The James Hardie case stems from proceedings brought by ASIC against former James Hardie Industries Limited Directors in relation to approval of a draft ASX Announcement at a Board meeting. The announcement was found to be misleading in relation to the ability to meet the claims of asbestos victims. Trial judge, Gazell J held that the Directors breached their statutory duty in approving the Announcement. The Directors were ordered to pay $30,000 in pecuniary penalties and were prohibited from managing corporations for five years.

Some of the Directors successfully appealed the trial judge’s finding of breach. Critically, the Court of Appeal did not agree with the trial judge’s conclusion that the Directors had approved the Announcement. Rather, it found that the Announcement was only informally discussed as a ‘work in progress’. Therefore, the trial judge’s finding that the Directors had breached their duty in approving the draft was overturned. Despite this, the Court of Appeal discussed the legal principles with respect to a Director’s duty of care under s 180 (1) of the Corporations Act and how they would apply to the hypothetical situation of the Directors having approved the Announcement.

The Court of Appeal concluded that if the Directors had approved the Announcement, they would have breached their duty as the circumstances surrounding the hypothetical approval were such that it was a decision of high importance to the Company and various stakeholders. These circumstances characterised the decision as one requiring the Directors to turn their own minds to the issue, utilise their knowledge and experience and not to rely solely on management or others. ASIC has indicated that it will appeal this decision to the High Court.

Directors’ Attendance by telephone  – can a Director’s silence amount to a breach of Duty?

This aspect of the case considered the duty of two Directors who attended the Board meeting by telephone and had not seen the draft Announcement.

In principle, failure to abstain from voting could also be a breach of s 180 (1) regardless of whether the vote was in favour or against the Announcement. The trial judge found that by their silence, they voted in favour of the Announcement. The Court of Appeal stated that had they voted, the non-attending Directors would have breached their duty as they approved the Announcement without knowing its terms or understanding what was being voted on. Therefore, their conduct of remaining silent and not abstaining, would have amounted to a breach of their duty.

Although the particular factual circumstances of this matter overturned the trial judge’s ruling that the former Directors had breached their statutory duty to exercise their powers and discharge their duties with care and diligence, the case is a stark reminder to all Directors of their obligations under Section 180 (1) of the Corporations Act requiring them to:

(a) properly and fully consider all issues presented to the Board;
(b) not to rely solely on the advice of management or others when making important decisions;
(c) abstain from voting on a matter if the issue is not fully understood and ensure such abstention is recorded in the minutes.

Jonathan Casson
Partner
T: +61 2 9390 8316
E: jonathan.casson@holmanwebb.com.au

Disclaimer – The contents of this newsletter are general in nature and should not be relied on as legal advice. No reader should act on the information contained without first consulting us.