Special Commission of Inquiry into Medical Research and Compensation Foundation
Allens breached its duties but is spared the rack
David Jackson QC has found that Allens Arthur Robinson breached a duty of disclosure to Justice Santow when seeking approval for the restructure of James Hardie Industries.
He went on to save the firm’s bacon by adding that the breach was “not deliberate”. Nonetheless, Allens is likely to have breached its duty of care to James Hardie Industries Ltd but whether that breach caused any loss to the company is not clear.
In August 2001, and subsequently, Justice Santow was assured that the shares issued by James Hardie Industries Ltd, the Australian shell, to the new Dutch company were the basis of the capital to “fully fund” the asbestos liabilities.
During the hearing Santow probed the strength of the lifeline. For instance, he wanted to know whether the call on the shares could be resisted by a Dutch company under Dutch law.
Jackson pointed to the matters that were NOT disclosed in the proceedings before Santow J:
1. The communications from the Medical Research and Compensation Foundation concerning its inadequate funding.
2. The put option contained in the deed of covenant and indemnity.
3. The possibility that the partly paid shares might be cancelled.
The commissioner said that if there was any doubt as to whether the company and Allens had a duty of full disclosure in how the scheme would impact on creditors, “it would have been resolved by the questions asked by Santow J which made clear he regarded the practical efficacy of the partly paid shares as a protection for JHIL’s creditors as an important matter”.
He expressed his findings on this aspect of his inquiry, as follows:
”(a) By failing to disclose that the separation of JHIL, and consequent cancellation of the partly paid shares, was likely in the short to medium term, Allens and JHIL were in breach of their duty of disclosure in the proceedings before Santow J.
(b) The failure to make such disclosure was not deliberate.
(c) In the circumstances, Allens is likely to have been in breach of its duty of care to JHIL, but it is not clear that any such breach caused JHIL loss. Nor is it clear that if disclosure had been made, subsequent events would have turned out differently.
(d) I reject the submissions that JHIL or Allens contravened s.52 of the Trade Practices Act 1974 (Cth), that they attempted to pervert the cause of justice, and that the orders of Santow J were procured by fraud.”
Jackson spelled out the history of Hardie’s course of separating its operating activities from its “rump” asbestos liabilities.
“After the creation of the (Medical Research and Compensation) Foundation in February 2001, separation of James Hardie Industries (the Australian “rump”) was the last remaining step in that process.”
It was quite evident in the thinking of all involved in the restructure that the Australian “legacy” or “rump” would be drowned in a shallow bucket of water. As Jackson put it:
“The notion that the holding company would make the cheapest provision thought ‘marketable’ in respect of those liabilities so that it could go off to pursue its other more lucrative interests insulated from those liabilities is singularly unattractive. Why should victims and the public bear the cost not provided for?”
The plans for complete separation were there in the evidence.
There was a file note dated January 4, 2001 from Julian Blanchard of Allens that said: ” may want to give up JHIL to trustee. Make sure nothing precludes this from happening.”
At a meeting on February 1, 2001 a James Hardie representative (probably CEO Peter Macdonald) said: “Do want to liquidate JHIL down the line.”
RobbOn February 5, 2001 Macdonald instructed David Robb (pictured) from Allens to include an option to “put” (sell) JHIL to another subsidiary. The exercise of the put “could almost inevitably have involved the prior cancellation of the partly paid shares”.
Also on February 5, 2001, Michael Quinlan from Allens noted a conversation with Robb which mentioned: “liquidation of JHIL within 12 months.”
These views were all recorded before the company and its lawyers approached the Supreme Court of NSW for approval of the restructure.
Those notes and conversations are at odds with the submission made to Santow by Hutley SC, for the company, which said:
“James Hardie Industries is in a position to meet all claims, any claims from whatever source because it has access to the capital of the group through the partly paid shares ”
Peter Shafron, Hardie’s senior in-house lawyer, in a revealing memorandum written in March 2001 said:
”[Stakeholders] may argue that JHIL could cancel the partly paid shares shortly after the scheme was approved to which the reply would be that the then JHIL directors are still subject to the Corporations Law and the risk of suits if they breach their directors duties involving creditors.”
