ASIC v Adler (2002) 41 ACSR 72 - Case Study

This case study analyzes the legal issues and penalties given in ASIC v Adler (2002) 41 ACSR 72. It also discusses the role of ASIC and alternative actions of directors in case of insolvency.

Running Head: CASE STUDY
ASIC v Adler (2002) 41 ACSR 72
Name Of the Student
Name Of the University
Author’s Note

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CASE STUDY
Facts of the Case:
The issue in the case is whether the defendant breached his duty to not make improper
use of his position as per the applicability of section 182.
Adler was the non-executive Director of HIH Company. He also controlled the trust
through Adler Corp and Pacific Eagle Equity Pty (PEE). Adler Corp was PEE’s single
shareholder.
The assets controlled by PEE were technological stock. These stocks were worth less
than 10 million $. However, HIH paid 10 million$ to the trust controlled by Adler. PEE used a
portion of this advanced money to buy the shares of HIH. Adler Corp also owned a good portion
of shares in HIH. No approval of the shareholders or any other statutory regulations were
complied with for such decisions of share purchasing or loan.
ASIC filed a suit against Adler, Williams and Fodera for interfering with the related party
dealings and fiscal help along with the interference with the director’s duty as incorporated in the
Corporations Law 1998 (Cth).
Issues in the Case:
The primary legal issue in the case is whether Adler made adverse profits from the
improper use of his position in the company and the trust under section 182 of the Corporations
Act 1998 (Cth).
The second issue in the case is whether the 10million$ loan as advancved by HIH to PEE
can be recognized as a fiscal benefit from a related party.

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The third issue in the case is whether Adler was entitled to any defence against the breach
of related parties transactions provisions.
Analysis:
The case of ASIC vs, Adler basically explains the appli8cability of section 181 of the
Corporation Act 1988 (Cth). HIH has been considered as the largest company cpollapse in the
history of Australian financial market.
Section 180 of the Act is the duty to act with due care and diligence. According to section
180 (1) of the Corporation Act, the directors and officers of the company are expected to
discharge their duty with proper care and diligence as a reasonable person in that position. In
other words, it is the duty of a director to discharge his powers and duties in the best diligent way
possible as it would have been discharged by a reasonable in that particular position (Australian
Securities and Investments Commission v Rich (2009) 75 ACSR 1, 627 [7254]). In this scenario,
a reasonable director would not have accepted the loan of 10 million $ from from HIH. Thus,
Adler also proved not to be able to protect the company of HIH. In other aspect, the loan was
advanced and accepted without any approval of the shareholders of the company and hence, the
shareholders and the other were not able to safeguard the company from the breach of section
180 of the Act and the subsequent actions. Adler had breached very important and major
provisions of the Act resulting in the failure discharge his duties and obligations effectively as a
director to the company and hence resulting in subsequent legal charges and further actions.
These duties and obligations which were breached were of utmost importance and should have
been carried out with utmost care and diligence (Australian Securities and Investments
Commission v Rich (2009) 75 ACSR 1, 627 [7254]).

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CASE STUDY
Section 181 of the Act states that the directors and officers of the company should make
decisions which are in the good faith of the company and the preservation of the company
interest. These interests should not be conflicting with the interests of the personal nature of such
director or the officer of the company. Therefore, it can be stated that the personal interest should
not overrule the interest of the company (Bevans 2007). Adler did not carry out his duties with
diligence and good faith of the company. He did not discuss with the other committee members
about the money advanced from loan and instead, used the money for the personal benefit of his
own company. His sole focus was to protect his shares and its holding in the company HIH.
Therefore, it was followed that Adler was in the breach of section 181.
Section 182 of the Act states that the directors and the officers of the company should at
all times avoid the improper use of their position. Favoring one company or person due to the
fact that he or she holds an influential position in the company is considered unlawful. Therefore,
in the given scenario, Adler had favoured the relations between HIH and PEE without
considering other aspects of such relationship. In other words, Adler used his position to achieve
his personal interest to maintain the shares held in HIH and hence, contravening the provisions of
section 182. El & Vault 2003 explains that the position was misused by accepting and
authorizing the ten million dollars payment with no consultation from the other committee
members and subsequent procedures for the same and thus, revoking the provision of section 182
of the Act.
Section 183 of the Act deals with the improper use of information. It means that the
director or officer or any member of the company should not use the information gained from the
archives of the company or confidential matters of the company should be maintained with

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secrecy and in utmost good faith of the company only. In the given scenario, Adler utilized the
information of the company for his own company’s benefit which is considered unlawful.
Penalties Given in the Case:
The tribunal disqualified Adler’s directorship from any organization for twenty long
years along with the imposition of fines.
Williams was disqualified from the directorship of any company or organization for ten
years.
According to Hill and McDonnell 2012, the penalties and punishment were at par with
the offences committed and it was made very transparent that those who will violate law shall be
dealt strictly with heavy penalties and punishments.
Alternative Actions of the Directors at the knowledge of the Insolvency of the
Company:
Analyzing the duties of the directors, the alternatives that the directors could have
taken when they gained the knowledge that the company is going to be insolvent (Baxt 2010):
 Act with care and diligence: it is an essential element of the directorship to maintain
minimum standard of care and due diligence in discharging his or her duties (Justice
Collier 2010). Adler should not have agreed for the loan in first instance. Even if he
agreed for the loan, he should not have used the portion of money to hold the shares of
his personal company. Further, Adler should have taken due care and diligence and
identify the legal provisions and work in accordance with the requirements of the law.

