ASIC v Adler & 4 Ors

R B S Macfarlan QC/ P Durack (Plaintiff) COUNSEL : S Glass (solicitor)/ C Platford (solicitor) (First and Fourth Defendants) B Hammond (solicitor) (Second Defendant) J E Sexton, SC/ W Jacobs (solicitor) (Third Defendant) Jan Redfern, Solicitor for ASIC (Plaintiff) Gilbert & Tobin (First and Fourth Defendant) SOLICITORS : Arnold Bloch Leibler (agent: Sparke Helmore) (Second Defendant) Dibbs Crowther & Osborne (Third Defendant) Speed and Stracey (Fifth Defendant) CATCHWORDS : CORPORATIONS - Procedure - Stay of orders or variation of orders for compensation and pecuniary penalty under Corporations Act - Relevant considerations - Relevance of anticipated appeal to Court of Appeal. LEGISLATION CITED : Corporations Act 2001; s206C; s206E; s206G Alexander v Cambridge Credit Corporation (1985) 2 NSWLR 685 CASES CITED : In re Blackspur Group Plc [1997] 1 WLR 710 Secretary of State for Trade and Industry v Bannister [1996] 1 WLR 118 DECISION : Short stay only allowed to accommodate application to Court of Appeal.

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

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 - ex tempore 6 June 2002 (Revised 6 June 2002) INTRODUCTION 1 Following submissions made in writing and orally, on 5 June 2002, it has been accepted by all parties that the orders I have made to-day (6 June 2002), being for disqualification from management, compensation and penalties under the Corporations Act, are in conformity with the relevant judgments (14 March 2002 on liability and, 30 May 2002 on relief). Undertakings are given by the First and Fourth Defendants (M Adler and Adler Corporation) concurrently with these orders. 2 There is no contest from the Defendants that the period for the stay of my orders to 3 July 2002 is adequate for those Defendants to make such application as they determine to the Court of Appeal for any further stay or variation. This is in circumstances where the First and Fourth Defendants have foreshadowed that they will be appealing from my earlier judgment of 14 March 2002 and subsequent judgment of 30 May 2002, but to date have simply filed an application for leave to appeal to be replaced by a formal appeal. 3 While my orders do not embody any undertaking to proceed with any appeal with due expedition, it can be taken from what has transpired in Court before me that such an undertaking is likely to be forthcoming. 4 As to the other Defendants, the Second Defendant (Mr Williams) has indicated that instructions are still to be obtained as to whether to proceed or not with any appeal. No indication has been given as to the position of the Third Defendant though no stay was sought to the orders I made on 5 June 2002. This is insofar as they required the Third Defendant to pay a pecuniary penalty of $5,000 with consequent release from undertakings thereafter. 5 It is appropriate that I give brief reasons for declining the application of the First and Fourth Defendants to vary my foreshadowed orders, in circumstances where no application was in fact made to have any further stay of my orders beyond 3 July 2002. 6 The first variation sought (subject to any appeal) related specifically to the disqualification of Mr Adler from managing corporations pursuant to s206C and s206E of the Corporations Act for a period of 20 years, as set out in the draft orders submitted by the Plaintiff, ASIC. The variation sought was in the following terms: "1A. Upon the undertaking of Adler to commence and prosecute an appeal from these proceedings with due expedition, Order 1 be stayed to the extent necessary to permit Adler to communicate instructions or wishes to the directors of Adler Corporation Pty Limited and its wholly owned subsidiaries until the determination of the appeal or further order." 7 In addition to that variation, a second variation was sought (subject to any appeal) in respect of (a) the penalty to be paid by Mr Adler and Adler Corporation pursuant to the relevant draft orders; and (b) the compensation payable by Adler and Adler Corporation pursuant to the relevant draft orders. 8 The variation sought was essentially for payment by instalments over six months and thus a stay to that extent. It was in the following terms: "7A. Order that the penalty payable by Adler pursuant to order 2, the penalty payable by Adler Corporation pursuant to order 6 and the compensation payable by Adler and Adler Corporation pursuant to order 7 be payable, subject to any appeal, as follows: (a) as to the sum represented by the cash and securities held by the plaintiff pursuant to paragraphs 4, 10, 11 and 12 of the orders made on 31 May 2001, by the release, within 28 days hereof, of that cash and those securities to the plaintiff; (b) as to the balance, in three equal 2-monthly instalments thereafter. 7B. The undertakings and agreements in paragraphs 6, 7, 8 and 9 of the orders made on 31 May 2001 to remain in effect until payment of the last instalment."

