August 2009

James Hardie penalties announced today - disqualification of Directors

In a decision handed down by Justice Gzell in the NSW Supreme Court today (20 August 2009), directors of James Hardie were disqualified from managing a corporation for periods ranging from 5 to 15 years.

In addition, directors were ordered to pay pecuniary penalties ranging from $30,000 to $350,000.

Today\'s decision deals with the penalties for the breaches found in a decision by Justice Gzell in April this year.  Justice Gzell found against the directors in civil proceedings brought by ASIC for breaches of section 180(1) of the Corporations Act. 

That section requires directors and officers of a corporation to "exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise" if they were in the same position.

The issues are too numerous to canvass in this bulletin. 

The key findings related to an announcement that the foundation established by James Hardie would have sufficient funds to meet all legitimate asbestos claims. In determining that the claims would be met the directors relied on reports from accountants and actuaries.  But those reports were based on a number of assumptions which were incorrect and incomplete. 

The court found that the directors in relying on the report had not exercised a degree of care and diligence required by section 180(1).

The announcement was tabled and considered at a board meeting.  Some directors claim not to have seen it at all because they were not physically present.

It is clear that the directors who didn\'t have a copy of the announcement should have insisted on being given a copy.  In all the circumstances the directors should not have approved the announcement.

While the largest penalties were awarded against the CEO, non-executive directors received a 5 year disqualification and a $30,000 penalty.

This is clear warning to all directors, in particular non-executive directors, to exercise care in performing their duties.  The consequences of not doing so are serious including fines and disqualification from being involved in company management, to say nothing of substantial legal costs which may not be covered by insurance.