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SPECIAL COMMISSION OF INQUIRY INTO THE MEDICAL RESEARCH AND COMPENSATION FOUNDATION SUBMISSIONS ON BEHALF OF UNIONS AND ASBESTOS SUPPORT GROUPS Unions Australian Council of Trade Unions Australian Manufacturing Workers Union Australian Services Union of NSW Communications, Electrical, Electronic, Energy Information, Postal Plumbing & Allied Services Union of Australia Construction, Forestry, Mining & Energy Union of Australia Finance Sector Union Labour Council of NSW Maritime Union of Australia Rail Tram & Bus Union of Australia Trades & Labour Council of Western Australia Asbestos Support Groups Asbestos Diseases Foundation of Australia Asbestos Diseases Society of Australia Inc Asbestos Victims Association of South Australia Cancer Council of NSW Gippsland Asbestos Related Diseases Support Inc Queensland Asbestos Related Disease Support Society Chapter 1: Summary 5 Overview 5 The February 2001 Events 5 The Restructure of 2001 6 The Cancellation in March 2003 7 Consequences of the Deception of Supreme Court and Cancellation of Shares 7 Term 4 Problems to be Addressed 7 Chapter 2: The Incoming Directors and their Legal Advisors 9 Introduction 9 Life of the Fund 10 Independence of the Incoming Directors 11 Trowbridge Report 12 The Financial Models 14 Deed of Covenant and Indemnity 15 Failure to Pursue JHIL 17 Replacement of MRCF Directors 17 Michael Gill 18 The Legal Advisors – Mallesons 19 JHINV Liability as a Shadow Director of MRCF 20 Chapter 3: Trowbridge – An Actuarial Failure 21 Introduction 21 Trowbridge Knowledge of Purpose of MRCF 22 Trowbridge Knowledge of Uncertainty of Actuarial Advice 24 Trowbridge Knowledge that their Assessment would be Relied Upon 26 The Non-Inclusion of Current Claims Data 27 Conclusion 29 The Inherent Unreliability of Actuarial Calculations of Future Asbestos Liabilities 30 Chapter 4: James Hardie Conduct in Establishment of MRCF 32 Introduction 32 JHIL Board Knowledge of Uncertainty 32 Management Knowledge of Trowbridge Inaccuracy 37 Management Knowledge of Flawed Financial Model 39 Shafron Manipulation 39 Attrill Conduct 42 Removal of Macdonald, McGregor and Shafron 44 Chapter 5: The Misleading of the Supreme Court of New South Wales in 2001 45 Misleading Conduct by JHIL 45 The nature of the misleading conduct 45 The misrepresentation was implicit in what Santow J was told 45 The representation by silence 47 What Santow J should have been told 57 JHIL’s duty of uberrimae fidei 59 Involvement by JHIL’s Officers and Solicitors in Misleading Conduct 61 Involvement by JHI NV in JHIL’s Misleading Conduct 66 Resultant Loss or Damage 69 Chapter 6: The Setting Aside of the Santow Judgment 71 Fraud by the JHIL Interests 71 The First Element 73 The Second Element 84 The Third Element 85 The Fourth to Sixth Elements 85 The Inherent Jurisdiction of the Court 86 Chapter 7: Perverting the Course of Justice 88 Chapter 8: The Cancellation of the Partly Paid Shares and Its Consequences 90 Material Prejudice to Creditors 90 Application of the legislation 90 Identifying the contingent creditors 91 JHI NV’s status as a shadow director of JHIL as at March 2003 93 The involvement by JHIL’s directors in the contravention of s 256D(1) 99 Breaches of directors’ duties under s 180(1) 100 Consequences of the contraventions 101 Unconscionable Conduct 101 Following the restructure the representation made to Santow J 101 JHI NV’s deliberate concealment of the impending cancellation of the partly paid shares 102 The consequences 104 Chapter 9: The Role and Liability of Allens Arthur Robinson 105 Introduction 105 The Wrongful Conduct of Allens 105 The Consequences of Allens’ Wrongful Conduct 108 Trowbridge 108 Amaca / Amaba Separation – Outgoing Directors 109 Misleading Account of JHIL Liability 110 MRCF – Incoming Directors 112 The Scheme of Arrangement 113 The Cancellation of the Partly Paid Shares 114 JHIL Separation 117 An On-Going Perversion of the Course of Justice 119 Trade Practices Act and Corporations Act Contraventions 120 Chapter 10: The Role and Liability of Corrs Chambers Westgarth 122 Deed of Rectification 123 Chapter 11: Submissions on Term 4 125 A Matter of Characterisation 126 The Need for Legislative Intervention 126 The Difficulties Absent Statutory / Government Intervention 127 The Current Mechanisms for Managing MRCF’s Liability 128 Voluntary administration v liquidation 128 Voluntary administration v chapter 11 129 Can the Victims be Protected without a Lifting of the Veil? 130 Attacking JHI NV without a lifting of the veil 130 Attacking JHI NV’s assets 130 The Lifting of JHI NV’s Corporate Veil 132 Other Measures 135 Suspension of JHI NV trading on the ASX 135 Reform to statutes of limitations 136 1. CHAPTER 1: SUMMARY OVERVIEW 1.1. Between 1996 and 2004, the management controlling James Hardie implemented a scheme. 1.2. It consisted of a chain of interlocking steps intended by James Hardie to achieve a single objective - the separation and removal of assets that may otherwise have been available to meet legitimate claims of asbestos victims. 1.3. The key elements of the scheme were: (a) the stripping of assets of Amaca via management fees and dividend payments; (b) the separation of Amaca and Amaba and the establishment of the MRCF in February 2001; (c) the restructuring application before Santow J between August and October 2001; (d) the creation/utilization of JHI NV in the Netherlands; (d)(e) the cancellation of the partly paid shares in March 2003; and Formatted: Bullets and Numbering (e)(f) the deed of rectification of February 2004. THE FEBRUARY 2001 EVENTS 1.4. In February 2001 a trust fund was established by JHIL which has proved to be inadequate for its stated purpose, namely to compensate all sufferers of asbestos related diseases with valid claims against two JHIL subsidiaries. 1.5. The inadequacy is attributable to the wrongdoings of a number of parties including JHIL, its directors, lawyers, Trowbridge and the incoming directors. 1.6. The resultant loss and damage suffered by aggrieved persons is substantial. Those aggrieved include the MRCF as trustee and the persons for whose benefit the fund was created. 6 THE RESTRUCTURE OF 2001 Misleading or deceptive conduct by JHIL and others 1.7. In the course of its application before Santow J, JHIL engaged in misleading or deceptive conduct in which its officers, legal advisers and JHI NV were involved and for which they become liable. Fraud 1.8. The deception was conscious, deliberate and amounted to fraud, giving rise to a case for the setting aside of the Orders made by Santow J. Perversion of the course of justice by JHIL and others 1.9. The same deception amounted to an offence of perverting the course of justice. THE CANCELLATION IN MARCH 2003 1.10. The cancellation of the partly paid shares in March 2003 was wrongful in that it: (a) materially prejudiced JHIL in its ability to pay creditors; (b) constituted a breach by JHIL’s directors of their duty to act in good faith and in the best interests of the company; (c) was unconscionable within the meaning of the unwritten law and of the States and Territories, being conduct in trade or commerce, engaged in by JHIL, its directors, its legal advisers and JHI NV within the meaning of s 51AA of the TPA and its other statutory equivalents. 7 CONSEQUENCES OF THE DECEPTION OF SUPREME COURT AND CANCELLATION OF SHARES 1.11. The deception caused the Supreme Court to approve a Scheme of Arrangement, resulting in a corporate structure that was to allow JHIL to place its assets beyond the reach of creditors. 1.12. The cancellation of the partly paid shares was the means by which JHIL attained that objective. 1.13. The consequential impecuniosity of JHIL means that persons aggrieved by the conduct of February 2001 and the subsequent deception of the Supreme Court may be unable to recover the full amount of their loss. The involvement of JHI NV in the wrongdoings 1.14. JHI NV is liable as a person involved in the deception of the Supreme Court and as a person who knowingly participated in the unconscionable cancellation of the shares. 1.15. It’s assets are sufficient to meet the size of any liability. However they are beyond the jurisdiction. TERM 4 PROBLEMS TO BE ADDRESSED 1.16. Failing a finding in accordance with 1.14 above, the Salomon doctrine of limited liability affords a complete level of protection to JHI NV. 1.17. Such a result would militate heavily against the public interest and should be avoided by legislative intervention that would have the effect of piercing JHI NV’s corporate veil. 1.18. Even were such legislation introduced, this initiative may be frustrated in its objective because JHI NV’s assets are substantially based in the USA. Further legislation is called for to enable its USA based assets to be attached. 8 A large volume of material has been served upon the parties by JHI NV and Allens in the last seven days, including in the past 24 hours. The unions and support groups are awaiting a response from the Commission to require to cross-examine in relation to parts of this material. This request is maintained. The unions and support groups seek the right to supplement these submissions once we have had a reasonable opportunity to peruse the new material. 9 2. CHAPTER TWO: THE INCOMING DIRECTORS AND THEIR LEGAL ADVISORS Introduction 2.1. Edwards, Gill, Jollie and Cooper (the incoming directors) over January and February 2001 failed to properly fulfil their responsibilities as incoming directors of what was in effect a trust fund comparable to an insurance fund in run-off.1 2.2. The importance of “funding” to the MRCF could not have been misunderstood by the incoming directors. By accepting the JHIL invitation to consider becoming a director of MRCF, each of the incoming directors accepted the responsibility of ensuring that the MRCF was properly funded; to ensure that those who would have legitimate claims against Amaca, Amaba or JHIL would not have their entitlements reduced or negatively impacted upon as a consequence of the corporate restructure they agreed to participate in. 2.3. The conduct of the incoming directors was deficient in the following respects: (a) assenting to the possibility that the fund would last 10-15 to 20 years in circumstances where there was no warrant or justification for such a time period, in view of the many persons who would contract asbestos related disease as a consequence of the use of James Hardie products after that time; (b) failing to enquire, check or validate information put before them by JHIL prior to and at the meeting of 15 February 2001 particularly the assumptions of the Trowbridge report of 13 February 2001; (c) the meek acceptance of the JHIL time frame for separation; and (d) failing to act so as to ensure the best interests of MRCF were protected when the incoming directors had knowledge of a serious shortfall in the funding provided by JHIL. This conduct is greatly exacerbated by Trowbridge reporting to the incoming directors in 1 Gill T373.25 10 August 2001 that the actuarial report prepared for 13 February 2001 was based on out of date claims figures and was flawed. 2.4. It is submitted that the overall ineptitude of the incoming directors gives rise to claims against them individually for negligence and breach of directors’ duties. That alone should mean they stand down from their position as directors. Life of the Fund 2.5. There is strong evidence to suggest the incoming directors were content with the funding that would give the MRCF a life of at best 10-15 to 20 years. There was no evidence of any kind to support a time limitation of 10-20 years. 2.6. Cooper was content to become a director on the basis there would be funding for at best 20 years.2 2.7. Gill is noted by Attrill in the presence of the other incoming directors (who did not demur from his assertion) as stating: “If funds adequate for 10-15 years OK. Question if funds are less than adequate for 10-15 years”.3 2.8. Gill in evidence stated that after the Trowbridge presentation he was of the opinion on a worse case scenario funding would last 15 years.4 2.9. The minutes of the MRCF meeting of 20 August 2001 confirm that the incoming directors were content with a limited lifespan for the fund. The minute records that it was critical to each of the incoming directors’ decision to participate in the Foundation that a “...a minimum expected life of some 15- 20 years” was essential.5 2.10. Whilst Jollie asserted that this minute was “accurate but capable of misunderstanding”6, it truly reflects the considered view of the incoming directors at the time they agreed to participate in establishing the MRCF. 2 Cooper T38.50 3 Ex 57, Vol 4, at pg 941 4 Gill T298.5 5 MRCF 2, Tab 6, at pg 10A 6 Jollie T399.30 11 2.11. This submission is supported by the Minty/Marshall note of the meeting of 13 February 2001 with the incoming directors. Morley is noted as stating in the presence of all the incoming directors: “Proj of net assets for next 20 yrs. Critical assumption is cash depletion due to asb litigation over next 15-20 years”. 7 Independence of incoming directors 2.12. The incoming directors demonstrated an extraordinary naivety in their dealings with JHIL. 2.13. Cooper agreed that between December 2000 and 15 February 2001 the incoming directors were totally reliant on information emanating from James Hardie for their decision-making concerning the viability of the Fund.8 No incoming director carried out any independent enquiry or investigation. 2.14. Every so called “independent” advisor involved with the incoming directors, Trowbridge, Bancroft, PWC, Access Economics were retained and reliant upon James Hardie as to the content of the information provided and the scope of their advice. This was known to the incoming directors. 2.15. Edwards was a director of JHIL to 15 February 2001 and Cooper an employee of JHIL until 15 February 2001. Both appeared to have been trusting and unquestioning of JHIL. The reality is that they were totally subservient to the will of JHIL and as such surrendered their discretion as directors. Whilst this may have been due to personal relationships, even a sense of loyalty to previous associates and workmates, it is no excuse when a careful and objective approach was critical to a proper analysis of the funding of the Foundation they consented to become part of. 2.16. Gill had previously been retained by James Hardie in 2000 to advise on “stakeholders” and “spoilers”. He knew then that James Hardie’s objective was to build an “unbridgeable gap” between its assets and its asbestos liabilities. He had advised as to the risks involved in making a public 7 Ex 50, Tab 13 at pg 173 8 Cooper T30.20 12 statement concerning the aggregate sum of money that JHIL believed was the total of its asbestos liabilities. He did not disclose this retainer, his advice or this knowledge to his fellow directors. His conduct is the subject of a separate submission. Trowbridge report 2.17. A review of the evidence surrounding the way in which the incoming directors approached the Trowbridge report of 13 February 2001 demonstrates an abject failure on their part to properly test the underlying assumptions. The report of 13 February 2001 was presented in draft. The draft report should reasonably have caused the incoming directors to question: (a) what was meant by revisiting “...the claim number assumptions that we adopted for our draft advice?”9 (b) what impact did the trend demonstrated by mesothelioma claims being worse than the high end of projections in the 1990’s have for the potential liabilities of the fund?10 (c) what impact would claims continuing to 2050 have on total funding?11 (d) what sort of accuracy could be expected of the figure for total claims? How accurate were previous Trowbridge assessments of James Hardie liabilities? (e) what impact would an increase in mesothelioma numbers over the next 5-10 years have on total funding?12 (f) what impact would the Attrill presentation of 15 February 2001 have on the Trowbridge projections in the February report, given that the figures showed that mesothelioma claims to December had significantly increased on the previous calendar year? 13 2.18. Such questions were basic. They were not asked. 2.19. A peripheral questioning of Minty would have established that: 9 Ex 3, Vol 3, Tab 3 at pg 450 10 Ex 3, Vol 3, Tab 3 at pg 450 11 Ex 3, Vol 3, Tab 3 at pg 450 12 Ex 3, Vol 3, Tab 3 at pg 451 13 Ex 7, Vol MRCF 1, Tab 11, p2 13 (a) Trowbridge was using outdated James Hardie figures; (b) there was inherent uncertainty in the projections; and (c) some form of sensitivity analysis was required. 2.20. A diligent director would have demanded historical context to the 13 February 2001 report including: (a) trends in mesothelioma claims; (b) trends in settlement figures; (c) trends for the mesothelioma peak; and (d) trends as to the nature of James Hardie’s liabilities. 2.21. In the absence of such an assessment the incoming directors were not in a position to make any informed decision concerning the life of the Fund. 2.22. The lack of an analytical approach to the actuarial presentation is demonstrated by the Attrill notes of the meeting on 13 February 2001. These demonstrate there was no informed questioning of Minty as to the underlying assumptions.14 The questioning is entirely consistent with the most cursory examination of this draft report. 2.23. The incoming directors maintained that the actuarial presentation was critical to their decision to become directors of the MRCF. That is inconsistent with their acceptance of the time frame for the provision and analysis of the actuarial material. The incoming directors read the report during the actuarial presentation. Given the complexity and importance of such report and their mere peremptory perusal of the document, they failed to diligently discharge their obligations. 2.24. Cooper stated that he had asked for the previous Trowbridge reports which were not provided.15 He followed up that request with Attrill. Cooper was 14 Ex 57, Vol 4 at pg 1058 15 Cooper T32.45-50 14 aware Attrill prepared monthly reports on liabilities and that it was desirable to have such reports. They were not obtained until May 2001.16 The financial models 2.25. The financial models provided by James Hardie to the incoming directors escaped any detailed analysis by them. 2.26. Jollie, an accountant, did not see himself engaged in due diligence but rather he sought “...an understanding of a proposition that had been put to me”. Regrettably, it appears this did not extend to obtaining a proper understanding of the financial model. He failed: (a) to enquire as to the figure for the costs of running MRCF which figure was not included in the Trowbridge calculations; (b) to question the figure contained in the model for cash depletion asbestos litigation of $16.3m for the 6 months to October 2000,17 a figure that should have been compared with the Trowbridge figure for the entire year of $22m; (c) to question the unrealistic earning rate of 11.7% over fifty years. 2.27. The other incoming directors similarly failed to undertake any questioning of the model. 2.28. The PWC and Access Economics reports were provided to the incoming directors. The reports were of no real value as they did not evaluate the key assumptions of the financial model. 2.29. Even with the above limitation, the PWC report urged “the directors [of JHIL] to satisfy themselves, as to whether the values and assumptions used in the model are reasonable.”18 This was not done. There were further warnings in this report that should have alerted the incoming directors to deficiencies in the financial model. For example, it was stated: 16 Cooper T33.30-35 17 Jollie T450.50 18 Ex1, Vol 8, Tab 83, at pg 2286 15 “The chosen model does not systematically explore the risks inherent in the forecast cash flows and therefore asset values.”19 “The chosen model does not deal with the possibility that interest rates, asset values and expenses vary over time and the possible impact various trends might have on the result. The model locks in current rates and values for all times; ...there is a possibility that the worse case scenario in relation to the cost of claims is combined with the most optimistic assumptions on earnings. As there is no necessary correlation between the cost of claims scenario and investment earnings, it is reasonable to investigate the possibility that the worse case eventuates in respect of both the cost of claims and investment returns.”20 2.30. This warning as to limitations and unreliability of the financial model should have alerted the incoming directors to the real deficiencies of the whole proposal. These reports provided no basis for reliance as to the sufficiency of the Fund. Deed of Covenant and Indemnity 2.31. No incoming director could point to any basis of calculation of the figure of $70m – the consideration for the indemnity payment under the DCI. 2.32. Jollie made no enquiry concerning the figure.21 He did not view it as his responsibility to monitor or check decisions of the outgoing directors.22 Any knowledge he had as to the difficulties of piercing the corporate veil was apparently provided by Morley.23 2.33. Edwards announced the figure of $70m to the meeting of incoming directors of 13 February 2001. He did not know how the figure had been calculated.24 Gill did nothing to establish how the figure was calculated.25 19 Ex1, Vol 8, Tab 83, at pg 2287 20 Ex1, Vol 8, Tab 83, at pg 2287 21 Jollie T440.35-40 22 Jollie T441.5 23 T434.20-.40 24 Edwards T231.20 25 Gill T309.15-20 16 2.34. Bancroft conceded that the commercial terms of the transaction concerning the establishment of the MRCF were being set by JHIL;26 the incoming directors had no way of assessing whether the best interests of Amaca and Amaba were served by entering the transaction documents. 2.35. The incoming directors were aware that the DCI provided for an indemnity by Amaca and Amaba to JHIL in relation to asbestos claims. The nature of the potential cost of such claims to Amaca and Amaba was not questioned. They were not in a position to judge how the indemnity would impact upon the funding of future asbestos claims for which Amaca and Amaba would bear responsibility. 2.36. Edwards first became aware of the indemnity as a condition of the provision of $70m on 15 February 2001.27 Edwards conceded he was aware of the significance of the case of Wren v CSR and that he appreciated that CSR had been found liable for its subsidiary Asbestos Products. In that context he was aware of the significance of the indemnity28 but “...it was too late it was done.”29 2.37. Jollie stated in his evidence that Bancroft indicated on 15 February 2001 that he was happy with the DCI.30 Bancroft’s written advice provided to the incoming directors on that day does not refer to the DCI. Bancroft stated that he was not in a position to advise on the DCI and that he told directors he would not do so. 2.38. Jollie, who like other incoming directors had been provided with a copy of the DCI31 was not aware that the deed contained a covenant binding Amaca and Amaba not to sue JHIL in relation to intercompany financial matters. He first became aware of this provision when the MRCF had problems and he had another look at it.32 Gill stated in evidence he did not know how the covenant came to be in the deed.33 26 Ex 95, Statement of Anthony Gregory Bancroft, para 62 27 Edwards T232.21 28 Edwards T233.1 29 Edwards T233.10 30 Jollie T437.50 31 Ex 7, Vol MRCF 4, Tab 23 32 Jollie T436.53 33 Gill T313.1 17 2.39. Bancroft is noted by Attrill in his notes of the meeting of 15 January 2001 as informing the incoming directors that their due diligence requirements were “...akin to purchasing a business.…”34 The incoming directors failed to institute even this basic requirement. 2.40. The lack of any commercial approach by the incoming directors to the DCI and the lack of questioning and analysis is consistent with the failure of the incoming directors to conduct themselves reasonably in relation to the whole transaction. Failure to pursue JHIL 2.41. From at least March 2001, the incoming directors knew that there was a serious problem with the under-funding of MRCF and the projections of Trowbridge. From at least 15 May 2001 (when Macdonald refused to accept a document describing the funding shortfall from Cooper), MRCF directors were aware that JHIL was unlikely to take a co-operative or sympathetic approach to the funding shortfall of MRCF. Competent and diligent directors would have understood as at May 2001 that the MRCF was in a major commercial dispute with JHIL, requiring decisive action which should have been unambiguously communicated to JHIL. 2.42. Despite this, the incoming directors took no proper steps to assert the MRCF’s legal rights for over two years. By reason of this delay, considerable damage was occasioned to the interests of MRCF, including the following: (a) MRCF and other concerned stakeholders lost the opportunity to raise the matter with Santow J in the application before his Honour on the scheme of arrangement; and, (b) time ran and time limits expired in relation to potential claims MRCF had to recover assets that had been stripped from Amaca and Amaba. Replacement of MRCF directors 2.43. Given the evidence in relation to their conduct, the continuing involvement of Edwards, Cooper and Jollie as officers of the MRCF should be brought to an end. The evidence compels a recommendation they be replaced. 34 Ex 57, Vol 4, at pg 940 18 Michael Gill 18.104.22.168. Gill was less than honest with his fellow MRCF directors in failing to Formatted: Bullets and Numbering disclose his prior involvements with Shafron and Attrill, his knowledge of the James Hardie intention and strategy in January/February 2001 and at any time thereafter. Gill did not consider it relevant to inform his fellow directors of his prior involvement with Shafron and Hardies.35 22.214.171.124. He did not include this in his original evidence before the Commission. 126.96.36.199. By reason of his prior involvement with Hardies and Shafron, Gill knew: (a) that the draft Trowbridge report was grossly inadequate for the purpose for which it was being used. He knew there were 3 previous actuarial reports. He did not read them36; (b) that Shafron intended to get a further report from Towers Perrin37. He did not follow it up; (c) that Shafron had had 8 months to get a final report from Trowbridge. That all Trowbridge reports were still in draft as of 14 February 2001 should have alarmed him; and he should have shared his alarm and this background to his fellow directors; (d) a great deal about actuarial reports and Shafron and Attrill’s working knowledge of them He knew Attrill believed that “the danger in the actuarial report is what is not taken into account”; and that the “meso bell curve was shifting to the right.”38 188.8.131.52. Gill did not inform the other incoming directors of this knowledge or Formatted: Bullets and Numbering use it in the proper exercise of due care and diligence in his role as incoming director. 184.108.40.206. Gill’s prior knowledge and contentment with a 10-15 year lifespan of the Fund is such that the Commission ought to conclude that he knew there 35 Ex 100, Supplementary statement of Michael John Gill, para 38 36 Ex 100, Supplementary statement of Michael John Gill, para 14 37 Ex 100, Supplementary statement of Michael John Gill, para 27 38 Ex 100, Supplementary statement of Michael John Gill, para 28 19 was never an intention to fully fund James Hardie asbestos liabilities or even to properly assess them in an independent expert fashion. The legal advisors - Mallesons 220.127.116.11. Bancroft failed to properly advise and warn the incoming directors of Formatted: Bullets and Numbering the implications of the DCI. He failed to exercise due care and skill in that: (a) he alleged he informed Cooper on 15 February 2001 that he could not give fullsome advice concerning the DCI. He was of the opinion the incoming directors would need more time to properly consider the document,39 yet he did not advise the incoming directors not to enter the transaction;40 (b) he failed to advise the incoming directors of the Allens’ conflict of interest in that he understood that firm to be acting for Amaca and JHIL;41 (c) he failed to identify and raise the extra clause in the DCI Indemnity as to inter company transactions in his advice of March 2001. He could not recall when he became aware of this clause;42 (d) in the March 2001 advice he ignored the critical question of the nature and extent of the JHIL asbestos liabilities; (e) he failed to appreciate the duties and obligations he owed to his clients in that he delivered his draft advice to Shafron for settling when he knew Shafron’s interests were potentially in conflict with his clients; 2.50. Bancroft as responsible partner, failed to properly advise the MRCF concerning the consequences for the MRCF of the proposed scheme of arrangement. The statement that: “We confirm that the proposal scheme of arrangement does not extinguish any rights which MRCF, Amaca or Amaba, may have against JHIL.”43 39 Bancroft T1850.20. 