Australian Securities and Investments Commission v Adler

[2002] NSWSC 171

Reported Decision: 41 ACSR 72
(2002) 20 ACLC 576

New South Wales

Supreme Court

CITATION:	ASIC v Adler & 4 Ors [2002] NSWSC 171 revised - 09/04/2002
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 2753/01
HEARING DATE(S):	26/11/01-30/11/01, 3/12/01-7/12/01, 10/12/01-14/12/01, 17/12/01-21/12/01
JUDGMENT DATE:	14 March 2002
PARTIES :	In the matter of HIH Insurance Limited (in provisional liquidation) ACN 008 636 575 and HIH Casualty and General Insurance Limited (in provisional liquidation) ACN 008 482 291 Australian Securities & Investments Commission (Plaintiff) Rodney Stephen Adler (First Defendant) Raymond Reginald Williams (Second Defendant) Dominic Fodera (Third Defendant) Adler Corporation Pty Ltd (ACN 054 924 373) (Fourth Defendant) Lynda Sharon Adler (Fifth Defendant)
JUDGMENT OF:	Santow J

COUNSEL :	R B S Macfarlan QC/ P Durack (Plaintiff) B W Walker, SC/ I M Jackman (First and Fourth Defendants) P Crutchfield (Second Defendant) J E Sexton, SC (Third Defendant)
SOLICITORS:	Jan Redfern, Solicitor for ASIC (Plaintiff) Gilbert & Tobin (First and Fourth Defendant) Arnold Bloch Leibler (agent: Sparke Helmore) (Second Defendant) Dibbs Crowther & Osborne (Third Defendant) Speed and Stracey (Fifth Defendant)
CATCHWORDS:	CORPORATIONS - Were director's or officer's duties breached under ss180, 181, 182 and 183 of Corporations Act - Relevant principles applicable to those duties and to determining who is an officer and to delegation by a director - Were each of three directors in breach of those statutory duties as director or officer by reason of their respective involvements in certain transactions - These transactions encompassed the making available of $10 million to an intended unit trust associated with the first director and initially undocumented and then the immediate application of that $10 million in part in buying shares in parent company of the company providing the $10 million and subsequently in application in part in buying unlisted investments owned by that director's associated company with capital raising difficulties and in making loans to associates of that director - Relevance of fact that no approval or ratification obtained to these transactions from investment committee or board - Role of other two directors and their respective responsibilities - Accessory liability by reason of involvement of directors in breach of s208 of Corporations Act (related party benefits) and s260A of Corporations Act (financial assistance for purchase of shares) - Did the relevant companies contravene these provisions - How the provisions to be construed in particular "financial benefit" and "arm's length terms" - What is required for such accessory liability under s79 of Corporations Act in the way of "involvement" - Whether Jones v Dunkel inference may be drawn from failure by Defendants to give evidence in these proceedings for civil penalty when concurrent Royal Commission - Causation and applicable test - Mode of calculation of loss - Relief by way of declaration - Other relief sought including compensation and banning orders to be dealt with separately.
LEGISLATION CITED:	Corporations Act 2001 (Cth) s9; s79; s180; s181; s182; s183; s184 s190; s198; s205; s206; s208; s209; s210; s228; s229; s251; s259; s260A to D; s1317; s1318; s1371(1); s1383; s1400(2); Evidence Act s41; s60; s79; s128 Trade Practices Act 1974 (Cth) s75B
CASES CITED:	ASC v Gallagher (1993) 10 ACSR 43 Australian Innovation Ltd v Petrovsky (1996) 21 ACSR 218 AWA Limited v Daniels t/as Deloitte Haskins & Sells (1992) 7 ACSR 759; (1995) 37 NSWLR 438) Biala Pty Ltd v Mallina Holdings Ltd (1994) 15 ACSR 1 Beach Petroleum NL v Johnson (1991) 105 ALR 456 Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 Bennett v Minister of Community Welfare [1992] 176 CLR 408 Bonnington Castings Ltd v Wardlaw [1956] AC 613 Brickenden v London Loan & Savings (1934) 3 DLR 465 Briginshaw v Briginshaw (1938) 60 CLR 336 Burton v Palmer (1980) 2 NSWLR 878 Canson Enterprises Limited v Boughton & Co (1991) 85 PLR(4th) 139 Cashflow Finance Pty Ltd v Westpac Banking Corp [1999] NSWSC 671 Chapman v Hearse (1961) 106 CLR 112 Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] PCLC 1 Chew v R (1992) 173 CLR 626 Re City Equitable Fire Insurance Co. Ltd [1925] Ch 407 Claremont Petroleum NL v Cummings (1992) 10 ACLC 1685, 9 ACSR 1; on appeal (1993) 11 ACLC 125, 9 ACSR 583 [CC s229 1989] Commercial Assurance Co of Aust Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 Daniels t/as Deloitte Haskins & Sells v AWA Ltd (1995) 37 NSWLR 438 Re Dawson [Deceased] (1966) 2 NSWLR 211 Dilose v Latec Finance Pty Ltd (1966) 84 WN (Pt 1)(NSW) 557 Fabre v Arenales (1992) 27 NSWLR 437 Fitzgerald v Penn (1954) 91 CLR 268 Fitzsimmons v R (1997) 23 ACSR 355 Georgianni v The Queen (1985) 156 CLR 473 GPG (Australia Trading) Pty Limited v GIO Australia Holdings Limited (2001) 40 ACSR 252 Henville v Walker (2001) 182 ALR 37 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Hutton v West Cork Railway Co (1883) 23 ChD 654 Insurance Commissioner v Joyce (1948) 77 CLR 39 Jones v Dunkel (1959) 101 CLR 298 LMI v Baulderstone [2001] NSWSC 866 Luxton v Vines (1952) 85 CLR 352 Maguire v Makaronis (1997) 188 CLR 449 March v E & MH Stramare Pty Limited (1991) 171 CLR 506 Mills v Mills (1938) 60 CLR 150 O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Pereira v Director of Public Prosecutions (1988) 63 ALJR 1 Permanent Building Society (In Liq) v McGee (1993) 11 ACSR 260 Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109 Phipps v Boardman [1967] 2 AC 46 Pilmer v Duke Group Limited (In Liq) (2001) ALJR 1067 Re Property Force Consultants Pty Ltd (1995) 13 ACLC 1051 Queensland Mines Ltd v Hudson (1978) 18 ALR 1 R v Byrnes (1995) 183 CLR 501 R v Russell (1933) VLR 59 Richardson & Wrench (Holdings) Pty Ltd and Anor v Ligon No. 174 Pty Limited (1994) 123 ALR 681 RPS v The Queen (2000) 199 CLR 620 Sheahan (as liquidator of South Australian Service Stations) (In liq) v Verco (2001) 37 ACSR 117 Simar Transit Mixers Pty Ltd v Baryczka (1998) 28 ACSR 238 SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] 1 L1 Rep 288 Stuart v The Queen (1976) 134 CLR 426 Target Holdings Ltd v Redferns (1996) 1 AC 421 Wallersteiner v Moir (1975) 1 QB 373 Wambo Mining Corporation Pty Ltd v Wall Street (Holdings) Pty Ltd (1998) 16 ACLR 1601 Wilkinson v Feldworth Financial Services Pty Ltd (1998) 29 ACSR 642 York v Ross Lucas Pty Limited (1985) 158 CLR 661
DECISION:	See paras 775 - 777.

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

SANTOW J

No. 2753/01
In the matter of HIH INSURANCE LIMITED (in provisional liquidation) ACN 008 636 575 and HIH CASUALTY AND GENERAL INSURANCE LIMITED (in provisional liquidation) ACN 008 482 291

AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION
Plaintiff

RODNEY STEPHEN ADLER
First Defendant
RAYMOND REGINALD WILLIAMS
Second Defendant
DOMINIC FODERA
Third Defendant
ADLER CORPORATION PTY LTD (ACN 054 924 373)
Fourth Defendant
LYNDA SHARON ADLER
Fifth Defendant


JUDGMENT
14 March 2002 (revised 9 April 2002)

Table of Contents

Page
INTRODUCTION AND OVERVIEW 5
Overview of relevant transactions and of the principal allegations and defences. 9
Mr Rodney Adler 12
Mr Raymond Williams 17
Mr Dominic Fodera 18
Adler Corporation Pty Limited 18
Mrs Lynda Adler 19
Defence Overview 19
DRAMATIS PERSONAE 26
HIH and HIHC 26
Directors 26
Officers 27
Other 28
Planet Soccer International Limited (“Planet Soccer”) 28
dstore Limited (“dstore”) 28
Nomad Communications Limited (“Nomad”) 28
Pacific Capital Partners Pty Ltd and PCP Ensor No 2 Pty Ltd 29
Morehuman Pty Ltd 29
Intagro Projects Pty Ltd 29
Minter Ellison 29
Adler Corporation Pty Ltd (“Adler Corporation”) 29
Journalists 30
Broker 30
FACTUAL CIRCUMSTANCES - DISPUTED FACTS AND ASSOCIATED LEGAL ISSUES 30
Early Background to 18 April 2000 31
Mr Adler an “officer” of HIHC FIRST LEGAL ISSUE 32
CONCLUSION 39
HIH Investments, Authorities and Management – Background to events of June 2000 39
CONCLUSION 44
Payment of $10 million to PEE and HIH Share Purchases: April 2000 to 12 October 2000 45
CONCLUSION 60
Completing the HIH share purchases 61
CONCLUSION 62
Notification by Mr Adler to ASX of HIH share purchases 63
CONCLUSION 73
Minter Ellison letters of advice to Mr Adler of 28 June 2000 and 5 July 2000 73
Related Party Benefits without shareholder approval SECOND LEGAL ISSUE 75
CONCLUSION 81
Constitution of AEUT 81
CONCLUSION 85
Involvement of Messrs Adler and Williams and Adler Corporation in breach of Related Party Benefit Provisions (ss208-9) THIRD LEGAL ISSUE 86
CONCLUSION 89
Involvement of Mr Fodera in breach of Related Party Benefit Provisions (ss208-9) FOURTH LEGAL ISSUE 89
CONCLUSION 95
Subsequent events to entry into AEUT Trust Deed on 7 July 2000 principally concerning corporate approval or ratification 96
The payment of $10 million and its subsequent investment knowledge and approval of directors and of Investment Committee? 97
CONCLUSION 105
Concealment of payment from Board and Investment Committee? Para 74(1(l) of Statement of Claim. 106
CONCLUSION 108
If the payment was not approved or ratified by the Investment Committee did it need to be? Paragraph 74(1)(m) of Statement of Claim 109
CONCLUSION 111
Significance of omitting to obtain approval or notification 112
CONCLUSION 115
Further pleading matters 115
CONCLUSION 116
Events pertaining to the AEUT investment in HIH 13 September 2000 to 3 October 2000 116
CONCLUSION 117
Events pertaining to AEUT in relation to HIH shares 4 October 2000 to 13 and 14 December 2000 118
CONCLUSION 126
Events pertaining to AEUT in relation to HIH shares 13 and 14 December 2000 to 22 December 2000 127
CONCLUSION 133
Financial assistance by HIHC in the purchase of its parent’s shares which was materially prejudicial FIFTH LEGAL ISSUE 133
CONCLUSION 141
“Involvement” by Messrs Adler, Williams and Fodera, and of Adler Corporation in breach of s260A SIXTH LEGAL ISSUE 142
CONCLUSION 147
Application of s180 to s182 of the Corporations Act to the investment in AEUT and by AEUT in HIH in relation to Mr Adler SEVENTH LEGAL ISSUE 148
CONCLUSION 158
Application of s183 of the Corporations Act to the investment in AEUT and AEUT in HIH in relation to Mr Adler EIGHTH LEGAL ISSUE 160
CONCLUSION 161
Application of ss180 – 182 of the Corporations Act to the investment in AEUT and by AEUT in HIH in relation to Mr Williams 161
Section 180 and Mr Williams: investment in AEUT and HIH 162
Jones v Dunkel - adverse inference from not giving evidence 175
Error of judgment or permissible delegation? 176
CONCLUSION 177
Section 181 and Mr Williams 178
CONCLUSION 180
Section 182 and Mr Williams: investment in AEUT and by AEUT in HIH 180
CONCLUSION 182
Application of ss180—182 of the Corporations Act to the investment in AEUT and by AEUT in HIH in relation to Mr Fodera NINTH LEGAL ISSUE 182
Jones v Dunkel Inferences 196
CONCLUSION 200
Investments in dstore, Planet Soccer and Nomad 201
dstore 204
CONCLUSION 220
Mr Williams 222
CONCLUSION 224
Planet Soccer 224
CONCLUSION 233
Nomad Telecommunications Limited (“Nomad”) 233
CONCLUSION 246
Overall Assessment of the three unlisted investments 247
The Unsecured Loans 248
The Loan of $160,000 to Morehuman Pty Ltd 249
CONCLUSION 251
Intagrowth Fund No 1 loan of $500,000 251
CONCLUSION 253
Loan of $200,000 to Pacific Capital Partners and loan of $1,275,475 to PCP Ensor No 2 Pty Limited 254
CONCLUSION 259
Accessory liability of Mr Adler in any contraventions by Mr Williams of s181 and s182 260
CONCLUSION 260
Some Further Issues 260
Pleading 260
Principles applicable to self-dealing - advantage by Mr Adler as a director 261
No conflict of Mr Adler’s duty vis a vis PEE, and HIH/HIHC 264
Objective standard for duty to act in good faith and proper purpose under s181 264
Calculation of loss 265
Causation and loss TENTH LEGAL ISSUE 265
CONCLUSION 275
Mode of calculation of loss ELEVENTH LEGAL ISSUE 276
CONCLUSION 277

