Adler v Australian Securities and Investments Commission - [2003] NSWCA 131

NEW SOUTH WALES COURT OF APPEAL

CITATION: Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131

FILE NUMBER(S):
40538/02
40556/02

HEARING DATE(S): 17, 18, 19, 20, 21, 24, 25, 26, 27 March 2003

JUDGMENT DATE: 08/07/2003

PARTIES:
Rodney Stephen Adler and Adler Corporation Pty Ltd - Appellants in matter No 40538/02
Raymond Reginald Williams - Appellant in matter No 40556/02
Australian Securities and Investments Commission - Respondent in both matters

JUDGMENT OF: Mason P Beazley JA Giles JA

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): SC 2753/01

LOWER COURT JUDICIAL OFFICER: Santow J

COUNSEL:
B W Walker SC, I M Jackman SC - Mr Adler & Adler Corporation Pty Ltd
P D Crutchfield - Mr Williams
R B Macfarlan QC, P Durack, A J Abadee - ASIC

SOLICITORS:
Gilbert + Tobin - Mr Adler & Adler Corporation Pty Ltd
Arnold Bloch Leibler - Mr Williams
Jan Redfern, Australian Securities & Investment Commission - ASIC

CATCHWORDS:
CORPORATIONS ACT - CONTRAVENTIONS OF CIVIL PENALTY PROVISIONS - orders for compensation and pecuniary penalties and disqualification from managing corporations - whether error shown in the trial judge's findings of contraventions - consideration of appellate review of first instance findings - whether findings paid regard to matters outside the plaintiff's pleaded and particularised case - consideration of functions of pleadings and particulars - to ensure procedural fairness -- CONTRAVENTIONS OF S208 OF THE ACT RELATING TO GIVING A FINANCIAL BENEFIT TO A RELATED PARTY - whether payment of money to related party as loan or held on trust - if held on trust whether a bare trust for payer - in any event was giving a financial benefit - financial benefit not on reasonable arms length terms - no error in findings - INVOLVEMENT IN THE CONTRAVENTIONS OF S208 - whether necessary to know financial benefit was given otherwise on reasonable arms length terms - sufficient to know facts whereby financial benefit was given otherwise than on reasonable arms length terms - CONTRAVENTIONS OF S260A OF THE ACT RELATING TO A COMPANY GIVING FINANCIAL ASSISTANCE TO ACQUIRE ITS SHARES - same payment of money - whether material prejudice to the company - whether opinion evidence of material prejudice properly admitted - no error in holding that opinion wholly or substantially based on witness's experience - even without the opinion evidence, material prejudice whether or not money held on trust - no error in findings - INVOLVEMENT IN THE CONTRAVENTIONS OF S260A - whether plaintiff must prove knowledge of facts constituting material prejudice to the company - not necessary - in any event there was knowledge - CONTRAVENTIONS OF SS180, 181, 182 AND 183 OF THE ACT RELATING TO DIRECTOR'S DUTIES - same payment of money and use of the money in various ways - whether opinion evidence that conduct was contrary to the provisions properly admitted - again no error in holding - no error in trial judge's findings of contraventions of ss180, 181, 182 - but conduct alleged and proved did not constitute contravention of s183 - JONES V DUNKEL INFERENCES - whether available in civil penalty proceedings - are civil proceedings and inferences available - were available on the facts - RULES OF PROSECUTORIAL FAIRNESS - whether applied so that plaintiff obliged to call a material witness - did not apply - in any event no miscarriage if witness not called - CAUSATION OF LOSS TO THE COMPANY PAYING THE MONEY - necessity to show company would not have paid if director's duties fulfilled - whether analogy with claims against defaulting fiduciaries - not analogous and must show causation in fact - on facts no error in finding of causation - LOSS THROUGH LOSS OF USE OF MONEY - whether analogy with claims against defaulting fiduciary - not analogous and must show loss in fact - different interest rate to calculate loss from that used by trial judge - PECUNIARY PENALTIES - trial judge's orders affirmed - DISQUALIFICATIONS - whether can make order as to some corporations only - order is as to management of corporations and can not do so - in any event trial judge's orders affirmed.

LEGISLATION CITED:

DECISION:
IN THE APPEAL BY MR ADLER AND ADLER CORPORATION: (1) Appeal allowed in part; (2) Vary declarations 3 and 4 made on 27 March 2002 by adding before "182(1)" the word "and" and deleting the words and figures "and 183(1)"; (3) Direct that within 21 days the parties calculate the compensation payable to HIH Casualty and General Insurance Ltd in accordance with the reasons of this Court and advise the Registrar of the sum calculated; (4) Vary order 7 made on 6 June 2002 by deleting the sum of $7,986,402 and substituting the sum advised to the Registrar; (5) Liberty to apply in the event of disagreement as to the calculation; (6) Appeal otherwise dismissed; (7) Appellants pay the respondent's costs. IN THE APPEAL BY MR WILLIAMS: (1) Direct that within 21 days the parties calculate the compensation payable to HIH Casualty and General Insurance Ltd in accordance with the reasons of this Court and advise the Registrar of the sum calculated; (2) Vary order 7 made on 6 June 2002 by deleting the sum of $7,986,402 and substituting the sum advised to the Registrar; (3) Liberty to apply in the event of disagreement as to the calculation; (4) Appeal dismissed; (5) Appellant pay the respondent's costs.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40538/02
CA 40556/02
ED 2753/01
MASON P
BEAZLEY JA
GILES JA
Tuesday 8 July 2003

ADLER & ANOR
v
AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

WILLIAMS v AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

Judgment

MASON P: I agree with Giles JA.
BEAZLEY JA: I agree with Giles JA.
GILES JA: The Australian Securities and Investments Commission (“ASIC”) brought proceedings against Mr Rodney Adler, Adler Corporation Pty Ltd (“Adler Corporation”), Mr Ray Williams and other persons alleging contraventions of sections of the Corporations Law. When the Corporations Act 2001 (C’th) (“the Act”) came into force the proceedings were taken to have been brought under its corresponding provisions (see s 1383). These are appeals by Mr Adler, Adler Corporation and Mr Williams from declarations that they contravened sections of the Act, orders that they pay compensation and pecuniary penalties, and in the cases of Mr Adler and Mr Williams orders that they be disqualified from managing corporations for significant periods.
The declarations of contravention were made pursuant to s 1317E of the Act, which provides that a Court must make a declaration of contravention if satisfied that a person has contravened one of a number of identified sections. The sections are described as civil penalty provisions, and include those next mentioned.
The contraventions found involved a variety of transactions, and can be grouped as follows.
First, it was found that Mr Adler, Adler Corporation and Mr Williams contravened s 209(2) of the Act because they were involved in contraventions by HIH Insurance Ltd (“HIH”) and HIH Casualty and General Insurance Ltd (“HIHC”) of s 208. Section 208 is concerned with a public company or an entity controlled by the public company giving a financial benefit to a related party of the public company. The transaction was the payment of $10,000,000 by HIHC to Pacific Eagle Equity Pty Ltd (“PEE”).
Secondly, it was found that Mr Adler, Adler Corporation and Mr Williams contravened s 260D(2) of the Act because they were involved in contravention by HIHC of s 260A. Section 260A is concerned with a company financially assisting a person to acquire shares in the company or a holding company of the company. The transactions were the payment of the $10,000,000 by HIHC to PEE and its use in part for the purchase by PEE of shares in HIH.
Thirdly, it was found that Mr Adler contravened ss 180(1), 181(1), 182(1) and 183(1) of the Act and that Adler Corporation contravened ss 181(2), 182(2) and 183(2) because it was involved in the corresponding contraventions by Mr Adler. Sections 180-183 are concerned with the duties of directors and other officers of corporations, essentially care and diligence (s 180), good faith and proper purpose (s 181), proper use of position (s 182) and proper use of information (s 183). Contraventions were found in relation to Mr Adler’s directorships of HIH and PEE and his position as an officer of HIHC. The transactions were the payment of the $10,000,000 by HIHC to PEE; its use in part for the purchase by PEE of shares in HIH; its use in part to acquire from Adler Corporation shares in dstore Ltd (“dstore”), Planet Soccer International Ltd (“Planet Soccer”) and Nomad Telecommunications Ltd (“Nomad”); and its use in part in loans to companies and a trust with which Mr Adler was associated, morehuman Pty Ltd (“morehuman”), Pacific Capital Partners Pty Ltd (“PCP”), Intagrowth Fund No 1 (“Intagrowth”) and PCP Ensor No 2 Pty Ltd (“PCP Ensor”).
Fourthly, it was found that Mr Williams contravened ss 180(1) and182(1) of the Act and that Mr Adler contravened s 182(2) because he was involved in the corresponding contravention by Mr Williams. Contraventions were found in relation to Mr Williams’ directorships of HIH and HIHC. The transaction was the payment of the $10,000,000 by HIHC to PEE.
The orders for payment of compensation were made pursuant to s 1317H of the Act, which provides that a person may be ordered to compensate a corporation for damage suffered by the corporation if the person has contravened a civil penalty provision and the damage resulted from the contravention. It was found that HIHC had suffered loss of $7,986,402, and each of Mr Adler, Adler Corporation and Mr Williams was ordered to pay it that amount.
The orders for payment of pecuniary penalties were made pursuant to s 1317G of the Act, which relevantly provides that a person may be ordered to pay to the Commonwealth a pecuniary penalty if a declaration of contravention by the person has been made and the contravention materially prejudices the interests of the corporation or is serious. It was ordered that Mr Adler and Adler Corporation pay pecuniary penalties of $450,000 and that Mr Williams pay a pecuniary penalty of $250,000.
The disqualification orders were made pursuant to ss 206C and 206E of the Act. Section 206C provides that a person may be disqualified from managing corporations if a declaration is made under s 1317E that the person has contravened a civil penalty provision and the Court is satisfied that the disqualification is justified. Section 206E relevantly provides that a person may be disqualified from managing corporations if he has at least twice contravened the Act while an officer of a body corporate and the Court is satisfied that the disqualification is justified. It was ordered that Mr Adler be disqualified from managing corporations for twenty years and that Mr Williams be disqualified from managing corporations for ten years.
Material to some of the submissions in the appeals, while Mr Adler and Adler Corporation were represented by counsel throughout the hearing, Mr Williams was not. Mr Williams was represented by counsel at the commencement of the hearing. His counsel informed the trial judge that, for financial and other reasons, Mr Williams “will not be represented during the plaintiff’s case” but wished “to have the right to call evidence” and sought “to make submissions about what the plaintiff’s evidence should mean for any findings the court makes” and if ASIC was successful “to make submissions as to what is the appropriate form of relief”. He said, “It is proposed that the Second Defendant, through his legal advisors, will monitor the proceedings, read the transcript and reserves the right to come back, as was discussed on the last occasion.” Mr Williams did not call evidence, but through counsel put submissions as to liability and as to relief.
The findings of contravention were made in reasons published on 14 March 2002 (“the liability judgment”), after a hearing over some weeks in late 2001. The declarations were made on 27 March 2002 after a further hearing on that day and for reasons published on that day (“the declarations judgment”). The orders were made on 5 and 6 June 2002 after a further hearing in early May and for reasons published on 30 May 2002 (“the orders judgment”). Unless otherwise sourced, references to the trial judge’s reasons will be to the liability judgment.
The scope of the appeal
Much of the evidence at the trial was documentary. Affidavit evidence was given of actions, conversations, states of knowledge, reactions and opinions, and many of the deponents were cross-examined. Neither Mr Adler nor Mr Williams gave evidence. A deal of the non-documentary evidence required assessment for its true import and for its reliability or weight. The evidence as a whole was voluminous and detailed.
The trial judge’s findings were correspondingly detailed, and included inferences and characterisations from facts which were beyond dispute and from facts which were arrived at upon assessment of the evidence. The appellants challenged many of the findings, particularly those arrived at upon assessment of the evidence and by the inferences and characterisations.
It is necessary that the appellants demonstrate factual error on the part of the trial judge. The observations of Santow JA, with which Meagher and Beazley JJA agreed, in Jones v Bradley [2003] NSW CA 81 at [113]-[116] are pertinent to the appellants’ challenges to the findings -
“113       … In Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of NSW (supra), Heydon JA delivering judgment for the court gave a detailed exposition of the law in this area. Many of his comments have particular application here, as the Appellant is seeking the Court to undertake a detailed review of all of the evidence in the case. Heydon JA held at [60] that the Appellant “bore the burden in the appeal not merely of showing that on the facts her contentions might be available or even correct, but of showing that the Trial Judge’s conclusions ought to be reversed”. Heydon JA then favourably referred to the Full Federal Court decision of Minister for Immigration, Local Government and Ethnic Affairs v Hamsher (1992) 35 FCR 359 at 369 where it was held:
‘ ... the court is not obliged to proceed to make new findings of fact on all relevant issues and discharge the judgment appealed from if those findings differ from those of the Trial Judge and do not support the judgment. The court must be satisfied that the judgment of the Trial Judge is erroneous and it may be so satisfied if it reaches the conclusion that the Trial Judge failed to draw inferences that should have been drawn from the facts established by the evidence. The court is unlikely to be satisfied if all that is shown is that the Trial Judge made a choice between competing inferences, being a choice the court may not have been inclined to make but not a choice the trial judge should not have made.’
114         In dismissing the appeal in Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of NSW, Heydon JA highlighted that the Appellant’s approach was inadequate to warrant appellate court interference with the judgment at first instance. The impugned approach was characterised by His Honour as [61]:
‘The Plaintiff's approach sometimes invited the court to survey for itself, afresh, all the evidence on particular points and arrive for itself at particular conclusions about them, without essaying the necessary task of positively demonstrating that the Trial Judge was wrong. The Plaintiff's approach also paid insufficient regard to the difference between, on the one hand, pointing to difficulties in the Defendants' path of establishing matters which they wished to contend for and, on the other, pointing to sufficient evidence to permit an inference to the contrary of the Defendants' contention.’
115         Heydon JA then favourably quoted from Biogen Inc v Medeva plc [1997] RPC1 at 45 per Lord Hoffman:
‘The need for appellate caution in reversing the judge's evaluation of the facts is based upon much more solid grounds than professional courtesy. It is because specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance (as Renan said, la [vérité] est dans une nuance), of which time and language do not permit exact expression, but which may play an important part in the judge's overall evaluation. It would in my view be wrong to treat Benmax as authorising or requiring an appellate court to undertake a de novo evaluation of the facts in all cases in which no question of the credibility of witnesses is involved.’
116         Thus it is clear that for the Appellant to succeed it is necessary that the Appellant demonstrate more than that there were alternate findings (which this Court may or may not prefer) available. The appellant must demonstrate, positively, that the Trial Judge in making the findings that he did was wrong.”
Where the facts are undisputed, or are established by the findings of the trial judge, this Court will give respect and weight to the conclusions of the trial judge, and the demonstration of error on the part of the trial judge -
“ … may not be straightforward where findings or conclusions involve elements of fact, degree, opinion or judgment or when the findings on conclusions in question can be seen as made with the advantage of hearing the evidence in its entirety, presented as it unfolded at the hearing and adjournments for reflection and mature contemporaneous consideration and assessment, in particular in a long and complex hearing … “. (Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at [24]).
As well, the appellants contended that the trial judge fell into legal error in a number of respects – in some of the tests for contravention of the Act, in relation to causation of loss, in admission of evidence, and in other ways. They particularly contended that the trial judge had taken into account, in finding the contraventions and in the orders for payment of pecuniary penalties and disqualification, matters outside ASIC’s pleaded case against them, and that in law many of the findings of fact made by the trial judge were not open to him on the pleaded case.
Thus the scope of the appeal was considerable. There were canvassed in this Court, for one reason or another, most of the trial judge’s findings, including those involving assessment, inference and characterisation, and most of his reasoning to his conclusions. It was an extensive exercise. These reasons must go to the facts, inferences and characterisations at some length, and explore also at some length the trial judge’s arrival at his conclusions.
The Adler appellants’ submissions were to a considerable extent adopted by Mr Williams, as was proper to avoid repetition. Some submissions were directed to the separate positions of Mr Adler and Adler Corporation and of Mr Williams. In these reasons I generally refer to Mr Adler, Adler Corporation and Mr Williams by name. Where there is reference to the appellants, it is either to all of Mr Adler, Adler Corporation and Mr Williams or, if the context so requires, only the Adler appellants, and where there is reference to the appellant it is to Mr Williams.
The transactions and some of their context
HIH was a listed public company conducting the business of an insurer. Mr Williams was one of the founders of the insurance business, and was a director of HIH from 2 December 1988 to 15 December 2000. He was Chief Executive Officer at all relevant times until about 12 October 2000.

