Australia Corporation Law ASIC v Adler †MyAssignmenthelp.com

Question: Discuss about the Australia Corporation Law ASIC v Adler. Answer: Australia Corporation Law ASIC v Adler In the year 2000, HIH Casualty and General Insurance Ltd (HIHC) gave out a loan of $10 million that was not documented and secured to Pacific Eagle Equity Pty Ltd (PEE). PEE is a corporation under the control of Adler, and it is a trustee of Australia Equities Unit Trust (AEUT). At the same time, Adler is anon-executive director of HIH with shares through his company Adler Corporation Limited. The $10 million loan from HIHC to PEE was later used in the subscription of HIHC for $10 million worth the value of AEUT units. Additionally, PEE bought $ 4 million shares of the HIH on the stock market. After that PEE sold shares at a loss of $2 million (Austlii.edu.au, 2005, 1). The intention of buying the shares from HIH was to give a false impression to the stock market that PEE was doing well to the investors of HIH. PEE further bought other unlisted shares communication and technology companies from Adler Adler Corporation Limited at $4 million. The whole amount was an investment loss. On the other hand, $2 million was awarded to Adler by AEUT under trust. However, all these transactions happened without the knowledge of the board and investment committee of the HIH. The $10 million loan that was given without security and proper documentation was done to prevent HIH directors from knowing (Television Education Network, 2002). The court ruling was that Adler violated his duties as an officer of HIHC and HIH because of the transactions. It also held that Adler breached his duties as a director under Corporations Act 2001. Therefore, this paper intends to examine Adlers inappropriate behavior as an officer, how Adlers actions contravened Corporation Act under Australian Law, punishment to Adler, the lesson to other Australian company managers, and observations. Adlers Inappropriate Behavior as an Officer Section 9 of the Corporation Law, states that a company director is a person who is appointed to that position regardless of the type of what name is given to that position. It also includes some people to be directors even if they are not properly appointed. Such directors can be referred as facto or shadow directors. Further, Section 9 also refers to corporation officer as a company executive who holds senior positions in the board committee (Lawteacher.net., 2017). Such persons may participate in decision making that may affect the entire company business activities and finances. It is a person who has the authority to influence the companys business standings significantly. The main duty of a director is to protect shareholders properties from any risk. Shareholders risks may include fraud from the directors, where the directors take company properties for personal gain and mismanagement of the company, where directors embezzle company finances. In the case of ASIC v Adler, it is clear that Adler as an officer behaved inappropriately in many ways: Firstly, he participated in a decision-making that affected the business of the companies. Secondly, he failed to inform the rest of the board members of the HIHC because of his personal interest. Thirdly, he acted fraudulently, by buying acquiring loan without authentication to avoid the involvement of the committee members of the HIH, the board directors of PEE, and stakeholders. Fourthly, he did not act in good faith and with care because he wanted to satisfy his own personal interest, but not the interest of his company. Fifthly, he misused his position to acquire the loan and sold shares in the stock market at a loss, therefore, he failed to act with care and diligence as required of him. How Adlers Actions Contravened Australian Law Adler actions contravene Australian Commercial law in various ways: First, Adler breached section 9 of the Commercial Law that talks about the director and its responsibility. Section 9 defines an officer as an executive who participates in making decisions that can affect parts or the entire corporation. Such person has the authority to significantly affect the companys financial status. The court found that Adler as the director of HIH and also an officer of HIH subsidiary in relation to section 9 definition of a director. This section affects Adler although he was selected as a non-executive director. Since Adler had a directors role, had the subsidiary investment company, and was also an associate of the HIH investment committee, was enough evidence to show that he participated in making the companys business decision, which affected a substantial part of the business (Adams, 2011). The law needs all the directors