Jackson described the proposed defensive responses described in the memo as having “a somewhat coy quality, suggestive to my mind of an appreciation by Mr Shafron both that cancellation was the likely eventuality and that creditors at least would be likely to regard that as material”.
Jackson added that after the restructure the evidence suggests that separation of the old Australian company from the group “had never ceased to be an objective”.
On March 13, 2002 Hardie announced the sale of its gypsum business for $345 million cash. This was the source of the money to fund the future asbestos liabilities through the foundation and the sale was the trigger for the cancellation of the partly paid shares.
This was confirmed in a note by Blanchard of Allens recording a discussion on March 25, 2002:
“Pay out indemnity now [because] gypsum sold. Sell to foundation JHIL has partly paid shares to JHI NV [therefore] need to get rid of partly paids.”
Allens and James Hardie denied in the strongest terms there was an intention to cancel the partly paids at the time they went before Santow and made all the right noises. They presented reams of evidence to support their lack of intention. One proposition was that ALL share capital is cancellable and Santow would be aware of that.
However, Jackson went on to find as follows:
“The circumstances here throw up the question of disclosure in a factual context where JHIL was saying, explicitly, that the partly paid shares would be available in the future and from time to time, and in which the judge made it clear that the efficacy of that ‘capital lifeline’ was a matter of concern.
In these circumstances it seems to me that disclosure of JHILs plans for itself after the re-structure ought to have been disclosed. Those plans went beyond mere consideration of the theoretical possibilities in my view. The circumstances were such that anyone familiar with JHILs internal strategic planning over the 19982001 period and with knowledge of the true purpose of the partly paid shares (ie, stakeholder management) would have formed the view that their cancellation was almost inevitable. The JHIL board, senior management, and Allens were all so placed.
It is inappropriate for me to attempt to say what the Supreme Court would have done if such disclosure had occurred.
However it is appropriate to say that, in my view, the court could have required JHIL to alter the constitution of JHIL so as to restrict its powers under s.256B, e.g. by requiring as a precondition that independent advice be obtained that the proposed cancellation would not materially prejudice the interests of creditors.
At the very least this would foreclose the risk of someone later acting on the basis contended for by JHI NV at one point in the Inquiry, namely, that in the case of partly paid shares cancelled for no payment, JHIL did not have to consider the interest of creditors at all.”
Quite how Jackson concluded that the failure to make the disclosure to the court was “not deliberate” is not clear from the report.
Then there is the issue of the non-disclosure to Santow of the put option. That option was part of the 2001 scheme of arrangement and allowed the transfer of the partly paid shares (assuming they had not been cancelled) to Amaca Pty Ltd, one of the companies which is now part of the MRCF and which held the asbestos liabilities.
In cross-examination Robb from Allens said that the put option should have been disclosed, but it wasn’t because its existence had “escaped his memory”.
CameronPeter Cameron (pictured), the former Allens partner who’s ended up on the James Hardie board, explained that with the benefit of hindsight the disclosure was unnecessary because the court would be so confident that JHI NV’s directors would act properly; that they would decline to exercise the put option without catering for the interests of creditors; and that the court would treat the existence of the right as immaterial.
“I did not regard this view as persuasive.”
However, Jackson accepted that the terms of the implementation deed meant that it was not necessary for the put option, considered in isolation, to be disclosed to the court.
Towards the final moments of his 600 page tome David Jackson quietly ventilated some of his concerns about the lawyers’ behaviour.
Both Robb and Cameron had been involved closely in the lead-up to the separation. The commissioner said:
“I remain surprised … that the question of the adequacy of the funding at separation was not raised by them earlier.”
And there was this observation, which goes to the heart of the vice:
“What is also disturbing, however, is that with solicitors acting for JHIL, for the outgoing directors of [Hardie operating companies], and for the incoming directors, no one expressed any view on the merits of the underlying transactions. The nature of directors’ duties was discussed at length, the subject to which the duties relate were not.”
Being deeply involved in a failure to disclose material information to the court, even if “not deliberate”, must make Cameron’s ascention to the chairmanship of Allens remote.