its directors and officers (cf: New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd [1975] AC 154). On this hypothesis, the patient or ASIC would nonetheless have a cause of action under s 180(1) against a director or officer if that person acted negligently and caused the company to need the protection of the clause. Such a cause of action based on s 180(1) would arise on the basis that, although the company would be protected from the claim under the contract itself, it was reasonably foreseeable that its reputation or future income might be damaged if, through the act or omission of the director or officer, it performed the contract for services badly. Again, if s 180(1) can operate in this way, the duty it imposes is indeterminate and would operate even though the contract had excluded all liability for negligence.

248    In Re D’Jan of London Ltd [1993] BCC 646, Hoffmann LJ (sitting at first instance) found that a director, who was also the holder of 99% of the company’s issued capital was negligent in failing to read, before signing, a proposal form completed by an insurance broker that contained an answer that the director knew, and should have detected, was incorrect. As a result the insurer later declined liability when an insured risk occurred causing the company to lose the benefit of the insurance. His Lordship held that this was a breach of the director’s statutory duty of care owed to company, which he categorised as the same as at common law ([1993] BCC at 648D–E). Hoffmann LJ then considered the position under the imperfect English analogue of s 1318(1) (and cf: s 1317S which the primary judge also considered). Section 1318(1) provides:

(1)    If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.

(emphasis added)

249    The principal difference is that the English provision required, as a condition for obtaining relief, the person to have acted “honestly and reasonably”, whereas s 1318(1) required the person only to have acted honestly.

250    Hoffmann LJ said that because the director and his wife, who was the only other director and shareholder, did not understand that there was an error, they did not give any thought to mandating or ratifying the director’s action in signing the form and therefore could not rely on a defence to the liquidator’s claim for damages based on the principles of company law that “an act authorised by all the shareholders is in law an act of the company”, as affirmed in Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258 at 269B–E per Lawton LJ, 288D–H per Dillon LJ. In that scenario, Hoffmann LJ found that the negligent director was liable in principle to compensate the company for his breach of duty. However, his Lordship considered that, while the director’s 99% shareholding did not give a complete defence, that factor was relevant to the exercise of the Court’s discretion under the analogue of s 1318(1). He said that (D’Jan [1993] BCC at 649A–B):

It may seem odd that a person found to have been guilty of negligence, which involves failing to take reasonable care, can ever satisfy a court that he acted reasonably. Nevertheless, the section clearly contemplates that he may do so and it follows that conduct may be reasonable for the purposes of [the imperfect English analogue of s 1318] despite amounting to lack of reasonable care at common law.

(emphasis added)

251    Hoffmann LJ then reasoned as follows (649B–D):

It may be reasonable to take a risk in relation to your own money which would be unreasonable in relation to someone else's. And although for the purposes of the law of negligence the company is a separate entity to which Mr D'Jan owes a duty of care which cannot vary according to the number of shares he owns, I think that the economic realities of the case can be taken into account in exercising the discretion under sec. 727. His breach of duty in failing to read the form before signing was not gross. It was the kind of thing which could happen to any busy man, although. as I have said, this is not enough to excuse it. But I think it is also relevant that in 1986, with the company solvent and indeed prosperous, the only persons whose interests he was foreseeably putting at risk by not reading the form were himself and his wife. Mr D'Jan certainly acted honestly. For the purposes of sec. 727 I think he acted reasonably and I think he ought fairly to be excused for some, though not all. of the liability which he would otherwise have incurred.

(emphasis added)

252    No doubt his Lordship had in mind what Dillon LJ had said in Multinational [1983] Ch at 288E–H, namely:

An individual trader who is solvent is free to make stupid, but honest commercial decisions in the conduct of his own business. He owes no duty of care to future creditors. The same applies to a partnership of individuals.

A company, as it seems to me, likewise owes no duty of care to future creditors….The duties owed by a director include a duty of care,…

The shareholders, however, owe no such duty to the company. Indeed, so long as the company is solvent the shareholders are in substance the company.

(emphasis added)

253    In Brumder v Motornet Service and Repairs Ltd [2013] 1 WLR 2783, the sole director of a company had not given any attention to the company’s statutory health and safety obligations and the director came to be injured by defective equipment that the company had not maintained in accordance with its statutory obligation to do so. Beatson LJ and Longmore LJ, with both of whom Sir Alan Ward agreed, found that the director was in breach of his duty to the company (under an analogue of s 180(1)) to cause it to comply with its absolute health and safety obligations and, as a result, had caused it to incur liability for his own injury: see at 2796–2797 [48]–[49], 2799–2800 [58], [61]–[62].

254    Thus, it is important to emphasise that the formulation and identification of the duty of care and diligence in the particular circumstances of each case will vary. That is because s 180(1) requires the individual circumstances of the director or officer to be articulated before discerning and applying an objective standard of care and diligence in the performance of that office to the facts of the case involving the alleged acts or omissions of that individual.

255    Where the relevant act or omission involves a collective decision, like a company’s board, such as in Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345 and Shafron 247 CLR 465, it makes sense to apply s 180(1) to the individual role and performance of each director, secretary or officer in the making of that decision: cf: Agar v Hyde (2000) 201 CLR 552 at 579–582 [74]–[83] where Gaudron, McHugh, Gummow and Hayne JJ discussed such a scenario. A public company’s board, for example, will have directors with a variety of responsibilities and experience, some of a non-executive, and others, possibly with an executive, role in the company.

256    In Hellicar 247 CLR 345 and Shafron 247 CLR 465, the board, assisted by Mr Shafron who was the general counsel and company secretary, issued a release to the Australian Stock Exchange that caused the company to contravene s 674(2) of the Act. No one individual made the decision to issue the release in the form approved by the board. Rather, the decision was a collective one and Mr Shafron gave, or failed to give, the board or the chief executive officer appropriate advice about the draft. There may have been real questions as to whether and how each individual board member and the general counsel and secretary could have been proved to have been an accessory to the company’s contravention. However, ASIC sought civil penalties against each of those individuals for breaching his or her individual duty of care and diligence prescribed by s 180(1).

257    If a director dissented from the board decision, he or she may have had a good defence to any allegation of, first, accessorial liability for the company’s contravention of s 674 and, secondly, a contravention by him or her of s 180(1). Other directors may have been able to establish, individually, that he or she either discharged his or her own duty under s 180(1) or should be relieved of liability for contravening that provision under ss 1317S or 1318(1), on a similar basis to what Hoffmann LJ suggested in D’Jan [1993] BCC 643.

258    The ambit of s 180(1) is constrained by its specification of the subjective and objective criteria for the operation of the duty it imposes. Its ambit is also informed by the purposes of the Act itself. As the authorities to which I have referred show, the creation and regulation of an artificial person, being a corporation, is intended to promote a field of activity that an individual might not undertake at all, or undertake in the same way. Since Salomon v A Salomon & Co Ltd [1897] AC 22, the law has recognised the distinction between a director, shareholder or corporator and the company with which he or she is associated. The law also recognises that companies are formed and operated to take risks that individuals may not be willing to assume themselves because of the spectre of personal liability.

259    And, the circumstances of each corporation and its relationship with the particular director or officer will shape the nature of the duty imposed under s 180(1). Where the corporation is effectively the creature of the director, who has formed and controls it, he or she may have a willingness to take risks with what, in substance (but not necessarily in legal form) is his or her own money or property invested in or risked by the corporate venture, which would or might not be appropriate for a corporation formed to invest or hold other persons’ money or property.

260    There will be a range of risks that an individual, who is a director and sole shareholder of a corporation, will be prepared to take with his or her own investment in the corporation. What risks, objectively, would a reasonable person, in that individual’s position, be able to choose to assume with one’s own investment, can have no unique answer. But, there will be a point where the duty under s 180(1) will constrain the reasonable director from causing the corporation to assume a particular risk.

261    If, rather than a risk of, an actual contravention of the law would occur if the company acted, or omitted to act, in a particular way, s 180(1) could operate, in the ordinary course, to impose a duty that a reasonable director, in the individual’s position, not cause or permit the corporation to engage in the conduct. But this would depend on the nature of the contravention of the law. That is because, if s 180(1) imposed an unlimited duty to ensure a corporation’s compliance with the law, no one would be prepared to be a director. No doubt that is why ASIC did not contend that the relevant duty here was simply to prevent Storm contravening s 945A(1)(b) or (c).

262    The duty under s 180(1) must be to prevent the corporation from suffering a real form of harm that no reasonable director or officer in the individual’s position could allow to occur. Where reasonable minds could differ on whether, or it is uncertain that, a director would have had to take steps to avert such a harm, a court should be very slow to hold that the particular individual contravened s 180(1).

263    I am of opinion that the nature of any risk of harm from a contravention of the legislative provision that, itself, does not expose a director or officer directly to a criminal or civil penalty (eg by force of ss 1311(1) of the Act and s 11.2(1) of the Criminal Code or ss 1317E(1) and 1317H(1) of the Act), must be established by cogent evidence sufficient to enliven the existence of a duty under s 180(1) to cause the corporation to avert it in all of the relevant circumstances. The position is more nuanced when the relevant risk involves the possibility that, depending on future events, there may or may not be detriment to the corporation.

264    There is a substantive difference between a situation in which s 180(1) operates on the degree of care and diligence that a reasonable person would exercise in the corporation’s circumstances as a director or officer exercising his or her powers and discharging his or her duties in respect of an act or omission of the corporation that amounts to a contravention of a statute directly by the person (such as a failure of the corporation to comply with s 674(2) arising from a decision by the board in which the person participated) as opposed to indirectly by the person because another agent of the corporation might, or would be likely to, cause the contravention to occur (such as a failure of the corporation, acting directly through another officer being an authorised representative, to comply with s 945A(1) with which the statute required any authorised representative personally to comply).

How should s 180(1) apply to Mr and Mrs Cassimatis?

265    Here, even though Storm contravened s 945A(1)(b) and (c), had the global financial crisis not occurred, or not been as severe in its financial impact as it was, the 11 investors whom ASIC proved to have been badly advised might have emerged without suffering any loss or indeed may have arrived at the predicted financial outcome despite what, with hindsight, was the flawed analysis in their statements of advice that Storm provided to them.

266    What s 180(1) required was for Mr and Mrs Cassimatis as directors of Storm to exercise the prescribed degree of care and diligence at the time of the alleged act or omission. At that time in late 2007, in the case of Mr and Mrs Dodson, had Storm’s contravention of s 945A(1)(b) and (c) come to light, the question arises whether a reasonable director in Mr and Mrs Cassimatis’ position would have to consider that ASIC might move to challenge Storm’s Australian Financial Services Licence (AFSL) or impose a banning order?

267    The primary judge found that a reasonable director in the position of Mr and Mrs Cassimatis would have been aware of a strong likelihood that Storm would contravene the Act if he or she caused or permitted it to apply, or failed to prevent it from applying, the Storm model to clients in the class that ASIC had pleaded, namely clients who were retired or nearing retirement (T696).

268    Relevantly, his Honour made clear that he was not considering this issue from the perspective of the actual losses that members of the vulnerable class suffered, which were not germane to whether, in giving them personal advice, Storm contravened s 945A(1)(b) and (c). Instead, the primary judge examined whether at some point ASIC would come to learn of the contraventions themselves given the “not insignificant” size of the potentially affected class. He concluded that it was a real possibility, or (as he found), likely, that ASIC would learn of the contraventions. Next, his Honour held that once this occurred it was reasonably foreseeable that ASIC could respond by taking regulatory steps including the very real possibility that ASIC, itself, might impose or obtain from a court, a banning order or a suspension or cancellation of Storm’s AFSL. That very real possibility, if it came to fruition, his Honour reasoned, was a threat to the very existence of Storm, since its business depended on its AFSL.

