Essay on the ASIC v Adler Case and its Implications

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Contents
ASIC v Adler (2002) 41 ACSR 72........................................................................................................2
Introduction...........................................................................................................................................2
Outline of the case - ASIC v Adler (2002) 41 ACSR 72...................................................................2
Parties involved and their position.....................................................................................................2
The issues raised....................................................................................................................................2
Penalties issued......................................................................................................................................3
Expected actions of the directors and the officers of the company........................................................3
Expected actions from Adler.............................................................................................................3
Expected actions from Ray Williams.................................................................................................4
Expected actions from Dominic Fodera.............................................................................................4
ASIC involvement in the said case........................................................................................................4
Observations or comments by writers or observers...............................................................................4
Self Observations..................................................................................................................................4
Conclusion.............................................................................................................................................5
Reference List.......................................................................................................................................6

ASIC v Adler (2002) 41 ACSR 72
Introduction
The present essay has made an attempt to evaluate the core of ASIC v Adler (2002). It is one
of the significant cases which helps to demonstrate the significance of the duties that must be
comply with by the company directors and the repercussions that might be faced by the
directors who are found to be in violation of the directorial duties.
The leading case has highlighted the collection of fiduciary duties that must be comply with
by the directors including the utmost important duty to avoid conflict of interest, not to
generate undisclosed profits and not to carry out actions which have not proper motives and
not in the best interest of the company.
In the present essay a brief analysis is made on the facts of the case and the parties who are at
fault. The position of the defaulting directors is also highlighted. The essay then moves on to
understand the principle issues that generate because of the duties that are not comply with
the directors of the company. An attempt is made to understand the actions that the
directors/officers should have taken when they have analysed that the company was about to
become insolvent. The reason for the involvement of ASIC was also understood.
In the end the essay is concluded by listing the observations on the case and the lessons that
are understood based on the case which helps the people who manages the companies in
Australia.
Outline of the case - ASIC v Adler (2002) 41 ACSR 72
In the leading case of ASIC v Adler (2002), there were four transactions that were undertaken
by the directors which form the basis of the issues that are raised. HIH is the company
involved and the collapse of HIH is one of the significant collapse in the history of Australia.
The largest insurance company of Australia was HIH. Casualty and General Insurance Co Ltd
(HIHC) is the subsidiary of HIH. In June 2000, HIHC had given an unsecured/undocumented
loan of $10 million to Pacific Eagle Equity (PEE). PEE is the company which is under the
control of Adler and Adler was also one of the main shareholders and is the non executive
director of HIH. Adler was giving illegal financial support to PEE. The transfer of loan was
performed by Dominic Fodera.
The actions of Dominic Fodera and Adler were not in the acquaintance of any of the other
directors of HIH. ( Fleckner and Hopt, 2013)
Later PEE also become the trustee of Australian Equities Unit Trust (AEUT), which is solely
under the control of Adler Corporations. Then AEUT issue units to HIHC @ $10 million but
the worth of the trust was not up to $10 million. The loan was used by PEE in several
transactions.
Because of the above facts, ASIC has initiated proceedings against the directors of HIH for
the violation of several provisions of the Corporations Law 1998 (Cth). ).(Paolini, 2013)
Parties involved and their position
The main defendants that were part of the whole transactions include:
Firstly, Rodney Adler- he was one of the main shareholders in the company and is the non
executive director of HIH. He was also one of the officers in HIHC.
Secondly, Ray Williams – he the founder of HIH and also hold the position of Chief
Executive officer in HIH;
Thirdly, Dominic Fodera – he is the director in HIH and the Chief Financial Officer of HIH.
The issues raised
There were several legal issues that were raised because of the acts that are undertaken by the
directors in their official capacity. The issues are:

Firstly, whether the loan which was provided by HIH to PEE is a financial gain which is
provided to a ‘related party’;
Secondly, if the transaction is found to be a related party transaction then whether the
transaction that took place was ‘ at arms length’. If that is the case then it is a defence for
Adler against the breach of the provisions of related party transaction provision.
Thus, these are two major issues that were raised.
Now, it is important to understand the penalties that were given to the defaulting parties and
who were prosecuted in the given case. (Duncan , 2012)
Penalties issued
The Supreme Court of the New South Wales directed that a financial benefit of $10 million
was given to Adler, Adler and PEE as there was no approval that was taken from the
shareholders before the payment of the loan is made.
Also, the payment that was made was neither documented nor secured and is permitted for
the self acquisition of the securities in HIH. Thus, there was no arms length transaction.
The court held that Adler was in violation of section 180, 181, 182, 183 of the Corporation
Act 2001. Williams and Fodera were also found in violation but only to lesser extent.
Now, it is important to understand the actual actions that must have been taken by the
directors of the company when it was discovered that the company probably become
insolvent
Expected actions of the directors and the officers of the company
Expected actions from Adler
Rodney Adler was one of the main shareholders in the company and is the non executive
director of HIH. He was also one of the officers in HIHC.
It was expected that Adler being the major shareholder of the company would have not
permitted HIHC to grant a loan of $10 million to PEE which is then used to seek shares in
HIH. Also, it was expected from Adler that he would have taken safeguards for HIHC which
were not taken by him. Instead of protecting, Adler was intending support to the share price
of HIH in order to have significant shareholding in the company. Adler would have not used
$4 million of money for the acquisition of unlisted shares. Adler was aware that the company
is facing huge financial crunch and that there are every bit of chance that the company would
collapse and become insolvent but still Adler did not take any heed of the matter was thus has
resulted in grave breach of section 180 of the Corporation Act.
Further, the actions of Adler were also found to be in violation of section 181of the Act as the
acts are not taken in the best interest of HIHC and HIH. It was expected that Adler would
have used the money for the acquisition of the shares of HIH for his own benefit so to make
profit for his hidings in HIH. The acts of the Adler has resulted in the conflicting interest
amid his own self interest and the interest of the company and thus it was expected from
Adler that he must have not indulged in the said actions. It was required that Adler must have
make full disclosure that he is acquiring the shares in HIH and not HIHC. By not disclosing
the said fact his intention was to hide the fact for his own benefit which he would have not
done. Further, Adler actions were also in violation of the Act. Adler should not have obtained
the unsecured loan from HIH to sell the shares in the said company and thus his acts are
nothing but to seek benefit for himself at the cost of the benefit of the company.
Adler also breached section 182 of the Act when he used his position as the director for his
own benefit at the cost of the company. It is expected that Adler would have not requested a
loan of $10 million from HIHC which is used for the benefit of his owns elf interest.

