Principles Of Contemporary Corporate Governance

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Principles Of Contemporary Corporate Governance

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Discuss about the Principles of Contemporary Corporate Governance.

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Introduction
The case of Australian Securities and Investments Commission v Adler (2002) 168 FLR 253, 364; 41 ACSR 72, acts as a reminded to all the directors and the companies, that they have the responsibility of making certain that there is a need for an effective corporate governance framework (Hooper, 2011). This framework is needed to protect the companies from any improper actions, which can be taken by the director of such a company. There is a need to have ample amount of checks and balances to guarantee that the system is not breached or bypassed with ease (Paolini, 2014).
This was a very complicated, yet unique case, involving the breach of a number of duties covered in the governing act of Corporations Act, 2001 (CA). Some of the duties breached in this case were related to the duty of care and diligence, duty to not use the information in an improper manner, and the duties of the director (Baxt, 2005). In the following parts, this case has been discussed using the IRAC format. Though, before that is carried on, a discussion has been made on the background of this case.
In this particular case, an undocumented and unsecured payment to the amount of $10 million loan was made by HIHC (HIH Casualty and General Insurance Ltd) to PEE (Pacific Eagle Equity Pty Ltd). Adler controlled this company PEE ad this in turn, was the trustee of AEUT (Australian Equities Unit Trust). Alder was both the substantial shareholder of HIH and the non-executive director through the Adler Corporation Limited. PEE became AEUT’s trustee after the loan was received by it. Afterwards, the $10 million loan to PEE by HIHC was applied for the subscription of HIHC, for $10 million worth of AEUT units (Justis, 2017).
A purchase was made by PEE for the shares of HIH, which were listed on the stock market, to the value of $4 million. And these shares of HIH were then sold by PEE at a loss of $2 million. The shares of HIH were purchased by PEE to give an untrue impression to the entire stock market that the investors of HIH were gaining due to the good work being varied on in the company. A purchase was also made by PEE from Adler Corporation towards their unlisted shares worth $ 4 million, of the technology and communication companies. This entire purchase was a complete loss based investment (Australian Institute of Company Directors, 2017).

Under the trust, a value of $ 2 million was given by AEUT to Adler. However, the board had no knowledge about these transactions and an approval of the shareholders was also not done. This was in addition to an absence of disclosure to the board, along with the same to the investment committee of HIH. There was also a lack of the proper documentation and security for the loan given. The rationale for the absence of these was to avoid an attention being drawn by the other directors of HIH (Cassidy, 2006).
Whether there has been a breach of directors duties on part of Adler, and other directors and officers, or not?
Section 9 of the Corporations Act, 2001 (Cth) defines who can be deemed as a director of the company. As per this definition, an individual who is appointed to work as a director or an alternative director, irrespective of the name given to their position, is a director of the company. Even though an individual may not be appointed as a director, they can still act as the director of the company. This is the case of de factor director, where the individual acts in the director’s position; or the shadow director, on whose instructions, the board is accustomed to act. There has to be an existence of the duties of directors to hold the individual responsible and to safeguard the shareholders. The officers of the company are also defined through this section, and involve such executives, who hold the senior position in the company, at the board level. They have the power of affecting the business of the company, either wholly or partly. And hence, have the same duties as the directors of the company (Federal Register of Legislation, 2017).
Section 180(1) of CA puts forward the duty on the directors, along with the other officers of the company to use their authority and discharge their obligations in a manner which shows diligence and care, which any prudent individual would undertake in similar situation and with similar position. The executive directors of the company are involved in the daily management of the company. Hence, they have special responsibilities in their position; along with that they have a knowledge pertaining to the company’s operations. Alternatively, the non-executive directors indulge in part time work for the company and have regular, but not daily based involvement with the company (Australasian Legal Information Institute, 2017a).
Section 180(2) of this act provides that the directors, along with the other officers of the company, when make a business judgment rule, cannot be held accountable for the judgment undertaken by them as per the equitable, statutory or common law duty of care and diligence, where the elements can be easily established. These elements relate to taking the decision for a proper purpose and in good faith, where there is an absence of material personal interest in the issue of judgment. Moreover, there is a need to be informed about the matter on which the decision is being taken and undertaking the reasonable steps to ensure that the decision is reasonable and that the decision is in the best interest of the company (WIPO, 2015).
Through these provisions, the directors are given a protection from the personal liability in the matter where they have taken a business judgment in best interest of the company and in good faith. The rationale behind the same is that certain decisions may turn out to be loss making and other as profit making, even when both are made in a rational and honest manner (Gonski, 2015).

