Australian Securities and Investments Commission v MacDonald (No 12)

[2009] NSWSC 714

Reported Decision: 259 ALR116
73 ACSR 638

New South Wales

Supreme Court

CITATION:	Australian Securities and Investments Commission v Macdonald (No 12) [2009] NSWSC 714 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	27 July 2009
JUDGMENT DATE :	20 August 2009
JUDGMENT OF:	Gzell J
DECISION:	Exoneration refused. Declarations of contraventions made. Disqualification orders made. Pecuniary penalties imposed. No order as to costs of some separate issues.
CATCHWORDS:	CORPORATIONS - Supervision, Regulation and Correction - breaches of civil penalty and other provisions - whether should be relieved from liability under s 1317S(2) or s 1318(1) of the Corporations Act - whether acted honestly - whether prohibition orders should be made under s 206C or s 206E - whether pecuniary penalty orders should be made under s 1317G(1) and s 1317G(1A) - COSTS - whether separate issues constituted by a group of discrete issues - whether no order for costs where the plaintiff succeeds on one separate issue and fails on another
LEGISLATION CITED:	Corporations Act 2001 (Cth) Corporations Law (Cth) Uniform Civil Procedure Rules 2005 James Hardie (Civil Penalty Compensation Release) Act 2005 James Hardie Former Subsidiaries (Winding up and Administration) Act 2005 James Hardie (Civil Liability) Act 2005 Civil Procedure Act 2005
CATEGORY:	Consequential orders
CASES CITED:	Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287; (2009) 256 ALR 199 Macdonald v Australian Securities and Investments Commission [2007] NSWCA 304; (2007) 65 ACSR 299 Daniels v Anderson (1995) 37 NSWLR 438 Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 Re HIH Insurance (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80 Australian Securities and Investments Commission v Vines [2005] NSWSC 1349; (2005) 65 NSWLR 281 Vines v Australian Securities and Investments Commission [2007] NSWCA 75; (2007) 62 ACSR 1 Powell & Anor v Fryer & Ors [2000] SASC 97; (2000) 18 ACLC 480 Powell v Fryer [2001] SASC 59; (2001) 37 ACSR 589 Hall v Poolman [2007] NSWSC 1330; (2007) 215 FLR 243 Nocton v Lord Ashburton [1914] AC 932 McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 Australian Securities and Investments Commission v Edwards (No 3) [2006] NSWSC 376; (2006) 57 ACSR 209 R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93 Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503 Australian Securities Commission v Forem-Freeway Enterprises Pty Ltd [1999] FCA 179; (1999) 30 ACSR 339 Deputy Commissioner of Taxation v Dick [2007] NSWCA 190; (2007) 242 ALR 152 Maelor Jones Investments (Noarlunga) Pty Limited v Heywood-Smith (1989) 54 SASR 285 Australian Securities and Investments Commission v Vines [2006] NSWSC 760; (2006) 58 ACSR 298 Australian Securities and Investments Commission v Whitlam (No 2) [2002] NSWSC 718; (2002) 42 ACSR 515 Deputy Commission of Taxation v Clark [2003] NSWCA 91; (2003) 57 NSWLR 113 Australian Securities and Investments Commission v Vines [2003] NSWSC 1116; (2003) 182 FLR 405 Australian Securities and Investments Commission v Southcorp Ltd (No 2) [2003] FCA 1369; (2003) 130 FCR 406 Exicom Pty Ltd v Futuris Corporation Ltd (1995) 123 FLR 394 Rich v Australian Securities and Investments Commission [2004] HCA 42; (2004) 220 CLR 129 Re Chemeq Ltd; Australian Securities and Investments Commission v Chemeq Ltd [2006] FCA 936; (2006) 234 ALR 511 Vines v Australian Securities and Investments Commission [2007] NSWCA 126; (2006) 63 ACSR 505 Australian Softwood Forests Pty Ltd v Attorney-General (NSW) [1981] HCA 49; (1980-1981) 148 CLR 121 Corporate Affairs Commission of NSW v Transphere Pty Ltd (1988) 15 NSWLR 596 Australian Securities & Investments Commission v Sweeney [2001] NSWSC 114 Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd [2002] NSWSC 310; (2002) 41 ACSR 561 Australian Securities and Investments Commission v McDougall [2006] FCA 427; (2006) 229 ALR 158 Australian Securities and Investments Commission v FUELbanc Australia Ltd [2007] FCA 960; (2007) 162 FCR 174 Elliott v Australian Securities and Investments Commission [2004] VSCA 54; (2004) 10 VR 369 Australian Securities and Investments Commission v White [2006] VSC 239; (2006) 58 ACSR 261 Australian Securities and Investments Commission v Sydney Investment House Equities Pty Ltd [2009] NSWSC 144; (2009) 253 ALR 616 Australian Securities and Investments Commission v Vizard [2005] FCA 1037; (2005) 145 FCR 57 Australian Securities and Investments Commission v Beekink [2007] FCAFC 7; (2007) 238 ALR 595 Re OneTel Ltd (in liq); Australian Securities and Investments Commission v Rich [2003] NSWSC 186; (2003) 44 ACSR 682 Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1 Mill v The Queen (1988) 166 CLR 59 Pearce v The Queen [1998] 8 HCA 57; (1998) 194 CLR 610 Postiglione v The Queen (1996-1997) 189 CLR 295 Lowe v The Queen (1984) 154 CLR 606 Australian Competition and Consumer Commission v ABB Transmission and Distribution Ltd (No 2) [2002] FCA 559; (2002) 190 ALR 169 ASC v Donovan (1998) 28 ACSR 583 Hughes v Western Australian Cricket Australian Inc (1986) 8 ATPR 40-748 Waters v PC Henderson (Australia) Pty Ltd [1994] NSWCA 338; (1994) 254 ALR 328 James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWCA 296 Alamdo Holdings Pty Ltd v Australian Window Furnishings (NSW) Pty Ltd [2008] NSWSC 7
TEXTS CITED:	Ritchie's Supreme Court Procedure NSW
PARTIES:	Australian Securities and Investments Commission (Plaintiff) Peter Donald Macdonald (First Defendant) Peter James Shafron (Second Defendant) Phillip Graham Morley (Third Defendant) Michael Robert Brown (Fourth Defendant) Michael John Gillfillan (Fifth Defendant) Meredith Hellicar (Sixth Defendant) Martin Koffel (Seventh Defendant) Geoffrey Frederick O'Brien (Eighth Defendant) Gregory James Terry (Ninth Defendant) Peter John Willcox (Tenth Defendant) ABN 60 Pty Ltd (Eleventh Defendant) James Hardie Industries NV (Twelfth Defendant)
FILE NUMBER(S):	SC 1490/07
COUNSEL:	Mr A Bannon SC/ Mr R Beech-Jones SC/ Ms D Hogan-Doran/ Ms S Pritchard / Ms J Single/ Mr A Kuklik (Plaintiff) Mr S Finch SC/ Mr D Studdy SC/ Mr D Mackay (First Defendant) Mr B Walker SC/ Mr M Holmes QC/ Mr R Lancaster/ Mr N Owens (Second Defendant) Mr B Oslington QC/ Mr R Dick/ Mr N Bender (Third Defendant) Mr T Bathurst QC/ Mr R Whitington QC/ Mr R Hollo/ Mr R Hardcastle/ Mr I Colquhoun (Fourth to Seventh Defendants) Mr P Wood/ Mr M Henry (Eighth Defendant) Mr R McHugh SC/ Mr S Nixon (Ninth Defendant) Mr T Jucovic QC/ Mr R Scruby (Tenth Defendant) Mr I Pike (Eleventh Defendant) Mr A Meagher SC/ Ms K Morgan (Twelfth Defendant)
SOLICITORS:	Clayton Utz (Plaintiff) Minter Ellison (First Defendant) Middletons (Second Defendant) Henry Davis York (Third Defendant) Atanaskovic Hartnell (Fourth to Seventh Defendants) Arnold Bloch Leibler (Eighth Defendant) Blake Dawson (Ninth Defendant) Kemp Strang (Tenth Defendant) Baker & McKenzie (Eleventh Defendant) Mallesons Stephen Jaques (Twelfth Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

GZELL J

THURSDAY 20 AUGUST 2009

1490/07 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v PETER DONALD MACDONALD & ORS (NO 12)

JUDGMENT

1 In Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287; (2009) 256 ALR 199 I found that each of the defendants had contravened a provision of the Corporations Act 2001 (Cth) or a provision of the Corporations Law (Cth) as carried over into the Corporations Act.

1 Exoneration

2 With the exception of the first defendant, Peter Donald Macdonald, and the eleventh defendant, ABN 60 Pty Ltd (ABN 60), formerly called James Hardie Industries Limited (JHIL), the defendants seek to be excused from their contraventions.

3 Those defendants, other than the twelfth defendant, James Hardie Industries NV (JHINV), breached their duty under s 180(1) of the Corporations Law as carried over into the Corporations Act (Section 180(1)). It provided:

“A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation’s circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.”

4 The Corporations Act, s 1317E(1) (Section 1317E(1)) provides that if a Court is satisfied that a person has contravened one of the following provisions, called “civil penalty provisions”, it must make a declaration of contravention. Section 180(1) is one of the following provisions. The power of the Court to exonerate in s 1317S(2) (Section 1317S(2)) arises with respect to eligible proceedings. That term is defined in s 1317S(1) to mean proceedings for a contravention of a civil penalty provision subject to specific additions and exclusions irrelevant for present purposes. Section 1317S(2) provides:

“If:
(a) eligible proceedings are brought against a person; and
(b) in the proceedings it appears to the court that the person has, or may have, contravened a civil penalty provision but that:
(i) the person acted honestly; and
(ii) having regard to all the circumstances of the case (including, where applicable, those connected with the person’s appointment as an officer, or employment as an employee, of a corporation or of a Part 5.7 body), the person ought fairly to be excused for the contravention;
the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention.”

5 It is open to the above defendants, therefore, being the JHIL executives Peter James Shafron, the second defendant, and Phillip Graham Morley, the third defendant, together with the non-executive directors of JHIL, Michael Robert Brown, the fourth defendant; Michael John Gillfillan, the fifth defendant; Meredith Hellicar, the sixth defendant; Martin Koffel, the seventh defendant; Geoffrey Frederick O’Brien, the eighth defendant; Gregory James Terry, the ninth defendant; and Peter John Willcox, the tenth defendant, to seek to be excused from their breaches of Section 180(1).

6 JHINV was in breach of its continuous disclosure obligation under s 674(2) of the Corporations Act (Section 674(2)). It applied to JHINV as a listed disclosing entity because listing rules required it to notify a market operator of information about specified events or matters as they arose for the purpose of the operator making that information available to participants in the market. Section 674(2) was in the following terms:

“If:
(a) this subsection applies to a listed disclosing entity; and
(b) the entity has information that those provisions require the entity to notify to the market operator; and
(c) that information:
(i) is not generally available; and
(ii) is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the entity;
the entity must notify the market operator of that information in accordance with those provisions.”

