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Adams, Michael --- "Australian Corporate Governance: Lessons from HIH Insurance" [2005] ALRS 1

Last Updated: 5 July 2009


Australian Corporate Governance: Lessons from HIH Insurance[#]

Professor Michael A Adams[∗]

Francis (2000)[1] said: “With economic opportunities come criminal ones, as well as opportunities for unethical profit”. There is no doubt that in Australia’s current economic climate this statement is being proven correct. Australia has been inundated recently with cases of corporate fraud, market manipulation, insider trading and corporate collapses. Are there lessons to be learnt?

This article addresses one of the common issues that arises in modern corporations: How can corporate crimes be prevented through better corporate governance processes? In order to answer this question, this article will examine some major corporate law litigations throughout recent and less recent history and the ramifications that white collar crimes have had on individuals and the companies they have been involved in.

Historical cases

Does history ever repeat itself? Let us consider for a moment the era of the Napoleonic Wars. In the 1800s, Napoleon Bonaparte, the French Emperor, was at war with the English, Germans, Prussians and Belgians. In 1815 he faced the ultimate show-down with the English Duke of Wellington at the Battle of Waterloo.

The Bank of England was created in 1694 and was both the Government’s bank and the debt-manager for the British. It developed the bankers’ bank concept and enforced the gold restrictions in war-time, as well as managing Government bonds. The London Stock Exchange was an active stock market in both shares, equities and bond market (debt, especially government debt with interest) from 1698.

Knowing the outcome of a Napoleonic war would have helped determine interest rates on government bonds and whether it was a good time to buy or sell. This lead to quite different scenarios in two leading cases: De Berenger (1814) and Rothchilds (1815). Both scenarios involved the conclusion to the Napoleonic war and the purchase of English government bonds. However, one was a crime; the other created a family fortune. What really happened?

The Case of De Berenger

On 21 April 1814, Mr de Berenger appeared in Winchester, scattering French money, wearing a military uniform and claiming Napoleon had been killed. Two other rogues dressed as French loyalists moved around announcing the same thing. As a result the price of government bonds rose rapidly on the stock exchange. Unfortunately, de Berenger was 12 months too early, resulting in the seven men, with de Berenger as their leader, being convicted of a conspiracy to spread false rumours.

The Case of Rothschilds

The Rothschilds’ family had agents in all capitals and trading centres in Europe. On 15 June 1815, a Rothschild agent actually at the Battle of Waterloo witnessed Napoleon being defeated by the English. He immediately sent a carrier pigeon to London, where Rothschild signalled to his agents to sell all their bonds. This resulted in others following and the prices dropped. It is alleged that Rothschild was secretly buying the bonds at a low price. As the real news of French defeat became known, the government bonds skyrocketed, with the Rothschild family multiplying their fortune by 20-fold.

Contemporary examples

How does this relate to modern day securities regulation in Australia? The answer is that some recent Australian cases have had a similar impact on the Australian securities markets. These cases include: Kenneth Firns (2001); Simon Hannes (2002); Rene Rivkin (2003); Rodney Adler (2002-2004); Bart Doff (2004) and John Petsas (2005).


The Rivkin case has received a lot of publicity due the fame and recent death of Rene Rivkin. The facts were that Rivkin was selling a property to McGowan and during discussions McGowan told Rivkin and Bart Doff that settlement could not resume until McGowan had sold Impulse Airlines to QANTAS, a sale which was subject to ACCC approval. It was stated that McGowan told Doff and Rivkin not to trade in these shares. Rivkin purchased 50,000 QANTAS shares at $2.78. The court found him guilty of insider trading and sentenced him to nine months’ weekend detention and a fine of $30,000 plus the loss of his stockbroking license. In February 2005, Bart Doff was sentenced, following his conviction in November 2004, to 350 hours community service, a $30,000 fine and a pecuniary penalty of $37,255.25. His net profit on the transaction was $11,440.71.[2]


The most recent application of market manipulation laws has been the Rodney Adler cases relating to the collapse of HIH Insurance. Rodney Adler, as a non-executive director of HIH Insurance, had $10 million transferred to a company he controlled. This was in breach of his directors’ duties and maybe market manipulation prohibitions as well, as the funds were used to buy HIH shares. This current case commenced on 7 February 2005 and was resolved at the first day of the trial. In “Adler Round No” 1 the HIH Royal Commission investigated one of Australia’s largest corporate collapses of $5.3 billion, and ASIC independently investigated civil and criminal contraventions of the law.

