Analysis of Directors' Duties and Responsibilities in the Adler Case

This essay provides an in-depth analysis of the duties and responsibilities of company directors, focusing on the Adler case. It explores the roles of directors, including non-executive directors, and examines the impact of their decisions on the company. The essay delves into the legal framework, referencing the Corporations Act, and highlights key issues such as breaches of duty of care and diligence, good faith, and the misuse of position and information. It outlines the penalties imposed on the involved parties, including disqualifications and pecuniary penalties, and discusses the actions directors should have taken when the company faced insolvency. The role of ASIC and other authorities in the case is explained, along with interesting observations and reflections on the case's implications for corporate governance and the importance of fulfilling directorial duties. The essay emphasizes the significance of proper procedures, conflict of interest identification, and the consequences of failing to act in the best interests of the company. The case study provides valuable insights into the legal and ethical obligations of company directors.

LAW ESSAY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Issue, parties to the case, their positions in company..................................................................1
Primary Legal Issues regarding directors duties..........................................................................2
Penalties imposed on parties........................................................................................................3
Actions of Directors and officers when they discovered company was insolvent. ....................3
Reasons behind involvement of ASIC and other authorities in the case.....................................4
Interesting Observations from the writers of this case.................................................................5
Reflections and Observations on the above case.........................................................................5
REFERENCES................................................................................................................................7

INTRODUCTION
The present report will reveal about the duties and responsibilities of directors of
company. The report will cover an argument about the duties of other directors of company and
the impact of decisions made by directors. Adler approved loan without following procedures of
company and taking concerns of investment committees. The conclusions will be drawn on the
basis of provisions laid down in Corporation Act.
Issue, parties to the case, their positions in company
Adler is non- executive director of company where Williams is CEO and director of
company. Financial controller and director of HIH is Dominic Fodera. In the June 2000 on
request of Adler, loan of $10 million was arranged by Fodera and Williams from their wholly
owned subsidiary HIHC for Pacific Eagle Equity Pty Limited the company which was
incorporated by Adler to make profitable trades as well as investment as per stated purposes for
HIHC. For next 15 days shares of HIH valuing around $3.9 million were purchased by PEE. It
was contended by ASIC that motive behind purchasing the shares of HIH so that it can support
share prices of HIH for getting the benefits of HIH shareholding. In July 2000, Australian
Equities Unit Trust was established by company for execution of trust deed in which PEE is
appointed as trustee. HIHC and Adler Corporations which is regarded as company controlled by
Adler was issued. units belonging to different classes. Investment of $10 million by HIHC
inclusive of purchased HIH shares which became part of AEUT. In September 2000 , shares of
HIH were sold with a loss above $2.1 million (Barker, 2018).
During August and September 2000, AEUT was insisted by Adler to purchase
investment from Adler Corporation in internet companies and unlisted technologies at cost .
After that AEUT on all 3 investments suffered loss around $3 million. In between July and
November 3 unsecured loans were raised for PEE by Adler above $2 million to funds which
were associated to him or to companies. On this allegations were raised by ASIC that loans were
raised for AEUT's disadvantage.
Proceedings against Adler, Fodera and Willians were raised by ASIC for contravening
related party transactions , provisions related to director's duty and financial assistance given in
Corporation Act.
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Primary Legal Issues regarding directors duties
Statutory duties regarding directors and officers are discussed in Corporation Act part 2D
Statutory duties which were considered in Adler's care are:
Duty of Care and Diligence (Sec 180)
Duty of good faith (Sec 181)
Duty of not making improper use of director's position (Sec 182)
Duty of not making improper use of information (Sec 183)
Issues
Adler breached the duty of reasonable care and diligence of director and caused payment
of $10 million by HIHC for purchasing shares of HIH by PEE. Adler misused his position for
personal interest of having substantial interest. The move was to raise the share price of HIH.
Fodera and William also breached the same duty as it happened in their knowledge and also the
interest of Adler. Director cannot alleviate and avoid the responsibility related to matters which
are in their knowledge by distancing themselves from breach (Huggins, Simnett and
Hargovan,2015).
Directors are required to perform duties in god faith and best interest of company and
also for proper purpose. Adler breached this provision as proper disclosure was not made by him
and personal interest was promoted by company and that was in conflict of interest with
company. And at the same time investments were made in unlisted technologies by PEE by
taking loans. Procedures should be adopted for identifying conflict of interest in company.
