ASIC v Hellicar & Others – James Hardie directors lose to ASIC in High Court

In ASIC v Hellicar [2012] HCA 17, the High Court today unanimously upheld an appeal by the Australian Securities and Investments Commission in the civil penalty proceedings against seven non-executive directors of James Hardie Industries Ltd. All seven were found to have contravened their obligations under s180 of the Corporations Act 2001, failing to exercise due care and diligence. 

The facts revolved around the attempt of James Hardie Industries Ltd (JHIL) to separate out two wholly-owned subsidiaries – James Hardie & Coy Pty Ltd, and Jsekarb Pty Ltd – which had both been subject to claims for damages for personal injury by those who had come into contact with their asbestos products. The separation would be achieved by JHIL establishishing a foundation, the MCRF, to manage and pay out asbestos claims, and to conduct medical research into the causes of, and treatments for, asbestos related diseases. Jsekarb and Coy would make a Deed of Covenant and Indemnity with JHIL, under which Jsekarb and Coy would make no claim against and indemnify JHIL in respect of all asbestos?related liabilities and, in return, JHIL would, over time, pay Jsekarb and Coy an amount of money.  A new company, James Hardie Industries NV ("JHINV"), would be incorporated in the Netherlands and that company would become the immediate holding company of JHIL and ultimate holding company of the James Hardie group.

The board of JHIL met on 15 February 2001 to consider the separation proposal, and the events at the board meeting formed the subject of the eventual High Court proceedings. The minutes of the meeting recorded a number of matters relating to the separation proposal, and included the board's resolution that "it is in the best interests of [JHIL] to effect the Coy and Jsekarb Separation" and a number of other resolutions relating to the separation.  It was said that the MCRF had sufficient funds to meet all legitimate compensation claims anticipated in the future, and that the directors of JHIL had determined the level of funding required by the MCRF, and were satisfied that sufficient funds were available.

Ultimately, the MCRF did not have sufficient funds.  It was found at trial and on appeal to the Court of Appeal  that, in February 2001, the directors of JHIL ought to have known that these statements about the MRCF's funding were misleading. This was not put in issue in the High Court.  The central issue was, instead, whether the Court of Appeal should have found, as it did, that ASIC had not proved that a draft of the announcement made to the ASX by JHIL was tabled at the February meeting of the board and had not proved that the directors approved that draft.

The directors sought to argue that the draft announcement had not been tabled at the February 2001 meeting by impugning the accuracy of the meeting minutes. The High Court rejected this, and in fact noted that “the respondents' arguments that the February and April minutes were false in the relevant respects were arguments that, if accepted, may go so far as to demonstrate that the respondents… had failed to take reasonable steps to ensure that the company's minute books were not false or misleading.” The High Court held that identifying other inaccuracies in the minutes did not prove that the relevant parts were inaccurate.  The fact that the minutes were prepared in draft before the meeting did not necessarily imply that they were not a true record of what occurred, and even so, the Board had subsequently adopted them as a correct record of what had occurred. 

Another key issue was the failure of ASIC in the NSW Court of Appeal to call as a witness an external solicitor for JHIL, Mr. Robb, who had attended the meeting. While the Court of Appeal indicated that ASIC had a duty to call Mr. Robb, the High Court rejected this, stating that “neither the source of a duty of that kind, nor the source of the rule which was said to apply if that duty were breached, was sufficiently identified by the Court of Appeal or in argument in this Court.” It was ultimately held that “ASIC not calling Mr Robb worked no unfairness to the respondents or other defendants at trial.”

The proceedings have now been remitted to the NSW Court of Appeal, which will consider whether or they should be relieved from liability in respect of contravention or penalty.

Also handed down today was the related decision in Shafron v ASIC [2012] HCA 18. Here, it was held that the company secretary and general counsel of James Hardie Industries Ltd, Mr Peter James Shafron, contravened s 180(1) of the Corporations Act 2001 (Cth) by failing to discharge his duties as an officer of JHIL with the degree of care and diligence that a reasonable person in his position would have exercised. 

The Court of Appeal of the Supreme Court of New South Wales had previously held that Mr. Shafron had contravened s 180(1) of the Act in two ways.  First, that he had failed to advise either the CEO or the board of JHIL that the company should disclose to the Australian Stock Exchange certain information about a Deed of Covenant and Indemnity governing JHIL's separation from two of its subsidiaries.  Second, that he had failed to advise the board of JHIL that an actuarial study he had commissioned to predict asbestos-related liabilities suffered from critical limitations.

Mr Shafron appealed this decision, arguing that the application of s 180(1) should be restricted to functions he performed in his capacity as company secretary.  He submitted that the contraventions alleged against him concerned his responsibilities as general counsel, not his responsibilities as an "officer" of the company, and thus should not be subject to s 180(1).

This argument was rejected by the High Court, which held that his duties with JHIL as company secretary and general counsel must be viewed as indisivible. As such, the Court of Appeal was found to be correct in affirming the finding at trial that Mr Shafron had contravened s 180(1) by failing to provide the advice in question.  Mr Shafron's appeal was dismissed.

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