CSR Limited, in the matter of CSR Limited [2010] FCA 33 (3 February 2010)

Last Updated: 4 February 2010

FEDERAL COURT OF AUSTRALIA

CSR Limited, in the matter of CSR Limited [2010] FCA 33

Citation:		CSR Limited, in the matter of CSR Limited [2010] FCA 33
Parties:		CSR LIMITED
File number:		NSD 1132 of 2009
Judge:		Stone J
Date of judgment:		3 February 2010
Catchwords:		CORPORATIONS – scheme of arrangement under Pt 5.1 Corporations Act 2001 (Cth) – proposed capital reduction a precondition to scheme taking effect – effect on current and future asbestos related claims – whether scheme unfair or oppressive – whether effect of scheme involving capital reduction on asbestos related claims consistent with public policy and commercial morality – whether adequate disclosure to shareholders
Legislation:		Corporations Act 2001 (Cth) s 411, s 256B ; Company Law Review Act 1998
Cases cited:		Re Central Pacific Minerals NL [2002] FCA 239 ; FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 ; Re Foundation Healthcare Limited [2002] FCA 742; (2002) 42 ACSR 252 ; Re NRMA Insurance Ltd [2000] NSWSC 82; (2000) 33 ACSR 595 ; Stork ICM Australia Pty Ltd v Stork Food Systems Australasia Pty Ltd [2006] FCA 1849, (2006) ACLC 208
Date of hearing:	29 January 2010
Place:	Sydney
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	39
Counsel for the Plaintiff:	T Bathurst QC with D Thomas
Solicitor for the Plaintiff:	Mallesons Stephen Jaques
Counsel for the Australian Securities and Investments Commission:	R Beech-Jones SC with J Emmett
Solicitor for ASIC:	K Turner
Counsel for the Asbestos Injuries Compensation Fund, AMACA Pty Ltd and AMABA Pty Ltd:	AJ Meagher SC
Solicitor for AICF, AMACA and AMABA:	Johnson Winter & Slattery
Counsel for James Hardie Industries and James Hardie 117 Pty Ltd:	RM Foreman
Counsel for the New South Wales Attorney-General:	MB Oakes SC with MA Izzo
Solicitor for the New South Wales Attorney-General:	NSW Crown Solicitor’s Office

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 1132 of 2009

CSR LIMITED Plaintiff

JUDGE:	STONE J
DATE OF ORDER:	3 FEBRUARY 2010
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The application contained in the originating process filed on 8 October 2009 be dismissed
   

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 1132 of 2009

CSR LIMITED Plaintiff

JUDGE:	STONE J
DATE:	3 FEBRUARY 2010
PLACE:	SYDNEY

REASONS FOR JUDGMENT

INTRODUCTION

1. On 8 October 2009 the plaintiff, CSR Limited, (CSR) filed an originating process seeking orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) for the convening of a meeting of its shareholders to consider a scheme of arrangement (Scheme) and for the approval of the explanatory statement summarising the Scheme.
2. The draft explanatory statement is set out in the Scheme Booklet which was tendered at the hearing as Exhibit 1. The Scheme was broadly outlined in the Chairman’s letter in the Scheme Booklet as follows:

On 17 June 2009, CSR announced it would pursue the Demerger of its sugar and renewable energy business to create two focused companies, both listed on ASX:

• Sucrogen – the leading sugar and renewable energy company in Australia and New Zealand; and
• CSR – a premium branded building products company with an attractive investment in aluminium

The CSR Directors believe that the Demerger will facilitate better realisation of the value of these businesses for CSR Shareholders over time.

The letter summarised the advantages that the CSR directors believe would follow from the demerger and adds:

If approved by CSR Shareholders and the Court, the Demerger will be implemented via a capital reduction and scheme of arrangement. ...
The CSR Directors have evaluated various alternatives to the Demerger ... and believe the Demerger is in the best interests of CSR Shareholders as a whole. The CSR directors unanimously recommend that you vote in favour of the resolutions to effect the Demerger. Each CSR Director intends to vote all CSR Shares controlled by him or her in favour of the resolutions.

