Corporations Law: ASIC v Adler Case Analysis

This article analyzes the ASIC v Adler case and its implications on the duties of directors and officers of companies under the Corporations Act 2001. It discusses the breach of provisions of sections 180, 181, 182 and 183 of the Act and the court's decision. The case involved a contravention of section 181 of the Corporations Act which makes it mandatory for the directors to discharge their duties in good faith and in the best interest of the companies. The court banned Adler to manage the operations of a company for a period of 20 years and the other directors in this scenario for a period of 10 years.

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Case Australian Securities Investment Commission v Adler
Case Introduction:
In the case of ASIC v Adler, the HIH Casualty and General Insurance Ltd(HIHC) had provided an
unsecured and undocumented loan amounting to 10 million dollars to the Pacific Eagle Equity Pty. Ltd.
The Pacific Eagle Equity Pty. Ltd was a company which was the trustee of the Australian Equities Unit
Trust (AEUT) and was controlled by Adler. It is important to mention that Adler acted as a non-
executive, as well as through the Adler Corporations Ltd acted as a substantial shareholder of the
company HIH. After the loan was provided Pacific Eagle Equity Pty Ltd. had become the trustee of the
AEUT. A chain of transactions took place subsequent to the approval of the loan which is enumerated
below:
The loan of 10 million dollars provided by HIH to PEE was later applied to the subscription of 10million
dollars worth of AEUT Units.
PEE purchased shares of the company HIH worth four million from the stock market
However, PEE had later sold the shares of HIHC at a loss of 2 million dollars. The reason for purchasing
the shares of HIHC was to give false impressions to the in the investors that the company was doing well
and was financially sound.
The company PEE had also purchased several unlisted shares in the communication and technology
companies from the company Alder Corporations Pty Ltd for four million dollars. This transaction was in
the form of an investment.
A sum of 2 million dollars had been given to Alder under the trust by AEUT.
It can be mentioned that all these transaction had been done in secrecy. The Board of directors did not
have knowledge about the transactions. The approval of the shareholders had not been taken and there
was no disclosure of the aforementioned transactions to either the board of directors or to the HIH’s
investment committee. It is to be mentioned that the loan had been given without any documentation
and the loan was given without any securities. The ASIC alleged that Alder, acting as an officer of the
company HIHC had breached his duties in relation to the provisions of sections 180, 181, 182 and 183 of
the Corporations Act 2001 (Cth).
Contravention of the provisions of the Corporations Act 2001 (Cth) in relation to this case

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Section 9 of the Corporations lays down the provisions related to the identification of persons as
directors of organization. This section also lays down the duties of such directors. It can be stated in
accordance with the provisions of section 9 of the Corporations Act 2001 that any person who is
appointed at the position of a director, irrespective of what name has been given to that position can be
called a director. It can be stated that this section identifies certain people as directors even though such
directors have not been properly appointed to the position of the director. It can be stated that
directors have certain duties in relation to governance of companies. Such duties are imposed on the
directors in order to protect the rights of the shareholders of the company from the risks of leading the
company to harm. Shareholders of a company are exposed to several risks such as fraud. Directors have
certain duties in relation to controlling the assets of the company for the purpose of carrying on the
business of the company and not using such assets in their personal interest, to avoid mismanagement
and making competent decisions of the company. Further in accordance with section 9 of the
Corporations Act 2001, it can be stated that an ‘officer of a corporation’ includes senior employees of
the company who hold a managerial post, executives of the company in senior positions and in the
board of directors of the company.
In the case ASIC v Adler, it was held by the court that Adler who was acting as the director of HIH
companies was also the officer of the wholly owned subsidiary of HIH Company in relation to the
provisions of section 9 of the Corporations Act 2001. The court held that Adler even though had not
been properly appointed as a director or officer of the company, he was to be regarded as a direct. The
court pointed out that Adler by virtue of being a director had been involved in the decision making
process of the company HIH and its subsidiary companies, therefore his decisions affect ted the
substantial or whole part of the business. Santow J in his judgment of this aforementioned case
provided a good summary of the principles which are applicable to the duties of a director.
In section 180 of the Corporations Act 2001 (Cth), it has been provided that directors or officers of
companies need to discharge their duties and exercise their powers with a standard of care and
diligence. This section of the Corporations Act provides that whether a director acted with a standard of
care and diligence is to be assessed from the perspective of another reasonable director acting in the
same circumstances and holding the same position as the director in consideration. If the court finds
that any reasonable director would have acted with additional diligence and care, the court will hold the
director in consideration breached his duty as provided in section 180(1). It can be stated in accordance
with the aforementioned section that executive directors are to be regarded as full time employees who