7 Section 674(2) is a civil penalty provision in terms of Section 1317E(1) of the Corporations Act. It follows that JHINV is entitled to ask the Court to excuse it for its contravention under Section 1317S(2).

8 It is also open to Mr Shafron, Mr Morley, Mr Brown, Mr Gillfillan, Ms Hellicar, Mr Koffel, Mr O’Brien, Mr Terry and Mr Willcox to seek relief under s 1318(1) of the Corporations Act (Section 1318(1)) which provides:

“If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default, or breach but that the person has acted honestly and that, having regard to all circumstances of the case, including those connected with the person’s appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.”

9 Section 1317S(7) of the Corporations Act provides that nothing in that section limits, or is limited by, Section 1318(1).

10 The bases upon which the Court may exculpate a person under Section 1317S(2) or Section 1318(1) are virtually identical as Spigelman CJ observed in Macdonald v Australian Securities and Investments Commission [2007] NSWCA 304; (2007) 65 ACSR 299 at 303 [22]. As the Chief Justice there observed and as was observed by Clarke and Sheller JJA in Daniels v Anderson (1995) 37 NSWLR 438 at 525, both provisions give the Court a wide discretion to relieve in whole or in part.

1.1 Acting honestly

11 The first element in the exercise of the Court’s power under either provision is the requirement that the offending party acted honestly when breaching the statutory duty.

12 In Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 196 and 198, Tadgell J equated acting honestly for the purposes of forerunners of Section 1317S(2) and Section 1318(1) with a lack of moral turpitude. That meaning was adopted by Santow J in Re HIH Insurance (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80 at 123 [166] and by Austin J in Australian Securities and Investments Commission v Vines [2005] NSWSC 1349; (2005) 65 NSWLR 281 at 292 [43]. His Honour’s conclusion that Mr Vines acted honestly was upheld on appeal in Vines v Australian Securities and Investments Commission [2007] NSWCA 75; (2007) 62 ACSR 1 at 110 [568] per Spigelman CJ, at 166-167 [797]-[800] per Santow JA and at 168 [805] per Ipp JA.

13 In Powell & Anor v Fryer & Ors [2000] SASC 97; (2000) 18 ACLC 480, Prior J gave judgment for liquidators in an action to recover compensation from the directors of a company for debts incurred by it while trading insolvently. At 488 [44] his Honour rejected the directors’ application for relief under the forerunner to Section 1317S(2) as follows:

“I do not think either defendant can be said to have acted honestly in the ordinary sense of that word or in a manner consistent with the meaning given to it in other provisions of corporation laws but even assuming that, having regard to all the circumstances of the case, I do not think that either of them ought fairly to be excused for any of their contraventions of the civil penalty provisions of the Corporations Law. In my view, both defendants were negligent and, indeed, reckless with respect to the company’s financial position and capacity to trade. They did not act fairly but took advantage of indulgent creditors by allowing the company to continue to trade.”

14 On appeal, Powell v Fryer [2001] SASC 59; (2001) 37 ACSR 589 at 605 [112], Olsson J cited the above passage and said at 605 [113] that all that needed to be said was that such a conclusion was demanded on the evidence.

15 In Hall v Poolman [2007] NSWSC 1330; (2007) 215 FLR 243 at 317 [320], Palmer J, having referred to the discussion of constructive fraud in Nocton v Lord Ashburton [1914] AC 932 at 954, commented that it had been easy to transpose into the word “honest” in companies legislation the special meaning attributed to fraud in Chancery parlance so that in Powell:

“a failure to perform one’s duty as a director, even if by genuine mistake or ignorance of the law, can be described as “failing to act honestly”.”

16 With respect, I do not think Prior J went so far. His Honour was of the view that the directors had not acted honestly in the ordinary sense of that word. But even if they had, they had been reckless and had taken advantage of indulgent creditors and, having regard to all the circumstances, his Honour found they should not be excused.

17 Palmer J in Hall at 317 [322] pointed to the clear distinction between acting without prudence, skill or judgment and acting dishonestly and concluded at 318 [325] that acting honestly for the purposes of Section 1317S(2) and Section 1318(1) is to be determined by the ordinary meaning of the words. His Honour said:

“In my view, when considering whether a person has acted honestly for the purposes of a defence under the CA, s 1317S(2)(b)(i) or s 1318, the court should be concerned only with the question whether the person has acted honestly in the ordinary meaning of that term, that is, whether the person has acted without deceit or conscious impropriety, without intent to gain improper benefit or advantage for himself, herself or for another, and without carelessness or imprudence to such a degree as to demonstrate that no genuine attempt at all has been to carry out the duties and obligations of his or her office imposed by the CA or the general law. A failure to consider the interests of the company as a whole, or more particularly the interests of creditors, may be of such a high degree as to demonstrate failure to act honestly in this sense. However, if failure to consider the interests of the company as a whole, including the interests of its creditors, does not rise to such a high degree but is the result of error of judgment, no finding of failure to act honestly should be made, but the failure must be taken into account as one of the circumstances of the case to which the court must have regard under the CA, ss 1317S(2)(b)(ii) and 1318.”

18 Reference was made to what Gaudron J had said in McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 at 596 [55] that dishonesty is an ordinary concept, not a term of art. While it is difficult on that account to define in any comprehensive manner, it is a matter to be determined by reference to the mental state of the person whose conduct is in issue.

19 But whether a person has acted honestly for the purposes of Section 1317S(2) or Section 1318(1) is not confined to a consideration of the subjective intention of the person in question. The lack of a subjective intention to deceive cannot avoid a conclusion that a person failed to act honestly if a reasonable person would have concluded that the conduct was dishonest.

20 Barrett J in Australian Securities and Investments Commission v Edwards (No 3) [2006] NSWSC 376; (2006) 57 ACSR 209 at 212 [8]-[9] pointed to authority for the proposition that dishonesty may exist in the absence of any subjective intention to deceive (R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93 at 110; Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503 at 506).

21 In Australian Securities Commission v Forem-Freeway Enterprises Pty Ltd [1999] FCA 179; (1999) 30 ACSR 339 at 346, with respect to a sole director of an insolvent company who did not subjectively intend to defraud customers, Madgwick J said:

“That Mr Morton did not subjectively intend outright to defraud customers of the company cannot avoid a conclusion that his behaviour in this regard was both unreasonable and dishonest. Any reasonable person in the position of a director of the company in the circumstances must have realised that at any given time its liabilities substantially exceeded its assets and that, by reason of the dishonoured cheques and the practice and/or entrenched fact of excessive delays in meeting customers’ orders, the company could only meet its debts as they fell due by falling into default in relation to obligations to customers. That is not an ability to pay debts as they fall due, and any reasonable person would understand this. The extent of what I have called the entrenched fact of excessive delays in meeting customers’ needs and the established practice of making unrealistic representations to them about how soon and how reliably they would get their equipment indicates that the boundary between self-deception as to the company’s prospects and conscious deception of its customers had been crossed, and crossed at Mr Morton’s behest. That was, in the ordinary meaning of the word, dishonest behaviour in relation to the affairs of the company.”

22 In my view a person acts honestly for the purposes of Section 1317S(2) and Section 1318(1), in the ordinary meaning of that term, if that person’s conduct is without moral turpitude in the sense that it is without deceit or conscious impropriety, without intent to gain improper benefit or advantage and without carelessness or imprudence at a level that negates the performance of the duty in question. That conclusion may be drawn from evidence of the person’s subjective intent. But a lack of such subjective intent will not lead the Court to conclude that a person has acted honestly if a reasonable person in that position would regard the conduct as exhibiting moral turpitude.

1.2 Arguments in common

23 Common threads ran through the submissions with respect to acting honestly. Neither Mr Shafron nor Mr O’Brien nor Mr Terry gave evidence. The plaintiff, the Australian Securities and Investments Commission (ASIC), submitted that in the absence of evidence from them, the Court could not be positively persuaded that they acted honestly when contravening Section 180(1).

24 In Adler 42 ACSR at 123 [166], Santow J having referred to Friedrich and the interpretation of acting honestly as meaning without moral turpitude, said:

“It would, however, be putting matters rather too high to say that there is no onus on a defendant to positively show honesty, in order to persuade the court to be positively satisfied that the person has acted honestly and to exercise its discretion favourably, if otherwise satisfied to do so.”

His Honour went on to say at [168]:

“Sensing the impropriety of another falls short, by itself , of a finding of dishonesty. But that is not the same as the court reaching a positive satisfaction that the person concerned “has acted honestly”, s 1317S(2)(b)(i), or that the person “has acted honestly” within the meaning of s 1318. If the court is unable to reach a conclusion as to the appearance of honesty, but is not prepared to make the grave finding of dishonesty, more especially in circumstances where no evidence has been given directly by Mr Fodera, the better view is that the jurisdiction to give dispensatory relief simply does not arise; indeed if it did arise, it would hardly be exercised favourably in the absence of demonstration of acting honestly, though that may not necessarily be enough.”

25 ASIC extended the submission to those non-executive directors who gave evidence - Mr Brown, Mr Gillfillan, Ms Hellicar, Mr Koffel and Mr Willcox - on the basis that none of them gave evidence that they acted honestly when they breached Section 180(1).

26 There is no requirement in the legislation that a person must give evidence of honesty before a finding of acting honestly can be made. It is conceivable that it may appear to a court that a person has acted honestly from an examination of the circumstances surrounding the breach of duty and from other evidence such as testimonials as to the person’s conduct before and after the breach of duty.

27 I would not exclude the discretions under Section 1317S(2) and Section 1318(1) simply on the basis that a defendant gave no evidence of honest intent.

28 ASIC did not allege dishonesty on the part of any defendant, with the exception of Mr Macdonald. It was not suggested that the Court should make any such finding with respect to the other defendants.

29 It was submitted that ASIC having disavowed any suggestion that the defendants had acted dishonestly, the Court should find that they had acted honestly in the ordinary meaning of that term.

30 The fallacy in that argument is that a finding of acting honestly does not follow automatically from the absence of an allegation of dishonesty as Santow JA observed in the above passage from Adler.

31 A more specific argument was raised on behalf of Mr Shafron. ASIC did not plead dishonesty against the defendants with the possible exception of Mr Macdonald. Counsel for ASIC did not cross-examine those defendants who gave evidence, putting dishonesty to them. It was submitted that ours being an adversarial system for the administration of justice and the proceedings being civil penalty proceedings, it should follow that it would appear to the Court that the defendants had acted honestly.

