Corporate Law Asic V Adler [2002] Nswsc 171 †Free Samples

Question: Discuss about the Corporate Law Asic V Adler [2002] Nswsc 171. Answer: Facts of the case and inappropriate behaviour of Adler The present case is based on the breach of duties of directors. On June 2000, HIHC provided an unauthorised and unsecured loan of $10 million to Pacific Eagle Equity Pty Ltd (PEE). PEE was a company controlled by Alder, and he was also a non-executive director at the same time. The company was holding an extensive share of HIH due to which the loan received by PEE turn out to be a trustee of AEUT. Subsequently, HIHCs $10 million loans to PEE were applied to HIHCs payment for $10 million worth of AEUT units. With this transaction, in the stock market, PEE bought $4 million worth of HIH share then the shares were sold at a loss of $2 million by PEE. HIH shares were purchased by PEE to give a fake impression to the stock market as the company is successful to HIHs investors (Gullifer and Payne, 2015). Further, PEE bought various unregistered shares worth of $4 million from Alder Corporation. The entire investment was a total loss. Further these all transactions carried out with no appro val of shareholders and also no information or disclosure was provided to the board as well as to the HIH. The loan was provided in an inappropriate manner and securities were also given to the loan so that the HIHS directors couldnt notice it. All of it was held due to Alder. He breached his responsibilities and duties as a director of HIH. It is because he misused his powers for individual benefit by not acting with care and diligence. His decisions were not in good faith due to which losses were faced by shareholders of the company. Contravention by Adler of Australian law According to the section 9, a companys director is termed as an individual who is selected for that position as a director or an optional director. It also considers those persons who are not directors but work as a director by whichever name is given to their position. It is a duty of director that he has to protect shareholder interest from the obligations which they have to bear because of their fault (Austin and Ramsay, 2015). These duties are imposed because shareholders of the company are having the risk of loss that if director use companys assets for their personal use and mismanagement due to incompetent decisions. Moreover, this section also describes the officer of a corporation which normally consists of the company executives who is having the higher position at the board level. These persons are identified for the certain situations and give their opinions and take part in the decision making which is considerable by the company. In the company, if the person is having the authority to give decisions and stands financially for the company so that person is known as a shadow director. According to the case of ASIC v Adler, the decision was held by the court that Adler, HIHS director, he is also an officer of fully owned HIH subsidiary satisfies all the condition of the definition of the director. This is also applied on Adler because he is not a director but he acts as a director of the subsidiary (Hannigan, 2015). Firstly he was acting as a director, and secondly, he was holding the position of the member of HIH investment committee so because of the membership he participated in the decision-making process of the company which affects the company wholly or partly. According to Corporations Act 2001, particularly, section 180 (duty to act with care and diligence), section 181 (obligation to act in good faith), section 182 (duty not to improperly use position) and section 183 (duty for appropriate use of information), the court seized that Alder breached directors duty. Detail description of these sections and link with the case is enumerated as below: Section 180: According to this section, it gives the right to the director to implement their powers and discharge their duties with regular care and diligence. They have to act like a prudent person will do if they are having similar circumstances take place in the office. According to the case of ASIC v Adler, the managing director of HIH and HICH who contravened section 180(1) because he failed to make sure that loan decision is viable prior to declaring it (Harris, Hargovan and Adams, 2013). Fodera, the finance director of HIH, he also breaches this section because he had not discussed the proposal of giving the loan of $10 million loans to PEE with HIH board of investment committee. Section 180(2): This section gives directions to run the company in case if any officer or director makes any rules so that would be held under the legality, the general laws, equal duties of care and diligence, in which all the essential will be shown (Venus, 2016). These elements are to ensure that judgment made by them is proper in good faith and for a proper reason. This will also ensure that no aspect is related to their personal interest in the matter of judgment. In accord with the case of ASIC v Adler, the court had given the order for a sentence of all three directors Adler, Williams, and Fodera because they contravene their statutory duty of care. They made business judgement on the basis of their biased interest. First of all the judgments which are given by Adler are not satisfying as per provisions of cited section. Section 181 This law shows that the directors or officers use their rights and power in good faith of the company and for a proper purpose. If the directors of the company are thinking of their personal interest, then it will result in contravention of the section (Sulaiman and et.al. 2005). By the lieu of this section, it is clearly shown that the Adler had breached this section because the transactions which took place in HIH and PEE were inappropriate as it were taken with the objective of his personal benefit. Section 182 This section states that the employees and officers must not misuse their position and take advantages of their positions in the company for personal benefits. In the case of Adler, he breached the section because he doesn't discuss anything about the investment and invest $10 million in the stock market (Austin and Ramsay, 2015). Due to this transaction, the company PEE bears the loss from reselling the shares of HIH. So, Adler had taken advantages of their position in the company due to which he will be liable for the damages. Section 183 Section 183 states