3. Taking the sugar and renewable energy business out of CSR coupled with the proposed capital reduction would leave the company (New CSR) with the building products, property and aluminium business and considerably less capital than CSR presently has. The proposed capital reduction has prompted considerable interest in, and opposition to, the Scheme. This was evidenced by the Australian Securities and Investments Commission (ASIC) and a number of objectors seeking, and being given, leave to intervene in the proceeding when it first came before the Court on 17 December 2009. The matter was then adjourned to allow the objectors and ASIC time to obtain expert assistance in reviewing the Scheme.
4. The objectors were James Hardie Industries NV and James Hardie 117 Pty Limited (together “James Hardie”), the Asbestos Injuries Compensation Fund Limited (under NSW administered winding up), AMACA Pty Limited (under NSW administered winding up) and AMABA Pty Limited (under NSW administered winding up) (together “AICF”) and the Attorney-General for the State of New South Wales (NSW). The objectors all opposed the Scheme and argued against the Court making the orders sought by CSR. In the case of NSW the opposition was to the Scheme in its present form which, it was submitted, could be remedied in accordance with a suggestion made by NSW. That recommendation is discussed below at [38].
5. ASIC and the objectors were concerned only with potential prejudice to asbestos claimants, that is persons who now have, or in the future may have, a claim for compensation from CSR for injury sustained from exposure to asbestos. They include:

(a) persons in which disease is presently manifest (whether or not they have made a claim against CSR);

(b) persons who have been exposed to asbestos which has not resulted in the manifestation of disease; and

(c) persons who will be exposed to asbestos in the future but who have not yet been exposed.

THE FIRST COURT HEARING

Applicable principles

6. CSR’s application came before the Court for the first court hearing on Friday, 29 January 2010. This is the first of the three stages in the promulgation of a scheme of arrangement under Part 5.1 of the Corporations Act. The second and third stages are, respectively, the members’ meeting(s) and the second court hearing at which the Court’s approval of the scheme is sought: Re Central Pacific Minerals NL [2002] FCA 239 at [6].
7. At the hearing on 29 January ASIC did not formally oppose or support CSR’s application for orders convening the Scheme meeting nevertheless, it made detailed oral and written submissions concerning factors that the Court should consider in addressing the issue. At the hearing much was said about the proper role of the Court at the first hearing. Different views were put as to the extent to which the Court should consider the details of a scheme, and the issues on which it was necessary for the Court to be satisfied before making orders for convening a meeting. In my respectful view the applicable principles are those summarised by Emmett J in Re Central Pacific Minerals NL at [8] – [11]:

Those principles require that the Court will not convene a meeting unless the arrangement proposed is of such a nature and is cast in such terms that, if the arrangement receives approval by the statutory majority at the relevant meeting, the Court will be likely to approve the arrangement on the hearing of any application that is unopposed. At the stage of convening a meeting, the Court will give consideration to compliance with such preliminary matters as are relevant to the holding of the meeting. Of paramount importance at that stage is the need to ensure that there will be sufficient disclosure, to those who will be affected by the arrangement, of its details and effect. The Court will also need to be satisfied, at that stage, that there has been reasonable opportunity for the Commission to examine the terms of the arrangement.
In exercising its discretion whether to convene a meeting, the Court will have regard to such matters as the acceptability of the documentation of the proposed arrangement, the commercial viability and morality of the arrangement, the likely acceptability of the arrangement, the bona fides of the proposals, whether the proposals could be achieved by another method and any objections or submissions by the Commission. It is always the practice of the Court, at the first stage, to go through the proposed arrangement, to raise matters as to the drafting of the documentation, to ascertain whether the arrangement complies with the substantive requirements of the law and to ensure that the arrangement, if given effect, will not involve any unfair or oppressive result.
In considering whether to convene a meeting, the Court will take into account questions of public policy as well as commercial morality. The Court will have regard to the interests of parties who will be bound by the arrangement and who might be careless of their own best interests. While security holders of a company may be considered to be better judges than the Court could be of what is to their commercial advantage, that does not extend to the technical or mechanical aspects of an arrangement. Security holders are likely to be influenced largely by their understanding of the broad economic consequences of an arrangement. However, they are entitled to rely on the Court’s approval as a sufficient safeguard against defects at the technical or mechanical level.
Accordingly, for the purposes of protecting the interests of security holders who have not agreed to an arrangement and yet will be bound by it, the Court will ordinarily seek to ensure that the terms of the arrangement would be enforceable by all persons bound by it against those who are seeking to implement it or obtain benefits from it. The Court will also seek to ensure that the arrangement does not, without sufficient reason, include provisions that may create inroads upon or modify the benefits that a security holder bound by it might legitimately expect to obtain under it. The mere fact that the Court has convened a meeting does not, however, necessarily mean that the Court will approve the arrangement, even if the arrangement is unopposed at the third stage.