RECAPITULATION OF CONCLUSIONS 278
OVERALL SUMMATION 300
CIVIL PENALTY ORDERS AND DISQUALIFICATION AND RELIEF GENERALLY 302

INTRODUCTION AND OVERVIEW

1 ASIC seeks declarations that various alleged contraventions of the Corporations Act have been committed by three of the directors of a collapsed insurance company HIH Insurance Limited (“HIH”). These are alleged breaches of their directorial duties, or duties as an officer, owed to it and its subsidiary. The three directors are Mr Adler a non-executive director of HIH and also Mr Raymond Williams and Mr Dominic Fodera, both executive directors. Also joined as a Defendant is Adler Corporation Pty Limited (“Adler Corporation”) a company associated with the First Defendant Mr Rodney Adler, against which company accessory liability is claimed. Accessory liability is also claimed against the three directors by reason of their alleged involvement in contraventions of the Corporations Act said to have been committed by HIH and its subsidiary. ASIC seeks against each individual director compensatory relief, civil penalties and banning orders from acting as a director. Though not therefore criminal proceedings it has been common ground that proceedings of this character invoke requirements for prosecutorial fairness and a standard of proof commensurate with the gravity of the allegations. These proceedings are vigorously defended.

These reasons which follow continue this overview. It is followed by an elaboration of the facts, identifying issues, legal and factual, as they arise. Competing arguments are explained and why they are resolved in a particular way. Finally, there is a recapitulation of the conclusions, with an overall summation at the end. The Table of Contents, headings and cross-references are intended to enable readers to readily find their way through the judgment, despite its length, and to encourage a reading of its conclusions with the reasons which support them.

2 The alleged contraventions are first that each director breached statutory duties under the Corporations Act owed to HIH and its wholly owned subsidiary HIH Casualty & General Insurance Company Limited (“HIHC”), as director or officer. Each director is also said to be liable as an accessory, being knowingly “involved” in contraventions by HIH and HIHC of two sets of provisions of the Corporations Act. The first prohibits “related party benefits” on a non-arm’s length basis without shareholder approval (ss208-9). The second prohibits the giving by a company of financial assistance for the purchase of its shares, or its parent’s, where materially prejudicial to the company, its shareholders or its creditors (ss260A and 260D). The Defendants deny any such contraventions. If successful, ASIC seeks relief (which I have ordered be dealt with separately with any supplementary character evidence) by way of civil penalties, compensation orders and orders for disqualification from acting as a director. ASIC so proceeds against the First, Second and Third Defendants, being Mr Adler, Mr Williams and Mr Fodera respectively, and against Adler Corporation as Fourth Defendant.

3 The relevant proceedings in relation to the alleged breaches of the Corporations Law are deemed by s1383 of the Corporations Act 2001 (Cth) to have been brought under those sections of the Act which correspond to the provisions of the Corporations Law referred to in the Statement of Claim filed in the relevant proceedings. This follows from s1400(2) of the Corporations Act which creates “substituted liabilities” and its definition of “carried over provisions” in s1371(1). I shall therefore refer to these alleged contraventions by reference to the Corporations Act rather than the Corporations Law, unless quoting from the pleadings.

4 The First Defendant Mr Adler, is sued as a non-executive director of HIH, the parent company. He is also sued as an alleged officer (non-executive) of its wholly owned subsidiary HIHC. Mr Adler denies he is a director or officer of HIHC. Mr Adler is being sued for alleged breaches of his statutory duties owed to HIH and HIHC and also, in his case only, as a director of the trustee company of a unit trust, the Australian Equities Unit Trust (“AEUT”), in which HIHC invested, namely Pacific Eagle Equity Pty Limited (“PEE”). Adler Corporation, also joined as a Defendant for accessory liability, at all material times controlled PEE and (with two others) acquired the majority of the units in AEUT. Those alleged contraventions relate to the first transaction constituted by HIHC’s investment of $10 million in the trust (“the trust transaction”). Then they relate to two further sets of transactions by the trust. Thus the second set of transactions involves a substantial purchase of HIH shares by AEUT contemporaneously with and made from the $10 million investment (“the HIH share transaction”). Later there is the third set of transactions relating to the sale by Adler Corporation to AEUT of certain unlisted share investments bought by AEUT from Adler Corporation at the latter’s cost (“the unlisted investment transaction”). Finally there is the fourth set of transactions comprising AEUT’s loans (unsecured save in two cases by unsecured guarantees) to entities associated with Mr Adler and Adler Corporation (“the unsecured loan transactions”). Proceedings against Mr Adler and Adler Corporation are in respect of all four sets of transactions.

Proceedings against the other two directors, Messrs Williams and Fodera, are in respect of the first two sets of transactions only. This is clear from the declarations sought and the material facts pleaded, though the pleaded Particulars are similar.

5 The directors against whom action is brought include two of the executive directors of HIH, Mr Williams, Chief Executive Officer of HIH and Mr Fodera, HIH’s Finance Director. They are the Second and Third Defendants respectively. There is no dispute that both are directors of HIHC as well as HIH. Accessory liability is also claimed against them, as elaborated below.

6 Accessory liability under the Corporations Act requires knowing “involvement” in the elements of the relevant contravention. Thus s79 of the Corporations Act provides:

“79 Involvement in contraventions
A person is involved in a contravention if, and only if, the person:
(a) has aided, abetted, counselled or procured the contravention; or
(b) has induced, whether by threats or promises or otherwise, the contravention; or
(c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d) has conspired with others to effect the contravention.”

7 Speaking generally, the provisions of the Corporations Act of which contravention as an officer or director of HIH and HIHC is alleged are as follows. Section 180 (lack of care and diligence), s181 (lack of good faith or proper purpose), s182 (improper use of position) and s183 (improper use of information). These contraventions are alleged against all three Defendants, save in relation to s183 where the allegation is only against Mr Adler and Adler Corporation. Mr Adler is sued in relation to PEE as well, for contravention of ss180, 181 and 182 (but not s183); only he of the Defendants was a director of PEE. In addition accessory liability is alleged, based on knowing involvement.

(a) against Mr Adler for involvement in contraventions by Mr Williams of ss181 and 182 of the Corporations Law in relation to HIH and HIHC;

(b) against Adler Corporation for involvement in contraventions of ss181, 182 and 183 in relation to HIH and HIHC and for involvement in contraventions of ss181 and 182 in relation to PEE;

(c) against Messrs Adler, Williams and Fodera, and against Adler Corporation, for involvement in contraventions by HIH and HIHC of s208 with s209(2) (prohibiting related party benefits without a shareholders’ resolution) and s260A (prohibiting financial assistance by a company in the acquisition of its shares unless no material prejudice).

8 The director/officer liability provisions of the Corporations Act said to have been breached can be broadly summarised as follows. Section 180 requires the director or officer to exercise the degree of care and diligence that a reasonable person would exercise in the corporation’s circumstances, with a “safe harbour” for those who satisfy the “business judgment” rule. Section 181 requires the director or officer to act in good faith in the best interests of the corporation and for a proper purpose. Section 182 prohibits a director or officer from acting improperly so as to use his position to gain an advantage for themselves or for someone else, or to cause detriment to the corporation. Section 183 precludes a person who obtains information because he is a director, from improperly using that information to gain an advantage for himself or for someone else, or to cause detriment to the corporation.

9 Though the actions are primarily brought against the three directors earlier mentioned, Adler Corporation, shown in its last annual return to be fifty percent owned by Mr Rodney Adler and fifty percent owned by his wife, is also subject to these proceedings in the way I have earlier outlined.

10 None of the Defendants elected to give evidence. Such significance as that may have falls to be considered when considering what inferences, if any, may be drawn in relation to particular matters. Contrary to ASIC’s position, the Defendants contend that no adverse inferences should be drawn in the circumstances.

Overview of relevant transactions and of the principal allegations and defences.

11 I will now describe in summary form as neutrally as possible the transactions said to give rise to the alleged contraventions, briefly mentioning the centrally relevant pleadings. The necessary elaboration of what occurred is dealt with later in this judgment.

12 The first transaction (the trust transaction) relied upon by ASIC as giving rise to the relevant contraventions proceeded by a payment by cheque of $10 million on 15 June 2000 by HIHC to PEE, controlled by Mr Adler. This payment followed earlier correspondence commencing 9 June 2000 between Mr Adler and Mr Williams and later steps involving various officers of HIH and HIHC. PEE either contemporaneously or shortly thereafter became the trustee of AEUT. Control of AEUT was vested in Adler Corporation with two others. Adler Corporation enjoyed an entitlement to ten percent of all distributable income via A class units issued at an issue price of $25,000. The remaining units being B class units, were issued to HIHC at a price of $10 million, thus appropriating the $10 million earlier paid over. Those B class units conferred an entitlement on HIHC to receive ninety percent of AEUT’S “distributable income”.

