Corporate Law Assignment

This Corporate Law Assignment discusses the duties of directors, their breaches, penalties, actions to be taken in case of suspected insolvency, role of ASIC and expectations from directors. The case of ASIC v Adler is discussed in detail to understand the practical implications of corporate law in Australia.

Running Head: CORPORFATE LAW ASSIGNMENT 0
Corporate Law Assignment
CLAW314
Student’s Name
7/12/2018

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Contents
Background of report.........................................................................................................2
Concise of ASIC v Adler....................................................................................................2
Duties of directors and its breaches..................................................................................3
Penalties............................................................................................................................6
Actions to taken in case suspected insolvency.................................................................6
Role of ASIC......................................................................................................................7
Interesting findings.............................................................................................................8
Expectations from directors...............................................................................................8
References.......................................................................................................................10

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Background of report
A corporation has a separate legal identification in the eyes of law and can do economic
activities in its name such as the purchase of assets, development of contract and so
on. However, in the end, a corporation has its limitations due to being an artificial
person. It does not have a brain and cannot make business judgments and therefore
some natural people are always required to act on behalf of the business of the
company. Different types of workgroups are there in a company such as promoters,
employees, directors, and officers. Directors as well as officers of the company are the
brain of the same and have decision-making powers. Because of expectations attached
to these posts, they are required to behave sensible and responsible. Every country has
its corporate law that outlines the manner of working for directors and their
responsibilities. In whole Australia, Corporations Act 2001 (Cth) is applicable that
regulates the behavior of every company incorporated in Australia and their director's. In
many of the cases, directors breached their duties as well as expectations of
stakeholders. ASIC v Adler (2002) 41 ACSR 72 is one such case that will be discussed
in this report. The case is significant because of heavy penalties and many interesting
facts that will also frame a part of this report.
Concise of ASIC v Adler
Different parties were involved in the case who had a different position in the company
as follow:-

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S. No. Name Position in the HIH
1. Rodney Adler Director (Non-Executive) and Shareholders
2. Ray Williams Founder and CEO
3. Dominic Fodera Director and CFO
In the subjective case, HIH was the centered of argument. This company had a
subsidiary named HIHC. The issue of the case started when HIHC has provided
a loan of $10 million to a different company called Pacific Eagle Equity (PEE)
PEE was owed by Adler and the respective loan was unsecured in addition to
being undocumented as Mr. Fodera got this transaction done. Being the holding
company of HIHC, HIH was required to be aware of this transaction but no other
directors had any knowledge of it.
PEE became a trustee of the Australian Equities Unit Trust (AEUT), which was
indirectly controlled by Adler. Adler Corporation (Controlled by Adler) owed this
trust.
AUET sold some units to HIHC at the consideration of $10 million. In actual, the
vale was less than $10 million.
Out of the total amount of loan received by PEE, the company brought shares of
HIH spending $4 million and sold this investment afterward at a loss of $2 million.
Further $4 million has been spent in purchasing shares of other unlisted
companies from Adler Corporation. This deal was of a loss for Adler Corporation
(Bottomley, Hall, Spender and Nosworthy, 2017).

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Nearly $2 million was lent to Adler without keeping any doing any documentation.
Duties of directors and its breaches
Companies Act 2001 (hereinafter mentioned CA 2001) prescribe that directors have
ordinary as well as the special duty to company and stakeholders when they perform
their functions. Ordinary duties are given under section 180, 181, 182 and 183. These
duties are mentioned below in detail:-
 The very first section, i.e. section 180 expects a level of good sense from
directors and its subsection 1 states that they should perform their
responsibilities keeping care and skills. In day-to-day business activities,
directors have to take business decisions (Iknow.cch.com.au, 2019). Subsection
2 states that while making such decisions, directors, and other officers states that
such decision is required to be in good faith of the company, must be in the best
interest of company's business and must be for the proper cause. In the case of
ASIC v Cassimatis (No 8) [2016] FCA 1023, the court held directors liable for the
breach of section 180 as they have been unsuccessful in performing their duties
with care and skills. Directors are not only required to take decisions considering
good faith and proper purpose but also the other activities.
 Section 181 is an important section here that provides every officer and/or
director of a company must execute their functions where they are in good faith
of the company and are associated with a proper purpose
(Lawhandbook.sa.gov.au, 2019)