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 Act in good faith (bona fide): Adler used the portion of money advanced to maintain the
shareholding of his own company to ensure its benefits over that of HIH. The payment is
the cause of action for the conflict of interest between Adler’s personal interest amd the
interest of the company. In the given scenario, Adler had the alternative to not use the
portion of money to maintain the shareholdings in his company and hence, the money
investment could have been used to revive the company from insolvency.
 Avoid improper use of position: Adler took undue advantage of his position to request a
loan for a huge amount for the benefit of his own company and personal interests.
 Avoid improper use of information: Adler used the information abut the company and its
financial nature that he may have gained due to his position in the company and he used
the same to gain loan from the other company and invest a portion in his own
company ,meaning that he used the information of the company to achieve his personal
goals.
Involvement of ASIC:
ASIC is the Australian Securities and Investments Commission which is a solo body
which is incorporated as a corporate regulator. Its role is to enforce and regulate the laws related
to the company and fiscal relations between them to protect the customers of Australia including
the investors and creditors. ASIC is a solo authority but reports to the Treasurer of the
Government, owing responsibility for the administration and regulation of all the parts and
provisions of Corporations Act 2001 (Cth), Insurance Contracts Act 1948 (Cth), National
Consumer Credit Protection Action 2009 (Cth). The areas of re sponsibilities for the
administration of ASIC includes following:

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 Management and governance of the corporates
 Financial services
 Securities management
 Insurance
 Protection of the consumers
 Financial literacy
Other Observations:
The factors that led to the observations of the case are:
 Disqualification of the directors are made to protect the other businesses from the
harmful intentions of such people.
 Proper role of the directors are supervised and promoted by showing that the violations
would amount to serious consequences.
 Consideration for the punishment and penalty in such cases are given to the seriousness
of the crime. In other words, if the crime is more serious, then the punishment and
penalties imposed shall be quantum to the gravity of the crime.
 There is a necessity to balance the personal issues with that of the professional ones.
Combining both would result in the undue influence of one over the other and as a human
character, emotions would flow with the personal hardships and hence, the outcome
would be grave legal consequences.
 Risk Mitigation is the essence of defendant reformation. This means that the directors
should be efficient to mitigate the risks involved with such situation. If the risk is not

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mitigated and the actions are the flow outcome of the personal hardships, then it may
amount to serious legal consequences.
 The extremity of seriousness of breaches, knowledge of the impropriety of the actions,
dishonesty, breach of public interest of the individuals dealing with the company are
given due importance for the determination of fraud and the intentions of the Director or
the Officer of the company involved or questioned.
Self-Observations of the Case:
It can be observed that the directors owe a minimum standard of duty towards the
company owing to their position as the officers of the company. A company may be legal person
but the directors and officers are its soul and thus, it is the duty of the soul to not defy its physical
being. In other words, if the soul is found to be defying the physical being of the legal person,
then courts can apply the doctrine of lifting up of the corporate veil. This is done so to ensure the
working mind and its objectives behind such people meaning that the soul of the company would
be bifurcated from its physical form to determine whether the actions taken or omitted by such
soul of the legal person was for the best interest of the company or their personal interest. Thus, I
have observed in this case that the law has strict provisions to deal with such situation crisis
where the directors defy their duties towards the company and are more inclined to the interests
of their own company. To protect the interest of the company, the court has established various
precedents along with the stringent application of laws.

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References:
Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1, 627 [7254].
Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1, 627 [7254].
Baxt R, ‘Insolvency Law Reform and the Business Judgment Rule: Some Mixed Messages from
the Government’ (2010) 28 CSLJ 147
Bevans, N. R. (2007). Business organizations and corporate law. Clifton Park, NY: Thomson
Delmar Learning.
El, K. Z., & Vault (Firm). (2003). Vault guide to corporate law careers. New York: Vault Inc.
Hill, C. A., & McDonnell, B. H. (2012). Research handbook on the economics of corporate law.
Cheltenham, U.K: Edward Elgar.
Justice Berna Collier, ALRC Part‐Time Commissioner, Corporate insolvency: restructuring the
financial sector and understanding the long terms effects of the GFC (7 August 2010)
available at http://www.alrc.gov.au/news‐media/debt‐and‐insolvency/corporate‐
insolvency‐ restructuring‐financial‐sector‐and‐understanding (viewed 9 March 2011