Several Breaches of Duties Mentioned †Myassignmenthelp.Com

Question: Discuss About the Corporation Several Breaches of Duties Mentioned? Answer: Introducation The facts of ASIC v Adler (2002) are quite complex and unique. In this case, it was alleged by the ASIC that several breaches of the duties mentioned in the Corporation Act, 2001 has taken place. As a result of very bad corporate governance, there was the collapse of HIH Casualty and General Insurance Ltd. The breach of duties alleged in this case included the breach of duty mentioned in section 180 (duty of care and diligence); duty mentioned in section 181 (to act in good faith); duty prescribed in section 182 (not to making proper use of position); the duty mentioned in section 183 (not to make improper use of information) and s 260A related financial assistance. The present issues were also related with the business judgment rule as provided in section 181(2). In this way, it can be said that the decision given by the court in ASIC v Adler serves as a clear reminder for the directors that it is necessary that the directors and the corporations should make sure that effective corporate governance frameworks have been installed in the company for the purpose of safeguarding the company from the improper actions of the directors. While implementing such a process, sufficient checks and balances should be introduced so that it can be ensured that it is not easy to bypass the system (CAMAC Report, 2006). In ASIC v Adler, the issue was related with the payment of $10 million by a subsidiary of HIH to a company in which Mr. Adler was the sole director. The below mentioned investments were made in this company by using a trust mechanism. Around $4 million were used for acquiring the shares of HIH; a purchase of venture capital unlisted investments was made from another company of Adler; and in the same way, loans were given to the entities that were related with Adler. All this took place without any approval from the board of directors. Similarly, there were no collective disclosures made to the board of the company or to the investment community of HIH. At the same time, these loans were it was without any proper documentation or taking any security. The payment was made in such a way so that the other directors of HIH may not know about it. In fact, in this case Santow J was of the opinion that the semi-covert by passing of the safeguards installed in the company revealed the consciousness of them property on part of Adler. Under these circumstances, the court arrived at the conclusion that Adler had made contraventions of the four sections mentioning the duties of directors in the Corporations Act. These included the duty of care and diligence (s180); duty of good faith (s181); duty not to use position improperly (s182) and duty which requires that the directors should not use the information improperly (s183). At the same time, the court also stated that the other two directors of the company, Williams and Fodera were also liable for the breach of their duties, although to a lesser extent. Therefore the decision given in this case has significant implications for the business judgment rule as well as for the arm's length provisions that are present in the Corporations Act. The purpose behind the introduction of the business judgment rule in the Corporations Act was to provide a safe harbor in case of the business segments that are made in good faith and by exercising due care (Ford, 2005). In the present case also, all the three directors of the company sought the protection provided by the business judgment rule. However Santow J, arrived at the conclusion that for the purpose of relying on the protection provided by the business judgment rule, first of all, it has to be established that a business judgment was made by the director (Black and Baldwin, 2010). Then, such a judgment has to satisfy the below mentioned requirements. It is necessary that the judgments should have been made in good faith and for proper purpose (Black, 2012). However, in the present case, San tow J was of the opinion that there was a material personal interest of Adler in this matter. Similarly, it cannot be established in this case that the business judgment was made in good faith and for proper purpose. As a result, the business judgment rule was not applicable in this case. The court also stated that the business judgment rule was also not applicable in case of the other two directors of the company. Regarding Williams, the court concluded that he had failed to make the business judgment. Or to the extent to which the business judgment was made by him, he could not establish that such statement was made by him in good faith and for proper purpose. Regarding the other director, Fodera the court had stated that there was no business judgment made at all by him. In fact, the lapse on his part was that he had failed to bring the attention of the other directors towards this transaction. Arm's length exception: According to s208, Corporations Act it is necessary that the approval should be taken from the shareholders of the company when a financial benefit is going to be given to a related party (Baldwin and Black, 2008). However, the exception that is present to this rule is known as the arms length exception. In the present case, the court discovered that the terms under which the payment of $10 million was made, it cannot be said that it was arm's length, and therefore a clear contravention of s208 was present in this case. The court also found in this case that it was not reasonable that the transaction should have involved the purchase of shares in the present company, that were going to be paid by the wholly-owned subsidiary of the company, without completing any documentation and security. Therefore the court stated that the terms of the trust deed were grossly inadequate for the purpose of protecting the company's interests. Once money was transferred to the trust, there was a complete lack of any mechanism, which could be used to dictate how the money was to be spent. Similarly in this case, no report from the any independent expert was taken and