8. The Court will ordinarily make the orders sought if, in accordance with these principles, the Court is satisfied as to the elements identified by Emmett J. It will not do so, however, unless it is likely that, the statutory majority of votes having been achieved at the meeting, the Court would approve the Scheme at the second court hearing: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72.
9. CSR placed much emphasis on a comment made by French J (as he then was) in Re Foundation Healthcare Limited [2002] FCA 742; (2002) 42 ACSR 252 at [44]:

The Court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the Court. ... That question is to be answered when the scheme returns to the Court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further.
[Emphasis added]

10. Relying on French J’s comment, Mr Bathurst QC who, with Mr Thomas, appeared for CSR, submitted that the summary nature of the application under s 411 made it inappropriate to consider issues associated with asbestos claims at the first Court hearing.

Proposed capital reduction

11. Mr Bathurst submitted that the capital reduction does not form part of the Scheme before the Court and therefore the Court is not required to consider the advantages and disadvantages of the capital reduction in this proceeding. It is true that the Scheme, which is set out in Appendix C to the draft scheme booklet, makes no provision for the capital reduction. It is also true, as Mr Bathurst submitted, that s 256B of the Corporations Act, which sets out the terms on which a company may make a capital reduction not otherwise authorised by law, does not require the Court’s approval for such a capital reduction. The necessity for court approval was repealed by the Company Law Review Act 1998 (Cth) which introduced the present provision. Section 256B requires that the reduction:

(a) is fair and reasonable to the company’s shareholders as a whole; and

(b) does not materially prejudice the company’s ability to pay its creditors; and

(c) is approved by shareholders under s 256C.

As the written submissions for the plaintiff point out, a creditor who disagrees with a proposed capital reduction under s 256B would be entitled to commence proceedings to restrain it or to have it declared unlawful.