32 It was no part of ASIC’s case against the defendants that they acted dishonestly and there was no need of a pleading nor cross-examination on that issue.

33 Section 1317S(2) and Section 1318(1) were pleaded in the defences of each defendant with the exception of ABN 60. There was no reply from ASIC. The Uniform Civil Procedure Rules 2005, Pt 14 r 14.27(2) provides that if there is no reply by a plaintiff to a defence there is an implied joinder of issue on that defence.

34 In response, it was submitted that relief granted under Section 1317S(2) and Section 1318(1) is, as Santow JA said in Deputy Commissioner of Taxation v Dick [2007] NSWCA 190; (2007) 242 ALR 152 at 174 [125], not by way of a defence but by way of a favourable exercise of the Court’s discretion.

35 Be that as it may, relief was pleaded by way of defence. The absence of a reply is no basis for the contention that the defendants who thus pleaded should be deemed to have satisfied the requirement of acting honestly. It is for the Court to determine whether this prerequisite to the exercise of discretion has been established. It is not a matter that should be determined on a pleading point.

1.3 Draft ASX Announcement and non-executive directors

36 In Macdonald (No 11) I found that Mr Brown, Ms Hellicar, Mr O’Brien, Mr Terry and Mr Willcox breached Section 180(1) by voting in favour of a resolution to approve a draft announcement (Draft ASX Announcement) to be forwarded to the Australian Stock Exchange (ASX) at a meeting of the board of directors of JHIL on 15 February 2001 (15 February 2001 Meeting) and that Mr Gillfillan and Mr Koffel breached Section 180(1) by failing to request copies of the Draft ASX Announcement, failing to familiarise themselves with its terms by other means, or failing to abstain from voting in favour of the resolution to approve it.

37 The Draft ASX Announcement was in the following terms:

“ Legally privileged and confidential – for legal advice only

Draft news release 14 February 2001

James Hardie resolves its Asbestos Liability
Favourably for Claimants and Shareholders

James Hardie Industries Limited (JHIL) announced today that it had established a foundation to compensate sufferers of asbestos-related diseases with claims against the company and fund medical research aimed at finding cures for these diseases.

The Medical Research and Compensation Foundation (Foundation), to be chaired by Sir Llewellyn Edwards, will be completely independent of JHIL and will commence operation with assets of $284million.

The Foundation will have sufficient funds to meet all legitimate compensation claims from people injured bv [sic] asbestos products manufactured in the past by two former subsidiaries of JHIL.

JHIL CEO, Mr Peter Macdonald said that the establishment of a fully-funded Foundation provided the best resolution for all stakeholders

“The establishment of the Medical Research and Compensation Foundation provides certainty for people with a legitimate claim against the former James Hardie companies which manufactured asbestos products,” Mr Macdonald said.

“The Foundation will concentrate solely on asbestos for the benefit of claimants allowing James Hardie to pursue its very exciting growth prospects for the benefit of shareholders.”

A separate fund of $3 million has also been set aside for scientific and medical research aimed at finding treatments and cures for asbestos diseases.

The $284 million vested into the Foundation includes portfolios of commonly traded shares, a substantial cash reserve, properties which earn rent and insurance policies which cover workers compensation claims.

Fund manager, Towers Perrin has been appointed to manage the Foundation’s investments, which will generate investment income and capital growth.

In establishing the Foundation, James Hardie sought expert advice from a number of firms, including actuaries Trowbridge, Access Economics and PricewaterhouseCoopersThis [sic] advice supplemented the company’s long experience in the area of asbestos and formed the basis of determining the level of funding required to meet all future claims.

“The directors of James Hardie are satisfied that the Foundation will have sufficient funds to meet all future claims,” Mr Macdonald said.

The initial $3 million for medical research will enable the Foundation to continue work on existing programs established by James Hardie as well as launch new programs.

When all future claims have been concluded, the Foundation will convert any remaining assets to cash and these surplus funds will be donated to a reputable medical and or scientific research organisation involved in work on lung diseases.

Mr Macdonald said, Sir Llewellyn Edwards, who had resigned as a director of James Hardie Industries Limited to take up his new appointment as chairman of the Foundation has enjoyed a long and distinguished career in medicine, politics and business. He is a director of a number of organizations including Westpac Banking Corporation and is also Chancellor of the University of Queensland.

The other Foundation directors include Mr Michael Gill, Mr Peter Jollie and Mr Dennis Cooper.

-ends-

For further information:

Greg Baxter
Bus:
Mob:”

38 The vice was that Mr Brown, Ms Hellicar, Mr O’Brien, Mr Terry and Mr Willcox voted in favour of the resolution when they knew that the Draft ASX Announcement conveyed or was capable of conveying that the material available to JHIL provided a reasonable basis for the assertion in the announcement that it was certain that the amount of funds made available to the Medical Research and Compensation Foundation (Foundation) would be sufficient to meet all legitimate present and future asbestos claims brought against two of JHIL’s former subsidiaries, James Hardie & Coy Pty Limited (Coy), which subsequently changed its name to Amaca Pty Ltd (Amaca), and Jsekarb Pty Ltd (Jsekarb), which subsequently changed its name to Amaba Pty Ltd (Amaba).

39 They also knew that the Draft ASX Announcement conveyed or was capable of conveying that Mr Macdonald believed that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Coy and Jsekarb.

40 They knew that the Draft ASX Announcement conveyed or was capable of conveying that all of the directors, or at least a majority of them, believed that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Coy and Jsekarb.

41 They knew that the Draft ASX Announcement conveyed or was capable of conveying that JHIL had received expert advice from PricewaterhouseCoopers (PwC) that supported the statement that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Coy and Jsekarb.

42 Finally, they knew that the Draft ASX Announcement conveyed or was capable of conveying that JHIL had received expert advice from Access Economics Pty Ltd (Access Economics) that supported the statement that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Coy and Jsekarb.

43 Those directors ought to have known that the Draft ASX Announcement was misleading in those respects.

44 Mr Brown, Ms Hellicar and Mr Willcox said they had no recollection of the Draft ASX Announcement being tabled, considered or approved at the 15 February 2001 Meeting. I found to the contrary.

45 They said they would not have approved the Draft ASX Announcement had it been considered at the meeting as it made forward-looking statements with which they disagreed as being over emphatic.

46 Those acknowledgments are inconsistent with a finding that those persons acting honestly in approving the content of the Draft ASX Announcement in terms of Section 1317S(2) or Section 1318(1). They voted in favour of the Draft ASX Announcement when they said they disagreed with its assertions of sufficient funding.

47 This is not a finding of dishonesty. It is finding that because of the belief of Mr Brown, Ms Hellicar and Mr Willcox that the content of the Draft ASX Announcement was unsupportable, the Court cannot be satisfied that in voting in favour of its presentation to the ASX they acted honestly.

48 Since Mr O’Brien and Mr Terry did not give evidence, any finding that they acted honestly in approving the sending of the Draft ASX Announcement to the ASX must be based on the evidence of others and the documentary evidence.

49 Three identical copies of the Draft ASX Announcement were produced to ASIC. Two were from Allens Arthur Robinson (Allens) with handwritten comments by Mr Peter Cameron and Mr David Robb, both of whom attended the 15 February 2001 Meeting. The other one was produced by BIL Australia Pty Limited (BIL Australia).

50 Mr O’Brien was a director of BIL Australia and the local agent of BIL International Limited, formerly called Brierley Investments Limited (Brierley International). Mr Terry was a director of Brierley International, the ultimate holding company of BIL Australia. Mr O’Brien and Mr Terry were appointed directors of JHIL by virtue of the shareholding of Brierley International in JHIL.

51 It follows that copies of the Draft ASX Announcement were given to Mr O’Brien and Mr Terry at the meeting and the copy of Mr O’Brien or Mr Terry was kept by BIL Australia.

52 Mr O’Brien and Mr Terry were aware of the content of the Draft ASX Announcement and its approval at the 15 February 2001 Meeting.

53 The then chairman of the board of directors of JHIL, the late Alan Gordon McGregor, conducted board meetings by consensus. He would summarise an issue and usually ask whether the board was happy with that and people nodded or otherwise indicated their agreement by silence.

54 There was no evidence from anyone else that Mr O’Brien or Mr Terry spoke against the resolution to approve the Draft ASX Announcement.

55 The position is that they attended the 15 February 2001 Meeting, had copies of the Draft ASX Announcement before them and did not dissent from a resolution approving its content.

56 There is nothing in that evidence from which it appears to me that I should be positively satisfied that Mr O’Brien or Mr Terry acted honestly.

57 Mr Gillfillan and Mr Koffel breached their duty under Section 180(1) in that at the 15 February 2001 Meeting they failed to request that they be provided with a copy of the Draft ASX Announcement, to familiarise themselves with its terms, or to abstain from voting in favour of the resolution.

58 Mr Gillfillan and Mr Koffel attended the 15 February 2001 Meeting by telephone. The Draft ASX Announcement was not provided to them prior to or during the meeting.

59 Mr Gillfillan said that so far as he could recollect there was no discussion of the Draft ASX Announcement at the meeting. Mr Koffel said he had no recollection of anyone reading out the contents of the Draft ASX Announcement and he was not asked to approve its contents.

60 Mr Gillfillan said that had he been shown the Draft ASX Announcement he would not have approved it because it contained wording “so unequivocal and unqualified”. Mr Koffel said if he had been provided with the Draft ASX Announcement he would not have approved it because of several broad statements that in the United States of America (US) would be interpreted as forward-looking.

61 Contrary to their recollection, the Draft ASX Announcement was considered at the 15 February 2001 Meeting. They should have been alerted at the stage of its discussion that an announcement was to be made to the ASX and the meeting was being asked to consider and approve a document, a copy of which they did not have. At the latest, they should have realised this when Mr McGregor summarised a resolution to approve the Draft ASX Announcement. Neither asked for a copy of the Draft ASX Announcement. Neither voiced an objection to the expression of approval of the release of the Draft ASX Announcement at the meeting.

62 This was the culmination of the project to create the Foundation and transfer Coy and Jsekarb to it. It was a matter that had been discussed at previous board meetings and a draft announcement with respect to it had been included in the board papers for the previous meeting.

63 It was not just mere inadvertence, imprudence or carelessness on the part of Mr Gillfillan and Mr Koffel not to have asked for a copy of the Draft ASX Announcement. The board was being asked to consider a matter additional to the circulated board papers relating to the formation of the Foundation, a most significant event in the life of JHIL.

64 The evidence does not persuade me that Mr Gillfillan or Mr Koffel acted honestly when they failed to request a copy of the Draft ASX Announcement, failed to familiarise themselves with its terms, or failed to abstain from voting in favour of the resolution to approve its publication.

