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In This Case, The Holding Company Of James Hardie Group Is KHIL

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Question:

Discuss And Critically Analyse The Court/Tribunal Decision And The Reason For The Decision In View Of The Corporations Act?

 

Answer:

Introduction

The Corporations Act, 2001 (Cth) is the applicable act in Australia, governing the duties of the directors. The case of Australian Securities and Investments Commission v Macdonald (No. 11) [2009] NSWSC 287 is one of such cases where the Supreme Court of New South Wales determining whether or not, the officers and directors of the company JHIL, i.e., James Hardie Industries Ltd had contravened the duties covered under this act, through its section 180(1). This section relates to the statutory requirement of duty of car and diligence, and this was raised in the context of the approval of board and released a defective media statement to the ASX, i.e., the Australian Securities Exchange (Hargovan, 2009).

In the following parts, this case has been detailed, where by the contentions made by the ASIC, i.e., Australian Securities and Investments Commission, along with the decision of the court in this matter have been detailed. But before the same can be done, a discussion has been carried on the duties breached as per the governing act, along with the factual background of this case.

 

ASIC v Macdonald (No 11) (2009)

In this case, the holding company of the James Hardie Group was KHIL, which manufactured, as well as, sol the asbestos products till the year of 1937. Two of the wholly owned subsidiary companies of the JHIL, Jsekarb Pty Ltd, aka Jsekarb, and James Hardie & Coy Pty Ltd, ala Coy, from 1937 to 1987 were also the manufacturer and seller of the asbestos products (Czoch and Mulder, 2010).

In the initial period of February 2001, JHIL’s board formed a foundation by the name of Medical Research and Compensation Foundation. The purpose of this foundation was to manage and pay the claims relating to asbestos which were made against the James Hardie Group. Regarding the formation of the foundation, a draft announcement for the ASX was approved by Board and the same had to be circulated as public release (Lavan, 2017). At the same time, a deed of covenant and indemnity was entered into by JHIL with both Jsekarb and Coy, as a result of which, JHIL was indemnified from all of the liabilities which were raised due to the manufacturing or sale of the asbestos products (Czoch and Mulder, 2010).

An ASX announcement was then released by the James Hardie Group, as per which the Foundation contained assets to the value of $293 million and that the same would have been adequate for meeting all of the legitimate compensation claims, which were anticipated from the individuals who were injured as a result of the asbestos products. When a press conference was held, it was stated that the CEO of JHIL, i.e., Macdonald had made a statement which showed the sufficiency of funds in the Foundation. And ASX announcements, having the same theme, were made in the following weeks regarding the Foundation. However, none of the ASX announcements contained a disclosure about the Deed (Norton Rose Fulbright, 2010).

One the Foundation was established, a new holding company, JHINV was formed which was actually a restricting of the James Hardie Group and the same was incorporated in Netherlands. Macdonald made overseas presentations in 2002 regarding the James Hardie Group and represented the sufficiency of funds in the Foundation (Plessis, Hargovan and Bagaric, 2010). For their misleading and deceptive conduct, continuous disclosure reaches and the false statements made regarding the securities, in February 2007, the ASIC initiated civil proceedings against both JHNIV and JHIL (Czoch and Mulder, 2010).

 

Duties Breached

As per section 180(1) of the Corporations Act, 2001, the directors, along with the other officer in any company/ corporation in Australia have a civil obligation of exercising their powers, and discharging their obligations in a manner, which depicts a degree of both care and diligence, which any prudent individual would undertake, in case they occupied the same office and had the same responsibilities as such director and officer, or if the individual was himself the officer or director of such company (Australasian Legal Information Institute, 2017). A contravention of this section results in attraction of penalties as per section 1317E, which relates to the declaration of contravention by the Court (Federal Register of Legislation, 2017).

This duty is usually applied with the provisions pertaining to the deceptive or misleading conduct of the directors, in cases where the directors have been sanctioned with the release of some important or crucial information which results in a civil claim being raised against the company for such a misleading or deceptive conduct. Hence, it is crucial for the directors to take care and ensure diligence when the information is released, and have to be certain that no information is contained which is likely to deceive or mislead (Gadens, 2010).

Section 181 of this act imposes a civil obligation on the directors, along with the other officers of the company, to discharge their duties, and exercise their powers for a proper purpose, which is in the best interest of the faith and with good faith (Department of the Premier and Cabinet, 2016). The penalties for contravention of this section are same as section 181(1)’s contravention (Federal Register of Legislation, 2017). 