40 Bancroft T1850.35 41 T1856.35-.45 42 Bancroft T1848.25 20 in the context of his knowledge that the scheme of arrangement provided for: (a) JHIL becoming a wholly-owned subsidiary of JHI NV; (b) JHIL transferring its operating assets to JHI NV; (c) JHIL effecting a capital reduction of $775m; (d) JHIL issuing party paid shares to JHI NV. was grossly negligent. Bancroft failed to properly advise on the potential impact of this restructure on the MRCF. 2.51. Bancroft knew, or ought to have known, that the proposed scheme of arrangement required court approval. He should have advised the MRCF to assert its rights at such court hearing. JHI NV liability as a shadow director of MRCF 2.52. The principles relating to shadow directors are dealt with elsewhere in these submissions. 2.53. The evidence demonstrates unequivocally that Edwards, Cooper and Jollie had cast themselves in a subservient role and surrendered their respective discretions as officers of the MRCF to the will of JHIL. 43 Ex 97 3. CHAPTER THREE: TROWBRIDGE – AN ACTUARIAL FAILURE Introduction 3.1. The evidence compels a conclusion that Trowbridge was prepared to put anything in its report which served the purpose of the company paying its fees. Any principle of independence or expert objectivity on the part of Trowbridge was steam-rollered over by its principals Minty and Marshall, in their single-minded determination to prove a compliant service provider. This subjugation of independence and expertise to customer service underwrites and explains all of Trowbridge’s actions. 18.104.22.168. Trowbridge knew that its ability to accurately estimate James Hardie’s Formatted: Bullets and Numbering asbestos liabilities under the model it had developed was next to impossible and had in fact diminished over time.44 22.214.171.124. Minty and Marshall were aware in February 2001 that: (a) the Trowbridge advice was being used to estimate the total asbestos liabilities of James Hardie; (b) the MRCF was being created as a consequence of a corporate restructure of James Hardie; (c) the MRCF would be responsible for the payment of what had previously been James Hardie asbestos liabilities when such liabilities fell due; (d) there were major deficiencies in the epidemiological model used to calculate James Hardie’s liabilities and that there was great uncertainty in the actuarial projections of the asbestos liabilities of James Hardie; (e) the great uncertainty in relation to the actuarial calculation of James Hardie asbestos liabilities existed independently of the use of up to date claims data by Trowbridge in the February 2001 report. 44 Ex 53 [this exhibit is only a table] 22 Trowbridge knowledge of purpose of MRCF 126.96.36.199. In January 2001 Trowbridge (through Minty) knew the fundamental Formatted: Bullets and Numbering question upon which they were being asked to provide advice was the amount of money necessary to fund the liabilities of Amaca and Amaba – “was the amount enough?”45 188.8.131.52. It is inconceivable that Minty did not know the purpose of the establishment of the MRCF: (a) Minty knew the amount of $280m referred to the amount to be given to the Foundation in order to fund it when liabilities fell due;46 (b) Minty understood his actuarial presentation of 13/02/01 related to a Fund designed to last 15-20 years;47 (c) Minty knew that the Trowbridge report was being used for the purpose of calculation of total funding for the purpose of the MRCF;48 (d) Minty knew within a couple of days of 13/02/01 James Hardie would announce publicly that $280m was sufficient for its future asbestos liabilities.49 184.108.40.206. Marshall knew: Formatted: Bullets and Numbering (a) the purpose of the Trowbridge presentation on 13/02/01 was to advise those present of the amount that was needed to be set aside to meet the asbestos liabilities of James Hardie;50 (b) the presentation of 13/02/01 was important as to whether those present would proceed with the restructure.51 220.127.116.11. Minty’s own notes of 13/02/01 clearly indicate he was present at the Formatted: Bullets and Numbering commencement of the meeting. In his notes he refers to Edwards stating to the meeting that $280m was “now available” and that this would not be 45 Minty T752.30-.45 46 Minty T752.53 47 Minty T754.40 48 Minty T754.52 49 Minty T753.35 50 Marshall T874.55 - T875.5 51 Marshall T875.20 23 “difficult to sell”. He noted, that the sort of questions that would be asked after the restructure would be “was the amount enough”? Other notes written by Minty referred to “Phils” (Morley) presentation.52 These notes clearly demonstrate a full and comprehensive understanding by the writer of the purpose of the funding of the MRCF. 18.104.22.168. The evidence of Minty that it was not until on or about 16/02/01 and his reading of newspaper reports that he appreciated the MRCF was meant to be funding all of what had previously been James Hardie asbestos liabilities 53 is not credible. This evidence is contradicted by the evidence referred to above. It is also inconsistent with his response to the newspaper reports that he read concerning the separation of Amaca and Amaba and the establishment of the MRCF. 22.214.171.124. Minty was aware of statements in newspaper reports, attributed to Macdonald, that the Foundation had funds to meet all anticipated future claims. Minty gave evidence: (a) that these statements were not justified on the basis of the Trowbridge actuarial advice;54 (b) that he had great concerns as to statements that the funding would extend beyond 20 years;55 (c) that he believed it was drawing a long bow to say that the Trowbridge actuarial advice gave certainty to future claimants;56 (d) that he knew the firm name Trowbridge was being used in the James Hardie press releases that contained these statements;57 (e) that he received an e-mail from Shafron on 16/02/01 informing him “the deal” had been approved by the Board of JHIL. 52 Ex 50, Tab 20, at pg 173 53 Minty T733.50 54 Minty T737.57 55 Minty T738.10 56 Minty T736.50 57 Minty T735.33 24 126.96.36.199. Despite all of the above, extraordinarily, Minty “was not very Formatted: Bullets and Numbering concerned” at the use of the Trowbridge name in the James Hardie press releases.58 3.11. Marshall agreed the press statements were quite misleading.59 3.12. This response is entirely consistent with a state of mind that was fully informed as to the way in which the Trowbridge report of 13/02/01 was to be used by James Hardie in the restructure and separation of Amaca and Amaba. 3.13. Minty understood that he was being paid to provide an opinion which served James Hardie’s corporate aims. Truth, independence and expert objectivity were all subjugated to this overriding objective. Trowbridge knowledge of uncertainty of actuarial advice 188.8.131.52. The June 2000 report sets out the Trowbridge knowledge of the Formatted: Bullets and Numbering potential unreliability of their own actuarial assessment of James Hardie liabilities. $424m is referred to as the high figure for potential liabilities in the “sensitivity analysis” in the June 2000 report. Yet even $424m, according to Minty, was not necessarily the upper limit but an example of the way a change in assumptions could effect the value of the potential liability.60 184.108.40.206. Minty appreciated the actuarial assessment made no allowance (as in insurance run-off) for all potential types of claims, adverse contingencies, validity of earnings rates and the actual incidences of liabilities. 61 The uncertainty of the actuarial projection was such that Minty described the failure to refer to these uncertainties in the February report as a “serious omission.”62 220.127.116.11. Minty conceded a sensitivity analysis should have been included in the 13/02/01 report along the lines of the June 2000 report so that the 58 Minty T735.33 59 Marshall T869.4 60 Minty T758.35 61 Minty T821.55 - T822.20 62 Minty T726.25 25 incoming directors would be aware of the potential of the liabilities estimate to explode.63 Yet he took no steps to insist on its inclusion. 18.104.22.168. Marshall appreciated that a sensitivity analysis was “very important” where an actuarial assessment was based on a deterministic model. 64 He took no steps to insist upon its incorporation. 22.214.171.124. The model used by Trowbridge to calculate James Hardie asbestos liabilities was totally inadequate. Shafron’s description in 2000 of the inadequacies of the model and the uncertainties thereby created is compelling: “It is based on very imperfect epidemiological models and very uncertain predictions of future claims numbers and claims costs.”65 3.20.Trowbridge were aware of the inadequacies and thus the unreliability of Formatted: Bullets and Numbering their assessment of James Hardie’s asbestos liabilities. 126.96.36.199. Minty was aware that: (a) the years of peak use of asbestos by James Hardie would be a critical factor in properly determining the liabilities of James Hardie.66 This factor only featured in the model “indirectly and qualitatively”, he agreed the failure to properly account just for this factor meant the model and the Trowbridge advice could be said to be inherently unreliable;67 (b) the date when James Hardie ceased using asbestos was also an important factor in assessing the scope and duration of the James Hardie liabilities. From his evidence it is clear that Minty was not aware of the date when James Hardie ceased production of asbestos products. Trowbridge made “no direct allowance” but a “qualitative allowance for this factor”. The failure to properly consider this date was yet another factor going to uncertainty in the actuarial analysis;68 63 Cooper T79.10 - .25 64 Marshall T896.18 65 Ex 150 at p19 66 Cooper T77.10 67 Minty T777.25 68 Minty T771.50 - .57 26 (c) there was an underlying uncertainty in respect of James Hardie cohort. There was no information as to the time or level of exposure. In applying the Wittenoom experience to James Hardie Trowbridge had to make “some fairly broad assumptions” about claims emergence for James Hardie.69 This was done by Trowbridge without the benefit of epidemiological advice;70 (d) Minty took into account “indirectly” the date when James Hardie stopped using the type of asbestos most likely to cause 71 mesothelioma. The way in which it was taken into account was not at all specific to James Hardie but rather for a “national model.”72 The national model was not developed to give an insight into James Hardie.73 The national model was not developed to analyse liabilities of a manufacturer/distributor such as James Hardie.74 The source of the data for the national model lagged James Hardie’s own data by two years.75 (e) the nature of the Trowbridge modelling meant that Trowbridge was not good at picking the peak (of mesothelioma claims) nor the number of claims that would eventually emerge.76 188.8.131.52. Marshall knew that to establish the peak of mesothelioma claims it Formatted: Bullets and Numbering was necessary to know: (a) when peak production of asbestos products occurred; (b) the type of asbestos used; 3.23.but did not do a lot (as he recalled) to establish these things.77 Formatted: Bullets and Numbering 184.108.40.206. Trowbridge failed to warn the incoming directors of the inherent uncertainty of their actuarial projections. 69 Minty T744.50 70 Minty T742.25 71 Minty T745.52 72 Minty T746.6 73 Minty T746.25 74 Minty T746.32 75 T722.15-T884.45 76 Minty T778.25 77 Marshall T883.42 27 Trowbridge knowledge that their assessment would be relied on 220.127.116.11. As to Trowbridge knowledge of reliance being placed on their Formatted: Bullets and Numbering assessment of liabilities please refer to submissions “Trowbridge knowledge of purpose of MRCF.” 18.104.22.168. Minty was specifically aware that the Trowbridge actuarial advice dated 13/02/01 and the “best estimate” figure contained therein was important information for the incoming directors and their decision as to whether they would proceed with the MRCF. Minty stated that: (a) he understood that one of the purposes of the presentation of 13/02/01 was to enable the incoming directors to decide whether they would become directors of the trust;78 and (b) he understood the incoming directors were relying on the accuracy of the Trowbridge report of 13/02/01.79 22.214.171.124. Marshall was aware that the February report would be relied upon by Formatted: Bullets and Numbering 80 the incoming directors. He never raised his concern with the incoming directors that this report failed to give a full picture of the Watson and Hurst analysis in that it only projected forward 20 years.81 126.96.36.199. Both Minty and Marshall believed that the incoming directors did not seem to have an appreciation that their advice of 13 February 2001 was based on data up to 31 March 2000.82 They appreciated the reliance that was being placed on their advice. Without any direct contact with the incoming directors, a date reference was inserted into the final report because Minty believed some day this matter might come back at him.83 188.8.131.52. Further, Minty knew the incoming directors had no experience of James Hardie’s asbestos claims.84 In the context of this lack of experience Minty must have appreciated they would heavily depend on the actuarial advice and presentation given to them. 78 Minty T804.20 79 Minty T714.50 80 Marshall T896.45 81 Marshall T897.35 82 Minty T705.15 83 Minty T706.5 84 Minty T714.40 28 5.The non-inclusion of current claims data 184.108.40.206. A dispute has arisen in the evidence of JHI NV and Trowbridge as to the status of the last nine months of claims data between March and December 2000. Trowbridge asserts it sought this data from Attrill but was told it was unavailable. JHI NV asserts it was told by Trowbridge it would make no difference to its projection. 220.127.116.11. Such data as was contained in the nine month period, would have further compromised the position sought to be advanced by JHI NV and Trowbridge, in that it demonstrated: (a) the number of claims had increased by approximately 70% on the corresponding period for the previous year.85 To January 2001, 236 claims compared with previous years 159 claims;86 (b) costs settlements and damages awards had increased by 33% over the corresponding period for the previous year87. To January 01 costs figure $24,734,000 compared with previous years $18,577,000;88 and (c) legal costs had increased due to the increase in legal activity;89 (d) the majority of settlements were for product liability claims and the greater proportion of those were for mesothelioma claims;90 and (e) mesothelioma claim numbers showed a significant trend upwards for the calendar year 2000. Mesothelioma claims were approximately 130 compared with the Trowbridge best estimate for 2001 of 103. 18.104.22.168. It is submitted that neither JHI NV nor Trowbridge has given a truthful Formatted: Bullets and Numbering account to the Commission as to the position of the nine months claims data. It suited JHI NV not to have this material considered so as to get the lowest liability figure. It suited Trowbridge not to use this data so as to maintain a commercial relationship with its client. 22.214.171.124. It can be said of Trowbridge: 85 Ex 57, Vol WJA 4, at pg 808 86 Attrill T1032.5-10; Ex 7, Vol MRCF1, Tab 36 at pg 395 87 Ex 57, Vol WJA 4, at pg 808 88 Attrill T1031.27; and Ex 7, Vol MRCF1, Tab 36 at pg 393 89 Ex 57, Vol WJA 4, at pg 808 90 Ex 57, Vol WJA 4, at pg 808 29 (a) that the provision of the data would have done no harm; at the least it would have further informed its view; (b) it knew that a data dump had on previous occasions been made available within 24 hours;91 (c) JHIL was seeking to use the Trowbridge report for a seminal and irreversible purpose; (d) all of the matters previously described should have emphasised to Trowbridge the need to leave no stone unturned in seeking to have their prediction as accurate and complete as possible. 126.96.36.199. It can be said of JHIL, Macdonald and Shafron: Formatted: Bullets and Numbering (a) they knew the data was available and of its content; (in particular, the upward trend in new cases of mesothelioma); (b) They knew that they could with little effort provide the data. 3.32. In this context, the “don’t ask – don’t tell” debate between Trowbridge and JHIL should be seen for the diversion it is. The absence of the nine months data is simply one more piece of evidence of the complete lack of interest entertained by either JHIL or Trowbridge in anything which might compromise the prediction JHIL was paying Trowbridge to reach. Conclusion 188.8.131.52. Trowbridge knew or at least ought to have known at all relevant times Formatted: Bullets and Numbering the MRCF was a “closed fund”. It had no operating profits, no recourse to outside assets and that to give advice as to an estimate of the James Hardie asbestos liabilities in these circumstances was entirely different to giving advice as to the total sum needed to provide compensation to future claimants of James Hardie92. In such circumstances, in establishing a provision for future uncertain liabilities, a competent actuary would: 91 Minty T788.45-.50 92 Minty T749.20 30 (a) establish “a prudential margin that will permit the fund to cope with some degree of worse than expected experience as liability unfolds”93. Such a provision is required to be made for the uncertainties or “more speculative” components of the potential liability; and (b) give a proper warning as to the inherent limitation and uncertainties involved in any such actuarial assessment, particularly for a purpose such as this. 184.108.40.206. Trowbridge knew that the James Hardie asbestos liabilities could not Formatted: Bullets and Numbering be accurately calculated. In these circumstances the Trowbridge advice of 13/02/01 was unprofessional – grossly incompetent. If Trowbridge had exercised due care and responsibility on 13/02/01 it would have refused to provide actuarial advice as to the future funding of MRCF. 220.127.116.11. At the very least Trowbridge should have warned the incoming directors of the great uncertainty underlying their actuarial projections concerning James Hardie – that it was extremely difficult to assess James Hardie’s asbestos liabilities. Trowbridge should have advised James Hardie and the incoming directors that any actuarial assessment as to the funding of the MRCF was useless without the obtaining of further important information and the conducting further research. 18.104.22.168. The MRCF has a strong claim for damages in negligence against Trowbridge. Such a claim does not rely on the failure to use the most up to date claims data. 3.37. The damages for the loss sustained by MRCF would be based upon the difference between the actual assessment of Trowbridge in February 2001 and the current total assessment of James Hardie’s asbestos liabilities on the basis that the separation and subsequent restructure would not have occurred if Trowbridge had provided proper and reasonable advice. 42.The inherent unreliability of actuarial calculations of future asbestos Formatted: Bullets and Numbering liabilities 93 Ex 251, Taylor Fry Report, paras 3-5 31 22.214.171.124. The Commission should refrain from determining a figure as to the MRCF’s asbestos liabilities. The model adopted by Trowbridge, Taylor Fry and KPMG is unable to accurately estimate future asbestos liabilities. 126.96.36.199. The performance of the actuaries to date sends a clear warning against reliance on any of the actuarial assessments provided to the Commission. 188.8.131.52. Trowbridge have attempted to estimate James Hardie’s asbestos liabilities on eight occasions with eight completely different results. 184.108.40.206. Even KPMG’s more complete model places a February 2001 liability at 694m. This leave unexplained three years later at least a $1b shortfall. 220.127.116.11. Wilkinson’s second statement, one month after his initial report calculated, with the benefit of the Trowbridge reports, Taylor Fry report and primary documentation, a substantially different liability to that initially adopted. 3.43. The unions and action groups may wish to reply to the actuarial report served 12/07/04 in submissions in reply. 3.44. None of the actuarial assessments before the Commission used an exposure based model. The only method of accurately assessing the myriads of possible paths that the Fund could have experienced was a Monte Carlo simulation based on an exposure model which took into account the possibilities of the unrealized random outcomes at every point in the Fund’s history. 4. CHAPTER FOUR: JAMES HARDIE CONDUCT IN ESTABLISHMENT OF MRCF Introduction 4.1. Each Trowbridge report (prior to February 2001) contained a sensitivity analysis and included a disclaimer as to the variability and uncertainty of the actuarial opinion. The draft report of June 2000 contained a sensitivity analysis that set out a “base case” of liabilities of $294m with high claim numbers $420m, low claim numbers $167m. Trowbridge stated: “This degree of variation gives some indication of the limited knowledge and history of asbestos related claims and the uncertainty that exists in respect of the potential impact of their emergence on Hardies exposure.”94 4.2. Individual Board members knew of the volatility of claims and the inaccuracy of Trowbridge. At the very least the Board should have known there was great uncertainty in the Trowbridge “best estimate” of February 2001. 4.3. Macdonald failed to provide to the Board critical information concerning his own knowledge of the defects of the Trowbridge actuarial analysis of February 2001. As CEO and Director his failure to inform fellow Board members of this highly relevant information should be found to be deliberate. 4.4. Senior management, Shafron, Morley and Attrill also possessed intimate knowledge of the defects of the Trowbridge analysis. Shafron and Morley also were aware of the limited nature of the review of the financial model conducted by Access and PWC. Their conduct in relation to the briefing of Trowbridge and in the way in which the actuarial and financial material was put before the JHIL Board demonstrates a deliberate attempt to mislead. JHIL Board knowledge of uncertainty 4.5. The uncertainty of the actuarial advice as to the quantum of asbestos liabilities must have been fully appreciated by the JHIL Board. In advising potential directors of Amaca in 1999 R Barrett of Mallesons referred to the 94 June 2000 reportEx 50, Tab 9, at pg 76 33 Information Memorandum sent by JHIL to shareholders in 1998 concerning the Project Chelsea restructure: “While certain Australian subsidiaries recognise that they will continue to be named as defendants in litigation in Australia as a result of past manufacturing and marketing of products containing asbestos, they cannot reliably measure their exposure with respect to future asbestos claims. The directors of those subsidiaries and the Company rely upon various internal and public reports and seek expert actuarial advice in assessing the ongoing exposure to claims. A contingent liability exists in respect of the ultimate cost of settlement of any claims yet to be made, which cannot be reliably measured at this point of time.”95 4.6. The unreliability and uncertainty of Trowbridge actuarial advice remained a feature of Project Green papers prepared for the JHIL Board in 2000-2001. In August 2000 it was reported to the Board that insurers had examined the Trowbridge report and viewed the “ultimate cost... to be higher than Trowbridge.”96 4.7. Further, it was stated in the August Board papers concerning the June 2000 Trowbridge report that: “The draft actuarial report currently has limited use as a tool for defending our position. heavily qualified findings numerous disclaimers would be attacked review conducted within limited scope Actuaries have favoured “low side” numbers.” 4.8. The January 2001 Board papers contained discussion as to the potential quantum of funds to be made available to Australian asbestos claimants by James Hardie. It stated: 95 th Ex 45, 4 pg of Ex (pg 2 of letter to Attrill dated 11/02/99) 96 Ex 148, Vol PDM1.1, at pg 12 34 “...there is no reliable basis for determining what amount any such future contribution should be if attempting to fund all future claims. Previous indicative advice obtained as to the potential quantum of future claims has been quite variable and unreliable.”97 4.9. The February Board papers set out draft Q and A in relation to the proposed separation of Amaca and Amaba. The response to the question as to “what does your actuarial advice say in relation to the ongoing exposure to claims” reflected accurately the JHIL historical position on the reliability of actuarial assessment: “We have learned that actuarial advice is not a reliable basis for ascertaining these kinds of liabilities.”98 4.10. In another passage of the draft Q & A it was stated the ultimate cost of asbestos claims cannot be measured reliably at this time... “nor is there any way to determine this with certainty... therefore, James Hardie cannot make a determination as to the adequacy of funding.”99 4.11. McGregor sought to explain these statements as being proper and accurate in accounting terms.100 He contended that what could or could not be seen in connection with the actuarial assessment was governed by accounting standards. Such a contention cannot be sustained. The draft Q & A did not deal with accounting matters. It is contradicted by the definitive statement of Macdonald in the media release of 16/02/01 that: “James Hardie is satisfied that the foundation has sufficient funds to meet all anticipated future claims”. 4.12. This statement, by the CEO and Director of JHIL, purporting to speak on behalf of JHIL, was designed to promote the concept of certainty for the future funding of legitimate claims. The statement indicated it was based on the advice of “...the actuarial firm Trowbridge...” and “the company’s long experience in the areas of asbestos...” 97 Ex 148, Vol PDM1.1, Tab 5, at pg 95 98 Ex 148, Vol PDM1.1, Tab 15, at pg 208, para 3 99 Ex 148, Vol PDM1.1, Tab 15, at pg 209 100 McGregor T1450.17 35 4.13. The JHIL Board were aware that each Trowbridge report had been inaccurate and had underestimated the James Hardie liabilities. At the JHIL Board meeting of 17/01/01 Shafron reported the net present value of the ‘96 report ($230m) ’98 report ($254m), 2000 report ($293m).101 Macdonald held the opinion at the time of this meeting that the Trowbridge estimates were not certain enough to assess funding for the Foundation.102 4.14. Chairman of Directors McGregor was aware of the volatility of the actuarial assessments. He was so informed on 01/12/00 when Macdonald forwarded to him an e-mail from Shafron concerning the Watson and Hurst paper. The e-mail informed that Watson and Hurst predicted an increase in cash flows concerning asbestos liabilities of 40%. Shafron indicated that the 40% increase “...broadly accords” with the James Hardie experience.103 4.15. There is no reasonable explanation on the evidence as to why or how the chairman of the JHIL Board in the short space of time changed opinion concerning actuarial advice from this long held and documented view of unpredictability to one of certainty. 