12. While correct, these submissions ignore the very important fact that while the proposed capital reduction may not formally be part of the Scheme, it is a condition precedent to the Scheme that the CSR shareholders pass the “Capital Reduction Resolution”. That Resolution is to be put to shareholders at a general meeting of CSR to be held immediately following the Scheme meeting. If the resolution is not passed the Scheme will not take effect.
13. In the written submissions made on behalf of AICF much was made of the need to ensure that the proposed capital reduction did not breach s 256B. In particular AICF submitted that “creditor” within the section includes persons who have been exposed to asbestos but (as yet) show no manifestation of disease and persons who have not yet been exposed to asbestos but will be exposed to it in the future. I do not propose to pursue that line of analysis. I accept CSR’s submission that to do so would be “to re-create a statutory regime of court approval for capital reductions that has been expressly abrogated by Parliament”.
14. This does not, however, preclude consideration of the effect of a proposed capital reduction which, as a matter of substance if not form, is part of a Pt 5.1 scheme of arrangement. Given that nexus, it is entirely appropriate for the Court to consider the impact of the proposed capital reduction on asbestos claimants. While I do not believe that the issue is one that arises under s 256B, I am satisfied that as a matter of public policy, commercial morality and fair disclosure to shareholders it should be considered in the context of the Scheme.
15. I am also satisfied that it is appropriate to consider the impact of the proposed capital reduction on asbestos claimants at the first hearing. Too much has been made of the difference between the comments made in Eastment and in Foundation Healthcare. In particular, I do not understand French J to be recommending that serious reservations the Court may have about the impact of a scheme should not be raised until the second hearing. If at the first hearing the Court has a concern about the fairness of an element of a scheme such that the Court would not be prepared to approve the scheme without that issue being resolved, it would, in my view, be entirely inappropriate (to use French J’s language) for the issue not to be raised at the earliest opportunity.
16. A proposed scheme only comes before the Court for a second hearing if it has been approved by the statutory majority; Corporations Act, s 411(4). By that stage a great deal of effort and expense has been incurred. It would be unfair to the company for the Court then to refuse to approve the scheme on the basis of an issue that could have been raised at the first court hearing. Even if the issue could be resolved at that stage it will almost certainly require a further meeting of shareholders to approve the changes that have been made. It is not in the interests of justice to expose a company to additional effort and expense that could have been avoided by more timely intervention. This much was recognised by Santow J when he said in Re NRMA Insurance Ltd [2000] NSWSC 82; (2000) 33 ACSR 595 at [40]:

By seeking to deal with the entirety of the scheme, including such issues of fairness as may have disclosure or legality implications raised by objectors, the court ensures that later arguments about the adequacy of disclosure and legality can be avoided or foreshortened, though without pre-empting the court's decision at the approval stage.

ASIC’s position

17. ASIC’s general practice is not to appear at a first court hearing unless it has concerns about an aspect of the scheme. In its written submissions ASIC has expressed concerns about the effect of the proposed capital reduction on asbestos claimants:

ASIC’s concern arises because the proposed scheme of arrangement will split the assets of CSR, in circumstances where only the assets of New CSR would be available to meet current and future asbestos liabilities of CSR. In its financial statements for the half year ended 30 September 2009 CSR has recognised a provision of A$446.8 million for current and future asbestos liabilities. This comprises 10% of CSR’s total assets as at 30 September 2009 but, based on the pro forma balance sheet produced by CSR as at 30 September 2009, would comprise 18% of New CSR’s assets at that date.
As a general proposition asbestos claims raise difficult issues for ASIC and the Court in considering applications under s.411 of the Act. The distinguishing features of such claims compared with other claims of creditors are:

1. Their extraordinary long term nature (generally in the period of 20 to 50 years);

ii. The number and spread of such claims;

3. The fact that at any given point in time persons can be “affected” by exposure to asbestos at a significant time in the past but they will not manifest symptoms for some time into the future;
4. The concomitant uncertainty surrounding their estimation; and
5. The social costs that they impose especially if for some reason the party that is legally responsible for their occurrence does not have the means to pay.

The nature of the uncertainty involved is illustrated by considering the provisions made for asbestos claims in CSR’s accounts for the period of 4.5 years from 31 March 2005 to 30 September 2009. They increased from A$318.4m at the start of the period to A$446.8m at the end. This occurred even though CSR’s asbestos activities apparently ceased in Australia in the 1970’s and the USA in 1966 and notwithstanding that in those 4.5 years A$150.4 million in claims payments and costs were made. These were amounts that should have been encompassed by the 30 March 2005 provision.

18. ASIC submitted that the members of CSR had a legitimate interest in the disclosure of information about the company’s provision for asbestos claims, the degree of confidence that those claims could be met and the effect of those claims on the ongoing business of New CSR including its ability to pay dividends. Despite the concerns expressed above ASIC stated that it is “currently content” as to the form of disclosure in the explanatory statement concerning asbestos claims and the ability of New CSR to meet those claims. This statement does not address the fairness and policy issues to which Emmett J referred in Re Central Pacific Minerals; see above at [7]. However ASIC did submit that it “would be contrary to public policy to allow a material reduction in the assets available to meet future asbestos claims arising from past business activities which cannot be shown to have no prejudicial effect”.
19. CSR does not deny that the potential effect of the demerger on asbestos claimants is a legitimate concern. The Scheme Booklet addresses the point at 95:

