Australia: High Court Rules on Liability of Company Directors

Last week the High Court of Australia handed down a decision which has important ramifications for non-executive directors of public companies and company directors generally. It also says much about the importance of ensuring that boards conduct meetings and record minutes with care.

In the late 1990's James Hardie Industries Ltd (James Hardie) was dealing with an increasing flood of litigation against two of its wholly owned subsidiaries, for personal injury arising from their manufacture and sale of asbestos products.

In February 2001 a proposal was tabled at a board meeting of James Hardie (the February meeting) to quarantine the liability of these subsidiaries by separating them from the rest of the corporate group and establishing a body called the Medical Research and Compensation Foundation (the Foundation) to manage and pay out asbestos claims made against the subsidiaries, and to conduct medical research into asbestos related diseases.

The minutes of the February meeting recorded that a draft announcement to the ASX was circulated and approved by the directors. That announcement stated, in part, that the Foundation had "sufficient funds to meet all legitimate compensation claims anticipated from people injured by asbestos products that were manufactured in the past by two former subsidiaries of James Hardie".

Unfortunately, the Foundation did not in fact have sufficient funds to meet the compensation claims reasonably anticipated in February 2001. At an earlier meeting in August 2000 the Board had been informed by management that "we cannot argue strongly that the funds left behind will be sufficient under every conceivable scenario". This turned out to be a considerable understatement.

As a result, in February 2007, ASIC commenced proceedings in the Supreme Court of New South Wales against the directors and officers of James Hardie, alleging that by approving the false and misleading announcement, they had breached their duties under Section 180(1) of the Corporations Act. This section requires directors and officers of a corporation to exercise their powers and discharge their duties with a degree of care and diligence that a reasonable person would have if they occupied that position.

At the end of the trial the directors were found to have breached these duties. A declaration was made that five of the directors breached their duties by approving an announcement which conveyed statements they knew to be misleading. Two of the directors who attended by telephone had not even seen the draft announcement. They were found to have breached their duties by voting in favour of the resolution without seeing a copy of the draft, or failing to abstain from the vote. Various disqualification orders and pecuniary penalty orders were made against each of them.

The seven directors appealed these findings with considerable success. The New South Wales Court of Appeal accepted that the draft announcement was brought to the February meeting; that it was misleading; that the minutes showed the Board approved the announcement; and that those minutes were themselves approved by the board as an accurate record of proceedings at the next Board meeting in April. But the Court of Appeal still found that ASIC had failed to prove that the directors had actually approved the announcement.

The Court of Appeal considered a number of circumstances surrounding the February meeting. The minutes had been prepared in draft form before the meeting by a solicitor, and they turned out to contain a number of inaccuracies. The announcement itself was amended by management after the meeting. Voting at the meeting was conducted relatively informally; the chairperson would summarise a resolution and directors would indicate their approval by assenting or remaining silent. The Court of Appeal found that the minutes themselves were only one of several matters to be considered in determining what had occurred at the meeting, and because ASIC had failed to call an important witness – the solicitor who drafted the minutes – it had failed to prove its allegation that the board had approved the misleading announcement.

On 3 May 2012, the High Court decided that this approach was incorrect. It decided that ASIC was perfectly entitled to point to the minutes of the meeting as being an accurate record of what had occurred in relation to the announcement; it was up to the directors to prove that this record was inaccurate. In this case it was not sufficient for the directors to point to other inaccuracies in the minutes and then say that none of the minutes were to be relied upon, particularly when they had approved those minutes at the next meeting and had not voiced any concerns about the announcement when it was made public.

The case demonstrates, among other things, the need for all directors to recognise that whether they consider themselves to be "executive" or "non-executive", they have duties which they must actively carry out. Furthermore, a failure to participate in decision making processes in meetings will not absolve a director of responsibility unless they actively abstain from voting. Finally, and obviously, it highlights the importance of ensuring that the minutes of a meeting actually reflect what occurred.

There are two final points to make about the case.

Firstly, ASIC would have had a much easier time if the minutes had been recorded in a minute book within one month of the meeting, as required by Section 251A(1) of the Corporations Act. Section 251A(6) of the Act provides that minutes recorded in this way are evidence of what actually occurred, unless the contrary is proved. Had James Hardie's minutes been kept in accordance with the Act, the Court of Appeal would not have been able to treat the minutes as merely one of several factors to be considered in determining what had occurred at the meeting.

Secondly, the Act imposes penalties on a person who authorises false or misleading statements in documents required under the Act, including minutes of meetings. The Act also makes it an offence to authorise the making of such a statement without taking reasonable steps to ensure that it was not false or misleading. The directors in this case had to say that the minutes of the February meeting were false, in order to escape liability for the misleading ASX announcement. But even if this tactic had ultimately been successful, they would have put themselves at risk of prosecution for failing to ensure that the company's minute book was not itself false and misleading.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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