In the case of ASIC v Adler (2002), basically deals with four types of transactions. The main defendants were Rodney Adler (a substantial shareholder and non-executive director of HIH, also an officer of HIHC), Ray Williams (the founder and Chief Executive Officer of HIH) and Dominic Fodera (a director and Chief Financial Officer of HIH) . HIH was the largest company collapsed in Australian history.
HIH is one of the largest insurance companies based in Australia. In June 2000, Casualty and General Insurance Co Ltd (HIHC), a subsidiary of HIH Company, provided an unsecured and undocumented $10 million loan to Pacific Eagle Equity (PEE), a company controlled by Adler, simultaneously provided illegal financial assistance. The transfer was performed by Dominic Fodera. The 10 million loans were arranged without any knowledge of other directors of HIH.
PEE became the trustee of Australian Equities Unit Trust (AEUT), which controlled by Adler Corporation (Adler was only the director and he and his wife, the only shareholders). Units were then issued by AEUT to HIHC at a value of $10 million. However, the value of the trust that PEE managed was worth less than $10 million . PEE used the $10 million loan in the following transaction:
- Approximately $4 million loan was used to acquire HIH shares on the stock market. Adler intended to create a false impression to the stock market that he was helping HIH’s falling share, hopping to increase the share price, or at least prevent the share price from falling dramatically. Shortly, PEE sold HIH shares at a $2 million loss.
- Nearly $4 million loan was used to purchase of unlisted shares in unlisted technology and internet companies from Adler Corporation. Unfortunately, Adler Corporation suffered the total loss on these investments.
- About $2 million was lent to Adler and the associated interest without sufficient documentation and it was an unsecured loan.
The court held that:
1. HIHC illegally provided financial assistance of $10 million to PEE to obtain shares in HIH. No disclosure was made to other directors or to the investment committees. Furthermore, the $10 million unit trust subscribed by HIHC was worth less than the initial subscription. As a result, this action materially prejudiced the interest of HIHC, HIH and the shareholders. Thus, section 260A was contravened .
2. Adler had convicted multiple breaches of directors duties. There are under section 180, 181, 182 and 183 of the Corporations Law. Sections 180 to 183 contain the duties to:
- [Section 180] Did not act with due care and diligence
- [Section 181] Did not act in good faith in best interest of the company
- [Section 181] Did not act for a proper purpose
- [Section 182] Did not avoid improper use of position
- [Section 183] Did not avoid improper use of information
The directors duties in each of these sections will be discussed later .
3. Mr Williams had contravened his director duties under section 180 and 182 of the Corporations Law. He failed to ensure the presence of a proper safeguard before allowing HIHC to lent $10 million to PEE.
4. Mr Fodera had contravened his director duties under section 180(1) of the Corporations Law. He failed to submit a proposal to HIH’s boards or the investment committees approval for lending $10 million to PEE .
In general, a director has the obligation and responsibility to supervise the management of the company and to ensure the company are in the best position. Under the Corporate Law, a director can be defined as a person who acts in the position of director, regardless of name called or whether he/she validly appointed as an official director.
Directors of companies whether public or private have various responsibilities towards their companies, breach of which may not only be detrimental to those companies and their shareholders but also may lead to civil and criminal liability of the individual director concerned.
Under duties in the corporation act, employees and officers are ought to comply with. The Corporations Law requires directors to:
- Act with care and diligence
- Act in Good faith (bona fide)
- Avoid improper use of position, and
- Avoid improper use of information
As mentioned above, Adler had contravened Sections 180 to 183.
Duty to act with due care and diligence
Firstly, section 180 is duty to act with due care and diligence. Section 180(1) of the Corporation Act states that directors or other officers in a company is essential to discharge their powers and duties with proper care and diligence as if a reasonable person would have acted if they:
a) were a director or officer of the company, and
b) occupied the office held by, and had the same obligations within the company as the director or officer
In ASIC v Adler, a reasonably careful and diligent director would not have allowed HIHC to loan the sum of $10 million to PEE to use some of the amount to procure HIH’s share. Adler also failed to ensure that safeguards were in place to protect HIHC. In fact, Adler’s intention was to support HIH’s share price for his own substantial shareholding. Furthermore, nearly $4 million was used to acquire unlisted shares. These companies where facing cash flow difficulties and there was a significant risk that these companies would collapsed.
