ASIC wins in the High Court against James Hardie directors

Today the High Court of Australia unanimously upheld an appeal by the Australian Securities and Investments Commission in its ongoing pursuit of civil penalty proceedings against seven non-executive directors of James Hardie Industries Ltd (“JHIL”).  The plurality judgment in ASIC v Hellicar was delivered by French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ.  Heydon J wrote a separate judgment to arrive at the same ultimate outcome.

The effect of the decision is that the seven directors have been found to have contravened their duties under section 180 of the Corporations Act 2001 (the obligation to exercise due care and diligence).  The proceedings have been remitted to the NSW Court of Appeal to enable that Court to consider the directors’ appeals in relation to the question of whether or not they should be relieved from liability in respect of those contraventions, and if not in relation to penalty.

The proceedings by ASIC (so-called “civil penalty proceedings”, in effect a quasi-criminal prosecution by the corporate regulator) arose out of the desire of the James Hardie Group to establish its ultimate holding company offshore in the Netherlands.  This was to be done be incorporating a new Dutch company that would own all of the shares in JHIL which, until that time, had been the ultimate holding company of the group.  Two of JHIL’s wholly-owned subsidiaries had manufactured and sold products containing asbestos.  For many years each had been, and continued to be, the subject of personal injury claims by persons who had come into contact with asbestos.  A decision was made by JHIL to restructure the group and to separate the asbestos subsidiaries.  As part of this separation, JHIL proposed to establish a foundation (the Medical Research and Compensation Foundation, or MRCF) to manage and pay out asbestos claims, and to conduct research into the causes of and treatment for asbestos-related diseases.

On 15 February 2001 the JHIL board met to consider the separation proposal.  Following that meeting an announcement was made to the Australian Stock Exchange by JHIL in which it said, amongst other things, that MCRF had sufficient funds to meet all legitimate compensation claims anticipated from persons injured by exposure to asbestos.  It was further stated that the directors of JHIL had determined the level of funding required by the MCRF and the directors were satisfied that MCRF had sufficient funds to meet anticipated future claims.  In fact, the MCRF did not have sufficient funds.  At trial and in the NSW Court of Appeal it was held that the directors of JHIL ought to have known that the statements about the level of funding were misleading.  That finding was not challenged in the High Court.

What was at issue ultimately was whether or not a draft of the announcement to the ASX was tabled at the meeting of 15 February 2001, and if so whether or not the directors approved it.  The trial judge answered both those questions in the affirmative, and made findings of contravention against each of the non-executive directors.  In a subsequent hearing Gzell J declined to excuse the contraventions, and imposed penalties on the directors in respect of those contraventions. 

On appeal, the NSW Court of Appeal held that ASIC had failed to prove those matters, and set aside the findings of contravention and the penalties imposed.  Having found no contravention, the Court of Appeal did not have to consider the directors’ appeals against the failure to excuse their conduct, and against the severity of the penalty. These matters will now need to be determined.

It must be said, as was emphasised by the High Court, that the directors faced considerable hurdles in seeking to argue that the draft announcement had not been tabled at the February 2001 meeting, and that it had not been approved by the Board.  The minutes of the 15 February 2001 meeting recorded both the tabling and the approval.  Those minutes had been confirmed as a correct record at the subsequent meeting of the Board on 3-4 April 2001, and “signed as a correct record” by the Chairman.  That meeting was attended by all but one of the directors that had attended the 15 February 2001 meeting. 

The directors sought to impugn the accuracy of the meeting minutes.  The irony of seeking to defend the finding of contravention by impugning the accuracy of the minutes, which would itself constitute a contravention of the obligations relating to the keeping of minute books and to ensure the accuracy of corporate records, was not lost on the High Court.

In any event, the High Court held that simply identifying other inaccuracies in the minutes did not necessarily imply that the relevant parts of the minutes were inaccurate.  Nor did the fact that the minutes were prepared in draft before the meeting mean that they were not a true record of what occurred during the meeting.  This conclusion rested upon an unstated premise that the draft prepared before the meeting was not considered after the meeting, a premise that was demonstrably false.  In any event, the time at which the minutes were prepared could not obscure the fact that they were subsequently adopted by the Board as being a correct record of what occurred, a matter which the Court of Appeal had given little significance.

The most significant and controversial part of the NSW Court of Appeal’s judgment centred around the failure by ASIC to call as a witness an external solicitor for JHIL who had attended the meeting, Mr Robb.  The Court of Appeal held that a body in the position of ASIC, having regard to the scope of its powers and the public interest in the exercise of its functions, had an obligation of fairness in the conduct of its prosecution that required it to call Mr Robb as a “witness of such central significance to critical issues that had arisen in the proceedings.”  The failure to call Mr Robb, according to the Court of Appeal, undermined the cogency of ASIC’s case on the tabling of the draft ASX announcement and its approval. 

The High Court addressed firstly the content of the obligation of fairness, saying that although there was no doubt ASIC had an obligation to conduct litigation in which it was a party fairly, there was no properly articulated basis for the jump from the generality of that obligation to the more specific obligation to call Mr Robb.  Even assuming such an obligation existed, the remedy would be to direct ASIC to call the witness or stay the proceedings until they did so, or on appeal to determine whether the failure gave rise to a miscarriage of justice necessitating a retrial.  There was no proper basis for requiring a court to apply some indeterminate discount to the cogency of the evidence otherwise called in support of ASIC’s case.

Next, the High Court noted that there was in fact no unfairness in not calling Mr Robb.  The Court of Appeal had held Mr Robb should have been called even if it was only to say that he could not recall what had occurred at the meeting.  However, the High Court held that the Court of Appeal should have examined what evidence Mr Robb would in fact have been prepared to give.  The evidence he was likely to give, as distinct from what evidence he might theoretically have been in a position to give, was critical to any determination of unfairness.  The conclusion that it was “unfair” of ASIC to not call Mr Robb proceeded on the assumption that the directors had thereby been deprived of some advantage.  This was said to be the opportunity to cross-examine him, but there was no reason to suppose that he would have sworn to a positive recollection that a draft announcement was neither tabled nor proved.  Anything less than that would not have advanced the directors’ defence.

Similarly, the High Court rejected the Court of Appeal’s reliance upon the principles in Blatch v Archer (that all evidence is to be weighed according to the proof which it was in the power of one side to have produced) and Jones v Dunkel (that the unexplained failure to call evidence entitled a court more comfortably to draw an inference favourable to the opposing party, where that inference was otherwise available on the evidence) had no relevant application.  ASIC’s case did not depend upon inference but upon direct evidence in the form of the minutes of the February 2001 meeting.  The most that could be inferred form the failure to call Mr Robb was that Mr Robb could not give evidence from his own recollection of what had happened at the February meeting.  There was certainly no basis for inferring that his evidence would have been adverse to ASIC’s case.

Accordingly, the High Court re-instated the findings of contravention made by Gzell J at first instance.  The saga continues, as the parties gear up for the determination of that part of the original appeal that has yet to be determined by the NSW Court of Appeal.