In January 1999 HIH completed a takeover of FAI Insurances Ltd (“FAI”), a company also conducting the business of an insurer in which Mr Adler had a substantial interest. Following the takeover, Mr Adler became a director of HIH on 16 April 1999. He remained a director until 26 February 2001.
The other directors of HIH during 2000 were Mr Charles Abbott, Mr Terrence Cassidy (to 12 October 2000), Mr Geoffrey Cohen, Mr Dominic Fodera (to 12 October 2000), Mr Justin Gardener, Mr Michael Payne (to 12 September 2000), Mr Robert Stitt, Mr George Sturesteps (to 12 September 2000) and Mr Hermann Wein. Mr Cohen was Chairman of the Board of Directors. Mr Cassidy held the office of Managing Director, Australia, and Mr Fodera that of Financial Director.
HIHC was a public company conducting the business of an insurer. At all material times it was a wholly owned subsidiary of HIH. Mr Williams was a director of HIHC from very early times until 15 March 2001. The other directors of HIHC during 2000 were Mr Cassidy, Mr Fodera and Mr Sturesteps (until 12 September 2000). Mr Adler was not a director of HIHC, but it was found in the proceedings that he was an officer of HIHC within the extended definition in s 9 of the Act. There was no appeal from that finding.
At all material times Mr Adler was a director of Adler Corporation and the beneficial owner of one of its two issued shares. His wife Mrs Lynda Adler was the other director and beneficial shareholder. It was accepted in the proceedings that Mr Adler controlled Adler Corporation.
(a)The payment of the $10,000,000 and the purchase of shares in HIH
At all material times Mr Williams held 10,517,714 shares in HIH. After the takeover of FAI Adler Corporation held 6,922,831 shares in HIH. In June and July 1999 Adler Corporation sold 1,422,831 of its shares in on-market transactions. On 14 June 2000 it sold its remaining 5,500,000 shares in HIH to Mr Adler in an off-market transaction at $0.95 per share.
From at least the beginning of 2000 the traded price of shares in HIH was in decline. From a price at that time in the vicinity of $1.50 it fell, with some intermediate minor fluctuations, to a price in the vicinity of $1.00 as at 9 June 2000. On that day the high was $1.03, the low was $0.99, and the closing price was $1.03.
On 9 June 2000, a Friday, Mr Adler sent to Mr Williams a fax on the letterhead of Adler Corporation. Omitting salutations, it read -
“Drenmex (or one of its wholly owned subsidiaries) is an investment company with a history of share trading and would like to borrow unsecured, $10M for the purpose of venture capital and share trading.
Drenmex would like absolute discretion to invest the funds as it sees fit but would report profits and/or losses on a quarterly basis. The management of Drenmex suggests it would like to take 10% of profits to initially prove itself to HIH Management with no management fee and only after HIH receives interest on its money at 10% per annum and these profits will be calculated on a yearly basis and cumulative.
I would appreciate your timely response to this matter as it follows up on our previous discussions.”
Mr Williams responded by a fax dated the same day. It was headed “Subject: Venture Capital and Share Trading”, and read -
“Many thanks for your fax of today.
This is an issue that you and I have been discussing for some months now. As you know one of my concerns has been the approporiate [sic] level of interest and fees to be earned and incurred on such a transaction. What you propose appears to me to be fair and reasonable since no management fees will be charged to HIH.
I will therefore arrange for these funds to be transmitted to you early next week. There is one aspect which should be clarified and that is the limit on any one particular venture or share trade.”
There was no direct evidence of the previous discussions.
A much later report based on interviews with Mr Adler and Mr Williams, the Minter Ellison report dated 29 November 2000 to which reference will later be made, included -
“5.In early June 2000, Mr Adler suggested to Mr Williams that the Australian Equities Unit Trust (“Trust”) be set up with a fund of approximately $30 - $40 million and with HIH as the foundation stakeholder investing $10 million. It was envisaged that Mr Adler would attract other investors, such as Phil Green of Babcock & Brown.
6.It was intended by both Mr Williams and Mr Adler that the Trust would be totally independent from HIH, managed by Mr Adler or a related person or entity who would have complete discretion as to the type of investments to be made. At this stage, it was not envisaged by either Mr Adler or Mr Williams that PEE would trade in HIH shares.”
The first of these paragraphs reappeared in modified form in a letter from HIH to ASIC dated 22 December 2000, as a suggestion by Mr Adler to Mr Williams -
“ … that the Australian Equities Unit Trust (‘Trust’) be set up to allow HIHC opportunities that were offered to Mr Adler or related entitles. The proposed Trust was to have a fund of approximately $30-$40 million, with HIHC as the foundation shareholder investing $10 million. It was envisaged that Mr Adler would attract other investors.”
As will appear, the accuracy and reliability of the information given to Minter Ellison and taken up in the letter is questionable. The faxes said nothing of a larger fund, and were concerned with a “transaction” (Mr Williams’ fax) of Drenmex borrowing $10,000,000 which it would then invest. It is plain from later events that there was no commitment to a trust named the Australian Equities Unit Trust at this time.
As earlier noted, on 14 June 2000, the following Wednesday, Adler Corporation sold its 5,500,000 shares in HIH to Mr Adler. When on 14 June 2000 the administrative steps involved in the sale were taken did not appear.
HIH’s copy of Mr Williams’ fax bears a note in the writing of Mr Williams dated 14 June 2000 -
“Dominic [Fodera]
Please arrange for the funds to be forwarded to DRENMEX PTY LTD.
[initials]
14/6”
The evidence did not reveal any communication providing the clarification mentioned in Mr Williams’ fax, or otherwise such that Mr Adler was told at this time that the instruction to transmit the money was about to be or had been given.
Late on 14 June 2000 Mr Adler sent to Mr Williams a fax on the letterhead of Adler Corporation, reading -
“I look forward to seeing you tomorrow at 7:30 am.
For various tax, disclosure and accounting reasons, it is not appropriate to use Drenmex. The name of the company that has been incorporated is Pacific Eagle Equity Pty Limited.”
The fax was anticipatory: PEE had not been incorporated, and was incorporated on 15 June 2000. Mr Adler was its only director and Adler Corporation was the holder of its one issued share.
There was no evidence of what passed between Mr Adler and Mr Williams at the foreshadowed meeting at 7.30 am on 15 June 2000.
At 10 am on 15 June 2000 Mr Adler instructed a stockbroker at Foster Stockbroking to purchase 2,000,000 HIH shares at market in the name of PEE. 1,873,661 shares were purchased at $1.0062 per share.
At some time on the morning of 15 June 2000, although the evidence did not reveal at what time, Mr Fodera called to his office Mr William Howard, the General Manager Finance of HIH, and gave him the copy of Mr Williams’ fax of 9 June 2000 with the note in the writing of Mr Williams. He said to Mr Howard, “Bill, here is a piece of paper”, with words to the effect that Mr Williams had passed it on to him. He said, “I would like you to talk to Rodney to draw a cheque for $10,000,000. I don’t want to give this to John because it will be too hard.” Mr Howard said, “Yes, you are probably right, I shall talk to Rodney”.
There was no evidence of any communication between Mr Williams and Mr Fodera other than by the handwritten note. “John” was Mr John Ballhausen, the General Manager, Investments of HIH. Mr Howard thought that Mr Fodera did not want Mr Ballhausen to deal with the matter because of a “personality clash” between Mr Adler and Mr Ballhausen, well known within HIH. The trial judge was more specific. He concluded that the difficulty involving Mr Ballhausen was that Mr Ballhausen was seen as an impediment to making the payment. He referred to evidence that Mr Adler had a poor opinion of Mr Ballhausen’s abilities and in particular considered that he was too conservative in his investment policies, and the clash was essentially over investment approach.
Mr Howard telephoned Mr Adler. The conversation as recounted in Mr Howard’s affidavit was -
“I said: ‘Rodney, I’ve been asked to talk to you about the drawing of this cheque.’
He replied: ‘Thanks Bill. I’d like you to make it payable to Pacific Eagle Equities Pty Ltd and could you have that done today. The ten million is for venture capital and short term trading opportunities. We’ve started to purchase some shares to take advantage of the over sold situation in HIH. I need the money today for settlement.’
I said: ‘I thought, you know, that we were doing the paper work as well.’
He said: ‘We’re doing that in parallel at the same time. Minter Ellison is dealing with that issue. I have also had conversations with Ray that the trust may or may not purchase other venture capital investments that I was associated with such as dstore at cost to give them a chance to make money. The discussions with Ray have been ongoing for a period of time and Ray will look after the necessary internal procedures.’
I said: ‘I will check back with Dominic in regards to drawing the cheque today.’
He replied: ‘Do that, but I need the money today.’”
According to Mr Howard’s oral evidence, “Mr Adler also said that HIH had been making losses on the insurance side, and with investment returns that were average, that we needed to do something”.
Mr Howard did not explain why he thought HIH was “doing the paper work”, and it may be that it was only an assumption. As will be seen, Mr Adler did instruct Minter Ellison, and Mr Howard later sought unsuccessfully to have an HIH involvement in that regard.
Mr Howard spoke to Mr Fodera -
“I said: ‘Rodney wants the cheque drawn today. Did you know we had purchased some shares in HIH today and that the funds are required to settle those trades?’
He said: ‘Talk to Dr Williams about it – I don’t want to know about it.’”
Mr Howard then spoke to Mr Williams -
“I said: ‘I’ve spoken to Rodney and we’ve bought some HIH shares. And he wants the $10,000,000 to settle the trades.’
He said: ‘Go ahead, draw the cheque but make sure Rodney follows through with the documentation.’”
Mr Howard gave the fax of 9 June 2000 to Mr Doug Cubbin, Head of Accounts Payable and Management Accounting, saying “Please organise for this cheque to be drawn”. The fax also bears a note in the writing of Mr Cubbin reading -
“Catherine
Please prepare a manual cheque for $10M to these people.
Pacific Eagle Equities Pty. Ltd.
Code as follows:
060-17141.
Thanks
Doug 15/6”
A cheque was drawn on an account of HIHC with the National Australia Bank, for $10,000,000 payable to PEE, and was delivered to Mr Adler. The evidence did not show the meaning of the code. The $10,000,000 was allocated in HIH’s investments portfolio to “loans unsecured” rather than “unlisted investments”. Why that happened was not explained, but it is understandable if the person directing the allocation referred to Mr Adler’s fax of 9 June 2000.
Still on 15 June 2000, Mr Adler sent a fax to Mr Howard. It read -
“This is just to acknowledge that we received the $10,000,000 cheque today. It will be duly banked and documentation is being prepared by Minter Ellison and a draft will be forwarded to you next week.
The reason that we are seeking Minter Ellison to draw-up the legal documentation is that there are aspects like investor advisor’s license, related party transactions, etc, that we are making sure are being properly provided for.”
The cheque was banked on 15 June 2000 in an account of PEE. An Adler Corporation internal receipt voucher was generated, with the brief narration “units”. This is the first indication, albeit only internal to Adler Corporation, of the unit trust later created.
Minter Ellison were instructed on 16 June 2000, as appears from a “client opening” form of that date signed by Ms Margaret Taylor. The client was Adler Corporation. There was no direct evidence of what the instructions were.
On 16 June 2000 Mr Howard rang Mr Leigh Brown at Minter Ellison, apparently the person with whom he was accustomed to deal in relation to legal advice for HIH. Mr Howard “had a discussion with him about it and he said that he would – couldn’t do anything about it in terms of advising the company, but would make enquiries into [sic] the firm about who was drawing the documentation”; Mr Brown “advised me while he couldn’t do anything about it, if mandated, he would do so and that the firm should look to someone to get an opinion on this”. So far as the evidence showed, nothing more was done at this time to have HIH involved in Minter Ellison drawing up the legal documentation, though Mr Howard later sought to have a review by Mr Brown of what had been done.
In the period 16 to 30 June 2000 further shares in HIH were purchased by PEE on Mr Adler’s instructions, through Foster Stockbroking and later Southern Cross Equities, at prices ranging from $1.00 to $1.03 per share. The purchases were on 16 June (951,339 shares), 19 June (425,000 shares), 20 June (425,000 shares), 21 June (75,000 shares), 22 June (79,545 shares), 23 June (50,000 shares) and 30 June (45,000 shares). With the initial purchase of 15 June, 3,9924,545 shares in all were purchased for a total sum, including stamp duty and brokerage, of $3,991,856.21.
The stockbroker from Foster Stockbroking did not give evidence. The purchases on and after 20 June 2000 were through Southern Cross Equities. Mr Brent Potts of that firm gave evidence that on 20 June 2000 Mr Adler said that he thought HIH was underpriced and that he was “looking to do a short term trade in them”. He said that in giving PEE as the client Mr Adler described it as “a venture capital vehicle which has been set up principally with HIH”, and “it’s a trust arrangement and we’ve had legal advice that we can buy HIH shares”. According to Mr Potts, when the market price for HIH shares rose above $1.03 he asked Mr Adler whether he wanted to raise his limit, to which Mr Adler replied -
“No I want to be careful as the company that is buying the HIH shares is investing for a short term trade. At a $1.02/$1.03 it’s cheap but I don’t want to go any higher at the moment. When it gets higher I intend to sell”
For a time the decline in the traded price of HIH shares ceased. They were at their temporary nadir of $0.94 on 14 June 2000, with a closing price of $0.95. They were traded in the vicinity of $1.05 until the end of June 2000, then over about a week crept up to trading at around $1.20. The zenith was $1.21 on 11 July 2000, with a closing price of $1.19. Then the traded price began to decline again.
As the controller of PEE, Mr Adler was required by s 205G of the Corporations Law to give notice to the stock exchange of his “relevant interests”, in effect of PEE’s purchases of the shares, within 14 days. Mr Adler gave notifications, commencing with a notification on 19 June 2000. It was necessary that he state “the circumstances giving rise to the relevant interest”. The notifications were in the form, “Purchase of [number] shares at [$] per share on [date] in an on-market transaction”. A copy of each notification was sent by Mr Adler to Mr Frederick Lo, the Secretary of HIH and HIHC, on the day it was given to the stock exchange, and Mr Adler also sent to the Secretary of HIH letters in the form, “I hereby notify you that Pacific Eagle Equities Pty Limited (a company in which I have a relevant interest) bought [number] shares in HIH Insurance Limited on [date] at [$] per share”.
Returning specifically to 19 June 2000, on that day Mr Adler sent a fax to Mr Williams reading -
“Just a courtesy note to inform you that interests associated with myself have purchased more shares in HIH and probably over this next week, there will be numerous statements issued that I have bought many millions of shares.
To date, I have purchased over 3 million shares and I intend to purchase AUD$4.5 to $5 million worth.”
There were no other purchases answering the description in this fax, and as at 19 June 2000 PEE had purchased a little over 3,000,000 shares. The purchases to which Mr Adler referred must have been the purchases by PEE. Whatever the reason for Mr Adler writing in terms of “interests associated with myself”, the fax put Mr Williams on notice that the market was being told that the purchases, in truth not by Mr Adler using Mr Adler’s money, were of that character.
As a result of his s 205G notifications, if for no other reason, there were indeed reports that Mr Adler had bought many shares in HIH. There had been much interest in HIH’s fortunes in the financial press in the period prior to 9 June 2000. The first notification to the stock exchange brought press reports to the effect that Mr Adler was increasing his shareholding in HIH. Further consideration of this and its significance in the proceedings, to the traded share price, and otherwise, is left for later in these reasons, but Mr Williams must have been aware of the press reports and the fax of 19 June 2000 specifically drew his attention to them.
Also on 19 June 2000 Mr Rob Baulderstone, the Secretary of Adler Corporation, wrote to Minter Ellison -
“Further to our telephone conversation it would be appreciated if you could prepare a Unit Trust Deed for the Austral [sic] Equities Unit Trust. The trustee will be Pacific Eagle Equities Pty Ltd ACN 093 319 227.
The Trust is being established to manage a portfolio of shares in listed companies. There will be two classes of Units with the following rights attaching:
Class A – entitled to 10% of the net income of the Trust
Class B – entitled to 10% of the net income of the Trust
- no interest or rights in respect of the assets of the Trust.”
There was no direct evidence of the telephone conversation.
On 28 June 2000 Ms Taylor wrote to Mr Adler at Adler Corporation providing a “general overview of the issues involved in setting up an investment fund”. The letter opened “Dear Rodney” and referred to preceding discussion, but there was otherwise no evidence of the circumstances in which the advice came to be given. The letter canvassed a number of ways in which the fund could be structured “such as through a partnership, a company or a trust – onshore or offshore”, and asked for some further information “before we recommend a particular structure to you”. It is plain that the letter was a response to the instruction as formulated in Mr Baulderstone’s letter.
On 5 July 2000 Ms Taylor wrote to Mr Adler, copied to Mr Baulderstone, advising “the following general issues which arise in setting up the Australian Equities Unit Trust”. The letter noted that “[o]ther relevant issues were discussed in our earlier advice dated 28 June 2000”. The general issues were the relevant interests provisions of the Corporations Law, conflicts of interest, insider trading and licensing to carry on a securities business. The advice was in broad terms, but presupposed that there was to be a unit trust and that Mr Adler would control the trustee. There was no evidence of the circumstances in which this further advice came to be given.
A deed poll constituting the Australian Equities Unit Trust (“the AEUT”) was executed by PEE as the trustee, with Mr Adler as the signatory attesting its seal, on 7 July 2000. The document had been prepared by Minter Ellison. Units gave the unit holders an undivided beneficial interest in the trust property as a whole. There were A class units and B class units. The A class units carried entitlements to ten per cent of the distributable income and to the balance of income and capital after the entitlements of the B class units were satisfied. The B class units carried no entitlements to any interest in the trust property except for the right to receive ninety per cent of the distributable income and an amount on termination calculated according to a formula. Redemption could be requested only after three years, and required the trustee’s agreement. The trust deed left investment policy and management of the trust wholly in the hands of the trustee, and the trustee could deal in any capacity with any related company or association. Voting at meetings gave one vote to each unit holder on a show of hands and one vote to each unit on a poll. The trustee could be compulsorily retired only by a vote of all unit holders.