4.16. Macdonald was aware on 15 December 2001: (a) of the volatility of mesothelioma claims;104 (b) that Trowbridge did not have James Hardie data beyond March 2000;105 (c) because he had been informed by Attrill, that for the year 2000 claims were up in ways that were not expected;106 (d) that asbestos costs in Q3 were not an outlier and that Q4, despite hopes to the contrary, would be at a similar level;107 (e) that PWC and Access were instructed not to review the basic assumptions of the financial model;108 101 Ex 92 102 Macdonald T2585.5 103 Ex 57, Vol WJA4, at pg 796, T2584.55-2585.5 104 Macdonald T2502.25 105 Macdonald T2586.10 106 Macdonald T2589.45-.50 107 Ex 75, PJS 1.7, Tab 110, para 3 36 (f) that the Board was not given that PWC and Access reports concerning the financial model,109 and that the Board was not told that the view of Access was that a poor return in early years could put at risk the whole of funding;110 (g) that (because he was told by Shafron) the Trowbridge work was uncertain and based on imperfect epidemiological models and uncertain predictions of future claims numbers;111 (h) the Board was not informed of the sensitivity analysis;112 (i) that there was no independent advice (contrary to the intention he attempted to convey in the media release of 16 February 2001) to the effect the Foundation had sufficient funds.113 4.17. Macdonald held an intimate understanding of the issues surrounding James Hardie asbestos liabilities. He kept a close eye on asbestos costs around the time of the formation of the Foundation.114 Consistent with this he “hit the roof” when he learned of the Watson-Hurst paper on the Trowbridge website.115 His assertion, that he did not read the Trowbridge reports, is stunning – unbelievable. If his evidence be accepted no JHIL director read the Trowbridge reports. For the CEO to allow this to occur in circumstances where the Trowbridge report was so fundamental to the decision making of the Board is deplorable conduct. 4.18. Macdonald as CEO failed to inform the JHIL Board of critically important information concerning the unreliability of the Trowbridge assessment. Macdonald was aware that his co-directors were acting on the basis that $293m was enough to meet the liabilities of Amaca and Amaba116. Macdonald’s failure to inform his co-directors of the various matters set out in paragraph 4.16 should be seen as deliberate, misleading, disgraceful. It demonstrates his determination to ensure the separation of Amaca and 108 Macdonald T2601.50 109 Macdonald T2529.1-.25 110 Macdonald T2529.16 111 Ex 150, at p19 112 Macdonald T2527.40 113 Macdonald T2568.10 114 Macdonald T2500.20 115 Ex 57, WJA 4, pg 795 116 Macdonald T2528.35 37 Amaba from JHIL irrespective of the true actuarial position. A proper assessment was foregone in order to minimise the asbestos liabilities. Management knowledge of Trowbridge inaccuracy 4.19. Key management personnel of JHIL had a full and complete understanding of the limitations of the Trowbridge actuarial advice. 4.20. On 11 October 2000 Shafron wrote to Macdonald concerning continuous disclosure obligations. The issue had been raised by JHIL director Michael Brown at the previous board meeting. Shafron stated. “The Trowbridge work is very uncertain. It is based on very imperfect epidemiological models and very uncertain predictions of future claim numbers and claims costs. On the basis of the sensitivity analysis the liability could be up to $384m higher or $220m lower (at net present value).” 117 4.21. On 9 November 2001 (just over a year later), Shafron, in a memo to Macdonald relating to concerns raised by MRCF over funding, referred to what he told the incoming directors concerning that issue. 118 “In our meetings with prospective directors...Philip Morley and I said that whatever the level of funding there could be no guarantees that the level of funding would be enough over the long haul... because no- one could predict the future and that history of asbestos litigation was that it usually got worse”. Shafron repeated in this memo that the epidemiology used by Trowbridge was subject to inherent uncertainty.119 4.22. In correspondence with Robb by email 27/03/01120 Shafron raised discussion as to whether the actuarial report of Trowbridge should be put before the Judge at the time of the Court approval of the restructure. Shafron stated in part “my point on T is really code for the thing is not defensible.” 117 Ex 150, at pg 19 118 Ex 150, at pg 194 119 Ex 150, at pg 196 120 Ex 194 38 4.23. Attrill and Shafron were aware of the highly significant criticisms of the Trowbridge assessment made by senior litigation partner at Allens, Roy Williams. Williams, on behalf of JHIL, commissioned the Trowbridge report of June 2000 so as “...to strengthen our claim for privilege” over the report.121 4.24. Williams after examining the report faxed Attrill a memorandum highlighting deficiencies in the report. Attrill on 11 July 2000 sent the Williams comments to Shafron.122 4.25. Williams was critical of Trowbridge for taking what he described as an excessively optimistic approach to the actuarial liabilities. More particularly, he expressed doubt as to the average settlement costs for mesothelioma and his surprise at the use of the figure of 25% for mesothelioma claims settled with no payment to the plaintiff. 4.26. Neither Shafron nor Attrill took any steps to question or alert Trowbridge to the significant matters raised by Williams in this memorandum. 4.27. In his evidence Robb stated that he became aware of the Williams memorandum because it was forwarded to him by Williams when a brief was being prepared for Bathurst QC concerning the potential restructure of James Hardie. According to Robb, Cameron received a copy of the memo from Williams at the same time he (Robb) did.123 Further, Robb advised Shafron on two occasions that he should refer the Williams memorandum to Minty of Trowbridge; when it first came to his attention124 and again when Trowbridge was asked for a further report around 16/01/01.125 Robb was of the understanding, as of January 2001, that Shafron had not sent the Williams memorandum to Trowbridge.126 Robb believed the Williams material was significant and that is why he raised it with Shafron in January 2001.127 121 See e-mail Shafron to Martin; Cameron 3 June 2000Ex 57, Vol WJA4, at pg 39 122 Ex 75, PJS 1.5, Tab 54 123 Robb T2903.35 124 Robb T2903.30 125 Robb T2904.10 126 Robb T2904.45 127 Robb T2905.5-.10 39 Management knowledge of the flawed financial model 4.28. Harman was a willing participant in the deception of the incoming MRCF directors by virtue of his involvement with the cash flow model. Evidence shows that Harman: (a) forced Brett to remove qualifications from the PWC report; (b) chose an investment rate that had no basis in reality but was in fact in iterative exercise to find a number which made the model work; and (c) he understood that the model could not purport to show certainty of funding. Yet he allowed the model to be used for exactly that purpose. Shafron manipulation 18.104.22.168. Shafron was aware that the Trowbridge analysis was critical to the Formatted: Bullets and Numbering transaction. He was aware the incoming directors and the JHIL Board would rely on the actuarial advice put before them. Despite this he deliberately permitted, indeed encouraged, Minty and Marshall to base their analysis on stale and false claims data. 22.214.171.124. The evidence strongly supports findings that Shafron: (a) controlled and manipulated the substance and the manner of presentation of the actuarial report;128 (b) deliberately failed to provide up to date claims data to Trowbridge and knowingly permitted Trowbridge to rely on data he knew to be false; (c) conducted himself so as to ensure the separation of Amaca and Amaba and to minimise the amount payable by JHIL to achieve such separation. The conduct of Shafron amounts to fraud. 126.96.36.199. The manipulative and scheming conduct led to Shafron ensuring the Formatted: Bullets and Numbering 129 incoming directors did not meet with Minty without his presence. This was 128 insert referenceEx 75, Vol 7, Tab 100 Formatted 129 Shafron T1618.25-.30 40 so he could maintain control, keep the projections under 20 years into the future “...to corner the directors...committing them to 10 to 15 years.”130 Shafron did not want the incoming directors to see a Trowbridge analysis beyond 20 years.131 Attrill could not provide any information to the incoming directors or Trowbridge without Shafron approval.132 Attrill stated that this was Shafron’s project.133 188.8.131.52. Shafron appreciated the dubious nature of his conduct. Even in January-February 2001 he perceived that the transaction with the incoming directors could give rise to litigation. One revealing justification he gave, in evidence, for retaining Trowbridge through Allens was that there may be “suits at the back end.”134 184.108.40.206. Shafron deliberately did not pass on information concerning James Hardie’s asbestos liabilities to the Trowbridge or to the incoming directors. Shafron: (a) knew in 2000 insurers had considered the Trowbridge report of that year but nevertheless assessed the asbestos liabilities of James Hardie at around $675m;135 (b) expected liabilities beyond 20 years could go out to the $350m;136 (c) must have been aware of the JHIL assessment of liabilities contained in the instructions to Bathurst QC that the “current best estimate... is that Amaca will face claims over the next 30 years amounting to around $400m;”137 (d) must have known of the increase in claim numbers and claims costs as the monthly reports soon after their production were conveyed to him by Attrill;138 130 Shafron T1612.35 131 Shafron T1609.20 132 Attrill T1037.40-50 133 Attrill T1063.1-.15 134 Shafron T1612.30 135 Shafron T1585.20 136 Shafron T1606.14 137 Ex 57, Vol WJA 4, at pg 853 138 Attrill T1033.15-.20 41 (e) knew as a consequence of the Macdonald e-mail of 31 January 2001 that 4th Q claims data indicated that the 3rd Q was not an outlier;139 (f) on 18/07/00 knew Hardies had a quarter of all Australian mesothelioma claims. He told Gill “we cop quarter of mesos.”140 220.127.116.11. Shafron did not inform the Board of JHIL of the sensitivity analysis Formatted: Bullets and Numbering contained in the Trowbridge report of June 2000. He also failed to inform the incoming directors. His dispute over the sensitivity analysis was that he wanted an upper number below $400m.141 18.104.22.168. In circumstances where Shafron controlled the information going to the incoming directors and where he knew that the incoming directors were relying on that information there was an obligation upon him to provide this information, all the relevant information. His conduct is personified by his email of 25/01/01 to Williams, “I want to keep Minty on JHIL side of things… For tactical reasons and control.” The ‘control’ was code for ‘mislead 142 incoming directors.’ 22.214.171.124. Further, in circumstances where the JHIL Board was of the view that $293m was enough to meet the future liabilities of Amaca and Amaba 143 it was incumbent on Shafron, acting in good faith, to provide full and frank information to the incoming directors. His failure to do so was not mere negligence – his conduct amounted to the deliberate misleading of those who relied on him. 4.37. Shafron controlled and by that control manipulated the nature and extent of the instructions given to the so called “independent” lawyers. The engagement of the independent lawyers for the purposes of advising the outgoing directors of Coy and Jsekarb and the future directors of MRCF was, as Shafron well knew, little more than window dressing. The engagement was an attempt to provide a gloss of propriety to his deceptive conduct. 4.38. Shafron controlled and manipulated the timing and signing of the DCI. On 1/2/01 he advised Cameron and Robb that Morley and D Cameron would sign 139 Shafron T1668.45 - 50 140 Ex 100, Tab 6, pg 11 141 Shafron T1411.35 142 Ex 75, Vol 7, Tab 100 143 Macdonald T2528.35 - 47 42 the DCI (with Allens advice if necessary). The DCI could then be presented to the incoming directors as a “fait accompli”. The DCI, for Shafron, overcame “… possibly the biggest question mark I have over the transaction…”, i.e. JHIL vulnerability. 4.39. Shafron ensured Amaca and Amaba had no separate legal representation in the lead up to their separation. Attrill Conduct 126.96.36.199. In January-February 2001 Attrill was in frequent contact with Formatted: Bullets and Numbering Trowbridge and the incoming directors. Attrill’s failure to inform of the defects in the June 2000 Trowbridge report and to ensure the provision of up to date claims data for the Trowbridge report of 13/02/01 was inexcusable and deceitful conduct. 188.8.131.52. Attrill knew that: (a) monthly reports were generated of detailed and up to date claims data which compared the data with previous time periods144 and that these reports could be produced at the touch of a button;145 (b) the monthly report January 01 described significant increases in claims against James Hardie and this increase in claims had been reflected in a large increase in payments. Further, such trend had been apparent since approximately July 2000;146 (c) (contrary to James Hardie experience) Trowbridge were preparing their report on the basis that James Hardie mesothelioma claims numbers had levelled off.147 Both Attrill and Shafron were present at a meeting when Minty informed them and Attrill recorded Minty as stating “...James Hardie meso numbers have levelled off recently...”148 when both were aware this was a false presumption; 144 Attrill T1031.5 145 Attrill T1033.55 146 Attrill T1032.50 147 Attrill T1086.7 148 Ex 57, Vol WJA 4, at pg 971 43 (d) Williams had challenged basic assumptions as to the Trowbridge report of June 2000 which if correct would mean the Trowbridge actuarial assessment was inaccurate;149 (e) in his paper produced 11/02/01150 which relied upon up to date claims data, Attrill demonstrated mesothelioma claims payments on average were $266,000 inclusive of costs. This he knew was in stark contrast to the Trowbridge report of June 2000 where the figure used for average settlement costs in mesothelioma claims was $135,000. Attrill stated this “...was nowhere near the average settlement of mesothelioma claims in February 2001” and that he was aware of the “likelihood of their (Trowbridge) projections being grossly 151 inaccurate;” (f) James Hardie never had nil claims;152 (g) it was impossible to assess James Hardie share of asbestos litigation in Australia;153 and (h) Trowbridge and the incoming directors relied on the accuracy on the information given by James Hardie. This proposition is most clearly demonstrated by Attrill’s e-mail to Shafron of 06/02/01.154 Attrill referred to the statement of Gill that other directors were relying on Gill for directions in actuarial matters and that the actuarial report would be “crucial” to the decision. 184.108.40.206. Attrill purported to excuse his conduct by asserting he could not Formatted: Bullets and Numbering 155 disclose this relevant information without Shafron’s approval. The excuse, if it be one, should be rejected. Attrill was an active participant, willing partner, in the conduct of deceit. He promoted the deceit. Ultimately he profited from the deceit with a three year contract to MRCF worth at least $1.5m per annum. 149 insert reference to Williams memoEx 75, Vol 5, Tab 54 at pg 1785 Formatted 150 Ex 63 151 Attrill T1226.15 152 Attrill T1076.55 153 Attrill T1097.35 154 Ex 57, Vol WJA 4, at pg 990 155 Attrill T1063.2-15 44 220.127.116.11. At no time did Attrill let it be known that Shafron had instructed him not to pass on up to date claims information156 or that he did not have the authority to give that information.157 Further, Attrill deliberately acted in a “neutral” way so as to put himself in a position where he did not have to disclose any information.158 18.104.22.168. There is no evidence of Attrill showing a determination to challenge the Shafron direction not to provide up to date information to Trowbridge or to warn the incoming directors of deficiencies in the actuarial analysis. 22.214.171.124. Attrill gave evidence that he spoke to Baxter in effect complaining as to the statement attributed to Macdonald in the press release of 16 January 2001 that there was sufficient funds in the MRCF for future claims.159 This of course was too little too late. Attrill’s failure to act honestly in his dealings with Trowbridge and the incoming directors was an important factor in the separation of Amaca and Amaba proceeding on 15 February 2001 based on false and misleading actuarial analysis. 126.96.36.199. Attrill as of 16 February 2001 at the commencement of his contractual relationship with the MRCF was bound to inform the MRCF of all of the non- disclosed relevant information. In failing to do so he remained a party to the JHIL deceit of the MRCF. Full and frank disclosure would have provided the MRCF with the opportunity to take decisive action concerning the deceit committed upon them at the earliest opportunity. 188.8.131.52. The Commission should find it is inappropriate for Attrill to continue in his contractual role with the MRCF. Removal of Macdonald, McGregor and Shafron 4.48. The totality of the evidence (not all of it addressed in these submissions) as to the conduct of McGregor, Macdonald and Morley should be referred to ASIC to determine whether each is a fit and proper person to hold the position of director of an Australian listed company. 156 Attrill T1062.25 157 Attrill T1039.35-.45 158 Attrill T1037.40-58 159 Attrill T1094.1 45 4.49. Based upon the totality of the evidence (not all of it addressed in these submissions) the conduct of Morley, Macdonald and Shafron should be referred to the State Attorney General for investigation. 6.5. CHAPTER FIVE: THE MISLEADING OF THE SUPREME COURT OF NEW SOUTH WALES IN 2001 MISLEADING CONDUCT BY JHIL The nature of the misleading conduct 184.108.40.206. JHIL’s misleading conduct comprised a misrepresentation to Santow J Formatted: Bullets and Numbering of an existing fact. 220.127.116.11. The existing fact was that, as at the time of the application before his Honour, JHIL had made a firm decision to avoid any action in the future that would prevent a call on the partly paid shares from being met. 18.104.22.168. The misrepresentation manifested itself in two forms: (a) it was implicit in what was conveyed to Santow J; (b) it was made by silence in the sense of non disclosure to Santow J of material matters in circumstances in which there was foist upon JHIL a duty of uberrimae fidei. 22.214.171.124. Each of these aspects is dealt with below. Formatted: Bullets and Numbering 6.5.The misrepresentation was implicit in what Santow J was told Formatted: Bullets and Numbering 126.96.36.199. The transcript before Santow J indicates in the clearest terms that it was central to his Honour’s concerns to be assured that the proposed Scheme of Arrangement would not impact adversely upon asbestos claimants: (a) “What effect will this [the proposed scheme] have on asbestos claims against Hardies;”160 (b) “Is there any possible basis upon which a call upon partly paid shares upon a Dutch company could be resisted under Dutch law? Is that 160 Ex 224, Vol 2, Tab 37, pg 480 at T20.45 47 with the explanatory memorandum because it is a fundamental matter. I don’t know whether it is dealt with at all;”161 (c) “One would need to make sure every step is taken not only of disclosure but every step is taken to ensure that a call must be met. In other words, there must be the clearest possible Dutch exchange approvals required if it is possible to get them in advance in order to ensure there is no blockage in the flow of funds to Australia.”162 188.8.131.52. His Honour’s concerns as set out above (made on the first day of Formatted: Bullets and Numbering JHIL’s application) were pointed and focussed. The reason is that it had been made clear to the Court that the partly paid shares had a particular purpose: (a) “… to ensure that [JHIL] has access to funding going forward to meet any potential liabilities;”163 (b) that the issuing of the partly paid shares would ensure that, notwithstanding the proposed transfer by JHIL to JHI NV of its principal operating assets “… [JHIL’s] net worth will remain essentially the same following implementation of the transaction;”164 (c) “under the terms of the issue of the partly paid shares JHIL will be able to call upon JHINV to pay any or all of the remainder of the issue price…at any time in the future and from time to time.”165 184.108.40.206. The various emphases in the words quoted in the immediately Formatted: Bullets and Numbering preceding paragraph speak of the future. They speak in terms of the enduring benefit of the partly paid shares to prospective claimants suffering from asbestos related diseases. 220.127.116.11. Therein one finds the representation implicit in what his Honour was told; namely that JHIL had made a firm decision (or, alternatively phrased, entertained a firm intention) to avoid any future action that might stand in the way of preventing a call on the partly paid shares from being met. 161 Ex 224, Vol 2, Tab 37, pg 481 at T21.5 (emphasis added) 162 Ex 224, Vol 2, Tab 37, pg 481 at T21.15 (emphasis added) 163 Ex 278 Vol 3, Tab 19, pg 58 (emphasis added) 164 Ex 278 Vol 3, Tab 19, pg 58 (emphasis added) 165 Ex 61, Vol 6 pgs 120, 126 48 18.104.22.168. So described, the partly paid shares were painted out to his Honour as being a “lifeline” which would always be made available to the creditors of JHIL. As the transcript discloses, those of the creditors that his Honour had at the forefront of his mind were persons with “asbestos claims against Hardie’s.” 166 22.214.171.124. Lest there have been any lingering doubts in his Honour’s mind as to JHIL’s intentions, such concerns were extinguished by JHIL’s responses to his Honour’s enquiries: (a) On 10 August 2001 his Honour was informed: “… JIL your Honour will see is in a position to meet all claims, any claims from whatever source … ever found against them because it has access to the capital of the group through the partly paid shares subject to the point your Honour raised as to whether it should be conditioned in some way.” 167 (b) By letter to his Honour’s Associate on 13 August 2001 his Honour was further informed: “As stated by Counsel in response to this query, the Scheme will not affect the position regarding asbestos claims. … JHIL will have, through existing reserves and access to funding in the form of partly paid shares, the means to meet liabilities which will or may arise in the future whether in relation to asbestos-related claims or other obligations to other persons.” 168 126.96.36.199. Such statements could only have had one effect. That was to pre- Formatted: Bullets and Numbering empt any line of enquiry by Santow J as to whether any other way lay open for the interference with the flow of funds to Australia which the partly paid shares were intended to secure. The representation by silence 188.8.131.52. On 10 August 2001 his Honour asked a significant question: Formatted: Bullets and Numbering 166 Ex 224, Vol 2, Tab 37, pg 480 at T20.45 167 Ex 224, Vol 2, Tab 37, pg 480 at T20.55 (emphasis added) 168 Ex 278, Vol 3, Tab 25, pg 214 at para (g) (emphasis added) 49 “Are there any other matters you should tell me about?” 169 184.108.40.206. His Honour was asking for assistance. It was at this point, if not Formatted: Bullets and Numbering earlier, that JHIL was being called upon to make full and frank disclosure. Yet the transcript reveals that this was not responded to by JHIL’s counsel in any meaningful way: “We have endeavoured to identify those potentially viewed as novel.” 170 220.127.116.11. The matters in respect of which full disclosure was called for, but never Formatted: Bullets and Numbering made, were: (a) the fluidity of JHIL’s intentions concerning the partly paid shares; (b) the existence of the put option171 in the February 2001 Deed; (c) the existence of the covenant not to sue and indemnity;172 and (d) the matters raised in the letter from Sir Llewellyn Edwards to Macdonald of 24 September 2001 and related earlier 173 communications. (“the Material Matters”) 18.104.22.168. Each receives separate treatment below. Formatted: Bullets and Numbering The fluidity of JHIL’s intentions concerning the partly paid shares 22.214.171.124. Contrary to JHIL’s representation to Santow J the Commission now Formatted: Bullets and Numbering knows that: (a) JHIL had made no firm decision to avoid actions that might prevent a future call on the partly paid shares from being met; (b) on the contrary, the possibility of subsequent cancellation was one of the options that, in JHIL’s mind and in the mind of its advisors, always remained open.174 169 Ex 224, Vol 2, Tab 37, pg 481 at T21.35 170 Ex 224, Vol 2, Tab 37, pg 481 at T21.45 171 Ex 1, Vol 6, pg 2033 at 2045, cl 5.1 172 Ex 1, Vol 6, pg 2033, at 2038 and 2040 (clauses 3.1 & 4.1) 173 Ex 7, Vol 8; Ex 150 pg 156; Ex 150 pg 163; Ex 150 pg 167 50 126.96.36.199. None of this was disclosed to his Honour. Cameron explained the Formatted: Bullets and Numbering reason for the non-disclosure in his evidence before the Commission. 188.8.131.52. Whether the result of feigned obtuseness on his part, or a genuine misapprehension as to JHIL’s duties of disclosure, Cameron seems to have attached himself to the view that a disclosure to Santow J concerning the partly paid shares would have become necessary if, and only if, JHIL had a firm intention in mind concerning their cancellation: (a) “… we had said to the company on a number of occasions that, if they entertained an intention - if the directors had an intention to cancel the partly paid shares, that they will be liable to disclosure…”175 (b) “… the relevance of those issues would have required something beyond a canvassing of them as possibilities by management some ten months before the scheme. They would have required some degree of fixity of intention on the part of somebody who had power to bring those acts about, namely the directors. To my knowledge there was no such intention.”176 (c) “Q By not raising the issue which had been raised in the 12 months prior to this application concerning the cancellation of the partly paid shares you directly avoided any interrogation by the judge concerning the way in which funding could occur with cancellation of the partly paid shares, isn’t that correct? A. No, I don’t think that is correct. It’s not correct for two or three reasons but the predominant reason is that underlying the question you have asked is an implication there was a degree of currency or belief that that was a course which was going to be pursued…”177 174 Additionally, although not a precondition to a finding of misleading or deceptive conduct, it is open to the Commission on the basis of the evidence to find that it had always been a firm intention on the part of the JHIL interests to pursue a scheme that would culminate in the cancellation of the partly paid shares. The submissions in this connection are dealt with in chapter 6 entitled “The Setting Aside of the Santow Judgment.” 175 P. Cameron T3028.5 (emphasis added) 176 P. Cameron T3034.25-35 (emphasis added) 177 P. Cameron T3057.35-45 (emphasis added) 51 (d) “We had similarly advised that if James Hardie had, at the time of the scheme, formed an intention to cancel the partly paids, that intention would need to be disclosed.”178 (e) “I do not think it was necessary to canvass with his Honour the gamut of options (including the status quo likely to be open to JHI NV at some future stage in relation to JHIL, or even that those options had been considered, when JHIL management had declared that they had formed no intention in respect of those options…”179 184.108.40.206. Emphatically, if JHIL had not formed an intention concerning the Formatted: Bullets and Numbering cancellation of the partly paid shares at the time of the Santow application, this would have been a matter of vital concern to his Honour. This was because, implicitly and by silence, the Court was being told exactly the opposite. The failure by JHIL to make full disclosure in this regard was a gross deception of the Supreme Court. 220.127.116.11. Robb’s evidence also supports the view that cancellation of the partly paid shares remained open in JHIL’s mind but that no attempt was made by him to ensure that Santow J was made aware of that fact: “Q. You were aware that it was always considered an option by your client from the very inception of the scheme and the separation that the partly paid shares that would eventually be part of the JHI NV, JHIL matter could potentially be cancelled? A. I was. Q. And at no time did you ensure that Santow J was made aware of that potential for cancellation? A. No.” 180 18.104.22.168. Had JHIL made the required disclosure to Santow J, it is clear that Formatted: Bullets and Numbering 181 conditions would have been imposed to safeguard the position of creditors. 