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Adams, MA --- "James Hardie final outcomes" [2009] ALRS 3; (2009) 61(9) Keeping good companies 519

Last Updated: 13 February 2010



“Does the punishment fit the crime? James Hardie case final outcomes”

By Professor Michael Adams, UWS Law School

In April 2009 the NSW Supreme Court handed

down an important decision for all governance

professionals. The case involved James Hardie

Industries (JHI) and went under the title of ASIC v

Macdonald (No 11)[2009] NSWSC 287. A careful

examination of that case is found in the June issue

of Keeping good companies1 but there was an

important aspect of the case that was missing. The

actual outcomes of the case were delayed for a

series of submissions by the 12 parties as to what

penalties should be imposed for the 33 breaches of

the Corporations Act 2001. The judge, Gzell J,

provided opportunities for some of the directors to

apply for court relief from the breaches and also to

focus on the issue of costs, a critical factor in

major litigation.

On 20 August 2009, Gzell J handed down the

penalty proceedings in ASIC v Macdonald (No 12)

[2009] NSWSC 714, which added a further 88

pages of judgment to the original 194-page

judgment in April. Penalty judgments are

normally reasonably short and succinct, but Gzell

J obviously wanted to make it crystal-clear why he

had decided to impose certain penalties and how

he had arrived at certain conclusions.

The most recent JHI case has generated a lot of

publicity in the mainstream media and quite

rightly has drawn public criticism for what seem

to be very light penalties for serious breaches of

the Corporations Act. This article attempts to

provide an objective analysis of the case and its

outcomes. One important factor to note is that

this was a civil case rather than a criminal case.

In early 2007, ASIC commenced a civil penalty

action against the original JHI company, its new

incarnation based in the Netherlands (JHI NV) and

the ten directors. The matter was also referred to

the Commonwealth Director of Public

Prosecutions (CDPP). In September 2008 the CDPP

determined that there was insufficient evidence to

pursue a criminal prosecution. Thus, no director

was going to be heavily fined or sent to prison for

breaching the Corporations Act.

The main case against JHI and its directors

hinged around a media release made to the

Australian Securities Exchange (ASX) in February

2001 which stated that the establishment of a

trust fund for asbestos victims of JHI products was

fully funded by an injection of $293 million.

Unfortunately, as the Special Commission of

Inquiry, chaired by Mr David Jackson QC, found

that by the end of 2003 the trust would in fact

need $1.5 billion in assets to provide for all the

asbestos-related claims. The current JHI NV

continued to make assertions that the trust was

fully funded, which was false and misleading to

investors of JHI. Additionally, the executive

directors (CEO, company secretary/general counsel

and CFO) and the seven non-executive directors,

were all in breach of their duty of care as officers

(s 180 Corporations Act) for approving the

company to make such a misleading statement.

A number of the non-executive directors tried to

argue that they were unaware of the media

statement to the ASX and that this was a general

management issue that would not normally be

approved by the board of directors. As such, they

argued that they should be granted court relief

under s 1817S or s 1318. Gzell J stated that this

document was so critical to the whole process of

reorganising JHI to move from Australia to the

Netherlands by way of the scheme of arrangement, that all the directors had a role in the final version. The judge noted that the relief provisions are based around officers acting honestly and having regard for all the

circumstances. The court has a very wide

discretion in applying the relief provisions and

determined that they should not be applied.

The media release, which was actually entitled

‘James Hardie resolves asbestos liability favourably

for claimants and shareholders’ on 16 February

2001 made three separate statements as to

sufficiency of funds to meet all future claims of

asbestos related diseases from JHI products. At

paragraph 104 of the JHI penalties judgment,

Gzell J states that:

This was a serious breach of duty and a flagrant

one. The non-executive directors were endorsing

JHIL’s announcement to market in emphatic

terms that the Foundation had sufficient funds to

pay all legitimate present and future asbestos

claims, when they had no sufficient support for

that statement and they knew, or ought to have

known, that the announcement would influence

the market.

It was a negligently misleading statement to

deliberately attempt to influence the market to

accept the relevant subsidiaries with asbestos

claims would be separated from JHI group.

What were the outcomes to this

important case, which has reignited

the debate on corporate social

responsibility over the more

accepted corporate governance

concepts? Well, the first surprise

was that the old JHI that was found

to have six contravention of

Corporations Act covering

misleading conduct, false

statements as to securities and

continuous disclosure was

exempted from liability under the

little known James Hardie (Civil

Liability) Act 2005(NSW). So although the old JHI

is now known as ABN 60 Pty Ltd and is in a

winding up for the next 40 years, the court could

not impose any damages or liabilities on it.

