ASIC V Adler: Breach Of Director's Duties And Corporate Governance Essay.

ASIC v Adler [2002] NSWSC 171 was one of the most significant cases in recent Australian law. You are to present an essay/report that includes the following:

• What was the inappropriate behaviour displayed by Adler as an officer of HIH and other companies he managed and controlled?
• How did Adler’s actions contravene Australian law, in particular the Corporations Act? Please discuss the different areas of company law that were breached.
• What punishment did Adler suffer as a result of his conviction?
• What lessons does this case indicate for those who manage an Australian company?
• Make any interesting observations you believe are appropriate regarding this case, eg what have you learnt from your reading and research?

Duties of Directors as per Corporations Act

In this present case, the directors of the company (Adler) make payment to a planned unit trust. However, the money is used to purchase shares in the parent company. For this transaction, no confirmation by the board was made by Adler. It shows contravention of provisions related to financial support and related party benefit (Viven-Wilksch, 2015). As per the Corporations Act Adler was responsible for breach of director’s duties and given powers with a charge of the standard of care and diligence in ss180, 181, 182 and 183.

Actions of Adler were not in a coherency of material prejudice to the financial assistance provisions due to which there was a huge loss to the company (O’Donnell, Hicks and Shantapriyan, 2015). The nature of transactions collected in case finding shows that the director neither acted in good faith nor in an appropriate purpose and their sole purpose was to individual benefit.

Though this entire case suffered from many legal issues as the reason was brevity, this whole cased focused on the breach of director’s duties of the company, benefit of related parties and financial support of purchasing shares.

Section 180 – Duty to work with care and diligence

As per this section, a director or other officer of an organisation must exercise their given powers with a standard of care and diligence. Provision of Section 180(1) (a) states action of direct must be like a sensible person. Further, provisions of Section 180(1) (b) describes that a director must follow its given responsibilities and duties in an ethical manner.

In the present case, the court had provided a decision that Adler contravened the directors’ duties as he didn’t exercise his given powers with a standard of care and diligence (Hill, 2013). As a result of his negligence, the company suffered a big loss. In addition to this, Adler also failed to ensure proper company safeguards and procedures while making decisions on being the position of director.

Section 180 (2) – The Judgment Rule

According to this section, a director or any other officer who is supposed to make business judgment rules must act in good faith. In accordance with the judgment of this case, decisions must be supported by all the legislative aspects, responsibilities and duties of care and diligence in which all of the basic elements are shown such as the judgment made in good faith or not (Windholz, 2015). In addition to this, in the matter of company’s judgment, there must not be any material personal interest.

Breach of Director's Duties by Adler

The court of law held that Alder had breached his duties as stated in section 180(1).  This rule was not applicable for Adler as he failed to satisfy the section 180(2) (b) because he had a disagreement of interest according to his decision to invest the $10 million payment from HIHC in PEE. This transaction occurred for his personal benefit which was not prejudicial to the interest of the company.

Section 181 – Statutory Duty to operate in good faith or viable objective

Under this section 181(1), a director or other officer of a company must use their given powers and discharge their duties in good faith and for a proper purpose that will result in best interest of the corporation (McGrew and et.al. 2013). This section can be breached only if the director of the company thinks that they are really doing action in their given duties for the best interest of the company. In case any of the directors does contrary to the cited approach then they must be having a conflict of personal interest along with the interest of the company they are conducting.

In Adler’s case, he breached section 181(1) as he failed to act in good faith and proper purpose and also can’t exercise his given powers and duties for the company. Since, the transactions held in the HIH, HIHC and PEE had been inappropriately passed, for the individual benefit.

Section 182 – Improper Use of Position

In accordance with this section 182, improper use of position is restricted to the officers and directors of a corporation for the perseverance of gaining power for individual benefit or for any other reason which is contrary to the interest of the company (Lalonde and Adler, 2015). In the case of Adler, the court detained that Adler breached the section 182 since he arranged a loan of $10 million from HIHC to PEE. Due to this transaction, PEE suffered a big loss. Since this transaction, Adler was seized that he offensively used his position to gain individual benefit for the Adler Company.

Section 183 – Improper Use of Information

As per in section 183, an individual who gets information as they are a director, an officer of a corporation, might not mistreat the information and make improper use of it for personal advantage as it will result in loss of the company (Viven-Wilksch, 2015). An individual might also not take advantage of personal information for their benefit or giving the information to another person. Adler misused the information in order to gain personal benefit by conducting insider trading.

Penalties Imposed by the Court

Under section 260A, it is stated that it is restricted for a company to give financial assistance to an individual who is willing to buy its own shares from the stock market as it will create maternal discrimination (Barrett, 2013). Still, if some circumstances are there when a company can do such transactions such as the capacity of the company to pay its liabilities (under section 260A (1) (a)).

In the case of ASIC V Adler, PEE is controlled by Adler, and he breached the section of 260A as he was giving financial assistance to PEE through HIHC. He used this assistance to acquire the HIH shares in the stock market (McGrew and et.al. 2013). As a result this provided a fake impression to the stock market and on the investors of HIH; nevertheless, the court held that Adler intention was to higher the HIH share prices for the benefit of Alder Company.