269    The way in which the primary judge reasoned that Mr and Mrs Cassimatis contravened s 180(1) focussed on the likely consequences for Storm of the discovery of the contraventions of s 945A(1)(b) and (c) that his Honour found. His Honour found that a reasonable person in the position of Mr and Mrs Cassimatis, as a director of Storm, would have known that it was likely that the corporation would contravene the Act if he or she did not take steps to prevent it from giving inappropriate advice to the relevant class of investors. Next, if the contraventions occurred, that would have the consequence that potentially on discovery of them, ASIC might take proceedings against Storm to put in peril its capacity to hold its AFSL, which was essential to Storm’s continuing in its business, and to impose regulatory sanctions, such as a banning order under s 920A(1).

270    In the end, his Honour concluded that Mr and Mrs Cassimatis each contravened s 180(1) (Cassimatis 336 ALR at [833]):

By exercising their powers in a way which caused or ‘permitted’ (by omission to prevent) inappropriate advice to be given to the relevant investors”

…

The consequences of that inappropriate advice would be catastrophic for Storm…It would have been simple to take precautionary measures to attempt to avoid the application of the Storm model to this class of persons.

(emphasis added)

271    At the time of the contraventions in 2007, Mr and Mrs Cassimatis had a close connection to the management, best interests and commercial fortunes of Storm and they knew of its then solvency and profitability. In that scenario, ASIC did not allege, and his Honour did not find, that Mr and Mrs Cassimatis had a duty merely to prevent Storm from contravening s 945A(1)(b) and (c). The primary judge imposed a duty of care and diligence on Mr and Mrs Cassimatis to prevent those contraventions in order to avoid foreseeable harm to Storm that would occur from ASIC finding out about them and taking proceedings that could result in Storm losing its AFSL or being subject to a banning order. Thus, the duty found was not merely to prevent the contraventions of s 945A(1)(b) and (c) at all, but to guard Storm against the likely or possible regulatory consequences of the discovery of those contraventions.

272    With respect, the imposition of such a duty, owed to Storm, is a backdoor way of creating liability on Mr and Mrs Cassimatis as accessories to Storm’s substantive contraventions of s 945A(1)(b) and (c): cf: Mariner 241 FCR at 582 [444].

273    As events have unfolded, ASIC could only establish, after the full benefit of its own investigatory processes and an extensive trial following the use of the Court’s powers to obtain relevant evidence, that on 6 occasions, 11 persons, being 5 couples and 1 other individual, had received statements of advice from Storm that it gave in contravention of s 945A(1)(b) and (c). While the potential class possibly may have been wider, there was no basis to conclude that a reasonable director in Mr and Mrs Cassimatis’ position would have considered that it was likely to be, or there was a real possibility that it would be, significantly more extensive. After all, as his Honour found, they were in control, and familiar with the detailed features of, Storm’s business. Thus, on those findings, they would have known only that the relevant class was relatively small in the overall context of Storm’s clientele.

274    In Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 at 291–295, Brennan, Deane, Dawson, Gaudron and McHugh JJ discussed the principles as to when a court can take into account subsequent events in the assessment of value or damages. Their Honours observed that in a case based on the tort of deceit, ordinarily, value is assessed at the date of the acquisition of the impaired property and the measure of damages is the difference between the price paid and that value. But, they held that in ascertaining value at the date of acquisition, the court can consider subsequent events that arise from the nature or use of the thing itself, as opposed to events that, like the global financial crisis, arise from external or supervening causes. In doing so, their Honours applied what Latham CJ said in Willis v Commonwealth (1946) 73 CLR 105 at 109:

It is not disputed that that the chances of remarriage of a widow are relevant to the assessment of damages under the Fatal Accidents Act, but it is said that this matter should be looked at by way of estimate as at the time of the death of the person which is the foundation of the claim, and that the circumstance that the widow has in fact subsequently remarried should not be taken into account. But, where actual facts are known, speculation as to the probability of those facts occurring is surely an unnecessary second-best. Damages are awarded for injury actually suffered and for prospective injury. Prospective injury can only be estimated with more or less probability. But where the extent and character of what would at one time be described as prospective injury depends on the happening or non-happening of a particular event and that event has in fact happened, it is unnecessary to speculate as to whether or not this event might happen and, if so, when.

(emphasis added)

275    Of course, this appeal does not concern damages or valuation. However, the conduct complained of affected only 11 investors comprising one individual and 5 couples in 6 statements of advice out of the many thousands that Storm provided. The subsequent events, thus, demonstrated that the nature of Storm’s method of obtaining its clientele and then applying the Storm model to that clientele resulted only in it engaging in the small number of serious contraventions of s 945A(1)(b) and (c) and placed those in an overall context.

276    The assessment of the consequences of a breach of Mr and Mrs Cassimatis’ director’s duty under s 180(1) must be approached by considering whether, in all of the circumstances, they acted unreasonably in exercising their powers in a way that caused Storm to contravene, or failed to prevent it from contravening, s 945A(1)(b) and (c) on at least 6, and possibly some (but not many) more occasions in 2007 and early 2008. At that time, the Storm model had operated successfully for at least 6 years and had been subject to (what a reasonable director in Mr and Mrs Cassimatis’ position would have been aware was) scrutiny by independent third parties, including ASIC, without attracting any relevant adverse consequence or comment. Storm was then solvent, if not thriving, and held professional indemnity insurance that reasonably could be thought to provide protection for any member of the affected class of 11 or so persons who in the future might suffer loss or damage (which was at the time by no means predictable, let alone probable). Moreover, the primary judge found that Mr and Mrs Cassimatis appeared to have acted honestly, albeit negligently, in causing or allowing Storm to contravene s 945A(1)(b) or (c).

277    As events turned out, the global financial crisis had catastrophic consequences for many of Storm’s clients, including the 11 investors, and that eventuality caused great public concern about Storm’s and Mr and Mrs Cassimatis actions. But, that financial misfortune for those persons is irrelevant to whether Mr and Mrs Cassimatis contravened s 180(1) in the way that ASIC alleged against them.

278    In my opinion, as at the time in 2007 and 2008 that the primary judge found that Storm contravened s 945A(1)(b) and (c) on 6 occasions, the evidence before him did not suggest that those 6 contraventions would have, or been likely to have, entailed the consequence that ASIC would impose, or obtain from the Court, a banning order or suspension or cancellation of the AFSL. Rather, the likelihood is that if, at that time, and not with hindsight, the deficiencies in the Storm model had been made known to ASIC and Mr and Mrs Cassimatis, prompt remedial action could and would have occurred.

279    The primary judge considered that there was a strong likelihood that ASIC would have chosen to impose or seek a regulatory sanction against Storm, such as the suspension or cancellation of its AFSL or a banning order. However, ASIC led no evidence of what it would have done. Its failure to lead such evidence should have led his Honour to conclude that any such evidence would not have assisted ASIC in proving this aspect of its case of what the risk of regulatory action was: Jones v Dunkel (1959) 101 CLR 298; Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361 at 384–385 [63]–[64]. In my opinion, since there was no evidence on the point from ASIC, as the person who could have led it and bore the onus of proof, ASIC’s argument should have been rejected.

280    Importantly, the primary judge found that the extent of the adverse consequences that occurred “was undoubtedly the result of the GFC [Global Financial Crisis] which was an event with a magnitude which could not have been reasonably foreseen by a director in the position of Mr and Mrs Cassimatis”. However, he found that a cause of those investors’ losses was Storm’s inappropriate advice. In addition, his Honour also found that had Mr and Mrs Cassimatis been warned, in strong terms, either by ASIC or persons with considerable experience and knowledge, then they would have acted to avoid the risk of further contraventions in relation to the class of investors of which the 11 investors formed part. He said:

I am satisfied that although they were powerfully committed to the Storm model, they were also conscious of the need for compliance and sought confirmation from a number of others about their compliance. They would have heeded a warning if it were expressed in strong terms from a person with considerable experience and knowledge.

281    After all, given the apparent success of the Storm model at the time of the contravening conduct and the relevantly good record of Storm as the holder of an AFSL, the likelihood is that it would have taken prompt steps to rectify the consequences of its limited number of 6 contraventions, and would have modified the Storm model appropriately. It is unlikely that ASIC would have used or sought from the court a regulatory sledgehammer to crack what was then a successful business walnut which had acted negligently, but honestly. And, if ASIC had so acted (which it was not prepared to prove at the trial), it is unlikely that a court would have imposed the drastic consequences that ASIC’s case at the trial asserted. That consequence would have been an overreaction in all the circumstances.

282    Thus, while Mr and Mrs Cassimatis were responsible by their (unintended) negligence for Storm’s contraventions of s 945A(1)(b) and (c), I am not satisfied that a reasonable director in their position in all of the circumstances came under a duty under s 180(1) to prevent the contraventions for the reason that the primary judge found: namely, that “the consequences of that inappropriate advice would be catastrophic for Storm” (Cassimatis 336 ALR at 370 [833]). I am not satisfied that he or she should have perceived a risk, or likelihood, of ASIC taking action to suspend or cancel Storm’s AFSL or the imposition of a banning order and then that he or she should have acted, for that reason, to prevent that action occurring.

283    The possibility of ASIC taking disciplinary proceedings against Storm to remove its licence would be different, if, for example, Mr and Mrs Cassimatis sold their shares in Storm to a third party which was a competent, highly regarded provider of financial services or they decided to stop Storm trading and give up its AFSL. In either of those situations, persons other than Mr and Mrs Cassimatis would control the licence yet Mr and Mrs Cassimatis (like the surgeon in my example above) would remain personally exposed to regulatory and professional proceedings in respect of any breaches of their duties of care. However, those breaches by Mr and Mrs Cassimatis would have no continuing realistic adverse consequences for Storm. Any “catastrophic consequence” to Storm, of the kind the primary judge found, would exist only were Mr and Mrs Cassimatis to choose to remain in control of the company while it held its AFSL.

284    The basis on which the primary judge found that Mr and Mrs Cassimatis were liable was necessarily connected to the assumption that they would continue to control Storm indefinitely so that, in the future, ASIC might act to imperil its holding of the AFSL. Yet they owed no responsibility or duty to Storm to continue to control it. They were free to sell their interest in it, to retire or to close it down. If they did any of these things, the risk that ASIC would take “catastrophic” action against Storm would be remote.

285    If Mr and Mrs Cassimatis decided to retire and caused Storm to no longer hold its AFSL, that would have caused the same supposed “damage” to Storm as the primary judge hypothesised in his conclusion, namely that their conduct in permitting it to breach s 945A, could have resulted in the loss of the AFSL through ASIC taking regulatory proceedings. But, Mr and Mrs Cassimatis owed no duty at all to Storm to continue its business or their management or control of it.

Conclusion

286    It is important to appreciate that the result at which I have arrived is the consequence of the artificial way in which ASIC sought to establish its case, by inference and not direct evidence, as to what it would have done. That case employed s 180(1) in an arcane and backdoor fashion. ASIC did not seek to prove directly that merely because of Mr and Mrs Cassimatis’ roles, as principals or accessories, in Storm’s actual contraventions of s 945A(1)(b) and (c), they had breached a duty under s 180(1). Instead, ASIC deliberately eschewed such a case and relied on the arcane argument that an indirect consequence of the contraventions was that it was likely that ASIC would have pursued a severe regulatory outcome, when it was unwilling to prove that it would have so acted.

