Facts of the case
ASIC v Adler [2002] NSWSC 171 deals with a number of issues regarding breach of directors’ duties. It is considered as one of the most significant cases in the Australian law. This report will focus on analysing the facts of this case to evaluate the inappropriate behaviour which was displayed by Adler while acting as an officer of HIH. This report will evaluate the actions of Adler to understand how they contravene the provisions of the Corporations Act 2001 (Cth) (the Act). The punishment given to the Adler and the lessons which are indicated in the case will be discussed as well. Furthermore, observations regarding this case will be included in the report.
HIH was the second largest insurance company in Australia and it was liquidates in 2001. In June 2000, an unsecured and undocumented loan of $10 million was given by Casualty and General Insurance Co Ltd (HIHC), which was a subsidiary of HIH, to Pacific Eagle Equity (PEE). Adler was acting as a non-executive director of HIH. PEE was controlled by Adler, and he provided illegal financial assistance in the transaction. The money was arranged without any knowledge of HIH’s directors and the transferred was performed by Dominic Fodera (Adams, 2011). After the transaction, PEE becomes the trustee of Australian Equities Unit Trust (AEUT). Adler and his wife were the only directors and shareholder in Adler Corporation which control AEUT. AEUT issued units of a value of $10 million to HIHC, however, the trust which was managed by PEE valued less than $10 million (Austlii, 2018). After receiving the loan, PEE used it in following transactions:
- The corporation purchased share of HIH with approximately $4 million from the stock market. Adler wanted to create a false impression in stock market he wanted to help HIH’s falling share. The purpose of this false impression was to increase the share price of the company or at least prevent the share price of HIH from reducing on the stock market dramatically. Shortly after, shares of HIH were sold by PEE at a loss of $2 million (Golding, 2012).
- PEE used approximately $4 million for purchasing the unlisted share from Adler Corporation which it owed in unlisted technology and internet companies (Hargovan, 2009). Adler Corporation suffered a total loss on the investments which it made in unlisted technology and internet companies.
- The rest $2 million were given as a lent to Adler and others who have an interest in the transaction. PEE did not properly document this transaction, and it was an unsecured loan as well.
Section 180 (1): This section provides that director should maintain a level of care and diligence while using their powers for taking business decisions and discharging their duties which any reasonable would in such situation. In this case, no reasonable person would have given an unsecured loan of $10 million to PEE which was incorporated recently. The actions of Adler had failed to maintain a safeguard to protect the interest of HIHC. Furthermore, Adler did not seek approval from any of the board member, and there was no information about the transaction to the investment committee of HIH. There was no documentation prepared regarding the transaction, and no security was demanded (Lumsden, 2010). Based on these factors, Adler had breached his duty to maintain a level of care and diligence. A similar judgement was given in Statewide Tobacco Services Ltd v Morley [1990] 2 ACSR 405 case in which the court held that directors have a fiduciary duty which they should maintain while taking business decisions (Lowry, 2012).
Analysis of Breach of Directors’ Duties
Section 181: While taking business decisions, a director should ensure that the decisions are in the best interest of the company and such decision are taken in good faith of the organisation. The director must not have any personal interest while taking any decision for the company. In this case, Adler did not disclose regarding the use of money. Furthermore, Adler was solely focusing on the interest of shareholders of HIH which conflicts with the company’s interest. He also contravened his duty by issuing an unsecured loan to AEUT and acquiring an investment in three unlisted technology companies (Adams, 2009). In Regentcrest v Cohen [2001] 2 BCLC 80 case, the court provided that a subjective test is used in order to evaluate the good faith of a director (Langford & Ramsay, 2015).
Section 182: Directors operates at an apex position in the company, and they must not misuse their position. Subsection (1) provides that the director or others officers must not use their position to gain personal benefits, providing benefit to others or causing harm to the company. Adler contravened this section because he supported the shares of HIH for personal benefit. Furthermore, Ray Williams, CEO and the founder of HIH, contravened his duties as well by misusing his position for authorising a loan of $10 million to PEE without complying with appropriate procedures (Healey, 2012).
Section 183: Directors have access to confidential information of an enterprise, and they must not improperly use such information to gain personal benefit, for the benefit of others or causing harm to the company. Adler breached this section by using the information for gaining personal and his company’s benefit. While making such transaction, Adler ensured that the money is invested in a way which is beneficial for him (Cassim, 2017).