Prior to the hearing on 5 June 2002, it had been indicated in correspondence between the solicitors for the First and Fourth Defendants and the Plaintiff that Mr Adler, in support of his foreshadowed application for stay of any orders, would seek to read and rely upon affidavits of 17 April 2002 and 29 April 2002; he in turn was required for cross-examination. Shortly before the day of the hearing it was indicated that, as it was not proposed to proceed with the stay application, Mr Adler would not be relying upon the affidavits. Accordingly, the question of his availability for cross-examination no longer arose. 9 The variations to the orders sought necessarily relied upon matters of fact, some but not all of which being dealt with in these affidavits. This meant that the variations to the orders had to be considered with no affidavit evidence beyond that at trial and in particular no affidavit evidence available to be tested as to the following critical matters: (a) the period of time required for Mr Adler to make appropriate arrangements to enable him to cease to be involved in the management of those corporations in which he is so involved, including Adler Corporation in circumstances where he was seeking the period to complete any appeal; and (b) the financial assets available to Mr Adler and Adler Corporation to satisfy the requirement to make payment of compensation, penalties and costs, the subject of then contemplated orders. 10 The latter had the consequence that the proposed regime for payment by instalments over six months fell to be justified with no other material before the Court than Exhibit POX 2, being financial information concerning the Adler Group and Mr Adler derived from subpoenae and material otherwise before the Court in the trial. REASONS FOR ORDERS MADE 11 The first variation sought was initially put on the basis that in order to conduct an appeal, Mr Adler would need to be able to communicate instructions or wishes to the directors of Adler Corporation. But the variation sought was in no way restricted to that but covered instructions or wishes on any subject matter. It is likely that a variation so restricted would have been allowed. 12 It was then put that in practical terms it was necessary to enable Mr Adler and the companies to have a transition period corresponding to the period for concluding an appeal with due expedition, during which Mr Adler needed to communicate instructions or wishes, inter alia, on commercial matters to the directors of Adler Corporation and its wholly-owned subsidiaries. Inferentially, one might presume that this argument was based on some premise that a new board would need to acquire familiarity with the affairs of these companies before it could make decisions without such instructions or wishes being communicated. Moreover that period was arbitrarily related to the period of an appeal. However, absolutely no affidavit evidence was provided to that effect. The proposition that Mr Adler's input into the affairs of these companies over some six months or so was essential was treated as self-evident, when clearly that is not so. 13 Thus an obvious difficulty with that course is that there is no necessary correlation between a reasonable transition period and the length of time for making and concluding an appeal. Clearly, the Court of Appeal can, with the assistance of the parties, make a more precise estimate of that period, though with the present state of the list most matters can be accommodated within six months, provided the parties co-operate. It is possible that this appeal though may be somewhat more substantial in time than the usual. But even making such estimate, there remains the issue of protection of the public dealing with those companies, as against any adverse consequences for Mr Adler in being excluded. Regrettably he has given no evidence whatsoever on the latter, to the extent it be relevant at all, or be capable of prevailing over the public interest. 14 To sum up, there are fundamental difficulties in the variation sought as follows: (a) prima facie, a reasonable transition period should be short, quite possibly no longer than the period to 3 July 2002 presently allowed. That is said in the absence of any affidavit evidence and the opportunity to test it, the onus being clearly on the First and Fourth Defendants, to justify any stay or variation, and where there has been ample period from the time of the judgment of 14 March 2002 and the subsequent judgment on 30 May 2002 to start that planning on the supposition that disqualification could be expected; (b) the scope for Mr Adler to communicate "instructions" to the directors of Adler Corporation, or even "wishes" if it be the case that these would ordinarily be complied with, effectively leaves Mr Adler as a shadow director of Adler Corporation and indeed in reality quite possibly with a preponderant influence, given his and his wife's shareholding, but even if the power were of a lesser order, it must not be overlooked that a disqualification order precludes involvement in management so that the power to instruct on commercial matters would very clearly leave the public at risk from Mr Adler's continued albeit indirect involvement in management of those companies even were he not a director or shadow director;