287    In my opinion, the appeal should be allowed, the orders below should be vacated and ASIC’s originating application should be dismissed. ASIC should pay Mr and Mrs Cassimatis’ costs of the trial and the appeal.

Associate:

Dated:    27 March 2020

REASONS FOR JUDGMENT

THAWLEY J:

OVERVIEW

288    The appellants, Mr and Mrs Cassimatis, were directors of Storm Financial Ltd. Storm held an Australian Financial Services Licence (AFSL). Its main activity included advising clients to invest in accordance with the “Storm model” which relevantly involved borrowing on the family home and entering into margin loans to invest in index funds.

289    The appellants appeal from orders made consequent upon a decision that they contravened s 180(1) of the Corporations Act 2001 (Cth): Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023.

290    The Australian Securities and Investments Commission’s (ASIC) case was pleaded, conducted and determined on the basis that:

(1)    first, ASIC had to prove that Storm in fact contravened s 945A(1)(b) and (c) and s 1041E(1) of the Corporations Act and, consequently, s 912A(1)(a) and (c): J[4] to [6], [27], [28], [834]; and

(2)    secondly, the appellants breached s 180(1) of the Corporations Act by not exercising their powers as directors of Storm with the degree of care and diligence that a reasonable director would have exercised in the circumstances and this caused or permitted Storm to contravene the Corporations Act, exposing Storm to a foreseeable risk of harm of:

(i)    being found guilty of an offence under s 1311 of the Corporations Act;

(ii)    cancellation or suspension of Storm’s AFSL by action under s 915C(1)(a) of the Corporations Act;

(iii)    a banning order by action under s 920A of the Corporations Act;

(iv)    court orders under s 1101B(1)(a)(i) of the Corporations Act; and

(v)    civil proceedings by the investors: J[29] to [33].

291    As to the first matter, the primary judge concluded that Storm did not breach s 1041E, but did breach s 945A(1)(b) and (c) of the Corporations Act: J[668], [835]. In summary, Storm provided advice to certain investors:

(1)    without investigating and considering the subject matter of the advice sufficiently, having regard to the information obtained from the investors, breaching s 945A(1)(b);

(2)    which was not appropriate having regard to the consideration and investigation of the subject matter of the advice, breaching s 945A(1)(c).

292    As to the second matter, the appellants were found to have contravened s 180(1) of the Corporations Act by exercising their powers in a way which caused or permitted (in the sense of failing to prevent) inappropriate advice to be given by Storm to the relevant investors: J[833]. His Honour summarised his conclusions at J[22] and [23] in this way:

[22]    For the reasons explained in detail later, 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.

[23]    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.

293    The relevant investors in respect of whom the primary judge concluded that Storm had breached its duties were:

    Mr and Mrs Dodson (Part E investors);

    Mr and Mrs Herd (Part E investors);

    Mr and Mrs Higgs (Part E investors);

    Ms Knight (Schedule investor);

    Mr and Mrs Madden (Schedule investors); and

    Mr and Mrs Walker (Schedule investors).

294    The “Part E investors” were investors who gave evidence in the proceedings by way of affidavit. None of the Part E investors was required for cross-examination. The “Schedule investors” were investors who did not give evidence; their position was summarised in the pleadings and admitted in certain respects.

295    The relevant investors had five matters in common: (i) they were over 50 years old; (ii) they were retired or approaching and planning for retirement; (iii) they had little or limited income; (iv) they had few assets, generally comprised of their home, limited superannuation, and limited savings; and (v) they had little or no prospect of rebuilding their financial position in the event of suffering significant loss: J[18].

296    For present purposes, it is sufficient to use the situation of Mr and Mrs Dodson as an example of the relevant investors:

[11]    … Like other investors, Mr and Mrs Dodson attended an education workshop run by Storm. The education workshop generally emphasised the reliability and low risk involved in the Storm model and the need for people to take on debt. One of the typical slides shown at that presentation said that volatility or “manageable risk” is “investing in an asset whose value can rise and fall but in such a way that over a longer time frame there is certainty that the value will rise”. A hypothetical question was asked of the attendees about which person of several persons they would want to be. The “correct answer” was that the prospective client should “want to be” the person who owes $2 billion.

[12]    In November 2007, Mr and Mrs Dodson obtained financial advice from a representative of Storm. Storm understood that the Dodsons were “preparing for retirement in a few years”. At the time that Mr and Mrs Dodson approached Storm, Mr Dodson was 60 years old. His wife was 55 years old. They had a combined total income before tax of $58,996 per annum. They were the guardians of a girl whose parents had died. They owned their own home. They had superannuation savings and around $10,000 surplus income each year. Mr Dodson was working night shifts. He had a heart condition.

[13]    Storm provided Mr and Mrs Dodson with a 138-page SOA [the executed copy was 106 pages]. The SOA followed the Storm model of advice. Mr and Mrs Dodson took Storm’s advice. They borrowed funds against the security of a mortgage over the unencumbered home in which they had lived for 27 years. They used the borrowed money to invest in index funds. They borrowed again for a margin loan from Colonial Margin Lending. Some of the remaining borrowings were used to create a “cash dam” to pay for expenses including interest. Mr and Mrs Dodson also had to use the borrowed money to pay $26,960 to Storm for its fees.

[14]    After the GFC in 2008, Mr and Mrs Dodson liquidated their investments. They now have a home loan on their house of $287,000 (with an offset of $197,000) and [a] line of credit drawn to $32,000. A $65,000 investment that they had prior to investing with Storm has been lost. Neither has been able to retire.

297    The trial only decided liability. All issues concerning remedies were deferred to a separate hearing: J[37], J[837]. These remaining issues were decided by the Court on 22 March 2018: Australian Securities and Investments Commission v Cassimatis (No 9) [2018] FCA 385. Mr and Mrs Cassimatis seek to have the orders in Cassimatis (No 9) set aside on the basis that those orders are predicated on the correctness of Cassimatis (No 8), which they challenge in this appeal.

298    There were two aspects to the appeal:

(1)    First, it was contended that the primary judge erred in concluding that there had been contraventions by Storm of s 945A(1)(b) and (c) of the Corporations Act.

(2)    Secondly, it was contended that the primary judge erred in concluding that the appellants had breached s 180(1) of the Corporations Act.

299    For the reasons which follow the primary judge has not been shown to have erred.

BACKGROUND

300    It is not necessary to set out the factual background in excruciating detail. Rather, it is better to focus on those matters necessary to understand the relevant context and the primary judge’s detailed reasons. This background provides an overview of the factual background. Further detail as to the facts is provided where relevant to particular arguments made during the appeal.

301    Mr and Mrs Cassimatis were the founders, sole shareholders in, and executive directors of Storm. Storm provided advice in accordance with the “Storm model”. The model involved clients being initiated into Storm through a “primer meeting” followed by an “education workshop”. During the education workshop, the presenter would explain (J[51]):

(1)    the types of assets that could be invested in;

(2)    that Storm recommended clients build wealth by using home loans and margin loans to borrow funds to invest in index funds;

(3)    that Storm was not a traditional financial planner and specialised in one area of client advice, that being advice about investing in indexed share funds; and

(4)    that volatility in the share market was used to trigger further investments. Mr McCulloch said that attendees were told that Storm’s philosophy was that if the share market fell in value by 10% or more from the date of the initial investment, a further investment should be made using cash reserves to fund the further investment and lower the average cost of the investment; and if the share market rose in value by 10% or more from the date of the initial investment, a further investment should be made by increasing the margin loan and returning the LVR to its level at the time of the initial investment.

302    There would then be an information gathering appointment during which clients would provide to an adviser – either an Employee Representative or an Authorised Representative – financial documentation and complete a “Confidential Financial Profile”. Storm would then centrally produce a cash flow based on the information provided by the client to the adviser. Storm would also centrally produce a Statement of Advice (SOA). The cash flow (often referred to as a “viability cash flow”) was one attachment to the SOA and was an important aspect of it. Much of the SOA was in template form, although particular amounts and ratios were tailored to the specific client investor, and some other sentences and paragraphs would be included for each particular investor. Almost 90% of Storm’s clients were advised to adopt a strategy described in evidence as “double gearing”. In summary, this involved: (i) taking out a loan on the family home; (ii) entering into a margin loan; and (iii) using the funds from these two sources to invest in index funds, establishing a cash reserve or “cash dam” and paying Storm’s fees.

303    Although the SOAs were presented to investors by advisers, those advisers could not make changes to the SOAs, which had been produced centrally by Storm. Mr Benson, an Authorised Representative, stated:

63.    I did not create any SOA. Each Storm SOA which I presented to clients was sent electronically to me (or my staff), by Storm HQ. I would arrange for the document to be printed in colour and bound in preparation for presentation to the client. The format of the SOA was such that I could not change it in any way.

64.    My usual process for presenting a SOA was for the client to come to my office and I would take them through the document. This process would usually take two to three hours. I would ask the client to take the SOA away with them so that they could read it, discuss its contents and come back with any questions if they wished. I would usually call the client two or three weeks later to see if they had any questions.

65.    If the client wished to change any aspect of SOA, I could not make that change. Rather, I was required to request that Storm HQ make the change. If the change was agreed to, I would receive a revised SOA from Storm HQ for presentation to the client. There were times when Storm HQ was reluctant to make a requested change and would organise a senior member of the Storm HQ staff to talk to the client involved.

66.    Once the client decided that they wished to proceed with the recommendations in the SOA, he or she would sign the appendix at the back of the SOA entitled “Authority to Proceed with Recommendations”. I would then arrange for the signed SOA to be sent to Storm HQ where the recommendations would be implemented. It was not part of my role to make the arrangements required for implementation of the recommendations.

304    The primary judge concluded:

[121]    … Mr and Mrs Cassimatis had considerable control over the financial advisers and the process for giving advice concerning the Storm model. I have already explained how the SOAs and cash flows were prepared centrally by Storm in a process over which Mr and Mrs Cassimatis had control. As Mr Cassimatis told Mr Benson, the role of an Authorised Representative of Storm was to collect data from clients and to present to them the advice that had been prepared by Storm. Indeed, during Mr Benson’s period of due diligence, Mr and Mrs Cassimatis each said to him that Storm advisers made no decisions but that “our specialists” or “our financial engineers” formulated the content of and prepared all advice to clients, obtained quotes from lenders, and executed recommendations …

[122]    Mr Benson gave evidence, which I accept, of one occasion in early 2007 when he thought some of the clients should not take a step. Because of this, he did not send to the clients the SOAAs [Statements of Additional Advice] that had been sent to him from Storm. A few weeks after he had received the SOAAs by email, he was told by someone at Storm Headquarters that not all of the clients who he advised had signed the SOAA. He explained that he did not think some clients should receive the SOAA. Mr Cassimatis subsequently said to him that he should not “assume the advice is not appropriate for the clients, we are the specialists and you should present it as it is sent to you”.

305    The primary judge concluded that Mr and Mrs Cassimatis had a high degree of control over Storm and its business at every level of operation and that they were aware that the Storm model was recommended to financially vulnerable clients including the relevant investors. At J[21] he stated:

Mr and Mrs Cassimatis had an extraordinary degree of control over Storm. They used their powers as directors to create an environment in which (as they were aware) it was almost inevitable that the Storm model would be applied to people with a high degree of financial vulnerability within this class … Mr and Mrs Cassimatis would reasonably have been aware that the Storm model was applied to financially vulnerable clients including those in the class pleaded by ASIC.