The position was used by them for gaining personal advantage and causing detriment to
organisation. Adler was at fault as support of HIH share price was an improper use. Williams
authorised $10million payment without knowledge and taking approval from HIH investment.
Adler was in breach in acquiring unlisted investments by PEE by excluding Adler corporation
from investments without any loss (Du Plessis, 2017).
Improper use of information was made by Adler gaining personal advantage and to
Adler Corporation . Information was to be concerned to investment committee , investment
guidelines and investment portfolio. The investment of HIH shares were made in unlisted
equities .
Case law of James Hardie and Centro
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Case law brought significant attention on director's duties and seeing the background of
the case for the collision of company , civil plus criminal proceedings were held on directors for
calling D&O policy for funding the defence cost. Receiver asserted charges over policy on the
ground that it intends to commence proceedings on directors. In this effect D&O policies perhaps
will not be operating intendedly and directors will be provided with funds for defence cost.
Penalties imposed on parties
Civil consequences faced by them were
Compensation for suffering damages according to sec 1317 H
Pecuniary penalty order sec 1717 G of maximum $200000
Disqualifications for such period as set out in managing corporation under sec 206C.
On Adler
The tribunal disqualified Adler as director of every company for the period of twenty years in
addition to the fines.
Williams
Williams was disqualified from becoming director of any company for a period of ten
years. And was guilty for contravening sections 180 and 182 of Corporation Act. And pecuniary
penalty of $250000 was imposed (Hanrahan, 2018).
Actions of Directors and officers when they discovered company was insolvent.
The duty of directors were contravened related to financial assistance of due care and
diligence. The directors were to discharge their duties and responsibilities with appropriate
diligence and care in this position. Directors of company have the responsibility of administering
the management of company an d ensuring that it is in best interest and position of company
(Gramitto Ricci and Miyairi, 2017).
Directors on discovering that company are having high probability of becoming
insolvent should have exercised their responsibilities and power and would not have passed the
loan amount of $10 million to PEE. The directors should have restricted the loan advancement
by HIHC. The Adler as a director should have placed safeguards for protecting HIHC. It was
also the duty of director to place the investment before investing to the investment committee of
HIH so that they can analyse the performance of company. The matter was also supposed to be
placed before board members in a board meeting as it would have stopped the sanctions of loan
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amount. Directors were required to put security for the loan amount they also did not made any
documentation for recognising the loan amount (Bowley, 2017).
Another duty of director after noticing that company was supposed to become insolvent
was to utilise its powers for the benefit of company and should have restricted the investment
which was made in unlisted equities by PEE. Adler made investment as loan was provided ton
him with consent of directors oh HIH. Adler also had the responsibility of not misusing his
powers for personal interest at the cost of company. After the knowledge of insolvency
directors have informed the company and its members about the fraud being taking place in
company. If after any of the director was not agreeing to comply with legal provisions. If the
directors had performed their roles properly the company would not have suffered big losses
(Barker and et.al., 2016).
Reasons behind involvement of ASIC and other authorities in the case.
ASIC is Australian Securities and Investment Commission is recognised independent
government body of Australia which acts as corporate regulator of Australia. ASIC has the roles
related to enforcement and regulation of laws concerning financial services and company law for
protecting investors, consumers and creditors of Australia. Scope and authority is defined by
Australian Securities and Investment Commission Act, 2001. ASIC reporting to treasurer is also
responsible for administering all or part of these legislations.
 Corporation Act, 2001
 Insurance Contracts Act, 1984
 National Consumer Credit Protection Act, 2009
ASIC is the body that has the responsibilities of ensuring that directors are complying
with provisions given in Corporation Act relating to duties of directors. It has concerns about the
duties are being conducted in a proper manner. ASIC is involved in a proceeding for recognising
the liabilities of directors in managing a company and impact that company may have if roles are
not exercised properly. ASIC was involved in the case as breaches that were made in the case
are serious and numerous . The action led to misinformation in the market. In the present case
ASIC was involved for contravening the provisions of Corporation Act by all of the three
directors of company in relation to collision of HIH insurance company. Allegation were made
for breaching the provisions related to directorial responsibilities. Aim of ASIC was at
reinforcing the expectations related to directors (Harris and Hargovan, 2016.).
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Supreme Court of Australia was also involved in the case as it is the Tribunal that makes
judgement about the cases. The matter was related second largest insurance company which
influenced the market therefore the case was brought to Supreme Court.
