HIH was already in trouble as a result of underprovisioning for claims over many years, and it accumulated large losses in the Lloyd's of London insurance market and in the US which eventually brought about its collapse in March
Connections at Firm Most Read Contributor in Australia, October The principle that underpins the concept of a limited liability company is that companies can fail.
Entrepreneurialism is encouraged by this principle because it encourages risk taking.
Directors can make decisions with the knowledge that, by taking a risk in running a limited liability company, they will Asic v adler hih insurance protected from losing their personal assets. Company failure will not result in personal ruin and so you would expect directors to act accordingly 1.
But this limit on liability does not give directors of a limited liability company carte blanche to act irresponsibly in making decisions that affect the company and those it deals with. With the protections of limited liability comes the responsibility to ensure that the company is well managed and that the law is upheld.
Directors must take their duties very seriously if they are to enjoy the benefits of being a director. As a sanction to the director who fails in their duties, the Australian Securities and Investments Commission ASIC has the power to disqualify a person from managing a corporation for up to 5 years in certain circumstances 2.
ASIC's decision to disqualify a director is open to appeal, in the first instance to the Administrative Appeals Tribunal and then later to the Federal Court of Australia.
But obviously it is a much better outcome if the decision of ASIC does not result in a director being disqualified. The following information discusses how best to achieve that result. Considerations by the Delegate in determining disqualification ASIC may disqualify a person if, within 7 years before ASIC gives notice to the person to demonstrate why they should not be disqualified: Disqualification orders are designed to protect the public including consumers, creditors, shareholders and investors that deal with the company from the present or future harmful use of the corporate structure or use that is contrary to proper commercial standards.
The law seeks to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office. When deciding whether disqualification is appropriate, and if so for how long, there are a number of matters which ASIC, through its delegate who determines whether to disqualify a director, will be required to take into account 3.
How the director managed the company and ensured that it met its statutory obligations will be an important consideration for the Delegate. The Delegate will want to ensure that the director understands the duties that are required of them by law, that they do their best to comply with those duties and that they do not act in a way that frustrates others who are attempting to administer the company.
A Delegate will consider the nature and seriousness of any breaches by the directors and, in particular, whether there is any fraud, dishonesty or gross incompetence involved 4.
The chances of a Delegate deciding that a person should be disqualified from being a director will be very high where these circumstances exist and cannot be explained by mitigating factors. A Delegate will consider whether a director did their best to avoid insolvent trading.
It will be important to show that a director took reasonable steps to cause a company to comply with accounting and reporting provisions and to avoid it incurring debts it cannot pay when due 5. The financial impact of that conduct on other people will be an important consideration and the Delegate will take into account the interests of shareholders, creditors, financiers and employees which have been affected by the collapse of a company.
The director needs to show that they did not have a casual approach to management. They should demonstrate that they understand the relationship between any group entities and each entities' financial position.
They should also be able to demonstrate that they saw management needs as important and appointed appropriate staff such as a Chief Financial Officer. A director will need to explain to the Delegate why taxes may have been unpaid and that the director has simply not tried to use the corporate veil as a way to avoid tax 6.
Where there has been a failure to lodge tax returns, the Delegate will be keen to understand whether its circumstances show a disregard of the interests of creditors including the ATO 7. Directors also need to appreciate that their responsibilities do not end when an external administrator is appointed to a company.
The Delegate will examine whether a director has assisted, or have been willing to assist administrators, liquidators and statutory authorities 8. Often the delegate will have a report from a liquidator that sets out any concerns the liquidator had regarding assistance provided by the director. In those circumstances, the director needs to be prepared to explain what they did to assist the liquidator.
A director's character will be an important consideration. If a director shows signs of contrition or acceptance of responsibility, an understanding of the proper role of a company director and duty of due diligence owed to the company, they will have a better chance of avoiding being disqualified.
The Delegate will also consider whether a banning order is necessary to ensure that the concerning conduct does not occur again. If a director seems likely to engage in similar conduct in the future the Delegate can determine that a banning order may be in the best interests of the public.
External factors causing company failure will be an important consideration when determining what level of culpability should be borne by its directors for failure of a company. The Delegate will consider whether the failure of the company can be attributed or partly attributed to causes outside of a director's conduct or control.
Events such as the GFC, a drought, predatory pricing by competitors, or the unexpected withdrawal of finance may be considered 9.
It is important not to assume that the Delegate will be aware of or understand such events, even if they are notorious. The specific nature of an event and its impact on the corporation in question needs to be detailed to the Delegate.
The Delegate can consider inter-company relationships, even if those companies are not strictly "related" in the sense of s F 2 a of the Act.
This includes if the companies had connections - including cross-provision of financial support, common directors, common staff or advisors, common shareholders, and similar activities - such that the failure of one was inextricably linked to the failure of the others and they can effectively be regarded as a single entity by the Delegate 1 HIH Case Study on Corporate Governance (Round 3) Attached is a new briefing note prepared by the senior manager of the branch respon-sible for HIH.
Protocol For Cooperation between ASIC and the HIH Royal Commission 4. Statement by the Council of Chief Justices of Australia and New Zealand on Appointment of Judges to other Offices by the Executive July Introduction CORPORATE GOVERNANCE AND THE JUDGES and ;.
asic v adler hih insurance HIH Insurance was founded in by Ray Williams and Michael Payne, which was known as "M W Payne Underwriting Agency Pty Ltd".
However, their company was acquired in by a British company called CE Heath PLC and appointed Ray . Rodney Stephen Adler (born 19 August ) is an Australian whose family founded the FAI Insurances group, of which he became Chief Executive in , and which was at one stage Australia's third largest general insurer.
Adler became a director of HIH Insurance after the acquisition of that company, and resigned in January , two months before HIH collapsed. Corporations Act (see Justice Santow’s comments in ASIC v Adler and 4 others involving HIH Insurance  NSWSC at paragraph , points 10 to 12).
Paragraph 43 mentions the Board should understand the limitations and assumptions. (HIHC), a wholly owned subsidiary of HIH insurance compony limited (HIH), advanced $10 million to pacific eagle Equity PTY Ltd (PPE), a newly registered company controlled by Rodney barnweddingvt.com was a non- executive director of HIH (but not a director of HIHC).