Corporations and Financial Markets Law

Question: Discuss about the Corporations and Financial Markets Law. Answer: Introduction This case of ASIC vs. Adler is one of the most unique cases and also it is very complicated. The facts of the case are that in the year 2000, a $ 10million loan was given to a company named Pacific Eagle Equity Proprietary Limited. This loan was given by HIH Casualty and General Insurance Limited. This abovementioned payment was neither documented nor was it secured. PEE was headed by a person named Adler. He was also the trustee of Australian Equities Unit Trust. He was a substantial shareholder of the HIH and also he was the non-executive director of the company named as the Adler Corporation Limited. Williams was the director and also the Chief Executive Officer of HIH. In the same company mentioned before, Fodera was the director and finance controller (PWC, 2008). After the receipt of the loan, PEE had become the trustee of the Australian Equities Unit Trust. This loan of $10 million was then applied to the subscription of the HIHC shares. These shares were applied for the $10 million worth of the AEUT units. The shares of HIH were bought by PEE and these were for the worth of around $3.8 million. These shares were brought on the stock market. The shares were then sold at a loss recorded for about $2 million. These were sold by PEE and purchased afterwards by it. The HIH shares were purchased by PEE and this was undertaken to defraud the people in the stock market that the company is holding good terms with the investors of the company HIH. Various shares pertaining to the unlisted index in the companies related to the technology and communication were bought by PEE. These shares were bought from Adler Corporation for $4 million. All of these investments were made at a total loss. Also payment amounting to around $2 million was given to Adler. This payment was made under the trust by the AEUT. These transactions that were being carried without the knowledge of the board as no prior approvals were taken from the board. The shareholders neither had any idea of the ongoing in the company nor were the disclosure made to the committee related to the HIHs investments. No proper documentation of the papers of the loan was undertaken or any security was given. These obligations were not fulfilled with the reason, that if fulfilled the circumstances of the company would catch everybodys attention and that is what they did not hope for (Dunford, 2005). The issue in the court was that whether Adler breached any of his duties being the director of the company and whether the provisions of the Corporations Act, 2001 were breached. The case was brought by ASIC against Adler, Williams and Fodera as they had also contravened various section of the Corporations Act, 2001. Duties/Responsibilities Breached And Why The Duties Were Breached. Under Section 180 of the Act, the duty of a director or an officer, that is associated with the company, to act with care and diligence has been mentioned (Black, 2015). This section states that the duties have to be discharged with a reasonable and standard care. Also the duty needs to be upheld diligently. Executive directors are those employees of the company that work as the full time employees. These people are engaged in the daily work activities of the company and carry various responsibilities that are special in nature. They also are very knowledgeable as they know about the daily operations that take place in a company. On the other side, the non-executive directors involve with the company on a regular basis and they do the part-time job. In the present case, the managing director of the two companies, HIH and HHIC have contravened this section as he did not fulfill his duties. He was supposed to ensure the fact that before giving any loan to PEE, he should have maintained proper safeguards. Another person named Fodera also was the finance director of the firm named HIH. He failed to take up his duties as he did not pay heed to the importance of discussion which was to be had in lieu of the loan that was to be given to PEE. No disclosure of the intention was made by either of them. Under section 180(2) of the Act the business judgment rule has been mentioned. This section states that the director or any officer who makes the rule mentioned above would not be held liable in case he has made that judgment in which all the elements could be easily depicted. He would not be liable for the judgment under any common law or duties under equity, that is, duties pertaining to care and diligence (Hooper, 2011) . There must not be any personal interest of the person making the judgment. Good faith is to be mandatorily established. The directors get a safe protection due to this rule and therefore they can be protected from any personal liability too (Langford, and Ramsay, 2017). However, any of the three directors cannot take the plea of this defense as no proper safeguards were undertaken and Ader had a personal interest in the subject matter of the transaction. Section 181 of the Act states regarding the statutory duty to act in good faith and also regards must be had to the exercise of powers for a purpose that is proper (Redmond, 2013). In the present case, Adler had also contravened the section 181 wherein he had used all the transactions of HHIC, HIH and also PEE for the purpose that was not proper. Section 182 was also violated as there was an improper use of the position in this case (Redmond, 2013). This section mentions that those officers and employees of the company who do not properly use their powers or use them to gain the advantage for their own sake should be restricted. The court held that Adler had also contravened this provision of the Act as the transaction that was undertaken that is the loan of $10 million was given to PEE, however, afterwards this loan was itself used by him for his personal interest. The interest pertained to the fact that this arrangement of loan was undertaken to acquire the shares of HIH on the stock market. This led to increase in the price of the shares and helped his company, Adler Corporation to dispose of the shares before PEE