Williams had caused detriment to HIH and HIHC by authorising the $10 million loan to PEE
without ensuring that the proper safeguards were in place. (Baxt, 2009)
Expected actions from Ray Williams
Ray Williams was the founder of HIH and also hold the position of Chief Executive officer in
HIH. He was found to be in violation of section 180 and 182 of the Corporations Law. It was
expected that he must have ensured himself that a proper precaution and safeguard had been
taken before permitting HIHC to provide a loan of $10 million to PEE. He has used his
position to seek benefit for Adler at the cost of the company and thus is found to be in breach
of section 182 of the Act. Loss is caused to HIHC and HIC by permitting a loan of $10
million to PEE without permitting the proper precaution are taken
Expected actions from Dominic Fodera
Further, Dominic Fodera was the director in HIH and the Chief Financial Officer of HIH. He
was found to be in violation of section 180(1) of the Corporations Law. It was expected that
he must have laid down a proper proposal to HIH’s boards or to the other committees and
sought the approval of the loan of $10 million before lending it to PEE.
It is now important to understand the role of ASIC and the reason for the Committee to be
involved in the case
ASIC involvement in the said case
The Australian Securities and Investments Commission (ASIC) is a government body which
is independent and is the corporate regulator of Australia. ASIC has played a significant role
in the case in had as the main aim and objective of ASIC was to make sure that the actions of
the directors must be regulated and enforced and the financial services that are undertaken by
the company must protect the interest of the investors, consumers and the creditors. ASIC
reports to the treasurer and is mainly accountable for the compilations of the provisions of the
corporation Act 2001.
Thus, it is the ASIC which keeps a check by acting as a watch dog on the actions that are
taken up by the directors of the company. If the directors of the company do not comply with
the provisions of the Corporation Act 2001 then it is ASIC which takes action against the
breached and the non compliation of the duties by the directors of the company. \
Observations or comments by writers or observers
While evaluating the case law ASIC v Adler (2002) 41 ACSR 72, Santow J had obsderved
that “A director of a company (here Adler) who is a director of another company (here Adler
Corp) must not exercise his or her powers for the benefit of the second company without
clearly disclosing the second company’s interest to the first company - - - .” (Camac, 2005)
Further, it was also observed that “The manifest failure of AEUT and the fact that the HIH
share price did fall despite AEUT’s buying, in no way obviates the intended advantage to Mr
Adler and Adler Corp. Thus to establish liability under s 182(1) it is sufficient to establish
that the conduct of the director was carried out in order to gain an advantage. It is not
necessary to establish that advantage was actually achieved.”83
Self Observations
It has been observed that the acts of Adler were nothing but the acts that are undertaken
which are grounded on improper purpose. It is submitted that the directors are found to be
c0onstant scrutiny of compilation of their directorial duties including the fiduciary duties tie

wards the company and its shareholders, officers, employees and creditors and these duties
must be comply with at each and every cost. If the directors of the company fails to company
with the said directorial duties then the corporation act2 001 has laid down the provisions and
consequences that must be faced by such deflating directors. The defaulting directors are not
only imposed with fines or compensation but the director can also be disqualified from his
position.
Conclusion
It is thus concluded that the case of ASIC v Adler is a landmark case and which tries to lay
down the importance that is given to the duties that a company director must comply with at
each and every scenario. The case highlights the importance of duties that a company director
must comply with. It also submits the repercussions that can be faced by the director of the
company if the duties that are casted upon the directors of the company are not comply with.
It is thus one of the historical cases in the company law history of Australia.

Reference List
Books/Articles/Journals
Baxt, R. 2009. Duties and Responsibilities of Directors and Officers. Australian Institute of
Company Directors.
Camac. 2005. Submission to Corporations and Markets Advisory Committee Review of
Corporate Duties Below Board Level.
<http://www.camac.gov.au/camac/camac.nsf/byheadline/pdfsubmissions/$file/
cpa_corpdut.pdf>.
Duncan, W. 2012. Joint Ventures Law in Australia: 3rd Edition. Federation Press.
Fleckner, A and Hopt, K. 2013. Comparative Corporate Governance: A Functional and
International Analysis. Cambridge University Press.
Paolini, A. 2013. Research Handbook on Directors Duties. Edward Elgar Publishing.
Case laws
ASIC v Adler (2002) 41 ACSR 72