The Demerger will reduce the size of CSR and following the Demerger CSR will be less able to readily absorb the financial and business effect of any significant adverse events. In determining to proceed with the Demerger, CSR has therefore undertaken a rigorous assessment in order to be satisfied that its future financial capacity will be adequate to satisfy its asbestos related liabilities. This assessment has included scenario testing, based upon plausible worst case estimates of its liabilities in circumstances of reasonable worst case business and operating environments. That review concluded that even in the worst case scenarios that were considered, CSR would have the capacity to meet the claims of all of its creditors including future asbestos related liabilities following the Demerger.

Expert evidence

20. CSR and the parties given leave to appear at the first court hearing tendered a number of expert reports analysing CSR’s asbestos liabilities and commenting on the analyses of each other. The expert reports tendered at the first court hearing include:

(1) The Grant Samuel Report commissioned by CSR to provide a Financial Services Guide and Independent Expert’s Report in relation to the proposed demerger;

(2) The Taylor Fry report commissioned by CSR to review the actuarial projections and valuation of CSR’s Australian asbestos liabilities;

(3) The Navigant Report commissioned by CSR to review the actuarial projections and valuation of CSR’s US asbestos liabilities;

(4) The Finity Consulting report commissioned by CSR to review the Taylor Fry and Navigant reports;

(5) Deloitte Touche Tohmatsu report commissioned by CSR to comment on the Lonergan Edwards (Coleman) report;

(6) Goldman Sachs JBWere report to assess CSR’s ability to meet post-demerger asbestos liabilities including stress tests involving “Downside Scenarios”;

(7) PricewaterhouseCoopers report – a limited scope review of CSR’s five year planning process and stress testing;

(8) Ernst & Young report commissioned by ASIC to review CSR’s provision for asbestos liabilities and to review the work of Taylor Fry, Navigant and Finity;

(9) KPMG Actuaries (Donlevy) report commissioned by AICF;

(10) Ernst & Young (Gard) report commissioned by ASIC to review the KPMG report;

(11) Lonergan Edwards & Associates (Coleman) report commissioned by AICF to evaluate the Grant Samuels report.

21. All of these reports except the Grant Samuel report were the subject of confidentiality orders made by the Court because they contain sensitive commercial material. For that reason it is difficult to describe the contents of these reports in any detail.
22. The Grant Samuel Report states that approximately 95 % of CSR’s total earnings are generated in Australia. The report analysed the contribution of the business operations of CSR to its Gross Assets as at 30 September 2009 and to its reported EBIT for the year ended 31 March 2009. The contribution of the building products, the aluminium and the property operations was 56% and 75% respectively. Following a detailed financial analysis including the advantages and disadvantages of the proposed demerger the report concludes that the proposed demerger (including the capital reduction) is in the best interests of CSR shareholders and will not materially prejudice “existing CSR creditors”. In relation to CSR’s liability for asbestos claims the report makes the point that following the proposed demerger the liability for asbestos claims will remain with New CSR which will not have access to the assets and cash flow of the sugar business to assist in meeting the claims.
23. The report notes that CSR has made provision of $446.8 million in its balance sheet “for all known and probable future asbestos claims but not for such claims as could not presently be reliably measured”. The report concludes that:

On the basis of the analysis undertaken by or on behalf of CSR, it would not be unreasonable for the directors of CSR to conclude that the Proposed Demerger will not have a material adverse impact on New CSR’s ability to continue to pay its creditors, including future asbestos related claims in Australia and the United States (subject to the limitations set out in the Scheme Booklet).