of a company to be continuously informed about the activities of t he company, they must be informed of the important transactions that the company is involved. This was not what Adler did; he failed to inform the board members about the activities of the company by doing them secretly. Secondly, Adler breached section 180 of the Australian Commercial law that talks about the duty to act with care and diligence (Uni Study Guides., 2013). Section 180(1) provides that a director or an officer of a company must within their power discharge their responsibilities with care and diligence that any sensible person can perform if given the opportunity to be the companys officer or director. Adler as a non-executive director of the PEE failed to discharge his duty by using the loan the company got from HIH and HIHC to buy shares that made the company lost a lot of money. He also failed to inform the board and the shareholders about the acquisition of the $10 million loan. Thirdly, Adler also contravened section 180 (2),(3) of the Australian Commercial law that talks about business judgment rule. Judgment rule requires a director or an officer to make a proper judgment in good faith and for the right reason. The judgment should not be for personal interest, and that the director or the officer has informed himself about the subject matter to an extent that he believed that the judgment was for the benefit of the entire company. In the case ASIC v Adler, the court resolved that Adler and his associates breached their constitutional duty to of care and could not rely on the judgment rule for defense. For Adler, it did not totally apply because he was not able to satisfy section 180(2)(b) because of having a conflict of interest in connection with the decision he made of investing $10 million in PEE ( Pey-Woan, 2006). Fourthly, he also contravened section 260A that addresses the issue concerning finance assistance. This section forbids a company from assisting an individual in obtaining shares in the company same company where he has investments. The law can only allow such transaction where the assistance does not affect the companys interest, ability to pay its debts. The law also allows financial assistance if it is authorized by the shareholders according to section 260B. Examining the ASIC v Adler case, it is evident that Adler as the PEE controller, clearly breached section 260A by awarding financial assistance to PEE by using HIHC, which is a subsidiary of the HIH that is also under the control of Adler. The loan that was given to PEE was again used in purchasing the shares of HIH on the stock market. The whole transaction process was a lie to the stock market and also to the investors to show that Adler was assisting the declining share price of its corporation by personally purchasing the shares. Adlers main purpose was to increase the price of the shares of the HIH for the benefits of Alder Corporation Limited, which has substantial shares in HIH. The Supreme Court held that the major intention of the transaction was that the loan that HIHC gate to PEE was to help it obtain HIH shares, which is an investment company of the HIHC. This transaction led to material prejudice of the HIHC and HIH, which violates section 260A. Punishment Adler got Due to Conviction There were various punishments that Adler suffered from the case ASIC v Adler. Some of the punishment included penalties such a fine of $900,000 and disqualification for twenty years and $8 million compensation to HIH Insurance Limited (Smh.com.au., 2005). These penalties were due to Adlers breach of the Corporations Act of the officer's duties. However, this was the end of Adler's punishments. In the round two of his case, he was prosecuted for a criminal act. On 16th February, he pleaded guilty to charges of false and deceptive information, conflict of interest, and inducing people to trade. On 14th April 2005, he was imprisoned for four and half years, with no parole time of two and a half years (Asic.gov.au., 2005). He received only 10 percent for a guilty plea because it was the first day of criminal trial. Lessons from ASIV v Adler Case Lessons learnt are that ASIC has demonstrated that they are serious about enforcing Australias corporate controlling laws. Jailing the reach company directors is a lesson that many directors have learnt. Many manage are know taking their duties seriously as indicated in the Corporations Act. Moreover, those directors who have a conflict of interest will really reduce due to what they have witnessed in the ASIC v Adler's case, and with that many directors will focus their interest in benefiting the entire company (Lawteacher.net., 2017). Other than that, numerous managers in