13 The characterisation of that payment of $10 million initially as an unsecured loan (as the Plaintiff prefers) or as throughout impressed with a trust (as alleged by the Defendants) and, if so, its precise legal character, is a matter of dispute. It is the Plaintiff’s view (disputed by the Defendants) that there would be no difference in result, under either characterisation; that is to say, the same contraventions would occur.

14 That payment of $10 million by HIHC to PEE, was, according to ASIC (but disputed by the Defendants):

(a) made at the instigation of Mr Adler, with Adler Corporation “involved” so liable as an accessory ;

(b) with the agreement of and under the direction of Mr Williams;

(c) with the assistance of Mr Fodera in implementing the payment and who (it is alleged) failed, with Messrs Adler and Williams to bring that transaction and the HIH share purchases to the attention of other directors of HIH or to its investment committee so that neither were approved or authorised as required by applicable investment guidelines by HIH’s Investment Committee, or by the Board;

(d) employed under a deed for AEUT that unduly favoured Mr Adler and Adler Corporation and lacked basic safeguards, permitting as it did self-dealing with no requirement for independent appraisal;

(e) was made and invested by AEUT without the necessary Board or Investment Committee approval.

15 Such payment was first utilised to the extent of $3,991,856.21 in paying for the purchase on the stock market of shares in HIH instigated by Mr Adler over an approximate two week period starting 15 June 2000. This was in circumstances where, according to ASIC, but disputed, the stock market was led to believe by Mr Adler that the purchases were made by Mr Adler or family interests associated with Mr Adler (as distinct from AEUT or HIH), in order to shore up the HIH share price. Adler Corporation was already a substantial shareholder in HIH. Such HIH shares were subsequently sold by AEUT at a loss of $2,121,261.11 on 26 September 2000. just over three months later.

16 The $10 million payment was later (commencing 25 August 2000) utilised in part in the purchase at cost from Adler Corporation of various venture capital unlisted investments made by it in technology or communications stocks. Thus AEUT bought dstore Limited on 25 August 2000 for $500,002, Planet Soccer International Limited on 25 August 2000 for $820,748 and Nomad Telecommunications Limited on 26 September 2000 for $2,539,000. I shall refer to them as, respectively “dstore”, “Planet Soccer” and “Nomad” and collectively as “the unlisted investments”. The AEUT purchases were made at the original cost to Adler Corporation in each case. Adler Corporation had earlier acquired dstore in February 2000, Planet Soccer in March 2000 and Nomad in August 1999. ASIC contend that this was in circumstances where their subsequent resale to AEUT was to the advantage of Adler Corporation because of their known financial and capital raising difficulties which potentially, if not actually, threatened their viability. While contending that it is not necessary to establish this, ASIC also contends that the acquisitions were in each case to the disadvantage of PEE and AEUT. The purchases were made without there having been any independent analysis of the worth of the relevant investments in circumstances where the purchases had occurred after the collapse in mid-April 2001 of the stock market for technology and communications stocks. The purchases were (according to ASIC) made following unsuccessful attempts to find other investors, as was, or should have been exercising reasonable diligence, known to Mr Adler and Adler Corporation. AEUT suffered a loss on all three investments totalling $3,859,750 (ignoring interest). That loss was realised in the case of Nomad and dstore in less than four months after PEE’s acquisition of them from Adler Corporation.

17 In addition, ASIC alleges that Mr Adler, between 26 July 2000 and 30 November 2000, caused three unsecured loans totalling $2,084,345 to be made by AEUT without adequate documentation to companies or funds associated with Mr Adler and/or Adler Corporation to the latter’s advantage. It is also alleged by ASIC that, though not necessary to establish this, the unsecured loans were to AEUT’s disadvantage.

18 I have described these transactions in broad terms only. It is important to emphasize that proof of the relevant contraventions depends upon ASIC making out its pleaded case. Much of each Defendant’s case is that ASIC has fallen well short of doing so. The Defendants have pleaded to ASIC’s Statement of Claim, though on the basis that they are not obliged to do so in the case of proceedings such as this, prosecuted for civil penalty.

19 Without attempting to be exhaustive, I shall attempt to summarise the contraventions relied upon by reference to the pleaded Particulars centrally relevant. I do so without reproducing the earlier paras 15 to 60 of ASIC’s Statement of Claim. These set out in greater detail material facts relied upon by ASIC in relation to the four sets of transactions insofar as Mr Adler and Adler Corporation are concerned. Only paras 15 to 46 apply to Messrs Williams and Fodera (being in respect of the first two transactions). That detail where relevant is to be found subsequently in this judgment, where I deal with the specific transactions.

20 For overview purposes, I now set out a summation of the alleged contraventions against each of the Defendants with the centrally relevant associated pleaded Particulars.

Mr Rodney Adler

21 It is alleged by ASIC that Mr Adler by reason of his pleaded conduct breached ss180(1), 180(1), 182(1) and 183(1) of the Corporations Act in relation to HIH, HIHC and (save as to s183) PEE.

22 Paragraphs 15 to 60 of the Statement of Claim set out the material facts relied on in relation to Mr Adler (and Adler Corporation). They contain a description of the relevant transactions being all four sets as comprise the transactions (see para 4 above). The further pleaded Particulars principally relied upon are to be found in para 74, though in the case of s183, additional Particulars are to be found as well (at para 95 of the Statement of Claim). Because of its importance to both ASIC’s case and the Defendants’ defences, I set out para 74 in full, as applicable to ss180 to 183 inclusive.

“74. By reason of the matters pleaded in paragraphs 15 to 60 (inclusive) above, Adler, being a director of HIH, failed to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise if they:
74.1 were a director or officer of a corporation in HIH’s circumstances; and
74.2 occupied the office held by, and had the same responsibilities with the corporation, as Adler;
and thereby contravened section 180 of the Corporations Law.

Particulars
(1) By his conduct as pleaded, Adler caused or procured HIHC, a subsidiary of HIH, to make a payment which:

(a) was a substantial sum of money;
(b) was on terms which were not finalised and which were not documented at the time the payment was made;
(c) was made to a company which Adler controlled;
(d) directly or indirectly advantaged Adler, Adler Corporation and PEE;
(e) was made on terms which, to the extent that they were known, were not reasonable in the circumstances if HIHC and PEE had been dealing at arm’s length;
(f) was made with the contemplated object of enabling PEE to acquire from Adler Corporation unlisted investments which were not the subject of independent analysis;
(g) further, or in the alternative to (f), was made with the object of:
(i) enabling PEE to purchase shares in HIH;
(ii) enabling Adler to state publicly that he was purchasing HIH shares;
and thereby maintain or stabilise the HIH share price;
(h) was ultimately accounted for as a subscription for a unit in a trust the terms of which were not reasonable as far as HIH was concerned and over which HIH had no control;
(i) resulted in HIH and HIHC contravening section 208 of the Corporations Law by reason of the fact that no steps were taken to obtain the approval of the members of HIH;
(j) resulted in HIHC, a subsidiary of HIH, contravening section 260A of the Corporations Law;
(k) was not disclosed to the directors of HIH other than Adler, Williams and Fodera or to the Investment Committee of HIH;
(l) was made in such a way that it would not come to the attention of the directors of HIH other than Adler, Williams and Fodera or to the attention of the Investment Committee of HIH;
(m) was not approved or ratified by the Investment Committee of HIH;
(n) if, contrary to the Plaintiff’s primary allegation at paragraph 20.6 above, Williams and Fodera (or either of them) were not aware that the $10 million payment was to be used in whole or in part by PEE to pay for the purchase of shares in HIH, was made in circumstances where this purpose was not, but should have been, disclosed by Adler to them.
(2) By conduct as pleaded, Adler caused or procured PEE, as trustee of the AEUT, to purchase shares in HIH and purchase unlisted securities from Adler Corporation and to make loans to entities related to or associated with Adler in circumstances where those purchases and loans:
(a) were not advantageous to the AEUT, the unitholders of the AEUT, including HIHC, or to HIHC’s holding company, HIH; and
(b) were not disclosed to other directors of HIH or brought to the attention of the Investment Committee of HIH.”

23 At para 95 the additional Particulars are pleaded as follows:

“Particulars
(a) The information obtained by Adler was information concerning the Investment Committee procedures and the Investment Guidelines, the HIH investment portfolio and the susceptibility of Williams to a proposal whereby HIH invest money in less conservative ways, such as in unlisted equities and venture capital.
(b ) The Plaintiff otherwise repeats the particulars to paragraph 74.”

24 The Statement of Claim (para 97) then pleads accessory liability on the part of Mr Adler. This is by reason of his alleged involvement in the earlier pleaded alleged contraventions by Mr Williams of s181 and s182. These are said to be in relation to the trust transactions and the HIH share transaction.

25 Then it is pleaded that Mr Adler has breached s209(2) (in failing to get member approval to a “related party” transaction), in relation to both HIH and HIHC. This is by reason of Mr Adler’s alleged “involvement” in a breach of s208 by HIH and HIHC respectively in consequence of HIHC’s earlier described payment of $10 million. It is alleged that HIH, as a public company and HIHC as an entity that the public company controls, has, contrary to the statutory prohibition in that behalf, given a “financial benefit” (as defined in ss9 and 229) without members’ approval, in circumstances where the “arm’s length” defence under s210 is not applicable. The latter defence, speaking generally, applies where the financial benefit is on terms that:

“(a) would be reasonable in the circumstances if the public company or entity and the related party were dealing at arm’s length; or
(b) are less favourable to the related party than the terms referred to in paragraph (a).”

26 Reliance is placed upon paras 3.5, 61, 62 and 63 of the Statement of claim in so far as any such contravention by HIH and HIHC is concerned and on paras 15, 17 and 20 in so far as any “involvement” by Mr Adler is concerned. The Defendants dispute whether the payment of $10 million by HIHC to PEE on 15 June 2000 amounted to the giving of a “financial benefit” to each of PEE, Adler Corporation and Mr Adler (para 62 of the Statement of Claim) and contend that the arm’s length defence in s210 is made out.

27 Finally, breach of the financial assistance provisions of s260A is pleaded in relation to HIHC. Section 260A prohibits a company giving financial assistance to a person to acquire its or its holding company’s shares (here HIH’s). This is save where it does not materially prejudice:

(i) the interests of a company or its shareholders; or

(ii) the company’s ability to pay its creditors.

That indeed is what the Defendants contend, by way of defence. They rely on the payment as impressed from the outset with a trust of one or other kind. But it was a trust whereby the shares when acquired were held absolutely on trust for HIHC, until AEUT was constituted. Since the shares were on the day of purchase worth what they were purchased for, the Defendants say there could be no material prejudice, this being so even if the shares are to be treated as held on the terms of the AEUT trust. (The same argument is put to obviate any “financial benefit” for s208 purposes.) The Defendants deny the characterisation of the $10 million as an unsecured borrowing. They accept it was made available, with documentation following only later.