(c) That influence would be contrary to the paramount public protective purpose of a disqualification order, with the concerns to which that gives rise set out in my judgment of 30 May 2002; see especially para [85] and following of the judgment of 30 May 2002 which rejects the notion that private companies can be treated as capable of being quarantined from the public in their dealings. 15 For these reasons I do not consider that the variation sought should be made. This is more especially as Mr Adler had not chosen to give any evidence or submit to cross-examination as to any of the supposed consequences of declining to make such variation. 16 Turning to the second variation sought, this is proffered in circumstances where, leaving aside cost orders, the amount involved from both Mr Adler and Adler Corporation in terms of compensation and penalty orders, is of the order of $9 million. The amount proffered by way of security even with the contemplated substitution of cash for real estate is of the order of $4 million. It is well-settled that what amounts to an effective stay, as here contemplated, presupposes that security in the full amount of the judgment debt or its equivalent must ordinarily be proffered; see in particular Alexander v Cambridge Credit Corporation (1985) 2 NSWLR 685 at 695. While less than the judgment debt may be contemplated in some circumstances where justified, there is here a complete absence of objective evidence from Mr Adler or Adler Corporation. 17 Thus if less than the judgment debt is contemplated there should be adequate evidence as to the available assets to justify this, including evidence of the assets available to satisfy the judgment debt or its equivalent. Because Mr Adler chose to provide no affidavit evidence able to be tested, such information as is publicly available is to be gleaned from the material under POX 2 tendered by the Plaintiff, ASIC. That material demonstrates that prima facie, Mr Adler and Adler Corporation have between them assets greater than those proffered by way of security. Such assets quite possibly may well exceed the amount of $9 million plus an allowance for costs. Thus apart from other assets, it is evident from this material that Adler Corporation sold shares in FAI prior to accepting the HIH takeover and subsequently sold his shares in HIH (see also judgment of 14 March 2002 [277]) in each case yielding very substantial sums. The Adler group balance sheet moreover demonstrates a substantial surplus of current assets over current liabilities. 18 It is nothing to the point to state that such current assets are in accounting terms, assets capable of being converted to cash not immediately but only within twelve months. First, there should have been time to put in place the necessary arrangements to find the cash to meet the orders now made. But even if that were insufficient, the onus is clearly upon Mr Adler and Adler Corporation to demonstrate that they could not feasibly provide security for the full amount and that therefore a staggered payment arrangement is justified. This they have simply failed to do. 19 In those circumstances the variation sought has not been demonstrated to be warranted. I should add that while the Second Defendant has a concurrent liability to meet the compensation payment, that liability does not affect the several liability also falling jointly upon each of Mr Adler and Adler Corporation. It cannot be the case that the effective stay sought by the second variation could be justified by waiting to see what monies the Second Defendant produces, nor justified by any absence of security from the Second Defendant. The Plaintiff is entitled to be properly assured of the amounts the subject of my earlier orders. 20 There is one final matter which bears particularly upon disqualification. It should not be overlooked that if at some future date Mr Adler choses to make application pursuant to s206G for leave to manage one or other of the corporations with which he is presently associated, he is in a position to do so. Thus if a particular transaction required such leave, the Plaintiff has fairly indicated that such an application might be made by consent, if warranted. Section 206G of the Corporations Act provides a more appropriate mechanism for the kind of variations that might fairly arise during the pendency of any appeal, as UK authority on its equivalent bears out; see in particular Secretary of State for Trade and Industry v Bannister [1996] 1 WLR 118 at 124 per Morritt LJ and at 126 per Glidewell LJ and subsequently In re Blackspur Group Plc [1997] 1 WLR 710 in relation to the lesser efficacy of undertakings, compared to the equivalent statutory provisions with their statutory sanctions. 21 By providing for a short stay, the Defendants are in a position to put such matters as they consider appropriate to the Court of Appeal, if so minded, for variation to the orders I have made. The Court of Appeal will have the advantage not only of these reasons and its own consideration, but also its knowledge of the timing for any appeal and thus the period till its likely resolution. That may have a bearing on the variations sought.

Last Modified: 06/11/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.