178 Ex 224, Statement of Peter Stewart Cameron, para 69 (emphasis added) 179 Ex 224, Statement of Peter Stewart Cameron, para 72 (emphasis added) 180 Robb T2884.40-50 181 Ex 224, Vol 2, Tab 37, pg 481 at T21.5 52 Adopting his Honour’s own words, these would have ensured that there was “no blockage in the flow of funds to Australia.”182 22.214.171.124. In that event, either JHIL would have submitted to his Honour’s conditions or withdrawn its application. Either way would have avoided the event that has now occurred, namely the adoption by JHIL of a corporate structure that has enabled the “lifeline” to be cut. 126.96.36.199. The Court’s supervisory jurisdiction with respect to schemes of arrangement has been the subject of judicial comment. 183 In Re Archaean Gold, in the context of full disclosure to shareholders and creditors, Santow J spoke of the need for a Court in the conduct of its supervisory role to strike a balance “between paternalism on the one hand and non-interference with shareholders’ commercial judgment” on the other.184 188.8.131.52. However the Court’s supervisory role goes further than this. It embraces the protection of creditors in the way described by the Victorian Full Court in Re City Bank of Melbourne Ltd: “… But when they have done their work and resolved on what seems to them beneficial for all, and have presented their scheme to the Court for sanction, then the Court’s operations should be confined to seeing that the meeting has been honestly procured and conducted, that the scheme itself is one founded on honesty of purpose, and that, on its face, it does not show any fraudulent or wrongful proposal, and it must appear that all reasonable information was before the meeting to enable the meeting to arrive at a real conclusion. And if it appeared to the Court that some important or substantial class or item of information was not before the meeting, then the Court might arrive at the conclusion that the creditors had not come to a determination because they had not the means of determining, and then the Court should set it aside or refuse sanction. Or if it also appeared that, although the information was there and although the creditors did their best to regard it, some flagrant error crept in and that, manifestly, they had not observed some important matter, the Court might again refuse 182 Ex 224, Vol 2, Tab 37, pg 481 at T21.10-20 183 Re City Bank of Melbourne Ltd (1897) 3 ALR 220; Cleary v Australian Co-operative Funds (No.2)  NSWSC 991; Re Archaean Gold (1997) 23 AC SR 143 184 (1997) 23 ACSR 143 at 146 53 its sanction. Or if it appeared that since the creditors arrived at their resolution to adopt the scheme, some important event had supervened which very materially altered the effect and operation of the scheme, again the Court might say that things had so greatly changed that it would be wrong to give it sanction. So if it appeared that the scheme plainly, no matter how honestly, would have the effect of injuring or unduly oppressing some class of creditors as distinct from others, the Court would again refuse its sanction, because that would be inequitable. The Court has a supervising duty to look to the interest of all by seeing that neither by wrongful intention or accident would the effect of the scheme be do to some plain wrong to a class of creditors.” 185 184.108.40.206. One might be forgiven for thinking that their Honours had in mind the Formatted: Bullets and Numbering very non-disclosure with which Santow J was concerned. 220.127.116.11. It was JHIL’s misleading conduct that encouraged his Honour’s approval of the scheme without safeguards. In turn this gave rise to a corporate structure that has enabled the subsequent cancellation of the partly paid shares. The existence of the put option 18.104.22.168. Santow J was concerned to protect the interests of JHIL’s creditors. Formatted: Bullets and Numbering The possibility of any interference with that objective was material to an informed assessment by his Honour and ought to have been disclosed. 5.28. Any matter that could potentially distance JHIL from its creditors would have been of prime interest to the Court. The materiality of the put option lay in the fact that this was precisely its objective. Such materiality was recognised by Cameron when he gave the following evidence: “Q. It may be, as you sit there now, something that Justice Santow might have considered a reasonable condition to impose that JHI NV undertake not to exercise the put option without, for 185 (1897) 3 ALR 220 per Madden CJ, Hodges and Hood JJ at 227-228; cited by Austin J in Cleary (supra) at 46, (emphasis added) 54 example, procuring a cancellation of the partly paid shares so that a process had to be gone through which did in fact protect the creditors of JHIL; is that not a plausible scenario? A. It's possible.”186 22.214.171.124. In this connection the submissions made in relation to term 4 of the Formatted: Bullets and Numbering Terms of Reference have application: “… Viewed from a topographical perspective, the Commission is concerned with a scheme. It was a scheme consisting of a chain of interlocking steps intended by the JHIL interests to achieve a single object, namely a separation from their assets which may otherwise have been available to meet legitimate claims of creditors.”187 126.96.36.199. The put option was one of the interlocking steps. Had it been Formatted: Bullets and Numbering exercised this would have relegated JHIL to the status of an Amaca subsidiary, effectively part of a charitable trust. As at the time of the application before Santow J, the existence of such a mechanism lying in wait would have commenced a chain of enquiry that, for obvious reasons, the JHIL interests were anxious to avoid. 188.8.131.52. That protection of JHIL from creditors was always the objective envisaged by implementation of the put option is made abundantly clear by the evidence: (a) Morley conceded that Macdonald “… wanted the option in there because he was of the view that over time JHINV – we had to deconsolidate any asbestos containing subsidiaries of which JHIL had a history pre 1937;”188 (b) When questioned in relation to notes of a meeting on 01/01/01189 Robb’s evidence was as follows: “Q. And the other choice left JHIL as part of the James Hardie Group, and in that respect your understanding 186 P. Cameron T3066.45-50 187 See section entitled chapter 12 “Submissions on Term 4” 188 MorleyT2044.40 189 Ex 204 55 as reflected in the third last entry on the last page, was that there was a determination to dispose of it one way or another, ultimately whether it be by liquidation or the exercise of a put option or some other mechanism? A. You’re quite correct …” 190 (c) On 04/01/01 Shafron advised: “may want to give up JHIL to trust. Make sure nothing precludes this from happening (may negotiate fee to do so).”191 (d) In an email dated 05/02/01 Macdonald stated: “we would also seek an option for JHINV to put JHIL to JH & Amaca once it had no subsidiaries and at least zero net worth.”192 (e) In cross-examination concerning the email Macdonald’s evidence was as follows: “Q. When you said in this email we would also seek an option for JHI NV to put JH and Amaca, you are referring are you not to the put option which was ultimately included in the Deed of Covenant and Indemnity that was executed between the existing directors and JHIL? A. I believe so.” 193 (f) Robb agreed that the ultimate separation of JHIL from James Hardie, whether by way of liquidation or the exercising of the put option was the subject of specific discussion in documentation up until 15/02/01.194 184.108.40.206. The Court’s interest in the existence of the put option would have Formatted: Bullets and Numbering been enlivened by knowledge as to each of the following: 190 Robb T2957.30-35 191 Ex 203 192 Ex 150, pg 107 193 Macdonald T2368.25 194 Robb T2961.30 56 (a) that it was highly likely, if not certain, that had the put option been exercised, the partly paid shares would have been cancelled and that this was known to JHIL in February 2001;195 (b) that Shafron had a clear understanding that “what would happen as a result of [the put option] was a complete shareholding severance between JHINV and JHIL;” 196 and (c) that, as was Robb’s evidence, even if the partly paid shares were not cancelled, the exercise of the put option would have ensured that JHIL’s net worth was not preserved because Amaca and Amaba had a net worth less than JHINV.197 220.127.116.11. The existence of the put option was material to his Honour’s concerns Formatted: Bullets and Numbering to ensure that JHIL’s creditors were not disadvantaged and cried out for disclosure. Non disclosure of covenant not to sue and indemnity in February 2001 Deed 18.104.22.168. The letter to his Honour’s Associate from Allens of 9 August 2001 Formatted: Bullets and Numbering related that: “The partly paid shares are to be issued by JHIL to ensure it has access to funding going forward to meet any potential liabilities.” 198 22.214.171.124. It was these “potential liabilities” that the February 2001 Deed was Formatted: Bullets and Numbering intended to reduce. By the deed, JHIL was to secure a covenant and indemnity from its subsidiaries. 126.96.36.199. The existence and effect of such provisions were highly relevant to the JHIL’s application before Santow J and were no less material than the matters dealt with above. An indemnity is only as good as the asset base of the indemnifying entity. The worth of each of the subsidiaries as the indemnifying entities, and whether they were sufficient to cover JHIL’s 195 Morley T2044.15; Robb T2848.45, T2858.5; and Cameron T3064.45 196 Shafron T1388.40 197 Robb T2698.25 198 Ex 278, Vol 3, Tab 19, pg 58 57 liabilities into the future, were matters fundamental to the Court’s ability to make an informed assessment. 188.8.131.52. Once again disclosure of these matters would have set off a chain of enquiry by his Honour into, amongst other things: (a) an estimate as to JHIL’s future liabilities; (b) whether such an estimate was reasonably based; and (c) the scope, extent and valuation of the indemnity agreed to by Cameron and Morley as outgoing directors of Amaca together with the circumstances in which that agreement was reached. 184.108.40.206. These were areas of inquiry that JHIL plainly wished to avoid. They Formatted: Bullets and Numbering were matters calling for full and frank disclosure. They were central to his Honour’s considerations. Again, the failure to disclose them was a breach by JHIL of its obligations to the Court. The matters raised in the letter from Sir Llew Edwards and related communications 220.127.116.11. These communications can be dealt with in summary form because Formatted: Bullets and Numbering they largely speak for themselves: (a) They consist of 3 documents culminating in the letter from Sir Llewellyn Edwards to Macdonald of 24/09/01.199 (b) Each of them reflects JHIL’s state of mind (via Macdonald as its CEO) in the months prior to and during the Santow application concerning a view held by Amaca’s directors that they have been misled by JHIL in February 2001: “Dennis has a ‘sensitive issue’ to discuss. … It may be that Dennis and the Foundation have decided to press on all possible fronts (including coming back to JHIL) to attempt to improve the situation of the Foundation,” Email of 23.4.01; 199 Email Macdonald to Shafron 23.4.01 (Ex 150 pg 156); Email Ashe to Shafron 7.8.01 (Ex 150 pg 167); Sir Llew Edward’s letter of 24.9.01 (Ex 7 Vol 8 of 8 behind Tab 12) 58 “[Dennis] mentioned that one of the considerations … is whether it is expected that AMACA will become insolvent. … In his words ‘the directors are all walking around with very long faces,’” Email of 7.8.01; and “Amaca … could be insolvent in less than 9 years … Our expectation as prospective Directors was that the most up to date data available would be used to provide information to us in February 2001. … we would seek an urgent meeting to discuss these matters and consider appropriate solutions,” Letter of 24.9.01. (c) JHIL knew that if, as Sir Llew had foreshadowed, Amaca was indeed facing insolvency, there was a realistic prospect that the MRCF, Amaca and its directors would “press on all possible fronts (including coming back to JHIL).”200 (d) Bearing in mind the timing of these events, this knowledge must have been at the forefront of JHIL’s mind at the time of its application before Santow J; (e) Had such information been disclosed, his Honour would have asked questions. Once again an inevitable chain of enquiry would have uncovered events vital to his Honour’s ability to make an informed assessment of the proposed scheme and all that it detailed. What Santow J should have been told 18.104.22.168. In answer to the question his Honour asked on 10 August 2001: Formatted: Bullets and Numbering (a)“[a]re there any other matters you should tell me about?” 201 6.43.in view of what the Commission now knows, an open and honest response by JHIL would have been along the following lines: 200 Ex 150, pg 156 and Macdonald T2383.50 201 Ex 224, Vol 2, Tab 37, pg 481 at T21.35 59 “Yes, there are a number of matters of which the Court should be appraised: The first is that, so far as the partly paid shares are concerned, JHIL considers that notwithstanding your Honour’s ultimate approval of the scheme, there is a whole gamut of options open to it. One is their cancellation, an option actively considered by JHIL’s senior management earlier this year. This would of course frustrate the purpose of the partly paid shares, namely to protect the creditors. The second is in relation to the Medical Research and Compensation Foundation. In February of this year, Amaca, one of JHIL’s asbestos subsidiaries, was separated from the Hardie Group. It was installed within the MRCF, a charitable trust that was funded by JHIL with the stated purpose of enabling it to compensate sufferers of asbestos related disease with valid claims. After approval of the Scheme of Arrangement, JHI NV will have the right to force Amaca to acquire all of JHIL’s issued ordinary shares via a put option. The exercise of the put option by JHI NV would relegate JHIL to the MRCF, removing the former parent from the Hardie Group. There is a suggestion by Amaca’s director that it is on the brink of insolvency. They claim that it was insufficiently funded by JHIL, and that they would not have assumed office had they known this to be so. There is also an indication that JHIL may be the subject of substantial claims, by any or all of Amaca, its directors or the fund itself on the basis of an allegation of misleading conduct. Amaca has provided a covenant not to sue JHIL together with an indemnity. However, in view of the possibility of Amaca’s insolvency, the utility of the indemnity is questionable. If you Honour wishes I will expand on each of these.” 60 5.41. One asks rhetorically what his Honour’s response would have been had disclosures to that effect been made. Yet this is precisely what should have occurred. 9.3.JHIL’s duty of uberrimae fidei Formatted: Bullets and Numbering 22.214.171.124. The proceedings before Santow J were effectively pursued by JHIL on an ex parte basis. The transcript of the proceedings before Santow J reveals ASIC’s presence on only two occasions,202 however on neither was ASIC assuming an active role: (a) On 15 August 2001, Ms Cuneo for ASIC made clear that the purpose of her appearance was “just to make a couple of timing and procedural points”203 (b) In a letter dated 23 August 2001, Ms Cuneo wrote the following to Allens Arthur Robinson: (c)“Therefore, I advise you that ASIC does not currently Formatted: Bullets and Numbering propose to appear to make submissions, or intervene to oppose the James Hardie Scheme, at the first court hearing;”204 (d)(c) On the same day Santow J made Orders convening a meeting of the members of JHIL on 28 September 2001;205 (e)(d) ASIC’s written submissions dated 5 October 2001 commence: “ASIC does not wish to intervene in these proceedings under section 1330 of the Corporations Act 2001 … to oppose the James Hardy Industries limited members’ scheme of arrangement. However, ASIC is making these submissions as 202 Ex 224, Vol 2, Tab 42, pg 0538 (15 August) and Ex 278, Vol 5, Tab ‘8 October 2001’ 203 Ex 224, Vol 2, Tab 42, pg 0538 at T1.15 204 Ex 278, Vol 4, Tab 42 205 Ex 278, Vol 4, Tab 45 61 amicus curiae as it is of the opinion that there are significant issues that ought to be brought to the attention of the Court.”206 (f)(e) ASIC’s submissions were limited to the effect of a new withholding tax, its impact on the proposed scheme and whether in light of that development the true will of the JHIL members had been ascertained through the voting process;207 (g)(f) On 8 October 2001 Ms Cuneo appeared as amicus curiae for ASIC.208 As his Honour’s judgment on that day makes clear, the short point considered concerned the effect on the Court’s anticipated approval of the scheme of an announced tax change;209 (h)(g) On the same day, his Honour made Orders approving the Scheme of Arrangement pursuant to subsections (4) and (6) of the Corporations Act 2001.210 126.96.36.199. There was never an effective contradictor before the Court. Even had there been an effective contradictor, only the JHIL interests were possessed of information pertaining to the Material Matters. As such, their non- disclosure to the Court would have gone undetected. 188.8.131.52. His Honour was entirely reliant upon the openness of JHIL, its directors and advisors. In such circumstances the duties imposed upon parties abound. 184.108.40.206. In the context of injunction applications Isaacs J stated the general rule in Thomas A. Edison Ltd. v Bullock: (a)"Dalglish v. Jarvie 2 Mac. & G., 231, a case of high authority, establishes that it is the duty of a party asking for an injunction ex parte to bring under the notice of the Court all facts material to the determination of his right to that injunction, and it is no excuse for him to say he was not aware of their importance. Uberrima fides is required, and the party inducing the Court to act in the absence of the 206 Ex 278, Vol 3, Tab 30, para 1 207 Ex 278, Vol 3, Tab 30 208 Ex 278, Vol 5, Tab ‘8 October 2001.’ 209 Ex 278 Vol 4 Tab 49 210 Ex 278 Vol 4 Tab 47 62 other party, fails in his obligation unless he supplies the place of the absent party to the extent of bringing forward all the material facts which that party would presumably have brought forward in his defence to that application. Unless that is done, the implied condition upon which the Court acts in forming its judgment is unfulfilled and the order so obtained must almost invariably fall. I add the word 'almost' in deference to such an exceptional case as Holden v. Waterlow 15 W.R., 139." 211 220.127.116.11. The rule is not confined to ex parte injunction applications. It extends to practically all ex parte applications.212 18.104.22.168. Accepting then, that there was a positive duty to disclose the Material Matters, non-disclosure of them by the JHIL interests constituted misleading or deceptive conduct. 22.214.171.124. To the extent that that conduct was by silence, it is well recognized that silence can constitute a misrepresentation for the purposes of s 52 of the TPA and its statutory equivalents.213 126.96.36.199. Finally, to the extent, as was the case, that the misrepresentation concerned future matters, in view of Cameron’s evidence concerning the fluidity of JHIL’s intentions, there was simply no justifiable basis for its making. 10.INVOLVEMENT BY JHIL’S OFFICERS & SOLICITORS IN THE Formatted: Bullets and Numbering MISLEADING CONDUCT 10.1.5.50. JHIL’s officers and solicitors become implicated in the misleading conduct before Santow J in 2001 because in all relevant respects they: (a) aided and abetted; and 211 (1912) 15 CLR 679 at 681.9 – 682.3 212 Victoria Teachers Credit Union Ltd v KPMG (a firm ) & Anor  VSCA 23 (9 March 2000) at para 17; The King v Kensington Income Tax Commissioners, ex p. Princess Edmond de Polignac  1 K.B. 486 at 504.4-506.3 213 Bank of Australia v. Mehta (1991) 23 NSWLR 84; Rhone-Polenc 68 ALR 77 at 85.3-85.10; Henjo 79 ALR 83 at 95.20; Demagogue Pty Limited v Ramensky 39 FCR 31 at 41.1-.2; Fraser v. NRMA Holdings Limited 15 ACSR 590 at 601.17; Mikaelian v CSIRO (1963) 163 ALR at 188.5 – 189.3 63 (b) had been, directly or indirectly, knowingly concerned in or a party to; 10.2.that conduct. Formatted: Bullets and Numbering 10.3.5.51. Insofar as aiding and abetting is concerned, proof of intent is not a requisite element to satisfy section 75B of the TPA or any of its statutory equivalents214. All that is required is actual knowledge of the essential elements of the contravention and intentional participation in it.215 Likewise a “party to a contravention” refers to a person who participates in or assents to it. Once again knowledge of the essential elements constituting the contravention is required. 10.4.5.52. The essential elements of which knowledge was required were relevantly: (a) the existence of a duty of disclosure to Santow J; (b) the fact of the non disclosure amounting to conduct that is misleading or deceptive or likely to mislead or deceive. 10.5.The involvement of Allens Formatted: Bullets and Numbering 10.6.5.53. Allens must be taken to have been fully aware of the duty of disclosure. Notwithstanding Cameron’s apparent misapprehension as to the duty as earlier referred to, the evidence clearly discloses a full appreciation on the part of the lawyers as to what was required: (a) Allen’s advice of 7 February 2001 sent by facsimile to Macdonald and Shafron unequivocally recognizes the likely chain of enquiry that would have been initiated, had full disclosure been made to his Honour: “… the subsequent financial reconstruction will involve JHIL Formatted: Bullets and Numbering considering the interests of creditors and is likely to involve a rigorous analysis by the Court of issues affecting creditors, with the possibility that the Court will seek to investigate the 214 Yorke v Lucas (1983) 68 FLR 268 at 272 215 Rural Press Ltd v ACCC (2002) 118 FCR 236; Giraffe World Australia Pty Limited (No. 2) (1999) 95 FCR 302 at 346 64 trust and related arrangements … The Court may enquire whether JHIL can quantify the potential asbestos exposure. It will probably do so. … It is likely that the scheme documents will need to disclose the directors’ intentions with respect to JHIL post the reconstruction. This may involve a discussion of the liquidation and vesting options, if indeed these are in contemplation. This may be regarded as at odds with arguing that post reconstruction JHIL’s creditors interests are not materially prejudiced. Accordingly, to the extent partly paid shares are to be used the Court may not regard them as sufficient protection for creditors” 216 (b) Robb conceded that in February 2001 he anticipated that the scheme documents would need to disclose the directors’ intention with respect to JHIL post-reconstruction, as he knew that Macdonald was contemplating the possibility of expelling JHIL from the group by use of the put option after the intended reconstruction.217 (c) In connection with Robb’s draft advice to JHINV dated 31 October 2003,218 he was questioned as follows: “Q: Was one of the concerns that you had that you believed Formatted: Bullets and Numbering that the failure to refer to the potential for changing control of ABN 60 may be misleading because of the failure to refer the put option to the Court may mean that, and the cancellation of the partly paid shares may mean, that in the event that ABN 60 became insolvent or was imminently insolvent, the partly paid shares would not be available. A: I think the answer is yes…”219 (d) Cameron was well aware that failure to make full disclosure to the Court would have been misleading: 216 Ex 80, Tab 6 at pg 152 (emphasis added) 217 Robb T2849.15-30 218 Ex 191 219 Robb T2929.10 65 “Q. You would agree that without full and frank disclosure Formatted: Bullets and Numbering that a judge such as Justice Santow could be misled in relation to the matters that were before him? (e)A. It’s possible, yes.”220 10.7.5.54. JHIL’s admitted duty, via its lawyers, to make full and frank disclosure to the court foist upon the lawyers a corresponding duty to inform themselves of all such matters as ought to be disclosed. Allens plainly failed in the proper discharge of this duty. It did not suffice that Cameron and Robb contented themselves with their failure to make reasonable enquiry of their clients. Indeed, this was the effect of their evidence.221 10.8.5.55. That JHIL’s solicitors participated in the contravention is beyond debate. They took instructions from JHIL, acted on its behalf in making the application before Santow J, authored the various letters to his Honour’s Associate and even appeared before his Honour at the bar table in the course of the application.222 10.9.5.56. Accordingly Allens are liable, no less then JHIL, to pay damages to any person who suffers loss or damage by reason of JHIL’s misleading conduct.223 10.10.The involvement of JHIL’s officers Formatted: Bullets and Numbering 10.11.5.57. Shafron, Morley, Macdonald and Harman were involved in JHIL’s misleading conduct no less than were its solicitors. 10.12.5.58. The evidence before the Commission indicates the extent of their involvement in the making of the application and, as with Allens, their knowledge of the essential elements constituting the contravention: (a) Shafron, as JHIL’s in house counsel and an ex-Allen’s man, must be taken to have been aware of the requirements of JHIL’s duty of 220 Robb T3024.5-10 221 Robb T2873.35 and T2893.40-55; and P. Cameron T3015.10 and T3034.20-35 222 Ex 224, Vol 2, Tab 42, pg 570 223 See section entitled, chapter 9 “The Role and Liability of Allens Arthur Robinson” Formatted 66 disclosure to the Court. As JHIL’s in house counsel, Shafron’s knowledge becomes the knowledge of JHIL; (b) Bearing in mind the level of their past involvement with the restructuring proposal, it would bordering on the fanciful to assume that JHIL’s officers were not intimately concerned with the process of instructing JHIL’s lawyers as to precisely what was and what was not to be submitted before Santow J.224 10.13.5.59. Indications in the evidence of such past involvement are referred to Formatted: Bullets and Numbering above.225 Other indications are as follows: (a) The notes of a meeting on 1 January 2001 (incorrectly dated 1 January 2002) attended by Shafron, Macdonald, Morley and others record: “want to liquidate JHIL down the line.”226 (b) Robb conceded that he had been instructed that James Hardie in due course, wanted to separate JHIL from the continuing James Hardie operating entities. One of the options considered was liquidation.227 (c) The evidence includes a file note of a telephone conversation between Macdonald and Robb on 13 February 2001 recording: “timetable to windup of JHIL.” 228 (d) The JHIL February 2001 Board papers indicated that management were considering a number of alternatives in relation to the “critical issues that James Hardie has been facing for over 5 years.”229 (e) On page 3 under the heading “Alternatives Considered and Rejected” one finds the option of “combined separation and restructure”. As to this option the papers relate: “Its major merit is that, having survived the court process, this Formatted: Bullets and Numbering option would more rapidly lead to a full asbestos separation 224 The affidavit of Donald Cameron placed before the Court, was approved by Shafron before it was sworn (T.1377.35). Either Shafron or Morely gave instructions in relation to the information sent to Santow J (T.1378.5 and T137.65). 