28 Again, Mr Adler is alleged to have been “involved” in that alleged contravention by HIHC under s260D(2), so as thereby to contravene s260A. The particular financial assistance said to have occurred is the provision of $10 million by HIHC to PEE in the circumstances referred to in paras 20 to 23 (inclusive) of the Statement of Claim. This is said to amount to the provision of financial assistance by HIHC to enable PEE to acquire shares in its holding company, HIH. Paragraphs 20 to 23 essentially set out the events of 15 June 2000 (see later) when $10 million was handed over and shares were subsequently purchased for PEE by the monies so funded in HIH, being events not themselves in dispute as to their occurrence.

29 Paragraph 69 of the Statement of Claim then pleads the material prejudice and the Particulars relied upon to establish it:

“69. The giving of the financial assistance materially prejudiced the interests of HIHC and its shareholder, HIH.

Particulars
(a) a diminution in the value of HIHC’s stake in PEE reflected by actual loss on the HIH share purchases of $2,102,802.74;
(b) exposure to diminution in the value of HIHC’s stake in PEE should the price of HIH shares fall and therefore cause PEE to suffer a loss;
(c) loss of use of $3,973,397.84 which could have been used for other investments or other business purposes;
(d) the creation of the false impression that a high profile director of HIH such as Adler was funding the purchase of HIH shares rather than HIHC;
(e) the exposure to the risk of publication of the fact that HIHC was funding the acquisition of HIH shares and the consequent negative impact on HIH, HIHC and the HIHC stake in PEE of publication of that information in the circumstances of the declining HIH share price;
(f) neither HIH nor HIHC acquired any, or any satisfactory, means of ensuring that HIHC could recover the amount provided together with interest thereon, or profit in respect of its use.”

30 It is then said in para 71 of the Statement of Claim that by reason of his earlier conduct (as pleaded in paras 15, 17, 19, 20 and 22 of the Statement of Claim) Mr Adler was involved in the contravention.

31 That completes the description of the contraventions alleged in relation to Mr Adler. I now turn to Mr Williams and Mr Fodera.

Mr Raymond Williams

32 It is alleged by ASIC that Mr Williams, by reason of his pleaded conduct in relation to the trust transaction and the HIH share transaction, breached ss180(1), 181(1) and 182(1) of the Corporations Act in relation to HIH and HIHC. No contravention is alleged in relation to s183.

33 The Particulars relied upon are to be found in paragraph 77 and are essentially the same as those earlier quoted in relation to Mr Adler in paragraph 74 (with the omission of sub-paragraph (n). It will be noted that subparagraphs (f) and (g) of para 74 of the pleadings (quoted in para 22 above) are expressed either as cumulative or alternative. Thus Mr Williams’ involvement in the contemplated object of the $10 million investment could be limited to the HIH share investment, if only subparagraph (g) were applied to him. There is also paragraph 92 which pleads the basis for the contravention of s182 alleged, as follows:

“92. By reason of his conduct pleaded in paragraphs 15 to 46 (inclusive) above, Williams, as a director of HIHC, improperly used his position to:
92.1 gain an advantage for Adler;
92.2 in the alternative, gain an advantage for PEE;
92.3 in the alternative, gain an advantage for Adler Corporation;
and thereby contravened section 182 of the Corporations Law.

Particulars
The Plaintiff repeats the particulars to paragraph 77.”

34 In addition, ASIC plead that Mr Williams is in breach of s209(2) in relation to HIH and HIHC by reason of his “involvement” in the earlier pleaded breach by HIH and HIHC of s208; see Statement of Claim, para 66.

35 Finally, it is pleaded that Mr Williams has breached s260D(2) in relation to HIHC giving financial assistance for purchase of HIH’s shares, on a similar basis to Mr Adler; see Statement of Claim, para 72.

Mr Dominic Fodera

36 ASIC’s pleaded case for Mr Fodera is essentially the same as it is for Mr Williams (alleging breach of ss180, 181 and 182 of the Corporations Act but not s183). The relevant Particulars are found in para 79 of the Statement of Claim, which is essentially similar to para 74 again. Accessory liability under s209(2) and s260D(2) is also alleged in relation respectively to the alleged breach by HIH/HIHC of s208 and by HIHC of s260A.

Adler Corporation Pty Limited

37 The Statement of Claim essentially pleads accessory liability on the part of Adler Corporation in relation to the earlier pleaded contraventions by HIH and HIHC in paras 64 and 70 of the Statement of Claim, the earlier pleaded contraventions by Mr Adler, as earlier described, and the earlier pleaded contraventions by Mr Williams, as earlier described. This is with the consequence that Adler Corporation is said to have “thereby contravened sub-sections 181(2), 182(2), 183(2), 209(2) and 260D(2)”. The following additional Particulars are pleaded:

“(a) Adler Corporation acquired the majority of units in the AEUT;
(b) Adler Corporation at all material times controlled PEE;
(c) The acquisition by PEE of Adler Corporation’s interests in dstore, Planet Soccer and Nomad Telecommunications Limited.”

38 These pleadings are to be found in relation to Adler Corporation at para 98 of the Statement of Claim.

Mrs Lynda Adler

39 I simply note that no contraventions are alleged against Mrs Adler, wife of Mr Adler, nor orders sought against her. She remains a Fifth Defendant and is shown in the public record as a 50% shareholder in Adler Corporation.

Defence Overview

40 In an overview such as this, it is not possible to summarise in any fully comprehensive fashion the detailed contentions of the various defences. There was, generally speaking, broad adoption by the other Defendants of the First and Fourth Defendants’ contentions. What follows is therefore by way of broad summation, drawn primarily from submissions, and is subject to the elaboration later in this judgment.

41 The Defendants severally or as indicated:

(a) dispute a substantial number of the factual matters relied upon by ASIC;

(b) contend that the pleaded Particulars relied upon by ASIC are not made out, so as to establish any of the alleged contraventions,

(c) contend these are proceedings for civil penalty where the Plaintiff must be strictly held to its pleaded case and has failed to establish it;

(d) contend that the relevant payment of $10 million to AEUT was not even in the first instance a loan, but was from the outset impressed with a trust in favour of HIHC absolutely, as were the shares in HIH bought therewith with the detailed terms of such trust later becoming those of AEUT when it was subsequently constituted, with the consequence that, taking into account the other relevant circumstances, this

(i) obviated any “financial benefit” as defined in s229 for s208 purposes, and any “financial assistance” by HIHC or HIH of the kind dealt with by s260A of the Corporations Act ;

(ii) satisfied the arm’s length exception in s208 in relation to any related party financial benefits, if (contrary to their denial) such there were;

(iii) ensured that any such financial assistance (if contrary to their denial such there were) did not “materially prejudice” the “interests of the company and its shareholders” or “the company’s ability to pay its debts”, and so

(iv) precluded any breach by either HIHC or HIH of s260A of the Corporations Act in respect of which any of the Defendants could be “involved” so as to render them liable;

(e) contend (in the case of the First, Second and Fourth Defendants) that the evidence, expert and otherwise, does not support the pleaded Particulars relied upon by ASIC to establish a breach of either s260A of the Corporations Act or of the related party benefit provisions (ss208 and 209(2)) in relation to Mr Adler, Adler Corporation and Mr Williams;

(f) in relation to knowing “involvement” in any relevant contravention (if contrary to the Defendants’ primary argument there were), contend that the relevant Defendants lacked the necessary actual knowledge of all material ingredients of such contravention so as to give rise to accessory liability and in the case of Mr Fodera, lacked the degree of active participation required for such liability;

(g) In relation to the alleged contravention of ss180, 181, 182 and 183 arising from Mr Adler’s alleged involvement in the particularised transactions (in first causing or procuring HIHC to make a payment of $10 million and second, causing or procuring PEE as trustee of the AEUT to purchase shares in HIH and thereafter unlisted securities from Adler Corporation and to make loans to entities related to or associated with Adler Corporation) the First and Fourth Defendants contend:

(i) there is no evidence that Mr Adler was, or was acting as, an officer of HIHC (as is necessary to ground liability in relation to HIHC) though concededly he was acting as an officer of PEE and was a director of HIH;

(ii) the remaining Particulars are not made out, in particular the alleged lack of board authority or lack of necessary approval by the Investment Committee for the payment and subsequent individual investment in HIH, the Defendants contending that a protocol applied whereby Mr Williams’ authority, here given, sufficed so that any further approval was unnecessary;

(iii) such Particulars do not suffice for the relevant elements of s180 being made out, or are unsupported by the evidence;

(iv) as to the investments in unlisted securities acquired from Adler Corporation at its cost, contrary to the pleaded Particulars or the assumptions underlying them, these

(aa) were acquired in accordance with HIH’s desire to accept greater speculative risk in return for the prospect of higher reward,

(bb) there had been sufficient disclosure,

(cc) the alleged lack of “due diligence” enquiry in relation to those investments was not pleaded and had in any event a “highly variable” meaning, and

(dd) the evidence as to the value and prospects of the three investments at the time acquired justified the cost price paid by AEUT, having regard to HIH’s desire for higher risk/reward through investing in speculative stocks,

(v) as to the unsecured loans, contrary to the pleaded Particulars,
(aa) these were documented;

(bb) they were at interest,

(cc) sufficiently disclosed,

(dd) in two cases where said to be unsecured, they were in fact secured by personal guarantee, and

(ee) were all on reasonable terms (in answer to ASIC’s contention that the loans were not “advantageous” to AEUT),

(vi) as to s183 in relation to Mr Adler, and the allegation of his improper use of information, being information concerning the Investment Committee procedures and the Investment Guidelines, the HIH investment portfolio and the susceptibility of Mr Williams to a proposal whereby HIH invest money in less conservative ways, such as unlisted equities and venture capital,
(aa) there was the “protocol” referred to in (g)(ii) above, enabling Mr Williams to authorise these investments without need for reference to the Investment Committee or the Board, and

(bb) such investment in fact fulfilled HIH’s bias towards speculative and technology stocks in order to continue HIH’s earlier out-performance of its benchmarks for investment performance through such high risk/reward investment.

See for elaboration of this and other defence grounds, principally the First and Fourth Defendants’ written submissions of 19 December 2001.