24. It is clear from the above that CSR’s provision for “known and probable asbestos claims” does not take into account claims that “cannot be reliably measured”. It would seem to follow that the “future asbestos related claims” referred to in the passage quoted above also fails to take into account such claims. Yet it is the very uncertainty raised by such claims that is at the heart of the objections to the capital reduction. `

The Court’s standard of satisfaction

25. The objectors and ASIC submitted that the Court should dismiss the plaintiff’s application unless clearly satisfied that the asbestos claimants would be no worse off after the demerger than before. That formulation draws on a comment made by Lindgren J in Stork ICM Australia Pty Ltd v Stork Food Systems Australasia Pty Ltd [2006] FCA 1849, (2006) ACLC 208. His Honour was considering the interests of asbestos claimants in connection with a scheme of arrangement which provided for all property of Stork ICM to be vested in Stork FSA. The property in question included ICM’s contractual right to require insurers to indemnify it in respect of sums which it was, or might become, liable to pay to asbestos claimants as workers’ compensation or common law damages. At [111] of his reasons his Honour said that in the course of the hearing he had indicated to the parties:

That I should not make the orders sought unless I was clearly satisfied that the potential claimants would be no worse off if the order were made than they would be otherwise.

26. The standard adopted by Lindgren J requires the plaintiff to prove a negative. That standard should be considered in context. The issue in Stork was the insurance indemnity which, I venture to suggest, lent itself more to such proof than the complex actuarial debate that is involved here. Be that as it may, I have, with great respect, some reservations about whether the Court’s discretion under s 411 extends so far especially in light of the principles articulated by Emmett J in Re Central Pacific Minerals; see [7] above. In particular, I am inclined to the view that unless the Court is satisfied that the Scheme is not consistent with public policy and commercial morality or does not provide adequate disclosure it should make the orders sought at the first hearing.
27. There can be no doubt that, as the Grant Samuel report acknowledges, any reduction of a company’s capital reduces its capacity to meet the claims of creditors. In itself that does not indicate any unfairness or conflict with public policy. Nor, as a practical matter, does it necessarily pose a material risk to creditors. In oral submissions however, Mr Meagher SC, who appeared for AICF, drew my attention not only to the conclusion quoted in [23] but also to the following passage in the penultimate paragraph of the Grant Samuel report:

The ability of New CSR to continue to pay its creditors, including asbestos related claims in the future will depend on future economic conditions and future decisions by the board of New CSR. There is also a risk that payments for asbestos related claims will increase in the future. As is the case with CSR prior to the Proposed Demerger, there can be no guarantee that New CSR will be able to continue to pay its creditors, including future asbestos related claims or that the payment of future asbestos related claims will not have a material adverse impact on New CSR.

28. There is, of course, never any guarantee that a company will be able to pay its future creditors. This is equally true of CSR before the demerger as of New CSR after demerger. Nevertheless, I do not accept that the position of future asbestos claimants is to be equated with every category of current and future creditor of New CSR. Their interest arises not from some future dealing with CSR but from their involuntary exposure to asbestos products supplied by CSR before demerger even if, in some cases, exposure does not occur until after demerger.
29. Whether New CSR is likely to be able to meet the claims of future asbestos claimants is of interest not only to those claimants but also to shareholders in CSR who are being asked to approve the Scheme and the proposed capital reduction. The effect of those claims on the ongoing business of New CSR is a necessary matter for disclosure to the shareholders. Before making orders convening the Scheme meeting the Court must be clearly satisfied that there has been proper disclosure in the explanatory statement.
30. It would appear that between 17 December 2009 and the first court hearing on 29 January 2010 there was an active conversation between CSR, ASIC and ACIF and their respective expert advisors. It is not for the Court to adjudicate between the expert advisors and determine whose is the better view. The critical issue that emerges from a review of the reports is that there is considerable uncertainty as to the conclusions about New CSR’s provision for asbestos claimants after demerger. As Mr Beech-Jones SC who appeared for ASIC observed, the significance of the expert material, in particular the Ernst & Young reports, is that it teases out the uncertainties and limitations in the reports relied on by CSR. It is the dispute that is significant not the resolution of it.