225 See section entitled, “The existence of the put option” Formatted 226 Ex 204, at pg 4 227 Robb T2954.25-55 228 Ex 205, at pg 1 229 Ex 80, Tab 6 at pg 81 67 (including JHIL) so that the risks of “breakthrough actions” would disappear more quickly than the recommended option …In contrast, the recommended option initially transfers out to the ongoing structure only JH & Amaca and Amaba, leaving JHIL in the ongoing “new world”. It would take some months for this issue to be addressed – so there is increased exposure.”230 (f) In evidence Macdonald admitted that it would be helpful to JHI NV in the future to remove JHIL from the group because of the perceived connection of JHIL with asbestos.231 He conceded that at no time did he consider whether the separation was in JHIL’s interest.232 (g) On 18 March 2003, Macdonald sent an email containing a draft analysis of options to manage JHIL: “We determined that there is no ongoing purpose or Formatted: Bullets and Numbering necessity for ABN 60 [JHIL] to remain within the JHINV group. JHINV would be advantaged by removing ABN 60 from the JHINV group as it would make even clearer the separation of JHINV from asbestos legacy of ABN 60 former subsidiaries (Amaca and Amaba).” 233 11.INVOLVEMENT BY JHI NV IN JHIL’s MISLEADING CONDUCT Formatted: Bullets and Numbering 188.8.131.52. As with JHIL’s officers and solicitors, liability falls upon JHI NV on the basis that that company aided and abetted and/or was directly or indirectly knowingly concerned in or a party to JHIL’s conduct. In this connection the principles referred to earlier have equal application here.234 184.108.40.206. JHI NV had knowledge of the essential elements constituting the contravention: 230 Ex 80, Tab 6 at pg 81 (emphasis added) 231 Macdonald T2446.45-55 232 Macdonald T2447.10 233 Ex 150, pg 259 234 See paras 5.51 to 5.60 Formatted 68 (a) Robb’s statement makes clear, “[D]uring the scheme of arrangement Allens advised JHIL and JHI NV”. They were obviously retained by both companies in circumstances in which each of their clients had common and overlapping interests in securing success of the scheme’s approval by the Supreme Court; (b) as solicitors for JHI NV and JHIL at the time of the application, in all respects their acts, intentions and knowledge concerning the scheme may truly be said to be the acts, intentions and knowledge of their clients;235 (c) the knowledge of Allens concerning the duty of disclosure and the want of disclosure before Santow J can therefore be imputed to JHI NV; (d) at common law, in the context of conveyancing transactions, there is authority that a client who employs a solicitor has imputed to him knowledge of anything that is known to his solicitor.236 The same principle has application to Allens’ role during the conduct of the application; (e) although not formally noted as a party to the application before Santow J, JHI NV was clearly a participant in the making of it. In this respect JHI NV’s cooperation was integral success of the application. This can be seen from the documents made available to Santow J: In their letter of 13 August 2001 to his Honour’s Associate, Allens advised: (1)“As requested by his Honour, we set out below Formatted: Bullets and Numbering responses to each of the non-takeover matters he raised during the hearing of this matter on Friday 9 August 2001 … Questions appear in the order in which they were asked by his Honour (save that answers to questions relating to Dutch law matters are contained in a separate advice from James Hardie’s Dutch legal 235 In Vigors (1887) 12 App Case 531 at 537-8 236 Sargent v ASL Developments Limited (1974) 131 CLR 634 per Stephen J at 649, per Mason J at 658-659 69 counsel, De Brauw Blackstone Westbroek, enclosed with this letter).”237 One then sees enclosed with that correspondence a letter from De Brauw Blackstone Westbroek (also dated 13 August 2001), James Hardie’s Dutch legal counsel. It is addressed both to JHI NV in the Netherlands and JHIL in Sydney; A separate letter of advice of even date from the same Dutch firm was sent to Cameron and Robb of Allens; and Plainly JHI NV was assuming an integral role in ensuring that the application before his Honour was successfully progressed. (f) One adds to these observations that: prior to the implementation of the scheme JHI NV was wholly owned by JHIL; prior to the implementation, Donald Cameron was the managing director of JHI NV238 and the treasurer and company secretary of JHIL; and eleven days following the approval by Santow J of the scheme (on 8 October 2001), Peter Macdonald assumed a directorship of JHI NV.239 (g) JHIL owned 100% of the shares in JHI NV prior to implementation of the Scheme of Arrangement. They had common legal advisors in Allens. JHI NV was an ultimate beneficiary of the scheme. For all intents and purposes their respective interests coincided and merged in the success of the application before Santow J; (h) JHI NV’s own literature relates its intended involvement in concert with JHIL in the proposed scheme: 237 Ex 278, Vol 3, Tab 25, at pg 214 (emphasis added) 238 Ex 42, Statement of Donald Cameron, paras 2, 4 & 5 239 His directorship lasted from 19/10/01 to 3/1/02 70 “On July 24, 2001, JHIL announced a further plan of Formatted: Bullets and Numbering reorganization and capital restructuring (the “2001 Reorganization”). On October 19, 2001, we completed our 2001 Reorganization. In connection with the 2001 Reorganization, JHI NV issued common shares represented by CUFS on a one for one basis to existing JHIL shareholders in exchange for their shares in JHIL and became the ultimate holding company for JHIL and JHNV.”240 220.127.116.11. JHI NV is liable to make good in its entirety the loss or damage suffered by aggrieved persons as a consequence of the involvement of that company in JHIL’s misleading conduct of 2001. This renders JHI NV a prime target in any recovery proceedings. 12.RESULTANT LOSS OR DAMAGE Formatted: Bullets and Numbering 18.104.22.168. Proof that the MRCF or the sufferers of asbestos related diseases relied on JHIL’s misleading conduct before Santow J is unnecessary for their success in any action based on misleading conduct. The conduct is actionable in their hands because they are directly aggrieved as a consequence of it. 22.214.171.124. The nexus between misleading conduct and the loss or damage does not require that it be proved that the claimants relied on conduct.241 All that is required is that it be shown in a common sense way that they suffered loss and damage “by” the impugned conduct. For this purpose “loss or damage” within the s 52 of the TPA and its related statutory equivalents is accorded a wide meaning.242 126.96.36.199. The MRCF and sufferers of asbestos related diseases (both those diagnosed and those as yet undiagnosed) suffer loss or damage by the misleading conduct before Santow J. Shortly stated, this arises in the following way: 240 United States Securities and Exchange Commission; Washington, D.C. 20549; Form 20-F 241 Jansesen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526; 109 ALR 638; Haynes v Top Slice Deli Ltd (1995) ATPR (Digest) 46-147; Hill v Tooth & Co Ltd [1998} ATPR 41-469 242 Murphy v Overton Investments (2004) 78 ALJR 324; Brabazon v Western Mail Pty Ltd (1985) 58 ALR 312 at 319; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 71 (a) causes of action are available against JHIL, its directors, its lawyers and Trowbridge as a result of the events of February 2001; (b) although the MRCF is an obvious claimant in relation to any such causes of action, those asbestos victims who have valid claims, but for whom funding will be insufficient, have standing also; (c) of the prospective defendants only JHIL had assets adequate to place the fund at a level sufficient for its originally stated purpose; (d) however in March 2003 JHIL managed to frustrate any claims by creditors by placing its assets beyond their reach; (e) JHIL managed to achieve this as a direct result of its misleading the Supreme Court of New South Wales in its application of 2001 because JHIL’s success in that application led to its adoption of a corporate structure that has in turn enabled the separation of JHIL from its assets; (f) but for JHIL’s impecuniosity, brought about by the misleading conduct before Santow J, that company may have proved a viable target for the MRCF and sufferers of asbestos-related diseases in their claims arising out of the events of February 2001; and (g) unless those claimants are now placed in a position to attach the assets of JHI NV they may be disabled from recovery to the full extent of their entitlement. 13.6. CHAPTER SIX: THE SETTING ASIDE OF THE SANTOW JUDGMENT (1)FRAUD BY THE JHIL INTERESTS Formatted: Bullets and Numbering 188.8.131.52. The failure by JHIL to make full disclosure to Santow J of material matters was a gross deception of the Supreme Court of New South Wales. They give rise to a case against JHIL for misleading or deceptive conduct and a case against third parties who were involved in JHIL’s contravention. 184.108.40.206. Success in a misleading or deceptive conduct count does not require proof of intention. These submissions go one step further. They support the view that the conduct of the JHIL interests: (a) was conscious, deliberate and amounted to fraud on their part; and (b) gives rise, in accordance with established principles, to a case for the setting aside of the Orders made by Santow J on 8 October and entered on 10 October 2001. 220.127.116.11. The established law in this area was stated by Kirby P, as he then Formatted: Bullets and Numbering 243 was, in Wentworth v Rogers. In that case his Honour was dealing with an application for the setting aside of a verdict and judgment on the basis that they were procured by fraud. His Honour stated the governing principles as follows: (a)“First, the essence of the action is fraud. As in all actions based on fraud, particulars of the fraud claimed must be exactly given and the allegations must be established by the strict proof which such a charge requires … (b)Secondly, it must be shown, by the party asserting that a judgment was procured by fraud, that there has been a new discovery of something material, in the sense that fresh facts have been found which, by themselves or in combination with previously known facts, would provide a reason for setting aside the judgment … 243 (1986) 6 NSWLR 534 73 (c)Thirdly, mere suspicion of fraud, raised by fresh facts later discovered, will not be sufficient to secure relief … The claimant must establish that the new facts are so evidenced and so material that it is reasonably probably that the action will succeed. … (d)Fourthly, although perjury by the successful party or a witness or witnesses may, if later discovered, warrant the setting aside of a judgment on the ground that it was procured by fraud, and although there may be exceptional cases where such proof of perjury could suffice, without more, to warrant relief of this kind, the mere allegation, or even the proof, of perjury will not normally be sufficient to attract such drastic and exceptional relief as the setting aside of a judgment … (e)Fifthly, it must be shown by admissible evidence that the successful party was responsible for the fraud which taints the judgment under challenge … (f)Sixthly, the burden of establishing the components necessary to warrant the drastic step of setting aside a judgment, allegedly affected by fraud or other relevant taint, lies on the party impugning the judgment. It is for that party to establish the fraud and to do so 244 clearly.” 18.104.22.168. The character of the fraud required to be proved in accordance with the first element was explained by Lord Simon in The Ampthill Peerage245 in the following terms: (a)`To impeach a judgment on the ground of fraud it must be proved that the court was deceived into giving the impugned judgment by means of a false case known to be false or not believed to be true or made recklessly without any knowledge on the subject. No doubt, suppression of the truth may sometimes amount to a suggestion of the false ... but short of this, lack of frankness or an ulterior or oblique or indirect motive is insufficient.'246 244 At 538D – 539F 245  AC 547 at 591 246 To a like effect see Lord Wilberforce at 570-571, (emphasis added) 74 22.214.171.124. The evidence adduced before the Commission is sufficient to support the stringency of this requirement. 126.96.36.199. The following analysis is considers the evidence within the framework of the six elements referred to in Wentworth v Rogers. 14.THE FIRST ELEMENT Formatted: Bullets and Numbering (1)General 188.8.131.52. The chapter entitled “the Misleading of the Supreme Court of New South Wales In 2001” concerns what his Honour was told and was not, but should have been told. They have equal application and, subject to what is said below, do not require repetition here. 184.108.40.206. Unlike those submissions, these focus upon the subjective state of mind of the JHIL interests as to the materiality of the matters not disclosed and whether there was any intention to mislead the Court. 220.127.116.11. Two conclusions may be drawn from the evidence: (a) the JHIL interests knew that the undisclosed matters were material to Santow J’s ability to come to an informed view; and (b) they deliberately abstained from disclosing them. 18.104.22.168. Each of these receives separate treatment below. Formatted: Bullets and Numbering 14.6.Knowledge by JHIL interests of materiality 14.7.What happened prior to the making of the Santow application 22.214.171.124. As early as January, eight months before the making of the application, considerations were well underway as to the probable “spoilers” to be encountered in an application for approval by the Court. 126.96.36.199. In an email of 10 January 2001, Shafron requested a hook up to go through issues including “post trust/post Green options for the JHIL shell.”247 247 Ex 189, Vol 7, pg 126, (emphasis added) 75 188.8.131.52. Robb’s notes of the meeting record Shafron saying: 14.11.“Trust and Green again – concerned about spoiler risk in the court. Answer – partly paid.”248 184.108.40.206. As at February 2001 JHIL appreciated that an additional reason for the importance of securing the approval of an Australian Court was satisfaction of USA bureaucratic requirements. On 8 February 2001, one sees an email from Wendy Hallgren copied to Shafron entitled “US Securities Laws and Project Green.”249 In it the author notes: (a)"We have been advised by the SEC that, so long as these procedures, which include an Australian Court holding a hearing on the fairness of the exchange, are satisfied, we do not need to seek a no action letter from them.” 220.127.116.11. An email from Shafron dated 24 March 2001 attaches a memorandum in which he outlines the process of seeking approval from the Supreme Court states. The covering email includes the caution: (a)“… please do not distribute further nor retain copies once read”.250 14.14.The need for this caution, of itself, underscores JHIL’s perception as to the materiality of what the attached memorandum contained. In it Shafron comments: (a)“If JHIL is left in the same economic position after the restructure as it was in before then stakeholders should effectively be deprived of grounds for complaint. … They may argue that JHIL could cancel the partly paid shares shortly after the scheme was improved – to which the reply would be that the then JHIL directors are still subject to the Corporations Law and to the risk of suits if they breach their directors duties involving creditors … “ 18.104.22.168. This wording is significant. Four months prior to the application the author was foreshadowing the very enquiry which, in the application itself, JHIL succeeded in avoiding. 248 Ex 189, Vol 7, pg 131, (emphasis added) 249 Ex 159 250 Ex 194 76 22.214.171.124. JHIL’s success in this regard was due to the way the application was conducted. Thanks to the assurances conveyed to his Honour concerning the enduring benefit to creditors of the partly paid shares, JHIL managed to stay clear of any sensitive line of enquiry.251 The intended result was that no occasion arose for this line of questioning, which was foreshadowed four months earlier.252 126.96.36.199. There could be no room for misapprehension by JHIL as to the likelihood that the Court would be concerned to explore the impact of the scheme on creditors. Indeed, previously JHIL had been advised by Cameron precisely as to this point: (a)“His Honour also asked, as I advised JHIL was likely, what effect the scheme would have on asbestos claims.” 253 188.8.131.52. The result is that prior to the application JHIL and its advisors appreciated with crystal clarity what was to be one of the Court’s key areas of focus. It was in JHIL’s interests, as in fact occurred, to steer this focus elsewhere by providing information and making representations to the Court that would placate any concerns that his Honour entertained. 14.19.What happened during the making of the Santow application Formatted: Bullets and Numbering 184.108.40.206. In the course of the application, JHIL and Santow J were equally focussed upon the same issue, namely the impact of the proposed Scheme of Arrangement upon asbestos claimants. Yet in relation to that issue, by the end of the proceedings there remained a world of difference between what his Honour was told and what JHIL knew. 220.127.116.11. The transcript reveals that it was central to his Honour’s concerns to be assured that the proposed Scheme of Arrangement would not impact adversely upon asbestos claimants: 251 As to which see submissions entitled “the Misleading of the Supreme Court of New South Wales In 2001” 252 The same email makes clear that in the absence of the partly paid shares the question would likely be put as to how JHIL arrived at the level of funding and what the funding was for. 253 Ex 224, Statement of Peter Stewart Cameron, para 65, (emphasis added) 77 (a) “What effect will this [the proposed scheme] have on asbestos claims against Hardie’s?”254 (b) “Is there any possible basis upon which a call upon partly paid shares upon a Dutch company could be resisted under Dutch law? Is that with the explanatory memorandum because it is a fundamental matter. I don’t know whether it is dealt with at all.”255 (c) “One would need to make sure every step is taken not only of disclosure but every step is taken to ensure that a call must be met. In other words, there must be the clearest possible Dutch exchange approvals required if it is possible to get them in advance in order to ensure there is no blockage in the flow of funds to Australia.”256 18.104.22.168. The assurances given to his Honour have been dealt with in the Formatted: Bullets and Numbering submissions entitled “the Misleading of the Supreme Court of New South Wales In 2001”, but are repeated here for ease of reference: (a) It had been made clear to the Court that: the partly paid shares were to “… to ensure that [JHIL] has access to funding going forward to meet any potential liabilities;”257 the partly paid shares would ensure that, notwithstanding the proposed transfer by JHIL to JHI NV of its principal operating assets “… [JHIL’s] net worth will remain essentially the same following implementation of the transaction;”258 and “under the terms of the issue of the partly paid shares JHIL will be able to call upon JHINV to pay any or all of the remainder of the issue price…at any time in the future and from time to time.”259 (b) On 10 August 2001 His Honour was informed: 254 Ex 224, Vol 2, Tab 37, pg 480 at T20.45 255 Ex 224, Vol 2, Tab 37, pg 481 at T21.5 (emphasis added) 256 Ex 224, Vol 2, Tab 37, pg 481 at T21.15 (emphasis added) 257 Ex 278, Vol 3, Tab 19, pg 58 (emphasis added) 258 Ex 61, Vol 6, Tab 25, pg 122 (emphasis added) 259 Ex 61, Vol 6, pgs 120 & 126, (emphasis added) 78 “… JIL your Honour will see is in a position to meet all Formatted: Bullets and Numbering claims, any claims from whatever source … ever found against them because it has access to the capital of the group through the partly paid shares subject to the point your Honour raised as to whether it should be conditioned in some way.” 260 (emphasis added) (c) By letter to His Honour’s Associate on 13 August 2001 His Honour was further informed: “As stated by Counsel in response to this query, the Scheme Formatted: Bullets and Numbering will not affect the position regarding asbestos claims. … JHIL will have, through existing reserves and access to funding in the form of partly paid shares, the means to meet liabilities which will or may arise in the future whether in relation to asbestos-related claims or other obligations to other 261 persons.” 22.214.171.124. Additionally in the affidavit of Donald Cameron sworn on 9 August 2001 (relied upon in the application) the evidence is that the partly paid shares could be called upon at any time in the future and from time to time262. 126.96.36.199. One also sees the following exchange between Santow J and JHIL’s counsel: (a)Santow J “When it says JHIL will be entitled to call upon JHINV in the future and from time to time, is that right?” (b)Counsel “Yes.” (c)Santow J “There is no time period laid down.” (d)Counsel “No.”263 188.8.131.52. Such assurances could only have had, and could only have been couched in terms intended to have had, one effect. That was to pre-empt any line of enquiry by Santow J as to whether any way lay open, and was 260 Ex 224, Vol 2, Tab 37, pg 480 at T20.50 261 Ex 278, Vol 3, Tab 25, at pg 214, (emphasis added) 262 Ex 61, vol 6, Tab 23, pg 120 263 Ex 224, Vol 2, Tab 37, pg 441 at T11.40 79 being considered by JHIL, for the interference with the flow of funds to Australia that the partly paid shares were intended to secure. 184.108.40.206. The deception of the representation made to the Court lay in its purpose, namely a “pacifier” having as its only end the quelling of any concern on the part of the Court to enquire further into the protection of JHIL’s future creditors. 6.27. Its purpose was as was summarised by Shafron: (b)(a) “I just don’t think the thing will fly unless we can guarantee stakeholder Formatted: Bullets and Numbering quiescence and that can only be assured with no economic change idea;”264 (c)(b) to “overcome any concern the court may have in the massive reduction of capital” and because JHIL was “not willing to justify to the court that creditor’s interests had not been affected”;265 and (d)(c) to “reduce completion risk”, however, management of JHIL considered the partly paid shares as “an altogether unnecessary capital lifeline”.266 220.127.116.11. Robb appeared at the bar table on behalf of JHIL in the course of the application before Santow J.267 Neither he nor Cameron disclosed any of the material matters to his Honour but had every opportunity to do so. 18.104.22.168. Yet Robb fully appreciated the importance of what his Honour was or was not told: 14.30.“Q. Of course, the way in which the Court appreciated the importance of partly paid shares depended upon the information with which the Court was provided, didn't it? 15.A. In part, yes. Q. And what I suggest the Court was never provided with, for example, was the deed of covenant and indemnity, was it? 264 Ex 146, pg 5 265 Statement of Julian Ross Blanchard, para 32; and JRB 10-12 266 Ex 147, pg 5 267 Ex 224, Vol 2, Tab 42, pg 570 80 A. It wasn't. 18.Q. Never informed of the put option in the deed of covenant and Formatted: Bullets and Numbering indemnity? 19.A. It wasn't.”268 22.214.171.124. Cameron shared that appreciation: 19.2.“Q. You would agree that without full and frank disclosure that a judge such as Justice Santow could be misled in relation to the matters that were before him? 20.A. It's possible, yes. 21.Q. And that a judge may be misled by what is said to him in Court, do you agree with that? 22.A. If it's capable of misleading him, yes.” 269 22.1.What would have happened had there been full and frank disclosure Formatted: Bullets and Numbering 126.96.36.199. Had a disclosure been made to his Honour consistent with that outlined in chapter entitled “The Misleading of the Supreme Court of New South Wales, it is clear from his Honour’s words that conditions would have been imposed to safeguard the position of creditors so that there was “no blockage in the flow of funds to Australia.”270 188.8.131.52. In that event, either JHIL would have submitted to his Honour’s conditions or withdrawn its application. Either way would have avoided the event that has now occurred, namely the adoption by JHIL of a corporate structure that has enabled JHIL to separate itself from its assets. 268 Robb T2885.55 – 2886.10 269 P. Cameron T3024.5-15 270 Ex 224, Vol 2, Tab 37, pg 481 at T21.15 81 22.4.Deliberate abstention by JHIL Interests from making required Formatted: Bullets and Numbering disclosure 184.108.40.206. It was with a view to avoiding the inevitable chain of enquiry that such a disclosure would have provoked, that JHIL deliberately avoided any statement that could lead to that result. (a)Robb’s admission 220.127.116.11. In a frank admission by Robb in cross-examination, the reason for JHIL’s non disclosure to emerges in a wholly undisguised way: 22.7.“Q. Could you turn back to page 262? You see at the bottom of the page the paragraph commencing with the words: “While the first limb of this transaction can be effected with minimal execution risk, the subsequent financial reconstruction will involve the directors of JHIL considering the interests of creditors and is likely to involve a rigorous analysis by the Court of issues affecting creditors with the possibility that the Court will seek to investigate the trust and related arrangements. This risk may arrive in the context of explaining why the transaction does not prejudice the interests of JHIL creditors and especially if reference will be made to the indemnity.” 23.A. Yes. 24.Q. I put to you, Robb, that there was a reason why the indemnity was never referred to before Santow J, and the reason was so that it would not lead to a rigorous investigation of the transactions between the MRCF, Amaca, Amaba and JHIL? 25.A. I agree”271 18.104.22.168. These words speak unequivocally of a design, consciously and deliberately pursued by JHIL, to avoid the disclosure of matters that would have led to a “rigorous investigation” by the Court. 271 Robb T2886.40-45 (emphasis added) 82 22.214.171.124. As one of JHIL’s legal advisers in relation to the proposed scheme Robb’s evidence can be accepted as authoritative and reliable. 25.3.Cameron’s tendency to obfuscate Formatted: Bullets and Numbering 126.96.36.199. In his evidence Cameron did not evince the same degree of frankness as did Robb. 188.8.131.52. The Commission should accept that Cameron is a most intelligent lawyer with an intimate understanding of the minutiae of the details placed before Santow J. He presented as an articulate witness who as would be expected was thoroughly tutored in anticipation of the expected line of questioning that came from the various interests represented at the bar table. Yet in Cameron’s answers one sees an exercise in sophistry that belied his abilities. 184.108.40.206. A prime example of this arose in relation to a line of questioning concerning the issue of whether Santow J would be justified, on the basis of what was communicated to him, in reaching a view that the partly paid shares were intended to endure into the future for the benefit of JHIL’s creditors: (a) In connection with the Allens letter to his Honour of 13 August 2001: 25.7.Q. And if I could ask you to turn to page 491 in Formatted: Bullets and Numbering your letter? If you could go to the bottom four lines. In paragraph (g) you say: (1)“JHIL will have, through existing reserves and access to funding in the form of the partly paid shares, the means to meet liabilities which will or may arise in the future, whether in relation to asbestos-related claims or other obligations to other persons.” 25.8.A. Yes, and I believe that that statement is correct. 25.9.Q. Nothing by way of qualification to his Honour, for example, "for as long as the partly paid shares exist"? 