Case Introduction
Discuss about the Case Australian Securities Investment Commission v Adler.
In the case of ASIC v Adler, the HIH Casualty and General Insurance Ltd(HIHC) had provided an unsecured and undocumented loan amounting to 10 million dollars to the Pacific Eagle Equity Pty. Ltd. The Pacific Eagle Equity Pty. Ltd was a company which was the trustee of the Australian Equities Unit Trust (AEUT) and was controlled by Adler. It is important to mention that Adler acted as a non- executive, as well as through the Adler Corporations Ltd acted as a substantial shareholder of the company HIH. After the loan was provided Pacific Eagle Equity Pty Ltd. had become the trustee of the AEUT. A chain of transactions took place subsequent to the approval of the loan which is enumerated below:
The loan of 10 million dollars provided by HIH to PEE was later applied to the subscription of 10million dollars worth of AEUT Units.
PEE purchased shares of the company HIH worth four million from the stock market
However, PEE had later sold the shares of HIHC at a loss of 2 million dollars. The reason for purchasing the shares of HIHC was to give false impressions to the in the investors that the company was doing well and was financially sound.
The company PEE had also purchased several unlisted shares in the communication and technology companies from the company Alder Corporations Pty Ltd for four million dollars. This transaction was in the form of an investment.
A sum of 2 million dollars had been given to Alder under the trust by AEUT.
It can be mentioned that all these transaction had been done in secrecy. The Board of directors did not have knowledge about the transactions. The approval of the shareholders had not been taken and there was no disclosure of the aforementioned transactions to either the board of directors or to the HIH’s investment committee. It is to be mentioned that the loan had been given without any documentation and the loan was given without any securities. The ASIC alleged that Alder, acting as an officer of the company HIHC had breached his duties in relation to the provisions of sections 180, 181, 182 and 183 of the Corporations Act 2001 (Cth).
Section 9 of the Corporations lays down the provisions related to the identification of persons as directors of organization. This section also lays down the duties of such directors. It can be stated in accordance with the provisions of section 9 of the Corporations Act 2001 that any person who is appointed at the position of a director, irrespective of what name has been given to that position can be called a director. It can be stated that this section identifies certain people as directors even though such directors have not been properly appointed to the position of the director. It can be stated that directors have certain duties in relation to governance of companies. Such duties are imposed on the directors in order to protect the rights of the shareholders of the company from the risks of leading the company to harm. Shareholders of a company are exposed to several risks such as fraud. Directors have certain duties in relation to controlling the assets of the company for the purpose of carrying on the business of the company and not using such assets in their personal interest, to avoid mismanagement and making competent decisions of the company. Further in accordance with section 9 of the Corporations Act 2001, it can be stated that an ‘officer of a corporation’ includes senior employees of the company who hold a managerial post, executives of the company in senior positions and in the board of directors of the company.
Contravention of the provisions of the Corporations Act 2001 (Cth) in relation to this case
In the case ASIC v Adler, it was held by the court that Adler who was acting as the director of HIH companies was also the officer of the wholly owned subsidiary of HIH Company in relation to the provisions of section 9 of the Corporations Act 2001. The court held that Adler even though had not been properly appointed as a director or officer of the company, he was to be regarded as a direct. The court pointed out that Adler by virtue of being a director had been involved in the decision making process of the company HIH and its subsidiary companies, therefore his decisions affect ted the substantial or whole part of the business. Santow J in his judgment of this aforementioned case provided a good summary of the principles which are applicable to the duties of a director.
In section 180 of the Corporations Act 2001 (Cth), it has been provided that directors or officers of companies need to discharge their duties and exercise their powers with a standard of care and diligence. This section of the Corporations Act provides that whether a director acted with a standard of care and diligence is to be assessed from the perspective of another reasonable director acting in the same circumstances and holding the same position as the director in consideration. If the court finds that any reasonable director would have acted with additional diligence and care, the court will hold the director in consideration breached his duty as provided in section 180(1). It can be stated in accordance with the aforementioned section that executive directors are to be regarded as full time employees who are involved in the everyday management of the company. Such non executive directors have some social responsibilities which are associated with their position and due to the knowledge and expertise of the everyday operations of the company. Non executive directors however, have no social responsibilities as they do not have regular involvements in the company and do part time work.
In this case ASIC v Alder, the court held that Williams who was acting as the managing director of the company HHIC and HIH contravened the provision of the section 180(1) of the Corporations Act 2001 as he had failed to take due care so as to ensure that loan provided by HIHC to PEE was properly safeguarded. The Court further held that Fodera, who was acting as the financial director of the Company had failed to comply with the provisions of section 180(1) of the Corporations Act as he had failed to discuss the proposal to give the loan of 10 million dollars to PEE with the board of directors of HIHC or to the investment committees. The court further held that as the executive directors, Williams and Fodera of the aforementioned companies failed to carry out their duty with due care and diligence.