(h) contend that no loss has been proved by ASIC on the part of PEE at the standard of proof required but that even if it had, it has not been shown that any such loss “resulted from” the alleged conduct of the Defendants or any of them, as required by s1317H(1)(b) of the Corporations Act dealing with compensation orders, more especially in view of the evidence by at least one of the directors that he would have voted to ratify; in any event the methodology for calculating interest by reference to 30 day bank bills is disputed;

(i) Mr Fedora, Third Defendant and the Finance Controller of HIH/HIHC contends that:

(i) ASIC has not proved its case as pleaded against Mr Fodera (see paras 1 to 99 of Third Defendant’s written submissions of 20 December 2001) and the drawing of adverse inferences against Mr Fodera by reason of his silence cannot be justified in the circumstances (paras 100 to 121 of submissions);

(ii) in any event, ASIC has not proved any contravention by Mr Fodera of ss180(1), 181(1), 182(1), or accessory liability under ss209(2) or 260D(2) (paras 122 to 171 of submissions), but

(iii) if a contravention has been proven, then Mr Fodera ought be relieved wholly from liability pursuant to s1317S and/or s1318 and no order for disqualification or for a pecuniary penalty should be made pursuant to ss206C or 1317G (paras 179 to 190 of submissions), and

(iv) in respect to the order for compensation sought pursuant to s1317H, subsection 1317H(1)(b) has not been satisfied in that any loss or damage suffered by HIH or HIHC has not “resulted from” any contravention by Mr Fodera (paras 191-196 of submissions);

(j) in answer to the allegation that Mr Adler and Adler Corporation were liable as accessories as being “involved” (within s79) in the alleged contraventions by Mr Williams of ss181 and 182 of the Corporations Law . Mr Adler contends (and Adler Corporation mutatis mutandis) that
(i) there was no actual knowledge of all the material ingredients of the alleged contraventions of Mr Williams (if indeed there were such), and

(ii) there was no such contravention for the reasons earlier set out (see, inter alia, paras 28—54 and 135—137 of the First Defendant’s submissions of 19 December 2001)

(k) Mr Williams disputes that he contravened any of s180 to s182 of the Corporations Act or was involved for accessory liability purposes in any contravention of s208 or s260A and in particular he contends, inter alia, that
(i) the HIH share purchase, viewed at the time, was in the interests of HIH;

(ii) Mr Williams had no interest other than the interests of HIH it not “having been seriously suggested otherwise”;

(iii) Mr Williams was entitled to assume Mr Adler would use the payment in a lawful manner;

(iv) there is no evidence Mr Williams knew of any of the purposes or motivations of Mr Adler alleged by the Plaintiff, the evidence said to support the position that Mr Williams knew of the purchase by PEE of Adler company investments being too indirect to be relied upon for such a serious finding, is inconsistent with the schedule to the ASIC letter of 22 December 2000 (PX1/268) and even if accepted does not mean that Mr Williams knew or should have known that the transaction would be to the detriment of HIH;

(v) the decision to advance $10 million for investment by PEE was within Mr William’s authority as Chief Executive Officer, to whom the Board had delegated the day to day management of the HIH Group and to suggest that every transaction needed Investment Committee approval in advance is to misunderstand the workings of large public companies where the Board delegates to the chief Executive Officer its powers of management of the company; AWA v Daniels (1992) 7 ACSR 759 at 867;

(vi) the evidence is clear that, contrary to the Plaintiff’s allegations, Mr Williams did not attempt to conceal the transaction since all members of the Investment Committee knew about it, as did the Chairman soon after the transaction occurred;

(vii) Mr Williams relied on Mr Adler and the advice provided by Minter Ellison that the transaction was lawful; Mr Williams asked Mr Howard (HIH General Manager, Finance) to obtain that advice and ensure the commercial agreement was properly documented the legal advice that the transaction was lawful was provided by Mr Adler to Mr Williams on 21 July 2000 (PX1/215); it related to an investment of a relatively minor magnitude (0.36% of HIH’s funds under management); that advice was subsequently confirmed by a different partner of Minter Ellison in advice provided to HIH on 29 November 2000.

(viii) the transaction was on arm’s length terms and there is therefore no breach of s209(2) (adopting First Defendant’s argument); and

(ix) there is no breach by Mr Williams of s260D(2) as there is no evidence Mr Williams agreed to lend Mr Adler money to acquire shares in HIH; the money was lent to PEE for investment under the direction of Mr Adler; the internal investigations of the transactions concluded that Mr Williams had no such prior knowledge.

See for elaboration of this and other defence grounds written submissions on behalf of Mr Williams of 20 December 2001.

(l) All Defendants again dispute the admissibility of the evidence of ASIC’s expert, Mr Cameron, contending that he failed to demonstrate for purposes of s79 of the Evidence Act that it was given by him as an expert with specialised knowledge in the relevant field (see my judgment of 29 November 2001 admitting that evidence as expert evidence) contending also (in the case of Mr Fodera) that it was admitted provisionally based on assumptions subsequently shown to be in disconformity with the evidence; they also attack the approach and methodology of ASIC’s valuation expert Mr Carter.

(m) Each Defendant

(aa) invokes the business judgment rule both as a statutory element or alternatively as a statutory defence (together with its general law equivalent), in relation to allegations of breach of s180 of the Corporations Act (care and diligence)

(bb) contends that the Court should decline to draw adverse inferences of the kind the Plaintiff invites the Court to draw from the fact that such Defendant did not give evidence in these proceedings; see written submissions in relation to Mr Williams paras 6—9, Mr Fodera paras 100 to 121 and Mr Adler para 152.


DRAMATIS PERSONAE

42 I now turn to the persons and entities principally involved, identifying them briefly in uncontroversial fashion, for ease of later reference.

HIH and HIHC
Directors
Geoffrey Arthur Cohen Director HIH and Chairman of this Board

Justin Herbert Gardener Director HIH

Hermann Franz Randolph Wein Executive Director HIH and HIHC

Charles Percy Abbott Director HIH

Robert Reginald Stitt, QC Director HIH

Rodney Stephen Adler Director HIH

Raymond Reginald Williams Director HIH and HIHC and Chief Executive Officer of HIH

Terence Kevin Cassidy Director of HIH and HIHC holding the executive position described as “Managing Director, Australia”

Dominic Fodera Executive Director and Finance Controller HIH and HIHC

George Osvald Sturesteps Executive Director HIH and HIHC

Of the above directors, Messrs Cohen, Adler, Fodera and Cassidy (but not Mr Williams) were members of an investment committee of HIH of which Mr Cohen was its chair, and on which committee was also Mr John Ballhausen (described as attending by invitation) (see “officers” below) and also it included external consultants who attended by invitation (see “other” below); TB, 2214, 2364, 2439. (Note references to “TB” are to the agreed Tender bundle exhibit PX1. The prefix “1” etc denotes the volume of the Tender Bundle.)

Officers
Frederick Lo HIH and HIHC Company Secretary

William Herbert Howard HIH General Manager Finance

Doug Cubbin Head of Accounts Payable and Management Accounting

John Ballhausen General Manager Investments

Michael Rook (not member of investment committee but attended by invitation)

Martin Braden (not member of investment committee but attended by invitation)

Other
Dr Steven Vaughan (not member of investment committee but attended by invitation). Dr Vaughan was not a HIH employee

Peter Thompson (no evidence of position)

Planet Soccer International Limited (“Planet Soccer”)
Aldo Santo Marcolin Director

Paul Woods Director and CFO

David Laundauer Burdett Buckerage Young

Anthony Laurence Davis Burdett Buckerage Young

dstore Limited (“dstore”)

David Gold Chief Executive Officer

Nicholas Frank Greiner Director and Chairman

Ari Stavropoulos Executive – Hindal Corporation

Simon Cant Employee of “Tinshed” an investment consortium.

Leslie Janusz Hooker Director Tinshed

Nomad Communications Limited (“Nomad”)
Carlton James Taya CEO and Group MD

Stephen Patterson Warrener Company Secretary and CEO

David Samuel Greatorex Chairman

Maxim James Carling Investment Banker – Cygnet Securities

Bradley Lawrence Prout Senior Vice President of Finance - BT

Adrian Blake Leighton Holdings

Pacific Capital Partners Pty Ltd and PCP Ensor No 2 Pty Ltd
Frank Wolfe Director

Suzanne Cameron Director PCP Ensor No 2 Pty Ltd

John L’Estrange No evidence of position

Morehuman Pty Ltd
Salman Ghassan Bayni Director

Intagro Projects Pty Ltd
Andrew George Robinson Director

Minter Ellison
Leigh Brown Solicitor

Margaret Taylor Solicitor

Adler Corporation Pty Ltd (“Adler Corporation”)
Rob Baulderstone Secretary

Lynda Sharon Adler Director

Journalists
Mark Francis Westfield Reporter – The Australian

Morgan Mellish Reporter – Australian Financial Review

Broker
Brent Roderick Potts Chairman – Southern Cross Equities Ltd

Stuart Foster Foster Stockbroking

FACTUAL CIRCUMSTANCES - DISPUTED FACTS AND ASSOCIATED LEGAL ISSUES

43 The Plaintiff was directed to prepare a “narrative of facts” to which the Defendants indicated agreement or non-agreement. For the earlier background (to 18 April 2000) I have reproduced much of that narrative amplifying it when necessary. Thereafter, given the importance of the more contemporary events, where much less agreement could be anticipated from the parties as to inference and (often) underlying fact, I have set out the evidence in more detail. Where matters of fact or inference require resolution, I have made findings stating the basis for them. I have also dealt with preliminary and other issues of law. Thus I have dealt with whether Mr Adler was acting as an “officer” of HIHC, within the meaning of s9 of the Corporations Act so as to have the statutory duties that attend that position. I have also had to determine whether HIH or HIHC contravened s208 or s260A of the Corporations Act, so as to give rise to the possibility of accessory liability on the part of the relevant Defendants. Then, I have had to determine whether each were (knowingly) involved, within s79 of the Corporations Act, in relation to such contraventions as were made out, where accessory liability is alleged. Finally, I have had to determine whether any contraventions of ss180 – 183 have occurred. Because there is some overlap between these questions in relation to each of the directors (and also Adler Corporation) there is some repetition of the evidence in the answers to those questions.

Early Background to 18 April 2000

44 HIH previously known as CE Heath International Holdings, was incorporated in 1988 (TB, 1949) and listed on the Australian Stock Exchange in 1992. Provisional liquidators were appointed to HIH on 15 March 2001 (TB, 1956). Liquidators were appointed to HIH on 27 August 2001 (TB, 1956).

45 Mr Williams was a director of HIH from 2 December 1988 to 15 December 2000 and Chief Executive Officer at all relevant times until his resignation as Chief Executive Officer on or about 12 October 2000 (TB, 1952). Mr Williams had been one of the founders of the insurance business that was acquired by HIH.

46 In January 1999 HIH completed a takeover of FAI Insurances Limited (“FAI”).

47 Following HIH’s takeover of FAI, Adler Corporation Pty Ltd is shown on its security register as at 31 March 1999 as holding 6,922,831 shares in HIH at a cost of $2.17 per share (TB, 216B).

48 On 14 June 2000 Adler Corporation sold 5,500,000 shares in HIH to Mr Adler at a cost of $0.95 per share (TB, 216B and TB, 218A).

49 Mr Adler was a director of HIH from 16 April 1999 to 26 February 2001 (TB, 1952).

50 Mr Fodera was a director of HIH from 9 May 1997 to 12 October 2000 and its chief financial officer from 1 September 1995 (TB, 953). He was a director of HIHC at all material times from 31 January 1996 (TB, 2012).

51 HIHC is a public company incorporated on 28 July 1970. At all material times it was a wholly owned subsidiary of HIH and controlled by HIH (as admitted by the defence) (TB, 2014).

52 Mr Williams was a director of HIHC from 21 October 1977 to 15 March 2001 (TB, 2012).

53 ASIC contends Mr Adler was an officer of HIHC within the meaning of s9 of the Corporations Law during the period from 16 April 1999 to 26 February 2001 acting in that capacity in relation to the relevant transactions with AEUT and by AEUT. That is disputed. I deal with this question as the first of the preliminary issues of law.

