ASIC V Adler: Inappropriate Behavior, Contravention Of Australian Law, Punishment, Lessons - 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?

ASIC v Adler

Recent corporate collapse of Ansett One Tel attracts the media and in Adler’s case, court commenced the action after the collapse of HIH. However, this event gives an appropriate stimulus for the purpose of reflecting the potential damages arise because of the breach of provisions of Corporation Act 2001. While considering this case, number of requirements related to transactions arises in respect of providing financial benefit to any related party, and any financial assistance provided by company for the purpose of acquiring shares in itself or holding company. In this case, general statutory duties of directors are also highlighted by Court (Law teacher, n.d.).

In this essay, various things are discussed related to this case such as inappropriate behavior of Adler, contravention of provisions of Corporation Act 2001, punishment suffer by Adler as a result of his conviction, and lessons teaches by this case. Subsequently, essay is concluded with brief conclusion.  

On June 2000, an undocumented and unsecured payment of $10 million in the form of loan was transferred by HIH Casualty and General Insurance Ltd (HIHC) Pacific Eagle Equity Pty Ltd (PEE). PEE Company is under the control of Adler, and he is also the trustee of Australian Equities Unit Trust (AEUT). Adler also holds the position of non-executive director and he also holds the shares in HIH through the Adler Corporation Limited. It must be noted that after receiving the loan from HIHC, PEE becomes the trustee of AEUT. However, later on loan of $ 10 million given by HIHC were applicable in HIHC subscription for $10 million worth of AEUT units, and then shares of $4 million worth of HIH shares was brought up by PEE, and they sold shares of HIH at the loss of $ 2 million. Shares of HIH were purchased by PEE for the purpose of giving the false impression to the stock market that the company is doing well to HIH’s investors. Number of unlisted shares of technology and communication companies was purchased by PEE from Adler Corporation of the amount of $4 million. After all these transactions total loss of investment $2 million was reported to Adler under the trust by AEUT.

Contravention of Provision of Corporation Act 2001

These transactions are carried out by Adler without informing the board of the company and without getting shareholder’s approval, and no disclosures were reported to the board of the company and also to the investment committee of HIH. Company provided the loan without any proper documentation or security to the loan, and all these things were done in such manner that it will not come in the knowledge of other directors of HIH. Therefore, it was found that this behavior of Adler was not appropriate and he breached his duties as officer of HIH and HIHC by conducting all of these transactions (Law teacher, n.d.) .

This case is very unique in nature and complicated also because it includes number of breaches of the provisions of Corporation Act 2001, and because of this bad governance collapse of HIH was take place. Such breaches of duties are covered by section 9, section 180, section 181, section 182, section 182(2), section 183, and section 260A. All these breaches are stated below in detail:

Section 9- this section defines the director as the person who is appointed to the position of director or alternate director, no matter what name was given to that position. Section stated that duties of directors are introduced to provide protection to the shareholders of the company against the risk of harm given by directors to the company. This section also states the meaning of officer of the company executives who hold senior positions in the board of the company (Corporation Act, 2001).

 In this case, Court stated that Adler was not only the director of HIH but he was also the officer of wholly-owned HIH subsidiary as per section 9 of the Act. This section applies to Adler even though he is not properly appointed as a director or an officer of the subsidiary. He plays role of director in the subsidiary holding company and also a member of HIH investment committee. All these things showed that he participated in the decision making of the company’s business which affected it the whole or substantial part of the business.

Inappropriate Behavior of Adler

Section 180- clause 1 of this section states that directors or other officers of the company must exercise their powers and discharge their duties with a due diligence and standard of care in which any reasonable person will do in those circumstance if they holds the similar position in the company (Corporation Act, 2001).

In the present case, William who holds the position of managing director in HIH and HIHC contravened section 180(1) because he does not ensure any safeguard before HIHC issuing loan to PEE, and this section was also breached by Fodera who holds the position of finance director in HIH because she failed to discuss the proposal related to $ 10 million loan to PEE with the board of directors of HIH or with its investment committee. Therefore, both Williams and Fodera failed to fulfill their obligations under this section as the executive director of the company (Law Teacher, n.d.).

Clause 2 of this section states that directors and other officers of the company who makes business judgment rule will not be held liable for any judgment made as per the statutory, common law or equitable duties of care. All of these things would be considered as reasonably unless any other person holds such position thinks it is not reasonable. However, this rule provides safe protection to the directors against any personal liability related to valid judgments taken by directors in good faith and best interest of the company.

In the present case, Court stated that all three directors that was Adler, Williams and Fodera breach their statutory duties defined in clause 1 of this section, and they cannot rely on the available defense of business judgment rule. In case of Adler, this rule is not applicable because he does not comply with 180(2) (b) since he had conflict of interest related to his decision for the purpose of investing $ 10 million payment from HIHC in PEE. Secondly, in case of Williams this rule is not applied to him he his fail to ensure the safeguard protection before allowing the loan and decision taken by him was not considered as Business judgment rule for the purpose of 180(3), and William does not show any evidence that decision taken by him was in good faith for the proper purpose as stated in section 180(2) (a). Finally, in case of Fodera business judgment rule does not apply because she does not inform to board and investment committee about the transaction (Hooper, 2011).

