Business Law of ASIC v Adler Samples for Students †MyAssignmenthelp.c

Question: Discuss about the Duty Of Care And Diligence ASIC v Adler. Answer: Issues As already said director have a number of duties to the companies and accordingly, they may also be held accountable for the breach of such duties. It is due to the position of immense power that they hold that the directors are also given huge responsibilities and a great degree of accountability. Directors are also deemed to stand in a fiduciary relationship with the company because the fate of the company depends to a great extent on the directors. Even a small breach of their duties may prove disastrous for the company, and all the stakeholders involved in it, as a whole. The case started off in earnest in 2000 when the company of Pacific Eagle Equity Pty Ltd (PEE) received a loan to the tune of $ 10 million from the HIH Casualty and General Insurance Ltd (HIHC). The loan was not documented, neither was it secured. Things took an interesting turn when the aspect of the involvement of Adler was inspected. With regard to HIHC Adler held two positions. One he was a non-executive director of HIHC and secondly he held a large number of shares of HIHC through a company by the name of Adler Corporation Ltd. PEE was again a company directly under the control of Adler and the company subsequent to the loan, also became a trustee of the Australian Equities Unit Trust (AEUT). Later on, the loan amount secured by PEE was used by the company to buy AEUT units which, subsequently were sold at a loss. This action was done simply to keep up the charade that PEE, as a company, was economically still viable (ASIC v Adler (2002) 171 NSWSC). Law These in brief are the duties of the directors of a company. Directors hold a key position in the company and as a result thereof they have to take many important and essential decisions on behalf of a company. To enable such decision making and to ensure that directors are able to wield their powers effectively, and not merely customarily, directors are given immense autonomy as well. However, as is wont, too much of power and autonomy concentrated in the hands of a director would lead to the invariable scope of misuse of such powers. To prevent such misuse, the law itself has envisaged several checks and balances which are discussed below. The Corporations Act, 2001 has spent copious amount provisions on the matter of directors duties and liabilities to a corporation. The first such duty may be said to be contained in section 180 which lays down in sub-section (1) that it is the duty of a director to act carefully and diligently. This duty is self-explanatory because it is natural and obvious that a director shall have such a duty. Sub-section (2) contains the business judgment rule. According to this rule, the director of a company may not be held liable for any decision that they may have taken with regard to the conduct of the affairs of the business, provided that such decision was taken in good faith and for legitimate purposes. One more requirement is that the judgment should not have been influenced by personal factors and/or interests Sally Ann Burrows, ["Directors' Duties (1St Edition)20102Andrew Keay. Directors' Duties (1St Edition). Jordan Publishing Limited, 2009. 476Pp." (2010) 52 International Journal ofL aw and Management. ] The next duty is enumerated in section 181 which says that it is incumbent upon a director to act in good faith and for valid purposes. This section may be said to be a legislative extension of section 180(2). Section 182 says that it is mandatory for the directors to not use their positions for any illegal or questionable purpose. Basically this duty makes it illegal for the directors to sue their positions in any manner so that they may get an undue or unwarranted advantage to the detriment of the company. The advantage is not limited to the directors only but top any other person, provided there is the involvement of the director. Again section 183 says that the director should not use in an improper or objectionable or questionable way any information that the director may have received simply by virtue of being a director. Improper usage of information implies gaining an undue advantage either for self or for someone else or causing an unwarranted loss to the company through the usage of such information(Rosemary Teele Langford, "The Duty Of Directors To Act Bona Fide In The Interests Of The Company: A Positive Fiduciary Duty? Australia And The UK Compared" (2011) 11 Journal of Corporate Law Studies). Ultimately section 260A of the Corporations Act, 2001 forbids a company from monetarily helping a person in the process of procuring or acquiring shares in such company or in any of its holding company. As is evident from the above, the main agenda of having so many checks and balances on the powers of the directors is to protect the interests of the company. In fact, a director for the continued progress and development of a company, financial and otherwise, and all other stakeholders involved, thus if the director himself does any act which contributes to the detriment of a company, thelawlaw provides for methods to prevent that and also to bring those responsible for the detriment to book [John H Farrar, Corporate Governance In Australia And New Zealand (Oxford University Press, 1st ed, 2001]. Application To decide upon whether Adler is guilty or not, it is pertinent that we apply the duties enlisted above to the given case. Turning to the first duty, Adler was in direct breach and contravention of that duty. Adlers actions may be said to be anything but careful and diligent. He was instrumental in procuring that loan to PEE, but there was no corresponding document or security in support of that loan. Basically, Adler acted in such a manner that HIHC lent an exorbitant amount of $ 10 million to PEE without any proof or evidence to that effect. To top it off, of that $ 10 million, $ 4 million was reportedly squandered off. Simply going by the yardstick of a reasonable and careful person, one may conclude that no reasonable and careful person would have allowed that loan, let alone a loan without security (Mina W.M. Yip, "Challenging The Role And Duty Of Directors In High Profile Corporate Failures In The USA And Europe In The Wake Of Financial Crisis - Possible Allegations Against Board Of Directors For Breach Of Duty Of Care, Skill