could. PEE had incurred great losses due to this and therefore it had to resell those shares at a low price. Section 183 was also violated under this case. Section 183 stated regarding the duty of the director, to not to use the confidential information which he gets by virtue of his position. This kind of information is known as the insider information and therefore it can be used by a person in order to be benefitted by it (Gibson and Brown, 2012, pp. 254 to 265) Ciritcal Analysis of the Judgment All the three, Adler, Fodera and William were penalized heavily and had to pay compensation. Alder and Williams were disqualified too however Fodera was not (Rogers, 2017). It was upheld in this case that the directors should uphold their duties while dealing during the course of the employment. Firstly, the interest should be fully disclosed by them (Law Handbook, 2017). Also they should abide by the structure of the corporation that is the way mechanism selected has to be reported. They should abide by the arms length principle. Also one more thing has to be ensured that is conflicts should be avoided to the maximum level. According to Section 9 of the corporations Act, 2000, a director of the company is the person who is appointed for that position (Companydirectors, 2016). People who are not appointed in a proper manner can also hold this position. The duties of the director are coherent with their duties towards the shareholders. Therefore, the protection is to be awarded to the shareholders from the risk of the directors. They should not be defrauded or their interests should not be used for directors personal interests. Also officers of a corporation are included under the definition of the directors. These refer to the various executives who hold the positions at a senior level. A director could be the person who makes such decisions that affect the company at a substantial level. In this case, the director of HIH, Adler was an officer of the wholly owned subsidiary and this could be related to the definition of directors given under the section 9 mentioned above. He was not appointed in a proper manner but did play the role of the director. He was the one who, had participated in the decision making which affected the stakeholders of the company. Also he was one of the members of the investment committee of the HIH. The directors had contravened the duties which have been laid down under the Section 180, 180(2), 181, 182 and 183. As mentioned above these duties, were not fulfilled by the directors and therefore they were liable. According to section 180, no due care and diligence was taken by the directors of the company. According to Section 180(2), in the present case, the court had stated that all of the three directors had breached their duty of care under this section (Pearcewebster, 2017). This rule could be of no defense as Adler could not satisfy the fact that they did not have a personal interest in the investment of around $10 million that was made to PEE by HIHC. Williams also could not be protected under this rule as he did not uphold proper safeguards before giving the loan and also he had material interest in the transaction and he did not present any evidence that the judgment taken by him was in good faith. Fodera, cannot hide behind the veil of business judgment rule as the tran saction pertaining to PEE was not mentioned by him to the board of HIH or the investment committee. It was not a business judgment as per this section (Legg and Jordan, 2014, pp. 407). Also, according to Section 182, Adler could be said to have misused his position as the director of the two companies for his own interest. Williams was no less in gaining utmost advantage from his position as a director and he breached his duties. He tried to fetch unjust enrichment from the companies named HIH and HIHC. Also the court found out that Adler as a director of PEE had misused his position. He acquired a number of unlisted capitals and these he had got at the rate of the cost price. He did not have to obtain any of the independent valuations of these and got it at a lesser rate from the Adler Corporation itself. Adler knew at that time that each of the businesses were in losses and would finally collapse. Still he tried to exclude himself and the corporation from these kinds of business operations, that were not commercially viable (Company Directors, 2004). Section 260A of the Corporations Act,2001 states about the financial assistance. This section states that if any of the companies gives any assistance, at a financial level, to a person who would buyback his own shares, then this would be held prejudicial to the interests of all the stakeholders of the company (Plessis, McConvill and Bagaric, 2005, pp..125) Hence this is restricted under this section. Adler, in the present case, had contravened this section. HIHC was prejudiced as financial assistance was provided to PEE and therefore due to this financial assistance, shares were acquired in HIH. The entry into the unit trust arrangement was made subsequently and the trust deed lacked any proper safeguards. Also, the arrangement that was made was contentious. HIHC acquired various rights under the transaction. However, these were deceptive as the rights were materially of a lesser value as against the advance of $10million that was made. This kind of arrangement was made knowingly so as to deceit the stakeholders of the company and therefore the transaction made were wholly one-sided (Cassidy, (eds.) 2006, pp. 133-134). Arms length exception was also used in this case. Section 208 of the Act states that whenever a company seeks to give financial benefit to a party that was related to it then, the approval of the shareholders is needed (Minterellison, 2011). However, the arms length principle is an exception to it. The terms of the $10 million payment were not made according to this principle and this therefore violated Section 208. The terms were not consonant with the principle as these were not at all adequate and therefore did not protect the interests of the company. Also no reports of the independent experts were taken into account. 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