It will be recalled that Mr Adler’s initial fax of 9 June 2000 included that Drenmex would “take 10% of profits”. PEE had replaced Drenmex. The trust deed said nothing of PEE taking 10 per cent of the profits, although stating that the trustee was entitled to “such fee as is agreed between the Trustee and the Holders from time to time” (cl 26). There was no evidence of agreement. However, in a memorandum dated 18 August 2000 from Mr Adler to Mr Howard and the two other persons whose entities held A class units in the AEUT, sent by way of a “Quarterly Report” on the performance of the AEUT, it was said “At this stage, over AUD$10 million dollars [sic] has been invested and, it is our intention to grow the fund. Everyone is aware of the fee arrangement in relation to PEE”. There was nothing to suggest any arrangement other than the 10 per cent of profits arrangement, and it seems that it was carried through.
Unit certificates were issued dated 7 July 2000 for four A class units in the AEUT. Three A class units were issued to Adler Corporation on subscription of $75,000 and one A class unit was issued to Sofisco Nominees Ltd on subscription of $25,000.
On 7 July 2000 Mr Adler sent a fax to Mr Howard. It was headed “Re: Australian Equities Unit Trust”, and read -
“I refer to HIH’s investment in the above named Trust, in mid-June, and now enclose your application form for your ‘B’ Class Unit.
As the only holder of ‘B’ Class Unit, you are entitled to 90% of the net income of the Trust.
It would be appreciated if you would complete the application form attached and return it to me as soon as possible. The Trust will keep you informed as to the range and type of investments made on a regular basis.”
The application form was addressed to PEE and, after spaces for details of the applicant company, read -
“Note: Defined terms used in this letter have the same meaning as when used in the deed constituting the Australian Equities Unit Trust (“Trust”) executed by Pacific Eagle Equities Pty Limited as Trustee on 7 July 2000 (“Trust Deed”).
We hereby irrevocably and unconditionally apply for 1 “B” Class Unit in the Trust at an Issue Price of $10,000,000 per Unit.
We undertake to pay the sum of $10,000,000 (being the aggregate Issue Price for the Units subscribed by us) in accordance with clause 7 of the Trust Deed in cleared funds to the Trustee before any Units are issued to us.
We warrant and confirm that this application for Units and any subsequent issue of Units to us falls within one of the excluded categories set out in section 708 of the Corporations Law and does not contravene the securities laws of the jurisdiction to which we reside or have an address.
We undertake that we have not applied for the Unit(s) specified in this Application for purposes of selling or transferring or granting, issuing or transferring interests in or options or warrants over such Units and that during the 12 month period after the allotment of the Unit or Units applied for in this Application, we will not make any offer for sale of any or all of the Units with the purpose of the person to whom the Unit(s) are to be sold selling or transferring or granting, issuing or transferring interests in, or options or warrants over such Units.
We agree to hold the Units issued to us subject to the Trust Deed, as amended from time to time.
We authorise you to register us as the Holder of the Unit(s) allotted to us in the Register under the name and address indicated above.”
On 12 July 2000 the application form, completed with particulars of HIHC as the applicant company, was signed by Mr Cassidy and Mr Lo. There was no evidence of the circumstances in which they came to sign it. A unit certificate dated 12 July 2000 for one B class unit was issued to HIHC on subscription of $10,000,000. The $10,000,000 paid on 15 June 2000 was plainly treated as the subscription monies.
There was no evidence that the terms of the AEUT were made known to HIH or HIHC at this time. A copy of the trust deed was provided to Mr Williams on 21 July 2000, see below. HIHC became a minority unit-holder, although by far the major subscriber to the trust. The terms of the trust deed effectively locked in a minority unit-holder for three years and left it entirely in the hands of the trustee, in practice meaning Mr Adler, and the majority unit-holders.
A unit certificate dated 14 July 2000 for one A class unit was issued to Castlecrag Investments No 2 Pty Ltd (“Castlecrag”) on subscription of $25,000. Castlecrag was a company of Mr Frank Wolf, who will be mentioned later in connection with the loans to companies associated with Mr Adler. No further units were issued.
As appears from the letter next mentioned, at some time in July Mr Howard asked that documents concerning the establishment of the AEUT be provided to him so that he could have them reviewed by Mr Brown of Minter Ellison.
On 21 July 2000 Mr Adler wrote to Mr Williams, under a heading referring to the AEUT -
‘I enclose copies of Letters of Advice dated 28 June 2000 and 5 July 2000 from Ms Margaret Taylor of Minter Ellison regarding the establishment of the fund and the tracing of relevant interests under the Corporations Law, together with a copy of the Trust Deed.
As discussed, the Trust was structured to ensure that HIH did not have a relevant interest in the assets of the Trust. As provided in the Trust Deed, the B Class unit held by HIH Casualty and General Insurance Limited carries no entitlements to any interest in the Trust Property except for the right to receive:-
1.90% of all Distributable Income; and
2. an amount on Termination equal (or as near as possible) to the Redemption Price.
The letter of advice from Margaret Taylor, who is Chairman of Minter Ellison, states that a holder of more than 20% of the votes in the Trust will be deemed to have the same relevant interests as the Trust. There are five ‘A’ Class Units and one ‘B’ Class Unit on issue and on the basis of Margaret’s advice HIH will not be deemed to have the same relevant interest as the Trust as it holds less than 20% of the votes in the Trust.
Bill Howard contacted my office and requested that all documents and advice regarding the establishment of the Trust be forwarded to him as he wished to have them reviewed by Leigh Brown, also at Minter Ellison. I appreciate the desire to have a legal sign-off, but professional jealousies can exist within firms and it would be a shame if the current advice is changed in any way. I would suggest that the advice we have already received from Minter Ellison covers the issues that you and I have discussed.”
There was no evidence of discussion as referred to in the second and last paragraphs of the letter, or evidence of a direct response to Mr Howard’s request from Mr Adler or his office, from Mr Williams, or from anyone else. Mr Howard’s request was not fulfilled, and there the matter rested until about October 2000, see later in these reasons. This was a rather extraordinary letter, in that it contemplated that a review might bring adverse advice and sought to discourage review.
The traded price of HIH shares fell after mid-July 2000. It hovered at a little over $1.00 during August, then fell to a closing price of $0.99 on 8 September. There was a marked drop on 13 September, on that day the high being $0.98 and the low $0.80 and the closing price $0.82; then again on 14 September when a large volume was traded with the high $0.71, the low $0.53 and the closing price $0.58. Further decline followed, to below $0.50 by the end of September, to a little over $0.30 by the end of October, and with an intermediate rally to a closing price of $0.24 at the end of December.
Commencing on 13 September 2000, Mr Adler began to sell his shares in HIH. The sales prior to 26 September 2000 were -