Justice Santow held that:
- to determine whether a director has act on reasonable care and diligence, a question must be asked; what a normal person with same knowledge of Adler, would respond to this situation if he/she was acting as a director
- court will consider the company’s condition and director’s obligation and position within the company
- a director was appointed because of his/her expertise in certain area of the company
- business judgment rule can be applied to director, provided the director has acted in good care and diligence
It is essential for all directors, whether executive or non-executive, to act in a minimal standard of care and diligence.
Duty to act in good faith in best interest of the company
Secondly, section 181 is duty to act in good faith in best interest of the company and duty to act for a proper purpose. Section 181(1)(a) of the Corporation Act states that a director should perform their power and duties in good faith in the interests of the company as a whole. The requirement to perform in good faith is generally refer to an obligation to act honestly.
Two tests, a subjective and an objective, are required in order for the court to determine whether a director has breached the duty to act bona fid (good faith).
- the court studies the actual intention of the director to conclude whether he or she was honest, and
- the court judges whether a reasonable person, in the director’s position, would have perform alike under the same circumstances
In section 181(1)(b), a director must perform their power and duties for a proper purpose. There is a close link between proper purpose and duty of good faith. For example, if a power is carried out without a proper purpose, it will probably be contrary to the company’s interest.
Therefore, a director can be in breach of section 181 where his or her power is performed for an improper purpose, even if he or she believes he or she is acting honestly.
In ASIC v Adler, Adler had contravened his duty to act in good faith in the interest of HIH and HIHC. Adler used some of the money to purchase HIH share for his on interest in order to make a gain for his own shareholding in HIH. The payment caused interest conflict between Adler personal interest and the companies in pursuing profits. Moreover, Adler did not mention that fact that he was purchasing HIH share, but not HIHC. His intention was to concealing the fact.
? Adler: Acted for an improper purpose by attempting to gain an advantage for himself by obtaining the unsecured loan from HIH to purchase shares in a company that he was involved in.
? Furthermore, Adler acted improperly by seeking to obtain a benefit from the loan by using part of the loan funds to purchase HIH shares on the stock market.
(CL assignment NOTES)
Avoid improper use of position
Thirdly, section 182 is to avoid improper use of position. Section 182(1) of the Corporation Act prohibits a director to inappropriately utilize his or her position to:
? achieve an advantage for himself/herself or someone else, or
? cause detriment to the company
Basically, section 182 refers to duty not to profit from position.
In ASIC v Adler, Adler was in breach of the duty not to make an improper use of his position under section 182. Adler took advantage of his position for requesting a $10million loan from HIHC for the benefit of his own interest. Furthermore, Williams also breached section 182 by inappropriately using his position as a Chief Executive Director of HIH to gain an advantage for Adler. Williams had caused detriment to HIH and HIHC by authorising the $10 million loan to PEE without ensuring that the proper safeguards were in place.
Improper use of information
Lastly, section 183 is to avoid improper use of information. Section 183 of the Corporation Act states that a director must not inappropriately utilize the information gain to:
? achieve an advantage for himself/herself or someone else, or
? cause detriment to the company
For example, a director is prohibited to use special knowledge, which he or she may have gained because of his or her contact with the stockbroker, to buy shares for him or herself that could have been purchased on behalf of the company. Directors may be in breach of section 183 when his or her conduct involves special knowledge of the poor financial position of the company and the possibility to result the company in an insolvent position.
Business Judgement Rule
Section 180(2) of the Corporation Act implemented a protection to a director to make a business judgement will only apply if the duty of care and diligence is carried out where all the following aspects are shown:
? the judgement was executed in good faith for a proper purpose
? did not have material personal interest in the subject matter of the judgement
? informed themselves about the subject matter of the judgement to the extent that they rationally believed to be appropriate
? reasonably believed that the judgement was carried out in the best interest of the company
These beliefs can be viewed as a rational business judgement unless none of the directors would have acted similarly. Section 180(2) provides directors from personally liable for their decision made in good faith and in the best interest of the company. One of the main reasons to enforce business judgment rule is to encourage directors to be more risk taking because they are assured by this regulation that if they perform their duty in honest, they will not be liable if something goes wrong.