54 Mr Adler joined the Investment Committee of HIH on 2 June 1999. (TB 2214) He was a member of that Committee throughout 2000. (Mr Williams was not a member of the Investment Committee).

Mr Adler an “officer” of HIHC FIRST LEGAL ISSUE

55 ASIC (in para 6 of its Amended Statement of Claim) pleads the basis for that contention. It is that during the relevant period, Mr Adler was an officer of HIHC within the meaning of para (b) of the definition of “officer” in s9 of the Corporations Law by reason of the fact that, as a director of HIH, the parent company of HIHC, he was a person:

“(a) Who made, or participated in making, decisions that affected the whole, or a substantial part, of the business of HIHC; or
(b) Alternatively, who had the capacity to affect significantly HIHC’s financial standing; or
(c) Alternatively, in accordance with whose instructions or wishes the directors of HIHC were accustomed to act.”

56 These subparagraphs (a) to (c) correspond to the three opening subparagraphs of para (b) of the statutory definition of “officer”. At para 283 to 285 (bis) of the Plaintiff’s written submissions, reliance is placed primarily upon the first of these subparagraphs. However, the second subparagraph is not abandoned.

57 At para 12 of ASIC’s pleading the following is asserted:

“12. At all material times during 2000:
12.1 the HIH group of companies had an investment portfolio comprising, inter alia, both internally and externally managed equities (“the HIH investment portfolio”);
12.2 the HIH investment portfolio was overseen by an Investment Committee, the members of which were Cohen, who was the Chairman of the Committee, Adler, Fodera, Cassidy and two external consultants;
12.3 subject to the direction and control of the Board of Directors of HIH, the Investment Committee had responsibility for the making, management and control of investments made or to be made by the HIH group of companies;
12.4 the terms of reference of the Investment Committee included considering and approving investment guidelines, approving investment authorities and performance benchmarks for internally managed investments, approving appointments, mandates and performance benchmarks for all external investment managers, reviewing the performance of all external managers and internally managed funds and reporting all decisions and recommendations to the Board of Directors.
13. During 1999, the Investment Committee published Investment Guidelines which remained operative at all material times during 2000 (“the Investment Guidelines”).
14. The Investment Guidelines contained the following provision (paragraph 1 viii):
‘Unlisted Investments
Investment in new unlisted equities and venture capital may not be undertaken without prior approval of the Managing Director, Australia or Finance Director. All such transactions are to be then ratified by the Investment Committee.’ “

58 The specific evidence relied upon by ASIC to render Mr Adler an officer of HIHC is that, as a director of HIH its holding company, Mr Adler was a person who “participated in the making of decisions that affected the whole or a substantial part of the business” of HIHC.

59 Investment decisions are then said to be decisions of that character. Mr Adler, as is undisputed, was a member both of the board of HIH and of the Investment Committee. Indeed as a director of HIH, Mr Adler clearly took a particular interest in the investment performance of HIH and the group. Shortly after joining the Board, he became a member of the investment committee. He expressed views that HIH should adopt a less conservative investment approach (see, for example, Gardener T, 380.20). Moreover Mr Adler initiated the very first investment transaction in question, namely the $10 million investment. Thus there is a letter Mr Adler wrote to Mr Fodera dated 17 November 1999 (PX17, p4) bringing up his concerns about the composition and strategy of the investment portfolio. Then there is a fax to Mr Williams in similar vein of 25 January 2000.

60 Finally, there is Mr Adler’s letter of 30 November 2000 (TB, 1/253) where he says he “approached Mr Williams with an idea that I felt would be beneficial for myself (obviously) and to HIH”. [emphasis added] This points to Mr Adler acting in relation to the particularised transaction ($10 million investment) both for himself and HIH.

61 According to ASIC’s pleaded case, “subject to the direction and control of the Board of Directors of HIH” “the Investment Committee had responsibility for the making, management and control of investments made or to be made by the HIH group of companies”.

62 In relation to HIH’s overall role in relation to HIHC, Mr Gardener, in para 4 of his affidavit of 3 October 2001, was not contradicted in stating that:

“HIH’s board made many policy and strategy decisions for the group as a whole.”

I would in that context adopt the description of a holding company vis a vis its subsidiary, made by Barrett J in the circumstances of LMI v Baulderstone [2001] NSWSC 866 especially in paras 89, 91 and 98 where he says of it that the holding company was “acting not as a negotiating or persuading outsider but as a participant in the subsidiary’s own internal decision making”.

63 However, the First Defendant responds that such a statement falls short of demonstrating how Mr Adler must have participated in such of the many policy and strategy decisions as were made for the group as a whole, no example having been given.

64 In response, ASIC take up investment decisions, and Mr Adler’s participation therein, as falling within the category of decisions which “affected the whole or a substantial part of the business” of HIHC. Reliance is in that context placed by the Plaintiff on the evidence of HIH’s chairman Mr Cohen. He said that the board of HIH monitored the group’s investment portfolio, which was reported to it on a group basis, not a company by company basis; para 20 of his affidavit, 2 October 2001; T, 126.32 - 127.1. Investment decisions were self-evidently decisions “that affected the whole, or a substantial part of the business” of HIHC, given that performance of its investment portfolio underpinned, or at the very least supported, its capacity to meet insurance claims, being the principal business of the HIH group.

65 These matters are disputed as follows. Mr Adler in his amended defence:

“(c) Denies each allegation in paragraph 12.2 and says that the functions of the Investment Committee were set out in a document entitled ‘HIH Insurance Limited Investment Committee Terms of Reference’.”

And then in paragraph (d):

“(d) Admits that the terms of reference included the provisions referred to in para 12.4 [of ASIC’s Statement of Claim] and will rely at the hearing upon the whole of the Terms of Reference for their true meaning and effect.”

The relevant Terms of Reference are to be found as Appendix 1 to a set of Investment Guidelines dated March, 1999 and described as “issued; August 1999” at the foot thereof. To “consider and approve the Group’s Investment Guidelines” (note reference to “Group”) is specifically part of its remit under the “Terms of Reference” of the Investment Committee; see third dot point of quoted “Terms of Reference” below (TB, 24).

“Investment Guidelines
Appendix 1
HIH Insurance Limited
Investment Committee
Terms of Reference
Consider and approve Policy Asset Allocation (PAA) and Asset Allocation Ranges (AAR). PAA is the neutral asset allocation benchmark, the characteristics of which are designed to meet the Group’s investment objectives. These objectives include solvency and capitalisation issues, liability profiles and return on equity requirements. AAR defines the degree to which weightings may vary from PAA. This creates a framework enabling asset allocation decisions to be made within acceptable risk boundaries.
Consider and approve Strategic Asset Allocation (SAA). SAA is an alternative set of benchmarks to reflect shorter term conditions (unlike PAA). SAA is generally not changed more than once or twice a year.
Consider and approve the Group’s Investment Guidelines including, credit and counterparty policy, derivative usage and exposure controls and foreign exchange policy.
Consider and approve valuation methods for all investments.
Review and approve foreign currency exposure and hedging policy.
Approval of all acquisitions, disposals, capital expenditures and major decisions relating to property investments.
Review and approve investment income budgets (and assumptions) and monitor and evaluate actual investment income results.
Approve appointments, mandates and performance benchmarks for all external investment managers.
Approve investment authorities and performance benchmarks for all internally managed investments.
Review the performance of all external managers against approved benchmarks.
Review the performance of all internally managed funds against approved benchmarks.
Review the investment performance of the internally managed NSW WorkCover Authority investment portfolio.
Report all decisions and recommendations made to the Board.” [TB, 24] .

66 From this quotation, it will be apparent from the third and last dot point, read with the Investment Guidelines themselves, that the Terms of Reference of the Investment committee

(i) relate to the Group as a whole and thus include HIHC,

(ii) include considering and approving “the Group’s Investment Guidelines”,

(iii) requires reporting of all decisions and recommendations to the Board, and

(iv) requires Investment Committee to “approve appointments, mandates and performance benchmarks for all external investment managers” (8th dot point above).

67 The Investment Guidelines, to which the Terms of Reference are an appendix, include under (viii), headed “Unlisted Investments” the following:

“Unlisted equities and venture capital, (originating principally from FAI). Investment in new unlisted equities and venture capital may not be undertaken without the prior approval of the Managing Director, Australia, or Finance Director . All such transactions are to be then ratified by the Investment Committee.”

68 The “Managing Director, Australia” at the relevant time was Mr Cassidy while Mr Fodera was the Finance Director.

69 Relevantly, the last dot point, in requiring that the Investment Committee “report all decisions and recommendations made to the Board”, is wholly consistent with the continuing ultimate “direction and control” of the board of directors of HIH of Group investment (see opening of para 12.2 of ASIC’s pleading). It is also, with the third and eighth dot points (approval of external investment mandates) wholly consistent with direct oversight by the Investment Committee of the HIH Investment Portfolio, as thereafter pleaded in para 12.2. Finally, page 2 of the Investment Guidelines makes clear that in calling for the Board to ratify asset allocation policy and range, it had not abdicated its overall responsibility for investment particularly as regards the critical area of asset allocation nor had the Investment Committee abdicated its immediate responsibility to recommend such allocation:

“The Policy Asset Allocation (“PAA”) and Asset Allocation Ranges (“AAR”) have been ratified by the Board on the recommendation of the Investment Committee.”

I elaborate on this at para 76 and following.

70 Finally, when regard is had to the whole of the Terms of Reference for their true meaning and effect (upon which the First Defendant in its pleading expressly relies), I observe that there is nothing in them which is other than consistent with the proposition pleaded in para 12.2; namely that the HIH Investment Portfolio “was overseen by an Investment Committee”. That oversight is confirmed by the Terms of Reference of the Investment Committee laid down by the HIH Board in requiring investment mandates for all external investment managers to be approved by the Investment Committee.

71 There is no evidence from the First Defendant to refute that Mr Adler was other than an active member of the HIH Board, with its group responsibilities, particularly for investment, and was an active member of the Investment Committee, with its investment oversight responsibility. The evidence is clearly to the effect that Mr Adler took a close interest in investment matters participating fully in that category of decision affecting the business of HIHC.

72 The Defendant’s argument to the contrary (that nothing has been proven concerning Mr Adler’s participation) fails to grapple with it being an agreed fact that the HIH group of companies had as a whole an investment portfolio comprising, inter alia, both internally and externally managed equities (“the HIH Investment Portfolio”). Nor does it grapple with the agreed fact that Mr Adler was a member of the HIH Investment Committee as well as the HIH Board. Though it be the case that the First Defendant disputes that the HIH Investment Portfolio was overseen by that investment committee (though the evidence as I have shown is to that effect) Mr Adler in his defence nonetheless admits the following critical paragraph 12.3 of ASIC’s Statement of Claim, namely:

“12.3 Subject to the direction and control of the Board of Directors of HIH, the Investment Committee had responsibility for the making, management and control of investments made or to be made by the HIH Group of companies;”

73 Even if it be contended that the Investment Committee did not oversee the HIH Investment Portfolio because, for example, it was subject to the direction and control of the Board of Directors of HIH (and no other basis for disputing that oversight credibly emerges) nonetheless Mr Adler cannot escape the conclusion that he participated in the making of that category of investment decisions in one or other capacity; that is either as board member or committee member, or more likely both. Moreover, that category of decisions, in particular the crucial matter of how funds of the Group were to be invested, clearly affects the whole or a substantial part of the business of HIHC as a member of HIH group. It would be unreal in the extreme to assume that Mr Adler did not participate in making the varied decisions about the Group’s investments, which were so obviously a matter of vital interest to him, whether as a member of the Investment Committee or the Board.