306    Expert evidence was given in the proceedings by Mr McMaster and Professor Valentine. They produced a Joint Expert Report (JER). The primary judge was impressed by Mr McMaster: J[231]. He was not impressed by Professor Valentine for the comprehensive reasons set out at J[232] to [243], none of which are challenged. His Honour was not prepared to accept without extreme caution Professor Valentine’s evidence on matters where he and Mr McMaster were in dispute: J[244]. It is not necessary to recount in detail why his Honour reached that point, although it assists an understanding of these reasons to note that Professor Valentine had previously been involved with the issues about which the proceedings were concerned and had actively promoted the Storm model as long ago as 1999. His Honour found him to be committed to the Storm model in a way which impaired his ability to assess it independently as was evidenced by the “defensive and sometimes remarkable positions that he took in giving oral evidence”: J[235], [236].

307    The experts agreed that a “financial planner should generally not advise a retired person or a person nearing retirement to invest in high risk investments” and that they “generally regard negative gearing as high risk within a period of approximately 5 years to retirement”: JER at [21], [23]. The use of the word “generally” was to permit exclusion of sufficiently wealthy individuals.

308    The experts also agreed at JER [36] to [40]:

Question 16

[36]    We agreed that since there was a probability of a negative return every 4 years that a financial adviser should look at how the client would be affected if a negative return occurred and advise the client with regard to that risk.

Question 17

[37]    We agreed that in the relevant period a financial adviser should have appreciated the need, when formulating advice for each Part E Investor, to account for a negative return from the share market.

Question 18

[38]    We agreed that in giving advice that accounts for a negative return from the share market, a financial adviser should ensure that the investors had access to sufficient cash to fund the strategy during negative periods.

Question 19

[39]    We agreed that generally a financial adviser should have been aware of the risk of share market falls from the second half of 2007 as the world moved to a period of tighter credit. We also agreed that nobody could have been aware of the magnitude of the falls that were likely.

Question 20

[40]    With regard to our answer to Question 19, we agreed that a financial adviser should have accounted for the possibility of a negative return in formulating their advice and advised the clients of this possibility.

309    The primary judge found that Storm breached s 945A(1)(b) for four reasons and Storm breached s 945A(1)(c) for three reasons. Themes in the reasons why those provisions were breached include that:

(1)    Storm did not adequately assess what would occur if there was a period of “negative growth” or a “negative return”;

(2)    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;

(3)    Storm advised the relevant investors, who were vulnerable in the ways identified earlier – including that they were retired or approaching and planning for retirement – to adopt the “Storm model” to invest, notwithstanding that this advice was inappropriate; and

(4)    the advice to adopt the “Storm model” was inappropriate even if – contrary to the primary judge’s conclusion – the relevant investors were “balanced investors” rather than “conservative investors”.

310    The primary judge concluded that the appellants contravened s 180(1) by exercising their powers in a way which caused or “permitted” (by omission to prevent) inappropriate advice being given to the relevant investors: J[833].

311    It is convenient to deal first with the breaches by Storm of s 945A(1).

SECTION 945A

The grounds of appeal

312    Grounds 7 and 8 in the notice of appeal were in the following terms:

7.    The learned primary judge erred in construing s 945A of the Act effectively on the basis that advice to a person with the characteristics pleaded [in sub-paragraphs 784(a) to (e) of the statement of claim], to borrow money to purchase units in the relevant Index Funds, secured in part on his or her residence would always be inappropriate, in contravention of s 945A(1).

8.    The learned primary judge:

(a)    ought to have found that the Respondent had not proved, to the requisite standard, what were the relevant personal circumstances of each Relevant Investor, as the Respondent had not proved their subjective willingness to accept a risk of capital loss;

(b)    consequently, should not have concluded that Storm had contravened: -

(i)    subs 945A(1)(b) of the Act; or

(ii)    subs 945A(1)(c) of the Act

in respect of the Relevant Investors.

Summary of the appellants’ argument

313    The appellants’ argument on appeal was that ASIC failed to discharge its onus of proof, advancing two principal submissions:

(1)    ASIC did not sufficiently establish what “consideration” or “investigation” was given by Storm and therefore failed to establish a breach of s 945A(1)(b). ASIC did not adduce evidence from the six financial advisers (who were employees of Storm) who dealt with, interviewed, and presented the SOAs to, the relevant investors. Rather, ASIC called three other client advisors, none of whom had investigated or considered the subject matter of the advice given to the relevant investors and had not dealt with them.

(2)    ASIC failed to prove the “relevant personal circumstances” of each of the investors, in particular their subjective willingness to take on the risks associated with the investments recommended by Storm, and therefore failed to establish a breach of s 945A(1)(c). The appropriateness of the advice depended upon an investor’s appetite for risk.

Relevant provisions of the Corporations Act

314    Section 945A of the Corporations Act was contained in Subdiv B of Div 3 of Pt 7.7 in Ch 7. Chapter 7 was entitled “Financial services and markets”. The objects of the Chapter were set out in s 760A:

The main object of this Chapter is to promote:

(a)    confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and

(b)    fairness, honesty and professionalism by those who provide financial services; and

(c)    fair, orderly and transparent markets for financial products; and

(d)    the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.

315    The general definition of “financial product” included “a facility through which, or through the acquisition of which, a person: … makes a financial investment”: s 763A(1)(a). The term “makes a financial investment” was defined in s 763B.

316    The circumstances in which a person provides a “financial service” were set out in s 766A. One such circumstance was where a person provides financial product advice: s 766A(1)(a). The term “financial product advice” was defined in s 766B(1):

766B Meaning of financial product advice

(1)    For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:

(a)    is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or

(b)    could reasonably be regarded as being intended to have such an influence.

317    Financial product advice included “personal advice” and “general advice”. The former was defined in s 766B(3) as follows:

(3)    For the purposes of this Chapter, personal advice is financial product advice that is given or directed to a person (including by electronic means) in circumstances where:

(a)    the provider of the advice has considered one or more of the person’s objectives, financial situation and needs (otherwise than for the purposes of compliance with the Anti‑Money Laundering and Counter‑Terrorism Financing Act 2006 or with regulations, or AML/CTF Rules, under that Act); or

(b)    a reasonable person might expect the provider to have considered one or more of those matters.

318    Section 766B(4) provided that “general advice” was “financial product advice that is not personal advice”.

319    Part 7.7 was entitled “Financial services disclosure”, Division 3 was entitled “Additional requirements for personal advice provided to a retail client” and Subdivision A was entitled “When this Division applies”. In that subdivision, s 944A of the Corporations Act provided that Div 3 applied to personal advice in the following circumstances:

944A Situation in which Division applies

This Division applies in relation to the provision of personal advice (the advice) in the following circumstances:

(a)    the advice is provided:

(i)    by a financial services licensee (the providing entity); or

(ii)    by a person (the providing entity) in their capacity as authorised representative of a financial services licensee (the authorising licensee), or of 2 or more financial services licensees (the authorising licensees); and

(b)    the advice is provided to a person (the client) as a retail client.

320    Subdivision B was entitled “Requirements relating to basis of advice”. In that subdivision, s 945A provided:

945A Requirement to have a reasonable basis for the advice

(1)    The providing entity must only provide the advice to the client if:

(a)    the providing entity:

(i)    determines the relevant personal circumstances in relation to giving the advice; and

(ii)    makes reasonable inquiries in relation to those personal circumstances; and

(b)    having regard to information obtained from the client in relation to those 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; and

(c)    the advice is appropriate to the client, having regard to that consideration and investigation.

(2)    In any proceedings against an authorised representative of a financial services licensee for an offence based on subsection (1), it is a defence if:

(a)    the licensee had provided the authorised representative with information or instructions about the requirements to be complied with in relation to the giving of personal advice; and

(b)    the representative’s failure to comply with subsection (1) occurred because the representative was acting in reliance on that information or those instructions; and

(c)    the representative’s reliance on that information or those instructions was reasonable.

321    The term “relevant personal circumstances” was defined in s 761A:

relevant personal circumstances, in relation to advice provided or to be provided to a person in relation to a matter, are such of the person’s objectives, financial situation and needs as would reasonably be considered to be relevant to the advice.

322    The following may be observed about the paragraphs of s 945A(1):

(1)    Paragraph (a) was directed to the client’s “relevant personal circumstances”. Advice was only to be provided if the providing entity had (i) determined the client’s circumstances; and (ii) made reasonable inquiries into those circumstances.

(2)    Paragraph (b) was directed to the point in time after the “relevant personal circumstances” have been ascertained and was focussed on the consideration given to, and the investigation of the subject matter of the advice, having regard to the information obtained from the client. Advice was only to be provided if the providing entity had considered and investigated to an extent that was reasonable in the circumstances.

(3)    Paragraph (c) was directed to the appropriateness of the advice to the client having regard to the consideration and investigations which occurred under paragraph (b). Advice was not to be given unless the advice was “appropriate to the client”.

323    The primary judge concluded that there had been breaches of paragraphs (b) and (c) of s 945A(1). Paragraph (a) was not in issue: J[600].

The breach of s 945A(1)(b)

324    The primary judge concluded that s 945A(1)(b) was breached for four reasons:

(1)    Storm did not give reasonable consideration to, or conduct reasonable investigation of, alternative investment strategies for those Part E and relevant Schedule investors who were retired or were approaching retirement: J[251] to [260].

(2)    Storm did not adequately determine the objective of its advice, which required measurement and, where possible, quantification: J[261] to [273].

(3)    Storm did not conduct an adequate sensitivity analysis before advising the Part E investors: J[274] to [284].

(4)    Storm did not give reasonable consideration to the income of the Part E and Schedule investors in all their circumstances: J[285] to [290].

Breach of s 945A(1)(b) – first reason

The primary judge’s conclusions and reasoning

325    The primary judge found at J[251] that Storm was required to give reasonable consideration to, and conduct reasonable investigation of, alternative investment strategies for those investors who had limited income. Focussing on the position of Mr and Mrs Dodson, as an example of investors who were retired or approaching retirement, his Honour held that “[t]heir circumstances required additional consideration of options beyond the generalised Storm model”: at J[251]. His Honour referred to the evidence of Mr McMaster as follows at J[251]:

Mr & Mrs Dodson were relying on a relatively small amount of capital to provide them with income for the rest of their lives. They could not afford to take high risk but the strategy of borrowing to invest and concentrating their leveraged investments in the share market was a high risk strategy.

326    The primary judge identified alternative possibilities at J[252]. These included taking a small loan for any travel, investing excess income in superannuation and taking out a reverse mortgage over their residence:

As Mr McMaster explained, the high risk arose because the inherent volatility of the share market created a risk of negative returns in early years which was magnified by the use of debt. In contrast, there were a number of alternative strategies that should reasonably have been considered and investigated by Storm. One of those was taking a small loan for any travel (ts 339). Another possibility was investing their excess income into superannuation. A third possibility was taking out a reverse mortgage over their residence (ts 397). Indeed, on a number of occasions Professor Valentine referred to this third strategy of releasing the equity in a home by a home equity loan or a reverse mortgage.