 

Court Decision

When the court was giving its decision, it was held by His Honor Justice Gzell that:

  • Regarding the draft announcements of ASX, all of the 7 previous non-executive directors, the CFO, the CEO and the General Counsel of the JHIL had all breached the section quoted above, i.e., 180(1) of the governing act, as all of them failed to make certain that this particular draft ASX announcement relating to the sufficiency of funds in the hands of Foundation for paying the compensation to the individuals was not deceptive or misleading (Czoch and Mulder, 2010).
  • Regarding the Deed, the General Counsel and the CEO had contravened the quoted section of the governing act, as they failed in giving the advice to the Board in an appropriate manner, which could have led to the disclosure of the said Deed (Jacobson, 2009).
  • Regarding the ASX Announcements which were approved, a breach of section 180(1) of this act was done by the CEO of the company by his failure in making certain that these announcements were not deceptive or misleading. In addition to the breach of section 180(1) of this act, there was an absence of breach of sections 995(2), as well as 999, of this act as the ASX Announcement was released, which was held to be both misleading and deceptive (Sixth Floor St James Hall Pty Limited, 2009).
  • For the presentations which were made by the company’s CEO, there was a breach on part of this CEO regarding the breach of section 180(1) of this act, due to the failure in making certain that these presentations could be taken as both misleading and deceptive. There was also a contravention on part of JHINV pertaining to sections 1041E, as well as, 1041H of this act by engaging in a conduct which is both misleading and deceptive regarding the presentations which were made to the Australian Securities Exchange (Czoch and Mulder, 2010).

It was also held by His Honor Justice Gzell that on part of ASIC, there was a failure in establishing a range of different allegations which were made against the James Hardie Group, its executives and its non-executive directors. One of the allegations in these was related to a claim which was made against the CEO of the company, for breaching section 181 of this act, regarding his obligation pertaining to acting in good faith (Czoch and Mulder, 2010).

A range of factors were considered by His Honor against the executives, directors containing both executive and non-executive, of the James Hardie Group in his findings, and these included the intelligence and sophistication of the directors, the experience, the importance of restructuring, the nature of the company, in addition to the fact that a considerable professional advice was given to the non-executive directors regarding the restricting (Czoch and Mulder, 2010).

The submissions from all the parties where heard by the Court in late July 2000 regarding the exoneration of the defendants as per sections 1317S or 1318 of this act pertaining to these breaches, and also regarding the form of sanction or penalty, which should be imposed over the defendants (Austin, 2012). A contention was submitted by the ASIC to the Court, as per which:

  • The disqualification of the CEO from managing any company for a period of twelve to sixteen years and the CEO should also receive a penalty in terms of fine, which had to range between the amounts of $1.47 million to $1.81 million.
  • There should also be a disqualification of the General Counsel from the management of any company, for a minimum period of eight years, and that he should also receive a fine, which had to range between the amounts of $350,000 and $450,000.
  • All of the non-executive directors were proposed to be banned from the management of any company for a period of five years and all of them should be given a fine ranging between $120,000 and $130,000
  • There should also be a disqualification of the CFO from the management of any company, for a minimum period of six years, and that he should also receive a fine, which had to range between the amounts of $150,000 to $250,000.
  • And lastly, 90% of the costs of ASIC should be jointly and severally be paid by the defendants (Czoch and Mulder, 2010).

Another submission was made by the ASIC to the Court regarding the consideration of the penalties which had to be imposed upon the case defendants and that the issue of indemnity should also be taken into consideration. Even though, the Corporation Act restricts any Australian company from indemnifying against such kind of civil penalty, a submission was made by ASIC that some of the defendants could be indemnified within the James Hardie group by the foreign companies (Czoch and Mulder, 2010).

The defendants sought to be fully exonerated from the claims of ASIC as they contended that the banning orders and the fine sought out by the ASIC were excessive in nature, with the exception of the CEO as he had admitted the seriousness of these breaches (Czoch and Mulder, 2010).

However, Justice Gzell, on August 20th 2009, refused to exonerate any of the former members of the board and he also handed down certain penalties, which were as follows:

  • The General Counsel was disqualified for a period of seven years from the management of any company and was also liable to pay a fine amounting to $75,000 (Taylor, 2012).
  • The CEO was disqualified for a period of fifteen years from the management of any company and was also liable to pay a fine amounting to $350,000.
  • The CFO was disqualified for a period of five years from the management of any company and was also liable to pay a fine amounting to $35,000.
  • All of the non-executive directors, individually, were disqualified for a period of five years from the management of any company and were also liable to pay a fine amounting to $30,000 individually.
  • And lastly, the company, JHINV was liable to pay a fine amounting to $80,000 (Czoch and Mulder, 2010).