The current company, JHI NV, which was

found to have three single breaches of the law for

misleading conduct, false statements as to

securities and continuous disclosure received a

mere $80,000 civil pecuniary penalty (similar to a

fine, but not criminal). By any standard this is

similar to a parking ticket and thus does not act as

a deterrent nor a real punishment. Additionally,

no compensation or damages order was made and

thus the victims of asbestos from JHI products

receive no greater funds to the trust.

The CEO, Peter Macdonald, was heavily

criticised in the original judgment for his lack of

advice to the board in respect of the media

statement and in particular failing to explain the

expert reports provided by Access Economics, PwC

and the actuaries, Trowbridge. The court found

that he had contravened s 180 duty of care ten

times. This included the original media release

and the repeating of the statements at investor

road shows in the UK. Thus, the penalty should be

a pecuniary penalty of $350,000 and a

disqualification order of 15 years from being

involved in the management of a company. ASIC

had requested a million-plus dollar fine. This

penalty appears to fit the breach of law and is on

par with what Ray Williams and Rodney Adler

received for their conduct in the HIH case.

The company secretary and general counsel, Peter

Shafron, was found to have contravened s180

duty of care six times and in particular for failing

to explain the meaning and consequences of the

expert reports, in relation to the media release.

The court determined that a financial penalty of

$75,000 and seven-year disqualification was

appropriate. This is on the lighter end of the range

of expectation, but similar to major litigations

such as the HIH case and the

One.Tel case. The CFO, Philip

Morley, who only was found to have

breaches a single provision, s 180,

was banned for five years and a mere

$35,000. For an executive director,

this is very much on the light end of

the scale of punishments that can be

provided. It is worth noting for a

single breach of s 180, the

maximum fine is $200,000 and the

maximum disqualification period is

five years.

The seven non-executive

directors, including the Chairman,

Meredith Hellicar, were all found to have a single

breach of s 180 Corporations Act. That is that they

failed to take reasonable care in allowing the

company to make the relevant media statement to

the ASX in respect of fully funding of the asbestos

claims against JHI. Gzell J determined to impose

the maximum disqualification period of five years

on all seven directors. This means that all JHI

directors must resign from their current board

positions (many have done so already) and they

may not be in the senior management of any

company in Australia. This does pose questions in

respect of the directors taking positions overseas

where this prohibition is not necessarily applied.

However, in respect of the financial

consequences, the pecuniary penalty (fines) was

limited to just $30,000 each. This is extremely low

out of the maximum $200,000 per contravention

and also for other directors that have been found to

have breached s 180. There is not, in my opinion, a

clear rationale, as to why the judge has stated such a

low amount relative to the breach of law. It was

certainly far below market expectations and that of

the general public, causing some public outcry, as

one would expect. The damage to reputation and

the imposing a maximum period of disqualification,

may be seen by the court as more important that

the lack of impact of any fine or financial penalty.

The case also raises some interesting questions in

respect of court costs. It has been stated that JHI has

spent approximately $25 million on the case and

ASIC must have spent a few million bringing the

matter to court. Gzell J did order some costs towards

ASIC, but the amounts have not been specified and

they relate to a very narrow range of the more

technical breaches rather than the broad directors

duties under s 180. There have also been questions

of corporate indemnities and the role of directors

and officers insurance in the case. Finally, from the

date of judgment, the defendants have 28 days to

lodge an appeal. A number of the non-executive

directors have indicated they might appeal and we

will all have to wait and see what happens.

Conclusion

This article asked the basic question, whether the

punishment in the JHI case fits the crime? Well it is

not really the right question, as the case was a civil

penalty case rather than a criminal case. However, it

is fair to say that the outcomes — the

disqualifications and the fines — were certainly

below the expectations of many people. It is

important to note that the judge did impose a

maximum disqualification period across the

directors and this would have a severe impact on

their livelihoods, as well as reputations. This does

act as a serious warning to all executives and non-

executive directors. But the lack of any

compensation (damages) and the low level of fines

(except for Peter Macdonald) does not act as a

barrier to any director from failing to take

reasonable care in executing their duties.

Note

1 See Adams MA, 2009, ‘How important is the 2009 James

Hardie decision?’, Keeping good companies, Vol 61 No 5,

pp 290–294