327    The primary judge drew the inference that none of these options were reasonably considered or investigated: J[253]. His Honour did so for two principal reasons:

(1)    First, there was the absence of any mention of any of these alternatives in the SOA. His Honour concluded that, from either 2005 or 2007, the SOAs should have contained any alternative strategies considered (including the “pros and cons” of each alternative) and that Mr and Mrs Cassimatis had been informed of this: J[253], [750], [751]. In this respect, the primary judge accepted the evidence of Mr Cashel, a financial services compliance consultant. He accepted his view, as representing the industry view, to the effect that there had always been an obligation on an adviser to advise on alternative strategies.

(2)    Secondly, there was what his Honour referred to as “the powerful emphasis upon, and ubiquity of, the Storm model for clients”: J[254]. The primary judge accepted Mr McCulloch’s evidence that Mr and Mrs Cassimatis frequently said that they would not countenance the giving of any advice to Storm clients that was inconsistent with the Storm system of advice. Mr McCulloch, who had “vast exposure to Storm and its clients”, was unaware of any investment client who was not advised to purchase units in index share funds: J[254]. Mr McCulloch was Storm’s group accountant, which was a senior management position, and a senior advisor at Storm: J[41] to [44].

328    The primary judge rejected the arguments raised by Mr and Mrs Cassimatis to support their submission that the giving of consideration to other alternatives was not rare: J[256] to [260]. His Honour concluded at J[255]:

The only limited consideration that was occasionally given to other alternatives for the relevant investors concerned superannuation products. But although Storm also gave advice on occasion on insurance and gave generic tax advice, that consideration and recommendation was not usual. And it was not sufficient for the discharge of Storm’s s 945A obligations in relation to the relevant investors.

The appellants’ complaints

329    First, the appellants submitted that Storm specialised in giving advice about geared investments in index funds and that Storm did not need to consider other strategies or models of investment. Storm was limited by its licence as to what it could recommend.

330    Secondly, the appellants referred to Regulatory Guide 175 (RG 175) which had been issued on 28 May 2007 and submitted that RG 175.153 did not require alternative strategies to be included in the SOA. This submission was directed to asserting error on the part of the primary judge in inferring an absence of consideration of alternative strategies from the absence of any mention of alternative strategies in the SOA.

Consideration

331    As to the appellants’ first complaint: whilst the appellants contended that Storm was limited in what it could recommend, they did not contend that Storm’s licence only permitted it to recommend geared investments in index funds. Even if Storm were so limited, that would not defuse the operation of s 945A(1)(b). If a proper consideration and investigation of alternative strategies revealed that the investment Storm was licenced to recommend was not appropriate, it would not matter that Storm could not have recommended investment in the better alternatives considered. Section 945A(1)(b) is not to be read as only requiring the “providing entity” to consider alternative strategies that they are in fact licensed to recommend. Such a reading is at odds with the evident purpose of the provision. Section 945A(1)(b) has a protective function: to ensure that proper consideration is given to what strategies might be appropriate in light of a particular client’s circumstances.

332    As to the appellants’ second complaint: RG 175.153 states that a “SOA must comply with the Corporations Act and regulations” and then sets out what it must include. It is correct that RG 175.153 does not expressly refer to alternative strategies. That is because, as is abundantly clear from its terms, RG 175.153 is addressing the requirements of ss 947A, 947B and 947C in Subdivision D of Div 3 of Part 7.7 of the Corporations Act. It does not purport to address s 945A(1) directly nor what the SOA should disclose in that respect.

333    This is important because, as is explained next, another part of RG 175 did precisely that. Before turning to that other part of RG 175, it is relevant to note that RG 175.153 did provide:

What must you include in an SOA?

RG 175.153 An SOA must comply with the Corporations Act and regulations, and must include all of the following:

…

(d)     a statement setting out the advice (s947B(2)(a) and 947C(2)(a));

(e)     information about the basis on which the advice is or was given (s947B(2)(b) and 947C(2)(b)); …

334    RG 175.126 did expressly refer to s 945A(1)(a) and (b), and it implicitly referred to s 945A(1)(c). As the primary judge recorded at J[752], it provided (emphasis added, notes omitted):

What must the SOA disclose about the advice and the basis of the advice?

RG 175.126 In administering the law, we will take the view that an SOA should:

(a)    clearly and unambiguously set out the providing entity’s personal advice; and

(b)    set out in easy-to-understand language, in one place, the reasoning which led to the advice, including:

(i)    subject to RG 175.127, a concise summary of the client’s relevant personal circumstances as ascertained after making the reasonable inquiries required by s945A(1)(a);

(ii)    a generic description of the range of financial products, classes of financial product or strategies considered and investigated within the meaning of s945A(1)(b); and

(iii)    a concise statement of the reasons why the advice was considered appropriate, including the advantages and disadvantages for the client if the advice is acted on.

335    As can be seen, RG 175.126 expressly required the SOA to set out the reasoning which led to the advice, including a description of the “strategies considered and investigated within the meaning of s 945A(1)(b)”.

Conclusion

336    It was not, accordingly, erroneous or illogical to have used the absence of a reference in the SOAs to the alternatives identified by the primary judge at J[252] (see [326] above) as one of the matters supporting an inference that those alternatives, or alternatives more generally, were not considered or investigated. In any event, this was not the only matter the primary judge relied upon. As noted earlier, the primary judge also accepted Mr Cashel’s evidence that there had always been an obligation on an adviser to advise on alternative strategies, and that Storm did not countenance advice being given inconsistently with the Storm system of advice.

337    The primary judge’s first reason for concluding there was a breach of s 945A(1)(b) was not shown to be wrong. The inference his Honour drew – that the alternatives he identified at J[252] were not considered – was an appropriate one to draw from the evidence as a whole, including the absence of any positive evidence that those alternatives were considered and the absence of substantial evidence that any real alternatives were considered.

Breach of s 945A(1)(b) – second reason

The primary judge’s conclusion

338    The primary judge concluded that Storm did not adequately determine the objective of the advice it provided to the relevant investors, noting that an objective can have different levels of precision: J[261], [262]. His Honour found at J[264] that the objectives of Mr and Mrs Dodson included for them to live self-sufficiently and travel in retirement:

To take Mr and Mrs Dodson as an example, Storm ascertained that their relevant personal circumstances included desires to live self-sufficiently and travel in retirement. The desire to live self-sufficiently required consideration of the detail of their usual living expenses including how those expenses might change over time. Would there be likely increased costs for health expenses? Would there be decreased costs when their dependent ward became independent? As for travel, to which places did Mr and Mrs Dodson wish to travel? How often did they wish to travel? In what manner would they travel? And, underlying all of these points, what would be the cost of their travel? Were there years when they might not wish to travel (and could save that expenditure)? Were there likely to be years when they could not travel, such as for health reasons (including Mr Dodson’s heart condition)?

339    The primary judge drew the inference that “Storm generally did not give reasonable consideration or investigation to these matters to determine or quantify the objective of its advice in relation to the other relevant investors”: J[265].

The primary judge’s reasoning

340    The primary judge gave three reasons for drawing this inference:

(1)    A “primary reason” was the rarity in the SOAs of any detail of these expenses or changes in circumstances: J[266].

(2)    A second, but independently sufficient, reason was the lack of any detail in the cash flows dealing with these details: J[267].

(3)    A third reason was that foreseeable incidents occurred, about which Storm had not given reasonable consideration: J[271] to [272].

The appellants’ complaints

341    The appellants made two complaints about the primary judge’s reasoning at J[264].

342    First, it was contended that it amounted to a conclusion that paragraph (a) of s 945A(1) was breached rather than paragraph (b). There had been a pleading that paragraph (a) was breached, but this was withdrawn. Section 945A(1)(a) was not in issue: J[600]. The appellants submitted that it was not pleaded that there were objectives or “relevant personal circumstances” which should have been, but were not, uncovered by Storm.

343    The statement of claim at [1992(h)], which was clearly directed at a breach of s 945A(1)(b), pleaded:

Storm did not give such consideration to, and conduct such investigation of, the subject matter of the advices to each of the Investors as was reasonable in all of the circumstances, having regard to the information obtained from the Investors in relation to their personal circumstances, in that:

…

(h)     Storm did not determine or quantify the objective of the advice and, accordingly, there were no parameters for the extent of gearing and the amount of risk that the Investors should take.

344    In support of their first complaint, the appellants submitted, correctly, that the questions identified by the primary judge at J[264] are ones which would naturally arise in either determining the personal circumstances under s 945A(1)(a)(i) or making “reasonable inquiries” in relation to those personal circumstances under s 945A(1)(a)(ii).

345    The appellants also pointed out, correctly, that s 945A(1)(b) is directed to consideration and investigation of “the subject matter of the advice” having regard to the information obtained in accordance with s 945(1)(a) in relation to the investors’ personal circumstances.

346    Secondly, the appellants contended that there was no factual evidence from which one could infer that Mr and Mrs Dodson had other quantifiable objectives to give if further inquiry had been made of them.

Further factual background

347    It is necessary to look a little further into the facts, remaining with Mr and Mrs Dodson as an example. With the assistance of an adviser, Mr and Mrs Dodson completed and signed a “Confidential Financial Profile”. It was dated 1 November 2007. This document was executed after a “primer meeting” and an “education workshop” and occurred at an information gathering appointment. The “Confidential Financial Profile” contained a section where “purpose and needs” could be inserted. It commenced with these words:

PURPOSE AND NEEDS

Examples of such a need are for a car; funding for a child’s education; house improvements; holidays or a child’s wedding, whether now or in retirement.

348    Mr and Mrs Dodson’s needs for the period from retirement until death as expressed in the Confidential Financial Profile were, as the primary judge noted, “to live self-sufficiently and be happy until the day you die” and to “travel in retirement”. The former “need” was likely part of the pro-forma “Confidential Financial Profile” document, as it also appears – typed – in the Financial Profiles of Mr and Mrs Herd and Mr and Mrs Higgs. That inference also stems from the language of the expressed need, in particular the word “you”. Accordingly, the only “need” apparently inserted by Mr and Mrs Dodson was (in handwriting) “travel in retirement”. In any event, Mr and Mrs Dodson adopted these two needs as accurately reflecting their states of mind at the time.

349    The Confidential Financial Profile also included details of current income and current expenditure. Living expenses were divided into “fixed spending” and “variable spending”. Included in “other variable expenses” was a reference to travel in the amount of $10,000. There was also a reference to a savings / holiday account with a balance of $9,900.

350    Much of Storm’s SOAs was in standard or template form: J[9]. The SOA for Mr and Mrs Dodson was dated 27 November 2007. The signed version was 106 pages long. It stated that it had been prepared “[f]ollowing investigations into your needs”. The SOA contained a short section on Mr and Mrs Dodson’s “present position” which included:

Personal Profile and Goals …

From the information you have supplied to us, we know that Paul you are 60 years of age working casually as a Traffic Controller for Acquired Awareness. We also know that Valerie you are 55 years of age and you are currently working part time as an Aged Care Worker for SSS Australia. You are a married couple and you have no financial dependants.

You have asked our advice on the best ways to continue your wealth building over the next 10 years and beyond. Important financial goals for the future include building a solid financial base that will aid your wealth creation, allowing you to maintain a comfortable lifestyle into your retirement. It is therefore a major aim to produce a portfolio of assets that will result in an income stream independent of your personal exertion work. This will facilitate the transition to relying on income from your capital, that is, you embark on your Journey to Capitalism.