Date	Number	Price
13 September	624,945	$0.85
14 September	775,055	$0.65
15 September	1,100,000	$0.59
19 September	1,170,875	$0.48
20 September	329,125	$0.49
4,000,000

On 26 September 2000 Mr Adler sent to Mr Williams, copied to Mr Howard, a fax dated 25 September 2000 on the letterhead of Adler Corporation. The fax was headed “Re: Reorganisation of Unit Trust Investment”, and was accompanied by a balance sheet for the AEUT as at 25 September 2000. It included -
“Further to our conversation, we have decided to reorganise the Trust Investment and for that to be carried out to the maximum advantage of HIH and Adler Corporation, I propose the following. The rationale for the reorganisation is that the environment has changed.
1.I will take Bill Howard through all of the investments – why they were made and how to manage them;
2.As HIH is the largest holder, subject to your permission and that of the other unitholders, I will purchase the HIH shares currently held in the Trust at the prevailing market price for any large line of stock … “
There was no evidence of the conversation between Mr Adler and Mr Williams.
The proposed purchase of the HIH shares by Mr Adler did not occur. Also on 26 September 2000, Mr Adler sent a hand-delivered letter to Mr Williams saying that “after discussion with various individuals, including yourself, I have decided that it would be cleaner and simpler to sell the HIH shares in the market rather than purchase them myself”. There was no evidence of the discussions.
On 26 September 2000 Mr Adler gave instructions whereby PEE sold its 3,924,545 shares in HIH at $0.48, realising a gross sum of $1,883,781.60. PEE obtained proceeds of sale of $1,870,595.10 net of stamp duty and brokerage. PEE’s net loss on the HIH shares was $2,102,802.74.
Thereafter Mr Adler sold the balance of his shareholding in HIH -

Date	Number	Price
3 October	169,301	$0.48
3 October	180,699	$0.48
4 October	400,000	$0.48
4 October	78,441	$0.49
5 October	121,559	$0.49
18 December	550,000	$0.26
1,500,000

