ASIC v Adler Essay

The theatrical role of ASIC v Adler is very unique as well as complicated since it involved several(prenominal) breach of duties in the Corporations dissemble 2001. The HIH collapse was caused by very bad corporate governance.Such breach of duties are, component 9 ( film directors duties), component clxxx ( occupation to act with care and diligence), partition 181 (duty to act in good faith and for a straightlaced purpose), section 182 (improper use of locate), section 182(2) ( crinkle taste rule), section 183 (duty non to im justly use entropy) and section 260A (fiscal assistance). All of these contraventions under the Corporations Act 2001 bequeath be discussed in detail below.Section 9 Who Is A Director And Their Duties under(a) section 9, a director of a company is defined as a soul who is appointed to that position such as a director or alternate director, watchless of what name it is given to that position. Section 9 besides includes certain people to be direc tors even though they are not properly appointed. Such people fucking act as a director even though without proper appointment of director position. This is where they act in the position of a director (which can be also known as de facto director) or the directors are used to act in accordance with the individuals instructions (which also known as a dominate director).Directors duties need to be existed in order to protect shareholders from the risks of directors giving terms towards the company. Shareholders essentially have risks such as fraud, where the directors took control over the assets belonging to the company by using it for their individual(prenominal) interest, and mismanagement, whereby directors made an incompetent decision with the monetary standing of the company.Furthermore, section 9 also defines the officer of a friendship, which basically includes company executives who held senior positions in the boardlevel. Such soulfulnesss can be identified in cer tain situations where that person (the executives) makes or joins participation into make decisions in which affects the whole or substantial part of the companys championship activities or, the person who has the authority to affect in a significant way towards the companys financial standings or, basically the same definition of a shadow director where the person are acting towards the instructions given to them to act.In the case of ASIC v Adler, the court held that Adler, the director of HIH, was also an officer of wholly- possess HIH subsidiary which can be related under the section 9 definition of directors. This applies to Adler even though he was not properly appointed as a director or an officer of the subsidiary. Since he has the role of director, the subsidiary holding company and also a member of HIH giftment committee, this has showed that he participated in the decision making of the companys chore in which affected it the whole or substantial part of the business. As Santow J gave his popular opinion on this case, he gave a good summary of principles applic fit to directors duties. more or less of it are a director must continuously kept communicate of the activities of the company, they must be familiar with the fundamental principle of the business whereby the company is doing.Section 180 Duty To Act With Care And DiligenceIn the section 180(1), it provides that a director or other officer of a company need to exercise their powers and discharge their duties with a standard of care and diligence in which a reasonable person volition do if they were the director or officer of a company due to companys circumstances (section 180(1)(a)) and occupied the office and had the same responsibilities in the company as the director or officer (section 180(1)(b)).Executive directors are full time employees of the company who involved in the day-to-day management of the company. They have special responsibilities with their position and have a hig h knowledge of daily operations of thecompany. Non-executive directors, on the other hand, do part-time and have regular involvements in the company.In the case of ASIC v Adler, Williams who was the managing director for HIH and HIHC as well, contravened section 180(1) as he failed to ensure there were proper safeguard before HIHC gave the loan to construct. Fodera, who was the finance director of HIH, contravened section 180 as he failed to discuss a proposal to give $10 million loan to eliminate to the HIH board or its investment committee. As the executive directors of the company, both Fodera and Williams failed to carry out their role properly without informing the HIH board of their function.Section 180 (2) The Business Judgement RuleIn the section of 180(2), the section provides that a director or any other officer who makes a business judgement rule, will not be held liable in respect of the judgement under the statutory, common law or equitable duties of care and dilige nce, in which all of the elements can be shown. Such elements are, the judgement was properly made in good faith and for proper purpose, there was not material ain interest in the subject as of the matter of the judgement, the directors and the officers informed themselves about the subject matter of the judgement to the extent they appropriately believed to be reasonable and also the judgement was believed to be in rational in the outstrip interest of the whole company. All of these would be reasonably justified unless any other person in such position thinks that it is completely unreasonable.The business judgement rule basically gives the directors with a safe protection from a personal liability in the relation of the business judgements that they get through are valid which is in a good faith and in the best interest of the company. This is because some of their business decisions may turn out to be profit-making or a do loss in honest and rational way. Some of the main rea sons for the business judgement rule defences are risk winning and activities in entrepreneurial activities will be encouraged since directors are aware of the specific legislation that if they act honestly,they will not be punished or personally liable as a result of adverse judicial review. Another rule defence is that better business judgement will be made as a result of removing of some uncertainty of liability under the statutory duty of care and finally, the shareholders interest are better provided by engaging risk taking activities. To make directors be liable for such small errors of decision will promote risk-adverse decision-making with contrast effect on the economy.If the directors or other officers are able to satisfy the above requirements, they will have safe protection which makes them to be protected from liability for any breach of their duties of care and diligence. This means that their business judgement in such situations will be reviewed by court. Under sect ion 180(3), the business judgement is defined that any decisions to take or not to take action with respect to matter that is relevant to business activities of the company. This only refers to business decisions that has made relevant to the business activities. It does not include any decisions made in the position of directors powers such as the power to issue shares or pay dividends.By referring to the case ASIC v Adler, the court held that all three Adler, Williams and Fodera breached their statutory duty of care as stated in section 180(1). They also, however could not rely on the business judgement rule as their defence. Firstly for Adler, the business judgement rule did not applicable for him since he cannot satisfy the section 180(2)(b) since he had a conflict of interest in the relation of his decision