The HIH Royal Commission responsible for investigating this crime was no small affair in Australia’s corporate world. The Commission involved 120 members of staff- six executives including Justice Owen, 23 Secretariat, 26 Assisting lawyers, 20 forensic accountants and actuaries, and a 44 strong team of IT specialists and document managers.

ASIC was able to isolate a single $10m transaction from the HIH Royal Commission so as to bring a civil penalty action focusing on “officers’ duties” against Adler, Williams (chairman) and Fodera (chief financial officer). The court found that the majority of the funds used to acquire HIH shares were actually provided by the company. The NSW Supreme Court (and subsequently the NSW Court of Appeal) found that the defendants had collectively contravened 197 provisions.

The Court[3] imposed civil penalties of:

It was reasonably assumed that Adler, after being found liable for breaches and contraventions of the Corporations Act for mostly officers’ duties, would have finished his litigation. However, “Round No 2” commenced with a criminal prosecution, brought by ASIC, for similar events. The NSW Supreme Court looked at the actual charges that had been laid, which related to market manipulation claims, and held they were very different in nature to the officers’ duties actions; as such, the double jeopardy rules did not apply.

Officers’ duties are owed to the company, and possibly to its shareholders. Where there is a liquidation, then, the action for breach of officers’ duties can be brought for recovery for the benefit of creditors (including the $8 million ordered for compensation by the earlier court). This has to be compared with the market manipulation provisions which are all about the protecting of the business community and market fairness, integrity and reputation.

On 16 February 2005, Rodney Adler pleaded guilty to charges relating to false and misleading information, inducing persons to trade and conflicts of interest. The market manipulation charges were dropped as part of a plea-bargain. On the 14 April 2005 Adler was sentenced to four and a half years imprisonment, with a non-parole period of two and a half years.[4] A day later, Williams was sentenced to four and a half years, with a non-parole period of two years.[5] Under the sentencing guidelines, the judges had to take into account the different sentencing regimes under the Commonwealth law and under the NSW state laws, as well as the discounting for the guilty plea. Williams received a 25% discount for his early plea, where as Mr Adler only received a 10% discount for his guilty plea as it was on the first day of the criminal trial. Additionally there are other criminal charges against Mr Howard, Mr Cooper, Mr Abbott, Mr Mainprize, Mr Wilkie and Mr Burroughs, to name a just few of the outcomes from the HIH insurance collapse.

The difficulties

There is clear evidence that the focus on corporate governance and preventing inappropriate market conduct only seems to arise when there is a business decline. Financial Services Reform Act amendments in 2002 and reforms are a step in the right direction, but are complex and expensive to comply with and enforce. Many companies are reporting difficulties with the time and expertise it requires to ensure a company is fully compliant with the current corporate governance legal regime. The first civil penalty action for insider trading was handed down in ASIC v Petsas[6] in February 2005, which may encourage other actions which would have been too difficult to prove as criminal cases. But the successful plea-bargaining of Adler to avoid the market manipulation charges and substitute other contraventions still indicates how hard it is for the regulators to prove a complex criminal case. A similar view could be taken with the Steve Vizard case in August 2005.

Before addressing the meaning of good corporate governance, it is important to understand the reputation damage caused to organisations when serious allegations of white collar crime are made.

What is the connection to corporate governance?

What is the common tie that binds these corporate criminals together? Apart from the fact that they were the rich business leaders of successful companies and are now professionally poorer, both financially and in reputation, with jail sentences hanging over their heads; the fact is that each of the corporations in question could have had better corporate governance systems in place. And with the beauty of hindsight, it is clear that with better corporate governance, none of them would be where they are today!

