The decision laid down by the court of Appeal New South Wales, in Morley v Australian Securities and Investments Commission (No 2) (2011) and Shafron v Australian Securities and Investments Commission (No2) (2012), was overruled by the High Court of Australia. The High Court held that the 7 non-executive directors of James Hardie Industries Ltd (JHIL) and its company secretary or general council were in violation of their directorial duties and the duties that are allocated upon them as the officers of the company in relation to the make public of the announcements that was misleading to the Australian Stock Exchange (ASX).
With the help of these two decisions the duties that are allocated by ASIC were better understood and help in aiding to bring legal proceedings under the Corporation Act 2001. The decisions help in understating the duties that are associated with the executive and non-executive directors of the company which is not up to the level of board. (Czoch and Whalebelly, 2012)
The James Hardie Group in 2001 has restricted it is business so as to ring fence its liabilities (asbestos). There were two subsidiary companies that were experiencing the claims of asbestos and thus were separated from the Group. A Medical Research and Compensation Foundation (MRCF) were formulated to finance compensation to the claimants. On 15th February 2001, a board meeting was conducted by the James Hardie Board wherein the separation of the subsidiary proposal was given assent. As per the minutes of the meeting it was found that an approval was also given to a draft ASX Announcement wherein the separation proposal was outlines which establishes that the Medical Research and Compensation Foundation would have enough finance to cater with the legitimate claims and thus must be funded adequate. The next day a complete ASX announcement was finalized. (Boardman, 2012)
Based on these actions, The Australian Securities and Investments Commission, in 2007, initiated a civil action against three former executive directors, 7 non-executive directors and the company secretary of James Hardie Industries Ltd.
The main allegation of Australian Securities and Investments Commission was that the directors of the company were in contravention of section 180 (1) of the Corporation act, 2001, that is, the duty of care and diligence was not complied with by them adequatly and as per the requirements of the Corporation Act 2001. The main reason that was alleged by the ASIC was that when the decision was made then the board has failed to release the information to the share market which is nothing but the violation of the duty of care and diligence under section 180 (1) of the Act 2001.
The case went to a series of legal proceedings and the decision of the Court of Appeal, New South Wale was not approved by the High Court and the case was remitted back to the Court of Appeal, New South Wales. The High Court disagree that ASIC has not met its burden of proof that the draft ASX announcements was approved at the board of meetings of the company. Various reasons are provided by the High Court which are critically analyzed herein under.
It was held by the Supreme Court of the New South Wales that the directors of the company have given assent to the misleading ASX announcement from the fact that they also approved the draft ASX announcements. The court decided that that one officer and none directors of the company were in violation of section 180 (1) of the Act;
The Court of Appeal did not approve the decision of the Supreme Court of New South Wales against seven non executive directors.
The decision of the Court of Appeal, New South Wale was not approved by the High Court and the case was remitted back to the Court of Appeal, New South Wales.
By Supreme Court of New South Wales
Justice Gzell gave various reasons which are cortically analyzed herein under: (Hill and Thomas 2015)
The court found out that it is in the Board of Meeting of the company that the draft ASX announcement was confirmed. It was also found that the draft that is prepared was misleading and was false because it gave reference to Medical Research and Compensation Foundation which will have adequate finance to meet all the legal claims (asbestos) and that the foundation will be funded fully. The court found that the fund that is created was underfunded by $1.5 billion. Also, the facts reveal that the economic model which supports the financing of the Medical Research and Compensation Foundation was not brought into the notice to the board by Mr Shafron. Further, Mr Shafron (the Company secretary and the general counsel for the company) also did not found it required that the JHIL must disclose to the ASX a deed of indemnity and covenant amid the company its subsidiaries.
Thus, it is rightful in submitting that even though seven non-executive members alleged that they did not approve of the draft ASX announcement at the board meeting but it can be analyzed from the facts that the minutes of the board meeting which was scrutinized discloses that all the directors have approved of the draft and has even approved that minutes of the meeting subsequently. The minutes are direct evidence which lay light on the intention of the directors supported by their action.
Thus, the court in 2009 August, imposes fines and disqualification orders for the violation of section 180 (1) of the Act and must be considered rightful in its approach.
But, some of the directors appealed to the Court of Appeal, New South Wales.
The court of Appeal found the case in favor of the directors by stating that the ASIC has not able to prove that the draft ASX announcement was consented at the meeting. Also, there were no witnesses that authenticate the decision that is taken in the meeting. Mr Robb (legal adviser of the company) was not brought in to authenticate the decision taken at the meeting and the minutes comprise of errors and thus cannot be relied upon.
But it is cortically submitted that the minutes of any board meeting are its official records which describe the conduct of the directors at the meetings. They are the evidence of truth of the activities that are carried on by the directors in the meeting and thus are recorded. These minutes of the company has established that the draft ASX announcement was laid down before the directors of the company and is approved.