65 I found that those individual defendants who swore that the Draft ASX Announcement was not before the meeting were mistaken. On raising the question what was the motive of the non-executive directors in approving the Draft ASX Announcement, I said they may well have believed they were acting in the best interests of the James Hardie group in divorcing asbestos claims against Coy and Jsekarb from the group. To quell any opposition to the formation of the Foundation and the transfer of Coy and Jsekarb to it they were prepared to allow JHIL to make unequivocal and unqualified statements as to the sufficiency of funding.

66 But neither of those comments sways the balance in favour of a conclusion that the non-executive directors acted honestly. It is the nature of the mistake and the circumstance in which it occurs that is significant. And belief by a director that he or she is acting in the best interests of a company does not require a Court to be satisfied that the person acted honestly, as witness the case of the director who causes a company to trade when insolvent in the belief that it might trade itself back into liquidity.

67 Mr Brown, Mr Gillfillan, Ms Hellicar, Mr Koffel, Mr O’Brien, Mr Terry and Mr Willcox have failed to satisfy me that in contravening Section 180(1) they acted honestly. They are not entitled to relief under Section 1317S(2) or Section 1318(1).

68 If I be wrong in this conclusion and the non-executive directors did act honestly, I would have exercised one or other of the discretions under Section 1317S(2) and Section 1318(1) against relief. As Austin J pointed out in Vines 65 NSWLR at 292 [44] there are two discretions under Section 1317S(2) and Section 1318(1), the first in terms of the second requirement, “under all the circumstances” and, if both requirements are established, the second discretion to relieve.

69 Because each case will depend on its own circumstances, it is difficult to lay down guiding principles with respect to the second limb of Section 1317S(2) and Section 1318(1) (Maelor Jones Investments (Noarlunga) Pty Limited v Heywood-Smith (1989) 54 SASR 285 at 292; Vines 65 NSWLR at 292-293 [46]).

70 But as Austin J observed in Vines 65 NSWLR at 291 [39] it is sensible and relevant to the exercise of the statutory discretion in Section 1317S(2) or Section 1318(1) to consider the degree to which a defendant’s conduct has fallen short of the statutory standard of reasonable care and diligence. So, at [41] his Honour said that a person may be excused from liability even though the contravening conduct has been found to have been unreasonable.

71 In Vines 65 NSWLR at 293-294 [51] Austin J said that the presence or absence of contrition by a defendant could be taken into account. So should the seriousness of the contravention. His Honour said at 294 [52]:

“Another relevant consideration is the seriousness of the contravention. This has three components: the importance of the provision contravened, in terms of public policy (as in Reiffel v ACN 075 839 266 Ltd ); the degree of flagrancy of the contravention; and the consequences of the contravention in terms of harm to others. In a case where the contravention amounts to mere inadvertent and temporary non-compliance with a procedural requirement having no damaging consequences (say, a contravention constituted by being late by a few days in filing a form) the court is likely to be much more ready to provide relief than in a case where the contravention is of a provision that has substantial importance from the point of view of public policy, or the defendant's contravention is reckless, or the contravening conduct has caused substantial loss.”

72 At 295 [57] his Honour identified other matters relevant to the exercise of discretion:

“Other matters that appear to me to be relevant to the exercise of the court's discretion under the second requirement, and/or its discretion to grant relief, are:
whether the person concerned obtained and followed competent advice before acting in contravention (Austin, Ford and Ramsay, op cit, at 659 [17.18]);
whether the conduct was in accordance with some established practice ( Maelor Jones Investments (Noarlunga) (at 293-295), discussing the Pacific Acceptance case); and
whether the person concerned was paid for undertaking the contravening conduct ( Maelor Jones Investments (Noarlunga) (at 290-295)).”

73 And at 295 [60]-[61], Austin J accepted a list of negative criteria pointing against the granting of relief under Section 1317S(2) or Section 1318(1). They are the obtaining of personal gain; the flagrancy of the breach; impropriety; consciousness of another’s impropriety; and deceptiveness.

74 The circumstances of this case are set out in Macdonald (No 11) which should be read as one with these reasons.

75 It was submitted that the decision to approve the Draft ASX Announcement was made at the 15 February 2001 Meeting where many other resolutions were passed including the decision to establish the Foundation and the amount of funding with which it was to be provided. The board meeting was attended by JHIL management and a number of external advisers including representatives of UBS and Allens. No member of JHIL’s management nor any of its advisers raised any concerns about the content of the Draft ASX Announcement.

76 UBS was retained to provide JHIL with assistance in preparation of announcements. Under the terms of its retainer, JHIL was to ensure that all announcements would only be published after discussion with UBS. Mr Wilson and Mr Sweetman of UBS were present at the meeting.

77 The fact that this was a busy board meeting does not excuse the non-executive directors’ breach of duty. Nor was this a case for reliance upon management, a co-director or an expert adviser. Management had sought the board’s approval and the task of approving the Draft ASX Announcement involved no more than an understanding of the English language used in the document.

78 The fact that neither management nor the advisers raised any problem about approving the Draft ASX Announcement does not advance the case of the non-executive directors in the unusual circumstances of this case. The document was brought to the board for its approval and approval was granted. It was incumbent upon the non-executive directors to ensure that the statements about full funding of the Foundation were accurate. They failed in their duty by approving statements that they ought to have known were misleading.

79 Furthermore, there was a contravention of standard practice with respect to the Draft ASX Announcement. That practice required the approval of a draft press release by line management and senior executives before its provision to the board. This was not done. And it offended the disclosure policy approved by the board. It was a last minute affair. None of the board or management or Allens had seen the document before the 15 February 2001 Meeting commenced. Its distribution at the meeting in those circumstances provided all the more reason for a detailed consideration of its content by each director.

80 It was submitted that the non-executive directors were entitled to assume that there had been compliance with the standard practice and disclosure policy adopted by the board when the Draft ASX Announcement was presented to them at the 15 February 2001 Meeting. I would not draw that inference, and inference it must be because there was no direct evidence from the non-executive directors that they had made this assumption. It was unusual that the board should be asked to approve a statement handed out at a meeting.

81 But even if a non-executive director made such an assumption, the duty remained to consider the terms of the Draft ASX Announcement and any justification for them and that took no more than an understanding of the English language.

82 The board had had communication strategy papers included in its board papers both for the 15 February 2001 Meeting and at earlier meetings. That material advised that a successful communication strategy was essential to the achievement of any separation and central to that was the need to convince stakeholders that there were sufficient assets available to meet all present and future legitimate asbestos claims. The board had rejected an earlier proposal of management to fund only to the level of the net assets of Coy and Jsekarb. But the message had to be accurate. It was not.

83 An opinion of James Allsop SC was before the meeting. He was asked:

“Assuming that the directors of JHIL act honestly and genuinely believe that the proposal is in the best interests of the company, can they pass each of the resolutions proposed consistently with their statutory and common law duties?”

84 The answer was in the affirmative: if the directors honestly believed that the steps were in the interests of JHIL and if they had made reasonable inquiry to substantiate their belief, Mr Allsop was of the view that their duties were satisfied. But no resolution to approve the Draft ASX Announcement was put to Mr Allsop and the fact that his opinion was before the board does not advance the position of the non-executive directors.

85 It was submitted that what the non-executive directors did could not be characterised as a pattern of conduct over a period of time or involving personal gain, fraud or dishonesty. Rather the contraventions were isolated incidents in lengthy careers of service on the boards and in positions of high management of an array of companies performed by each of them with competence, diligence and honesty.

86 That is so. Each of the non-executive directors read impressive testimonial affidavits.

87 But they do not dictate the exercise of discretion in favour of the non-executive directors under Section 1317S(2) or Section 1318(1). The testimonial affidavits cover the period before and after the approval of the Draft ASX Announcement and the fact remains that the conduct of the non-executive directors in approving the Draft ASX Announcement was different from the conduct described in the testimonial affidavits and it is the characterisation of that conduct that is in issue.

88 The approval by the non-executive directors of the Draft ASX Announcement may have been an isolated event but it was one, nonetheless, that demanded their attention. Non-executive directors are required to exercise the degree of care and diligence that a reasonable person in their position would exercise, whether the matter calling for their attention is an isolated incident or not.

89 It was submitted it was significant that Mr Macdonald and Mr Shafron had been found to have failed to advise the board that the Draft ASX Announcement was expressed in too emphatic terms.

90 At the 15 February 2001 Meeting the board was presented with a cashflow exercise (Cashflow Model). It was submitted that it was significant that Mr Macdonald, Mr Shafron and Mr Morley had been found to have failed to advise the board of the limitations of the PwC and Access Economics reviews of the Cashflow Model. A board of directors, it was submitted, could not discharge their responsibility properly unless senior executives accurately laid information before the board.

91 That is true, but it does not exonerate the non-executive directors from their breach of duty when they accepted the task of approving the content of the Draft ASX Announcement on the information that was available to them.

92 With some variations from the Draft ASX Announcement and, in particular, the introduction of the word “anticipated” in relation to asbestos claims, the announcement was forwarded to the ASX (Final ASX Announcement). It was approved by Mr Macdonald. It was in the following terms:

“media release
16 February 2001
James Hardie resolves its Asbestos Liability
Favourably for Claimants and Shareholders


James Hardie Industries Limited (JHIL) announced today that it had established a foundation to compensate sufferers of asbestos-related diseases with claims against two former James Hardie subsidiaries and fund medical research aimed at finding cures for these diseases.

The Medical Research and Compensation Foundation (MRCF), to be chaired by Sir Llewellyn Edwards, will be completely independent of JHIL and will commence operation with assets of $293 million.
The Foundation has 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 JHIL.
JHIL CEO, Mr Peter Macdonald said that the establishment of a fully-funded Foundation provided certainty for both claimants and shareholders.
“The establishment of the Medical Research and Compensation Foundation provides certainty for people with a legitimate claim against the former James Hardie companies which manufactured asbestos products,” Mr Macdonald said.
“The Foundation will concentrate on managing its substantial assets for the benefit of claimants. Its establishment has effectively resolved James Hardie’s asbestos liability and this will allow management to focus entirely on growing the company for the benefit of all shareholders.”
A separate fund of $3 million has also been granted to the Foundation for scientific and medical research aimed at finding treatments and cures for asbestos diseases.
The $293 million assets of the Foundation include a portfolio of long term securities, a substantial cash reserve, properties which earn rent and insurance policies which cover various types of claims, including all workers compensation claims.
Towers Perrin has been appointed to advise the Foundation on its investments, which will generate investment income and capital growth.
In establishing the Foundation, James Hardie sought expert advice from a number of firms, including PricewaterhouseCoopers, Access Economics and the actuarial firm, Trowbridge. With this advice, supplementing the company’s long experience in the area of asbestos, the directors of JHIL determined the level of funding required by the Foundation.
“James Hardie is satisfied that the Foundation has sufficient funds to meet anticipated future claims,” Mr Macdonald said.
The initial $3 million for medical research will enable the Foundation to continue work on existing programs established by James Hardie as well as launch new programs.
When all future claims have been concluded, surplus funds will be used to support further scientific and medical research on lung diseases.
Mr Macdonald said Sir Llewellyn Edwards, who has resigned as a director of James Hardie Industries Limited to take up his new appointment as chairman of the Foundation, has enjoyed a long and distinguished career in medicine, politics and business.
His experience with James Hardie will assist the Foundation to rapidly acquire the knowledge it needs to perform effectively. Sir Llew is a director of a number of organisations including Westpac Banking Corporation and is also Chancellor of the University of Queensland.
The other Foundation directors are Mr Michael Gill, Mr Peter Jollie and Mr Dennis Cooper.
Ends.
For further details contact:
Greg Baxter, Senior Vice President Corporate Affairs
Tel:
Mob:
This document is available from the Investor Relations Section
of the James Hardie website –

This document contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties and, as a result readers should not place undue reliance on such statements. The inclusion of these forward-looking statements should not be regarded as a representation that the objectives or plans described will be realised.”

