High Court: James Hardie Directors misled investors on asbestos fund

James Hardie misled investors on a compensation fund for asbestos victims when seven directors breached their duties by approving the company's release of a misleading statement to the stock exchange, the top court ruled.

Australia's High Court also held that company secretary and general counsel Peter James Saffron failed to discharge his duties with diligence by neglecting to advise the board that a study he had authorised to predict asbestos-related liabilities was not complete.

The High Court judgment on the James Hardie case is considered a major milestone in identifying directors' duties as well as the disclosure regime.

The Sydney Morning Herald reports that it has been 11 years since the company transferred its asbestos liabilities into a special foundation, and claimed through a statement to the stock exchange that the foundation was "fully funded" to meet future compensation claims. However, the fund was running out of money within three years. It was then revealed that the foundation was underfunded by about $1.5 billion.

The Australian Securities and Investments Commission (ASIC) filed a civil case against the seven James Hardie directors in 2007. It was in 2009 when Justice Ian Gzell of the NSW Supreme Court found that James Hardie chairman from 2004 to 2007, Meredith Hellicar, former non-executive directors Michael Brown, Michael Gillfillan, Martin Koffel, Dan O'Brien, Greg Terry and Peter Wilcox breached their responsibilities in approving a misleading public statement. They were fined $30,000 each and were banned from acting as company directors for five years.

Peter Macdonald, former James Hardie chief executive was banned for 15 years and fined $350,000 for his role in establishing the foundation and publicising it.

The directors filed an appeal, and in December 2010 three NSW appeal court judges reversed the decision, saying that the corporate regulator had failed to prove the directors passed a resolution at a board meeting approving the statement to the stock exchange.

ASIC filed an appeal against this decision to the High Court. Following the High Court's decision, the case will be referred back to the NSW Court of Appeal to consider issues on liability, disqualification and penalties.