83 25.10.A. I believe it would have been absolutely unnecessary to say to Santow J that if circumstances changed or it became possible at some later time that capital was capable of cancellation - whether it be partly paid or fully paid or any other sort of capital - it would have been a debt capital, it would have been equally capable of changing if circumstances changed.”272 (a)(b) Again in connection with the Allens letter to his Honour, dated 13 August 2001: Q We went to this yesterday Cameron but this is a letter that was addressed to the judge with your name appearing on it and at page 491. In the bottom four lines you indicate to the judge that: (1)"JHIL will have, through existing reserves and access to funding in the form of the partly paid shares, the means to meet liabilities which will or may arise in the future whether in relation to asbestos related claims or other obligations to other persons"? … 25.11.Q. And what I want to put to you is that you knew the concern that the judge had in relation to the way in which the partly paid shares could be called upon, you got an opinion from a Dutch lawyer about it? 25.12.A. Yes, and as we discussed yesterday, I thought in some detail, that the terms to which he had directed his mind was whether or not there were potential legal barriers which would prevent JHI NV meeting those calls if made.”273 (a)(c) As to statements made to Santow J by JHIL’s counsel: 272 Cameron T3027.10-30; referring to Ex 278, Vol 3, Tab 25, at pg 214 273 Cameron T3056.5-2020; referring to Ex 278, Vol 3, Tab 25, at pg 214 84 (b)“Q You were in Court, I suggest, on 10 August 2001, when Hutley informed Santow J that "JHIL was in a position to meet all its claims, any claims from whatever source, we are talking about the whole of its business ever be found against them because it has access to the capital of the group"; see that at the bottom of page 480? 26.A. Yes, I am not sure I was in Court at the time this was said. (a)… 27.Q. My point is there is no suggestion that it's only in step or in place as long as the partly paid shares exist? 28.A. Well, it says "is" and I take it to mean that - take it to be a reference to the partly paids and under the partly paids it will be in a position to meet all claims.”274 220.127.116.11. It is inconceivable that Cameron could not have appreciated the points being put to him, namely that Santow J could easily have been misled by what was being put to the Court. This is particularly so in view of the evidence contained in his statement that he had already advised JHIL that it “was likely” Santow J would be concerned to explore the effect the scheme would have on asbestos claim.275 18.104.22.168. Cameron’s tendency to obfuscate was repeated. His responses to simple and direct questions seemed wholly incongruous for a person of his ability, shown elsewhere in his evidence, to articulate with clarity. 28.3.“Q. The reason that there was no rigorous examination by the Court and no need to quantify it - the JHIL asbestos liabilities - is because of the assurances that were given to Santow J concerning the availability of the partly paid shares? 29.A. No, I don't think that follows. I mean, I think - I mean, the issue - that would be entirely inconsistent with what had been said in this document which is the - one of the issues you would, or may have 274 Cameron T3025.55 - 3026.20 275 Ex 224, Statement of Peter Stewart Cameron, para 65 85 to deal with in the context of JHIL, if you ever did cancel the partly paid shares, was to undertake a capital reduction and you would have to then measure the claimants against the company. So I don't think that does - it follows from what you've just said that that is a reason why there was not any formal quantification. I don't think such a quantification could readily have been undertaken.”276 29.1.Conclusion based on the evidence Formatted: Bullets and Numbering 22.214.171.124. Having regard to: (a) JHIL’s understanding concerning the importance of full and frank disclosure to Santow J; (b) the fact that it had been advised by Cameron prior to the application as to the likelihood that the Court would be concerned to enquire into what could only have been perceived as extremely sensitive issues; (c) the certainty that had JHIL made full and frank disclosure as required, the proposed Scheme would not have been approved by Santow J; (d) the fact of non disclosure by JHIL; and (e) the admissions by Robb; 29.3.a conclusion that JHIL deliberately misled the Court is irresistible. Formatted: Bullets and Numbering (1)THE SECOND ELEMENT Formatted: Bullets and Numbering 126.96.36.199. The second element referred to in Wentworth v Rogers is that, it must be shown, by the party asserting that a judgment was procured by fraud, that there has been a new discovery of something material, in the sense that fresh facts have been found which, by themselves or in combination with previously known facts, would provide a reason for setting aside the judgment. 276 Cameron T3032.15-30 86 188.8.131.52. The matters set forth in these submissions and in those entitled “the Misleading of the Supreme Court of New South Wales In 2001” arise directly from the evidence adduced during the course of this Special Commission of Inquiry. 184.108.40.206. Such evidence has been uncovered only by reason of compulsion of law inherent in the Commission’s investigation. It could not possibly have been known or deployed at any earlier time. (1)THE THIRD ELEMENT Formatted: Bullets and Numbering 220.127.116.11. The third element was couched by Kirby P in the following terms: (a)“Thirdly, mere suspicion of fraud, raised by fresh facts later discovered, will not be sufficient to secure relief … The claimant must establish that the new facts are so evidenced and so material that it is reasonably probably that the action will succeed.” 18.104.22.168. The Commission is not concerned with a mere suspicion of fraud. Robb’s evidence supports the view of a deliberate omission of disclosure in order to avoid a rigorous investigation by the Court in circumstances in which there was an obvious and recognized duty to disclose. 22.214.171.124. In this sense the Commission is concerned with a deliberate suppression of the truth.277 As already observed there can be no reasonable doubt that had JHIL conveyed to his Honour the matters set out above under the subheading “What would have happened had there been full and frank disclosure” the Court would have seen such matters as critical to its assessment of the proposed scheme. (1)THE FOURTH TO SIXTH ELEMENTS Formatted: Bullets and Numbering 126.96.36.199. These can be dealt with in summary form: 277 See Lord Simon’s dicta in The Ampthill Peerage (supra) at 591 87 (a) it is unnecessary for reliance to be placed on the fourth element, namely perjury, for the purposes of these submissions; (b) the fifth element is that it must be shown by admissible evidence that the successful party was responsible for the fraud which taints the judgment under challenge. No persons other than the JHIL interests, for whose benefit the application before Santow J was pursued, could have been responsible for the fraud that tainted the orders made by his Honour. For the reasons advanced elsewhere in the victims’ submissions JHI NV is to be seen as a active participant in the application; and (c) the sixth element, namely “that the burden of establishing the components necessary to warrant the drastic step of setting aside a judgment .. lies on the party impugning the judgment” does not arise in the present context of a Commission of Inquiry. (1)THE INHERENT JURISDICTION OF THE COURT Formatted: Bullets and Numbering 188.8.131.52. Whilst “every system of justice is bound to insist upon the finality of the judgment arrived at by a due process of law,”278 it is well recognised that the Court has an inherent power to recall a judgment where the public interest in finality is overridden by the public interest. 184.108.40.206. Even where a judgment has been apparently regularly obtained, it may be impeached if vitiated by fraud. 220.127.116.11. It was the public interest that inspired the Governor to commission Jackson QC to inquire into and report on the matters that are the subject of these submissions. Likewise it is the public interest that should support the Commission’s making of findings sufficient to ground an application for the setting aside of the judgment. 18.104.22.168. Having regard to the many events that have occurred since the orders were made by Santow J in October 2001, one wonders whether a setting 278 Lord Devlin in Connelly v Director of Public Prosecutions  AC 1254 at 1353.9 88 aside of the orders has utility in the sense that it can work to undo the massive damage to which the fraud has undoubtedly given rise. 22.214.171.124. However, the Commission is not being asked (nor is it empowered) to set aside the orders, but only to make findings in support of such an application should one be made. 126.96.36.199. As previously submitted, such findings supported by evidence, are that the JHIL interests: (a) knew that the undisclosed matters were material to Santow J’s ability to come to an informed view; and (b) deliberately abstained from disclosing them to the Court. Formatted: Bullets and Numbering 89 30.7. CHAPTER SEVEN: PERVERTING THE COURSE OF JUSTICE 188.8.131.52. The corollary of the matters set out in the previous chapter is that, by Formatted: Bullets and Numbering their conscious and deliberate deception of the Supreme Court of New South Wales, the JHIL interests engaged in conduct that had a tendency to, and in fact did, pervert the course of justice. 7.2. The law in this area as at 1992 was as enunciated in The Queen v Rogerson279 by Brennan and Toohey JJ, in the following terms: at 279.7 (b)“At common law, attempting to pervert the course of justice, like Formatted: Bullets and Numbering perverting the course of justice, is a substantive offence. It consists in the doing of an act which has a tendency to pervert the course of justice with an intent to pervert the course of justice.”280 and at 280.2-.7 (d)“The course of justice consists in the due exercise by a court or Formatted: Bullets and Numbering competent judicial authority of its jurisdiction to enforce, adjust or declare the rights and liabilities of persons subject to the law in accordance with the law and the actual circumstances of the case. The course of justice is perverted (or obstructed) by impairing (or preventing the exercise of) the capacity of a court or competent judicial authority to do justice. The ways in which a court or competent judicial authority may be impaired in (or prevented from exercising) its capacity to do justice are various. Those ways comprehend, in our opinion, erosion of the integrity of the court or competent judicial authority, hindering of access to it, deflecting the applications that would be made to it, denying it knowledge of the relevant law or of the true circumstances of the case, and impeding the free exercise of its jurisdiction and powers including the powers of executing its decision. An act which has a tendency to effect any such impairment is the actus reus of an attempt to pervert the course of 279 [1991-1992] 174 CLR 268 90 justice. An act which effects any such impairment is the actus reus of a perversion of the course of justice.”281 184.108.40.206. Deliberately denying Santow J knowledge of “the true circumstances of the case”, when it was incumbent upon the JHIL interests to make full and frank disclosure of those circumstances, had the direct effect of impairing (or preventing the exercise of) the capacity of Santow J to do justice. 220.127.116.11. The “true circumstances of the case” are those previously referred to and need not be repeated. 18.104.22.168. Given the evidence by Cameron and Robb, they were complicit in the commission. 22.214.171.124. The offence at common law of perverting the course of justice has now been abolished by section 341 of the Crimes Act, 1900 (NSW) and replaced by section 319 which provides: (a)“A person who does any act, or makes any omission, intending in any way to pervert the course of justice, is liable to imprisonment for 14 years.” 31.8. CHAPTER EIGHT: THE CANCELLATION OF THE PARTLY PAID Formatted: Bullets and Numbering SHARES AND ITS CONSEQUENCES MATERIAL PREJUDICE TO CREDITORS 31.2.Application of the legislation Formatted: Bullets and Numbering 126.96.36.199. The cancellation of the partly paid shares in March 2003 materially prejudiced JHIL’s ability to pay creditors within the meaning of section 256B(1)(b) of the Corporations Act 2001 (Cth). 188.8.131.52. “Creditors” in this context includes contingent creditors. By section 462(2)(b) of the Corporations Act, the class of persons entitled to apply for an order to wind up a company includes “a creditor (including a contingent or prospective creditor) of the company”. It would be inconsistent for the legislature to have provided contingent creditors with standing to pursue a winding up application, whilst leaving them unprotected for the purposes of s256B(1)(b). 184.108.40.206. The term “contingent creditor” in section 462(2)(b) is undefined. In Re William Hockley Limited, Pennycuick J expressed the view, applied in Australia,282 that it must be taken to denote: (a)“A person toward whom, under an existing obligation, the company may or will become subject to a present liability on the happening of such future event or at some future date.”283 220.127.116.11. The concept of an “existing obligation” is seen as essential in proving a contingent liability.284 As at March 2003, JHIL had existing obligations arising out of its liability to remedy the loss or damage suffered by aggrieved persons as a consequence of its involvement in the events of February 2001. 282 Community Development Pty Limited v Engwirda Construction Company (1969) 120 CLR 455; Lyford v Carey (1985) 3 ACLC 515 at 518 283  1 WLR 555 at 558, (emphasis added) 284 see the analysis by Franklyn J in Lyford supra 92 31.7.Identifying the contingent creditors Formatted: Bullets and Numbering 18.104.22.168. As a consequence of JHIL’s misconduct in and leading up to February 2001, the MRCF was established with a level of funding that was wholly inadequate for its purpose. 22.214.171.124. JHIL’s misconduct is actionable by at least the following aggrieved persons on the bases expounded in earlier submissions: (a) the MRCF; (b) Amaca; (c) the directors of each of these companies to the extent that they were involved in the misconduct; (d) those of the asbestos sufferers with valid claims against the James Hardie Group but for whom the available fund will permit inadequate compensation; and (e) asbestos sufferers with valid claims against JHIL; 126.96.36.199. Salter and Morley were well aware of the legal status of contingent Formatted: Bullets and Numbering creditors. Prior to the cancellation they received legal advice that the cancellation may materially prejudice the rights of asbestos victims as creditors for the purposes of s 256B(1)(b) of the Corporations Act: (a)“Q. You understood … that Watson Mangioni had briefed senior counsel to assist them in giving this opinion? 32.A. Yes. 33.Q. And that senior counsel had observed … that ‘having regard to the nature of the potential claims and the effect of the reduction of capital being to deny plaintiffs indirect access up to 2 billion …a court would be likely to do everything possible to construe an asbestos related claim and to be a creditor for the purposes of judgment section 256B,’ and that the solicitors were at least in draft concurring with those views, do you see that? 93 (a)A Yes.” 285 188.8.131.52. The potential claims by the MRCF, its directors, and Amaca were not fanciful or imaginary: (a) They were intimated as far back as April 2001.286 This reflects JHIL’s state of mind (via Macdonald as its CEO) in the months prior to and during the Santow application, concerning a view held by Amaca’s directors that they had been misled by JHIL in February 2001: “Dennis had a ‘sensitive issue’ to discuss. … It may be that Dennis and the Foundation have decided to press on all possible fronts (including coming back to JHIL) to attempt to improve the situation of the Foundation,” Email of 23.4.01; “[Dennis] mentioned that one of the considerations … is whether it is expected that AMACA will become insolvent. … In his words ‘the directors are all walking around with very long faces,’” Email of 7.8.01; and “Amaca … could be insolvent in less than 9 years … Our expectation as prospective Directors was that the most up to date data available would be used to provide information to us in February 2001. … we would seek an urgent meeting to discuss these matters and consider appropriate solutions,” Sir Llew’s letter of 24.9.01. (b) As at 11 April 2002, those claims had not gone away in Morley’s mind. On that date he attended a meeting with Robb and others. The typed notes of the meeting, concerning “Ongoing Relationship with Foundation”, record inter alia: (c)“They have conveyed their concerns (property, shortage of Formatted: Bullets and Numbering 287 funds, US cases), which are at some level a veiled threat.” 285 T1935.35 - .50 286 Email Macdonald to Shafron 23.4.01 (Ex 150 pg 156); Email Ashe to Shafron 7.8.01 (Ex 150, pg 167); Sir Llew Edward’s letter of 24.9.01 (Ex 1 Vol 8, Tab 12) 287 Ex 187, Vol 2, Tab 49, pg 460 94 (d)(c) Morley participated in meetings with Jollie, Edwards and Cooper and conceded in evidence that he was aware, prior to the cancellation of the partly paid shares, that unless a satisfactory sum of money was arrived at by settlement with the Foundation, the Foundation would look to further action.288 184.108.40.206. As at March 2003 such grievances were festering. On 13 February 2003, the MRCF had demanded payment by JHIL of the sum of $200 million,289 a demand rejected by JHIL on 19 February 2003.290 Such grievances were most serious and still had to be ventilated. In these circumstances, the characterisation of such persons and entities as contingent creditors cannot be in issue. 220.127.116.11. Through the cancellation of the partly paid shares the rights of the contingent creditors were not only materially prejudiced, they were entirely frustrated. The reason is that, by the cancellation, JHIL was rendered impecunious and unable to satisfy its substantial liability arising from its involvement in the events of February 2001.291 18.104.22.168. As the reduction of capital did not comply with the requirements of section 256B(1)(b), JHIL’s conduct constituted a contravention of section 256D(1) of the Corporations Act. 33.6.JHI NV’s status as a shadow director of JHIL as at March 2003 22.214.171.124. At the date of cancellation JHIL’s appointed directors were Morley and Salter. 126.96.36.199. However the legislative definition of director in section 9 of the Corporations Act extends to a person who, although not validly appointed as such, is a person in accordance with whose instructions or wishes the directors of the company are accustomed to act. In March 2003, JHI NV comfortably fitted that description. 288 Morley T2034.15-25 289 Ex 3, Vol 1, Tab 15, pg 140 290 Ex 3, Vol 1, Tab 16, pg 140 Formatted 95 188.8.131.52. The criteria for a person to qualify as a “shadow director” has been variously stated: (a) It would be sufficient to show that in the face of directions or instructions from JHI NV, the appointed directors of JHIL had cast themselves in a subservient role or surrendered their respective discretions;292 (b) In Ken Robson’s Annotated Corporations Act the author speaks of a requirement that the appointed directors “must be dancing to the tune called by some body outside the board;”293 (c) In Standard Chartered Bank of Australia Limited v Antico,294 Hodgson J reached the view that a company was a shadow director of another on the bases that the former had effective control via its shareholding of the latter, it exercised management and financial control over the latter, and imposed on the latter requirements for financial reporting consistent with its own reporting requirements. 184.108.40.206. The evidence before the Commission is replete with evidence which Formatted: Bullets and Numbering renders irresistible a conclusion that, as JHIL’s directors, Salter and Morley were “dancing to the tune” of JHI NV: 33.11.The relationship between JHIL and JHI NV indicated a clear potential conflict: (a) following implementation of the scheme JHI NV became a 100% shareholder of JHIL; (b) at the same time as Salter was a director of JHIL, he was also JHI NV’s tax manager;295 (c) within JHI NV, Salter reported directly to Morley, the chief financial officer of that company;296 (d) at the same time Morley was a director of JHIL; 292 Secretary of State for Trade & Industry v Deverell  2 WLR 907 293 CCH 2002 ed at 123 294 (1995) 18 ACSR 1 295 Ex 103, Statement of Donald Salter, para 1. 296 Salter T1940.40 96 (e) Salter’s directorship of JHIL post-separation was, the result of an invitation to him from Shafron;297 (f) In their respective roles within JHIL and JHI NV there was thus a clear potential for conflict, one which materialised, as indicated below, in their conduct of preferring the interests of JHI NV over those of JHIL; (g)The potential for conflict was enhanced by the retainer of Allens as legal Formatted: Bullets and Numbering advisors to both JHIL and JHI NV: (h)(g) Salter’s recognition of Allens as playing an integral role in relation to cancellation of the partly paid shares emerges clearly from the evidence: In a document referred to as a “step plan”298 one sees as “step 5” the description “Cancel partly paid shares”; Adjacent to this one finds Salter’s hand written words “AAR draft resolution,”299 a clear reference to Allens Arthur Robinson; When asked what steps Salter took to examine the indemnity Formatted: Bullets and Numbering under the Deed of Covenant to ensure that it was as wide as possible in the interests of JHIL his evidence was: A: “I think I was comfortable in relying upon our legal advisors to find the deed in a satisfactory manner. Q: Your legal advisors being what, Shafron and Allen Allen & Hemsley is that right? A: Yes.” 300 297 Salter T1948.55 298 Ex 116 299 Ex 116 300 Salter T1944.45-55 97 35.2.Preferring interests of JHI NV over those of JHIL in relation to the cancellation (a)(h) Salter’s total subservience to JHI NV comes through in relation to his evidence concerning the failure to ensure that the Deed of Covenant in favour of JHIL was signed before cancellation occurred. In evidence he admitted that whether the indemnity would be signed depended on the grace and favour of the board of JHINV;301 (b)(i) In evidence Salter conceded that the cancellation of shares was for the benefit of JHI NV: “Q. It is clear that the leaving of ABN 60 with assets of 22 million and the cancellation of partly paid shares would be of benefit to JHI NV; isn't that right? 35.3.A. Yes, yes.”302 (a)(j) When asked if he gave any consideration at all to adverse consequences for JHIL as a result of the cancellation of the partly paid shares Salter’s reply was: “Possibly. I don’t recall any in particular”.303 (b)(k) Salter emailed Robb on 1 April 2002 in relation to the consequences of JHINV of cancelling the shares. Salter’s evidence in connection his loyalties is unequivocal: “Q. And you in pursuance of considering that subject, you sent this email on 1 October 2002 to Robb did you not, about the consequences for JHI NV of cancelling the partly paid shares, do you see that? 35.4.A. Yes. 35.5.Q. And you were here expressly considering were you not, the interests of JHI NV that might be effected 301 Salter T1975.35; see also Morley T2125.20 302 Salter T1930.25 303 Salter T1932.40 98 by the cancellation of the partly paid shares, namely an adverse taxation effect upon JHI NV? 35.6.A. Yes, well a shareholder has to know, yes.”304 (a)(l) The total surrender by Salter of his of his discretions as a director of JHIL in favour of JHI NV emerges from the following exchange: “Q: Salter, you had to consider whether you would or would not agree to the cancellation of the partly paid shares. A: Yes. Q: At that point, did you give consideration to the question – consideration to not agreeing? A: No.” 305 (b)(m) Salter also conceded that in return for the cancellation JHIL was insufficiently protected: “Q. You'd agree with this proposition, wouldn't you, that there was simply no commercial basis for the cancellation of the partly paid shares in the interest of ABN60 unless they were replaced by an equivalent indemnity? 35.7.A. Yes, something more or less equivalent. 35.8.Q. You appreciated on 31 March 2003 and the days leading up to it that what was being provided for in the deed that ABN60 was going to execute fell well short of the benefits which were covered by the partly paid shares? 35.9.A. No, I don't think that was my view. 304 Salter T1932.25-40 305 Salter T1933.30-35 99 35.10.Q. You understood that the indemnity did not provide for any recourse to JHI NV in respect of asbestos related liabilities and in respect of intragroup claims, didn't you? 35.11.A. Yes.”306 35.12.Q. Before the partly paid shares were cancelled, it was your belief that any claim by the Medical Research Compensation Foundation to the extent that it was successful and there were insufficient funds otherwise available in ABN 60, would be a claim which may result in recourse against JHI NV on the partly paid shares? 35.13.A. That would follow. 35.14.Q. You are saying here that you had an understanding that the indemnity was not going to cover a claim by MRCF, aren't you? 35.15.A. Yeah.”307 (a)(n) In Salter’s notes of a conference on 20 September 2002, following a reference to the cancellation of the partly paid shares, he wrote the word “protection.”308 In evidence Salter conceded the possibility that the word protection was a reference to an awareness that the cancellation of the partly paid shares would destroy assets otherwise available to satisfy a claim by Amaca and that this would not be replaced by anything;309 (b)(o) Salter’s evidence contains an unequivocal admission that the cancellation of the partly paid shares for JHI NV’s benefit would have the effect of rendering JHIL incapable of satisfying a claim and that this would not be replaced by anything: 306 Salter T1946.40-55 307 Salter T1945.10-25 308 Ex 111 309 Salter T1973.20 100 “Q. So what you were doing, and expecting, and intending when the partly paid shares were brought to an end, was that the assets that would be the substantial means of satisfying a claim in respect of dividends by Amaca, would be brought to an end and not be replaced by anything, isn't that right? 35.16.A. Yes”.310 (a)(p) Morley shared Salter’s conduct in preferring the interests of JHI NV over those of JHIL. He appreciated that by cancellation of the partly paid shares JHIL would be left with fewer financial resources to meet any claim by the MRCF.311 220.127.116.11. It is inconceivable that any director would pursue such a course of action unless, to adopt the criteria suggested in Secretary of State for Trade & Industry v Deverell,312 Salter and Morley, as directors of JHIL, had cast themselves in a subservient role or surrendered their discretions. 35.18.The involvement by JHIL’s directors in the contravention of s 256D(1) 18.104.22.168. This portion of the submissions can be briefly stated, given that it follows from the evidence referred to above. 22.214.171.124. Section 79 of the Corporations Act reflects similar provisions to be found in s 75B of the TPA and s 12GB of the ASIC Act. 126.96.36.199. Insofar as aiding and abetting is concerned, proof of intent is not a requisite element.313 All that is required is actual knowledge of the essential elements of the contravention and intentional participation in it.314 Likewise, a “party to a contravention” refers to a person who participates in or assents to it. Once again, knowledge of the essential elements constituting the contravention is required. 310 Salter T1975.44-55 311 Morley T2052.40-50 312  2 WLR 907 313 Yorke v Lucas (1983) 68 FLR 268 at 272 314 Rural Press Ltd v ACCC (2002) 118 FCR 236; Giraffe World Australia Pty Limited (No. 2) (1999) 95 FCR 302 at 346 101 188.8.131.52. That they participated in the cancellation is beyond challenge. Without their active involvement it could not have occurred. 184.108.40.206. As at the date of cancellation, Salter and Morley were JHIL’s only appointed directors. For the reasons already advanced, JHI NV should be regarded as a director because of the part it played in dictating JHIL’s actions of March 2003. 220.127.116.11. The essential elements of which knowledge by each of the directors (shadow or otherwise) was required were relevantly: (a) the fact of the cancellation in March 2003; and (b) its material prejudice to JHIL in its ability to pay creditors. 18.104.22.168. Each of these is abundantly satisfied by the evidence. Formatted: Bullets and Numbering 35.26.Breaches of directors’ duties under s 180(1) Formatted: Bullets and Numbering 22.214.171.124. It follows from what has gone before that each of JHIL’s directors, in preferring the interests of JHI NV to those of JHIL, have acted in flagrant breach of their duty to act in good faith and in the best interests of the corporation of which they were directors. 