Implications Arising from the James Hardie Decision
The James Hardie decision handed down in September 2009 has serious ramifications for company directors in respect of the signing and entering of company minutes, and corporate practices will need to be extensively reviewed in light of this case.
Traditionally minutes are circulated after a meeting and then confirmed at the next directors meeting - often this takes place at a time in excess of one month after the minutes meeting was held. Minutes of a directors meeting, however, are an important record of the decision making by a company and for matters under review, the minutes will provide protection for directors, particularly in circumstances where directors justify a commercial decision by relying upon the business judgement rule adopted in the terms of Section 180 (2) of the Corporations Act.
The Corporations Act
Section 251A(1) of the Corporations Act provides:
'a company must keep minute books in which it records within one month:
Section 251A(2) provides that a company must ensure that minutes of a meeting are signed within a reasonable time of the meeting by the chair of the meeting or by the chair of the next meeting. By the terms of section 251A(5) a failure to comply with sections 251A(1) and 251A(2) creates a strict liability offence. Pursuant to section 1311 reading in conjunction with the Third Schedule, the penalty for a contravention of 351A is ten penalty units or imprisonment for three months per offence.
Importantly in respect of relying upon minutes for evidentiary purposes section 251A provides:
'a minute that is so recorded and signed is evidence of the proceeding, resolution or declaration to which relates, unless the contrary is proved.'
Accordingly it can be seen from the strict wording of 251A, a minute that is not signed and entered into the minute book of the company within one month of the meeting arguably ceases to have evidentiary effect.
In the James Hardie case (ASIC v MacDonald (No 11) (2009) NSWSC) the directors sought to rely upon minutes of the company that had not been signed and entered into the minute book within a month. In this case, the minutes of the relevant meeting, held on 15 February 2001 at the earliest, were recorded in the minute book on 7 April 2001.
The significance of this was explained by Justice Gzell in the following terms:
'[68] in Gosford Christian School Ltd v Totonjin [2006] NSW SC 725, Barrett J extended the effect of a failure to comply with section 251 (1) to a non-entitlement to the benefit of section 1305. His Honour held that a copy of a minute that did not form part of a minute book in accordance with section 251A (1) did not derive evidentiary value from section 1305 (2). To construe section 1305 (2) as ASIC submits would circumvent the purpose of section 251A(1) and its forerunner at section 253. I see no reason why the observation of Wilcox J should not apply to section 251(6). One thing that has emerged clearly in this case is that recollection is fallible. If a minute is to be given evidentiary value, it ought to be a contemporaneous document, for then it is more likely to be an accurate reflection of the proceedings of the meeting than a reconstruction of them.
When the legislature created the requirement of one month in section 251A(1) it did so with the object of restricting the benefit of the section to reasonably contemporaneous documents. Hence the need for strict compliance.'
Conclusion
Companies should urgently review the process by which they both keep and record minutes. The minutes should be prepared as soon as possible after a relevant meeting. They should be reviewed by the chairman, signed by the chairman and entered into the minute book. Where possible other directors' comments should be sought prior to signing. If they cannot be sought, then the same procedure should be used, but at the next directors meeting opportunity should be given for directors to comment on the minutes signed by the chairman. This way directors who believe that the minutes inaccurately record debate may place on record their views as to the minutes.
The importance of recording the minutes promptly and preserving their evidentiary value cannot be overstated. The eight directors of James Hardie – each of whom contended that they had no recollection of the draft ASX announcement being tabled and considered at the meeting of February 2001 – were deprived of the opportunity to rely upon the evidentiary value of minutes and now all face bans from holding company directorships for between 5-15 years as well as hefty personal fines of between $30,000 and $350,000.