Mr Williams did not sell any of his shares in HIH.
(b) The purchases of shares from Adler Corporation
As at June 2000 Adler Corporation held 99,404 shares in dstore, having acquired them in February 2000 at a cost of $500,002.12; 1,000,000 shares in Planet Soccer, having acquired them in March 2000 at a cost of $820,748.52; and 3,627,143 shares in Nomad, having acquired them in August 1999 at a cost of $2,539,000.10.
On 10 July 2000 Mr Adler sent a memorandum on a PEE letterhead to Mr Williams and Mr Howard. It read -
“As the fund being managed by Pacific Eagle Equities Pty Limited (PEE) is to be a dynamic/non risk adverse fund, it should be noted that apart from subsequent investments made on the formation of the trust, I will place two of my own investments, being dStore [sic] and Planet Soccer into the fund at my original cost. Both would be valued at higher than that level, I am reliably informed.
I will furnish further details through the normal reporting mechanisms when the fund reports.”
There was no evidence of any response to this memorandum, or of further communications concerning placing dstore and Planet Soccer into the fund.
The memorandum of 18 August 2000 to Mr Howard and the two other persons whose entities held A class units in the AEUT was headed “Re: Quarterly Report”, and amongst other things described the AEUT’s “investments”. The description included -
“INVESTMENTS
At this time PEE as [sic] the following investments:
1.HIH  3,924,545 publicly listed shares at an average price of AUD$1.02
2.dStore  AUD$500,000
3. Planet Soccer   $US$500,000
…
DETAILS
1. HIH  Self-explanatory, publicly listed company.
2.dStore*  This is an online department store that intends to be listed next year.
Has very good backing from LookSmart and various other known venture capitalists.
3.Planet Soccer*              This is an e-commerce site that provides soccer content to the sport’s one-billion –plus international fans. The site is positioned to capitalise on the resulting e-commerce and other revenue opportunities that arise out of this sport.
Hope to list this year.
…
* Please note these two interests were purchased from Adler Corporation as per my original letter at the inception of the fund.”
The “original letter at the inception of the fund” was presumably the memorandum of 10 July 2000.
In fact neither dstore nor Planet Soccer had been placed into the fund as at 18 August 2000. On 25 August 2000 Mr Adler caused PEE, as trustee of the AEUT, to acquire Adler Corporation’s shares in dstore for $500,212. On the same date he caused PEE, as trustee of the AEUT, to acquire Adler Corporation’s shares in Planet Soccer for $820,748.52.
In Mr Adler’s fax of 25 September 2000 to Mr Williams concerning reorganisation of the trust investment he stated, “4. The Trust will purchase from Adler Corporation its interest in Nomad Technologies”. The company so referred to was Nomad. So far as the evidence showed this was the first mention of Nomad, and there was no evidence of any response to the bald statement that the purchase would take place.
On 26 September 2000 Mr Adler caused PEE, as trustee of the AEUT, to acquire Adler Corporation’s shares in Nomad for $2,539,000.
The shares in each of dstore, Planet Soccer and Nomad eventually proved all but worthless to PEE. The shares in dstore were disposed of by PEE in November 2000 for about $50,000, in exchange for shares in Harris Scarfe Holdings Ltd. Planet Soccer was still in existence in mid-2001, but valuation evidence gave its shares a nil value. Nomad went into receivership on 18 January 2001 and into liquidation on 22 January 2001. PEE lost on the purchases of the shares from Adler Corporation a total of about $3,810,000.
(c)The loans
On 26 July 2000 Mr Adler caused PEE, as trustee of the AEUT, to lend $160,000 to morehuman. Mr Adler was a director and the secretary of morehuman. Adler Corporation held 19.6 per cent of the shares in the company. The loan was recorded in a letter of 26 July 2000 to Mr Gassy Bayni, the other director of morehuman, as “for three (3) weeks” and “to meet short-term working capital commitments and is very clearly a loan that must be repaid when any new capital or other loan funds come into morehuman”. It was guaranteed by Mr Bayni by his signing a copy of the letter. There was no reference to interest. There was no other documentation for the loan.
Prior to the loan by PEE, Adler Corporation had lent $250,000 to morehuman. Something should be said of the recovery of the Adler Corporation loan as well as the PEE loan.
Mr Baulderstone wrote to Mr Bayni on 24 August 2000, on behalf of PEE, noting that the PEE loan had not been repaid and requiring payment from Mr Bayni as guarantor.
On 7 September 2000 Mr Adler wrote to Mr Bayni, agreeing to give more time for repayment of the Adler Corporation loan but saying -
“ … however, in regard to the $160,000 loan from Pacific Eagle Equities, this is a fund that I manage and the $160,000 plus interest must be returned next week.
If it is not returned, it will be taken out of my hands and legally acted upon under the Trust Deed.”
The reference to action under the trust deed is difficult to understand. In any event, it was not taken.
In a letter to Mr Bayni dated 18 September 2000 Mr Adler said -
“I wrote to you on Friday, 15 September indicating my great concern in regard to your $160,000 exposure to Pacific Eagle Equity. You very promptly rang back and we met over the weekend at which time we discussed that exposure plus Adler Corporation’s much larger exposure. You indicated to me that you would assign your interest and the income that you expect to receive from the ‘Republic Development’ to Adler Corporation.
Although the legal documentation underlying that agreement will take some time, I appreciate your response to the most serious matter for it concerns me greatly and I will have Rob Baulderstone draw up the appropriate legal agreement and then have it signed forthwith.
I am aware that you are not travelling well financially at the moment and would appreciate you signing a copy of this letter indicating your acceptance of this agreement.
Could you also please ring Rob Baulderstone as soon as possible and organise the details so we can enter into the agreement more formally.”
Mr Bayni signed the copy of the letter. The agreement was for some kind of security for or satisfaction of the Adler Corporation loan. The PEE loan was left unsecured and unsatisfied.
After HIH took over the AEUT Mr Ballhausen sought information from Mr Adler. As to the PEE loan to morehuman, in a fax dated 2 February 2001 Mr Adler said -
“4. In regard to morehuman, we have sent a legal default letter to Mr Gassy Bayni, telephone number 0414 578 880. He acknowledges the debt but is in financial difficulty, nevertheless, my own recommendation would be to ring Mr Bayni and place additional financial pressure upon him”
What HIH did was not disclosed. But a deed of charge was executed by morehuman on 18 May 2001, in which it charged its present and future assets, rights and undertaking to Adler Corporation to secure its indebtedness (stated as a maximum of $750,000) to that company.
The loan to morehuman was repaid, with interest of $21,610.96, on 14 September 2001, by a cheque enclosed with a letter from Mr Adler on the letterhead of Adler Corporation reading -
“Pacific Eagle Equities advanced Morehuman [sic] funds for $160,000. Please find attached a cheque for $181,610.96 being the full return of said funds plus full interest.
That is better than a kick in the head!!”
The cheque was a cheque of Trafalgar Properties Ltd. The evidence did not show who stood behind that company.
On 20 September 2000 Mr Adler caused PEE, as trustee of the AEUT, to lend $500,000 to Intagro Projects Pty Ltd (“Intagro”), the trustee of Intagrowth. The loan was recorded in a letter of that date as for two months at 10 per cent and to be secured by a floating charge. In fact it was not secured. Pacific Mentor Pty Ltd, of which Mr Adler was a director and in which he owned 70 per cent of the shares, held 50 per cent of the units in Intagrowth.
Monthly interest was paid on the loan to Intagrowth, and the loan was repaid as to half on 4 October 2000 and as to the balance on 13 December 2000 (in fact there was an overpayment of $1,506).
On 3 October 2000 Mr Adler caused PEE, as trustee of the AEUT, to lend $200,000 to PCP. The loan was recorded in a letter of that date as for two years at 20 per cent compounded monthly, and was neither guaranteed nor secured over property. Mr Adler was a director of PCP and Adler Corporation held 50 per cent of its shares. The other director was Mr Wolf earlier mentioned, whose company Castlecrag held one of the A class units in the AEUT.
Between 28 June 2000 and 30 November 2000 Mr Adler caused PEE, as trustee of the AEUT, to lend a total of $1,275,476 to PCP Ensor by making payments to or for the benefit of PCP Ensor. The payments were made pursuant to a Shareholders Agreement providing for a joint venture to develop some land, under which PEE was to provide such loans as were required to enable PCP Ensor to comply with its payment obligations. PEE held 60 per cent of the shares in PCP Ensor and Mr Adler was a director of PCP Ensor. The payments so made were to be at an interest rate of 30 per cent and were to be guaranteed by a number of companies apparently associated with the other joint venturer.
After the Shareholders Agreement was entered into it was agreed between Mr Adler, apparently for PEE, and Mr Wolf, apparently for PCP Ensor, that the development project would be managed by PCP for a monthly fee of $7,500. Of the $1,275,476, $50,631 was payments representing monthly management fees paid to PCP.
The loan to PCP and the loans to PCP Ensor were the subject of a payment of $1,300,000 on 5 March 2001. The payment was made to PEE by Mr Wolf on behalf of PCP, and was said to be “in full and final settlement of your interests in PCP Ensor No 2 Pty Limited and in the amount owing by Pacific Capital Partners Pty Limited.” Underlying this was an agreement that Adler Corporation and Castlecrag would buy PEE’s shares in PCP Ensor and discharge the indebtedness of PCP Ensor by the one payment. Principal and interest were not otherwise met.