93 I have excluded the telephone number and mobile number set out in the announcement.

94 It was submitted that the Draft ASX Announcement was not released to the public. The Final ASX Announcement was. But it was based upon the Draft ASX Announcement.

95 While none of the non-executive directors offered evidence of contrition, this was not a case of a defendant guilty of obvious and palpable wrongdoing maintaining innocence against the overwhelming weight of evidence (Australian Securities and Investments Commission v Vines [2006] NSWSC 760; (2006) 58 ACSR 298 at 331-332 [103]).

96 Furthermore, there is a tension when a matter is the subject of an appeal or likely to be the subject of an appeal and there is perceived to be some significance in a resolute continuance of a denial of events found by the primary judge (Australian Securities and Investments Commission v Whitlam (No 2) [2002] NSWSC 718; (2002) 42 ACSR 515 at 520 [16]).

97 I do not place a great deal of weight on the lack of evidence of contrition.

98 The first element of seriousness identified by Austin J was the importance of the provision contravened in terms of public policy.

99 Section 180(1) imposes a statutory duty much like the duty at common law. Its public policy value is to ensure that boards of directors of companies are composed of individuals with suitable skills to monitor the actions of management and to perform any special tasks for which they are appointed. In Deputy Commission of Taxation v Clark [2003] NSWCA 91; (2003) 57 NSWLR 113 at 140 [108]-[109] Spigelman CJ said:

“What constitutes breach of the standards of care and of diligence, in a particular case, will depend on a wide variety of circumstances including the precise nature of the business conducted by the company and the composition of its board. However, the case law indicates that there is a core irreducible requirement of involvement in the management of the company.
Although the standard of skill may vary in accordance with the particular skills of the director, the core, irreducible requirement of skill involves an objective test, such as “ordinary competence” ( Kemish , above at 373 per Foster J) or “reasonable ability” ( Rema Industries and Services Pty Ltd v Coad (1992) 107 ALR 374 at 382; 7 ACSR 251 at 259 per Lockhart J). An equivalent objective test applies to the core irreducible requirement of diligence, such as “reasonable steps to place themselves in a position to guide and monitor the management of the company” per Rogers CJ CommD in AWA Ltd v Daniels , above at 864, adopted by Clarke and Sheller JA on appeal in Daniels v Anderson at 501.”

100 As Austin J points out in Australian Securities and Investments Commission v Vines [2003] NSWSC 1116; (2003) 182 FLR 405 at 415 [38] there is encompassed by the statutory formulation of care and diligence an objective standard measured by reference to what a reasonable man of ordinary prudence would do enhanced where the directorial appointment is based on special skill by an objective standard of skill referable to the circumstances, notwithstanding the absence of the word “skill” from the statutory formulation.

101 The circumstances in which Section 180(1) is breached will vary from the trivial where a bias towards exoneration under Section 1317S(2) will be likely, to the serious in which that bias will be unlikely, or less likely.

102 It was submitted that since the release of the Final ASX Announcement was but part of a series of communication strategies for informing the public of the separation of Coy and Jsekarb from the James Hardie group, the contravention of Section 180(1) was at the lower end of the spectrum of seriousness and misleading aspects of the Draft ASX Announcement were errors of emphasis in what the board was told was a single aspect of a much wider strategy in the approval and implementation of which the non-executive directors were not involved.

103 I do not accept that submission. This event, while isolated, was highly significant. The board had decided to form the Foundation, to settle Coy and Jsekarb upon it and to provide a level of funding to meet future asbestos claims. The non-executive directors knew from the board papers they had received at this and earlier meetings that JHIL had to convince the public that there were sufficient funds to meet all legitimate asbestos claims. They had rejected an earlier proposal that did not provide sufficient funding. They were aware of the significance of what was to be said in the Draft ASX Announcement about the level of funding. The information at their disposal did not support the emphatic terms of the Draft ASX Announcement.

104 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 the market.

105 Here the negligently made misleading statement was serious as it was a deliberate attempt to influence the market to an acceptance of the separation of Coy and Jsekarb, with their attendant asbestos claims, from the James Hardie group.

106 Included in the material made available to them at the 15 February 2001 Meeting was a sensitivity analysis forming part of the Cashflow Model. It demonstrated that a drop of 1% in the investment rate adopted in the Cashflow Model halved the fund. In other words, on a 51 year analysis, the fund would be exhausted somewhere between year 20 and year 25. The shortcomings of the Cashflow Model must have been obvious to the non-executive directors, or at least they ought to have been, and they should have realized that they were prevented from approving the unequivocal and unqualified statements as to the certainty of sufficient funding in the Draft ASX Announcement.

107 The meeting was not informed that PwC and Access Economics had been instructed not to analyse the assumptions underlying the Cashflow Model. All the non-executive directors were told was that PwC and Access Economics had found the Cashflow Model to be logically sound and technically correct. But that did not justify the emphatic statements made in the Draft ASX Announcement. That statement simply drew attention back to the Cashflow Model and its sensitivity analysis denied the accuracy of the statements as to sufficiency of funding in the Draft ASX Announcement.

108 There were a number of occasions subsequent to the meeting at which the Draft ASX Announcement was approved when the non-executive directors should have complained about the statements in the Draft ASX Announcement and other statements to like effect. None of them did. The evidence of those non-executive directors who gave evidence was that they did not read, or had no recollection of reading, such statements. I did not accept the chorus of denial of recollection to be genuine.

109 Like Austin J in Vines 65 NSWLR at 293 [51], I do not feel myself constrained to ignore conduct after the event.

110 It was submitted that my findings of unsatisfactory conduct on the part of Ms Hellicar should not be used in determining the presence or absence of honesty under Section 1317S(2) and Section 1318(1) as that matter had to be decided at the time of contravention.

111 As it has turned out my decision that Ms Hellicar has not satisfied me that she acted honestly in approving the Draft ASX Announcement was not based on findings as to credit. I arrived at that view for the same reasons as I found that Mr Brown and Mr Willcox had not satisfied me that they acted honestly in approving the Draft ASX Announcement.

112 It is true that the question of honesty must be determined at the time the duty is breached. But it cannot be correct to say that subsequent conduct cannot be taken into account. Findings as to credit subsequent to an event may be highly significant in determining whether an earlier breach of duty was nonetheless committed honestly.

113 Had it been necessary I would have relied upon my rejection of the chorus of denials and my findings of unsatisfactory conduct on the part of Ms Hellicar to conclude that the non-executive directors had not established that they acted honestly at the antecedent time they breached their duty of care and diligence.

114 It was submitted that there was no evidence of damage or harm emanating from the publication of the Final ASX Announcement other than the legal liability on the part of JHIL established in these proceedings.

115 The Final ASX Announcement would not have been understood to convey representations of certainty to sophisticated readers. They would have assumed, however, that such emphatic statements as the Final ASX Announcement contained could only be made if very conservative assumptions had been adopted by JHIL in determining the funding level for the Foundation. A risk free investment earnings rate was not adopted in the Cashflow Model. It adopted 11.7%.

116 There were a series of analysts’ reports and newspaper articles regarding the establishment of the Foundation published shortly after the publication of the Final ASX Announcement. None of them stated that it was certain that there would be sufficient funds for asbestos claimants or that JHIL had said that this was certain.

117 Apart from the current proceedings, in which no penalty or costs order is sought against JHIL, no other proceeding in respect of the Final ASX Announcement has been brought, nor could now be brought successfully given the limitation period.

118 As Austin J observed in Vines 65 NSWLR at 294 [55] of this third component of seriousness, it can give rise to awkward and difficult questions of causation. What his Honour suggested, and I endorse, at 294-295 [56] is that it is sufficient to deal with this issue in general terms:

“It was sufficient for Tadgell J in Commonwealth v Friedrich and for Mandie J in ASIC v Plymin (No 2) to advert to the effect of the defendants' contravening conduct in general terms, without making any specific findings about causation for the purpose of exercising the discretion. Consistently with that approach, it seems to me adequate, in the case of negligently misleading statements, to consider the degree of plausibility, in a general sense, of the contention that the contravening conduct caused or did not cause loss, having regard to the applicable principles of causation. The stronger the likelihood that loss has been caused, the more powerful this factor becomes as a factor against granting leave. Conversely, the weaker the likelihood is that the contravening conduct caused loss, the weaker is the "serious contravention" factor.”

119 The publication of the Final ASX Announcement had the effect of maintaining the market price of JHIL shares. Thus, the market operated on a false basis and by reason of the misleading announcement the price of JHIL shares was artificially maintained. That increased the potential harm to JHIL if the misleading statements were revealed.

120 It was submitted that this effect lasted for only 41 minutes before the Press Conference Statements were made. But those statements did not supplant the effect of those contained in the Final ASX Announcement. They enforced them.

121 With respect to the other matters identified by Austin J of whether advice was taken, whether a standard practice was followed and whether the transgressor was paid, none raises an issue of significance in the circumstances of this case.

122 Of the negative criteria accepted by Austin J, none was present in this case with the exception of flagrancy of the breach.

123 Mr Gillfillan and Mr Koffel were appointed to the JHIL board to provide strategic advice in relation to JHIL’s operations in the US. Those operations had become, and were expected to continue to be, the main source of profitability and revenue for the company.

124 It was submitted that the gravity of the contravention by them was of a lower scale than that of the other non-executive directors who were physically present at the 15 February 2001 Meeting and who approved the Draft ASX Announcement. Had any of the advisers and, in particular, Allens, been aware that the US directors were not entitled to rely on their fellow directors, management, or independent advisers, Allens would have insisted, it was submitted, that Mr Gillfillan and Mr Koffel be provided with copies of the Draft ASX Announcement. It was submitted that had Mr Gillfillan and Mr Koffel abstained from voting, the Draft ASX Announcement would still have been approved by the directors present at the meeting.