ASIC considered this particular case as a leading decision in the corporate governance of the nation as it presents the crucial direction and guidance to the boardrooms regarding the practical applicability of the content and the scope of the duties of the executives, when they take any significant matter to the board and regarding the disclosure of these matter in the market. This was in addition to the direction and guidance pertaining to the responsibility of the non-executive directors of any public companies, when they are questioned regarding the consideration of strategic matters by the board, as well as, for the approval of disclosure in market regarding the decisions of the board (Australasian Legal Information Institute, 2009).

 

Conclusion

Civil proceedings were initiated in this case by the ASIC against JHIL, JHINV, i.e., James Hardie Industries NV, along with the previous seven non-executive directors, and the three former executives of the JHIL, for breaching the governing act, regarding the preparation, as well as, approval of the public statements.

The decisions taken in this case highlights the significance which is placed over the director’s role, which includes both the executive and the non-executive directors, along with the senior executives of a company, when the crucial strategic matters of the company are considered and implemented. Keeping the corporate governance issue aside, the decision in this case raised the broadening focus put over the senior executives below the board level and the non-executive directors.

 

References

Austin, R. (2012) The High Court decides the James Hardie case. [Online] Minter Ellison. Available from: https://www.minterellison.com/files/Uploads/Documents/Publications/Alerts/NA_20120509_JamesHardieDecision.pdf [Accessed on: 26/04/17]

Australasian Legal Information Institute. (2009)  Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287 (23 April 2009). [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/au/cases/nsw/NSWSC/2009/287.html [Accessed on: 26/04/17]

Australasian Legal Information Institute. (2017)  Corporations Act 2001 - Sect 180. [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html [Accessed on: 26/04/17]

Czoch, K., and Mulder, M. (2010) Australia: The James Hardie Decision: Australian Securities & Investments Commission v Macdonald (No. 11) [2009] NSWSC 287. [Online] Mondaq. Available from: https://www.mondaq.com/australia/x/106690/Corporate+Governance/The+James+Hardie+Decision+Australian+Securities+Investments+Commission+v+Macdonald+No+11+2009+NSWSC+287 [Accessed on: 26/04/17]

Department of the Premier and Cabinet. (2016) 7.3 Corporations Act 2001 (Cth) (the Corporations Act). [Online] Queensland Government. Available from: https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx [Accessed on: 26/04/17]

Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 26/04/17]

Gadens. (2010) Misleading and deceptive conduct in the corporate sphere. [Online] Gadens. Available from: https://www.gadens.com/publications/Pages/Misleading-and-deceptive-conduct-in-the-corporate-sphere.aspx [Accessed on: 26/04/17]

Hargovan, A. (2009) Australian Securities and Investments Commission v Macdonald [No 11] Corporate Governance Lessons from James Hardie. Melbourne University Law Review, 33(3), pp. 984-1021.

Jacobson, D. (2009) ASIC v James Hardie Decision: Company, Directors and Officers Were Misleading. [Online] Bright Law. Available from: https://www.brightlaw.com.au/asic-v-james-hardie-decision-company-directors-and-officers-were-misleading/ [Accessed on: 26/04/17]

Lavan. (2017) The responsibility for continuous disclosure announcements in the light of James Hardie - Australian Securities and Investments Commission and Macdonald (No 11) [2009] NSWSC 287. [Online] Lavan. Available from: https://www.lavan.com.au/advice/banking_finance/the_responsibility_for_continuous_disclosure_announcements_in_the_light_of [Accessed on: 26/04/17]

Norton Rose Fulbright. (2010) Insurance & Financial Services Bulletin. [Online] Norton Rose Fulbright. Available from: https://www.nortonrosefulbright.com/knowledge/publications/30007/insurance-financial-services-bulletin#section12 [Accessed on: 26/04/17]

Plessis, J.J.D., Hargovan, A., and Bagaric, M. (2010) Principles of Contemporary Corporate Governance. 2nd ed. Cambridge: Cambridge University Press, p. 59.

Sixth Floor St James Hall Pty Limited. (2009) ASIC v Macdonald (No 11) [2009] NSWSC 287. [Online] Sixth Floor St James Hall Pty Limited. Available from: https://www.sixstjameshall.com.au/recent-cases/2016/7/14/australian-securities-and-investments-commission-v-macdonald-no-11-2009-nswsc-287 [Accessed on: 26/04/17]

Taylor, T. (2012) James Hardie – The final instalment – NSW Court of Appeal disqualifies and penalises company officers. [Online] Holding Redlich. Available from: https://www.holdingredlich.com/corporate-commercial/james-hardie-the-final-instalment-nsw-court-of-appeal-disqualifies-and-penalises-company-officers [Accessed on: 26/04/17]

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