Parties Involved
Question:
Discuss about the Landmark Case of Asic v Adler and 4 Ors.
Asic v Adler and 4 Ors, is a landmark case and requires analysis as there are several directorial duties that are enshrined under the Corporation Act 2001 which are violated by the parties to the case. There was HIH collapse and which was the outcome of very bad corporate governance.
Adler, William and Fodera were the three major parties who were involved in the leading case. (The Law Teacher, 2017)
Adler – Controls PEE and is the non-executive director of PEE
William – In HIH and HIHC, he was the Managing Director.
Fodera – Finance Director in HIH.
On June 2000, Pacific Eagle Equity Pty Ltd (PEE – Adler is a person who controls PEE and is the non-executive director of PEE) received a payment of $10 million loan (undocumented and unsecured) from HIH Casualty and General Insurance Ltd (HIHC). Post loan, PEE becomes the trustee of Australian Equities Unit Trust (AEUT). Adler was a major shareholder in HIH through Adler Corporation Limited. The loan which was granted to PEE was later used to HIHC’s subscription for $10 million worth of AEUT units. Also, $4 million worth of HIH shares were purchased by PEE (Adler) from the stock market which are later sold at $2 million loss. The main reason for the purchase of shares to built a market image to the investors of HIH that HIH is doing well. Also, PEE purchased unlisted shares in technology and communication companies from Adler Corporation worth $4 million. AEUT gave $2 million to Adler under the trust. (Plessis, Hargovan, Bagaric, 2010)
The above actions of Alder resulted that he was in violation of several duties which he must cater being the officer of HIHC and HIH.
It was held by the court that Adler must be banned to act as the director for twenty years. William was banned for ten years. Alder was also imposed with a personal fine of $450,000 and William was imposed with a fine of $250,000 and Fodera with a fine of $5000. Adler Co was imposed with a fine of $450,000. Also, a compensation of $7,986,402 was imposed on Adler, Adler Corporation and Williams to pay to HIHC. (Baxt, 2005)
The court held that all the transactions had taken place without any approval from the board of directors or at the approval of the shareholders of PEE. The HIH investment committee was also not aware of the same nor was the board acquainted with the said facts. The loan which is provided by HIHC to PEE was also without any proper documentation work nor was the loan secured. The main reason for making the loan was a secret affair so that no other directors of HIH were get knowledge of the same and Adler make personal interest from the said transactions.
The Corporation Act 2001, has defines the term director. A director is a person who is placed at the directorial position. Thus, whatsoever name is provided to a person, if he is carrying out all the directorial functions then he are capable to be define as a company director. Thus, an alternate director, de facto director and shadow directors are also considered as the director under section 9 of the Act (Grimaldi v Chameleon Mining NL [2012]). Further, the officers who are the executives of the company at senior positions are also comes within the preview of section 9 of the Act. Every company director must cater his duties adequately so that the interest of the shareholders can be protected. (Davis, 2016)
Violation of Directorial Duties
Now, Adler was considered to be director of HIH as per section 9 of the Act. He was also the officer of the wholly-owned HIH subsidiary and there comes within the preview of section 9 of the Act. Even though he is not formally appointed at the position of the director, still, he was at a senior executive post and thus is considered as the director under section 9 of the Act. He was pursuing the role of the director in the subsidiary holding company and he is also the member of HIH investment committee, thus, he has full involvement in the decisions making process of the company and its business which may affect the business wholly or substantially.
Now, there are several duties that are violated by Adler. The same are submitted herein below:
Alder was in violation of some of the important duties established under the Corporation Act 2001. The same are:
As per section 180, sub section 1, every officer and the director must perform their power and comply with the duties with due care and diligence. The care and diligence must be of standard form and must be equal to what a normal prudent man will deal in the similar situations. The executive directors are the employee of the company which caters their duties on the full time basis. They carry out the day to day management of the company and have high knowledge and special responsibilities. Whereas, the non –executive company directors are engaged in part time works and but have regular involvement in the affairs of the company. (Campbell, 2007)
Now, this duty of care and diligence was not performed by Adler Adequately.
In HIH and HIHC, William was the Managing Director. He was in total violation of section 180 (1) of the Act. This is because no adequate safeguards were provided to HIHC prior sanctioning any loan to PEE.
Likewise, Fodera was the Finance Director in HIH. He also violated section 180 (1) as the proposal to sanction $10 million loan to PEE was not discussed with the board of HIH or its investment committee.
The duty of care and diligence that was desired from both William and Fodera were not catered by them. They were the executive company directors and the duty must be performed by them adequately.
Further, Adler, William and Flora cannot take the defense enshrined under section 180 (1) of the Act which deals with Business judgment Rule (section 180 (2)). As per the rule, if any company officer and director has acted with utmost good faith and for proper purpose and has no material personnel interest in the transaction, then, the duty of care and diligence is not considered to be violated.
Now, Adler cannot take the defense) because he is not able to satisfy the requirements of section 180 (2) (b), that is, there is presence of conflict of interest when he takes the decisions to invest $10 million payment from HIHC in PEE.