Principles applicable to the duties of a director under section 9 of the Corporations Act 2001
Section 180(2) of the Corporations Act 2001 lays down the business judgment rule. In this section it has been provided that a director or officer of an organization who makes a business judgment, cannot be hed to be personally liable for making such judgment under the provisions of common law, equitable duties of care and diligence if such director can prove that all the essential elements of the directors’ duties were involved in the decision making process. The director must prove:
The judgment had been made in good faith, that was fit for the purpose
The judgment was made in good faith
The judgment was not made in the personal interest of the director
The officers and the directors informed themselves about the subject matter of the decision to the extent such directors or officers believed to be reasonable and in the best interest of the company.
It is worth mentioning that all these elements are considered t be justified unless any other person in the position of the director or officer considers such judgment to be unreasonable. Therefore it can be inferred that the business judgment rule provides the director with a protection from incurring personal liability. The rationale behind the business judgment rule is that some business judgments which are made by directors turn out to be a total loss of profitable for the business even though such judgment had been made with honesty and due care. This rule encourages directors or officer of companies to take risks in the entrepreneurial activities since the directors or officers of companies are aware of specific legislation governing the operations of companies. In accordance with the provisions of section 180(3), it can be stated that the business judgment can be defined as the decision to take action with respect to the business activities of the organization. The court in relation to the ASIC v Adler case stated that all the three defendants, Alder, Fodera and Williams had al breached their duties as directors or officers of the companies HIH and HIHC as provided in section 180(1) of the Corporations Act. The business judgment rule could not be applied for any of the defendants in this case as it was evident that:
Alder could not satisfy the provision of section 180(2)b as there was a conflict of interest in relation to the decision to give a loan of 10 million to the PEE
Overview of the business judgment rule under section 180(2)
William contravened the provisions 180(3) as he failed to ensure that the correct safeguards were not enforced. Further it can be stated that he had material personal interest in accordance with section 180(2)(B). William failed to provide relevant evidence that the judgment had been made in good faith and with proper purpose.
Fodera, in this given case had failed to refer the transactions of PEE to the board of directors of HIHC or the investment committee as per section 183.
Further this case involved a contravention of section 181 of the Corporations Act which makes it mandatory for the directors to discharge their duties in good faith and in the best interest of the companies. This section is held to be contravened if any reasonable director acting in the position of the director in consideration believes that the director failed to act in good faith and in the best interest of the company. In the aforementioned case, the courts assessed that Alder and the rest of the defendants had failed to act in good faith as per the provisions of section 181(1) while discharging ther duties. This can be substantiated by the fact that the transactions which had taken place in the HIHC, HIH and PEE had been done for the sake of the personal interest of the directors.
Under section 182 of the CA, it has been provided that directors or officers of companies must not indulge in misusing their powers for the purpose of gaining advantage for themselves. However, in this case the court held that Alder had improperly used his power and position to make the arrangement for providing the loan of 10 million dollars to PEE. The amount of 10 million dollars had been used to acquire the shares of the company HIH on the stock market. The court further held that the Alder had the breached the provisions of section 182 of the Corporations Ac which restricts the directors or officers to misuse information related to the operations of the company in consideration for the purpose of gaining advantage for themselves.
The Court held that the defendant Alder had also breached the provisions of section 206A which prohibits a company to assist any person to acquire shares in the same company or holding company.
Decision of the court
The Court banned Adler to manage the operations of a company for a period of 20 years and the other directors in this scenario for a period of 10 years. The court imposed pecuniary penalties for on Adler,Adler Corporations, Williams and Fodera a penalty of $450,000, $450,000, $250,000 and $5000 respectively. Alder Corporations, Alder and Williams were ordered to pay compensation of $7,986,402 to HIHC.
Thus by analyzing the facts of the case and the decision of this case, it becomes evident that directors or officers of companies must discharge their duties with due care and diligence, in good faith and which are fit for particular purpose. Further it can be said that direct ors must not misuse their position or information of the company to gain personal advantage.
While conducting the research on this notable case, I gained knowledge about the role of directors in managing the affairs of the company. Researching on this case gave me insights about the statutory liabilities of the directors in case of breach of the provisions of the Corporations Act.
Reference List:
Corporations Act 2001(Cth)
ASIC v Adler [2002] NSWSC 17
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