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 Section 182 of the act states that any director or officer/employees of the
company must not use their position in the company improperly to earn profits for
them or any other person or to harm the corporation (Austlii.edu.au, 2019). In the
case of Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378, the court held a
director liable where they used their position in the company for their personal
benefit. Further, in the case of Boston Deep Sea Fishing & Ice Co v Ansell (1888)
39 Ch D 339, the court decided that improper use of position seems to be there
when a director is paid secret commission or bribe and can be held liable under
section 182.
 Section 183 of CA 2001 is similar to section 182 of the act but focus on
organizational information rather than the position of director. As per this section,
any person who gets some information because of being on position of
director/employee or officer must not use the same for personal benefit or benefit
of others or to cause detriment to the company (Williamroberts.com.au, 2019).
Now after the discussion of these duties, this is to state that all the three directors of
HIH were held liable for breach of one or more duties. Firstly, Mr. Adler was the person
who found liable for breach of almost every ordinary duty given in CA 2001. He
breached section 180 as he did not do any business judgment, which was in good faith
or the best interest of the company. Adler has used no skills and care while making
business decisions as most of the decisions proved wrong for HIH and its subsidiary.
He arranged an unsecured loan for HIHC, which was a big threat to the company. He
purchased shares of HIH just to create a fake good image of the company and
ultimately sold the investment on a loss. Not only Adler but other directors also became

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unsuccessful in maintaining their degree of care and diligence in their performance as
was required under section 180 (1). For instance, Mr. Fodera did not inform other board
members that HIHC was going to sanction an unsecured loan to PEE. Ray Williams
was CEO of the company and must be aware of every business decision. This person
did not take any steps even when he was aware that providing an unsecured loan can
be held risky. The transaction of share purchase done by Adler was also in breach of
section 181. By purchasing shares out of the loan, money was not in the best interest of
the company and in addition to this; no proper purpose could be seen. William and
Adler breached their duties they were required to perform under section 182 of the act.
Being the common director and interested party in all the group companies, Adler
misused his position in various companies. He was aware of the financial position of
each company yet modified transaction in a way to earn a profit. In this manner, he took
unfair advantage of his position.
Penalties
The court imposed a pecuniary penalty on various parties to the case who have
defaulted. Adler and his company i.e. Adler Corporation both paid $450,000 each as a
penalty. Other directors also faced penalties of a certain amount. Mr. Fodera faced
penalty worth $5,000 whereas Mr. William paid worth $250,000 against such penalty.
Since Mr. William and Adler also breached provisions under section 182 of the act
hence also been liable for compensation (Asic.gov.au, 2019a). They have paid
$7,986,402 in form of compensation. The most important penalty that has been
imposed on directors is their disqualification. Adler has been disqualified from being a

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director for the next 20 years and William has been declared disqualified for the next 10
years from managing affairs of any company.
Actions to taken in case suspected insolvency
Directors of the company are ultimately authority, which is there to take a decision on
behalf of the business and take steps to secure its interest. Sometimes, the financial
situation of the company starts getting disturbed and poor that may lead insolvency to
the same. In such a situation, directors must not wait for the real insolvency but must
make efforts to resolve the situation and to prevent the company from being insolvent.
Australian Securities and Investments Commission has developed certain suggestions
that can be used by directors to save their company form being insolvent where the
companies are in financial difficulty. The very first step is to take legal advice from
independent professionals as such advice increase the chance of company survival
(Asic.gov.au, 2019b). Generally, directors do delay in seeking such advice that
increases financial stress to the company. In the studied case also directors could take
the services of legal advisors when they detect a chance of insolvency. Adler and other
directors could make the informed decision by reviewing various options available and
practicality in the implementation of the same. They could use a scheme of
arrangement or could consider other options such as restructuring, obtaining financial
assistance and so on.
Role of ASIC