125 In the manner in which Mr McGregor conducted board meetings, the silence of Mr Gillfillan and Mr Koffel was, in effect, a vote approving the Draft ASX Announcement.

126 The fact that the Draft ASX Announcement would have been approved in any event does not excuse the conduct of the US directors.

127 Nor do I consider their breach of duty to be of a lower flagrancy to the conduct of those who attended the 15 February 2001 Meeting in person. There was discussion at the meeting of the Draft ASX Announcement. The statements as to the key message to be communicated to the market made at the meeting bore a correlation to the paragraphs of the Draft ASX Announcement. That in itself may have been sufficient for Mr Gillfillan and Mr Koffel to be taken to have approved the release of the Draft ASX Announcement. But there was clearly enough discussion to have alerted Mr Gillfillan and Mr Koffel to the fact that the board was considering a document that they did not have. Their failure to ask for a copy and their silence knowing that it would be taken as a vote in favour of approval was, in my view, just as flagrant as the approval of the Draft ASX Announcement by those who attended the meeting in person.

128 I dismiss the applications of Mr Brown, Mr Gillfillan, Ms Hellicar, Mr Koffel, Mr O’Brien, Mr Terry and Mr Willcox for relief under Section 1317S(2) and Section 1318(1). I must make declarations of contravention of Section 180(1) under Section 1317E(1). I will return later in these reasons to the form of the declarations.

1.4 Draft ASX Announcement and Mr Shafron

129 Mr Shafron was one of the company secretaries of JHIL. He is a qualified legal practitioner with Bachelor and Masters of Law degrees from the University of Sydney. He was admitted to practice in Australia and in California. He performed the role of general counsel.

130 In Macdonald (No 11) I found Mr Shafron in breach of Section 180(1) in failing to advise the board that the Draft ASX Announcement was expressed in too emphatic terms concerning the adequacy of the funding made available to meet all legitimate present and future asbestos claims brought against Coy and Jsekarb.

131 Mr Shafron did not give evidence. I have already rejected the submission of ASIC that unless a person gives evidence on the topic the Court cannot be satisfied that the person acted honestly for the purposes of Section 1317S(2) or Section 1318(1).

132 Mr Shafron did not read testimonial affidavits. But that does not mean that he is excluded from seeking relief under Section 1317S(2) or Section 1318(1). But the absence of evidence by him and other persons as to his character and directorial performance leaves him in a worse position than that of Mr O’Brien and Mr Terry. There is nothing in the evidence from which I am positively persuaded that Mr Shafron acted honestly in failing to advise the board of the too emphatic terms of the Draft ASX Announcement.

133 Mr Shafron was involved in the making of decisions that affected the whole or a substantial part of the business of JHIL. The separation proposal considered by the board at the meeting at which the Draft ASX Announcement was approved was such a decision. And Mr Shafron played a vital role in the board’s deliberations thereby participating in the making of that decision.

134 As general counsel protecting JHIL from infringement of statutory obligations, it must have been obvious to Mr Shafron, or at least it ought to have been, that if JHIL authorised the release of a public statement concerning separation that was false and misleading, that would be harmful, or potentially harmful, to JHIL in that it might contravene or risk contravening s 995(2) (Section 995(2)) and s 999 (Section 999) of the Corporations Law as carried over into the Corporations Act.

135 Section 995(2) was in the following terms:

“A person shall not, in or in connection with:
(a) any dealing in securities; or
(b) without limiting the generality of paragraph (a):
(i) the allotment or issue of securities;
(ii) a notice published in relation to securities;
(iii) the making of, or the making of an evaluation of, or of a recommendation in relation to, offers under a takeover bid;
(iv) the carrying on of any negotiations, the making of any arrangements or the doing of any other act preparatory to or in any other way related to any matter referred to in sub paragraph (i), (ii) or (iii);
engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”

136 Section 999 was in the following terms:

“A person must not make a statement, or disseminate information, that is false in a material particular or materially misleading and:
(aa) is likely to induce other persons to subscribe for securities; or
(a) is likely to induce the sale or purchase of securities by other persons; or
(b) is likely to have the effect of increasing, reducing, maintaining or stabilising the market price of securities;
if, when the person makes the statement or disseminates the information:
(c) the person does not care whether the statement or information is true or false; or
(d) the person knows or ought reasonably to have known that the statement or information is false in a material particular or materially misleading.”

137 Guarding against legal risks to JHIL was at the core of Mr Shafron’s responsibilities as general counsel.

138 Most of the submissions on behalf of Mr Shafron had been dealt with in considering the position of the non-executive directors.

139 It was submitted that it should be apparent to the Court from its own review of Mr Shafron’s communications that they bespeak the honest execution of his duties as general counsel. In a general sense, that may be so.

140 It was submitted that the contraventions found should be considered to be isolated, out of character and probably explained by the presence at the board meeting of more experienced and senior external lawyers from Allens and inattention arising from a profoundly busy and demanding period of work before and at the meeting.

141 I have already dealt with these contentions with respect to the non-executive directors. They apply a fortiori to Mr Shafron whose duty it was to protect JHIL from legal harm.

142 ASIC submitted that it was appropriate for the Court to take into account that there was no cooperation from the defendants. I place little store on that submission so far as Mr Shafron is concerned. He resides in the US. He returned to Australia to attend ASIC’s examination of him during its investigation and he instructed his solicitors in Australia to accept service when ASIC commenced these proceedings.

143 It was submitted that since the wording of the Draft ASX Announcement was not a matter for reliance upon management or outside experts, the directors should have known without being told by anyone that the Draft ASX Announcement was too emphatic and not supportable. It was submitted it was not a serious contravention to neglect to tell sophisticated, intelligent and experienced board members something they already knew or something that must have been obvious to them. It was submitted that it would have been against board etiquette for someone in Mr Shafron’s position to do so.

144 I do not accept that submission. If the directors were not concerned at the emphatic terms of the Draft ASX Announcement it was Mr Shafron’s duty as general counsel, in protecting JHIL, to warn them that the contents were too emphatic, etiquette or no etiquette.

145 Gregory John Baxter was the senior vice-president of corporate affairs of JHIL. His name appeared on the Draft ASX Announcement and on the Final ASX Announcement. Announcements to the ASX other than those of a financial nature were drafted by corporate affairs under his supervision.

146 It was submitted that Mr Baxter was the “real culprit”. But that does not excuse Mr Shafron’s breach of duty.

147 For similar reasons to those enunciated with respect to the non-executive directors, I dismiss Mr Shafron’s application for relief under Section 1317S(2) and Section 1318(1) with respect to his failure to warn the board of the too emphatic content of the Draft ASX Announcement. I will make a declaration of contravention of Section 180(1) under Section 1317E(1) the form of which will be discussed later in these reasons.

1.5 Cashflow Model and Mr Shafron

148 In Macdonald (No 11) I found that Mr Shafron had breached Section 180(1) in failing to advise the JHIL board at the 15 February 2001 Meeting that a review of the Cashflow Model by PwC and Access Economics was limited to reporting on the logical soundness and technical correctness of the model, that it had not been verified and PwC and Access Economics had been specifically instructed not to consider the key assumptions adopted in it, being fixed investment earnings rates, litigation and management costs and future claim costs.

149 Mr Morley told the meeting that the Cashflow Model had been reviewed by PwC and Access Economics and they had found it to be logically sound and technically correct. He did not say that the reviews were limited to this analysis. He did not say that key variables had not been considered.

150 Mr Shafron knew, or ought to have known, that the unqualified statements that PwC and Access Economics had advised JHIL and that advice supplemented the company’s long experience in the area of asbestos and formed the basis of determining the level of funding required to meet all future claims was false or misleading and potentially damaging to JHIL.

151 In the absence of explanation by Mr Morley, it was Mr Shafron’s duty, in protecting JHIL from legal risk, to have advised the board of the limitations.

152 It was submitted that Mr Shafron’s role in the discussions on this topic were secondary and, it was submitted, his level of default was not substantial.

153 Stephen Gregory Ashe was vice-president public affairs of JHIL. He reported to Mr Baxter. Mr Ashe sent an email to Mr Macdonald, Mr Shafron and Mr Morley. It suggested wording for the reports to be provided by PwC and Access Economics. The wording suggested included a finding that the Cashflow Model was logically sound and technically correct. It contained the statement that the Cashflow Model showed that a surplus of funds would exist after all claims had been paid. But the suggested wording concluded:

“Key variables in the model which we have not checked and on which we express no opinion are:
investment earnings rates
litigation and management costs
future claim costs.”

154 It was submitted that it was Mr Macdonald and not Mr Shafron who responded to this email indicating that Mr Shafron’s role was secondary.

155 The preparation of the Cashflow Model was the core responsibility of Mr Morley. It was Mr Morley who presented the Cashflow Model to the board meeting. Mr Shafron did not have carriage of the issue of the PwC and Access Economics reviews. It was submitted that responsibility fell much more to either Mr Morley or Mr Macdonald to address the board on this issue.

156 As with the breach of Section 180(1) by Mr Shafron with respect to the over emphatic statements in the Draft ASX Announcement, reference to the evidence, he having elected not to give evidence himself, does not provide a basis for it appearing to me that Mr Shafron acted honestly when he contravened a civil penalty provision and the first limb of Section 1317S(2) and that of Section 1318(1) has not been established and Mr Shafron is not entitled to relief under those provisions.

157 If I be wrong in that view I would have rejected the application for relief under those provisions under one or other of the two discretions in them.

158 No contrition is expressed in the submissions made on Mr Shafron’s behalf. But I have already indicated my view on that topic.

159 It was submitted that the most likely inferred explanation of Mr Shafron’s conduct was momentary inattention borne of a confidence that Mr Morley would address the board on the subject with his usual thoroughness and accuracy.

160 Mr Shafron was the second or third most senior executive of JHIL. He took part in the slide presentation at the 15 February 2001 Meeting in the unusual circumstance of the presentation to the board of a draft release and bearing in mind the flagrancy of the adoption of the over emphatic statements in it.

161 I do not accept that Mr Shafron’s conduct is explained as momentary inattention. He understood that the scope of the review by PwC and Access Economics was limited and that key variables had not been considered. The Draft ASX Announcement contained the statement:

“In establishing the Foundation, James Hardie sought expert advice from a number of firms, including actuaries Trowbridge, Access Economics and PricewaterhouseCoopersThis [sic] advice supplemented the company’s long experience in the area of asbestos and formed the basis of determining the level of funding required to meet all future claims”.

162 To allow that statement to pass when he knew that key assumptions in the Cashflow Model had not been checked by PwC and Access Economics was a flagrant breach on his part, albeit that primary responsibility lay with Mr Morley and, to a lesser extent, with Mr Macdonald.

