By Elisabeth Sexton
The impact of Friday’s appeal ruling concerning a 2001 media release by James Hardie on the parties to the case is clear. It is a stunning win for seven former directors and an enormous blow for the corporate regulator.
However, the wider implications are not so straightforward.
For a start, the judgment will not provide much comfort in boardrooms about the law’s expectations of care and diligence.
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The NSW Court of Appeal overturned last year’s Supreme Court decision because of holes in the factual case assembled by the Australian Securities and Investments Commission. The three appeal judges made no criticism of the regulator’s interpretation of directors’ duties.
Some weekend commentary suggested the decision shored up a non-executive director’s entitlement to rely on management and professional advisers. The appeal judges explicitly rejected this notion, which was submitted during the appeal by the directors.
The unanimous judgment contains no sympathy for anxious views aired in the business community about last year’s decision. Some reacted by saying, for example, that it was asking too much of non-executive directors to expect them to pay attention to media releases or that a lower standard of care should apply to board members attending a Sydney meeting by telephone from California.
Although the appeal judges quashed the contraventions for lack of factual evidence, they said they had a duty to explain the legal issues on a hypothetical basis.
They found that if ASIC had managed to prove that the directors approved the media release, they would have upheld last year’s findings of breaches of duty of care and diligence under section 180 of the Corporations Act.
The media release related to the creation of a trust intended to end Hardie’s liability to compensate people who fell ill and died from exposure to asbestos products it had manufactured until 1987.
The appeal judges described this as ”a decision of high importance” to the company.
”The board had long been considering [asbestos liability] separation, and the directors were well aware of the importance of sufficiency of funding and its communication to stakeholders in relation to the separation proposal,” they said.
”Stakeholders included but were not limited to shareholders and prospective shareholders, and the directors’ awareness must have included that the market must not be misled in relation to sufficiency of funding and the risk of an announcement being misleading in that respect.”
They said the directors well knew that actuarial estimates of future claims were uncertain and the circumstances called for ”inquiry … and not blind acceptance” that the trust would have enough money to pay claims.
”The non-executive directors, with their familiarity with the importance of sufficiency of funding and whether an assurance of sufficiency could be given, could not properly accept the say-so of management,” they said.
The two American directors deserved no special consideration. They ”participated in the meeting, albeit by telephone, and the principal business of the meeting was the establishment of the [trust] and all it entailed,” the appeal judges said.
As for the media release itself, submissions by some of the directors that it was not misleading were rejected.
The implications of the appeal for those who rely on ASIC to hold directors accountable will remain unclear until the regulator decides whether to approach the High Court and, if it does, until another decision.
If Friday’s ruling holds, ASIC will have to meet a higher procedural standard in civil cases where it seeks bans from company directorship or fines. This will make it harder for it to win some civil penalty suits.
The appeal judges noted that only ASIC can seek such penalties for company directors and officers under the Corporations Act.
Because of these and other powers, they found the regulator had an ”obligation of fairness” to call an important witness, an external solicitor who attended the board meeting as an adviser.
They said this broke new legal ground. There was plenty of case law saying a government agency had an obligation of fairness. But there was no precedent in which the failure to call a witness had been held to be a breach of that obligation.
If the High Court were to overturn this finding, it might lead to the whole result being reconsidered because of the significance of the absence of the witness.
There was no direct evidence that the directors considered and approved the media release.
The trial judge inferred from other evidence that they did; the three appeal judges that they didn’t. This involved weighing contradictory circumstantial evidence and deciding whether ASIC had proved its case on the balance of probabilities.
The appeal judges said an important factor as they balanced competing evidence was ”the effect of the failure to call [the solicitor] on the cogency of the evidence presented by ASIC in the discharge of its onus of proof”.
”The consequence that the case of the party in default suffers in its cogency is the more so where, as we have held, the failure to call a witness is contrary to an obligation of fairness,” they said.
This suggests that if the High Court were to reject the new interpretation of a regulator’s obligation of fairness, the weighing exercise might have to be undertaken again.
Source: www.smh.com.au