Mr Adler made a file note dated 7 March 2001 -
“In reviewing the portfolio of Pacific Eagle Equities, HIH determined that they wished to dispose of their property interest in North Steyne, Manly. After discussions between Bill Howard and Dr Frank Wolf, it was decided that Adler Corporation, on behalf of the joint venture between Adler Corporation and Dr Frank Wolf (Pacific Capital Partners), would bid $1.3 million and buy Pacific Eagle Equities interest in that project for $1.3.
The reason that this transaction was mandated was:
1.Documentation between Pacific Eagle Equities and Pacific Capital Partners was not as precise as originally thought;
2.HIH/Pacific Eagle Equities is in desperate need of cash;
3.We were the logical buyer.
It was pointed out that there was substantial profit with that investment but management of Pacific Eagle Equities decided that the cash was more important than the profit.”
It will be noted that Mr Adler was responsible for PEE’s entry into the transaction upon imprecise documentation, and profited from the contribution that the inadequacy made to the under-recovery.
I have earlier mentioned the quarterly report sent by Mr Adler to Mr Howard and others on 18 August 2000, listing the AEUT’s then “investments”. None of the loans then on foot was listed or otherwise mentioned, that is, the loan to morehuman or some of the loans to that time made to PCP Ensor, nor were PEE’s shares in that company listed. The balance sheet accompanying the fax of 25 September 2000, however, did include the loans to morehuman, Intagrowth and PCP Ensor, in the case of PCP Ensor at $1,070,507.86.
The fax of 25 September 2000 concerning reorganisation of the AEUT contemplated that HIH would take over the management of its investments. Mr Adler resigned as PEE’s director on 4 October 2000, although it is not clear that the HIH personnel knew it. In early October Mr Williams asked Mr Howard “to get all the records relating to the PEE trust so we can have a look”. Mr Howard rang Mr Adler and asked for the records, and a few weeks later a box of files was delivered to him. Mr Howard looked at the contents of the box and then passed it on to Mr Williams. He regained the box in late 2000, and in early 2001 Mr Ballhausen “reviewed” the files.
The one share in PEE was transferred by Mr Adler to HIHC by a share transfer dated 10 February 2001. Mr Howard was appointed its director on 10 March 2001. A letter dated 7 February 2001 from Mr Adler to Mr Ballhausen indicates that the share transfer had been signed by Mr Adler and sent to HIH in early October 2001. According to the note Mr Ballhausen made as part of his review, following his resignation Mr Adler had “continued to act and execute documents as though he were a director well after October”. In the letter Mr Adler said that “any actions that I took in the period since October such as filing the annual return were to protect the interests of the Company”.
According to the report by HIH to ASIC of 22 December 2000 earlier mentioned, in November 2000 “Mr Adler consulted Mr Williams and advised that he had decided to collapse the Trust”, for the reasons then stated. This is not easy to reconcile with the preceding paragraphs; again, the accuracy of the report is questionable.
PEE received from unitholders a total of $10,125,000. The purchase of shares in HIH, the purchases of shares from Adler Corporation and the loans took up $9,987,292.71.
The quarterly report memorandum of 18 August 2000 referred to an investment of $500,000 in “Jewish Minds”, described as “a very interesting product that will specialise in on-line education”, and to trading in North Broken Hill shares at a loss of $2,255. The fax of 25 September 2000 concerning reorganisation of the trust referred to an investment “MindAtlas”, said to have a book value of $1,000,000 although shown in the balance sheet accompanying the fax at $400,000, and to “one property investment”. MindAtlas and Jewish Minds were the same investment, and the property investment may have been the shares in PCP Ensor. The balance sheet accompanying the fax also had as assets shares in Renaissance Capital Ltd with a book value of $250,000 and a Concept Systems Int Ltd debenture with the same book value. An HIH letter written after HIH had taken control of the AEUT referred to investments of $1,000,000 in Psiron made on 19 September 2000 and $250,000 in Worlduct Services made in August 2000 (neither of which was in the balance sheet accompanying the fax of 25 September 2000). These investments are referred to in ASIC’s calculation of the loss to HIH, together with an investment by the purchase of shares in North Ltd on 28 June 2000 for $970,000; this seems to have been the North Broken Hill Trading.
These other uses of PEE’s money were not part of the contraventions alleged by ASIC. No point was taken that the purchases of shares from Adler Corporation and the loans were apparently from a mixed fund. On the surface, the investments in total required more than the subscribed $10,125,000. It is, however, not necessary to go into an accounting exercise further explaining and reconciling income to the fund and the uses of money, because no point was taken that on an accounting some of PEE’s money was unexplained.
This is a sorry tale of incestuous and selfish dealings and loss to HIHC. However, that does not mean that there were the contraventions of the Act. The questions are whether, with the regard to what occurred which was open upon ASIC’s case as pleaded against the appellants, the contraventions alleged by ASIC were made out, and if so whether the compensatory and other orders were properly made.
The structure of the pleading
As I have indicated, prominent in the appellants’ submissions was that the trial judge had taken into account, in finding the contraventions and in making the orders for payment of pecuniary penalties and disqualification, matters outside ASIC’s pleaded case against them. I will return to the specific allegations of contravention, including their particularisation, when considering the contraventions. An overview of the pleading is appropriate.
In accordance with the Corporations Law Rules, ASIC brought the proceedings by filing an originating process and supporting affidavits. Exercising its power to do so in order better to define the issues, the Court ordered that ASIC file a statement of claim, to which the defendants filed defences.
A party’s pleading is required “to contain, and contain only, a statement in summary form of the material facts on which he relies, but not the evidence by which the facts are to be proved” (Supreme Court Rules, Pt 15 r 7(1)). It must be “as brief as the nature of the case allows” (Pt 15 r 8), but a plaintiff must “plead specifically any matter which, if not pleaded, may take the defendant by surprise” (Pt 15 r 13(1)). The party pleading “shall give the necessary particulars of any claim, defence or other matter pleaded by him” (Pt 16 r 1(1)). A party pleading “any condition of mind”, which includes “fraudulent intention” but does not include “knowledge”, must give particulars of the facts on which he relies (Pt 16 r 3).
ASIC’s statement of claim in its form at the trial was divided into parts, being “A: The parties”; “B: HIH Investments, Authorities and Management”; “C: Payment of $10 million to PEE and HIH Share Purchases”; “D: Other AEUT Investments”; and “E: Contraventions of the Corporations Law”. Then followed the statement of the relief sought.
Part A contained paras 1-11. They dealt with ASIC’s existence and powers, the existence and nature of HIH, HIHC, Adler Corporation and PEE and their relationships, and the directorships of the various companies.
Part B contained paras 12-14. They dealt with HIH’s investment portfolio, the membership and functions of its Investment Committee and its Investment Guidelines.
Part C contained paras 15-46. They dealt in some detail with the payment of the $10,000,000, and with the purchase of shares in HIH and giving of the notifications (paras 21-24). The allegations broadly encompassed the course of events as to those transactions earlier described, and went further in alleging consequences, intentions or purposes. Four respects in which the allegations went further should be set out.
First, after referring to Mr Adler’s notifications of relevant interests to the stock exchange as to the June 2000 share purchases, it was alleged -
“25.None of Adler’s notifications referred to in paragraph 24 disclosed to the Australian Stock Exchange that in acquiring the HIH shares the subject of the notification PEE had been financially assisted by HIH or HIHC.
26.In late June 2000, Adler made public statements to a journalist, to the effect that he was using his own money to purchase shares in HIH and that this demonstrated that he believed in HIH and the insurance industry.
27.Such statements were likely to induce the purchase of shares in HIH by other persons.
28.No public statements were made by HIHC or HIH to the effect that the HIH share purchases had in fact been funded by HIHC.
29.At the time of the HIH share purchases none of Adler, Williams and Fodera intended that the funding of the HIH share purchases by HIHC be the subject of any public statement.
30.The natural consequence of the matters referred to in 21, 22, 24, 25, 28 and 29 above was the creation of an impression that the HIH share purchases were funded by Adler or his interests and not by HIHC or HIH.”
Secondly, as to the constitution of the AEUT it was alleged that it was constituted by the entry into the deed poll of 7 July 2000 (para 33), and -
“35.The AEUT was constituted specifically as a means of accounting for the payment of $10 million by HIHC to PEE which had taken place on 15 June 2000.
36.The HIH shares purchased by PEE in June 2000 were, subsequent to 7 July 2000, treated as an asset of the AEUT.
37.From the time of the constitution of AEUT on 7 July 2000, it was always intended by Adler that:
37.1 the only B Class unitholder would be HIH;
37.2the payment of $10 million by HIHC to PEE which had taken place on 15 June 2000 would be taken to be a subscription by HIHC for one B Class unit;
37.3 there would be at least five A Class unitholders;
37.4the A Class units would be held either by himself or a related or associated entity or by persons or entities subject to his control and direction.”
Thirdly, it was alleged -
“40.The terms of the AEUT and HIH’s subscription for one B Class unit for $10 million:
40.1would not have been reasonable in the circumstances if HIH or HIHC and PEE were dealing at arms length; or
40.2alternatively, were not less favourable to PEE than the terms referred to in (40.1) [sic].
Particulars
(a)the effect of the provisions of the deed concerning the distribution of income as between HIH, as the only B Class shareholder, and the A Class shareholders, including Adler Corporation was that HIHC provided 98.8% of the fund but received only 90% of the income whereas the A Class unitholders provided only 1.2% of the funds and received 10% of the income;
(b)HIHC did not receive any priority on termination, notwithstanding that it provided the majority of the fund;
(c)HIHC was locked into the investment in the AEUT for three years as redemption was not possible until 7 July 2003 and removal of the trustee required the direction of all unitholders;
(d)HIHC had no capacity to control the conduct of the trustee in any way;
(e)HIHC could not self convene a meeting of unitholders notwithstanding that it provided 98.8% of the fund;
(f)the voting power was entirely disproportionate to the level of contribution to the fund as between HIHC and the A Class shareholders;
(g)there was no limit on the type of the investments which the trustee could make;
(h)clause 24(c) exposed the trust fund to the risk of transactions by the trustee involving clear conflicts of interest without any protections requiring independent evaluation of the terms of the transactions;
(i)the effect of the provisions concerning the issue price of new units and the redemption price of all units was that if the fund was successful, a new unit could be issued to a new unitholder with the effect that the value of HIHC’s units would be immediately diminished the instant after the issue of the new unit. Conversely, if the fund was unsuccessful, the value of a new unit was immediately diminished to the benefit of HIHC the instant after it was issued. Hence, the more that the fund lost money the less likely it was to attract new unitholders and the more successful the trust, the more attractive it was to new unitholders who could achieve a windfall at the expense of HIHC.”
Fourthly, it was alleged -
“43.Apart from Williams, Adler and Fodera, no other director of HIH or HIHC was made aware of or consulted in relation to the fact that Adler, on behalf of PEE, was purchasing shares in HIH utilising funds which had been advanced by HIHC until about September or October 2000.
44.On no occasion prior to about September or October 2000 did Williams:
44.1notify the Investment Committee or any of its members of the advance of $10 million to PEE, though in the circumstances pleaded in paragraphs 15, 17, 20 and 38 above Cassidy, Fodera and Adler were aware of the advance;
44.2seek to have the Investment Committee ratify the advance of $10 million to PEE;
44.3notify the Investment Committee or any of its members (other than Adler) that PEE was purchasing shares in HIH utilising the funds which had been advanced by HIH.
45.On no occasion prior to about September or October 2000 did Adler:
45.1notify the Investment Committee of the advance of $10 million to PEE, though in the circumstances pleaded in paragraph 15, 17, 20 and 38 above Cassidy and Fodera were aware of the advance;
45.2seek to have the Investment Committee ratify the advance of $10 million to PEE.
45.3notify the Investment Committee that PEE was purchasing shares in HIH utilising the funds which had been advanced by HIH.”
Part D contained paras 47-60. They dealt with the purchase from Adler Corporation of its shares in the three companies and the loans to companies and a trust with which Mr Adler was associated. The allegations broadly encompassed the course of events as to those transactions, including corporate associations, earlier described. They went further, in alleging knowledge on the part of Mr Adler.
First, as to the purchase of the shares in dstore it was alleged -
“49.At the time of the acquisition by PEE of the shares in dstore, Adler was aware that:
49.1dstore was in need of significant capital in order to continue in business;
49.2dstore was encountering difficulties in raising new capital;
49.3dstore was having cashflow difficulties;
49.4there was a significant risk that dstore would fail;
49.5in transferring the dstore shares to PEE, Adler Corporation was in breach of pre-emptive rights clauses in a shareholders agreement to which it was a party.”
Secondly, as to the purchase of the shares in Planet Soccer it was alleged -
“52. At the time of the acquisition by PEE of the shares in Planet Soccer, Adler was aware that:
52.1Planet Soccer was in need of significant capital in order to continue in business;
52.2Soccer [sic] was encountering difficulties in raising new capital;
52.3there was a significant risk that Planet Soccer would fail.”
Thirdly, as to the purchase of the shares in Nomad it was alleged -
“54.At the time of the acquisition by PEE of the shares in Nomad Technologies [sic] Limited, Adler was aware that:
54.1Nomad Technologies [sic] Limited was in need of significant capital in order to continue in business;
54.2Nomad Technologies [sic] Limited was encountering difficulties in raising new capital;
54.3there was a significant risk that Nomad Technologies [sic] Limited would fail.”
As well, in para 55 the loans were alleged to have been made “unsecured … and without any or any adequate documentation”.
Part E contained paras 61-98. Paras 61-67 were addressed to contravention of ss 208 and 209(2) of the Act. Paras 68-73 were addressed to contravention of ss 260A and 260D(2) of the Act. Paras 74-80 were addressed to contravention of s 180 of the Act. Paras 81-87 were addressed to contravention of s 181 of the Act. Paras 88-94 were addressed to contravention of s 182 of the Act. Paras 95-96 were addressed to contravention of s 183 of the Act. Paras 97-98 were addressed to involvement in the various contraventions. There was some reference back to the paragraphs in the earlier parts of the pleading and some particularisation.
Further detail should be left for the consideration of each contravention, but a general observation is appropriate at this point.
The function of pleadings is to state with sufficient particularity the case that must be met: Banque Commerciale SA v Akhil Holdings Ltd (1996) 169 CLR 279 at 286. They “serve to ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her and, incidentally, to define the issues for decision” (ibid).
But their function as a foundation for procedural fairness means that whether matters were within or outside ASIC’s pleaded case must have regard to the pleading as a whole, and should not be approached with undue pedantry. As was said by Mason P in Greek Herald Pty Ltd v Nikolopoulos (2001) 54 NSWLR 165 at [18], speaking of but going beyond the pleading of defamatory imputations -
“The pleader's task is to capture the essence of the specific matters imputed in relation to the plaintiff. Necessarily there will be questions of degree and "if a problem arises, the solution will usually be found in considerations of practical justice rather than philology" (per Gleeson CJ in Drummoyne Municipal Council v Australian Broadcasting Corporation (1990) 21 NSWLR 135 at 137). In this as in other areas, pleadings serve the ends of justice: they must not be permitted to assume an independent self-referential function. The pleaded imputation remains "the statement which, as the plaintiff alleges, the publication gives the reader or viewer to understand" (per Mahoney JA in Singleton v Ffrench (1986) 5 NSWLR 425 at 428). It is not a straitjacket, although the rules of procedural fairness place limits upon judge and jury's capacity to enlarge the issues.”
Particulars serve the same function, but for a further reason are not a straitjacket. Thus in Dare v Pulham (1982) 148 CLR 658 at 664 it was said, after putting aside cases where parties choose to disregard the pleadings and to fight the case on issues chosen at the trial -
“But where there is no departure during the trial from the pleaded cause of action, a disconformity between the evidence and particulars earlier furnished will not disentitle a party to a verdict based upon the evidence. Particulars may be amended after the evidence in a trial has closed (Mummery v. Irvings Pty. Ltd, at pp. 111, 112, 127), though a failure to amend particulars to accord precisely with the facts which have emerged in the course of evidence does not necessarily preclude a plaintiff from seeking a verdict on the cause of action alleged in reliance upon the facts actually established by the evidence (Leotta v. Public Transport Commission (N.S.W.), at p. 668).”
The underlying regard to procedural fairness is material to whether it should be concluded that a pleaded and particularised case, fleshed out by evidence, was not open to a party.
The nature of the proceedings