simply it was a clear case of the lack of proper safeguards. Although in this case, there was not much discussion regarding the legal concepts related with the arm's length terms, it was suggested by the court in context of this type of transaction that there is at least a need for sufficiently documents and prospects of providing security. The court also stated that any reasonably careful officer or director who was in a similar position as Adler would not have allowed the payment of $10 million to PEE to be applied in part for buying the shares of HIH. In this case there was failure on the part of Adler to follow the authorized practices concerning the investments made by HIH/HIHC. And also to make sure that sufficient safeguards have been stalled to protect HIH or HIHC. The objective of Adler was to support the share price of HIH (he was doing so for his own significant shareholding in the company), instead of allowing HIH to obtain, through its interests in AEUT, the advantage of good profit by reselling the HIH shares. Similarly regarding Ray Williams, the court stated that he knew very well that the amount of $10 million was going to be used in whole or partly for paying for the shares of HIH still he allowed that this amount should be paid in advance without any documentation and without prescribing any required safeguards to deal with the potential conflicts of interest of Adler as special vigilance was needed in these circumstances. Although the main responsibility was of the director who had proposed to enter into this transaction, but in such a case the other directors or officers cannot be excused when they came to know of the proposed transaction. Common sense required that any other reasonably care for director would have raised the issue of making a payment of $10 million to a director before the board of the company or at least with the investment committee of the HIH. In the same way, the court stated that Fodera was also liable for the breach of section 180. In this case, the former directors tried to rely on the protection provided by the business judgment rule.. Are they could not be successful. In this case, the code stated that there was no business judgment. In this case, Rodney Adler calls three unsecured loans, to be given to AEUT without sufficient documentation, to companies all funds that were associated with them or his Adler Corporation. It was held to be called the advantage of Adler and at the same time, to the disadvantage of AEUT. The court arrived at the conclusion that in this case, the payment of $10 million made by HIHC to PEE can be considered as "giving a financial benefit" to PEE, Adler Corporation and Adler, falling within the purview of s 229. In this way, HIH and HIHC were held responsible for contravening the provisions of section 208. At the same time, it was also stated that this transaction cannot be considered as an arms length transaction as mentioned in section 210. Similarly, when it entered into the trust deed later on, was also not considered as falling within the purview of arms length exception as provided in s. 210 due to the reason that there were no proper safeguards present in the trust deed under the circumstances in which there was a possibility of Adler. Having your conflicts of interest, and when it was considerably one-sided against HIHC. The court also held in this case that this transaction was performed at the requests made by Adler and with confidence and directions given by Williams. As a result, it can be said that both these persons were involved in giving a financial benefit as mentioned in section 79. Similarly, it was held that both of them had contravened the provisions of section 209(2) when they were found to be involved in the breach of section 208 by HIH and HIHC. Similarly, the court arrived at the conclusion that Fodera was also liable for breaching the provisions of s. 209(2). The reason was that it was discovered by the court that he had adequate knowledge concerning the essential elements of the contravention and the attempts made by him later on to distance himself from the transaction by referring these matters to the persons did not alter the situatio n. Duty of good faith (s181): In this case, Rodney Adler was the director who was held by the court to have breached the provisions of section 181. The reason was that Adler, other than the failure to make proper disclosure, was also held to be promoting his personal interest when a substantial possibility was present regarding a conflict between the interests of the company and his personal interests. As a result of the illegality under sections 208 and 260A, the interests of HIH and HIHC were put at stake and also due to the reason of concealing the fact from the market that the purchase of HIH shares was funded by HIHC and not Adler on his interests In this way, the judgment given in ASIC v Adler serves as a reminder that the statutory protection provided by the business judgment rule cannot be used as a shield against liability for the conduct of dishonest or reckless directors. Similarly, the Australian courts have not yet applied the business judgment rule provided in the Corporation Act in the favor of a director. Moreover, in view of the fact that the rule mentioned in the Corporations Act in Australia is closely based on its US equivalent, should provide comfort to the directors in Australia that the courts will not second-guess the good faith decisions of the directors who approved an acquisition on the basis of expert advice and by following the appropriate board process. References Corporations and Markets Advisory Committee (CAMAC) Report, 2006 The Social Responsibility of Corporations, CAMAC, at 82 Ford H A J. 2005, Fords Principles of Corporations Law, 12th ed, Butterwroths, Sydney, 2005 at 176. Julia Black and Robert Baldwin, 2010 'Really Responsive Risk-Based Regulation', University of Denver Law Policy, p. 184. Julia Black, (2012) 'Paradoxes and Failures: "New Governance" Techniques and the Financial Crisis', Modern Law Review 75:6, p. 1039 Robert Baldwin and Julia Black, 2008 'Really Responsive Regulation', Modern Law Review 71:1 pp. 59, 6667