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are involved in the everyday management of the company. Such non executive directors have some
social responsibilities which are associated with their position and due to the knowledge and expertise
of the everyday operations of the company. Non executive directors however, have no social
responsibilities as they do not have regular involvements in the company and do part time work.
In this case ASIC v Alder, the court held that Williams who was acting as the managing director of the
company HHIC and HIH contravened the provision of the section 180(1) of the Corporations Act 2001 as
he had failed to take due care so as to ensure that loan provided by HIHC to PEE was properly
safeguarded. The Court further held that Fodera, who was acting as the financial director of the
Company had failed to comply with the provisions of section 180(1) of the Corporations Act as he had
failed to discuss the proposal to give the loan of 10 million dollars to PEE with the board of directors of
HIHC or to the investment committees. The court further held that as the executive directors, Williams
and Fodera of the aforementioned companies failed to carry out their duty with due care and diligence.
Section 180(2) of the Corporations Act 2001 lays down the business judgment rule. In this section it has
been provided that a director or officer of an organization who makes a business judgment, cannot be
hed to be personally liable for making such judgment under the provisions of common law, equitable
duties of care and diligence if such director can prove that all the essential elements of the directors’
duties were involved in the decision making process. The director must prove:
The judgment had been made in good faith, that was fit for the purpose
The judgment was made in good faith
The judgment was not made in the personal interest of the director
The officers and the directors informed themselves about the subject matter of the decision to the
extent such directors or officers believed to be reasonable and in the best interest of the company.
It is worth mentioning that all these elements are considered t be justified unless any other person in
the position of the director or officer considers such judgment to be unreasonable. Therefore it can be
inferred that the business judgment rule provides the director with a protection from incurring personal
liability. The rationale behind the business judgment rule is that some business judgments which are
made by directors turn out to be a total loss of profitable for the business even though such judgment
had been made with honesty and due care. This rule encourages directors or officer of companies to
take risks in the entrepreneurial activities since the directors or officers of companies are aware of

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specific legislation governing the operations of companies. In accordance with the provisions of section
180(3), it can be stated that the business judgment can be defined as the decision to take action with
respect to the business activities of the organization. The court in relation to the ASIC v Adler case
stated that all the three defendants, Alder, Fodera and Williams had al breached their duties as directors
or officers of the companies HIH and HIHC as provided in section 180(1) of the Corporations Act. The
business judgment rule could not be applied for any of the defendants in this case as it was evident that:
Alder could not satisfy the provision of section 180(2)b as there was a conflict of interest in relation to
the decision to give a loan of 10 million to the PEE
William contravened the provisions 180(3) as he failed to ensure that the correct safeguards were not
enforced. Further it can be stated that he had material personal interest in accordance with section
180(2)(B). William failed to provide relevant evidence that the judgment had been made in good faith
and with proper purpose.
Fodera, in this given case had failed to refer the transactions of PEE to the board of directors of HIHC or
the investment committee as per section 183.
Further this case involved a contravention of section 181 of the Corporations Act which makes it
mandatory for the directors to discharge their duties in good faith and in the best interest of the
companies. This section is held to be contravened if any reasonable director acting in the position of the
director in consideration believes that the director failed to act in good faith and in the best interest of
the company. In the aforementioned case, the courts assessed that Alder and the rest of the
defendants had failed to act in good faith as per the provisions of section 181(1) while discharging ther
duties. This can be substantiated by the fact that the transactions which had taken place in the HIHC,
HIH and PEE had been done for the sake of the personal interest of the directors.
Under section 182 of the CA, it has been provided that directors or officers of companies must not
indulge in misusing their powers for the purpose of gaining advantage for themselves. However, in this
case the court held that Alder had improperly used his power and position to make the arrangement for
providing the loan of 10 million dollars to PEE. The amount of 10 million dollars had been used to
acquire the shares of the company HIH on the stock market. The court further held that the Alder had
the breached the provisions of section 182 of the Corporations Ac which restricts the directors or
officers to misuse information related to the operations of the company in consideration for the
purpose of gaining advantage for themselves.

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The Court held that the defendant Alder had also breached the provisions of section 206A which
prohibits a company to assist any person to acquire shares in the same company or holding company.
Decision of the court
The Court banned Adler to manage the operations of a company for a period of 20 years and the other
directors in this scenario for a period of 10 years. The court imposed pecuniary penalties for on
Adler,Adler Corporations, Williams and Fodera a penalty of $450,000, $450,000, $250,000 and $5000
respectively. Alder Corporations, Alder and Williams were ordered to pay compensation of $7,986,402
to HIHC.
Implications of the case and personal observations
Thus by analyzing the facts of the case and the decision of this case, it becomes evident that directors or
officers of companies must discharge their duties with due care and diligence, in good faith and which
are fit for particular purpose. Further it can be said that direct ors must not misuse their position or
information of the company to gain personal advantage.
While conducting the research on this notable case, I gained knowledge about the role of directors in
managing the affairs of the company. Researching on this case gave me insights about the statutory
liabilities of the directors in case of breach of the provisions of the Corporations Act.

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Reference List:
Corporations Act 2001(Cth)
ASIC v Adler [2002] NSWSC 171