A company director who unreasonably exposes the company to sanctions, civil liability or reputational damage in allowing the company to contravene the Corporations Act 2001 (Cth) (the Corporations Act) or some other relevant law may be found to have breached their duties to the company, potentially giving rise to both civil penalties and disqualification as a director.
This process of finding secondary liability on the part of a director for allowing a primary breach by the company has been coined as “stepping stone liability” and has recently formed the basis of a number of successful actions brought by ASIC against company directors.
Overview of directors’ duties
Under section 180(1) of the Corporations Act:
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.
This is the statutory duty of care and diligence imposed on company directors.
Under sections 181 and 182, directors owe further fiduciary duties to the company. These duties can be summarised as:
- The duty for directors to exercise their powers in good faith and for a proper purpose; and
- The duty for directors not to improperly use their position to gain an advantage or to cause detriment to the company.
Where a director is in breach of sections 180, 181 or 182, ASIC may prosecute the breach, giving rise to pecuniary penalties and disqualification from acting as a director for a period of time.
A step towards the director’s breach
Not all breaches by the company will lead to the conclusion that a director has breached their duties under sections 180-182 of the Corporations Act.
In ASIC v Maxwell, it was said that the duties owed under sections 180-182 are not general duties for the company to exercise its affairs in accordance with the law – they are concerned with the duties owed to the company by the directors.
Similarly, in ASIC v Mariner, it was said that:
“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.”
It is not enough that the company has breached the Corporations Act or other applicable law. For the directors to be liable, there must be some degree of involvement in the company’s breach such that it could be said the directors failed to exercise their duties properly and with due care and diligence.
In Australian Securities and Investment Commission v Cassimatis (No 8)  FCA 1023 (Storm Financial) it was suggested that directors who engage in unreasonable or intentional acts that are extremely likely to involve a serious breach and perhaps threaten the existence of the company may breach their duties even when there is no actual breach by the company. In contrast, a director will not breach their duties where it is not foreseeable that their conduct would cause the corporation to breach the law.
A successful leap by ASIC
Storm Financial concerned the inappropriate financial advice given by Storm Financial Limited in breach of the Corporations Act. Following the company’s breach, the directors were successfully prosecuted by ASIC under section 180(1) of the Corporations Act for failing to exercise their duties with care and skill.
A number of interesting points can be taken from Storm Financial:
- The two company directors were still in breach of section 180(1) despite being the sole shareholders of the company. The Court stated that the interests of the company should not be narrowly understood as the interests of the shareholders as the two interests do not always coincide; and
- An actual breach or loss by the company may not be necessary for a contravention of section 180(1). A director could be liable where they place the company in jeopardy in such circumstances where a breach is extremely likely and there is a high degree of risk.
In Storm Financial, the two directors were in breach given they developed and adapted the “Storm Model” of investing and because they were involved in key management decisions, including the extent of the model’s inappropriate use.
On this basis the director’s were not relieved of their liability for civil penalties under section 1317S of the Corporations Act.
Similarly in Australian Securities and Investment Commission v Padbury Mining Ltd  FCA 990 (Padbury Mining) and Australian Securities and Investment Commission v Sino Australia Oil and Gas Ltd  FCA 934 (Sino), the company directors were found to have breached section 180(1) for causing or permitting their respective companies to contravene the continuous disclosure and prospectus provisions of the Corporations Act.
Section 180 of the Corporations Act does not impose strict liability on company directors for any breaches of the Corporations Act or other law. Nonetheless, company directors should ensure foreseeable risks of contravention are appropriately managed and that the directors do not cause or permit such contraventions.
This article was written by Cameron Jorss, Partner, and Graham Johnson, Winter Clerk.