163 I dismiss the application of Mr Shafron for relief under Section 1317S(2) and Section 1318(1) with respect to his failure to advise the board of JHIL of the limited nature of the reviews by PwC and Access Economics. The form of the declarations to be made under Section 1317E(1) will be dealt with later.

1.6 DOCI Information and Mr Shafron

164 At the 15 February 2001 Meeting the board resolved to execute a deed of covenant and indemnity (DOCI). Information in relation to the DOCI (DOCI Information) was not notified to the ASX shortly after the board meeting. As JHIL was a listed disclosing entity to which the provisions of the listing rules of the ASX rules applied and those rules, namely listing rule 3.1 (Listing Rule 3.1), required continuous disclosure, s 1001A(2) of the Corporations Law as carried over into Corporations Act (Section 1001A(2)) applied. It was in the following terms:

“(1) This section applies to a listed disclosing entity if provisions of the listing rules of a securities exchange:

(a) he knew that the 21 March 2001 ASX Announcement conveyed or was capable of conveying that:
(i) it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(ii) the material available to JHIL provided a reasonable basis for the assertion in the announcement that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(b) he knew or ought to have known that the 21 March 2001 ASX Announcement was misleading in those respects.

8. The First Defendant contravened Section 180(1) in relation to JHIL by his conduct, as a director and Chief Executive Officer of that corporation, on and from 15 February 2001 in failing to:
(a) advise the Chairman or the board of JHIL as to whether or not the following information ( DOCI Information ) was required to be disclosed to the ASX namely that JHIL had entered into a deed of covenant and indemnity with Amaca and Amaba pursuant to which:
(i) Amaca and Amaba provided certain covenants and indemnities to JHIL in respect of its potential asbestos liabilities;
(ii) JHIL agreed to pay certain amounts in exchange for those covenants and indemnities;
(iii) Amaca agreed that it would acquire all the shares in JHIL if it was put to it by a sole registered shareholder of the entirety of JHIL shares;
(b) seek and consider advice and satisfy himself in relation to whether JHIL was required to disclose the DOCI Information to the ASX;
(c) resolve or determine that JHIL would disclose the DOCI Information to the ASX; and
(d) raise with or propose to the Chairman or the board of JHIL that they needed to consider and determine whether or not to disclose the DOCI Information to the ASX;
in circumstances where Mr Macdonald knew or ought to have known that:
(e) if JHIL failed to disclose the DOCI Information to the ASX it risked contravening s 1001A(2) of the Corporations Law as carried over into the Corporations Act ; and
(f) if the DOCI Information was not disclosed to the ASX and JHIL had an obligation under the ASX Listing Rules to do so and that failure was revealed, it would be harmful to JHIL’s interests and harm market perceptions of JHIL.

9. The First Defendant contravened Section 180(1) in relation to James Hardie Industries NV ( JHINV ) by his conduct, as a director and Chief Executive Officer of that corporation, on or about 10 June 2002 in either approving for release to the ASX a set of slides ( ASX Slides ), or failing to advise that they not be released in circumstances where:
(a) he knew that the ASX Slides conveyed or were capable of conveying that:
(i) it was certain or highly likely that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(ii) the material available to JHINV provided a reasonable basis for the assertion that it was certain or highly likely that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(b) he knew that the ASX Slides were misleading in those respects.

10. The First Defendant contravened Section 180(1) in relation to JHINV by his conduct, as a director and Chief Executive Officer of that corporation, in making a presentation in Edinburgh on or about 10 June 2002 during which he made statements which conveyed that:
(a) it was certain or highly likely that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(b) the material available to JHINV provided a reasonable basis for the assertion that it was certain or highly likely that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
in circumstances where he knew that those statements were false or misleading in those respects.

11. The First Defendant contravened Section 180(1) in relation to JHINV by his conduct, as a director and Chief Executive Officer of that corporation, in making a presentation in London on or about 11 June 2002 during which he made statements which conveyed that:
(a) it was certain or highly likely that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(b) the material available to JHINV provided a reasonable basis for the assertion that it was certain or highly likely that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(c) the James Hardie Group had received legal advice that it had no remaining asbestos liabilities;
in circumstances where he knew that those statements were false or misleading in those respects.

473 With respect to Peter James Shafron I will make declarations in these terms:

The Court declares that:

1. The Second Defendant contravened s 180(1) of the Corporations Law as carried over into the Corporations Act 2001 (Cth) ( Section 180(1) ) in relation to ABN 60 Pty Ltd (formerly known as James Hardie Industries Ltd) ( JHIL ) by his conduct, as an officer of that corporation, on or about 15 February 2001 when its board of directors voted in favour of a resolution to approve a draft ASX announcement ( Draft ASX Announcement ) and authorise its execution and sending to the Australian Stock Exchange ( ASX ), in failing to advise the board that:
(a) the Draft ASX Announcement was expressed in too emphatic terms concerning the adequacy of the funding made available to meet all legitimate present and future asbestos claims brought against two of JHIL’s former subsidiaries Amaca Pty Ltd ( Amaca) and Amaba Pty Ltd ( Amaba ); and
(b) in that respect the Draft ASX Announcement was misleading.

2. The Second Defendant contravened Section 180(1) in relation to JHIL by his conduct, as an officer of that corporation, on or about 15 February 2001 in failing to advise its board of directors that reviews of a cashflow model ( Cashflow Model ) of the funding being made available to meet asbestos claims brought against Amaca and Amaba that had been undertaken by PricewaterhouseCoopers ( PwC ) and Access Economics:
(a) were limited to reporting on the logical soundness and technical correctness of the Cashflow Model;
(b) had not verified, and PwC and Access Economics had been specifically instructed not to consider, the key assumptions adopted by the Cashflow Model, being:
(i) fixed investment earnings rates;
(ii) litigation and management costs; and
(iii) future claim costs.

3. The Second Defendant contravened Section 180(1) in relation to JHIL by his conduct, as an officer of that corporation, before and at the board meeting of 15 February 2001 in failing either to:
(a) advise the Chief Executive Officer or the board of JHIL that it needed to consider whether or not JHIL was required to disclose the following information ( DOCI Information ) to the ASX, namely, that JHIL had entered into a Deed of Covenant and Indemnity pursuant to which:
(i) Amaca and Amaba provided certain covenants and indemnities to JHIL in respect to its potential asbestos liabilities;
(ii) JHIL agreed to pay certain amounts in exchange for those covenants and indemnities;
(iii) Amaca agreed that it would acquire all the shares in JHIL if it was put to it by a sole registered shareholder of the entirety of JHIL shares; or
(b) obtain advice for the Chief Executive Officer or the board, or provide his own advice to the board as to whether or not they were required to disclose the DOCI Information to the ASX; or
(c) advise the Chief Executive Officer or the board to resolve or determine that JHIL would disclose the DOCI Information to the ASX;
in circumstances where the second defendant knew or ought to have known that:
(d) if JHIL failed to disclose the DOCI Information to the ASX it risked contravening s 1001A(2) of the Corporations Law as carried over into the Corporations Act ; and
(e) if the DOCI Information was not disclosed to the ASX and JHIL had an obligation under the ASX Listing Rules to do so and that failure was revealed, it would be harmful to JHIL’s interests and harm market perceptions of JHIL.

474 With respect to Phillip Graham Morley I will make a declaration in these terms:

The Court declares that:

1. The Third Defendant contravened s 180(1) of the Corporations Law as carried over into the Corporations Act 2001 (Cth) ( Section 180(1) ) in relation to ABN 60 Pty Ltd (formerly known as James Hardie Industries Ltd) ( JHIL ) by his conduct, as an officer of that corporation, on or about 15 February 2001 in failing to advise its board of directors that reviews of a cashflow model ( Cashflow Model ) of the funding being made available to meet asbestos claims brought against two of JHIL’s former subsidiaries Amaca Pty Ltd and Amaba Pty Ltd that had been undertaken by PricewaterhouseCoopers ( PwC ) and Access Economics:
(a) were limited to reporting on the logical soundness and technical correctness of the Cashflow Model;
(b) had not verified, and PwC and Access Economics had been specifically instructed not to consider, the key assumptions adopted by the Cashflow Model, being:
(i) fixed investment earnings rates;
(ii) litigation and management costs; and
(iii) future claim costs.

475 With respect to Michael Robert Brown I will make a declaration in these terms:

The Court declares that:

1. The Fourth Defendant contravened s 180(1) of the Corporations Law as carried over into the Corporations Act 2001 (Cth) ( Section 180(1) ) in relation to ABN 60 Pty Ltd (formerly known as James Hardie Industries Ltd) ( JHIL ) by his conduct, as a director of that corporation, in voting on 15 February 2001 in favour of a resolution of the directors to approve a draft ASX announcement ( Draft ASX Announcement ) and authorise its execution and sending to the Australian Stock Exchange ( ASX ) in circumstances where:
(a) he knew that the Draft ASX Announcement conveyed or was capable of conveying that:
(i) the material available to JHIL provided a reasonable basis for the assertion in the announcement that it was certain that the amount of funds made available to the Medical Research and Compensation Foundation ( Foundation ) would be sufficient to meet all legitimate present and future asbestos claims brought against two of JHIL’s former subsidiaries Amaca Pty Ltd ( Amaca ) and Amaba Pty Ltd ( Amaba );
(ii) JHIL’s Chief Executive Officer, Mr Macdonald, believed that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(iii) all of the directors or at least a majority of them believed that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(iv) JHIL had received expert advice from PwC and Access Economics that supported the statement that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(b) he ought to have known that the Draft ASX Announcement was misleading in those respects.

476 With respect to Meredith Hellicar, Geoffrey Frederick O’Brien, Gregory James Terry and Peter John Willcox I will make a declaration in identical terms to that to be made with respect to Mr Brown.

477 With respect to Michael John Gillfillan I will make a declaration in these terms:

The Court declares that:

1. The Fifth Defendant contravened s 180(1) of the Corporations Law as carried over into the Corporations Act 2001 (Cth) ( Section 180(1) ) in relation to ABN 60 Pty Ltd (formerly known as James Hardie Industries Ltd) ( JHIL ) in that, as a director of that company, at a meeting of the board of directors of that company on 15 February 2001 during which it resolved to approve a draft ASX announcement ( Draft ASX Announcement ) and authorised its execution and sending to the Australian Stock Exchange ( ASX ) he failed to take any of the following steps:
(a) request that he be provided with a copy of the Draft ASX Announcement;
(b) familiarise himself with its terms; or
(c) abstain from voting in favour of the resolution to approve the Draft ASX Announcement and authorise its execution and sending to the ASX.

478 With respect to Martin Koffel I will make a declaration in identical terms to that to be made with respect to Mr Gillfillan.

