Discuss about the HIH Casualty and General Insurance.
The issue before the court in this case was the HIH Casualty and General Insurance had given undocumented, unsecured amount $10 million to Pacific Legal Equity in June 2000. The company was under the management of Adler and he was also the trustee of Australian Equity's Unit Trust. This was the time when Adler was also acting as a nonexecutive director through Adler Corporation, as this company was a major shareholder of HIH. After PEE receives the loan amount, it also became a trustee of Australian Equity's Unit Trust. Later on, shares of HIH worth $4 million were also purchased by this company when PEE sold these shares, because it had suffered a loss of $2 million. The shares of HIH were purchased by PEE for the purpose of giving an erroneous impression to the investors of HIH that nothing was wrong with the company. Simultaneously, PEE also bought different unlisted shares for a value of $4 million in a number of communication technology companies from Adler Corporation. The result of all these investments was that the company lost nearly $2 million. AEUT had given this money to Adler Corporation under trust. However, the company undertook these transactions without informing the boot of the corporation and also without obtaining the consent of the shareholders. Similarly, it failed to inform the board of the company and also the members of the investment committee. The required documentation was not completed before giving this loan and in the same way, the company also failed to take proper security for the loan. The reason behind these actions was to avoid the attention of the other directors of HIH.
On the basis of the above-mentioned facts, it can be said that this was a unique and complicated case. The reason was that in case, there were a number of breaches of the duties of the directors. Several duties have been described for the directors by the statutory law under the Corporations Act and also by the common law. The effect of this bad corporate governance was the collapse of HIH. The provisions of statutory law that were breached in this case was provisions mentioned in section 180 requiring the directors to act with care and diligence, the provisions of s. 181, according to which the directors should act with good faith, s. 182 which prevents the directors from using their position improperly, s183 prohibiting the directors from improperly using the information and section 260A, which is related with financial assistance.
Another relevant provision is present in section 9, Corporations Act, which gives the definition of the term director and provides the a person can be considered as a director of the corporation if such person is formally appointed as director, irrespective of the name used for the position. In this regard, section 9 also provides that certain persons can be treated as the directors even if they have not been validly appointed to this position. Therefore, these positions are treated by the law as directors, although they were not appointed formally as such. In view of this provision, shadow directors and the de facto directors are also treated by the law as the directors of the corporation. This section also explains the term officer of the company. For this purpose, the officers of the company include the executives of the company who are holding senior positions. In some cases, the officers of the company include the persons who have the authority to make decisions or take part in decisions that have positive impact on the business activities of the company. Therefore, the persons having the authority to have significant influence on the financial position of the company are also considered as being included in the term, 'officers'.
A very important duty prescribed for the directors is present in section 180. It has been mentioned in s180(1) that according to this duty, the directors under an obligation to use their powers by using the same care and diligence that can be expected in case of any reasonable person if that person is holding the position of a director in a company under similar circumstances. In this context, it has been mentioned by the law that the executive directors also need to be considered as full-time employees and therefore, they should be involved in the routine management of the company. At the same time, executive directors have special responsibilities, and as a result, it is vital that the executive directors should have sufficient understanding of the affairs concerning the routine management of the corporation. As against the other directors, it is considered that the nonexecutive directors act, part-time however the law requires that these directors and should also be often occupied in running the affairs of the company.
On the other hand, the Corporations Act has also provided a defense to the directors. Section 181(2) incorporates the business judgment rule of the common law. According to this rule when a director has made a business judgment, such director cannot be considered as being responsible for the judgment for the breach of duty of care and diligence if the elements of business judgment rule are satisfied. For this purpose, it needs to be seen that the judgment was made by the director for proper purpose and in good faith. The director should not have any personal interest concerning the judgment. It is also required that the director has properly informed himself or herself in case of the judgment to a reasonable extent. It is also required for the purpose of availing the defense provided by the business judgment rule that the directors should be under the impression that they are making the business judgment in the best interests of their company. In this way the protection provided to the directors under the common law by the business judgment rule has also been incorporated in the Corporations Act. Therefore, the directors can use this defense for the purpose of escaping liability concerning the business judgments that they have made if it can be established by the directors that they acted in good faith and to protect the best interests of the company. The purpose behind providing this defense to the directors is that in routine cases, it is natural that while certain decisions made by the directors will be profitable for the company, it is also possible that on account of certain decisions made by the directors, the company will have to face a loss even if the directors have made the decision rationally and in good faith.