Also, William was not able to provide adequate safeguard to avoid the breach. Also, he was one of the holding major shares in HIH and thus there is material personnel interest when the transaction took place. No evidence was laid down by him which depicts that he was acting in good faith and for proper purpose.
Duty of Care and Diligence
Fodera also cannot take the defense because he did not refer the transaction which is to be dealt with PEE to the boards of HIH, nor was the same referred to the investment committee.
As per section 181 (1) of the act can be considered to be violated even when the director believes that he acting as per the provisions but in reality the same was not the case.
The transactions that took place amid HIH, HIHC and PEE were mainly motivated to bring personal interest to Adler. Adler was in violation of section 181 as he had not acted in good faith and in the best interest of the company as the powers and duties that are discharged by him were not Adequate. (Cassidy, 2006)
- Section 182 of the Act – Duty not to misuse the position.
No company officer or director must use his position in such a manner so that it results in bringing undue advantage to them and undue loss to the company.
In the leading case it was submitted that Adler was in clear violation of section 182 of the Act. He arranged a loan of $10 million which is to be provided to PEE by HIHC. The money was then to be used purchase the shares in HIH on the stock market. The main reason for indulging in such an act is so that the share price of HIH increases and then Adler Corporation will sell the shares of HIH before PEE could sell off their shares in HIH, thereby, making huge profits to Adler Corporation in which Adler has substantial interest. The total act has resulted in causing loss to PEE when it sell of their shares of HIH.
The court held that Adler has breached section 182 of the Act by misusing the position (the director of HIH, director of PEE and being the officer of HIHC). His actions have brought substantial gain to Adler Corporation.
Further, since Adler was the director in PEE, he mis-utilized his position as he acquired unlisted capitals at cost price from Adler Corporation but he has not sought any separate valuation for the same. If these transactions are considered to be successful then the Adler Corporation and Adler were able to keep out from theses business unviable operations.
The court also held that William was also in violation of section 182 of the Corporation Act 2001. He was the director in HIHC and HIH and thus has misused his position to bring advantage to Adler Corporation. He has permitted the loan of $10 million without seeking proper authorization. No approval was sought from the investment committee of HIH prior granting the loan to PEE and which is very essential as per the investment guidelines of HIH.
Any person, whether director or officer or any employee, of acquired information from the company then no such information should be used which brings gain to themselves or anyone else and loss to the company.
The court applied ASIC v Vizard, and it was held by the court that Vizard was the non-executive director of Telstra and he uses the inside information to bring advantage to CTI, Brigham and himself and thus is in violation of section 183 of the Act.
Alder is fully aware that the HIH and HIHC were facing problems with cash flows and there is so much risk that ultimately they will fall down. Knowing the fact, Adler still has not revealed his self interest in the transactions to the board of HIH except to Fodera and William.
Nno company must financially assist any other person so as to acquire/obtain shares in the same company or in its holding company. However, there are few exceptions, such as, if such assistance is not prejudice to the company or will hamper the company ability to pay its creditors or shareholders (260 A(1)(a)), or if the shareholders approve of the assistance (260B) or if the assistance is exempted or relieved (260C).
Now, Adler was controlling PEE. However, he was found to be in contravention of section 206A of the Corporation Act 2001. Adler with the help of HIHC has provided financial assistance to PEE (HIHC was the subsidiary of HIH, a company which is in control of Adler). Thus, Adler has indirectly provided loan from his own company to his own company. The loan which was provided by Adler to PEE was used to purchase shares of HIH on the stock market.
These actions of Adler has provided an impression that Alder is helping the decreasing process of HIH by purchasing the shares personally.
The court submitted that Adler has no intention to earn gain by reselling the shares of HIH. The main intention was to enhance the share prices of HIH so as to provide advantage to Alder Corporation Limited. This is because when PEE sell off its HIH shares then the same was carried out only when Adler Corporation intends to sell off its HIH shares which has resulted in loss for PEE’s investment.So, there is a clear violation of section 260A.
The most important point that is learned from the given case is that the directors and the companies must make sure that it is necessary that there must be proper corporate governance to protect a company from any kind of improper actions which can be taken by the directors for their own benefits. There is a need to have an adequate check and balances to make sure that the system is not bypassed.
References
Books/Articles/Journals
Baxt, R (2005) Duties and Responsibilities of Directors and Officers, AICD.
Cassidy, J (2006) Concise Corporations Law, Federation Press.
Campbell, C (2007) International Liability of Corporate Directors [2007] I, Lulu.com.
Plessis, J, Hargovan, A and Bagaric, (2010) Principles of Contemporary Corporate Governance, Cambridge University Press.
Case laws
Asic v Adler and 4 Ors [2002] NSWSC 171.
ASIC v Vizard [2005]
Grimaldi v Chameleon Mining NL [2012] FCAFC 6
Online Material
Davis, S (2016) Who is liable for company decisions?(online).Available at: file:///C:/Users/mypc/Downloads/Who+is+Liable+for+Company+Decisions+-+SED+-+April+2016.pdf. (Accessed on 17th May, 2017).
The Law Teacher (2017) Case summary – ASIC v Adler (online). Available at: https://www.lawteacher.net/free-law-essays/company-law/case-summary-asic-v-adler-law-essays.php. (Accessed on 17th May, 2017).
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