Australia have learned that embezzlement of company funds is a criminal case that leads to many years imprisonment without parole. On the other hand, such cases have increased stakeholders confidence in entrusting their shares with the company directors. It is because they believe that if there any mismanagement of company funds, they can seek for ASIC intervention to help them solve such issues. Additionally, the case ASIC v Adler has shown how the managers should act in good faith when executing their duties (Uni Study Guides., 2013). This case is teaching managers that they should act in the best interest of the company but for their own personal gain. Failing to act in the best interest of the company can lead to disqualification of directors from their position as witnessed in ASIC v Adler case (Adams, 2016). Moreover, it has also taught directors that they should perform according to their fiduciary duties. As a result of this case teaches the company directors or officers that they should put the interest of the company ahead of their own. Therefore, they have learned that they should not themselves into positions where they have a personal interest in the conflicts of the company, which they are supposed to protect (Venus, 2016, 29). Some of the consequences that have been seen in the case ASIC v Adler have shown directors and other officers that they need to involve their stakeholders and board of directors in making major company decisions. Observation To conclude with, it evident that the well-being of the company lies in the hands of its directors and officers who are in charge of its management. Therefore, it is vital that companys directors should perform their duties with care and diligence for their own safeguards. Other than that, it significant for them to avoid making decisions which are valuable to the company without involving company board of governors and stakeholders. Moreover, it is vital for the officers to respect Corporations laws for their own safety and for the well-being of their relationship with the company. Furthermore, this case shows clearly that Adler problem was as a result of a conflict of interest, and because of it, he has lost his fortune and led to the collapse of HIH Company together with his company. Lastly, ASIC is a strong body and is capable of dealing with any corporation mismanagement by following the right provisions of the Corporations Law. References Adams, M 2011, 'Latest Developments in Officers' Duties of SMEs', Journal Of Business Systems, Governance Ethics, 6, 3, pp. 31-42. Adams, MA 2016, 'Contemporary case studies in corporate governance failures', Governance Directions, 68, 6, pp. 335-338 Asic.gov.au. (2005). 05-91 Rodney Adler sentenced to four-and-a-half years' jail | ASIC - Australian Securities and Investments Commission. [online] Available at: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2005-releases/05-91-rodney-adler-sentenced-to-four-and-a-half-years-jail/ [Accessed 25 May 2017]. Austlii.edu.au. 2005. Adams, Michael --- "Australian Corporate Governance: Lessons from HIH Insurance" [2005] ALRS 1. [online] Available at: https://www.austlii.edu.au/au/journals/ALRS/2005/1.html [Accessed 25 May 2017]. Lawteacher.net. (2017). Case Summary ASIC v Adler | Law Teacher. [online] Available at: https://www.lawteacher.net/free-law-essays/company-law/case-summary-asic-v-adler-law-essays.php [Accessed 25 May 2017]. Lawteacher.net. (2017). Contraventions of ASIC v Adler | Law Teacher. [online] Available at: https://www.lawteacher.net/free-law-essays/business-law/contraventions-of-asic-v-adler-business-law-essay.php [Accessed 25 May 2017]. Pey-Woan, L 2006, 'Regulating Directors' Duties with Civil Penalties: Taking a Leaf from Australia's Book', Common Law World Review, 35, 1, pp. 1-23, Smh.com.au. (2005). The Adler judgment - Business - www.smh.com.au. [online] Available at: https://www.smh.com.au/news/Business/The-Adler-judgement/2005/04/14/1113251721186.html [Accessed 25 May 2017]. Television Education Network. (2002). Television Education Network services the professional development needs of lawyers, accountants, business, and finance executives. [online] Available at: https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfmPaperDisplay=https://www.tved.net.au/PublicPapers/June_2002,_Lawyers_Education_Channel,_Directors_Duties_and_ASIC_v_Adler.html [Accessed 25 May 2017]. Unit Study Guides. (2013). Directors duty of care. [online] Available at: https://www.unistudyguides.com/wiki/Directors%E2%80%99_duty_of_care [Accessed 25 May 2017]. Venus, P 2016, 'How to avoid disqualification as a director by ASIC', Governance Directions, 68, 1, pp. 28-31, Business Source Complete, EBSCOhost, viewed 25 May 2017.