Another relevant duty that has been mentioned in the Management Corporations Act is present in section 182. This duty requires that the directors should refrain from using their powers improperly. It can be said that the power has been used improperly by the directors, if these powers were use by the directors for a cleaning your personal benefit. Similarly, another duty is present in section 183, which prohibits the directors from improperly using the information that has been received by them. When any information has been received by the director, on account of their position in the company, the law requires that such information should not be used improperly. The improper use of information takes place when such information is used for obtaining a personal benefit or to cause a loss to the company.
In the present case, Adler was acting in the position of the director of HIH and at the same time, also as the officer of the company that was wholly owned subsidiary of HIH. Consequently, the court stated that Adler falls under the definition of director described in s 9. The definition of director is applicable in case of Adler, although he was not appointed formally to this position in the subsidiary. The reason was that Adler had played the role of a director in the subsidiary company. He was also acting as a member of the investment committee of HIH. Under these circumstances, the court concluded that an active role was being played by Adler in the decision-making process of the company which had significant impact on the whole on a major part of the business of the corporation.
The findings of the court concerning the MD of HIH, and the M.D. of HIHC, Williams were that he was also liable for the breach of duties mentioned in section 180(1). The court arrived at this conclusion on the basis of defects that Williams could not ensure that proper safeguards will present before a loan was given to PEE by HIHC. Further, the court pointed out that the financial director of HIH, Fodera was also found to be responsible for breaking these duties. This conclusion was based on the fact that Fodera did not discuss these proposals that the board, regarding during a loan of 10 million to PEE and similarly. He did not discuss it with its investment committee.
Under these circumstances, the court was of the opinion that these executive directors were liable for the failure to fulfill their duties, especially when there was a failure on their part to inform the court of HIH concerning the decisions made by them. Regarding the application of the business judgment rule, it was held by the court that all these directors, Adler, Williams and Fodera were found to be responsible for the breach of their duty mentioned in s180(1). The court also stated that the defense under business judgment rule is not available to these directors. Hence these directors were not allowed to rely on this defense. It was explained by the court that in the present case, business judgment rule cannot be used by Adler. The reason given in support of this conclusion was that according to the court, Adler did not satisfy the requirements stated in s. 180(2)(b). Similarly a conflict of interest also existed in the case of the decisions made by Adler to invest 10 million in PEE. In case of the other director, Williams, it was held by the court that business judgment rule cannot be relied upon due to the reason that he did not ensure that sufficient safeguards were in place before giving the loan. The court also pointed out that although the decision made by Williams can be described as a business judgment, but view of the fact that he was a major shareholder of HIH, and the court concluded that a personal interest was present for Williams in the business judgment which fell under the purview of s180(2)(b).
The court also pointed out the words, the fact that during the trial, Williams had not provided any evidence to suggest that the judgment was made by him in good faith.
In case of the other director, Fodera, the conclusion of the court was that this director cannot be allowed to rely on the business judgment rule. Reason was that Fodera failed to inform the board of the company or investment committee regarding the deal. Under these circumstances, the court held that Adler was liable for contravening the provisions of s. 181(1). Regarding the allegations that Adler had used his position in the company improperly, it was noted that as HIH's director and officer of HIHC, as well as being the director of PEE, he had used this position for a cleaning a benefit for Adler Corporation. Likewise, it was also stated in this case that the other director, Williams had also breached his duties when he allowed a loan of $10 million without informing the investment committee of HIH, which was required under the investment guidelines of the company.