Consideration

351    As to the first two reasons (see [340] above) given by the primary judge for drawing the inference that “Storm generally did not give reasonable consideration or investigation to these matters to determine or quantify the objective of its advice in relation to the other relevant investors”:

(1)    The SOA did not address the considerations identified by the primary judge at J[264] (see [338] above) as ones which would naturally arise for consideration given the statement in the Confidential Financial Profile of Mr and Mrs Dodson’s needs.

(2)    The cash flow, which was expressly a critical part of the SOA, contained an amount of $0 for extraordinary expenses and yearly living expenditure and did not include the extent of expenditure for future years such as when Mr Dodson was well into his 70s, a conclusion which Professor Valentine thought was certainly not reasonable: J[268].

352    As mentioned, s 945A(1)(b) was focussed on consideration and investigation of the “subject matter of the advice”. ASIC pleaded at [192] of the statement of claim that the “subject matter of the advice” was:

(a)    the matters set out in the statement in the second paragraph on page 13 of that Statement of Advice that:

“You have asked our advice on the best ways to continue your wealth building over the next 10 years and beyond. Important financial goals for the future include building a solid financial base that will aid your wealth creation, allowing you to maintain a comfortable lifestyle into your retirement. It is therefore a major aim to produce a portfolio of assets that will result in an income stream independent of your personal exertion work. This will facilitate the transition to relying on income from your capital, that is, you embark on your Journey to Capitalism.”

(b)    the investment recommendations set out on page 50 of that Statement of Advice as pleaded in paragraph 191 above [relating to Mr and Mrs Dodson].

353    The investment recommendations set out at [191] of the statement of claim were that Mr and Mrs Dodson:

(1)    take out a loan of $276,000.00 from the Bank of Queensland;

(2)    take out a margin loan of $90,000.00 from Colonial Margin Lending;

(3)    use their existing managed funds worth approximately $65,000.00 as security for the margin loan;

(4)    using those borrowings to invest:

(a)    $16,000.00 in the Storm Australian Technology Indexed Trust;

(b)    $202,000.00 in the Storm Australian Industrials Indexed Trust;

(c)    $97,000.00 in the Storm Australian Resources Indexed Trust;

(d)    pay Storm’s fees of $26,960.00 for the advice; and

(e)    the residue of approximately $21,000.00 in a Macquarie Cash Management Trust Account.

354    The appellants submitted that the “subject matter of the advice” was the investment in index funds and cash management trust referred to in the SOA. Paragraph [41] of the defence pleaded:

41.    The Respondents deny paragraph 192 of the Statement of Claim and say that:

(a)    the subject matter of the advice that Storm gave to Mr and Mrs Dodson in the Statement of Advice was investment in the Index Funds and cash management trust referred to on page 50 of the Statement of Advice;

(b)    the particular investment recommendations set out on page 50 of the Statement of Advice comprised advice rather than the subject matter of the advice;

(c)    the matters pleaded in subparagraph (a) of paragraph 192 are objectives or needs rather than the subject matter of the advice;

(d)    section 766B(3) of the Act draws a distinction between the ‘advice’ and the ‘objectives, financial situation and needs’ considered in the course of providing advice;

(e)    sections 944A and 945A draw a distinction between “advice” and the “subject matter of the advice”.

355    The primary judge accepted ASIC’s position, concluding that “the subject matter of the advice” in s 945A(1) was the subject matter of “a recommendation or a statement of opinion, or a report … that … is intended to influence a person … in making a decision in relation to a particular financial product”; the subject matter is not limited to “a particular financial product”: J[607]; J[544] to [548]; s 766B(1)(a). His Honour considered that the statutory context and extrinsic material also supported this broader interpretation: J[609] to [612]. The primary judge was correct for the reasons he gave.

356    It follows from this conclusion that the subject matter of the advice for the purposes of s 945A(1)(b) included the SOA (being a report) and the recommendations and the statements of opinion made in it. Section 945A(1)(b) required sufficient investigation and consideration of these various matters, having regard to the information which had been obtained in relation to Mr and Mrs Dodson’s personal circumstances under s 945A(1)(a).

357    If reasonable investigation and consideration of the subject matter of the advice showed that the information which had been obtained was insufficient, then s 945A(1)(a)(ii) would operate to require (further) reasonable inquiries to be made. Section 945A(1)(a) does not cease to operate once investigation and consideration under s 945A(1)(b) has commenced.

358    If reasonable investigation and consideration in accordance with s 945A(1)(b) had occurred, then it would have been evident that further information was required, including the information identified by the primary judge at J[264]. However, the obvious questions identified by the primary judge at J[264] were not asked and therefore it was to be inferred that Storm did not give reasonable consideration to and investigation of the subject matter of the advice: J[265]. His Honour’s reasoning was open.

359    As to the third reason – that foreseeable incidents occurred about which Storm had not given reasonable consideration (see [340] above) – the primary judge gave the example that Mr and Mrs Dodson required a new car only four months after the SOA. His Honour stated at J[271], [272]:

… One example was that only four months after the SOA for Mr and Mrs Dodson, the following entry was made in Phormula:

Paul and Val have phoned the office and are in need of $20K to purchase a new car as Pauls car has died. can we withdraw the funds and Margin up the $20K as their LVR on their margin loan is very low. Cashflow required as soon as possible as clients need funds ASAP.

Ultimately, Mr and Mrs Dodson decided to use “holiday money” to pay for the purchase of their new car.

360    There are two difficulties with this example. First, Mr and Mrs Dodson’s attention was expressly drawn to the question whether they might “need” a new car at the time they executed the Confidential Financial Profile. The need for a car was an express example of a potential future need – see [347] above. They did not state that they did need a car. Secondly, the terms of the entry in Phormula (set out immediately above) suggest that the need to purchase a car came about unexpectedly. Even if appropriate consideration and investigation had occurred, that would not have resulted in the obtaining of further information to the effect that it was anticipated a car would be needed in the short term.

361    However, the difficulties with the particular example selected by the primary judge may be put to one side. The primary judge drew the inference he did for each of the first two reasons which he considered, of themselves, sufficient.

Conclusion

362    The primary judge is not shown to have erred in drawing the inference he did, nor is the inference sufficiently improbable to warrant appellate intervention. Accordingly, the primary judge’s second reason for concluding Storm breached s 945A(1)(b) is not shown to be erroneous.

363    Returning to the appellants’ two complaints recorded at [342] and [346] above:

(1)    The primary judge’s conclusion was not that s 945A(1)(a) was breached, but that the absence of inquiry in relation to the matters at J[264] was one matter supporting the inference that there was inadequate consideration and investigation of the subject matter of the advice such that there was a breach of s 945A(1)(b). In this regard, the “subject matter of the advice” was broader than the appellants contended.

(2)    It was not necessary in order to establish a breach of s 945A(1)(b) to show that Mr and Mrs Dodson would have given other quantifiable objectives. Section 945A(1)(b) is directed at ensuring that consideration and investigation occurs. In any event, the probabilities favour that, if asked, Mr and Mrs Dodson would have given answers to the questions identified at J[264] which would have been relevant to the consideration and investigation which ought to have, but did not, occur.

Breach of s 945A(1)(b) – third reason

The primary judge’s conclusion and reasoning

364    The primary judge concluded that Storm did not conduct an adequate sensitivity analysis before advising the Part E investors: J[274]. His Honour identified two inadequacies. The first was described at J[276]:

The first, although less significant defect, was that the graphs and cash flows prepared for the investors did not clearly show their net equity position. The net equity position was not clearly shown because the graph marked “cash reserves” was actually a graph of the movement in combined cash and index fund values but not the value of the family home. Not only was this inaccurately labelled as a “cash” reserve but it also did not show the net asset position (ts 306). This was because on Storm’s model the family home should have been included to obtain a net asset position (although I explain later that the family home ought not to have been treated as an investment asset in the first place).

365    The second was more important, described in the following terms at J[277]:

The second and more fundamental defect was that the cash flows prepared by Storm did not properly reveal to the client the effect of different scenarios, particularly movements in the market. Storm’s typical cash flows for each client, which followed a template model, were of three varieties, although sometimes there were multiple cash flows within one of these varieties. None of the cash flows provided for any negative growth from the index funds. As I have explained, the first type of cash flow was the “viability cash flow”. The second was the “reality check cash flow” which was prepared using higher interest rates for the loans and lower growth rates. The third was the “maximum capacity cash flow” which used a higher interest rate again for the margin loan. However, even the maximum capacity cash flow was not, as Mr McMaster said in re-examination, an appropriate sensitivity analysis in relation to the circumstances where the investments performed badly. This was because negative investment returns were never tested (ts 335).

366    Central to the primary judge’s conclusion in that paragraph, expressed in the third sentence and in the last, was that none of the cash flow modelling tested what was referred to as “negative growth”.

The appellants’ complaints

367    First, the appellants submitted that the primary judge ignored evidence from those who had worked at Storm to the effect that sufficient sensitivity analyses were in fact conducted, and based his conclusion solely on the expert evidence of Mr McMaster.

368    Secondly, the appellants observed that, whilst the primary judge referred to what the cash flows revealed to the client, the statutory question so far as concerns s 945A(1)(b) is what consideration and investigation was in fact undertaken by Storm, not what the client was told, nor whether the advice given was appropriate (a matter in the province of s 945A(1)(c)). This revealed, so the appellants submitted, that the primary judge focussed attention on the wrong question, namely what was contained in the SOAs rather than what consideration and investigation was in fact undertaken.

369    Thirdly, it was submitted that, in any event, ASIC had not established what the investors were told when the cash flows and SOAs were presented because ASIC had not called any of the advisers who in fact dealt with the relevant investors. It was suggested those advisers may have given some consideration or made some investigation in the respects in which the primary judge found Storm had failed.

Further factual background

370    In order to understand the complaints, it is necessary to know a little more of the process undertaken by Storm. The Confidential Financial Profile meeting involved obtaining significant amounts of financial information: J[58]. After the Confidential Financial Profile was completed, the Storm data entry team would enter information into the cash flow spreadsheet or, from about late 2007, into the Phormula database: J[66].

371    The cash flow was prepared in an excel spreadsheet and included an input of all of the client’s income and expenditure upon which Storm’s recommendations were based: J[68]. Every plan was done over a 17 year period irrespective of the age of the client: J[68]. The cash flow showed how much the client could borrow secured by a home loan and a margin loan, and the amount the client would need to contribute in order to fund the investment: J[68].

372    The primary judge explained:

[69]    The cash flows involved many standardised formulas but they did not merely involve inserting a client’s figures into a spreadsheet. Sometimes more information about the client was requested (such as more precise tax calculations: ts 207-208). Different clients also had different provisions made for contributions and cash reserves (ts 198). Different approaches were also taken for different classes of client. As Ms Bock and Mr Turvey said, if a client was not retired an overall debt ratio of 60% or less (with a home loan of 80%) would be used and capital growth was not generally the sole source of funding for the recommended borrowings. However, for a client who was retired or nearing retirement age, the overall debt ratio was 50% or less (assuming a home loan of 60%).

[70]    A critical component of the cash flow was a client’s “cash reserves”, sometimes referred to as a “cash dam”. These cash reserves were held in a Cash Management Trust. The cash flow showed these reserves of cash over a 17 year period having regard to: (i) the client’s revenue and expenses flowing from the recommendations; (ii) the client’s contributions and distributions; and (iii) an assumed rate of return. Ms Bock explained that Storm’s practice was to leave a minimum of 12 months of interest servicing in the cash reserves (ts 132).