126.96.36.199. One may add to the following in relation to the assessment by Morley of JHIL’s asbestos liabilities: (a) In assessing JHIL’s asbestos liabilities, Morley obtained advice from Robb of Allens concerning the question of how he should undertake the exercise;315 (b) He relied upon the Allens’ advice that liability would be limited to claims by employees, although Watson Mangioni had advised that he should carry out his own investigation;316 (c) Morley did not obtain the actuarial advice as recommended by Watson Mangioni. Instead he relied upon the stale June 2000 Trowbridge 315 Morley T2054.40 316 Morley T2057.25 102 report,317 which he never actually read,318 and a conversation between Shafron and Attrill;319 (d) When asked why he did not obtain more up to date information Morley’s evidence was: (e)“I discussed the method of calculation with Allens, our Formatted: Bullets and Numbering lawyers that were working on this with me and calculated it on that basis.”320 35.29.Consequences of the contraventions Formatted: Bullets and Numbering 188.8.131.52. Proceedings are available to be pursued against JHIL, its directors and anyone else involved in the contravention under Part 9.4B of the Corporations Act. 184.108.40.206. By s 1317E(1), the Court may make a declaration of contravention if it is satisfied that a person has contravened, inter alia, sections 181(1) [duties of directors to act in good faith and for proper purpose] and 256D(2) [persons involved in contravention of 256D(1) concerning reductions of capital in compliance with the requirements of s 256B(1)]. 220.127.116.11. Compensation is payable to JHIL under s 1317H(1) should the Court so order, for damage suffered resulting from the contraventions. 18.104.22.168. For reasons advanced elsewhere in the submissions, such is the substantial size of the potential liability that a realistic source for recovery lies only in JHI NV. That JHI NV is liable in its own right for the loss and damage flowing from the cancellation is dealt with below. 317 T2057.30 318 Morley T2010.5, and T2159.20-35 319 Morley T2057.30 320 Morley T2118.25 103 36.UNCONSCIONABLE CONDUCT Formatted: Bullets and Numbering 36.1.Following the restructure the representation made to Santow J 22.214.171.124. As advanced in earlier submissions, the failure by JHIL to make full disclosure to Santow J of material matters was a gross deception of the Supreme Court of New South Wales. 126.96.36.199. Those material matters included the fact that, contrary to JHIL’s representation to the Court, made implicitly and by silence, that it had made a firm decision to avoid any action in the future that might prevent a call on the partly paid shares from being met: (a) in fact JHIL had reached no such decision; and (b) the possibility of subsequent cancellation was one of the options that, in JHIL’s mind and in the mind of its advisors, always remained open. 188.8.131.52. The proceedings before Santow J and the resultant approval by his Formatted: Bullets and Numbering Honour of the Scheme were matters of public record. Following the restructure, the representation made to Santow J remained operative. 184.108.40.206. It did so in the sense that the creditors, for whose benefit the partly paid shares were installed, could, had they learned of its falsity in a timely manner, have taken steps to restrain the cancellation. 220.127.116.11. The creditors may thereby have prevented the attainment by the JHIL interests of the final step in a scheme put in place to assure an “unbridgeable gap” between JHIL and its assets. 18.104.22.168. Had this occurred the events that have given rise to the need for this Commission of Inquiry would probably have never taken place. 36.8.JHI NV’s deliberate concealment of the impending cancellation from public scrutiny 22.214.171.124. No notice was provided to the public of the impending cancellation of the partly paid shares. No opportunity was given to the MRCF, as a potentially aggrieved party, nor ASIC, to take pre-emptive action by seeking injunctive or other relief. 104 126.96.36.199. The failure to give any notification of the impending cancellation was no accident. It was deliberate, it was conceived and pursued by JHI NV via its Chief Executive Officer Macdonald and it succeeded. 188.8.131.52. The following emerges from the evidence: (a) JHIL was aware that a claim by the MRCF was looming;321 (b) JHIL must have also been aware, as was the intention underlying the cancellation, that once cancellation had occurred any action by the MRCF would be rendered futile; (c) Even once the cancellation had occurred, given the representations made to Santow J one and a half years earlier, JHI NV, its directors and its legal advisors would have been highly sensitive to the probability that an exposure of what they had done would have led to a public outcry; (d) Exposure of the cancellation was to be avoided at all costs. Consistent with this policy of avoidance was Macdonald’s unilateral instruction to Shafron and Morley in his email of 18 March 2003: “No communication with the MRCF for now.”322 Formatted: Bullets and Numbering (e) The reason for this stance was obvious. Any ongoing communication with the MRCF might provide an avenue for later criticism that an opportunity for disclosure had occurred but had not been availed of; (f) Prior to the cancellation JHI NV and its officers had an employed strategy of “stringing along” the MRCF with continual references to a possible settlement. (g) It is no coincidence that Macdonald’s unilateral instruction to cease communication with the MRCF took place shortly after the resolution to cancel the partly paid shares was executed. 184.108.40.206. All of this occurred in circumstances in which the participation by Formatted: Bullets and Numbering JHIL’s directors (including JHI NV as a shadow director) constituted a flagrant 321 T1499.10-.20 322 Ex 150, pg 262 105 breach of their duties of good faith and proper purpose under s 181. It also occurred in circumstances in which there was an obvious breach of s 256B(1) by acting so as to materially prejudice JHIL’s ability to pay its creditors. 220.127.116.11. Both subjectively and objectively Morley and Salter were well aware that this would be the effect of the cancellation. 18.104.22.168. Such conduct was heinous in its disregard for the legitimate interests of a significant class of persons (many of whom are as yet undiagnosed) who have contracted asbestos related diseases through the negligence of James Hardie. 22.214.171.124. Notwithstanding the potential of the cancellation to inflict substantial damage, the decision by JHI NV to follow that course appeared to attract minimal consideration on the part of its board.323 126.96.36.199. It was conduct by JHIL, JHI NV, their directors and advisors fitting the description of conduct in conscious and contumelious disregard for the rights of others within the line of cases concerning exemplary damages.324 36.17.The consequences Formatted: Bullets and Numbering 188.8.131.52. By sanctioning the cancellation of the partly paid shares, JHIL, its directors and its advisers in trade or commerce engaged in conduct that was unconscionable within the meaning of the unwritten law and of the States and Territories. 184.108.40.206. By orchestrating the cancellation in the way described JHI NV, its directors and advisors engaged in like conduct. 220.127.116.11. Whether one is addressing the statutory prohibition contained in s 51AA of the TPA or s 12CA of the ASIC Act is of no consequence, the applicable principles relevantly being identical. 323 Macdonald T2422.25 324 XL Petroleum v. Caltex 155 CLR 448, 471.5-471.6; Lamb v. Cotogno 164 CLR 1, 8-9; Gray v. Motor Accident Commission (1998) 73 ALJR 45 106 18.104.22.168. The resultant loss or damage to persons aggrieved by such conduct is no less than that recoverable as a consequence of: (a) the events of February 2001 involving the establishment of the MRCF; and (b) the subsequent misleading of the Supreme Court of New South Wales. 9. CHAPTER NINE: THE ROLE AND LIABILITY OF ALLENS ARTHUR ROBINSON Introduction 9.1. The conduct of Allens Arthur Robinson (Allens) in the establishment of the MCRF and restructure of the James Hardie group warrants the strongest criticism and enlivens a number of causes of action against the law firm. These include: (a) breach of contract, and breach of fiduciary duties to Amaca and Amaba as clients of Allens; (b) negligence. Even if Amaca and Amaba were not considered clients of Allens for the purposes of Project Green this does not preclude them from owing a duty of care to those parties. It is well established that solicitors can owe duties to third parties; (c) deceit and conspiracy (with Shafron, Macdonald and JHIL) relating to the incoming MRCF directors in 2000-2001; (d) deceit and conspiracy (with Shafron, Macdonald and JHINV) to deceive JHIL and its various directors between August 2001 and February 2004; (e) contraventions of the Trade Practices Act and Corporations Act, including misleading of deceptive conduct, unconscionable conduct, and conduct accessorial to the wrongful conduct of James Hardie. The Wrongful Conduct of Allens 9.2. Allens’ conduct in the conception and implementation of “Project Green” transgressed proper standards of legal practice in the following ways: (a) Allens permitted the Trowbridge report of 13/02/01, to be used by Shafron to deceive the incoming directors of MRCF, knowing that the 108 report was seriously flawed and knowing that Shafron intended the incoming directors to so rely upon it;325 (b) Allens cooperated with Shafron in ascribing a dishonest claim to legal professional privilege to the Trowbridge report;326 (c) Allens permitted the “separation” to take place and the Deed of Covenant and Indemnity (DCI) to be executed by Amaca knowing that the company was not legally represented.327 Further, Allens had direct knowledge that Amaca’s executing directors were employees of JHIL effectively operating under the direction of JHIL executives;328 (d) Allens permitted the February 2001 separation to take place with Amaca unrepresented in circumstances where Allens had itself previously represented Amaca for decades and in circumstances where Allens had given Amaca no reason to suspect that it might be acting contrary to Amaca’s best interests; (e) Allens provided D. Cameron and Morley with a misleading impression of the potential tort liability of JHIL in February 2001;329 an impression inconsistent with its own continuing research and views;330 (f) Allens misled the NSW Supreme Court in August and October 2001 by asserting that the partly paid share arrangement would provide 325 On 16 January 2001, Shafron reported to a JHIL Audit Committee meeting that the incoming directors had requested a Trowbridge Report [see Ex 75, Vol PJS1.7, Tab 94A, page 2502; and Shafron T1596.35 – 1597.20]. Shafron was present when Peter Jollie stated, ‘we intend to rely on this” in relation to the Trowbridge Report in the meeting on 13 February 2001, [Ex 75, Vol PJS1.8, Tab 113A, page 2667]. 326 Note that the better case for the assertion of a fraudulent privilege claim was in relation to the Trowbridge June 2000 Report, which was intended for insurers rather than for the purpose of legal advice or litigation. However, the February 2001 Report was only ever an ‘update’ of the June 2000 report. Further, Allens had expressed doubts as to the effectiveness of the privilege claim – suggesting that the report was more appropriately commissioned by Mallesons Stephen Jaques on behalf of the incoming trust directors if privilege were desired. Shafron did not regard this as preferable for “tactical reasons and control” [Ex 75, Vol PJS1.7, Tab 100; and Ex 75, Statement of Peter Shafron, para 152] 327 Robb T2772.20-.25 328 Robb T2781.45, T2783.55-T2784.5 329 Ex 2, Vol 2, Tab 6, page 426; D. Cameron T633.35 – T634.10; and Morley T2152.40- 0.50 330 Ex 81 109 long-term financial security over the claims of asbestos victims,331 when it knew: its client had had the future cancellation of the partly paid shares under consideration in the twelve months leading up to the application;332 a continuing fundamental premise of “Project Green” was the removal of any prospect of asbestos liabilities being imputed to JHINV in the future; which could only be achieved by the removal of the partly paid shares; the prospect of future cancellation of the shares always remained an available and attractive option for its client; when it knew of the existence of the DCI and the put option and failed to disclose it to the court; (g) Allens misled the NSW Supreme Court in 2003: by its silence as to the cancellation of the partly paid shares; and by its acceptance of instructions from JHINV to bring into effect the execution of the cancellation; by its failure to strongly admonish JHIL and JHI NV that in the light of the assurances provided to the court, the cancellation of the partly paid shares would be a wrongful act; (h) Allens acted for both JHI NV and JHIL in the negotiation and execution of the Deed of Covenant, Indemnity and Access (DCIA), and the subsequent cancellation of the partly paid shares: to the intentional detriment of its client JHIL; when there was a clear and obvious conflict of interest. 331 See Chapter 5 332 See for example, Ex 75, Vol PJS1.7, Tab 110, page 2606 110 (i) Allens deliberately concealed from the incoming JHIL directors the potential liability of JHIL to MRCF over the separation transaction and the pendency of such a claim.333 (j) Allens provided a tendentious and misleading letter of advice to the JHINV Board, which wrongly asserted that any MRCF claim against JHIL over the separation transaction had no prospect of resulting in any liability to JHIL.334 The Consequences of Allens’ Wrongful Conduct 9.3. If Allens acted in accordance with proper professional standards and in accordance with the duties of care it owed to both Amaca and JHIL throughout this period, the consequences of the following wrongful and intentional conduct of James Hardie management could not have been brought into effect: (a) the misleading of the incoming directors into accepting the separation arrangement and the creation of the MRCF; (b) the misleading the NSW Supreme Court in order to immunise the on- going Hardies entity from its liability to the legitimate claims of asbestos victims; and (c) the misleading the outgoing and incoming directors of JHIL in relation to the Deed of Covenant, Indemnity and Access. 9.4. In this sense, the wrongdoing of Allens is a direct cause of the losses sustained by Amaca and by JHIL. Trowbridge 9.5. Allens commissioned the Trowbridge report in June 2000, which estimated Hardie’s future liabilities.335 The report was then returned to Allens for analysis.336 Allens knew that this report was integral in the process used to estimate the funds needed by the MRCF to satisfy James Hardies future asbestos liabilities. 333 Ex 61, Vol 6, Tab 32 334 Ex 79 335 See for example Attrill T941.40; and Morley T2159.25 336 David Robb conceded this possibility in relation to the June 2000 Report [Robb T2908.30] 111 9.6. Allens knew of the many flaws in the Trowbridge report. Indeed, Roy Williams specifically drew those flaws to the attention of Attrill, who relayed them to Shafron.337 It was clear to Allens338 that Shafron intended to proceed with the flawed report, unaltered. Allens elected to take no further action either to correct the report or to deter James Hardie from using the report for the wrongful purpose of misleading the incoming directors and other stakeholders in the transaction.339 Amaca / Amaba Separation – Outgoing Directors 9.7. Allens was at all times the principal adviser to JHIL, and subsequently JHINV, in carrying out Project Green. Its role was pivotal throughout 2000-2004. Its solicitors had been briefed on the project, were aware of its objectives (as defined by James Hardie), and advised JHIL (and later JHINV) at every stage of the project. It must have known at all times of the intention to “build an unbridgeable gap”340 between the company left holding the asbestos liabilities of Hardies on the one hand, and the valuable operating assets built up over decades by the group on the other. 9.8. Allens partner, Peter Cameron, provided written advice to JHIL on the various legal mechanisms to carry out Project Green.341 9.9. Allens lawyers drafted all of the principal legal documents which comprised Project Green including the Deed of Covenant & Indemnity. 342 Allens made critical changes to the CDI DCI on 15-16 February at the last moment without giving Amaca, its directors or its lawyers any reasonable opportunity to review or understand such changes. 337 Ex 61, Vol 4, Tab 13 338 Robb T2902.5-.35; Cameron T2903.30-.35; T3038.1-.20 339 On 10 August 2000, Robb called Attrill in relation to Williams’ concerns. In a hand written note, Attrill records himself as stating, “we’re doing our own critique” and that “I counselled that Roy shouldn’t be too pessimistic” [Ex 61, Vol 4, Tab 35]. Robb recognised the importance of William’s observations in the context of the Amaca/Amaba separation. He recalled advising Shafron to forward the document to Trowbridge, but did nothing to ensure that advice was followed through [see Robb T2902.10 – 2905.20] 340 Ex 61, Vol 4, Tab 31, pg 2 341 Ex 23 - attached to JHIL Board Papers, April 2000 342 See for example, Morley T2156.5-25; Robb T2776.50 112 9.10. Allens partners regularly attended the board meetings of JHIL, including the board meeting of 15/02/01 where the board agreed that Project Green would proceed.343 9.11. Allens Partners were present during the board meetings of Amaca and Amaba on 15/02/01 where those companies agreed that they would participate in Project Green, and executed the separation documents.344 9.12. In the course of acting for Amaca, Amaba and JHIL, David Robb had a clear awareness of the potential conflicts of interest. He was aware that the outgoing directors of Amaca and Amaba were both employees of JHIL, and that they were purporting to execute legal documents on behalf of Amaca and Amaba that bestowed valuable rights on JHIL.345 9.13. Robb specifically raised with Shafron the need for Morley and Cameron to receive separate and independent representation, “both as directors, and for the benefit of Amaca.”346 Shafron “fobbed him off” by telling him it was “under control.”347 It never was. Robb, who has demonstrated an impressive attention to detail in so many other areas of the complex transactions involved in these matters, never followed up his concern in relation to independent representatives representation of Amaca.348 He left the matter in the hands of his client, whom he knew to be desperate to finalise the transaction, despite his express recognition that any failure to provide Amaca with full and independent legal advice “may impinge on the enforceability of the indemnity.”349 22.214.171.124. Robb also knew that Shafron had controlled the flow of information of to the lawyers for the directors, ; in addition to selecting selected them and paying paid them. Misleading Account of JHIL Liability 343 Ex 75, Vol PJS1.8, Tab 118, pages 1 and 4 344 Ex 42: Statement of Donald Cameron, paras 73-74; Tabs 20 and 31. 345 Robb T2781.45 346 E-mail from Robb to Shafron, dated 7 February 2001, (Ex 189, Vol 1, pg 292); Robb T2779.35 347 E-mail from Shafron to Robb, dated 8 February 2001, (Ex 189, Vol 1, pg 292); Robb T2779.10-15 348 Robb T2779.15-30 349 E-mail from Robb to Shafron, dated 7 February 2001, (Ex 189, Vol 1, pg 292); Robb T2779.5 113 126.96.36.199. Allens partner Roy Williams provided oral advice to the directors of Amaca and Amaba in relation to the DCI on 15 February 2001. This advice included the suggestion that Shafron’s summary of the direct tort liability position of JHIL to asbestos victims was “a fair summary” of the legal position.350 This advice was misleading and erroneous in the following ways: (a) it omitted any reference to the fact that Williams had been asked to provide this advice at the behest of JHIL, which had an interest adverse to Amaca’s in minimising the appreciation of any prospect of direct tortious liability to asbestos victims being visited upon JHIL; (b) it omitted reference to the fact that Allens’ review of JHIL’s liability position was on-going and incomplete;351 (c) it omitted a proper reference to the fact that Allens had recently discovered that the Industrial Hygiene Unit of Amaca had been transferred to JHIL in the mid to late 1970s, and this fact alone may significantly affect the JHIL liability position;352 (d) it omitted any proper consideration of the effect on JHIL of the recently decided High Court decision of Crimmins v. Stevedoring Industry Association;353 (e) it omitted any proper consideration of the differences in the factual scenario in the Putt case to the Australian liability position of JHIL, and it omitted any reference to any unique problems in the Putt case, which may have emerged from the way in which that case was pleaded;354 (f) it omitted any reference to the effect of CSR v. Wren; or to the content of the advice Allens had obtained from James Allsop SC by this time, which stated, 350 Ex 2, Vol 2, Tab 6, page 426 351 D Cameron T622.25; see also Ex 81 352 See for example, Ex 57, Vol WJA,4, page 903; Ex 81; Ex 2, Vol 2, Tab 6, at 428; Ex 224, Vol 2, Tab 34, pg 432 at para 3.1; Ex 75, Vol 8, Tab 120, pgs 2817-8; and Shafron T1643.35- T1644 353 (1999) 200 CLR 1 354 Shafron T1643.35-45 114 Putt however left open the question as to whether JHIL could be liable, not as the employer and not ignoring the corporate veil, but working from the foundation of those accepted factual and legal hypotheses, by reason of its failure to act to direct the subsidiary to avoid foreseeable harm to its (the subsidiary’s) employees;355 (g) the Shafron note on JHIL liability provided to Cameron and Morley refers peremptorily to a small period of possible exposure for JHIL in the late 1970s to mid 1980s. It failed to have any proper regard for the increasing importance of this period in the future claims demography of the James Hardie exposure cohort.356 Future claims of mesothelioma arising from exposure to Hardie’s products are increasingly likely to implicate this period in whole or in part. Williams must have appreciated this. MRCF – Incoming Directors 188.8.131.52. Allens Partner, David Robb, briefed the incoming directors of the MRCF on 15 January and 13 February 2001 as to the legalities of the trust structure that was to be adopted. He was in the presence of Edwards, Cooper, Jollie and Gill on 15 February 2001, when they signed on as trustees and directors of the MRCF. In the course of their dealings, Robb misled the incoming directors: (a) as to the flaws in the Trowbridge report which were known to Allens since at least 30 June 2000;357 (b) as to the fact that Shafron had sought to prevent the incoming directors from having unfettered access to Trowbridge officers “for tactical reasons and control;”358 (c) as to the fact that the most recent data available to JHIL as to James Hardie’s asbestos liabilities had been deliberately withheld from Trowbridge. Robb stated that he learned for the first time on the morning of 15/02/01 that the Trowbridge report had not been up-dated 355 Ex 75, Vol 7, Tab 83, page 2381 at 2385 356 See Ex 232, Statement of Bruce Armstrong 357 Ex 75, Vol 5, Tab 54 at pg 1785 358 Ex 75, Vol 7, Tab 100 115 with data beyond March 2000.359 He raised the matter with Shafron and did not accept his explanation that the latest data would make no difference.360 He and his Allens partner Peter Cameron raised the matter with Macdonald and were given the same explanation.361 He and Cameron resolved to take no further action, relying on the fact that these were their client’s instructions.362 Robb and Cameron knew that Macdonald and Shafron were not actuaries. They knew that there already existed significant concerns with the assumptions underlying the Trowbridge report. They knew it was in JHIL’s interests to minimise the actuarial assessment. They knew that Shafron had deliberately kept Trowbridge away from the incoming directors. They knew Shafron and Macdonald intended the incoming directors to rely on the Trowbridge report. To hide behind the defence that they should merely accept their client’s instructions on this subterfuge without so much as telephoning Trowbridge to confirm the situation, is deplorable. (d) as to the fact that the transaction involved MRCF undertaking liability by way of an indemnity for the direct tortious liability of JHIL, which Allens knew to be potentially much more substantial than had been disclosed. 184.108.40.206. Allens must be taken to have been aware that the public statements made by Macdonald were misleading and deceptive.363 Indeed, when Macdonald sought to justify his comments to journalist Ben Hills by saying the projection had been validated by Allens, Allens wrote to Shafron privately disassociating themselves from those statements but took no other corrective action and continued to act disassociating themselves from the statements. The Scheme of Arrangement 220.127.116.11. Allens acted for JHIL during the Scheme of Arrangement in October 2001, representing the company in its application to obtain NSW Supreme Court approval for the said scheme. At this time, Allens knew that the 359 Ex 187, Statement of David Robb, para 55; Robb T2793.10-25 360 Robb T2796.55-T2797.10 361 Ex 187, Statement of David Robb, para 61; Robb T2798.35-55 362 Robb T2807.45-55 363 Including the JHIL Press Release dated 16 February 2001 (Ex 3, Vol 1, Tab 3), and the Presentation to Analysts on 16 February 2001, (Ex 1, Vol 7, Tab 6, at pg 2161). 116 cancellation of the partly paid shares had been under consideration by its client. It knew that Hardie’s overall intention was the separation of the group’s main operating entity from the asbestos liabilities of both Amaca and JHIL. Allens must also have known that, to divorce the James Hardie Group from its asbestos-ridden past, it was likely that the partly paid shares would need to be cancelled. The Cancellation of the Partly Paid Shares 18.104.22.168. On 17 July 2002, there was an internal meeting between Allens’ partners David Robb and Michael Ball, and senior associate Julian Blanchard. The purpose of this meeting was “to obtain high level input from Michael Ball about the proposed transaction.” Ball’s advice was sought due to his experience, and his “outstanding reputation within Allens as an analytical thinker.”364 22.214.171.124. The Allens lawyers recognised the conflict posed by the intended cancellation of the partly paid shares. David Robb had written to the Supreme Court stating that: “JHIL will be entitled to call upon JHINV to pay any or all of the remainder of the issue price of the partly paid shares at any time in the future and from time to time.365 The partly paid shares are to be issued by JHIL to ensure it has access to funding going forward to meet any potential liabilities. The issuing of the partly paid shares will ensure that, notwithstanding the transfer by JHIL to JHINV of its principal operating assets, which are owned by JHNV, its net worth will remain essentially the same following implementation of the transaction.”366 126.96.36.199. These statements were unqualified, as were the representations made (on instructions) by Noel Huttley SC to Justice Santow to a similar effect. 367 The Information Memorandum, which had been put before the Court and sent to shareholders, made no mention of the cancellation of the partly paid 364 Statement of Julian Blanchard, para 24 365 Ex 61, Vol 6, Tab 24, pg 3 366 Ex 61, Vol 6, Tab 24, pg 6 367 Ex 278, Vol 5, Tab 6, pg 23 117 shares, despite this cancellation having been contemplated by JHIL executives from the outset. 188.8.131.52. Ball’s advice was contemptuous of the firm’s duty to the Court. When told that no mention had been made of JHIL’s intention in relation to the continued existence of the partly paid shares at the time of the scheme, he asked, “what would discovery reveal? What would witnesses say? What explanation given for change of timing?”368 184.108.40.206. Ball stated that the “Flaw if there is one is difference b/w what said in scheme & what doing now. But as a stand alone transaction, can’t see any flaw.”369 Ball did not advise Robb and Blanchard to consult JHIL as to whether it had intended to cancel the partly paid shares prior to the Supreme Court proceedings. At no stage did the lawyers contemplate returning to Justice Santow to alter their previous statements. 