Case Study: ASIC Vs Adler


Question:

Case Study: ASIC (Australian Securities and Investments Commission) Vs Adler.

Answer:

HIH was Australia’s second-largest insurance company, which is considered to be the largest corporate collapse in Australian history. In the well-known case ASIC (Australian Securities and Investments Commission) vs Adler (2002), the chief defendants were Rodney Adler (asubstantial shareholder and non-executive director of HIH, also an officer of HIHC), Ray Williams (the founder and Chief Executive Officer of HIH) and Dominic Fodera (the director and Chief Financial Officer of HIH).

In June 2000, HIHC a subsidiary of HIH Company provided a ten million dollars loan to Pacific Eagle Equity (PEE) without being in any knowledge of other directors of HIH. Dominic Fodera performed the transfer. Adler controlled the company PEE. PEE became the trustee of Australian Equities Unit Trust (AEUT), which was controlled by Adler Corporation(Adler was the only director and he and his wife were the only shareholders).

By issuing units of value ten million dollars to HIHC by AEUT, Adler intended to create a false impression to the stock market that he was trying to help HIH from falling share price to increase its share price or at least prevent the share price from falling. While later PEE sold shares of HIH at a loss of 2.1 million dollar loss. Consequently, the market received the shocking news of the sudden collapse of HIH, which was the result of rapid expansion, unsupervised delegation of authority, underpricing, false reports, fraud, greed, self-dealing, reckless management and other such issues. This drastic collapse had a massive community impact by adversely affecting its shareholders, policyholders, professional groups, tax-payers, community groups, small business-owners, home-owners and injured individuals were left stranded with unpaid claims. This massive loss caught the attention of the parliament which instructed ASIC to look deeply into the matter. Later after an investigation, the ASIC drew the conclusion that Adler purchased the HIH shares for his personal advantage. Adler used four million dollar loan through AEUT to purchase unlisted shares in unlisted technology and internet companies. Adler Corporation suffered a total loss on the investments. Afterwards, Adler through PEE made various unsecured loans of more than two million dollars to the organizations he was associated with. The ASIC alleged it was harmful to AEUT. However, the ASIC carried out various proceedings against Adler, Williams, and Fodera as they contravened the associated party transaction. They also contravened their financial status assistance and duties as directors (as per Corporation Act, Clarke et al, 2003).

Firstly, Section 180 of the Act is a duty to act with due care and diligence. As per Section 180(1) of the Corporation Act, the directors or other officers in a company are essential to discharge their powers and duties with proper care and diligence as a reasonable director. In specific, a director has the obligation and responsibility to administer the management of the company and to ensure it is in the best position. The case reminds the directors of their duties and responsibilities while being in position. In the case, a reasonably careful and diligent director would not have allowed HIHC to loan the sum of ten million dollars to PEE. Adler also failed to ensure to place the safeguards to protect HIHC. No approval was sought by any other board member, even the investment committee of HIH was also completely unaware of the decision. No documentation or any form of security of the loans was issued. As the director, Adler had contravened various sections of the Act. Such crucial and significant duties and responsibilities were breached which should have been carried out with utmost care and diligence.

Secondly, Section 181 of the Act is, the directors should make decisions in good faith in the best interest of the company without any personal interest. While Adler made the decisions that fulfilled his personal interest by benefiting his newly formed company (Bevans, 2007). The directors breached the Section 181. Adler did not make the proper disclosure of where the cash was intended to be used. On the one hand, where Adler solely focused on protecting his shareholding with HIH which was in conflict with the interests of the company. On the other hand, he also contravened his duty of acquiring the three unlisted technology investments to PEE and the unsecured loans to AEUT.

Thirdly, the section 182 of the Act is to avoid improper use of position. Section 182(1) of the Corporation Act states that any officer, director or employee of any organization should not inappropriately utilize his or her position to achieve an advantage for himself/herself or someone else, or cause detriment to the company. It refers to duty not to profit from the position. This Section was also contravened, as Adler supported the cost of shares for his benefit. Williams also misused his position by authorizing the ten million dollar payment without following the appropriate procedures. (EI & Vault, 2003).

Lastly, the Section 183 of the Act is to avoid improper use of information. Section 183 of the Corporation Act states that any member of an organization must not inappropriately utilize the information gain to achieve an advantage for himself/herself or someone else, or cause detriment to the company. While Adler contravened the Section by utilizing the information for his and his company’s benefit. He ensured that the money was invested in the proper way by HIH that would lead to a major advantage and good profits to him. The directors contravened the Act by taking prohibited actions. They were supposed to act in a way that is stipulated by the law and ensures smooth functioning of the organization.

The tribunal in its judgment disqualified Adler as a director of any organization for twenty years with some fines. As he failed to act as a responsible director of HIH and has not acted on behalf of HIH, on the contrary, he kept his own financial interests before HIH interests. Adler had committed serious offenses and displayed lack of commercial morality. Breach of the Corporation Act is a punishable offense. Williams and Adler had contravened the various sections of the Act that clearly outlines the duties and responsibilities of the directors in an organization. In the Supreme Court ruling, Williams was disqualified as a director of any organization for ten years. Williams was found guilty of breaching the Section 180 & 182 of the Corporation Act and other convictions were made against the associates. The decision of the court passed a clear message to other people with similar intentions. It was considered as an example and caution for other directors of various organizations about the consequences of not following the act. One and all must respect and follow the Corporation Act and work in the interest of the company keeping aside their personal interests. It was made very clear that all the individuals must follow the law and those who violate are dealt with heavy penalties (Hill &McDonnell, 2012).

In conclusion, where on one hand Adler misused his position and power by providing ten million dollars fund to his newly formed company PEE for his personal interest. On the other, Williams authorized the payment without following right procedures or following up to know the exact truth of the matter. Adler misused the information to acquire funds and increase his shareholding in HIH. Due to which company had to face deterioration, as there were no interests gained. HIH was supposed to invest and acquire encouraging interests that would help it in gaining profits. The Supreme Court penalized the directors and imposed heavy penalties for violating the Corporations Act. Adler was disqualified to be a director for twenty years and Williams was disqualified for ten years. Heavy penalties with punishment were imperative for them, as they have not complied their duties & responsibilities and worked in the interest of the company & its stakeholders, rather fulfilled their personal interest.

References

Wheelen, T. L., & Hunger, J. D. (2002). Strategic management and business policy. Reading, Mass. [u.a.: Addison-Wesley.

Clarke, F. L., Dean, G. W., & Oliver, K. G. (2003). Corporate Collapse: Accounting, regulatory and ethical failure. Cambridge [u.a.: Cambridge Univ. Press.

Hill, C. A., & McDonnell, B. H. (2012). Research handbook on the economics of corporate law. Cheltenham, U.K: Edward Elgar.

Bevans, N. R. (2007). Business organizations and corporate law. Clifton Park, NY: Thomson Delmar Learning.

El, K. Z., & Vault (Firm). (2003). Vault guide to corporate law careers. New York: Vault Inc.

Lee, D., Swartz, M., & American Bar Association. (2007). The corporate, securities, and M & A lawyer's job: A survival guide. Chicago: ABA, General Practice, Solo & Small Firm Division.

Bainbridge, S. (2015). Corporate Law. West Academic. Bainbridge, S. M. (2002). Corporation law and economics. New York, N.Y: Foundation Press.

Tomasic, R., Bottomley, S., & McQueen, R. (2002). Corporations law in Australia. Sydney: Federation Press.

Kraakman, R. H. (2009). The anatomy of corporate law: A comparative and functional approach. Oxford: Oxford University Press.





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