[71]    As Mr McCulloch explained, cash flows would not be approved if the clients’ cash reserves were not predicted by the cash flow to increase over time. If the cash reserves were not shown as increasing with the assumption of no growth then the parameters were changed to allow growth in the investment, such as after a period of between two and five years for retirees. However, these “cash flows” did not factor in any period of negative growth (ie any decline in the value of the index funds). In the extreme case, where “cash reserves”, even after adjusting the parameters, still did not show an increase over time (potentially because the client did not have sufficient capacity to borrow), then the prospective client would not receive a recommendation to invest in accordance with the Storm model.

[72]    It will be apparent from this discussion that, as Mr McMaster explained, the “cash flow” was not really a cash flow and that “cash reserves” were not actually cash reserves. The formulas calculated “cash reserves” as a combination of cash and growth in the index funds (ts 306). The index funds were relatively liquid so that clients could generally sell them when they wanted to (at least prior to the GFC) (ts 186) but they were not actually cash. Not only did the spreadsheet treat the growth in index funds together with cash, but it also assumed that the growth would not be liquidated because it was assumed that there would be dividends and further growth; the cash rate would only be applied to the actual cash balance of the cash reserves unless cash reserves became “negative” (because the cash had all been used and the growth had been liquidated) (ts 156).

373    The cash flow team would prepare three cash flows, at least for many clients: J[73]. These were described by the primary judge at J[74] to [76]:

(1)    A “viability cash flow” or “recommended cash flow”: It generally formed the basis for the SOA to the client and was the cash flow which was annexed to the SOA for Mr and Mrs Dodson. This cash flow showed the lowest investment returns of the three cash flows prepared.

(2)    A “reality check cash flow”: This was based on the viability cash flow but (i) used the current interest rates rather than the higher interest rates of the viability cash flow, and (ii) used historical average share market growth rather than no growth or a low rate of growth after two to five years.

(3)    A “maximum capacity cash flow”: This increased the amount of the margin loan to the maximum allowable under the margin lender’s Loan to Value ratio (LVR) requirement.

374    The cash flows were discussed with the client in meetings with Employee Representatives. The primary judge recorded at J[78]:

Mr McCulloch said that at these meetings he was trained to (i) repeat topics from the education workshop; (ii) show clients a projected cash reserve levels graph to “prove” the “viability” of the plan [an example graph is shown at [381] below]; and (iii) conduct the meeting in a way which would not shock the client by the level of debt.

375    If the client wished to modify information previously provided, or was dissatisfied with part of the cash flow, it could be sent back to the cash flow team which retained control over the cash flow. The primary judge recorded at J[80]:

Once the prospective client was satisfied with the viability cash flow, the following process would take place:

(1)    the client would sign various bank application and privacy consent forms which enabled Storm to approach home lenders on the prospective client’s behalf;

(2)    the SOA cell commenced preparation of the SOA;

(3)    the banking cell issued requests for quotes to various home lenders and, if the client had requested a specific bank, to that bank;

(4)    the SOA cell would select a bank and a margin lender;

(5)    the cash flow cell would confirm the accuracy of the final viability cash flow, taking into account the amount of funding offered by the bank; and

(6)    once the SOA was complete, the cash flow cell checked and approved it. A hard copy was then delivered to the adviser for the adviser to present to the client.

376    Authorised Representatives and Employee Representatives could suggest changes to the cash flow team, but were not permitted to make changes: J[144]. The formulas in the excel spreadsheets provided to Authorised Representatives were removed, although most advisers had access to an illicit copy of a cash flow with formulas: J[140]. Employee Representatives were however provided with cash flows with formulas: J[141] (but see J[77] and [138]). The primary judge found at J[143]:

It is possible, but unlikely, that in some cases an Employee Representative might have shown a client how a cash flow might be different based on an additional input which had not been included by the cash flow team in the spreadsheet (such as including expenditure for travel). But an Employee Representative would have avoided this scenario because (i) such an additional input, if confirmed by the client, would have to be sent back for alteration to the cash flow team; (ii) the detail of the cash flows and the control exerted over them by the cash flow team made it clear that Employee Representatives should not experiment in front of the client with scenarios other than those provided in the worksheet (including the viability cash flow which was described in Phormula notes for Mr and Mrs Dodson as the “worst case” scenario); and (iii) the Employee Representatives would likely have been aware that the Strom model encouraged uniformity as much as possible and that the Authorised Representatives were not entitled to have access to spreadsheets with formulae included.

377    His Honour described the presentation of the SOA, which typically included (and in the case of Mr and Mrs Dodson did include) the viability cash flow, in the following way:

86    Once an SOA had been prepared, an adviser would meet with the prospective client for two to three hours to explain the recommendations contained within it. A hard copy of the SOA would be given to the client together with all relevant Product Disclosure Statements.

87    Mr McCulloch described how he was trained to reassure prospective clients at this meeting that Storm’s plan implemented measures designed to ensure that the client had no risk of getting a margin call. He would also ask whether the clients’ personal circumstances had changed (ts 196). The typical process also involved insisting that the client take the SOA home to read it, to flag pages that he or she did not understand, and to raise any questions.

378    The SOA in respect of Mr and Mrs Dodson included:

Cashflow

We have prepared a Cashflow that tracks the estimated revenues and expenses associated with this Financial Plan for the remainder of this financial year, and for the next 17 years. This allows us to detail all of the income and expenditure flows that would occur should you implement these Recommendations. This analysis assures us that the plan is viable and that the associated borrowings are manageable. This Cashflow is attached as Appendix B, and forms an integral part of this document.

Capacity to Invest

…

The Cashflow is a Viability Test – it is not intended for use as a forecast or projection of returns. We have included many conservative estimates of incomings, and have overstated many of the outgoings. The result is that the material that follows will in most cases be more pessimistic than any actual results achieved by the investment plan. We emphasise again that the purpose of this Cashflow is to test in rigorous conditions that the Plan is viable.

…

Assumptions Used in the Cashflows

The Cashflow is used as a test of the viability of the Investment under unfavourable conditions. An Investment that is viable under these conditions means that you can survive and prosper even if the conditions outlined do occur. It is unlikely that considerations as unfavourable as these will eventuate, however it is prudent to consider exaggerated circumstances to ensure comfort with the plan even under such conditions. The specific assumptions used in the building of the Cashflow are detailed in the following pages.

Investment Growth

The viability test assumes NO GROWTH in the share investment for the remainder of this financial year, and for the next 3 years. This shows that even without sharemarket growth, the Cashflow remains viable and does not initially depend on growth in the share Investment. Following this period of time, modest growth of 2.55% per annum in the Sharemarket is required to keep your Cash Reserves growing.

379    The viability cash flow itself was contained at Appendix B. It included the statement:

We stress that this cash flow is a viability test and in it we attempt to overstate outgoings and costs and understate income and benefits. The essence of the plan is to position you for when growth occurs and NOT to rely on growth in any individual year.

380    Although called a “cash flow” and referring to “cash reserves”, it is important to understand that:

(1)    the “cash reserves” included the anticipated growth in the underlying assets and did not contemplate “negative growth”;

(4)    it contemplated that there were no yearly living expenses, no extraordinary expenses and no life insurance costs (which is not consistent with the Confidential Financial Profile for Mr and Mrs Dodson).

381    The cash flow contained a graph entitled “cash reserve levels” which, for Mr and Mrs Dodson, was in the following form:

382    It will be observed that this graph rather attractively indicates that the cash reserve levels will always be positive. It was this graph to which Mr McCulloch referred when he stated that he had been trained to “show clients a projected cash reserve levels graph to ‘prove’ the ‘viability’ of the plan”: J[78]. However, a more careful reading of the cash flow presents a different picture as his Honour recognised at J[72]. The graph above shows the “cash reserve level” as at July 2014 to sit at approximately $25,000. The correct position was that “cash reserves” as at July 2014 were forecast to be -$4,201. The “cash reserve level” graph included accumulated investment growth of $29,869 as a “cash reserve”, meaning that “total reserves” were $25,668. These “total reserves” were only positive because of the assumption of growth in the underlying investment. It was “total reserves” which was shown in the graph above, not “cash reserves”. There were no forecast positive “cash reserves” as at July 2014 in the viability cash flow.

Consideration

383    First complaint: As mentioned, the appellants submitted that the primary judge ignored evidence to the effect that sensitivity analyses were conducted and based his conclusion solely on the evidence of Mr McMaster. Neither proposition is made out.

384    The appellants submitted that Mr McCulloch had given evidence of the sensitivity testing, referring to his cross-examination at T185. The substance of Mr McCulloch’s evidence was that the cash flow team would not have been able to explain “the sensitivity testing of the volatility within various index funds” to the advisers: T184. At T185, he explained that his reference to sensitivity was to how far the market needed to fall to trigger a margin call. This was not evidence that Storm carried out the kind of sensitivity testing his Honour concluded ought to have occurred. In particular, it did not answer the primary judge’s central concern which was that Storm did not test cash flows in a situation of negative growth.

385    The appellants next referred to the cross-examination of Ms Bock. This was said to demonstrate that Storm undertook three sensitivity analyses, being the three cash flows described by the primary judge at J[74] to J[76] and also always performed a margin call test. In fact, her evidence was to the effect that usually a viability cash flow would be prepared (T114) and “on occasion” there would be a number of different types of cash flows prepared: T115. Again, this evidence did not suggest that a sensitivity analysis was conducted which tested negative growth.

386    Appendix 1 to the JER was Mr McMaster’s report concerning Mr and Mrs Dodson. In that report, Mr McMaster demonstrated a simple sensitivity analysis over a one year period based on the recommendations in the SOA dated 27 November 2007. He modelled a fall in capital growth of -10.24% representing a moderate fall in markets and a fall of -25.95% representing a significant market fall. He noted at [165] and [169]:

It is normal for share markets to have negative returns from time to time. In the 25 calendar years prior to 2007 there were 6 years when the share market had a negative return. There was a statistical probability of a negative return every 4 years. The last negative year was December 2002. A reasonably competent financial adviser would be aware of these statistics and would understand that formulating advice for Mr & Mrs Dodson should account for a negative return.

…

It is my opinion that Storm did not exercise due care and skill in their analysis leading to the advice that Mr & Mrs Dodson should borrow to invest.

387    It was submitted that the primary judge only relied upon the evidence of Mr McMaster in concluding that Storm did not conduct a sensitivity analysis which tested what would occur in a situation of negative growth. It was not necessary to rely on more. The primary judge accepted Mr McCulloch who, as mentioned, was Storm’s group accountant, as a witness of truth: J[41] to [44]. Mr McCulloch had said:

The cashflow did not factor in a period of negative growth on the investment (i.e. a decline in the value of the indexed share funds). The key differences between a cashflow for a retired and a non-retired client were that retired clients’ plans:

(a)    would involve higher starting levels of cash reserves than a typical working client;

(b)    would require the use of growth to support the plan; and

(c)    had a lower overall starting LVR.

388    His Honour accepted at J[71] that a period of negative growth was not factored into the cash flows.

389    Also at J[71], the primary judge accepted that the assumed period of “no growth” was shortened by the cash flow team if that was necessary for the model to show “cash reserves” increasing over time. Making such an assumption of growth was, obviously enough, something more likely to be necessary for retirees without independent sources of income to service necessary repayments. This conduct does not suggest adequate sensitivity analyses were conducted and certainly does not test “negative growth”.

