The High Court’s decision on the James Hardie Directors

The High Court has confirmed that seven former non-executive directors of James Hardie Industries Ltd (JHIL) breached their duties as directors by approving the release of a misleading announcement to the Australian Securities Exchange (ASX) concerning the funding arrangements of the Hardie Group's asbestos liabilities. The High Court rejected the directors’ argument that the draft ASX announcement had neither been tabled at the meeting nor approved by them, finding that there was sufficient evidence of both events.

The facts

The proceedings arose out of a restructure of the James Hardie group of companies in 2001. As part of that restructure, JHIL sought to separate two of its subsidiaries with significant asbestos-related liabilities. The Medical Research and Compensation Fund (MRCF) was established as the holding vehicle.

The JHIL board met on 15 February 2001 to consider aspects of the restructure, including a draft ASX announcement. The draft ASX announcement contained a statement to the effect that the MRCF was fully funded to meet all future compensation claims. The JHIL management made amendments to the draft ASX announcement following the meeting, and the amended announcement was released on 16 February 2001.

Draft minutes were prepared before the February meeting. The final draft minutes were included in board papers for the April 2001 board meeting, and were adopted without objection at that meeting.

In the years that followed these board meetings, the MRCF was discovered to be significantly underfunded by over AUD$1 billion.

The history of the legal proceedings

ASIC commenced civil penalty proceedings in the New South Wales Supreme Court (Supreme Court) in 2007 against various individuals, including those who had been non-executive directors of JHIL in 2001, for contraventions of s 180(1) of the Corporations Act 2001. At trial, ASIC did not call JHIL’s solicitor. The non-executive directors denied that the ASX announcement was tabled at the board meeting, and denied that they had approved it. The Supreme Court ultimately held that the respondent directors had breached their duties under s 180 by approving the draft ASX announcement, and imposed penalties and disqualifications.

The respondent directors appealed to the New South Wales Court of Appeal (Court of Appeal). The Court of Appeal found that ASIC had neither established that the draft ASX announcement was tabled at the meeting, nor that the respondent directors had approved it. The Court of Appeal considered that while there was “some basis for finding that the draft ASX announcement resolution had been passed”, because of the  record in the minutes, ASIC had not discharged its burden of proof, and had not fulfilled its responsibilities as a “model litigant” because it did not call JHIL’s external lawyer as a witness. ASIC was granted special leave to appeal the decision to the High Court. In the High Court, the respondent directors argued that:  

• management made alterations to the text of the draft announcement after the February board meeting so it could not have been approved by the board at that meeting
• the minutes of the February meeting were inaccurate in certain respects, casting doubt on their reliability as a whole, and
• the usual process for preparing and signing-off ASX announcements had not been followed with respect to the announcement in question, so it was unlikely that an incomplete draft would have been brought to the meeting.

In the High Court’s view, however, the directors, by approving the minutes at their subsequent board meeting, indicated their acceptance that the events recorded in those minutes did take place. Although many years had passed by the time of the court proceedings, making it difficult for participants to remember the details of the meeting, the minutes had been approved at a time when the events of that meeting would have been fresh in peoples’ minds.

The High Court’s reasons

The High Court’s analysis commenced with a discussion of the statutory requirements for board minutes. Section 251A(1) of the Corporations Law, which applied at the time of the meeting, and its equivalent, s 251A(1) of the Corporations Act 2001 (Cth) in force at the time of the trial, provided that a company must keep minutes in which it records within one month proceedings and resolutions of the directors’ meetings. Section 251A(2) required the company to ensure that the minutes were signed within a reasonable time after the meeting. Pursuant to sub-section (6), a minute that is recorded and signed within one month of the meeting is evidence of the proceeding, resolution or declaration to which it relates unless the contrary is proved.

The High Court noted the Supreme Court’s finding that, since the minutes were not recorded in a minute book within one month, s 251A(6) was not engaged and the minutes held no special evidentiary value. However, the minutes were still admitted into evidence as business records evidencing the matters recorded in them. The minutes from the April meeting were evidence that the minutes from the February meeting had been approved as an accurate record.

While the High Court accepted that the minutes contained inaccuracies, those matters did not bear directly upon whether the draft ASX announcement was tabled and approved at the February meeting. The preparation of draft minutes ahead of the meeting did not undermine the value of the final approved minutes.

ASIC only had to establish, on the balance of probabilities, that the draft ASX announcement was tabled, and approved by the respondent directors, at the February meeting. ASIC proved its case by tendering the minutes, and the respondent directors did not tender any evidence to the contrary.

The High Court held that the Court of Appeal erred in holding that ASIC had not proved that the draft ASX announcement was tabled and approved at the board meeting. The High Court observed that the minutes were a near contemporaneous record of the meeting, and were subsequently adopted by the board as a correct record of what happened at the meeting. Where there is a dispute as to the facts, the Court must decide on the basis of evidence made available, not speculate about what other evidence might have been introduced.

The High Court further held that the Court of Appeal was also wrong to conclude that ASIC had breached its duty of fairness by not calling JHIL’s solicitor and that, as a consequence of the breach, the cogency of the ASIC’s evidence was diminished. The High Court said that no unfairness was caused by not calling JHIL’s solicitor, as there was no reason to suppose that his evidence would have supported the directors’ arguments.

Lessons from the High Court

The High Court’s decision dealt with the process of creating and approving minutes, and the weight to be accorded to minutes of company meetings. The underlying principle, that the directors had breached their duties to act with skill and diligence, had already been decided.

The key learnings from this decision are that: 

• approving minutes “as a correct record” is much more than an administrative formality
• once adopted the minutes will, in the absence of contrary evidence, be viewed as an accurate and near contemporaneous record of all business done at the meeting. From a director’s perspective, they are evidence of the way in which the directors carried out their duties
• directors each need to satisfy themselves that the minutes represent an accurate record of the business done at the meeting, and must take the time to raise any concerns they have with their accuracy. 

The High Court has remitted the case to the Court of Appeal to determine whether there is scope to reduce the directors’ liability on the basis of good faith, and to determine issues of penalty and disqualification.

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