In ASIC v Adler, Adler brought up the defence of the business judgment rule to avoid the liability for contravened section 180(1). The court concluded that the defence, section 180(2), was not valid to protect Adler. The rule may be invoked only if a decision is made and will not cause the company to suffer loss because the directors failed to act good faith for a proper purpose.
Section 184 of the Corporations Act states that a reckless or dishonest director who contravenes of sections 181 or 182 or 183 or the entire corporations act leads to:
? criminal offenses with maximum imprisonment up to 5 years
? fines of up to $200,000
? or both
In some cases, directors may be disqualified from the workplace. In ASIC v Adler (2002), Adler was a director of HIH and should act on behalf of HIH. However he advanced for his own financial interests before HIH��s interests. The law clearly states that a director must act in honest and in the best interests of the company or shareholders. Adler had contravened serious offenses and displays lack of commercial morality. Directors are not appointed to take advantage of their own interests, but to govern the company for the benefit of the shareholders. Therefore, Adler was disqualified as a director for 20 years and some fines.
First of all, financial assistance is not stated under the Corporation Act. Financial assistance can be defined as when a company supports another party to acquire certain shares in its own or holding companies. The most common type of financial assistance is granting of security such as, a fixed & floating charges, over the assets of the company to support the purchaser’s financier securing loaned for the purpose of the acquisition.
Under section 260A of the Corporations Act, financial assistance is prohibited unless:
? the giving of assistance does not materially prejudice the company��s interest, its shareholders or the company’s ability to pay its creditors, or
? the assistance is approved by shareholders under section 260B, or
? the assistance is exempted under the section 260C
In this case, financial assistance that materially prejudices the company��s ability to pay its creditors will not breach section 260A because the decision has been carried out under these conditions.
In my opinion, it can be tempting for the directors of the company to make a statement that the financial assistance does not materially prejudice the company��s interest, its shareholders or the company’s ability to pay its creditors. However, I think directors should resist the temptation to make such a statement. Financial assistance generally put the company in a risky position by putting all of the company��s assets to support the purchaser��s interest.
In ASIC v Adler, no disclosure was made to other directors or to the investment committees of lending $10 million to PEE. There was clearly a materially prejudiced in the interest of HIHC, HIH and the shareholders, there are as follow:
? the $10 million unit trust subscribed by HIHC was worth less than the initial subscription
? PEE sold HIH shares at a $2 million loss
? $4 million lost of unlisted shares
? unsecured loan was provided
As a result, this action materially prejudiced the interest of HIHC, HIH and the shareholders. Thus, section 260A was contravened.
Executive and Non-Executive directors
A large company usually employ both executive directors and non-executive. Directors�� attitude toward care and diligence of their duty vary according to
? the size and business of a particular company
? the experience or skills that the director held themselves out to have
Executive or inside directors are the full time employees. Executive directors are appointed because of their specialised knowledge and skills of the company��s daily operation that the non-executive directors often lack of. On the other hand, the roles of non-executive or outside directors have the duty or obligation to ensure that the board fulfils the company main objectives. The law never implement a rule stating business experience or educational qualification is needed for non-executive directors. However in the case of Daniels v Anderson (1995), the court sets out minimum standards of care and diligence as a general rule for non-executive directors.
From my observation, a person should not accept a directorship unless he or she has the appropriate knowledge and skills to perform the role.
In ASIC v Adler, Adler breached section 180(1) because a reasonable and careful person would not permits the $10 million loan to PEE without a proper safeguard applied. Even thought Adler was a non-executive director, executive and non-executive directors have the same responsibilities under the Corporation Act. All directors, whether executive and non-executive, are required to take reasonable steps to place themselves in a position to work for the best interest of the company.
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