Due to the contradiction of provision of companies’ law, Mr Adler was restricted for the position of director in any company for a minimum of 20 years. In addition to this, the monetary penalty was also imposed as due to his due negligence of Adler loss was borne by the company. As a consequence, Mr Adler and Adler Corporation were ordered by the court to make payment of pecuniary penalties of $450,000 each. Thus, total penalty for Adler was $900,000.

Along with this, there was combined penalty charge on Messrs Adler and Williams. They both were required to pay compensation charge of $7,986,402 to General Insurance Limited and HIH Casualty (Venus, 2016). This penalty was complimented with the clause that the interest component of that sum is recalculated by The Court of Appeal.

The present case shows that directors are required to follow best guidelines for avoiding the conflict of interest. This case had imposed a requirement for directors to develop a conflict of interest policy. From this guideline, it will be clear that which method will be followed by directors in the event for building conflict of interest which is required to be evaluated by committees formed by shareholders (Langford and Ramsay, 2014). Policies which are formed by the Adler are creating the conflict of interest which are not assessed by the board of directors and ultimately there was a loss of the business.

Further, directors are required to provide full disclosure by way of standing notice under section 192. This section states that when an individual is selected as a director, it is their duty to maintain a proper and full disclosure of all material information by the method of standing notice (Grant, 2016). As per the section 192, concerns about the personal interest of material they haven in decisions taken by them. The standard notice also includes:

• Extent and nature of the interest.
• How interest of director will or might relays with the corporate transactions.

Corporate Governance Framework

Director are required to issue a register for standing notice, and it is maintained by the secretary of the company thus it can be referred to and circulated where applicable. If in case there is potential conflict is present, then there is no need for directors to participate in decision-making processes (Subedi, 2016). Further, directors are required to obtain the informed consent of the board at the point of conflict of interest. In such situation, one must make sure that the informed approval from the board of directors is received or in the case where permission is not attained then directs should provide confirmation that whether the transaction is advantageous to the company.

In ASIC v Adler case, there has been clear description that directors of the company have compulsory obligation to make sure that there is efficient and effective company governance framework (Hanrahan, Ramsay and Stapledon, 2013). This has to be placed to secure from inappropriate actions held by directors. The procedure must contain enough balance to assure that the system cannot be easily bypassed.

• Proper and full Disclosure of information
• Avoiding of potential conflicts
• To stand up for the reporting structure of the company
• To make sure that they are performing at their own interest in any of the transaction for which they are selected (Coffee Jr, Sale and Henderson, 2015).

The present study had provided me significant knowledge regarding duties of directors and consequence if the provisions are not followed by the director in an appropriate manner. In this case, I get to know that there should be effective governance of company in order to monitor actions of directors. Further, sole power must not be given to an individual person as it can lead to significant losses to business as that individual will try to misuse their right for the purpose of personal benefits.

Case scenario also indicates that if the board of directors and audit committee had taken care of their responsibilities than entire scandal can be prevented as Adler cannot misuse their position in such situation. This case is the keystone for describing duties and responsibilities for director and lesson for stakeholders to ensure prevention such actions. Further, this case had provided guidelines for regulatory framework of corporate entities to ensure there is no possibility of conflicts of interest and actions of directors are monitored by independent parties to ensure interest of company.

References

Barrett, J., 2013. ACCC uses powers to ban director from managing companies for the first time. Keeping Good Companies, 65(1), p.40.

Coffee Jr, J.C., Sale, H. and Henderson, M.T., 2015. Securities regulation: Cases and materials.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Hanrahan, P.F., Ramsay, I. and Stapledon, G.P., 2013. Commercial applications of company law.

Hill, J.G., 2013. Evolving Directors’ Duties in the Common Law World.

Lalonde, C. and Adler, C., 2015. Information asymmetry in process consultation: An empirical research on leader-client/consultant relationship in healthcare organizations. Leadership & Organization Development Journal,36(2), pp.177-211.

Langford, R.T. and Ramsay, I., 2014. Conflicted directors: What is required to avoid a breach of duty?.

McGrew, D.A., Baugher, M., Adler, S. and Melohn, W.C., Cisco Technology, Inc., 2013. Inspection and rewriting of cryptographically protected data from group VPNs. U.S. Patent 8,347,073.

McGrew, D.A., Baugher, M., Adler, S. and Melohn, W.C., Cisco Technology, Inc., 2013. Inspection and rewriting of cryptographically protected data from group VPNs. U.S. Patent 8,347,073.

O’Donnell, K., Hicks, B., Streeter, J. and Shantapriyan, P., 2015. Getting it right: directors’ assessment of information. Managerial Auditing Journal,30(2), pp.117-131.

Subedi, S.P., 2016. International investment law: reconciling policy and principle. Bloomsbury Publishing.

Venus, P., 2016. How to avoid disqualification as a director by ASIC.Governance Directions, 68(1), p.28.

Viven-Wilksch, J., 2015. The adventures of good faith: can legal history and international developments provide guidelines for Australia?. Alternative Law Journal, 40(2), pp.89-92.

Windholz, E., 2015. Team-Based Professional Sporting Competitions and Work, Health and Safety Law: Defining the Boundaries of Responsibility.