Section 181 of this act puts a statutory obligation on the directors, along with the other officers of the company, to act in the best interest, good faith and for proper purpose, while using their authority and discharging their obligations (Armstrong Lawyers, 2007). For establishing what can be deemed as interest, good faith or the proper purpose, the approach of a reasonable individual in same situation is undertaken. For instance, when a conflict of interest occurs and the directors deals with the matter on behalf of the company also, and fails to disclose the material interest, a breach of this section would take place (ICNL, 2017).
As per section 182 of CA, the employees and the officers are prohibited from using the position in the company, which is detrimental for the company or which results in an advantage being gained for them or for someone else. Section 183 contains the provisions regarding the proper use of information. as per this section, the officers and directors of the company are forbidden from making a misuse of the information of the company which is detrimental for the company or which results in an advantage being gained for them or for someone else (Plessis, ‎Hargovan and Bagaric, 2010).
Section 208 of CA provides that an approval of shareholders is needed when a financial benefit is discharged towards a related party. The only exception is when the same is done at arm’s length (IMF, 2012).
In this particular case, Adler is the director of the company as per the definition given in section 9 of the act, even though he had not been appointed as being an officer or director of the company. The decision making on part of Adler can be seen from his role in the subsidiary, the holding as being the director and as being the investment committee’s member and his decisions impact the business of the company. He was constantly informed about the fundamental of the business, which made him the director of the company (Australasian Legal Information Institute, 2017b).
William was the HIH and HIHC’s managing director and there was a contravention of provisions of 180(1) on his part. This is because he failed to protect HIHC while the loan was being given to PEE. HIH’s finance director Fodera breached this section as he did not discuss the proposal for giving the loan to the amount to $ 10 million to PEE, or to the investment committee and board of HIH. So, being the executive directors of the company, there was a breach on part of William and Fodera, as they both fell short in carrying their role in a proper manner (Australasian Legal Information Institute, 2017b).
Regarding section 180(1), there had been a breach on part of Williams, Fodera and Adler as they failed to take the requisite care. Moreover, reliance could not be made by the three of them as per section 180(2) of this act. This is because for Adler, this rule could not be applied on him. The reasons for this being his conflict of interest position, due to the decision for investing $10 million in PEE from HIHC. For Williams, this rule could not defend him as there was a failure on his part, to make certain that the proper safeguards had been applied and there was no business judgment undertaken by him for satisfying section 180(3). Even if the same is considered as a business judgment, the presence of material personal interest renders it useless. He failed to act for a proper purpose or in good faith to satisfy the obligation of section 180(2) (a) (Armstrong Lawyers, 2007). Fodera also cannot use this defense as he failed to refer transaction undertaken between PEE and HIH to the board or investment committee of HIH (Australasian Legal Information Institute, 2017b).
In this case, there was also a contravention section 181(1) as Adler did not discharge his obligations or use his authority in good faith of the company, or in the best interest of the same. This is evident from the transactions which took place in PEE, HIH and HIHC, where there was an improper use, for his personal interest (Australasian Legal Information Institute, 2017b).