479 With respect to JHIL I will make declarations in these terms:

The Court declares that:

1. On or about 16 Febraury 2001 ABN 60 Pty Ltd (formerly known as James Hardie Industries Ltd) ( JHIL ) contravened s 995(2) of the Corporations Law as carried over into the Corporations Act 2001 (Cth) ( Section 995(2) ) by engaging in conduct that was misleading and deceptive, or likely to mislead or deceive, in relation to a notice published in relation to securities, in that it published to the Australian Stock Exchange ( ASX ) an announcement that falsely and misleadingly represented that:
(a) it was certain that the amount of funds made available to the Medical Research and Compensation Foundation ( Foundation ) would be sufficient to meet all legitimate present and future asbestos claims brought against two of JHIL’s former subsidiaries, Amaca Pty Ltd ( Amaca ) and Amaba Pty Ltd ( Amaba );
(b) the material available to JHIL provided a reasonable basis for the assertion in the announcement that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(c) JHIL’s Chief Executive Officer, Mr Macdonald, believed that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(d) all the directors, or at least a majority of them, believed that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(e) JHIL had received expert advice from PricewaterhouseCoopers ( PwC ) and Access Economics that supported the statement that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba.

2. On or about 16 February 2001 JHIL contravened s 999 of the Corporations Law as carried over into the Corporations Act ( Section 999 ) by making a statement or disseminating information, namely, an announcement to the ASX that:
(a) was false in a material particular or materially misleading in that it falsely represented that:
(i) it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(ii) the material available to JHIL provided a reasonable basis for the assertion in the announcement that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(iii) JHIL’s Chief Executive Officer, Mr Macdonald, believed that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(iv) all of the directors, or at least a majority of them, believed that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba; and
(v) JHIL had received expert advice from PwC and Access Economics that supported the statement that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(b) JHIL knew or ought to have known was false in a material particular or materially misleading; and
(c) was likely to induce the sale or purchase of JHIL’s shares and have the effect of increasing or maintaining the market price of JHIL shares.

3. On or about 16 February 2001 JHIL contravened Section 995(2) in that, in connection with dealings in securities, it engaged in conduct that was misleading and deceptive, or likely to mislead or deceive, in that its Chief Executive Officer, Mr Macdonald, made statements at a press conference that falsely and misleadingly represented that:
(a) it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(b) the material available to JHIL provided a reasonable basis for the assertion that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(c) Mr Macdonald believed that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(d) JHIL had received expert advice from PwC and Access Economics that supported the statement that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba; and
(e) JHIL did not have any potential claims on the assets of Amaca and Amaba.

4. On or about 16 February 2001 JHIL contravened Section 999 by making a statement or disseminating information, namely, statements made on its behalf by its Chief Executive Officer at a press conference that:
(a) were false in a material particular or materially misleading in that they falsely represented that:
(i) it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(ii) the material available to JHIL provided a reasonable basis for the assertion that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(iii) Mr Macdonald believed that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(iv) JHIL had received expert advice from PwC and Access Economics that supported the statement that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba; and
(v) JHIL did not have any potential claims on the assets of Amaca and Amaba;
(b) JHIL knew or ought to have known were false in a material particular or materially misleading; and
(c) were likely to induce the sale or purchase of JHIL shares and have the effect of increasing or maintaining the market price of JHIL shares.

5. On or about 23 February 2001 JHIL contravened Section 995(2) by engaging in conduct that was misleading and deceptive in relation to a notice published in relation to securities, in that it published to the ASX an announcement that falsely and misleadingly represented that:
(a) it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(b) the material available to JHIL provided a reasonable basis for the assertion in the announcement that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba; and
(c) JHIL’s Chief Executive Officer, Mr Macdonald, believed that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba.

6. On or about 23 February 2001 JHIL contravened Section 999 by making a statement or disseminating information, namely, an announcement to the ASX that:
(a) was false in a material particular or materially misleading in that it falsely and misleadingly represented that:
(i) it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(ii) the material available to JHIL provided a reasonable basis for the assertion in the announcement that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba; and
(iii) JHIL’s Chief Executive Officer, Mr Macdonald, believed that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(b) JHIL knew or ought to have known was false in a material particular or materially misleading; and
(c) was likely to have the effect of maintaining or stabilising the market price of JHIL shares.

7. On or about 21 March 2001 JHIL contravened Section 995(2) by engaging in conduct that was misleading and deceptive in relation to a notice published in relation to securities, in that it published to the ASX an announcement that falsely and misleadingly represented that:
(a) it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba; and
(b) the material available to JHIL provided a reasonable basis for the assertion in the announcement that it was certain that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba.

8. On or about 15 February 2001 JHIL contravened s 1001A(2) of the Corporations Law as carried over into the Corporations Act by its conduct as a listed disclosing entity in contravening the provisions of ASX Listing Rule 3.1 and negligently failing to notify the ASX of the following information, namely, that it had entered into a Deed of Covenant and Indemnity with Amaca and Amaba pursuant to which:
(a) Amaca and Amaba provided certain covenants and indemnities to JHIL in respect of its potential asbestos liabilities;
(b) JHIL agreed to pay certain amounts in exchange for those covenants and indemnities; and
(c) Amaca agreed that it would acquire all the shares in JHIL if they were put to it by a sole registered shareholder of the entirety of JHIL shares;
in circumstances where a reasonable person would expect, if it were generally available, that information to have a material effect on the price or value of JHIL shares.

480 With respect to JHINV I will make declarations in these terms:

The Court declares that:

1. On or about 10 June 2002 James Hardie Industries NV ( JHINV ) contravened s 1041H of the Corporations Act 2001 (Cth) by engaging in conduct in relation to a financial product, namely, shares in JHINV, that was misleading or deceptive or was likely to mislead or deceive in that it published to the Australian Stock Exchange ( ASX ) a set of slides ( ASX Slides ) which falsely and misleadingly represented that:
(a) it was certain or highly likely that the amount of funds made available to the Medical Research and Compensation Foundation ( Foundation ) would be sufficient to meet all legitimate present and future asbestos claims brought against two former subsidiaries of ABN 60 Pty Ltd (formerly known as James Hardie Industries Ltd) ( JHIL ) Amaca Pty Ltd ( Amaca ) and Amaba Pty Ltd ( Amaba ); and
(b) the material available to JHINV provided a reasonable basis for the assertion that it was certain or highly likely that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba.

2. On or about 10 June 2002 JHINV contravened s 1041E of the Corporations Act by making a statement or disseminating information to the ASX, namely, the ASX Slides that:
(a) was false in a material particular or materially misleading in that it falsely and misleadingly represented that:
(i) it was certain or highly likely that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba; and
(ii) the material available to JHINV provided a reasonable basis for the assertion that it was certain or highly likely that the amount of funds made available to the Foundation would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba;
(b) JHINV knew was false in a material particular or materially misleading; and
(c) was likely to induce persons in Australia to acquire financial products, namely, securities in JHINV, and to have the effect of maintaining or stabilising the price for trading in financial products, namely, securities in JHINV.

3. On and from 25 March 2003 until 30 June 2003 JHINV contravened s 674(2) of the Corporations Act in that, as a listed disclosing entity to which the subsection applied, it failed to notify the ASX in accordance with the ASX Listing Rules of information that it had ( ABN 60 Information ) which those provisions required it to notify the ASX, namely, that JHINV and its subsidiary JHIL had arranged for JHIL’s transfer out of the James Hardie group of companies by the following steps:
(a) the cancellation on 15 March 2003 of partly paid shares issued by JHIL to JHINV;
(b) the consolidation of JHIL’s share capital into one fully paid share held by JHINV on 15 March 2003;
(c) the reduction of JHIL’s share capital by approximately $1.5m and payment of that amount to JHINV on 31 March 2003;
(d) the execution of the ABN 60 Foundation Trust Deed by JHINV on 31 March 2003;
(e) the execution of a Deed of Covenant, Indemnity and Access by JHINV and JHIL on 31 March 2003;
(f) the issue of 1,000 shares by JHIL to the ABN 60 Foundation as trustee of the ABN 60 Trust on 31 March 2003; and
(g) the cancellation by JHIL of its one fully paid share owned by JHINV for no consideration on or about 14 April 2003;
in circumstances where:
(h) the ABN 60 Information was not generally available; and
(i) a reasonable person would expect, if it were generally available, the ABN 60 Information to have a material effect on the price or value of JHINV shares.

481 I will make the following disqualification orders under s 206C of the Corporations Act.

482 I will make an order that Peter Donald Macdonald be disqualified from managing a corporation for a period of 15 years.

483 I will make an order that Peter James Shafron be disqualified from managing a corporation for a period 7 years.

484 I will make an order that Phillip Graham Morley be disqualified from managing a corporation for a period of 5 years.

485 I will make orders that each of Michael Robert Brown, Michael John Gillfillan, Meredith Hellicar, Martin Koffel, Geoffrey Frederick O’Brien, Gregory James Terry and Peter John Willcox be disqualified from managing a corporation for a period of 5 years.

486 I will impose the following pecuniary penalties under s 1317G(1) of the Corporations Act.

487 I will make an order that Mr Macdonald pay to the Commonwealth of Australia a pecuniary penalty of $350,000.

488 I will make an order that Mr Shafron pay to the Commonwealth of Australia a pecuniary penalty of $75,000.

489 I will make an order that Mr Morley pay to the Commonwealth of Australia a pecuniary penalty of $35,000.

490 I will make orders that each of Mr Brown, Mr Gillfillan, Ms Hellicar, Mr Koffel, Mr O’Brien, Mr Terry and Mr Willcox pay to the Commonwealth of Australia a pecuniary of $30,000.

491 I will impose the following pecuniary penalty under s 1317G(1A) of the Corporations Act.

492 I will make an order that James Hardie Industries NV pay to the Commonwealth of Australia a pecuniary penalty of $80,000.

493 In relation to costs I will make the following orders.

494 I will make no order as to costs of the group of issues comprising the allegations with respect to the Draft ASX Announcement, the Final ASX Announcement, the Press Conference Statements, the 23 February 2001 ASX Announcement and the 21 March 2001 ASX Announcement.

495 I will make no order as to costs of the Scheme of Arrangement issue.

496 I will make no order to costs of the DOCI Execution issue such that Mr Morley and ASIC will bear their own costs of that issue.

497 I will order Mr Macdonald to pay one third of ASIC’s costs of the DOCI Disclosure issue and I will order Mr Shafron to pay one third of those costs.

498 I will order JHINV to pay ASIC’s costs of the cancellation of partly paid shares issue.

499 I will order JHINV to pay 50% of ASIC’s costs of the Roadshow Presentations issue.

500 I order the parties to bring in short minutes of orders reflecting these reasons.

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26/08/2009 - Revision to Paragraph 253 - Paragraph(s) 253