Michael Rose, a partner with the law firm Allen Arthur Robinson, has identified four reasons why in the last 15 years greater enforcement of “white-collar crimes” has been pursued:

That leads to the natural question of “how can good corporate governance have provided better protection for either the individuals involved in these cases or their corporate entity?”

What is corporate governance today?

Without doubt ‘corporate governance’ had become the buzzword of the 1990s and has continued into the 2000s. Historically the phrase “corporate governance” can be dated back to the Swiss cantons of the 1300s and the modern version from the financial corporate collapses of the late 1980s.

The phrase was coined with modern usage around the common law world after the release of the Cadbury Report in the UK in 1992. Sir Adrian attempted to define this concept as ‘the system by which companies are directed and controlled’. This report prompted many other common law jurisdictions, such as Australia, New Zealand, Malaysia and South Africa to follow suit with their own reports into corporate governance.

Other definitions found in the academic environment include the Cochran and Wartick’s 1988 publication Corporate Governance: A Review of the Literature, believe corporate governance to be ‘an umbrella term that includes specific issues arising from interactions among senior management, shareholders, boards of directors and other corporate stakeholders’.

Australia’s attempt at reviewing corporate governance as part of the reform of directors’ duties under the Corporate Law Economic Reform Program (CLERP) defined it as ‘dealing with how, and to what extent the interests of various agents involved in the company are reconciled and what checks are put in place to ensure that managers maximise the value of the investment made by shareholders’.

Probably, one of the most significant contributions is the 2003 Final Report into the Collapse of HIH Insurance by Royal Commissioner, Justice Neville Owen. He stated that ‘corporate governance’ is not a term of art and thus will vary from corporate entity to corporate entity. He said “At its broadest, the governance of corporate entities comprehends the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations.” Owen went on to state that at a high level, corporate governance is all about accountability and stewardship. As a part of this Royal Commission, 61 policy recommendations were made to strengthen and reform Australias’ system of corporate governance.

But how can one term mean so many different things? Well, the answer isn’t an easy one! As with defining things like fulfilling ‘legal obligations’ or ‘account keeping’, corporate governance will mean different things to different corporations depending upon what class of company they are, what style of management they use, what type of personnel they involve and the companies particular needs and attributes. There is no ‘One Size Fits All’ approach to corporate governance.

What does corporate governance encompass?

If we accept the thoughts of Justice Owen that the board is responsible for setting the framework for the system and processes of accountability and stewardship, then the ‘corporate governance’, as a task, can be divided into three definitive aspects. There is often a lot of confusion between the inter-relationship between corporate governance, due diligence and compliance. These three fundamental components may be applied to any company from the smallest of firms to the largest ASX listed entity:

Due Diligence:

Due diligence, as a phrase, is another import from the USA, which had a specific defence to certain legal transactions, such as a takeover or a fundraising exercise. This might be fairly described as “external due diligence” or possibly transactional due diligence. This has become established in Australia as there are legal defences at common law (in negligence) as well as in the Corporations Act 2001 (Cth) for directors and officers who have taken reasonable care. One of the most significant examples introduced in March 2000 was the statutory business judgment rule defence as found in s 180(2) Corporations Act. There are also defences in terms of financial products, such as a product disclosure statement or a fundraising document (prospectus) or the reliance on others defence in s 189. At an even broader level, much of the Corporations Act is governed by the Commonwealth Criminal Code and that contains a defence to general due diligence under Division 12 of the Criminal Code Act 1995 (Cth).