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As the name of the authority implies, it is a lead regulator for corporates in Australia. To
protect the interest of creditors, investors and customer, ASIC enforce and regulate
corporation and finance-related law in the nation. It approves the formation of the
company and companies are required to submit various returns and documents with
ASIC on a timely basis. It shows that it is a significant authority over there that controls
the affairs and conducts of companies and directors. ASIC receives complaints against
those companies and directors, which are engaged in the unfair practice or are
breaching provisions of CA 2001 or any other relevant act. As it is a duty of ASIC to
take actions against the cases of breach of the law, hence it was involved in the chosen
case i.e. ASIC v Adler. In addition to ASIC, the court was also involved. ASIC does not
have the power to give the final decision of a case or to impose a penalty and therefore
courts are there to help in this situation. NSW Supreme court and the NSW Court of
Appeal were involved in the selected case that entertained the hearings and provided
final penalties.
Interesting findings
The case shifted the focus of directors of Australian companies from ordinary duties to
other duties. This was the case, where it has been observed that every transaction of
the company can be reviewed by authorities. Further, one of the findings was related to
knowledge of the breach of duty. William did not make earn any personal profit but
since he failed to report the issue to the investment committee of the company, he
declared liable under section 180. It has been observed that directors are not only liable

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to comply with duties but are also liable to report the issue if another director is not
complying with duties.
In conjunction with the above, it has been observed that if a person is appointed as a
director in more than one company then the duty of care and skills meant to be related
to the company in which board he/she is appointed for a purpose of a particular
transaction. Lastly, the court held the duty as an objective element under this case and
stated that duty seems to be a breach if no reasonable director believe a transaction
has been in the best interest of the company.
Expectations from directors
After this case, it has been clear that duties of directors are not limited to section 180 to
183 of the act but stakeholder expects much more. If a person has an interest in more
than one company then stakeholders expect that the person would do the things in the
best interest of the company to whose behalf he/she is making a decision. Further, this
case teaches that directors should also be aware of the conduct of other directors and
officers and should report the issue rather than being quite. Lastly, now after the heavy
penalties imposed in this case, directors of companies themselves understand what
level of sense and responsibility regulators are expecting from them.

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References
ASIC v Adler (2002) 41 ACSR 72
ASIC v Cassimatis (No 8) [2016] FCA 1023
Asic.gov.au. (2019a) 03-217 Court upholds penalties against HIH directors. [online]
Available from: https://asic.gov.au/about-asic/news-centre/find-a-media-release/2003-
releases/03-217-court-upholds-penalties-against-hih-directors/ [Accessed on
12/09/2019]
Asic.gov.au. (2019b) Insolvency: A guide for directors. [online] Available from:
https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/insolvency-
a-guide-for-directors/#suspect [Accessed on 14/09/2019]
Austlii.edu.au. (2019) Corporations Act 2001 - SECT 182. [online] Available from:
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s182.html [Accessed on
14/09/2019]
Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339
Bottomley, S., Hall, K., Spender, P. and Nosworthy, B. (2017) Contemporary Australian
Corporate Law. Australia: Cambridge University Press.
Corporations Act 2001 (Cth)
Iknow.cch.com.au. (2019) Corporations Act 2001, Section 180 Care And Diligence —
Civil Obligation Only. [online] Available from:

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https://iknow.cch.com.au/document/atagUio485896sl14504541/corporations-act-2001-
section-180-care-and-diligence-civil-obligation-only [Accessed on 14/09/2019]
Lawhandbook.sa.gov.au, (2019) General Duties of Directors - Corporations Act 2001
(Cth). [online] Available from: https://lawhandbook.sa.gov.au/ch05s04s02.php
[Accessed on 14/09/2019]
Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378
Williamroberts.com.au. (2019) Directors' Duties. [online] Available from:
https://www.williamroberts.com.au/News-and-Resources/News/Articles/Directors--
Duties [Accessed on 14/09/2019]