And Diligence?" (2015) 1 EuroMed J. of Management). The next duty is to act according to the business judgment rule. In the course of the hearing of this case Justice Santow held the opinion that to determine the reasonableness of Adlers actions they may be judged against the action a reasonable and prudent man would have taken in Adlers place. But, the business judgment rule was held to be inapplicable in Adlers case because Adler had a clash of interest in this case considering Adlers involvement in both HIHC and PEE. The test with regard to section 181 may be said to be rather subjective because the test is to be done from the point of view of a director himself. In many cases it might happen that the decision taken by a director may actually end up acting harming a company, however, in such cases the director may escape liability by proving that he had actually acted in good faith and for genuine purposes for the company, however, his actions had backfired. Thus, this section must be applied keeping the full facts and circumstances of the case in mind and not merely the ultimate outcome of the directors actions. With regard to this case, if we were to consider the full facts and circumstances of the case, it must be borne in mind that Adler was acted in complete clash of interest between himself and HIHC. Therefore his actions can never be said to be in good faith (ASIC v Rich (2009) 1229 NSWSC.) With regard to section 182, Adler may be said to have breached this section to the maximum possible extent. He fully misused his position as a director of HIHC. Firstly, Adler had not disclosed his interest in the impugned transaction to HIHC, thereby losing his defense of good faith, secondly, by misusing his position as director of HIHC he ensured and mobilized a loan for PEE that to without an iota of proof to that effect. Thereby, through these actions it is rather clear that Adler had misused his position as a director massively and totally. His actions had caused undue and unwarranted damage and loss to the HIHC and undue gain to himself. He had also failed in his duties as the director of PEE because the ultimate beneficiary of the $ 10 million loan was not even PEE but Adler himself indirectly through the Adler Corporation [Joshua George, The Duty Of Care And Diligence (Talomin Books, 1st ed, 2004)]. With regard to section 183, again Adler may be said to have acted in blatant disregard of this section. This section mandates that directors should not make improper use of the information that such person may have received in their capacity as director of a company. Adler had much information in his hand, which, as a director of a company, he should have disclosed to the company. Instead he chose to keep such information simply to himself and use it for his selfish ends. The greatest example of such a perfidious act on the part of Adler may be said to be his decision of not disclosing his clash of interest in HIHC and also his position in PEE. Such acts of non-disclosure and willful withholding of information gives rise to the assumption that Adlers intentions were not honest or above board and thus he did not have the best interests of the corporation in mind while acting. Finally, we come to section 260A which forbids a company from assisting a person monetarily so that such person may procure or acquire shares in a company or a holding of that company. Of course, there are certain exceptions to this rule. If we were to look at it strictly, HIHC did not help a person directly. To that end, Alder did not provide financial assistance to any person directly or singly. What he did was he acted as a catalyst and facilitated the providing of loan to PEE by HIHC. But through PEE, and then through Adler Corporation, the ultimate beneficiary of the loan was Adler himself and the ultimate losers, in this whole complex web of transactions were HIHC and its stakeholders (J. W. Shaw, "Company Directors: Ethical And Public Interest Responsibilities" (2001) 73 AQ: Australian Quarterly). Therefore, from the above it may be clearly and unequivocally realized that Adler had acted in clear and gross contravention of the duties of a director. Such contravention was not in respect of only one or two duties, but rather a host of duties. Conclusion The above facts and circumstances of the case should serve as a lesson for all directors and potential directors of a company that their ultimate duty must always be towards the company only and not to anybody else. Not even them. As a result of his misdemeanor, Adler had to receive heavy penalties. He was held to be disqualified to be a director for 20 years was put under imprisonment for 5 years and was also fined the amount of about $ 400,000. One interesting observation that may be made in this case is that though the loan was provided at the behest of Adler and was provided without and security or any document, thereby effectively provided without any proof, yet Adler was implicated in this case. This merely goes on to prove the truth of the adage that there is no escape from law. it also teaches that the position of a director is not a position of only power and discretion. It is a position which comes with responsibilities and a duty of trust and good faith to the company and its shareholders. Thus, a director must always remain vigilant and honest, not only to the company, but to himself as well. References Asic v Adler (2002) 171 NSWSC ASIC v Rich (2009) 1229 NSWSC Burrows, Sally Ann, "Directors' Duties (1St Edition)20102Andrew Keay. Directors' Duties (1St Edition). Jordan Publishing Limited, 2009. 476Pp." (2010) 52 International Journal ofLaw and Management Farrar, John H, Corporate Governance In Australia And New Zealand (Oxford University Press, 1st ed, 2001) George, Joshua, The Duty Of Care And Diligence (Talomin Books, 1st ed, 2004) Langford, Rosemary Teele, "The Duty Of Directors To Act Bona Fide In The Interests Of The Company: A Positive Fiduciary Duty? Australia And The UK Compared" (2011) 11 Journal of Corporate Law Studies Shaw, J. W., "Company Directors: Ethical And Public Interest Responsibilities" (2001) 73 AQ: Australian Quarterly Yip, Mina W.M., "Challenging The Role And Duty Of Directors In High Profile Corporate Failures In The USA And Europe In The Wake Of Financial Crisis - Possible Allegations Against Board Of Directors For Breach Of Duty Of Care, Skill And Diligence?" (2015) 1 EuroMed J. of Management