Contravention of Corporation Act Provisions

Section 181- as per this section it is necessary that director and other officer of the company must exercise their powers and discharge their duties in bona fide manner for the best interest of the company, and also for proper purpose. In the present case, Adler breach his duties stated under section 180(1) because transactions occurred in the HIH, HIHC and PEE is used for his own personal interest.

Section 182- Section 182 of the Act prevent both officers and employees of the company to use their power in improper way for the purpose of gaining advantage for themselves or for any other persons or for any other person (Corporation Act, 2001).

In the present case, Court stated that Adler breach his obligations stated under section 182 by arranging loan from HHIH to PEE for the purpose of acquiring the shares of HIH on stock market. Transaction done by Adler was for the purpose of increasing the share price of HIH, and sell out the shares owned by Adler Corporation before PEE could sell off their HIH shares. After this transaction, heavy loss was suffered by PEE by reselling the shares of HIH.

In lieu of this transaction, it was held by court that Adler used his position in improper way as director of HIH, officer of HIHC and director of PEE for the purpose of gaining advantage for the Adler Corporation. Court further stated that duties are also breached by Williams under section 182 for the purpose of helping Adler in gaining advantage for Adler Corporation by authorizing the $10 million loan without getting any proper approval from the HIH’s investment committee.

Section 183- as per this section if any person receives information because of their capacity of director, officer, and employee of the company, and they must not use this information for the purpose of gaining advantage for themselves or for any other person and cause any failure in the company. In the present case, Court stated that vizard contravenes section 183 as he receives information in the capacity of non-executive director of Telstra. This information is misused by Vizard for gaining advantage for CTI, Brigham, and for himself (Corporation Act, 2001).

Punishment

Section 260A- this section forbids the company to provide financial assistance to the person for the purpose of obtaining or acquiring shares in the same company or of the holding company, but this transaction can be done if some conditions are met by the company such as this transactions does not adversely affect the capability of company to pay to its creditors, does not materially prejudice to the interest of the company, and such transaction must be validated by the shareholders of the company (Corporation Act, 2001).

In this case, the main purpose of all the transactions is to increase the share price of HIH for the benefit of Adler Corporation Limited, and the main evidence related to this is PEE sells its shares after the shares sold by Adler Corporation and this result in heavy loss to PEE. As per the Supreme Court of New South Wales the main purpose of entering in this transaction is to provide financial assistance for acquiring shares in HIH which is HIHC’s holding company. Because of this transaction both HIHC and HIH suffered material prejudice, which is considered as contravention of section 260A (Gibson & Brown, n.d.).

In this case all Adler, Williams, and Fodera face civil consequences stated in part 9.4B of the Act for contravening civil penalty provisions sections 180, 181,182,183 209(2), 260D(2), and it also includes:

• Order is passed for compensation for damages suffered as per s.1317H;
• Order related to Pecuniary penalty under section 1317G which includes maximum of $200,000 applies.
• Disqualification of directors from managing corporation for the period stated in in section 206C (Find law, n.d.).

Conclusion:

After considering all the facts, it is clear that company must ensure good governance, because good corporate governance is the most important character of any company. This allowed the company to ensure confidence and trust among the members of the company such as directors of the company, shareholders of the company, and other related parties in the company. Good corporate governance not only increases the value of the company but also sustain the growth of the company. In case, company does not comply with these rules stated under the Corporation Act 2001, then number of section are breached by corporation under Corporation Act 2001.

However, this case also teaches that directors are very important part of the company, and they must not influence by their senior managers and fail in complying with their duties. Directors of the company must be familiar with the business of the company, and possess all necessary information related to the company. In case Daniels v Anderson (1995), it is stated by Court that directors of the company, whether executive or non-executive, should comply with their minimum standards of the duty in the company.

References:

Corporation Act 2001- sect 180.

Corporation Act 2001- sect 9.

Corporation Act 2001- sect 181.

Corporation Act 2001- sect 182.

Corporation Act 2001- sect 183.

Corporation Act 2001- sect 260A.

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Law Tecaher. Contraventions Of ASIC V Adler. Available at: https://www.lawteacher.net/free-law-essays/business-law/contraventions-of-asic-v-adler-business-law-essay.php. Accessed on 19^th May 2017.

Law teacher. Director Duties ASIC V Adler. Available at: https://www.lawteacher.net/free-law-essays/business-law/director-duties-in-asic-v-adler-business-law-essay.php. Accessed on 19^th May 2017.

Find law. Checklist for directors' duties. Available at: https://www.findlaw.com.au/articles/1303/checklist-for-directors-duties.aspx. Accessed on 19^th May 2017.

Hooper, M. (2011). The Business Judgment Rule: ASIC v Rich and the

reasonable-rational divide. Available at: https://www.austlii.edu.au/au/journals/ElderLRev/2011/1.pdf. Accessed on 19^th May 2017.

Gibson, B. & Brown, D. Asic’s Expectations of Directors. UNSW Law Journal, Volume 35(1).