There was also a contravention of section 182 here on part of Adler. This stemmed from the arrangement made to HIHC to PEE regarding the $10 million loan, which was later on used for making an acquisition of the shares of HIH from the stock market. The sole purpose of undertaking this transaction was to support the increase of price in the shares of HIH and to later sell the same owned by Adler Corporation, before these could be sold off by PEE. This resulted in a total loss of investment on part of PEE regarding the share of HIH (Australasian Legal Information Institute, 2017b).
Adler has made an improper use of his position by being HIH’s and PEE’s director, and the officer of HIHC for putting Adler Corporation in an advantageous position. There was also a breach on part of Williams for being director in HIHC and HIH as per section 182 for helping Adler in putting Adler Corporation in an advantageous position. The reason was that the loan payment was made in absence of the approval of investment committee of HIH, which was required on his part as per the investment guidelines of HIH (Australasian Legal Information Institute, 2017b).
Adler wrongly used his position as being PEE’s director for the acquisition of unlisted capital from Adler Corporation at a cost price where an independent valuation was not taken for these ventures. Due to the success of these transactions, both Adler Corporation and Adler were able to exclude themselves from the business operations which could be deemed as commercially unviable. Adler was aware about the cash flow problems which were being faced by these businesses and that each one of these had a major risk of collapsing ultimately. There was also a failure on part of Adler to disclose his personal interest to the board of Williams and Fodera. There was also a misuse of the information of the company, so section 183 was also breached (Australasian Legal Information Institute, 2017b).

The transaction undertaken by Adler did not attain a shareholder approval as per section 208 of this act. Also, the same could not fulfill the exception of being at arm’s length. Hence, all three, i.e., Fodera, Adler and Williams breached this section of the act too (Segalla, 2017).
Conclusion
To summarize, the directors and other offices, in this case, failed to fulfill the provisions of the CA. And hence, deserve appropriate penalties, as levied by the court of law.

References
Armstrong Lawyers. (2007) Directors’ Duties. [Online] Armstrong Lawyers. Available from: https://www.vcta.asn.au/documents/item/400 [Accessed on: 30/04/17]
Australasian Legal Information Institute. (2017a) Corporations Act 2001. [Online] Australasian Legal Information Institute. Available from: https://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions [Accessed on: 30/04/17]
Australasian Legal Information Institute. (2017b) ASIC v Adler and 4 Ors [2002] NSWSC 483 (30 May 2002). [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2002/483.html?stem=0&synonyms=0&query=asic%20v%20adler [Accessed on: 30/04/17]
Australian Institute of Company Directors. (2017) The AdlerWilliams cases on appeal Law Reporter. [Online] Australian Institute of Company Directors. Available from: https://www.companydirectors.com.au/director-resource-centre/publications/company-director-magazine/2000-to-2009-back-editions/2004/february/the-adlerwilliams-cases-on-appeal-law-reporter [Accessed on: 30/04/17]
Baxt, R. (2007) Duties and Responsibilities of Directors and Officers. 19th ed. Sydney, NSW: The Australian Institute of Company Directors.
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 30/04/17]
Gonski, D. (2015) I Gave a Gonski: Selected Speeches. London: Penguin UK.
Hooper, M. (2011) The Business Judgment Rule: ASIC v Rich and the reasonable-rational divide. [Online] Bond University. Available from: https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1021&context=cgej [Accessed on: 30/04/17]
ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 30/04/17]
IMF. (2012) Australia: Basel Core Principles for Effective Banking Supervision—Detailed Assessment of Observance. Washington DC: International Monetary Fund.
Justis. (2017) ASIC v Adler & 4 Ors 2002. [Online] Justis. Available from: https://app.justis.com/case/asic-v-adler-4-ors/overview/c5CJn0CdnXWca [Accessed on: 30/04/17]
Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, MA, USA: Edward Elgar.
Plessis, J.J.D., Hargovan, A., and Bagaric, M. (2010) Principles of Contemporary Corporate Governance. 2nd ed. Cambridge: Cambridge University Press.
Segalla, S. (2011) Checklist for directors’ duties. [Online] Find Law. Available from: https://www.findlaw.com.au/articles/1303/checklist-for-directors-duties.aspx [Accessed on: 30/04/17]
WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 30/04/17]

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