Analyses of expert reports

31. It is not possible to give detailed analysis of the confidential reports, however, the flavour of the debate is reflected in submissions made on behalf of those commissioning the various reports. For example, the written submissions for ASIC contain 12 pages of detailed analysis of the actuarial material concerning asbestos liabilities and financial stress testing. The submissions analyse the CSR actuarial material including the expert reports and advice provided by Taylor Fry and Navigant, the expert reviews of that material by KPMG and Ernst & Young as well as the response of the CSR advisers. The submissions set out ASIC’s conclusions in relation to the actuarial material as follows:

First it is self evident that there is considerable uncertainty surrounding any process of actuarially assessing future asbestos liabilities. Notwithstanding that CSR ceased involvement in asbestos related activities in 1977 both [Taylor Fry] and Navigant have continually being [sic] revising their central estimates upwards from 2004 based on new information that emerges.
Second, as described above, there are limitations on the scope of the actuarial assessments which have the potential to under estimate the overall valuations.
Third, within the actuarial assessments there are significant matters of judgement over which reasonable minds may differ and which have considerable potential to adversely and materially affect the valuations. This is exemplified by the differences in professional opinion between KPMG and Taylor Fry in relation to both the central estimate and the 95th percentile estimate of the Australian liabilities.
Fourth, ASIC submits that in determining this application the Court need not embark upon the task of determining which expert is “correct” or to be preferred. Instead it should note the differences of professional opinion but, in the context of determining the application based on the approach outlined above, it should afford significant weight to the views expressed by KPMG at least so far as they affect the 95th percentile estimate provided by [Taylor Fry]. KPMG have significant expertise in the area and they have provided a detailed rationale for their opinion on these issues. Their views at least so far as they affect the 95th percentile estimates are supported by [Ernst & Young] and, in some limited respects, by Finity.

32. The submissions also analyse the financial stress testing that CSR had undertaken and the Ernst & Young review of this stress testing. The conclusion is stated as follows:

A review of the material concerning the financial analysis and stress testing undertaken by and on behalf of CSR reveals that there are a number of aspects of uncertainty surrounding such an exercise mainly:
(i) The obvious uncertainties that arise from any exercise of financial modelling the future performance of any business especially in the context of measuring its ability to meet long tail liabilities such as those that arise from asbestos use;
(ii) The limited external scrutiny of the assumptions and workings of the 5 year and 20 year financial models prepared by CSR management, the inputs to which most always primarily originate from CSR's management;
(iii) The judgements involved in identifying the various risks to the business, the relevant parameters for the “shock testing” and the exclusion of other forms of risk ...; and
(iv) The absence of any testing of the combination of a prolonged downturn and the high case estimates and the related questions of judgement as to whether it would be feasible for New CSR to respond to the various risks to the business under the shock scenarios that were stress tested.

33. CSR's submissions in reply make the following comments about the submissions made by ASIC:

In its written and oral submissions, ASIC ... sought to stress the uncertainties and limitations inherent in actuarial analyses of future events. Such a submission should not be taken too far.
By definition, any assessment of possible future events involves uncertainty and any attempt to actuarially assess such events will be subject to limitations. As the Court noted in argument, such uncertainties and limitations are equally applicable to CSR in its current structure as they are to CSR post-demerger. Provided that the advice provided to the CSR Board has been shown to be reasonable, the fact that the advice is subject to uncertainties does not warrant a conclusion that the advice should be rejected or lacks persuasive force.
Further, ... the doubts and uncertainties and the differences between the actuarial experts are of no relevance in circumstances where CSR's analysis has taken account of the full range of actuarial opinion. Cash outflows associated with the asbestos-related claims have been projected having regard to all “reasonable hypotheses”. Further, no party has sought to demonstrate a flaw in the other principal aspects of that analysis, namely the projection and “stress testing” of future cash inflows from CSR's de-merged business operations. That aspect of the analysis has been reviewed by PWC. It has also been reviewed on behalf of ASIC by [Ernst & Young] without unfavourable comment. In the light of the above, and as there is no correlation between risks attending the projected business cash inflows and the risks of under-estimation of the asbestos related cash outflows, the analysis provides a very high level of comfort that asbestos claims will be met.
ASIC's submissions should be read with this in mind. Its submissions are open to the criticisms that:

• they fail to reflect the conclusions of their own expert;
• they place undue focus on limitations and uncertainties that no actuary (including KPMG) can avoid without regard to the conclusions ultimately stated by the experts;
• they overstate the significance of the limitations and uncertainties ...