However, ‘due diligence’ is no longer limited to this external transaction approach and limited to a reactive legal form of defence. The term due diligence now also refers to the internal processes of evaluating everything within a corporation from internal legal audit and risk management processes. Thus many organisations to fulfil their corporate governance plans or frameworks have established an internal due diligence process. It is common to have a legal risk audit conducted (either internally or by external professionals, depending upon the type of business). This is used as a driver for a compliance planning program to be developed which will be overseen and implemented by senior management. On a regular basis (between six months and two years) these compliance programs may be reviewed and adapted to changing regulatory and business environments and finally audited as part of the risk management strategy. The actual process may vary from corporation to corporation and other labels may be applied, but a due diligence process made up of a variety of compliance programs, will help set the framework for a culture of good corporate governance to develop and be led by the board of directors, who have the ultimate responsibility.

Thus, due diligence no longer just refers to the process of evaluating external processes and transactional activities, but also refers to the internal processes of legal compliance.

Compliance Programmes:

Often it is the compliance programmes that are where the confusion between the three fundamental processes within the periphery of corporate governance stems. Part and parcel of engaging in fulfilling the duty of due diligence when conducting day to day checks on internal processes is checking compliance to legal obligations, to trade practices, to environmental, corporate and privacy law. This process of implementing compliance programs to ensure compliance is a key defence or at least mitigation by the corporation against any legal actions.

It may be that a corporation, in carrying out its internal due diligence will conduct a legal risk audit, from which plans will be developed in order to manage and minimise risk. The development of compliance plans may be a part of performance of due diligence, but the simple act of designing and implementing compliance programs does not constitute due diligence per se. It is accurate to say that internal processes of due diligence then, involve factors of establishing compliance programs, yet it would be inaccurate to say that the two were synonymous. Regulators like ASIC have many powers to help them enforce the Corporations Act and other such legislation. The use of enforceable undertakings often requires a corporation to undertake a new compliance program and put in place a due diligence process to make sure that such potential contraventions of the law do not arise, as well as an educational program for employees, agents and officers of the corporation.

Final Conclusion

Lessons learnt in recent Australian corporate history including the $5.3 billion collapse of HIH Insurance; One.Tel Limited; the NAB’s foreign exchange division, Rene Rivkin’s insider trading activities, indicate a stronger commitment to prevent and prosecute corporate crime. The High Court has recently ruled on the impact of Directors and Officers insurance in two cases (Willkie v Gordian Runoff Limited[7]and Rich & Silbermann v CGU Insurance.[8] These cases involved the payment of defence costs in out standing litigation by regulators and creditors. The court ruled that the terms of the policy are crucial to the advancement of costs, but re-enforce why corporate officers would want an effective corporate governance framework, based on an effective internal due diligence system, which is supported by efficient compliance programs to white-collar crimes.

ASIC in recent times has indicated that they are serious about enforcement of Australia’s regulatory regime and corporate governance laws. In 2004/05 to June this year ASIC is responsible for jailing 21 people for an average term of 3.7 years for corporate crime. So far this year, the most popular sentence has been for a period of between one and two years, with eight people being jailed for this period. This is followed by sentences of four to eight years which seven people have been awarded. No one this year has been sentenced to more than 10 years imprisonment. Despite this, ASIC’s high profile litigations have been sent the message to the Australian corporate world: White collar crime will not and is not tolerated. Good corporate governance could ensure that your company is not the next HIH collapse!


Professor Michael Adams, Faculty of Law, University of Technology Sydney

22 August 2005

Word count = 3, 100


[#] This is an edited version of a presentation at the Australasian Law Teachers Association conference at the University of Waikato, New Zealand in July 2005.

[∗] Professor Michael A Adams, Perpetual Trustees Australia Chair of Financial Services Law and Professor of Corporate Law, University of Technology, Sydney; Assistant Director, UTS Centre for Corporate Governance and Consultant to Blake Dawson Waldron (lawyers), <>

[1] Francis, Ethics and Corporate Governance (200) at p19

[2] R v Rivkin [2004] NSWCCA 7

[3] ASIC v Adler [2002] NSWSC 510; Adler v ASIC [2002] NSWCA 303

[4] R v Adler [2005] NSWSC 274

[5] R v Williams [2005] NSWSC 315

[6] [2005] FCA 88

[7] [2005] HCA 17 (7 April)

[8] [2005] HCA 16 (7 April)

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