NSW Supreme Court hands down penalties in James Hardie
The New South Wales Supreme Court last week imposed penalties
against 10 former non-executive and executive directors of James
Hardie Industries Limited (JHIL).
The penalties stem from a decision of the Court in April of this
year in which it was held that the former board members had
breached the Corporations Act 2001 (Cth)
(Act) when making statements about the adequacy of
asbestos compensation funding.
Among other findings, Justice Gzell held that the directors had
breached their duty to exercise due care and diligence under
section 180(1) of the Act in making representations to the public
that a foundation set up for compensating asbestos victims was
The foundation later proved to be under-resourced to the tune of
In handing down his decision, Gzell J said,
"This was a serious breach of duty and a flagrant one. The
non-executive directors were endorsing JHIL's announcement to
the market in emphatic terms that the Foundation had sufficient
funds to pay all legitimate present and future asbestos claims,
when they had no sufficient support for that statement and they
knew, or ought to have known, that the announcement would influence
While falling short of the penalties requested by the Australian
Securities and Investments Commission (ASIC), the
Court ordered substantial penalties against each of the former
Despite application by all but the former chief executive
officer, Peter Macdonald, none of the former directors were
Macdonald was disqualified from running companies for 15 years
and fined $350,000 for his role in the misleading and deceptive
representations made to the public.
The company's former secretary and general legal counsel,
Peter Shafron, was fined $75,000 and disqualified from managing
corporations for seven years.
The remaining former non-executive directors were banned for
five years and fined between $30,000 and $35,000 for their
involvement in the furor.
James Hardie Industries NV, the parent company based in the
Netherlands, was fined $80,000 for breaching its continuous
disclosure obligations in 2003.
Commenting on the decision, ASIC Chairman Mr D'Aloisio
"The decision is another important step in improving
corporate governance in Australia and that improvement will add
confidence to the integrity of our markets."
Justice Gzell also made limited costs orders in favour of
Under section 180(1) of the Act, directors and officers are
required to exercise their powers and discharge their duties with
the degree of care and diligence that a reasonable person would
exercise if they were a:
director or officer of a corporation in the corporation's
occupied the office held by, and had the same responsibilities
within the corporation as, the director or officer.
In considering a director's responsibilities, courts have
traditionally drawn a distinction between executive and
Gzell J's judgement goes some way to breaking down this
distinction, placing a greater burden on non-executive directors to
investigate the veracity of information placed before them by the
Despite not being involved in the day to day running of the
business, the Court found that the non-executive directors knew, or
ought to have known, that the press release was misleading.
A timely reminder
Above all else, the case demonstrates in real terms that the
role of a company director, whether executive or non-executive, is
not a passive one.
Directors need to display proactivity in corporate decision
making. This requires more than simply relying on the guidance of
fellow board members.
If a director knows or ought to have known that a decision of
the board is flawed, and they do not act on that knowledge, they
are highly likely to be held accountable.
Where a director does not have sufficient information to make an
informed decision on a board matter, the best course of action is
to abstain from voting and ensure that the board minutes reflect
It is also advisable for in-house legal counsel and directors to
keep detailed personal file notes should supporting evidence ever
need to be adduced.
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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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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