to invest the $10 million payment from HIHC in PEE. Secondly for Williams, the business judgement rule did not apply to him because of his failed to ensure the correct safeg uards were enforced was not business judgement for the purpose in section 180(3). However, even this was a business judgement, since he was a major shareholder of HIH, he basically has material personal interest as in the section 180(2)(b). Other than that, Williams also failed to present any evidence that his judgement was done in good faith for the proper purpose as stated in section 180(2)(a). Finally, Fodera cannot rely on his business judgement rule as he failed to refer the feat of PEE to the HIH board or its investment committee. This was not a business judgement asstated in section 180(3).Section 181 Statutory Duty To Act In Good Faith And For A Proper PurposeUnder section 181(1), it says that a director or other officer of a corporation to exercise their powers and discharge their duties in bona fide (good faith) for the best interest of the company and also for a proper purpose. The section 181(1) can be contravened if the director thinks that they are rattling doing th eir duties for the best interest of the company in which any other director, in that situation, thinks that is distinctly unacceptable approach to do it. This may be happen when a director have a conflict of interest personally with the interest of the company they are handling.In the case of ASIC v Adler, it can clearly be seen that Adler, had contravened the section 181(1) to act in good faith by properly excising his powers and discharging his duties for the best interest of the company. This is because, the transactions that occurred in the HIH, HIHC and PEE had been improperly used, for the sake of his personal interest.Section 182 Improper Use Of PositionUnder section 182, the section states that it restricts officers or the employees of a company from improperly using their power to gain benefit for themselves or for any other persons to the company.In the case of ASIC v Adler, the court held that Adler had contravened the section 182 due to the arrangement of $10 million loan from HIHC to PEE which was and so to be used to acquire HIH shares on the stock market. This transaction was merely done for the purpose of supporting the HIH shares to increase the determine and thereby selling the HIH shares owned by Adler Corporation before PEE could sell off their HIH shares. Because of this transaction, PEE had incurred a total loss of investment by reselling on the HIH shares.In regard of this transaction, Adler was held that he had improperly used his position as a director of HIH, officer of HIHC and director of PEE to gain advantage for the Adler Corporation. The court also held that Williams, also had breached his duties as a director for both HIH and HIHC under section 182, to help gaining advantage for Adler Corporation. This is because Williams, used his position improperly by authorising the $10 million vitiate payment without proper approval from the HIHs investment committee, which he was required to disclose under the HIHs investment guideli nes.Other than that, the court also held that Adler improperly used his position as a director in the PEE transactions of acquiring a number of unlisted capitals at the cost price from Adler Corporation without recovering independent valuations of these ventures. With these transactions successful, Adler and Adler Corporation was able to exclude himself from these commercially unviable business operations. Adler basically knew that each of those businesses were having major cash flow problems and each had a significant risk that they would ultimately collapse. Adler, however, failed to disclose his personal interest to the HIH board other than Williams and Fodera.Section 183 Improper Use of InformationAs stated in section 183, a person who gets culture because they are or are not director, officer or employee of a company, must not misuse the information just to gain advantage for themselves or to any other person whereby causing failure in the company. Section 183 also applies t owards resigned or retired directors, officers and employees as well. Informations such as insider information can be taken as an advantage by any person in order to gain benefit by using it to themselves or by giving to other person.In the case of ASIC v Vizard, the court held that Vizard involved in the contravention of section 183, whereby he gained the insider information as he was the non-executive director of Telstra. He misused the information in order to gain advantage for CTI, Brigham and himself as well whereby based on the information that he receives (Telstra boards decision to acquireother company and selling their interest on another company), he would act accordingly to bargain for or sell off his shares ahead of Telstra.S260A Financial AssistanceIn section 260A, the section states that it forbids a company financially assisting a person to obtain or acquire shares in the same company of its holding company. However, if some of the conditions are met then the compan y may proceed to do such transaction. Some of the conditions are, giving the financial assistance will not materially prejudice the interest of the company, its shareholders or the companys ability to pay its creditors (under section 260A(1)(a)), the financial assistance is validated by the shareholders (under section 260B) or the financial assistance is relieved or exempted (under section 260C).Financial assistance is can be basically referred to where a company is lending money to a person to buy the company shares. This means that the company gives a certain amount of money to a person so that the person buys some of the companys shares. Another example is where a company gives a surety or guaranteed a persons loan in which the sum of the loan will be proceeded to buy shares in the company. The company is basically providing a loan to a person for the sake of purchase back its own shares off the stock market. Another example is where the company is giving its own assets as a sec urity to a persons loan in which the loan money will be used to buy the shares of the company given its assets as security.The section 260A clearly states that a company is restricted from giving financial assistance to a person to buy its own shares in the stock market as it will cause material prejudice. By analysing the case of ASIC V Adler, it can be seen that Adler, who was controlling PEE, was clearly contravened the section of 260A by which giving financial assistance to PEE through HIHC, a subsdiary of HIH, which is also a company controlled by Adler. This financial assistance given to PEE, was then used to buy the HIH shares on the stock market. This transaction gives a false impression over the stock market as well as its investors that Adler was supporting the falling shareprice of its company, HIH, by buying the shares personally. However, the court found out that Adler does not have the intention to make easy profit and reselling the HIH shares.The real purpose was to i ncrease the HIH share price in benefit of Alder Corporation Limited as substantial shareholding in HIH. The actual evidence is that when PEE went to sell off the HIH shares, it was done only later on Adler Corporation decided to sell off its HIH shares in which leads to total loss for PEEs investment.The Supreme Court of New South Wales held that the main intention of the transaction was that HIHC gave PEE financial assistance in order to acquire the shares in HIH which is HIHCs holding company. Due to this transaction, according to Santow J, both HIHC and HIH suffered material prejudice, which therefore, contravening section 260A.