Also, it cannot be stated that by not calling Mr Robb to submit its evidence, the Australian Securities and Investments Commission has diminished the effectiveness of its evidence. This is because firstly, the New South Wales, Court of Appeal has not identifies any kind of duty that can be raised to call for the evidence of Mr Robb. Also, there was nothing to show that u not calling Mr Robb to submit his evidence, there is any kind of duty that is violated by Australian Securities and Investments Commission; secondly, even if it is assumed that there is duty of care that is imposed upon Australian Securities and Investments Commission that it must call Mr Robb to submit his evidence, then, this duty must be rectified whether by the primary judge wherein directions must be issued to Australian Securities and Investments Commission to call the witness or the primary judge must put a stay to the proceedings till the time Australian Securities and Investments Commission did not call the witness OR even if the case is decided by the appellant court then whether the non calling of witnesses is of such an importance that it requires the retrial of the case.
But the court concluded that Mr Shafron was at fault and thus was in breach of his directorial duties.
ASIC aggrieved by the decision of the Court of Appeal made an appeal to the High Court.
The decision of the Court of Appeal, New South Wale was not approved by the High Court and the case was remitted back to the Court of Appeal, New South Wales.
The High Court rejected the contention of the defendant that the minutes of the meeting must not be relied upon as they were formed before the board meeting of February and are inaccurate. It is cortically submitted that it is very abrupt to consider it as a coincidence that none of the boated members that are present at the April Board meeting to recognize that they are actually adopting the minutes of the February Board meeting and that the contents of the minutes which they are agreeing to adopt are not within their knowledge. It was specifically quoted by the High Court that ‘a glaring blunder, or worse than a blunder – recording a vitally important resolution which never took place’.
Further, the draft ASX announcement which was passed by the board of directors in the April meeting was also circulated which was also later found from the files of the BIL Australian Pty Ltd. BIL Australian Pty Ltd is one of the largest shareholder in JIHL and there were two non-executive directors who are very much associate with each other;
Also, the High Court established that the ASX draft announcement that was tabled at the board meeting and later the amendments that are made to the draft amendments and the misrepresentations that are found later in the ASX drat announcements are not much of the difference and are later found to be the same. It was specifically submitted by the high Court that the announcement that is tabled and approved by the board of directors of the company and the draft of the said document which is later published must be compared in such a manner which more than literal in its sense, that is, the literal comparison amid the two documents and texts. The court submitted that the errors and any slips can be rectified and better wordings can be sought. It is correct to state that if only minor changes are made then it implies that the people who made those minor changes are not authorized to do so.
The High Court also submitted that when the draft ASX announcement was later circulated then none of the remembers or any individual raised any kind of objecting or raised any kind of question in relation to the terms of the ASX draft announcements. This implies that the board of directors of the company had actually approved of the draft ASX announcements.
The High Court also did not approve of the reliance that is made by the New South Wales, Court of Appeal Blatch v Archer (1774) and Jones v Dunkel (1959). It was held by the High Court that the case of Australian Securities and Investments Commission is not depending upon the any kind of inference but is based on the direct evidence, that is, the minutes of the board meeting that took place in February.
The High Court also submitted that Mr Robb agreed to the fact that he was part of the board meeting that took place by the company and that he also settled the meeting minutes which does not correctly recorded the board of directors resolution and which depicts that it is not in the interest of the company in any manner would defiantly requires cross examination is nothing but a ‘possessed of the most boundless and heroic optimism’. The evoked laid down by Mr Robb is nothing but has resulted the Australian Securities and Investments Commission to conclude that it is not required in the present given case. That the Court of appeal was not right in concluding that the evidence laid down by Australian Securities and Investments Commission is not correct and the question of facts must be decided with the help of evidence laid down and not on mere speculations. (Tobin 2012)
Conclusion
The decision laid down by the high court was welcomed by the Australian Securities and Investments Commission and decision held’s in clarifying that duties that are attributed to the management of the company and the non-executive directors of the company which are below the level of the board of directors. the objective standard of diligence that is expected from the officers and directors of the company is reinforced by the High Court through this decisions.
Reference List
Books/Articles/Journals
Czoch, K and Whalebelly, R 2012, Australia: The James Hardie Decisions: ASIC v Hellicar & Ors [2012] HCA17; Shafron v ASIC [2012] HCA 18, Norton Rose Fulbright Australia.
Hill, J and Thomas, R 2015, Research Handbook on Shareholder Power. Edward Elgar Publishing.
Boardman, P 2012, High Court Rules James Hardie Directors Approved Misleading ASX Release.
Case Laws
Australian Securities and Investments Commission v Hellicar & Ors [2012] HCA 17;
Blatch v Archer (1774)
Morley v Australian Securities and Investments Commission (No 2) (2011);
Jones v Dunkel (1959)
Shafron v Australian Securities and Investments Commission (No2) (2012).
Online Material
Tobin, G 2012, The decision: ASIC v Hellicar & Ors, viewed on 5th June 217,
https://www.lexology.com/library/detail.aspx?g=c02498f5-ec3a-4514-af79-0d8982db328a.
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