that if a person gets the information and whether they are or not the director of the company, dont have the right to use that information for their personal use. In the case of ASIC v Vizard, the court detained Vizard because he was not the member but he knows all the internal information of the company and use that information for buy and sell the shares as per the Telstra (Hedges and et.al. 2016). This act is considered to be an offence under provisions of insider trading. Similarly, Adler had used the information of the company for his personal benefits, so it shows clearly a contravention of the section. Section 260A According to this section, the company financially appoints a person who acquires the shares of its investment company must behave ethically. The financial assistant is those who buy the share for their company and think of profitability on behalf of the company (Gullifer and Payne, 2015). In the case of ASIC v Adler, he clearly breaks the section to give financial supporter to PEE which used the information to buy the shares of HIH in the stock market. The main purpose behind this is to increase the share price of HIH shares for the benefit of the Adler. Punishment suffered by Adler as a result of this conviction Considered case study clearly shows that Adler breached his duties as a non-executive director of HIH and HIHC as per division 1 part 2D. In the given transactions, it was also found that the trust purchase of the share was unauthorised and unsecured. Further, unlisted technology and internet entities were connected with Adler and loans given as per the trust from other entities were also associated with Adler (Hannigan, 2015). Due to these activities; a compensation order was charged for all the damages and sufferings. With this entire loss has been borne by Alder. As per the s.1317G a pecuniary penalty was ordered for him. Further, Adler was banned from the organisation corporation for certain period of time as given in section 206C. The final judgment made by the court was to ban Alder from the company for 20 years. Apart from this, penalties were also imposed by the court. They were as follows: Adler - $450,000, Adler Corporation - $450,000, Williams - $250,000 and Fodera - $5000. Besides this pay, a total compensation of sum of $7,986,402 was ordered to pay to HIHC by Adler on behalf of Adler Corporation and Williams Lessons Indicated by case study In the case of ASIC V ADLER [2002] NSWSC 171, it was found that Adler contravened the directors duties he didnt exercise his given powers with a standard of care and diligence. He also avoided proper company safeguards and measures (Langford and Ramsay, 2014). Further, he couldnt make the proper use of judgments for the company, and he was making wrong use of judgment for his individual benefit. The details verified that Adlers purpose of the transaction was to hold up the HIH share price. The whole case highlights the perspective of a conflict of interest which takes place in directors who holds shares in an organisation involving the factors that what is best for the company and what interest the individual holds. In the case of dealing with such risks, appropriate measures must be adopted by the entity such as proper information, knowledge, disclosures and communal decision making (Langford, Ramsay and Welsh, 2015). To prevent such acts, an appropriate internal control system is required to be developed by considering all inherent risk factor. In addition to this, the unbiased internal audit committee must be developed by mutual consent of shareholder to monitor the activities of shareholders. In this case; Fodera and Williams were also held to be in breach of the legislative duty of care and diligence. It is because; they were also responsible for the transaction of $10 million. This case fact provides learning that sensibly careful and diligent directors in their situation might have brought the concern previous to the board (Venus, 2016). The court also detailed that no logical director in Adlers position and procuring his knowledge might have begun with PEEs gaining of the three unauthorised technology and communication investments and the three unsecured loans from the AEUT to entities related with Adler. Learning from this case law Present case had provided me in-depth learning regarding responsibilities of director and consequence if they contravene the same. Considered case showcases that Adler had contravened the directors duties as he didnt exercise his given powers with a standard of care and diligence (Barker and et.al. 2016). He recognised that material injustice could be estimated by reference to the net transfer of value if the company diminished its economic resource as a result by making use of insolvency test (Burton v Palmer). Mutually these tests lead to the result that was legal according to s260 (1) (a), as their ultimate purpose was to stabilise the share prices which eventually failed. The share prices diminished significantly. As a result company suffered from a 2 million loss. In accordance with the Burton v Palmer test, financial resources were decreased by the company thus keeping aside the transactions validity Adler states that the rights received are less rather than the price paid for his own benefit. References Books and Journals Austin, P. R., and Ramsay, M. I., 2015. Principles of Corporate Law. Barker, S., Baker-Jones, M., Barton, E. and Fagan, E., 2016. Climate change and the fiduciary duties of pension fund trusteeslessons from the Australian law. Journal of Sustainable Finance Investment, 6(3), pp.211-244. Gullifer, L. and Payne, J., 2015. Corporate finance law: principles and policy. Bloomsbury Publishing. Hannigan, B., 2015. Company law. Oxford University Press Harris, J., Hargovan, A. and Adams, M.A., 2013. Australian corporate law (Vol. 2). LexisNexis Butterworths. Hedges, J. and et.al. 2016. An Empirical Analysis of Public Enforcement of Directors Duties in Australia: Preliminary Findings. Langford, R.T. and Ramsay, I., 2014. Conflicted directors: What is required to avoid a breach of duty?. Langford, R.T., Ramsay, I. and Welsh, M.A., 2015. The origins of company directors' statutory duty of care. Sulaiman, M., Bidin, A., Ramsay, I., Hanrahan, P. and Stapledon, G., 2005. Commercial applications of company law in Malaysia. Commerce Clearing House Sdn Bhd (Wolters Kluwer). Venus, P., 2016. How to avoid disqualification as a director by ASIC. Governance Directions, 68(1), p.28.