The trial judge then approached the orders to be made through the nine transactions or episodes, saying that they were “to be judged individually as well for their cumulative effect”. The orders made were not moulded by the particular sections of the Act contravened by Mr Adler and Adler Corporation, or by the number of sections contravened. They were made upon the contravening conduct. I do not think that the trial judge would have come to any different orders had he declined to find the contraventions of s 183 of the Act. That in his Honour’s view Mr Adler’s conduct was in contravention of s 183 as well as the other civil penalty provisions was not part of his reasoning to the orders to be made, and excluding the contraventions of s 183 from consideration does not materially affect the exercise of discretion in making a disqualification order and the order at which the trial judge arrived, or the exercise of discretion in making a pecuniary penalty order and the order at which the trial judge arrived. In any event, subject to the submissions next mentioned on a re-exercise of the discretions excluding the contraventions of s 183 from consideration I would affirm the orders his Honour made.
The submissions otherwise made do not call for wholesale review of the orders judgment. They were made globally in relation to both the pecuniary penalty orders and the disqualification order, and were that the trial judge erred in the exercises of his discretion in that –
(a)he took into account “a substantial number of findings relating to the underlying transactions” which were outside ASIC’s pleaded and particularised case;
(b)he compounded that error by taking into account what was described as Mr Adler’s “decision not to give evidence in respect of those unpleaded allegations” and by failing to take into account what was described as “the possibility of criminal prosecution”;
(c)he failed to take into account the evidence of Messrs Gardener, Cohen and Stitt “in assessing the appropriate degree of censure attaching to the transactions” and treated their evidence as “pertaining only to the likelihood of ratification if such approval had been sought”; and
(d)he erred in finding that ss 206C and 206E of the Act do not permit particular companies to be excepted from a disqualification order and not making an exception in relation to Adler Corporation.
(a) Findings outside ASIC’s pleaded and particularised case
The trial judge summarised the findings in the liability judgement. He noted that Mr Adler conceded that they were “extremely serious”. He continued, and this is at the heart of the submission as to error -
“ASIC, in its supplementary submissions on relief, summarises the position in these terms:
‘So far as Adler is concerned, the findings indicate not only that he contravened the Corporations Law in many respects but also that he did so with knowledge of the impropriety of his conduct and for the purpose of advancing his own personal interests at the expense of the companies of which he was a director or officer. His conduct thus amounted to a most serious dishonesty, occurring not as an isolated act but as a pattern of conduct over a number of months. This conduct was coupled with persistent lies and deceits designed to conceal his conduct and/or its impropriety.’
58 Attachment A to ASIC's submissions fairly summarises those "persistent lies and deceits and the associated impropriety", by reference to the relevant paragraphs in the Judgment which elaborates upon those matters. For convenient reference, I reproduce that attachment below:
[121-7], [148] False impression conveyed by Adler to Mr Westfield, journalist, that Adler was purchasing the HIH shares on his own behalf or on behalf of family interests through some related trust.
[146-8] Adler intended to convey the false impression to the market through his s.205G notice that he was purchasing the HIH shares on his own behalf or on behalf of family interests through some related trust.
[155], [161], [148] False impression given by Adler to journalist, Mr Mellish, that he was using his own money to buy the HIH shares.
[164(xi)], [277] Adler blatantly preferred his own interests over those of AEUT and HIH by selling Adler Corporation's shareholding in HIH before that of AEUT.
[165] Adler's purpose in causing PEE to purchase HIH shares was to benefit his own company's shareholding in HIH, not to benefit AEUT or HIH.
[169] Adler less than frank in giving instructions to Minter Ellison in June 2000.
[170] By not selling the HIH shares held by AEUT in July 2000, Adler preferred his own interests to those of HIH.
[191] Adler preferred his own position over that of HIH and HIHC in a number of respects.
[219] Adler made no attempt to correct the misleading impression given by press publicity which he had played an important role in generating.
[221] Adler wanted to avoid HIH obtaining its own advice.
[254] Adler intended that the Investment Department be sidestepped.
[278], [280], [321], [349] Adler's purpose in having PEE purchase HIH shares in June 2000 was not to enable PEE to make a profit on the resale of HIH shares but to advantage himself.
[296] Adler's failure at the end of 2000 to fully and frankly describe what had occurred was an admission of his consciousness of the impropriety in what occurred.
[300], [307] Adler falsely stated in a letter to the Chairman of HIH that he was unaware that neither the Board nor the Investment Committee knew of the creation of the trust.
[307] At the end of 2000, Adler gave Minter Ellison materially false information.
[334] Adler knew that Minter Ellison's letter of advice to the HIH Board contained a number of misstatements and omissions but made no attempt to correct them.
[359], [364] Adler knew that the assistance given by HIHC to PEE to purchase shares in HIH materially prejudiced the interests of HIHC.
[387] The semi-covert bypassing of proper corporate safeguards reflected consciousness of impropriety on Adler's part.
[571-2], [611-3] Adler's Quarterly Report to HIH/HIHC and other investors contained a number of obviously false statements and gave a grossly misleading picture.
[618-9] Adler's memo to HIH directors of 15 December 2000 gave a misleading impression in connection with Planet Soccer.
[725] In connection with PCP and PCP Ensor, Adler blatantly exploited for his own advantage a shortcoming which was to be laid at his own door. He was clearly advancing his own and not PEE/HIH's interests and taking advantage of HIH/PEE's desperate need of cash.
59 Moreover, Mr Adler's conduct from the time the PEE transaction first came to the attention of the non-executive directors until the present time has manifested no contrition whatsoever. While it may go only to mitigation of a statutory penalty, lack of contrition has a direct bearing upon disqualification. For here the interest of the public must be paramount. Mr Adler has at all times, by himself and through his counsel, vigorously denied any wrongdoing. In those circumstances, there is nothing whatsoever in his conduct to suggest that he would in the future act any differently in the performance of his duties as a company director or officer that he did in relation to the relevant transactions.”
It was submitted that within the summary of lies, deceit and impropriety were the matters outside ASIC’s pleaded and particularised case to which attention has already been given, and that reference to absence of contrition in relation to those unpleaded matters emphasised error in paying regard to them. Further, it was said, dishonestly was found against Mr Adler in its own right, although not within ASIC’s pleaded and particularised case. In this respect, reliance was placed on a later observation by the trial judge that Mr Adler “committed offences involving dishonesty (though not fraud)” (para 111) and a reference to “the seriousness of the contraventions and the dishonesty apparent in them” (para 140). The matters in the Adler appellants’ schedule of unpleaded matters took up paras 57-58 last set out and some other passages in the orders judgment.
Much was made of the word “offences” in para 111, which was not really appropriate but I do not regard it as significant. There is no doubt, however, that the trial judge acceded to ASIC’s characterisation of Mr Adler’s conduct.
The trial judge was not finding the contraventions. That had been done. In the task of finding the contraventions, for the reasons already given I do not accept that the matters in the schedule were not open to the trial judge. The appellants’ submission must be considered in the different context of making the pecuniary penalty and disqualification orders.
Section 1317G gives a discretion as to making a pecuniary penalty order, see “may” at its commencement, and calls for an assessment of whether the contravention is serious. Sections 206C and 206E require that the Court be satisfied “that the disqualification is justified”, and provide that the Court may have regard to “the person’s conduct in relation to the management, business or property of any corporation” and “any other matters that the Court considers appropriate”. For both pecuniary penalty and disqualification the task is normative, and the nature of the conduct of the person found to have contravened the civil penalty provision is relevant. That a director fails to exercise care and diligence through neglectful inattention is one thing; it is another thing if a director fails to exercise due care and diligence with knowledge that he is acting wrongly, contrary to the interests of the company, and in his own interests. Provided procedural fairness is afforded, there is no error in characterising the director’s conduct as dishonest, if it fairly bears that characterisation, when it comes to deciding whether a pecuniary penalty should be imposed and if so in what amount, or to deciding whether disqualification is justified and if so for what period. It would be nonsense if that could not be done.
The appellants returned to s 160A(3) earlier set out, providing that dishonest involvement in a contravention of s 260A is an offence. Section 209(3) makes similar provision as to s 208. They said that provision for an offence if there was dishonesty meant that dishonesty could not come into consideration for the civil penalty contravention. That does not follow, and it is not necessary to consider how the argument could apply to the contraventions of ss 180-182 of the Act. It is unnecessary that the character of dishonesty be ascribed to the director’s conduct for the purposes of finding a contravention of the Act, and so not necessary to plead dishonesty. But whether the director’s conduct is of that character is important to any consequential civil penalty or disqualification order.
The appellants submitted that Smith v New South Wales Bar Association (1992) 176 CLR 256 was to the contrary.
Disciplinary proceedings were brought against Smith, on complaints that he had appeared before a magistrate without an instructing solicitor and had not believed in the truth of his statement to the magistrate that he was instructed. Smith gave evidence of a conversation with the solicitor bearing upon instruction to appear. He was disbelieved, and two members of the Court considered that he had lied in that evidence. A disciplinary order was made. Smith applied to reopen the proceedings on the ground that there had been a mistake of fact, and sought leave to present evidence of the conversation from the solicitor. Reopening was permitted, but the leave was refused. The disciplinary order remained. That he had lied was taken into account in the disciplinary order. The disciplinary order was set aside in the High Court.
Brennan, Dawson, Toohey and Gaudron JJ said (at 269) -
“But even if the evidence was sufficient to support the findings so made [that Smith lied] and even if that finding could properly be taken into account in determining the result, considerations of procedural fairness required that the appellant be given an opportunity to be heard as to whether the finding should be made. In the first hearing before the Court of Appeal, no allegation of deliberately lying was made against the appellant before the adverse finding was made. That being so, the finding then made that the appellant had lied and the consequence of that finding then determined by Mahoney and Meagher JJA that the appellant be disbarred were flawed. In the second hearing, evidence which might have affected the finding of deliberate lying was erroneously rejected. It follows that the affirmation of the finding that the appellant lied and of the order that he be disbarred cannot stand.”
Deane J said (at 271) -
“If the members of the Court of Appeal were convinced that the appellant had deliberately given false evidence, they were entitled to take account of that in their assessment of the effect of the evidence as a whole and in their decision about whether the particularized complaints of alleged professional misconduct against the appellant, which were the subject of the proceedings before them, had been made out. Those particularized complaints were that the appellant had sought to appear for Mr Knight without the intervention of an instructing solicitor and that the appellant had deliberately misled the Penrith Local Court by informing it that he was instructed by Mr McDonald and in certain other specified respects. They were not amended to include a specific complaint that the appellant had deliberately given false evidence before the Court of Appeal. Nor was the appellant ever called upon to answer such a specific complaint or given an appropriate opportunity of being heard in relation to it. In those circumstances, the members of the Court of Appeal were not entitled to make an adverse order against the appellant which was wholly or partly based on a finding that the appellant was guilty of professional misconduct in that he had deliberately given false evidence before them. I turn to explain why that is so.”
In his explanation Deane J referred to the failure to expand the allegations against Smith to include an allegation that he deliberately given false evidence to the Court, and said (at 272-3) -
“In fact, there was no attempt to amend the particulars of complaint. In the absence of any such amendment, the issue before the Court of Appeal remained whether the effect of all the evidence, including the appellant's evidence about the car park conversation, was that the particularized complaints had been made out to the requisite standard of proof. The appellant could not realistically be expected, while maintaining the reliability of his evidence in relation to that issue, to have set out to establish how and why that evidence was honestly mistaken. If the Court of Appeal, after reaching the conclusion that the appellant's evidence about the car park conversation should be rejected, had thought it desirable or necessary to consider whether the appellant had been guilty of professional misconduct in that he had deliberately given false evidence before it, ‘at the very least a new charge would have [had] to be laid (before it could be relied upon) so that [the appellant could] then know of it, appreciate what he [had] to meet and be allowed ample opportunity to meet it’. Such a new charge could have been laid by appropriate amendment to the particulars of complaint and an appropriate opportunity of being heard could have been provided by relisting the matter for that purpose. In fact, however, no specific charge of deliberately giving false evidence before the Court of Appeal was ever laid against the appellant and no opportunity was extended to him to deal with such a specific charge before the Court of Appeal made its initial finding of guilt.”
His Honour said that it followed that the disciplinary order made following the initial finding of guilt “was affected by a denial of procedural fairness for the reason that [Smith] had never been given an appropriate opportunity of being heard in relation to the question whether his evidence of the car park conversation was deliberately false”, and that on the re-opened hearing there had been a denial of procedural fairness in that Smith had not been given the opportunity of being heard or leading evidence upon whether he had deliberately given false evidence (at 273-4).
The appellants submitted that, from these passages, it was not open to the trial judge to take into account against them any dishonesty seen in Mr Adler’s conduct, because dishonesty had not been alleged in ASIC’s pleaded case.
I am unable to agree. The circumstances were quite different. The lying in Smith v The New South Wales Bar Association was lying to the Court, conduct distinct from the conduct before the magistrate. Dishonesty in the present case was not conduct distinct from the conduct constituting the contraventions, but the finding as to the nature of the latter conduct. Their Honours’ reasons would not have precluded regard to the character of Smith’s conduct before the magistrate, for example whether from misunderstanding or with consciousness of impropriety, when the Court was considering whether to make a disciplinary order and if so what order.
In my opinion, it was open to the trial judge to ascribe to Mr Adler’s conduct the character of impropriety or dishonesty.
(b) Failure to give evidence
I set out the relevant passage of the orders judgment when considering the Jones v Dunkel question; for convenience, it is repeated. After noting “factors” said in an earlier case to be material to the orders in question, the trial judge said -
“72 In the present case each of those factors are present, though it should be noted that Mr Adler himself did not assert any personal explanation for what he had done. Rather, through his legal advisers, he denied that there was any contravention in the circumstances, a denial which is at odds with the findings of the Judgment and thus cannot stand.” (emphasis added)
The submissions were a reprise of the appellants’ Jones v Dunkel submissions. While the trial judge was referring to Mr Adler’s failure to give evidence, it is not clear that it amounted to the drawing of a Jones v Dunkel inference. At this point the trial judge was not concerned with the findings of contraventions, but with the factors material to the orders to be made. However, for the reasons earlier given I do not think that so far as the trial judge paid regard to Mr Adler’s failure to give evidence he was in error, any more when considering the orders to be made than when finding the contraventions.
(c) The evidence of Messrs Gardener, Cohen and Stitt
It was submitted that the effect of the evidence of Messrs Gardener, Cohen and Stitt was that they saw nothing improper or unlawful in the transactions when they became aware of them in late 2000. It was acknowledged that their views were “not determinative of the appropriate approach which the Court should take”, but it was said that they “indicate the genuine assessment by experienced company directors of unquestioned integrity as to the conduct of a fellow director in which there is no evidence of their own participation”.
The submission had been made to the trial judge. He did not advert to it in the orders judgment. That is readily understandable. It is plain from the liability judgment that the trial judge did not consider that the evidence of Messrs Gardener, Cohen and Stitt was to the effect that they saw nothing improper or unlawful in the transactions, and that to the extent that their evidence went in that direction he considered that they were wrong. There is no reason to think that the trial judge overlooked the evidence or the submission made to him.
(d) An exception for Adler Corporation?
The trial judge noted the submission on behalf of Mr Adler that any disqualification order should be made only in relation to the management of public companies, or that at the least it should permit Mr Adler to be involved in the management of Adler Corporation and its wholly owned subsidiaries -
“ … on the basis that the failure to provide such an exception would be harsh, oppressive and unfair against Mr Adler because it would deprive him of the means of earning substantially all his income”.