74 Mr Adler, in relation to HIHC, was at the relevant times a person who (within the meaning of para (b)(ii) of that definition) “has the capacity to affect significantly the corporation’s financial standing”. This is for the reason that his involvement in matters pertaining to investment earlier described gave him that capacity. It is also, more broadly because of his participation in the control and direction of the affairs of the Group, including HIHC, as a director of its parent HIH.

CONCLUSION

75 Mr Adler was at the relevant times of the pleaded transactions an officer of HIHC and acting as such (see para 737) within the meaning of the definition of “officer” in s9 of the Corporations Act, and in particular para (b)(i) thereof as being at the relevant times, one “who makes or participates in making, decisions that affect the whole, or a substantial part, of the business of HIHC” namely investment decisions. The same result also follows from para (b)(ii) of s9, on the basis that Mr Adler, as a director of the parent HIH, had at the relevant times “the capacity to affect significantly the corporation’s [HIHC’s] financial standing”.

HIH Investments, Authorities and Management – Background to events of June 2000

76 I now elaborate on the foregoing investment procedures, as they operated in practice at the relevant times. At all material times during 1999 and 2000:

(a) The HIH group of companies had an investment portfolio comprising, inter alia, both internally and externally managed equities (“the HIH investment portfolio”);

(b) ASIC contends, and the Defendants dispute, that the HIH investment portfolio was overseen by an Investment Committee though para 12.3 of ASIC’s pleading is not denied (see para 72 above). I have earlier found that ASIC’s contention is correct. It is not disputed that its members were Mr Cohen, who was the Chairman of the Committee, Mr Adler, Mr Fodera and Mr Cassidy; Mr Ballhausen attended in his capacity as General Manager, Investments. Two external consultants also regularly attended meetings (Mr Braden and Dr Vaughan).

(c) ASIC contends, and the Defendants dispute, that subject to the direction and control of the Board of Directors of HIH, the Investment Committee had responsibility for the making, management and control of investments made or to be made by the HIH group of companies.

(d) It is clear that the terms of reference of the Investment Committee are contained in a document entitled “HIH Insurance Limited Investment Committee, Terms of Reference, which is set out under para 65 above and which is described as “Issued August 1999”. Those terms include to “consider and approve Policy Asset Allocation (“PAA”) and Asset Allocation Ranges (“AAR”)”, and also to “consider and approve Strategic Asset Allocation (“SAA”)” (each as there described), to “Consider and approve the Group’s Investment Guidelines”, to “Approve appointments, mandates and performance benchmarks for all external investment managers” and “Review the performance of all external managers against approved benchmarks”. The terms of reference conclude with to “Report all decisions made to the Board”.

(e) the Investment Guidelines, which operated pursuant to those “Terms of Reference”, start with a “Management Overview”. The opening paragraphs of that Management Overview are as follows:


“ Management Overview
i) Objective
To maximise the return on assets within prudent risk parameters. These parameters reflect the risk averse approach the Group adopts with investment management. The level of acceptable risk is defined through the Group’s asset allocation and long term benchmarks.
ii) Investment Committee
The Policy Asset Allocation (PAA) and Asset Allocation Ranges (AAR) have been ratified by the Board on the recommendation of the Investment Committee. In addition to making such recommendations the Investment Committee is responsible for formulating strategic asset allocation recommendations within the AAR. This Committee is chaired by the Group’s Chairman Mr Geoffrey Cohen, and comprises the Group’s Australian Managing Director, Mr Terry Cassidy; Finance Director, Mr Dominic Fodera; and non-executive Director, Mr Rodney Adler. The General Manager, Investments Portfolio Manager and two external consultants also attend by invitation. The latter members are Mr Braden, a long term corporate adviser to the Group with a background in banking and economics, and Dr Vaughan, an economist with extensive corporate advisory experience.
The Committee meets formally each quarter to review current asset allocation. This ensures the Group’s risk tolerance is properly reflected in the investment portfolio. At these meetings the Committee reviews the Group’s effective exposure to all asset classes. Comparisons of investment results are made to budget forecasts and against performance benchmarks where appropriate. An economic presentation by Dr Vaughan is followed by debate on the appropriateness of current asset weightings. Subsequent approved recommendations of the Committee are delegated to the General Manager, Investments for implementation.

(d) Insofar as the “business judgment” provisions of s180(2) are concerned, these could not apply to exonerate Mr Adler. This was because there was no “business judgment” (as either a defence or as an element in the contravention) shown by Mr Adler to have been made “in good faith for a proper purpose” (s180(2)(b)). Clearly Mr Adler did have “a material personal interest in the subject matter of the judgment” so also precluding application of that rule. No equivalent defence at general law is made out either.


(21) Application of s183 of the Corporations Act to the investment in AEUT and by AEUT in HIH in relation to Mr Adler Eighth Legal Issue [see earlier paras 388 - 393]
Conclusion: It is premature to consider whether Mr Adler contravened s183 of the Corporations Act in so far as the investment in shares in HIH was concerned, without considering that in the overall context of all of the transactions, being all investments “of a less conservative character”. The factual position and findings with regard to the investment in unlisted equities and the loans are dealt with later (between paras 513 to 730). It is there concluded (see principally para 577(d) that Mr Adler contravened s183 taking into account each of the unlisted investments acquired from Adler Corporation and each of the loans to Adler associated entities.

(22) Application of ss180 – 182 of the Corporations Act to the investment in AEUT and by AEUT in HIH in relation to Mr Williams [see earlier paras 395 - 452]
Conclusion: As to s180 and the duty of care and diligence, Mr Williams was not entitled to rely on Mr Adler to make investments, which conformed with the law and were not detrimental to the interests of HIH, without at the least making sure there were put in place proper safeguards including independent appraisal of the investments made by way of proper due diligence and by ensuring that before the arrangements were put in place, the terms of the mandate were approved by the Investment Committee, if not the Board. Mr Williams simply did not do this either when making the original commercial deal or by instructing Mr Howard. It is nothing to the point to say that he hoped that the investment would turn out profitably or he would not have made it. The fact of the matter was that Mr Williams did not ensure that the company complied with its own safeguards laid down for approval of such a mandate by its Investment Committee, nor did he put in place safeguards to avoid investments being made which were in breach of the law and which, directly or indirectly, advantaged Mr Adler, Adler Corporation and PEE and were not reasonable in the circumstances even if HIHC and PEE had been dealing at arm’s length. Mr Williams’ concern should have been heightened by the fact that he was dealing with a fellow director. That is enough, though one can add that Mr Adler, as should have been apparent, had an obvious inherent conflict of interest as a significant shareholder in HIH. That is quite apart from his early intention to on-sell investments to AEUT like dstore; the evidence of the extent of Mr Williams’ knowledge about such investment is set out at para 515 below. Accordingly, I conclude that Mr Williams was in breach of s180 of the Corporations Act in failing to exercise the degree of care and diligence that a reasonable person would have exercised as a director in the circumstances and occupying the office held by Mr Williams. Mr Williams is not able to invoke the business judgment rule in the circumstances where he either failed to make a business judgment at all or to the extent that he did, failed to establish that he made it in good faith for a proper purpose, and in any event, where he had a material personal interest in the subject matter of the judgment and had failed to inform himself to the extent he could reasonably believe to be appropriate.

(23) Section 181 and Mr Williams [see earlier paras 454 - 456]
Conclusion: On balance and though close to the line, I am not able to be satisfied, at the stringent standard of proof required, that Mr Williams was in breach of his statutory obligation as a director to exercise his powers and discharge his duties in good faith in the best interests of the corporation and for a proper purpose, as required by s181 of the Corporations Act . This is in relation to the initial transaction in making available the $10 million and in the application of part thereof in purchasing HIH shares.

(24) Section 182 and Mr Williams: investment in AEUT and HIH [see earlier paras 458 - 460]
Conclusion: Mr Williams breached his statutory obligation under s182 not to improperly use his position as a director of HIH and HIHC to gain an advantage for Mr Adler. He likewise improperly used his position to cause detriment to HIH and HIHC, in authorising the relevant payment without proper safeguards and without having the relevant mandate to Mr Adler and PEE submitted for approval to the Investment Committee and for the relevant investment to be ratified by the Investment Committee, in accordance with the Investment Guidelines.

(25) Application of ss180—182 of the Corporations Act to the investment in AEUT and by AEUT in HIH in relation to Mr Fodera Ninth Legal Issue [see earlier paras 462 - 511]

Conclusion:
(a) Mr Fodera failed to exercise the degree of care and diligence required by s180 of the Corporations Act by reason of the failure of Mr Fodera to take such steps as were open to him to have the proposal either submitted for approval in advance to the Investment Committee, if not the Board, or thereafter submitted for ratification by the Investment Committee if not the Board. This was especially in circumstances where extraordinary features of the transaction should have been apparent to him, including in particular involvement of a fellow director Mr Adler and the purchase of shares in HIH by an entity associated with Mr Adler with part of the $10 million. He was not entitled to rely on others to do this, though primary responsibility to do so lay with Mr Williams and Mr Adler. He must be taken to have known that there had been no submission to the Board or Investment Committee, as he was a member of both. Yet he took no steps from July 2000 to 8 or 12 September 2000 when the auditors first drew attention to the transaction. The business judgment rule does not avail Mr Fodera, though no finding of lack of good faith or improper purpose or dishonesty is made in the case of Mr Fodera. It would be premature to consider the application of s1317S or s1318, in terms of any relief in relation to the contravention in question. That needs to be considered as a matter of discretion in light of the evidence then before the Court.

(b) Though Mr Fodera failed to bring the AEUT investment (including the associated purchase of shares in HIH) to the attention of the other directors of HIH or to the Investment Committee, it has not been established to the stringent standard required for a civil penalty that any contravention occurred of s181 (lack of good faith or proper purpose) or s182 (improper use of position) of the Corporations Act .

(26) Investments in dstore, Planet Soccer and Nomad [see earlier paras 513 - 575]
Conclusion: At the time of the acquisition by PEE of the shares in dstore, it is a fair inference, on the evidence, and strengthened by Mr Adler’s failure to give any other explanation, of a matter which was peculiarly within his knowledge, that he was aware that:

(a) dstore was in need of significant capital in order to continue doing business given the “burn rate” it was known to Mr Adler to have been experiencing;

(b) dstore was encountering difficulties in raising new capital;

(c) dstore was having cash flow difficulties;

(d) there was a significant risk that dstore would fail (para 49 of ASIC’s Statement of Claim).