34. In addition to these criticisms CSR made detailed submissions in tabular form responding to the submissions made by AICF. Those submissions confirm that there is a genuine dispute between the experts as to the appropriate way to assess New CSR’s ability to meet future asbestos claims. The submissions made on behalf of James Hardie echoed the submissions of ASIC and AICF as well as making some additional criticisms of the provision made for New CSR to meet future asbestos claims.
35. In summary, the expert evidence presented by CSR, ASIC, and the other intervening parties brings into sharp relief the inherent uncertainty involved in any actuarial estimate of future asbestos-related claims and in particular the limitations and qualifications expressed in the actuarial reports relied on by CSR. In addition, specific issues raised by the experts retained by ASIC and AICF point to particular limitations in the material supplied by CSR’s experts in relation to future asbestos claims that cannot be reliably estimated at this time. The starting point in considering whether these flaws should lead to my not being satisfied that the provisions made in respect of asbestos-related claims following demerger are consistent with public policy or commercial morality must be:

(a) that New CSR will be the repository of all CSR's liabilities in respect of asbestos-related claims both present and future; and

(b) that it will suffer a significant reduction in the capital available to meet such claims.

36. The significance of those two factors increases with the uncertainty of the actuarial estimates and other expert opinion and is such that I cannot be satisfied that the provisions made are consistent with commercial morality or that the Scheme, if given effect, would not involve an unfair or oppressive result. Moreover, these same issues lead me to conclude that the material in the explanatory statement cannot provide adequate disclosure to CSR shareholders of New CSR's ability to meet these future liabilities. For both these reasons I have concluded that I should decline to make the orders for convening the Scheme meeting. In the circumstances, it is not necessary that I should consider the aspects of the Scheme that might otherwise be addressed at the first hearing.

NSW submissions

37. There is one last issue to be addressed, namely the submissions made for NSW. Mr Oakes SC who appeared for NSW stated that from his client's point of view the central issue is:

[W]ho in the future should bear the risks if asbestos claims projections are too low, or that actual cash flow is too low because of the inherent uncertainties in long-term earnings and cash flow forecasts ... ? So the question is: should the risks be borne by the businesses that currently comprise the CSR group and, thus, indirectly by the CSR shareholders, or should the risks be borne by the current and future asbestos claimants? Our submission is the risks shouldn’t be borne by the current and future asbestos claimants ...

38. Given the inherent uncertainties in the actuarial material that had been put before the Court, Mr Oakes submitted that the only way forward would be for the Sucrogen Company to provide a deed poll in favour of current and future asbestos claimants undertaking to satisfy asbestos-related liabilities if New CSR proved unable to do so. In a letter to CSR's solicitors, Mallesons Stephen Jaques dated 28 January 2010, from the New South Wales Crown Solicitor's Office a suggestion to this effect was made. I understand that CSR did not regard the suggestion as attractive. Its submissions in reply noted that the proposal “would significantly alter the commercial characteristics of the proposed demerger”. In particular it was said that the proposal would subject Sucrogen “to a contingent liability over which it had no effective control, which had no correlation to its business revenue and which offered no commercial return or benefit”. Given that rejection no such proposal is part of the Scheme which is presently before the Court and it is not appropriate that I make any comment as to whether, if the proposal were to be implemented, the amended Scheme would continue to face the difficulties that I have identified.

CONCLUSION

39. For the reasons given above I have concluded that the orders sought by the plaintiff should not be made and that the Plaintiff’s application should be dismissed.
    

I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.

Associate:

Dated: 3 February 2010