Gilfillan & Ors v Australian Securities and Investments Commission [2012] NSWCA 370 – last word on the James Hardie case

We have at last heard the final word from the courts on the James Hardie case.  The NSW Court of Appeal yesterday handed down judgment on the penalties to be imposed on directors and the company secretary/general counsel.

The case has followed a tortuous path:

  • A liability judgment and a penalty judgment in the NSW Supreme Court – directors and executives held liable for contravention of civil penalty provisions – pecuniary penalties and disqualifications imposed.

  • An appeal on liability issues to the NSW Supreme Court – findings of contravention set aside on the basis that ASIC had failed to call a key witness.

  • A further appeal by Australian Securities and Investments Commission (ASIC) to the High Court – decision of NSW Court of Appeal on evidence point overturned – case remitted to Court of Appeal for further consideration of penalties.

  • Decision on penalties by the NSW Court of Appeal – pecuniary penalties and disqualifications imposed on directors, but at a lower level than in the original penalties judgment.

Readers will recall that on 15 February 2001, the James Hardie Board approved a proposal to separate the Group’s expected future liabilities for asbestos-related diseases, from the operating revenues of the Group.  This was done by establishing a standalone Foundation, which would be responsible for meeting the liabilities with funding from the operating companies in the Group.  It was clearly critical to this proposal that the funding provided should be adequate.  On 16 February 2001, James Hardie Industries Limited issued an ASX announcement about the separation decision, which included statements to the effect that funding would be adequate to meet claims.

In fact, funding was inadequate by a considerable margin.  ASIC commenced civil penalty proceedings against James Hardie directors and executives, claiming they had breached their duties of care and diligence.  The primary basis for the claim against the non-executive directors was that they had approved the making of an ASX release which they should have known was misleading. 

Since the relevant events occurred in February 2001 and ASIC commenced its proceedings in February 2007 (just before the six year time bar limit), it is evident that directors have endured many years of emotional stress and reputational damage.

The leading judgment in the NSW Court of Appeal’s penalty decision was delivered by Justice Sackville.  His Honour canvassed in detail the factors relevant to civil penalties.  This analysis led the Court to the following decisions on penalties:

  • Australian non-executive directors:  pecuniary penalty of $25,000, and disqualification from managing corporations for a base period of three years (which is to take into account time already served, and is further reduced to account for part of the time between the Court of Appeal and High Court decisions when no disqualification order was in place but directors effectively remained “in limbo” while waiting for the outcome of ASIC’s appeal).

  • US non-executive directors: pecuniary penalty of $20,000, and disqualification for a slightly shorter period (shorter by four months).  The slightly lower penalties for US directors reflect the fact that they did not receive copies of the draft announcement that was found to be misleading.  Their breach of duty was in failing to ask for a copy of the draft release, or at least in failing to vote in favour of releasing it (thereby dissociating themselves from the decision to release it).

  • Company secretary and general counsel: pecuniary penalty of $75,000 and disqualification from managing corporations for seven years (again, time already served is to be taken into account).

Justice Barrett agreed with Justice Sackville, as did Justice Beazley.  However, Justice Barrett (who has extensive corporate law experience, both as a practitioner and as a judge) added two important observations about corporate governance issues.

  • First, he criticised the common practice of “collegiate conduct leading to consensual decision-making”, where a chairman says after discussion “I think we are all agreed on that”.  Justice Barrett said:

    The aim is not to consult together with a view to reaching some consensus, although it may well be, as a practical matter, that such consultation facilitates the decision that is ultimately required.  The aim is rather that the members of the board should consult together so that individual views may be formed and the individual will of each member may be made known in a clearly communicated way.

    The culmination of the process must be that is possible to see (and to record) that each member, by a process of voting, actively supports the proposition before the meeting or actively opposes that proposition; or that the member refrains from both support and opposition.  And it is the responsibility of an individual member to take steps to ensure that his or her will is expressed in one of those ways.

  • Second, Justice Barrett focused on the pitfalls of board meetings held by telephone or video conferencing.  He pointed out that directors must not only be able to see and hear each other; they must also be able to see all documents that are tabled, or come before the meeting for discussion.

Lavan Legal comments

  1. This last episode of the James Hardie litigation has one novel and important feature: the comment by Justice Barrett about board decision making.  The “collegiate, consensual” process he criticises is considered by many company chairs to be the “state of the art”.  Justice Barrett’s comment shows that it’s time for a rethink.  We suspect that getting traditionalist chairpeople to change their views on this issue won’t be easy.

  2. Justice Barrett’s comments about telephone and video meetings are also important.  However, allowing all directors to see documents tabled is easier now that meetings can be linked in real time by computer technology.

  3. Overall, the story of the James Hardie litigation is a sad one.  Now that we can see it in retrospect, two lessons emerge:

    • The continuous disclosure dimension of board decisions is very important.  It’s worth taking the time to get it right.  That may require non-executive directors to push back hard on management.

    • Australian corporate law processes grind slowly – so the real penalty for a director caught up in a high-profile breach of duty claim is to be ground slowly through years of emotional distress.