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