The court held that the financial assistance of $10 million given by HIHC to PEE to purchase the share of HIH is illegal because no disclosure about this transaction is made to other directors or the investment committee. Moreover, the unit trust subscribed by HIHC of $10 million was less valued than the initial subscription based on which the action taken by the director is considered as against the interest of HIH, HIH and other shareholders, hence, it contravened section 260A. Adler was held liable by the court for breaching section 180,181,182, and 183 of the Act. The court disqualified Adler from acting as a director of any corporation for a period of twenty years along with imposing some fines (Adams, 2013). The court held that Adler failed to act as a responsible director for the company, and he had taken business decisions for personal interest rather than focusing on the interest of the company. He displayed lack of commercial morality which is considered as a punishable offence as per the Corporations Act. Furthermore, Williams was held liable by the court for contravening his duties given under section 180 and 182. He also failed to maintain a proper safety before authorising the loan of $10 million from HIHC to PEE. Williams was disqualified by the court to act as a director for any company for a period of ten years (Austlii, 2018).
Punishment and Lessons from the case
The judgment of this case marked history, and it provided many lessons to those who manage Australian corporations. Firstly, the judgement of this decision has a clear message for people who manage Australian companies with similar intentions. The judgement of the case is considered as a good example and caution for the directors in order to ensure that they fulfil their duties to avoid legal consequences. The duties clearly mentioned that directors should not focus on their personal interest, and they should take business decisions which are in the interest of the corporation. Directors have a substantial number of powers, and they should ensure that they did not misuse such powers for personal gain. The judgement of the case made it clear that the court takes the breach of directors’ duties very seriously and it takes serious legal action and imposes penalties on directors who breach their duties. The judgement of this case is a serious warning for directors who manage Australian companies to ensure that they should comply with the duties given in the Corporations Act. In case they did not comply with these duties, then serious legal actions can be taken against them based on which they can be held liable for their actions. Thus, the main lesson in this case for directors is to ensure that they effectively comply with their duties in order to avoid legal consequences.
This care provides a good example regarding the duties of directors which they are necessary to fulfil by exercising their powers and discharging their duties in the company. The case shows how easy it is for directors to misuse their powers especially when they wanted to in a company. By using his powers, Adler takes the decision of giving a loan to PEE without letting other directors or investment committee know about it. It shows that directors operate in an apex position in the company, and they should treat it appropriately. It is very easy for them to misuse their position or misuse the information that they have to gain personal interest or cause harm to the corporation. Thus, the duties imposed by the Corporations Act assists in ensuring that directors did not misuse their powers to gain an unfair advantage, and they focus on the interest of the company.
Conclusion
From the above observations, it can be concluded that ASIC v Adler is considered as one of the most important cases in Australian law because it gives a good example regarding the compliance with directors’ duties. In this case, Adler misused his position to issue a loan to $10 million to PEE from HIHC. The purpose of the transaction was to gain personal interest from the money of the company and Adler did not have an intention to benefit the company. The court held that there a number of duties which are breached by Adler while authorising this transaction. He failed to maintain a level of care and diligence because he issued an unsecured loan to PEE which was newly formed and the transaction was not documented correctly. The decision of Adler was against the interest of the company, and he did not act in good faith. He also misused his position and information which he had for gaining personal benefit rather than focusing on the interest of the company. The judgement of this case provides a good lesson for directors to ensure that they comply with the regulations of the Corporations Act for avoiding legal consequences.
References
Adams, M. (2011). Latest developments in officers’ duties of SMEs. Journal of Business Systems, Governance and Ethics, 6(3), 31.
Adams, M. A. (2009). Corporate Law: How Important is the 2009 James Hardie Decision?. Keeping good companies, 61(5), 290.
Adams, M. A. (2013). Leighton’s character, complexities and conflicts. Keeping Good Companies, 65(11), 676.
ASIC v Adler [2002] NSWSC 171
Austlii. (2018). ASIC v Adler and 4 Ors [2002] NSWSC 171 (14 March 2002). Retrieved from https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2002/171.html?&nocontext=1
Cassim, R. (2017). The launching of delinquency proceedings under the Companies Act 71 of 2008 by means of The derivative action–Lewis Group Limited v Woollam 2017 (2) SA 547 (WCC). Obiter, 38(3), 673-688.
Corporations Act 2001 (Cth)
Golding, G. (2012). Tightening the screws on directors: Care, delegation and reliance. UNSWLJ, 35, 266.
Hargovan, A. (2009). Company Secretary: Directors’ and Officers’ Statutory Duty of Care Following James Hardie. Keeping good companies, 61(10), 586.
Healey, D. (2012). Governance in sport: outside the box?. The economic and labour relations review, 23(3), 39-60.
Langford, R., & Ramsay, I. (2015). Directors’ Duty to Act in the Interests of the Company: Subjective or Objective?. SSRN.
Lowry, J. (2012). The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors: Australian Securities and Investments Commission v Healey. The Modern Law Review, 75(2), 249-260.
Lumsden, A. (2010). The Business Judgement Defence-Insights from ASIC v. Rich. SSRN.
Regentcrest v Cohen [2001] 2 BCLC 80
Statewide Tobacco Services Ltd v Morley [1990] 2 ACSR 405
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