390    Second complaint: The second complaint was that the primary judge focused on what the relevant investors were told, rather than on whether the relevant sensitivity analysis was conducted. It is true that his Honour’s language at J[277] is framed in terms of what the cash flows revealed to the clients. However, it is tolerably clear from his reasons as a whole, including in particular the passages set out above and at J[278], that his Honour was addressing whether Storm had in fact sufficiently considered and investigated the subject matter of the advice within the meaning of s 945A(1)(b). The better understanding of J[277] is that the primary judge considered the fact that the investors were not told about a scenario of “negative growth” was probative of whether such a situation was in fact considered by Storm. The appellants’ second complaint focusses attention solely on the language of J[277]. That language should be read in the context of the whole judgment.

391    Third complaint: The appellants submitted that, whilst ASIC called two advisers (Mr Benson and Mr Turvey), neither of them dealt with the Part E and Schedule investors. However, whilst the specific adviser who dealt with Mr and Mrs Dodson was not called, a note was recorded in “Phormula” of what the adviser had said (errors in original):

Andrew and Wally have presented the cashflow together with [Val] and Paul explaining to them that they need to build their capitol; [sic] base for their retirement and deliver the appropriate income and we can do this by using their asset. Wally explained that they would be investing in the Australian economy the top 300 companies and that we invest long term in this quality asset. Andrew went throught [sic] the cashflow and delivered the figures explaining they are the worst case scenario and thaqt [sic] the plan will survive. Went over the imortance [sic] of doing steps depending on the market movement and growth of the investment. Please do SOA appointment booked for 30th NOV.

392    This suggests that the adviser was not aware of, and did not separately perform, a sensitivity test which looked at what would occur, so far as Mr and Mrs Dodson were concerned, in a situation of “negative growth”. It is also relevant to note in this regard that the primary judge had concluded that the advisers were unlikely to have shown a client a cash flow which had been altered by them rather than prepared by the cash flow team – see [376] above.

Conclusion

393    The primary judge concluded that Storm had not sufficiently considered and investigated the subject matter of the advice, in particular because it did not consider or investigate the consequences of “negative growth”. His Honour’s conclusions were open on the evidence and were not shown to be affected by error. If Storm had made such an investigation, it might be expected to have told the investors about that investigation rather than – taking Mr and Mrs Dodson as an example – stating that the “viability cash flow” (which did not countenance “negative growth”) was the “worst case scenario”. The primary judge did not err in concluding that s 945A(1)(b) was breached by reason of Storm failing to carry out an adequate sensitivity analysis in the ways he did.

Breach of s 945A(1)(b) – fourth reason

The primary judge’s conclusion and reasoning

394    The primary judge’s fourth reason for concluding that Storm breached s 945A(1)(b) was that Storm did not give reasonable consideration to the income of the Part E and Schedule investors in all their circumstances: J[285] to [290]. This reason was “closely related” to the third reason, but independently sufficient to support a conclusion of breach of s 945A(1)(b): J[285], J[250].

395    The primary judge was not prepared to accept that Storm did not consider the clients’ income and expenditure at all, even though it was not considered as part of the (viability) cash flow: J[285]. However, his Honour did conclude that it was unreasonable to fail to conduct an analysis of the clients’ actual cash flow independently of the proposed investment. If this had been done, it would have enabled an analysis of whether the client had capacity to fund the costs associated with the borrowing and margin calls to the extent not covered by income received from the investments: J[286]. Whilst Storm considered the probability of a margin call, it did not consider the extent to which the relevant investor could fund costs from their own income or resources if such were needed because, for example, there was a margin call.

396    His Honour considered the likely conclusion, if Storm had investigated that issue, would have been that they could not fund such costs. He agreed with Mr McMaster that this omission was unreasonable. His Honour concluded at J[290]:

Ultimately, I am satisfied that the analysis performed by Mr McMaster [of the consequences to Mr and Mrs Dodson of market falls or -10.24% and -25.95%] was a reasonable one. But the basic point is that Storm gave no reasonable consideration to the extent to which any of the relevant Part E or Schedule investors could fund interest payments from their own resources in a scenario where their cash reserves were exhausted. A reasonable consideration and investigation into a client’s capacity to fund the borrowing costs required Storm to consider scenarios in which the client would have been required to pay those costs without access to investment income. The analysis that Storm did of the probability of margin calls being made demonstrated that this scenario was not a likely possibility. But in the circumstances of the Part E and Schedule investors, and the extreme consequences for them of default, this exercise should reasonably have been performed. It was not performed.

The appellants’ complaints

397    First, the appellants submitted that this case was not pleaded.

398    Secondly, the appellants submitted that, in light of the finding that a margin call was not a likely possibility, it was difficult to see why it was unreasonable not to investigate the relevant investor’s ability to fund the costs which would be required. The appellants submitted there was no suggestion that Storm or the clients were labouring under a misapprehension that, if margin calls were made, the clients would have been able to meet the calls. The investments were said to have to stand or fall on the basis of the assets and income that Storm anticipated would be available. If the plan did not stack up without resort to income required for domestic and personal expenses, it was not recommended.

Consideration

399    As to the first complaint, the statement of claim included at [1992(m)]:

Storm did not give such consideration to, and conduct such investigation of, the subject matter of the advices to each of the Investors as was reasonable in all the circumstances, having regard to the information obtained from the Investors in relation to their personal circumstances, in that:

…

(m)    Storm did not prepare an analysis of the actual cash flow of the Investors to consider whether they would be able to fund their consumption, cost of borrowing and any potential margin calls from their income.

400    That pleading adequately engaged the issue. In any event, the case was conducted on the basis that this was an issue.

401    As to the second complaint, the primary judge’s conclusions were open. The relevant investors were either retired or approaching retirement. They had provided in their Confidential Financial Profiles details of their income and expenditure. It was plainly appropriate to consider whether and how investors could fund a margin call if one was made; if they could not, the consequences were severe. One reason for performing that task would be to consider what might occur, for example, in a situation of “negative growth”. Another would be to inform the investor so that the investor could make an informed decision about whether to take on the risks associated with the investment. It was open to conclude that failing to consider this matter was unreasonable, in circumstances where the investors could potentially lose all of their assets at a time when their capacity to produce income was substantially over.

Conclusion

402    The primary judge has not been shown to have erred in concluding that s 945A(1)(b) was breached because Storm did not give reasonable consideration to the income of the Part E and Schedule investors in all their circumstances.

The breach of s 945A(1)(c)

The primary judge’s conclusions and reasoning

403    The primary judge concluded that s 945A(1)(c) was breached for three reasons.

404    First, Storm classified the relevant Part E investors and Schedule investors as balanced investors and advised them as such when in fact they were likely to be conservative investors: J[292] to [315]. This was significant because the typical ratio of growth assets (shares and property) to defensive assets (fixed interest and cash) for a balanced investor was in the region of 60% growth and 40% defensive, but 20% growth and 80% defensive for a conservative investor. The primary judge held that an adviser could not reasonably have reached the conclusion that the Part E investors were balanced investors for four reasons (J[300]):

(1)    The potential loss of their homes would be catastrophic. They had few other assets and no real prospect of rebuilding their financial position in the event of significant loss: J[301]. Although they were told in the SOAs that they might lose their home, there was other material in those SOAs which operated to alleviate concern about risk: J[302] to [304].

(2)    The oral presentations by Storm in the “education workshops” encouraged investors to adopt the view that any risk was minimal and that debt should not to be feared. This was more powerful than the isolated statement in the SOA: J[305] to [312]. The primary judge set out a number of examples which included statements that “volatility” was “manageable risk” involving investment in an asset whose value is certain to rise over time and that there was no risk of getting a margin call: J[307], J[312].

(3)    The Part E investors each chose a profile consistent with a conservative profile rather than a balanced profile in their Confidential Financial Profiles: J[313].

(4)    Even if the Part E investors had an unusual appetite for risk, it was appropriate that they be treated and advised as conservative investors: J[314] to [315]. They might choose to reject the advice given on that basis, but it was appropriate for it to be given.

405    Secondly, Storm included the Part E and Schedule investors’ family homes in their asset portfolio for investment purposes: J[292]; J[316] to [327]. It was inappropriate to treat the family home as an asset which formed part of their investment portfolio. If the value of the residence was removed from the investment portfolio of assets then the investors were advised to adopt a higher LVR than even Storm considered to be prudent for them, even if they were viewed as balanced investors. The effect of the advice was to concentrate investments in shares and take a higher risk than Storm considered was appropriate for either a balanced investor or a conservative investor: J[316]. The primary judge noted that Professor Valentine “who was utterly devoted to the Storm model, conceded in cross-examination that if retirement is imminent then advice to borrow significantly against the home to invest is unreasonable”: J[291].

406    Thirdly, and independently of the first two matters, in all the circumstances the advice to the relevant investors to utilise the Storm model was generally inappropriate: J[292]; J[328] to [335]. Even if the appellants were correct that (i) the relevant investors were balanced investors and (ii) the home should be included as part of their investment portfolio, the advice was still inappropriate because the circumstances of the relevant investors meant that a double geared investment which was concentrated in the share market was not appropriate for them because it involved high risk: J[328]. The experts agreed that a fall of 10% could have been predicted at the time of the SOAs: J[330]. A significant downturn, such as 22%, was a possibility: J[330]. The experts agreed that a financial planner should not advise a retired person or a person nearing retirement to invest in high risk investments. Negative gearing within a period of approximately 5 years to retirement was high risk: J[331].

The appellants’ complaint

407    The appellants’ challenge in relation to the primary judge’s findings regarding s 945A(1)(c) was that ASIC failed to prove the “relevant personal circumstances” of each of the relevant investors; in particular their subjective willingness to take on risks associated with the investments recommended to them by Storm. The appellants submitted that the evidence of the relevant investors supported the conclusion that they were aware of, and voluntarily accepted, the risk that their assets might be lost.

408    The appellants referred, in particular, to the primary judge’s observation at J[302]:

It is true that each of the investors was told in the SOAs that there was a possibility of losing their home:

Apply the same caution if you are thinking of using your home as security – borrow conservatively as a default on the loan could mean loss of the security for the loan. If you have used your home as security, this means you could lose your house.

409    The appellants observed that none of the relevant investors stated in their affidavits that they were not prepared to accept a real risk that some of their assets might be irrecoverably lost.

Consideration

410    Section 945A(1)(c) directs attention to whether “the advice is appropriate to the client, having regard to” the consideration and investigation carried out in accordance with s 945A(1)(b). The advice must be appropriate “to the client”, which necessarily requires a consideration of the client’s particular circumstances. The case at trial and on appeal was argued on the basis that the investors’ subjective willingness to take on risk was a relevant circumstance for the purposes of application of s 945A(1)(c).

411    The statement of claim at [1993] pleaded that the advice given by Storm breached s 945A(1)(c). It included:

The advice given by Storm to each of the Investors was not appropriate to them, having regard to a consideration and investigation of the subject matter of the advice that was reasonable in all of the circumstances, in that:

…

(e)    The Investors were not prepared to accept a real risk that some of their assets might be irrecoverably lost.

Particulars

The fact that the Investors were not prepared to accept a real risk that some of their assets might be irrecoverably lost and the fact that they communicated this information to Storm is to be inferred from the following facts:

(i)    When completing the confidential financial profile, each of the Investors responded to a question as to their views on investments by ticking the box next to the statement: “I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated.”