Interesting Observations from the writers of this case
After analysing the above case relating to Adler and other Directors of HIH insurance
company. Adler made investments in HIH shares and later they were applied over loan of
unlisted investments. The interesting factor in the case was that the loan of such big amount
was made by two directors and it was not noticed by any of the other members of the boards.
The loan was to be approved by investment committee and the other me members of the board
but than also it was sanctioned without involving all the directors . Approval was not required
only of board but also of investment committee before making investment.
Investment committee should have taken care of the investment being made by directors
immediately and enquiry would have been made by committee for the investments made in
internet technologies and other unlisted companies which were on the verge of becoming
insolvent. Other factor of concern and focus is that loans were raised without any security and
other legal documentation for the payment of interest. The loans were guaranteed in such a way
that they do not come to notice of other board members and investment committee (Ramsay and
Saunders, 2018.).
Adler very efficiently managed to make investment by establishing AEUT trust and
excluding self from all the three investments which were made routing through PEE. Adler
raised money for supporting the share prices of HIH for increasing the shareholding with huge
amount than also it did not drew the attention of authorities and market is an questionable factor.
Reflections and Observations on the above case
Concluding it is observed that Adler has made misuse of power and position of director
by approving the loan amount of $10 million for funding the newly incorporated company PEE
for advantage accruing to self. Williams who was CEO and director of company also approved
the payment of loan even when the right procedures were not followed as a consequence
company faced deterioration as company did not received any interests on the loan amount.
Business law, 2013. Heavy penalties were imposed on directors for for contravening the
provisions of Corporation Act. As a result Adler were disqualified from becoming director for
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next twenty years and Williams faced disqualifications of 10years. Penalties in addition with
punishment are imperative for breaching the duties and responsibilities.
Above case sets example about the duties and responsibilities of directors that are related
to company. Companies are required to make proper procedures and regulations so that no
directors are not able to make decisions on their own without concerning every members of the
board of directors. The company should be aware of each and every transaction taking place
within. The sanctioning for personal benefit led to collision of whole company which means
director's failure to take their responsibilities can lead to dissolution of whole company.
Directors should perform their responsibilities with due care and diligence. The case shows that
how on wrong move can lead to collision of whole company. Therefore every director should
ensure that their actions are not at the cost of company for their personal benefit(Hanrahan,
2018).
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REFERENCES
Books and Journals
Barker, S., 2018. An introduction to directors’ duties in relation to stranded asset risks.
In Stranded Assets and the Environment (pp. 221-271). Routledge.
Barker, S. and et.al., 2016. Climate change and the fiduciary duties of pension fund trustees–
lessons from the Australian law. Journal of Sustainable Finance & Investment.6(3).
pp.211-244.
Bowley, R., 2017. Flexible Yet Firm: The Practice of the AAT and the Courts in Reviewing
ASIC S 206F Management Disqualification Orders.
Du Plessis, J.J., 2017. Disqualification of Company Directors: A Comparative Analysis of the
Law in the UK, Australia, South Africa, the US and Germany. Taylor & Francis.
Gramitto Ricci, S. and Miyairi, J., 2017. The Abstract Void in Practice: Has the Statutory
Business Judgment Rule Changed the ‘Acoustic Separation’Between Conduct and
Decision Rules for Directors’ Duty of Care?. Australian Journal of Corporate
Law. 31(107). pp.17-18.
Hanrahan, P.F., 2018. Directors' Duties and Public Interests. Available at SSRN 3434936.
Hanrahan, P.F., 2018. On Compliance-Essay in Honour of Professor Bob Baxt
AO. Contemporary Issues in Corporate and Competition Law Essays in Honour of
Professor Robert Baxt AO (LexisNexis Butterworths, Sydney, 2018) Chapter, 9.
Harris, J. and Hargovan, A., 2016. Still a sleepy hollow? Directors’ liability and the business
judgment rule. Directors’ Liability and the Business Judgment Rule (March 7, 2016).31.
Huggins, A., Simnett, R. and Hargovan, A., 2015. Integrated reporting and directors’ concerns
about personal liability exposure: Law reform options. Company and Securities Law
Journal.33. pp.176-195.
Ramsay, I. and Saunders, B., 2018. An Analysis of the Enforcement of the Statutory Duty of
Care by the Australian Securities and Investments Commission. Company and Securities
Law Journal.36(6).pp.497-521.
Online
Business law. 2013 [ONLINE] Available through: https://study.com/academy/lesson/what-is-
business-law-definition-overview.html<>
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