After explaining why that would be contrary to the protective purpose of disqualification orders, the trial judge said -
“81 The second matter is one of jurisdiction. Section 206C and s206E both confer upon the Court the power to "disqualify a person from managing corporations". There is no suggestion that an order may discriminate between corporations and thus operate distributively only against a certain class of corporation such as any corporation that is not a public company, or any corporation that is not Adler Corporation and its wholly-owned subsidiaries. Indeed, that logically follows from the public protective purpose earlier identified.
82 Moreover, the power of the Court to grant leave under s206G, in contrast to s206C and s206E, does contain language expressly permitting application for leave to manage "a particular class of corporation", or "a particular corporation". That strongly suggests that the associated disqualification provisions are not to be read as permitting a qualified order.”
The appellants submitted that, since words in the plural include the singular unless a contrary intention appears (Acts Interpretation Act 1901 (C’th) s 23), “corporations” in ss 206C and 206E could be read in the singular, and that there was nothing to indicate a contrary intention. Reference was made to predecessor provisions referring to orders prohibiting a person from managing “a corporation”.
In my opinion, the trial judge was correct in his construction of ss 206C and 206E. If contravention of a civil penalty provision justifies disqualification, it is because of the unfitness of the person to manage corporations, not because of unfitness of the person to manage a particular corporation or corporations. Selective unfitness is a difficult concept, but to the extent it can be recognised alleviation of a general disqualification comes through leave to manage a particular class of corporation or a particular corporation, on application made under s 206G. An intention contrary to the rule of interpretation is manifest. It is necessary to construe the Act, rather than the predecessor provisions, but prohibition from managing “a corporation” would naturally mean any corporation, not just one corporation.
The trial judge went on to give reasons why, if his construction of ss 206C and 206E were incorrect, he would not confine Mr Adler’s disqualification. Although it strictly does not arise, I should address the appellant’s submissions in that respect.
In the appeal the appellants made submissions directed to permitting Mr Adler to be involved in the management of Adler Corporation and its subsidiary companies. They were, in brief, that from its corporate name members of the public would not unwittingly deal with Adler Corporation as a corporation managed by a suitable person; that an exception for Adler Corporation would not signify the safety of dealing with that corporation; and that in declining to give significant weight to the financial consequences to Mr Adler of inability to manager Adler Corporation because the consequences flowed from Mr Adler’s own misconduct, the trial judge relied on the unpleaded matters.
The first two arguments amounted to saying that a person unfit to manage corporations should be allowed to manage a corporation because everyone knew the person was unfit. They should not be accepted. Further, a change in corporate name could leave members of the public unaware of Mr Adler’s management, or control of other corporations through Adler Corporation could be unknown to members of the public. For reasons already apparent, I do not accept the basis of the third argument.
I do not think error in the exercise of discretion has been shown within the principles for which House v The King (1936) 55 CLR 499 is conventionally cited. In my opinion, the reasons the trial judge gave for declining to confine disqualification to the management of public companies, or to permit Mr Adler to be involved in the management of Adler Corporation and its wholly owned subsidiaries, were well open to him in the exercise of his discretion in determining the extent of disqualification. I see no appealable error in that exercise of discretion.
The pecuniary penalty and disqualification – Mr Williams
Mr Williams’ grounds of appeal included that the trial judge erred in finding that the pecuniary penalty of $250,000 was just or appropriate, in finding that a disqualification order was justified, and in finding that the disqualification for ten years was justified. His submissions against the findings of contraventions of the Act at all went to those grounds, since contravention was a precondition to the orders. He did not otherwise submit that the orders were erroneous.
It may have been intended that the submissions of the Adler appellants be adopted so far as applicable to Mr Williams’ position. The trial judge noted a number of findings which, in his submissions going to the contraventions, Mr Williams said were not open on ASIC’s case as pleaded and particularised (for example, side stepping the Investment Department). While noting that Mr Williams had expressed deep regret for “the consequences of the PEE transaction on HIH and HIHC”, the trial judge thought the contrition thus indicated was limited, and also observed that Mr Williams’ submission that he was himself deceived “does not sit well with the findings which I have earlier summarised or the absence of any evidence from Mr Williams himself as to what he knew or did not know”. Thus there was room for partial translation of the submissions of the Adler appellants to Mr Williams’ position.
I have considered the submissions of the Adler appellants so far as they appear applicable to Mr Williams’ position. I do not think that they are any more persuasive.
The result
Although I have differed from the trial judge on some matters, the appeals in substance fail. The limited success of the appellants does not warrant any relief as to costs. The declarations of contravention should exclude contravention by Mr Adler and Adler Corporation of s 183 of the Act, and the amount of compensation must be recalculated, but otherwise the declarations and the orders stand.
I propose the following orders -
In the appeal by Mr Adler and Adler Corporation -
1.            Appeal allowed in part.
2.Vary declarations 3 and 4 made on 27 March 2002 by adding before “182(1)” the word “and” and deleting the words and figures “and 183(1)”.
3.Direct that within 21 days the parties calculate the compensation payable to HIH Casualty and General Insurance Ltd in accordance with the reasons of this Court and advise the Registrar of the sum calculated.
4.Vary order 7 made on 6 June 2002 by deleting the sum of $7,986,402 and substituting the sum advised to the Registrar.
5.            Liberty to apply in the event of disagreement as to the calculation.
6.            Appeal otherwise dismissed.
7.            Appellants pay the respondent’s costs.
In the appeal by Mr Williams -
1.Direct that within 21 days the parties calculate the compensation payable to HIH Casualty and General Insurance Ltd in accordance with the reasons of this Court and advise the Registrar of the sum calculated.
2.Vary order 7 made on 6 June 2002 by deleting the sum of $7,986,402 and substituting the sum advised to the Registrar.
3.            Liberty to apply in the event of disagreement as to the calculation.
4.            Appeal dismissed.
5.            Appellant pay the respondent’s costs.
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LAST UPDATED: 08/07/2003