(e) PEE had thereby acquired from Adler Corporation an unlisted investment (dstore) which was not the subject of independent analysis, was purchased from interests associated with a director (Adler), who had not disclosed this to the directors of HIH other than Mr Williams and Mr Fodera (and subsequently Mr Cassidy) nor sought approval from the Investment Committee or Board either for the investment of $10 million in AEUT or its application in part to acquire assets such as dstore from Adler Corporation, in circumstances where this entailed a clear conflict of interest for Mr Adler;

(f) that purchase was not advantageous to AEUT or to the unit holders of the AEUT, including HIHC, or to HIH but was to the advantage of Adler Corporation and Mr Adler;

(g) no disclosure was made by Mr Adler to HIH or HIHC before dstore was acquired of the matters in (a) through (d) above and the first HIH and HIHC knew of the failure of this investment was on 15 December 2000;

In so doing, Mr Adler breached his obligation

(a) to exercise the degree of care and diligence required from a director by s180 of the Corporations Act breaching his obligations as a director or officer to HIH, HIHC and PEE, and having a material personal interest in the subject matter of any business judgment could not rely on any defence under the business judgment rule;

(b) to act in good faith for a proper purpose as required by s181 of the Corporations Act;

(c) not to improperly use his position to gain an advantage for himself or to cause detriment to each of HIH, HIHC and PEE, so breaching s182 of the Corporations Act, and

(d) not to improperly use information obtained by him to gain an advantage for himself or to gain an advantage for Adler Corporation, so contravening s183 of the Corporations Law, being information concerning the Investment Committee procedures and Investment Guidelines, the HIH Investment Portfolio and the susceptibility of Mr Williams to a proposal whereby HIH invest money in less conservative ways, such as in unlisted equities and venture capital; see para 95 of the Plaintiff’s Statement of Claim (no s183 claim is made in relation to PEE).

Adler Corporation, by reason of its “involvement ” as vendor to PEE of the unlisted investments, and being in (shared) control of PEE as majority unit holder, must be taken to have contravened each of the provisions of the Corporations Act that Mr Adler has contravened (save s180 which is not pleaded against Adler Corporation).

(27) Mr Williams [see earlier paras 579 - 585]
Conclusion: Subsequent events concerning the investment in dstore, insofar as they bear on the relevant Particulars in para 77 of the Plaintiff’s pleading (see in particular, Particulars (f), (k) and (l)) but only on the material facts pleaded at paras 15 to 46; support the earlier conclusions reached concerning Mr Williams’ contravention of s180 (see para 453) and s182 (see para 461).

(28) Planet Soccer [see earlier paras 587 - 620]
Conclusion: At the time of acquisition by PEE of the shares in Planet Soccer, Mr Adler was aware that:

(a) Planet Soccer was in need of significant capital in order to continue in business;

(b) Planet Soccer was encountering difficulties in raising new capital; and

(c) There was a significant risk that Planet Soccer would fail, in the absence of such new capital.

In all other respects, the position with regard to the investment in Planet Soccer is substantially the same as for dstore. Mr Adler is in contravention of s180 to s183 in relation also to the purchase of Planet Soccer, as also is Adler Corporation (save for s180) by reason of its involvement in the relevant breaches.

(29) Nomad Telecommunications Limited (“Nomad”) [see earlier paras 622 - 677]
Conclusion: At the time of the acquisition by PEE of the shares in Nomad, Mr Adler was clearly aware that:

(a) Nomad was in need of significant capital in order to continue in business;

(b) Nomad was encountering difficulties in raising new capital and failed to do so when needed by the time of the sale to AEUT, nor subsequently;

(c) there was a very significant risk, which Mr Adler must have appreciated, that Nomad would fail, which risk eventuated in less than four months; and

(d) again the Investment Committee and its approval process were bypassed by Mr Adler, and also Mr Williams.

Despite this, Mr Adler and Adler Corporation caused the sale to occur to extricate Adler Corporation from an investment with which he had long been dissatisfied to advantage himself and disadvantage PEE, HIH and HIHC. In the circumstances, this produces the same finding as in relation to dstore and Planet Soccer. Mr Adler contravened ss180—183 of the Corporations Law, as also Adler Corporation (save for s180) by reason of its involvement in the relevant breaches.


(30) The Loan of $160,000 to Morehuman Pty Ltd [see earlier paras 687 - 693]
Conclusion: Mr Adler caused PEE, as trustee of the AEUT, to make an unsecured loan without any adequate documentation of $160,000 to Morehuman Pty Limited, without any documented obligation to pay interest and with no security other than an inadequately documented guarantee. That loan was not advantageous to AEUT, nor disclosed to other Directors of HIH, or brought to the attention of the Investment Committee of HIH, save that it came to the attention of Mr Adler and Mr Williams. In those circumstances, Mr Adler was in contravention of s180 to s183 of the Corporations Act for similar reasons as are set out in relation to the earlier findings, as is Adler Corporation (save for s180).

(31) Intagrowth Fund No 1 loan of $500,000 [see earlier paras 695 - 705]
Conclusion: The conclusion as to the loan to Intagrowth Fund No 1 by AEUT, is the same as the finding in relation to the Morehuman loan in para 694, above.

(32) Loan of $200,000 to Pacific Capital Partners and loan of $1,275,475 to PCP Ensor No 2 Pty Limited [see earlier paras 707 - 729]
Conclusion: The finding in relation to the two loans to PCP and PCP Ensor respectively, is the same as for the loan to Intagrowth (para 706) and earlier to Morehuman (para 694). The PCP Ensor loans were favourable to Mr Adler because of his apparent entitlement to a very substantial share of the profits in respect of the development and via PCP’s role as project manager. The loans were disadvantageous to HIH/PEE because they were made without security other than the Wolfe guarantee (itself unsecured) in respect of the PCP Ensor loan, for a very limited (ten percent) share of profits which was never paid and in circumstances where the careful scrutiny and monitoring would ordinarily have attended an HIH property development investment, through the Investment Management Group and Investment Committee, was entirely bypassed.

(33) Accessory liability of Mr Adler in any contraventions by Mr Williams of s181 and s182 [see earlier para 731]
Conclusion: There is no basis for Mr Adler to be “involved” in any contravention by Mr Williams of s181 of the Corporations Act as I have earlier concluded Mr Williams did not himself contravene that provision. However, Mr Adler was knowingly involved in Mr Williams’ contravention of s182 so as to be in breach of s182(2).

(34) Causation and loss Tenth Legal Issue [see earlier paras 743 - 767]
Conclusion: Whether the more stringent equitable test applicable to fiduciaries is applied or the common law test, on either basis, the loss identified has “resulted from” the identified contraventions, so as to satisfy the requirements of s 1317H of the Corporations Act for the making of compensation orders.

(35) Mode of calculation of loss Eleventh Legal Issue [see earlier paras 769 - 773]
Conclusion: The proper analogy upon which the court should act in exercising its discretion in making a compensation order for damage suffered is that applicable to a defaulting trustee or other fiduciary, on the basis that Mr Adler, Mr Williams and, to the extent applicable, Mr Fodera, were each fiduciaries. Thus, it is in accordance with principle and a proper estimation of loss, to assume that the $10 million had been invested safely in thirty day bank bills and the loss calculated accordingly as Mr Carter, the Plaintiff’s expert, has done.

OVERALL SUMMATION

775 The effect of the foregoing can be summarised briefly as follows, though such summary needs to be read with the earlier reasons and conclusions:

(1) HIH and HIHC contravened s208 (related party financial benefits without shareholder approval) and HIHC contravened s260A (financial assistance for the purchase of shares) of the Corporations Act by the payment of the $10 million used (in part) for the purchase of shares in HIH, this being a determination I make for the purpose of determining (2) below (there being no proceedings brought against HIH or HIHC as such).

(2) Each of Mr Adler, Mr Williams and Mr Fodera, and Adler Corporation were “involved” in those contraventions so as themselves to be in breach of s209(2) and s260D(2) respectively. Declarations should be made accordingly in terms reflecting this judgment.

(3) Mr Adler contravened his directorial duties or duties as an officer under ss180, 181, 182 and 183 of the Corporations Act owed to HIH and HIHC and (save in relation to s183) PEE, by reason of the transactions pleaded concerning payment of $10 million to the AEUT and its subsequent investment

(a) in HIH shares;

(b) in unlisted investments acquired from Adler corporation; and

(c) in loans to entities associated with Mr Adler.

Thus the declarations as broadly sought against Mr Adler in paras 1, 2 and 3 of the Plaintiff’s pleading should be made accordingly, in terms reflecting this judgment.
(4) Adler Corporation was involved in the foregoing contraventions, so as itself to be liable under ss181(2), 182(2) and 183(2) of the Corporations Act . See more precisely the declarations sought against Adler Corporation in paras 10, 10A, 11 and 12 of the Plaintiff’s pleading, which should be made broadly as sought, in terms reflecting this judgment.

(5) Mr Williams contravened his directorial duties or duties as an officer , owed to HIH and HIHC, under s180 of the Corporations Act and s182 (but not s181) through his involvement with the payment of $10 million by HIHC to PEE on or about 15 June 2000 in the circumstances pleaded. Mr Adler was involved in Mr Williams’ contravention of s182. Declarations in terms of this judgment should be made accordingly. See paras 4 (omitting s181(2)), 6 and 7 of the Plaintiff’s pleading for the effect of the declarations sought.

(6) Mr Fodera contravened his directorial obligations, or obligations as an officer owed to HIH and HIHC under s180 of the Corporations Act (but not ss181 and 182) through his involvement with the payment of $10 million by HIHC to PEE on or about 15 June 2000 in the circumstances pleaded. However, declarations in relation to Messrs Williams and Fodera should be made accordingly in terms reflecting this judgment


(a) broadly as in paras 6 and 7 of the Plaintiff’s pleading, (omitting s181) for Mr Williams; and
(b) broadly as in paras 8 and 9 of the Plaintiff’s pleading for Mr Fodera, omitting ss181-182.

(7) Relief will need to be separately considered.

CIVIL PENALTY ORDERS AND DISQUALIFICATION AND RELIEF GENERALLY

776 It is appropriate, and in accordance with the orders that I made at the outset that I consider relief (apart from the declarations) only after further submissions have been made. These must be directed to relief only and will be made with an opportunity to consider the reasons in this judgment and to advance any further character evidence that may be thought appropriate. It suffices if I say that on the evidence presently before me I consider that the contraventions by Mr Adler (and Adler Corporation) the most serious of all. But I view with considerable seriousness the contraventions by Mr Williams of his obligations. It may be anticipated from submissions so far that a case may be put in his favour that his motivation was directed, though misguidedly, to the best interests of HIH and HIHC. Certainly he did not profit in the way Mr Adler and Adler Corporation profited by the investments derived from Adler Corporation or the loans made to Adler Corporation or Adler related entities. As to Mr Fodera, I consider that his failings were of a significantly lesser order, though still amounting to contraventions in the respects earlier identified. Basically, his failure was as a responsible director in facilitating the original $10 million payment knowing it was to be used (in part) to buy HIH shares and in neglecting to ensure that the proper processes were followed for approval of the relevant transactions after Messrs Adler and Williams had failed to bring that about. However, the proper perspective in which to view Mr Fodera’s contraventions in the context of relief will need to be the subject of further consideration, as also will the position of Mr Adler and Mr Williams.

777 I direct the parties to return within five days with declarations as earlier foreshadowed which reflect the terms of this judgment.

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Last Modified: 02/25/2005