220.127.116.11. Instead, Ball took a cynical approach. He effectively invented a version of the facts and the Company’s intention that might bear scrutiny based on the limited access to information any future review of this conduct would have: Say, no int[ention] to t/f [transfer] at time of scheme. Didn’t cross anybody’s mind to do this. Reason had partly paid shares was to have greater flexibility. Had an intention to deal with it later.370 Blanchard’s note reveals Ball’s attitude as effectively the following – Here’s what we’ll say, We never had the intention at the time. It’s something that only occurred to us at a later date. Let’s check there’s no evidence, that there’s nothing discoverable, which might cause us trouble. The firm’s focus on what evidence might be around to cause trouble adds to the suspicion that this approach was a deliberate fiction. 18.104.22.168. Ball knew that the partly paid shares were put in place because neither JHIL nor Allens were “willing to justify to the court that creditors 368 JRB6, while these comments were not attributed by Blanchard, they appear to be in response to the list of five issues that he and Robb had taken to Ball (Statement of Julian Blanchard, at para 26) 369 JRB8, attributed to Ball in Statement of Julian Blanchard, at para 30 370 JRB12 118 interests [would] not [be] affected.”371 As a result, Ball stated, “critical q[uestion], at time of scheme, we had intention to cancel these partly paid shares?”372 22.214.171.124. Ball recognised that it was misleading to have failed to disclose that intention in the scheme documents. However, he believed that a creditor would have a ‘hard case’ in establishing that such a state of mind existed in fact. He was wary of what evidence might exist of intent prior to the application. In the absence of such an intention, Ball reasoned would not require disclosure could be avoided as “a court must be aware could sell them and person may not be able to meet call.”373 whatever contrary assurances may have been given to the Court. 126.96.36.199. In addition to Ball’s question, “what would discovery reveal,” there are several references to “sensitive documents” and to the pending appeal in McCabe. In the light of Shafron’s demonstrated propensity to destroy sensitive documents, the Commission should infer that there is a real risk that further documents demonstrating prior intent are likely to have been destroyed. Both Robb and P Cameron in their evidence before the Commission, used the explanation which was invented in July 2002 by Ball. The Commission should find the explanation (of Robb and P Cameron) to be a fabrication. 188.8.131.52. A meeting of 25/07/02, including Robb, Blanchard and Shafron, refers to the following “Technical reg. of dir[ectors], what their future intentions were … Risk/arg[ument], hard to believe we didn’t had [sic] the intent … … just generally misleading.” We agree. 184.108.40.206. Ball noted that the issue of timing is a “Factual question. Whatever misleading conduct that may be alleged has already occurred.”374 This opportunistic perspective ignored that the further work of JHINV and Allens in completing the DCIA crystallised the mischief created by the misleading of the Court. 371 JRB10, attributed to Robb in Statement of Julian Blanchard, at para 32 372 JRB11, attributed to Ball in Statement of Julian Blanchard, at para 33 373 JRB11-12 374 JRB10, attributed to Ball in Statement of Julian Blanchard, at para 31 119 220.127.116.11. The Allens lawyers concluded that it was not in their interests, or the interests of their client, for JHINV to disclose the cancellation of the partly paid shares or the ABN60 separation, as: Legally risk may not be higher Commercially/Politically of higher risk Nothing Santow can do ASIC might do something375 18.104.22.168. In his supplementary statement, dated 5 July 2004, Robb stated that he had no recollection of the meeting referred to above.376 However, tThis is unlikely in light of his oral evidence, in which he repeated the concocted arguments referred to in paragraphs 9.22 and 9.28 above. 22.214.171.124. Ball removed almost every reference from the draft Robb advice to the possibility that the Supreme Court might have been misled in 2001. 377 Instead, in relation to a prior intention to cancel the partly paid shares, the final advice stated: Although JHI NV may have answers to an allegation of that type, we think it is preferable to avoid the issue by confronting now the issue whether ABN 60 can pay its creditors even if the partly paid shares are cancelled.378 126.96.36.199. Allens deliberately participated in misleading the Supreme Court, and then attempted to cover up the fact. As such, the firm is independently responsible for the damage caused as a consequence. JHIL Separation 188.8.131.52. Allens represented JHINV in 2003 during the separation of JHIL from the James Hardie Group and the establishment of the ABN60 Foundation. However, it did nothing to warn officers of JHIL that Allens was acting for JHIL 375 JRB12 376 Supplementary Statement of David Arthur Robb, dated 5 July 2004 at para 28 377 Robb T2935.35 – T 2937.10 378 Ex 148, Vol 2, Tab 24, pg 492 at 498 120 in relation to the subject transaction;379 certainly it did nothing to alert JHIL that it was acting adverse to its interests. In circumstances where Allens had acted for JHIL for decades and would continue to act for it in a range of other transactions,380 this conduct was inexcusable. 184.108.40.206. Allens misled the directors of JHIL as to the fact of a pending substantial claim by MRCF against JHIL. Robb made it clear to Macdonald that he had been careful not to disclose to those directors the looming claim by the MRCF. Peter, we met with Don and John this afternoon. We gave a full description of the transaction although we did not go into detail on your recent difficulties with the Foundation, or the Foundation’s concerns about funding promises. They are both on board.381 220.127.116.11. Robb explained his action on the basis that he considered it to be a matter for JHI NV management to disclose this matter.382 The explanation is implausible. Why would Robb meet with the directors at all if this were true? Why would he supply a range of other information but withhold this information? Robb knew that the presence of a large potential liability of JHIL would prevent any responsible JHIL director from cancelling the partly paid shares. Indeed, he specifically advised all relevant parties to that effect.383 Robb must be regarded as having participated in a deliberate deception of the JHIL directors. These actions are inexcusable and deplorable. 18.104.22.168. In their advice to the JHI NV Board dated 29 March 2003, Ball and Robb stated that: We think the better view is that the directors [of Amaca and Amaba] will be able to prove that they relied on any misrepresentation by ABN60. … On the other hand, we think it will be very difficult for the 379 For instance, in August 2003, Allens did not hesitate to advise D. Cameron in relation to the letter he had received from the MRCF seeking to speak to him as a former director of Amaca and Amaba (D. Cameron T510.35-T511.30). Mallesons Stephen Jaques had represented Cameron at the time of the MRCF separation. Although Allens repeatedly sought to involve independent solicitors at various stages of the separation and restructure, the firm remained the primary legal adviser for all Hardie’s officers and empl oyees at all times. 380 Including acting for both JHINV and ABN60 in the Special Commission of Inquiry, despite their legal separation. 381 Ex 61, Vol 6, Tab 32 382 Robb T2879.30 - 2880.15 383 121 directors to establish that they or Amaca or Amaba have a right to a substantial remedy.384 This advice was presented as definitive legal opinion. Unlike many of the earlier advices prepared by Allens in relation to this and other transactions, this advice was not scrutinised by Senior Counsel prior to release. The Board relied on this advice as a basis for approving the separation of JHIL from the James Hardie Group. The advice was fundamentally flawed. Allens must have known this. The advice was given (it must be assumed deliberately) for the purpose of permitting Shafron, Macdonald and Morley to assert that there was no liability of JHIL which might impair its capacity to cancel the partly paid shares. An on-going Contemptperversion of the course of Justice 22.214.171.124. Allens’ instructed counsel to provide assurances to the Court as to the security provided by the partly paid shares.385 Allens provided written answers to the questions posed by Justice Santow repeating the assurances,.386 126.96.36.199. This conduct there should be regarded as a deliberate deceit upon the Supreme Court. David Robb effectively acknowledged as much when he prepared a draft advice to JHI NV following the cancellation of the partly paid shares in 2003 in which he stated that there were grounds to suggest that JHI NV had misled the Court.387 188.8.131.52. Robb did not provide an adequate explanation as to why this advice was never actually provided to JHINV. The failure to be frank with the Commission about this matter raises issues concerning Allens’ conduct in circumstances where: (a) Robb had given two statements to the Commission which were silent on the issue; 384 Ex 121, Vol 8, Tab 150, pg 3470E at paragraphs (d) and (e) 385 Ex 278, Vol 5, Tab 6, pg 23 386 Ex 61, Vol 6, Tab 24, pg 6 387 Ex 201 122 (b) Allens had purported to comply with numerous summonses to produce but had failed to provide this seminal document; (c) Allens has provided no explanation for its failure to so comply; and (d) Allens partner Ball, who removed all references to misleading the Supreme Court from the final advice provided to JHI NV,388 has provided no explanation for his actions to the Commission. 184.108.40.206. The Commission should make findings of fact that: (a) Cameron and Robb misled Santow J concerning partly paid shares; (b) the conduct of the Allens lawyers is such that: in relation to the misleading of Santow J the Commission should recommend investigation of the conduct of Cameron, Robb and (Shafron) by the Prothonotary of Supreme Court of New South Wales and the Legal Services Commissioner; in relation to the cancellation of the partly paid shares the Commission should recommend investigation of the conduct of Robb and Ball by the Legal Services Commissioner; Robb and Cameron gave false evidence to the Commission as to the intention of JHIL to cancel the partly paid shares at the time the scheme o f arrangement was before Santow J. 220.127.116.11. Allens should never have represented JHINV at this Commission. The fundamental conflicts of interest were demonstrated by the evidence; must have been apparent to the senior partners involved prior to the commencement of the hearing and would increasingly complicate the position. The failure of both parties to act appropriately reflects their mutual desire to ‘keep a lid on’ the wrongful conduct that has been exposed only by virtue of the powers of the Commission. 388 The sanitised final Advice of Robb and Ball, dated 31 January 2003 appears attached to the JHINV Board Papers of 7 March 2003: Ex 148, Vol 2, Tab 24, pg 492; also Ex 79. 123 Trade Practices Act and Corporations Act Contraventions Formatted Formatted 18.104.22.168. The partners of Allens were engaged, between January 2000 and February 2004 in a series of communications and representations to the directors of Coy, MRCF and JHIL; as described in this section. The deliberate failure of Allens: (a) to advise Cameron and Morley of the true tort liability position of JHIL; when they were considering the DCI; (b) to advise the incoming directors of the serious flaws in the actuarial assessment provided by Trowbridge; (c) to advise Justice Santow of the put option and of JHIL’s intention to cancel the partly paid shares in August-October 2001; (d) to advise the directors of JHIL of the nature and pendency of claims against it by MRCF; were, in the circumstances: misleading and deceptive conduct within the meaning of s52 of the Trade Practices Act, and related legislation; unconscionable conduct within the meaning of s51AA of the Trade Practices Act and related legislation; conduct accessorial to the transgressions of James Hardie within the meaning of s75B of the Trade Practices Act and related legislation. 124 10. CHAPTER 10: THE ROLE AND LIABILITY OF CORRS CHAMBERS WESTGARTH 10.1. Stevenson was retained to provide professional advice to Macphillamy and D Cameron as to their duties as incoming directors of JHIL and to the consequences of the DOCIA. Stevenson breached his duty of care in the provision of that advice. The MRCF suffered loss and damage consequent on the breach. 10.2. Stevenson was retained for the directors by Allens on Friday 28th March 2003. The scope of the brief was defined by Allens. The DOCIA was executed and signed on 31/03/03. 10.3. Stevenson’s advice of 01/04/03 was qualified: “However we do not have a comprehensive knowledge or understanding of the facts underlying the business or restructure of the James Hardie Group of companies. Accordingly, due to time constraints and the limited scope of our instructions, our advice is limited to the efficacy of the indemnities under the ABN 60 Officer Indemnity Deeds, the ABN 60 Foundation Officer Indemnity Deeds and the Indemnity in favour of ABN 60 under the new deed.”389 10.4. In light of this qualification the only advice given by Stevenson was that the DOCIA would be binding and contained terms not uncommon in such documents. Given the technical nature of the DOCIA and the gravity of its effects on JHIL’s liabilities, Stevenson should have advised the incoming directors not to act at least until further information could be obtained as to the following: (a) The nature and extent of JHIL’s asbestos liabilities which were excluded by the DOCIA; (b) the capacity of JHIL to meet such liabilities; (c) clarity of the definition of intragroup claims. 10.5. Stevenson failed to make even the most basic enquiries of the relevant facts including: 389 Ex 124, Tab 3, pg 4 125 (a) the existence of the partly paid shares;390 (b) The extent of the coverage provided to the incoming directors by the proposed D + O policy.391 Deed of Rectification 10.6. Stevenson was further retained in December 2003 to advise on the signing of the DOR, which was aimed at addressing an alleged common mistake made in the DOCIA. Stevenson advised the directors to sign the DOR. This advice was negligent. 10.7. Stevenson appreciated that the effect of the DOR was “to carve out the indemnity from JHINV that would be to the detriment of ABN 60 Pty Ltd.” 392 Despite the gravity of the proposal Stevenson failed to make any independent enquiries as to the intention of the parties to the DOCIA. Unbelievably 393 Stevenson did not even consult his own file . Rather he relied upon and accepted at face value the instructions of Cameron who was not a party to the DOCIA.394 10.8. Compounding his failure to make enquiries Stevenson, at the time of giving advice, appreciated the following pertinent facts: (a) at the time of the DOR, Stevenson was aware of the possible shortfall in funds of the MRCF;395 (b) the real possibility of a claim by the MRCF in the light of the public announcement;396 (c) that if DOCIA did not contain a common mistake, then the DOR would not be the appropriate instrument for changes to the DOCIA, but rather an amendment would be required. This he conceded may have 390 T2062.45 391 T2092.45 392 T2074.40 393 T2086.45 394 T2075 395 T2067.5 396 T2065.25 126 been subject to greater scrutiny, especially in the light of pending litigation;397 (d) that if the DOR was in fact an amendment then consideration would need to be provided to JHIL.398 397 T2076.10 398 T2067.45 127 11. CHAPTER ELEVEN: SUBMISSIONS ON TERM 4 11.1. Statutory schemes and tort reform do not form any part of the terms of reference of the Commission. Term 4 was particularly included as a Term of Reference to enable reform under the Corporations Act for the benefit of the MRCF in the management of its liabilities. Such reform should be directed as best it can at recapturing the James Hardie assets removed off shore. 11.2. It has often been said that extreme cases make bad law. Discussions about substantial reform of the corporation or bankruptcy laws of this country, including the possible inclusion of a US Chapter 11 – style bankruptcy provisions, are inappropriate to provide any short term relief. 11.3. As has been amply demonstrated in the evidence and in these submissions, the entire scheme devised by James Hardie has been attended by fraud and gross corporate misfeasance at very senior levels of management. The extensive resultant damage to the community calls for immediate relief that long term legislative reform initiatives do not offer. 11.4. As these submissions and the evidence disclose, Macdonald, Shafron and Morley acted between January 2000 and 2004 in a manner that was fraudulent, directed at deceiving and misleading a wide variety of stakeholders. These included the incoming directors, other directors of Amaca and JHIL, other stakeholders including the government, unions, victims groups, the public and of course, the Supreme Court of New South Wales. 11.5. The Board of JHI NV must bear responsibility for the conduct of its senior management. The evidence discloses that at best, the Board willfully turned a blind eye to the years of fraud and deceit. This in itself constitutes corporate misfeasance of a high order. 38.8.A MATTER OF CHARACTERISATION Formatted: Bullets and Numbering 22.214.171.124. In the Commission's characterisation of what has occurred it is important to avoid artificial compartmentalisation of events. The events commencing with the stripping by JHIL of the assets of its subsidiaries in 1996 and ending with the Deed of Rectification in February 2004 were related. 128 11.7. Viewed from a topographical perspective, the Commission is concerned with a scheme. It was a scheme consisting of a chain of interlocking steps designed and deliberately intended by the JHIL interests to achieve a single object, namely a separation from their assets, which might otherwise have been available to meet legitimate claims of creditors. 38.10.THE NEED FOR LEGISLATIVE INTERVENTION Formatted: Bullets and Numbering 11.8. With the exception of JHI NV, the persons and companies immediately available as prospective defendants in proceedings arising from the various wrongdoings with which this Commission has been concerned will have insufficient means to meet the size of the liability in question. 11.9. Execution against JHI NV’s assets is conditional on: (a) the sheeting home to JHI NV of liability either through recognized principles in Australian law or by way of the lifting of the corporate veil; (b) the availability of legislative machinery which would permit the attachment of JHI NV’s overseas assets. 11.10. Current mechanisms available at common law and under statute may prove inadequate to achieve these objectives. 11.11. To the extent that this is so, the demands of justice and the public interest, which has resonated in the media since announcement of this Commission of Inquiry, call for legislative intervention to right the wrong. THE DIFFICULTIES ABSENT STATUTORY / GOVERNMENT INTERVENTION 11.12. The inclusion of term 4 in the Terms of Reference was encouraged by an expectation that currently available curial processes may be inadequate to afford protection to persons who are or may become aggrieved by the wrongful conduct of the JHIL interests. 129 11.13. Those ultimately aggrieved are an indeterminate class of sufferers of asbestos related diseases, many of whom are as yet undiagnosed, for whom and for whose families, the funding available will have been exhausted by the time their respective claims crystallise into judgment debts. 11.14. Although they are the persons ultimately aggrieved and have standing to pursue their own causes of action, the reality is that in the main, compensation will flow to them as the beneficiaries of such causes of action as are pursued by the MRCF for their benefit. 11.15. Based upon the delinquency of the MRCF directors in not pursuing appropriate redress in the past399, the Commission can have no confidence that the MRCF’s causes of action will be responsibly pursued if the trust remains in their hands. 11.16. This gives rise to the submissions already made that the directors should be replaced by persons who will loyally protect the interests of the asbestos victims. The Court has power to order the removal of a director in the exercise of its statutory jurisdiction to provide a remedy where a company’s affairs are being conducted oppressively and unfairly.400 An application for such an order may be made by a person whom ASIC thinks appropriate having regard to investigations it is conducting into the company’s affairs.401 11.17. The MRCF has viable causes of action and it is important that the pursuit of them remain in the hands of such directors as are installed following the removal of Jollie, Cooper and Edwards. 11.18. Assuming success by the MRCF in its pursuit of available causes of action, absent any government intervention, there are two significant matters that present themselves as obstacles in the way of a satisfactory resolution: (a) the limited assets of the prospective defendants save for JHI NV; (b) the location of JHI NV’s assets. 399 as to which see insert of these submissions 400 Pt 2F.1 of the Corporations Act 401 s 234(e) Corporations Act 130 THE CURRENT MECHANISMS FOR MANAGING MRCF’S LIABILITY Voluntary administration v liquidation 11.19. The forms of external administration available under the Corporations Act [relevantly liquidation or voluntary administration] have in common the passing of control of the MRCF to an external administrator. 11.20. Voluntary administration was designed to overcome a number of the problems associated with other forms of insolvency administration. As identified in the Harmer Report402 the existing forms of insolvency administration had their limitations. Receiverships protected only secured creditors. The interests of unsecured creditors could only be protected by application to the Court for appointment of a liquidator, but liquidation inevitably leads to the dissolution of the company. Whilst schemes of arrangement are available to avoid problems of dissolution they are costly and time consuming. 11.21. For these reasons, as between voluntary administration and liquidation, the former is to be preferred as allowing the administrator an opportunity to rehabilitate the MRCF by testing the causes of action available to it with a view to increasing the size of the fund. 11.22. Nevertheless the voluntary administration mechanism may have its limitations, arising out of the term “creditor”. Plainly there is a large class of contingent creditors who are as yet unidentified because they have not yet been diagnosed and whose claims have therefore not been pursued. The current position is that where the word “creditor” is used in Pt 5.3A of the Corporations Act it means a person who has a claim that would be provable in a winding up under s 553403. 11.23. The difficulty is that the identity of such persons may not become known for many years to come, yet actuarial studies identify their existence and the likelihood of future claims being made as a certainty. Since the first Trowbridge Report of 1996 such persons ought in reality to be regarded as class of claimants having creditor status. Their rights should not be disadvantaged by limitations in the existing external administration mechanisms. 402 Australia Law Reform Commission “General Insolvency Inquiry” (report no. 45, 1988) Vol 1, para 53 403 Brash Holdings Ltd (admin appd) v Katile Pty Ltd  1 VR 24 131 Voluntary administration v Chapter 11 11.24. Alternative regimes may be considered. The question has been raised in the Issues Paper as to whether reforms along the lines of Chapter 11 of Title 11 (Bankruptcy) of the United States Code might afford better mechanisms for the problems that arise. 11.25. The thrust of Chapter 11 is that it provides a corporation the opportunity of continued existence under its own management (as opposed to the external administrator imposed under Australian law) for the purpose of working through financial difficulties. In this way the company is itself able to address its problems free from the ongoing demands of creditors for immediate payment. The principal effect of the initiation of Chapter 11 proceedings is a statutory prohibition preventing creditors from enforcing their security or commencing an action. The company will either emerge from a Chapter 11 Plan as a going concern or alternatively the Chapter 11 regime may be utilised to achieve an orderly liquidation of the company’s assets. 11.26. The major difference between voluntary administration in Australia and the regime provided by Chapter 11 is that under the latter the company will continue to manage its own affairs as a “debtor in possession”404. Use of Chapter 11 Plans has not been confined to insolvency cases. It has been used in the USA as a business strategy to lessen the impact of massive tort liability405. 11.27. A regime along the lines of Chapter 11 is to be preferred in the current context because such a regime would afford the MRCF the opportunity of self help. 11.28. It may afford a greater measure of protection for the contingent creditors referred to above. Moreover, providing there is a change in the MRCF to new and responsible management by the replacement of directors, it may be that the MRCF would then pursue its own claims with more rigour and focus than would an external controller. 11.29. Alternative regimes may have little practical utility in view of the pervading difficulty underlying the appointment of this Commission of Inquiry. Whether one proceeds under a Chapter 11 type regime or by way of voluntary 404 Voluntary Administrations: Will they work? 3 ILJ 11 405 A H Robins (who manufactured the Dalcon Shield) and Manville Corporation (asbestos liability); see “Voluntary Administration and Chapter 11 of the Bankruptcy Code (US) 2 ILJ 93 132 administration or liquidation, the reality remains the same, namely the inadequacy of funds in all prospective defendants save for JHI NV. CAN THE VICTIMS BE PROTECTED WITHOUT A LIFTING OF THE VEIL? Attacking JHI NV without a lifting of the veil 11.30. For the reasons articulated earlier, submissions are available sheeting liability home to JHI NV for its involvement in the misleading conduct before Santow J in 2001 and for its orchestration of the cancellation of partly paid shares in March 2003. 11.31. The nexus between the JHI NV’s wrongful conduct and the MRCF’s loss is that the wrongful conduct has resulted in JHIL’s impecuniosity. As JHIL was the company against which full recovery, flowing from the events of February 2001, was available, its subsequent impecuniosity is the source of substantial loss. Attacking JHI NV’s assets 11.32. If such liability in JHI NV can be established, there is a system of comity which may enable the cooperation of United States’ courts in the attachment of JHI NV’s American assets. 11.33. In external administrative matters, s 581(4) of the Corporations Act provides a mechanism for the Court to request a court of a country other than Australia, having appropriate jurisdiction, to act in aid of, and be auxiliary to the Australian Court. By Regulation 5.6.74(i) the United States is a country prescribed for the purposes of the section. 11.34. That provision permits the administration of a company to be conducted elsewhere if the law of that place offers facilities unavailable in Australia and that may result in a better return for the benefit of creditors as a whole 406. 11.35. The mischief to which section 581 is directed was described by Barrett J in Re AFG Insurances Limited (Admin apptd)407 in the following terms: 406 Re Dallhold Estates (UK) Pty Ltd (1992) 6 ACSR 255. See generally Joyce v Beach Petroleum NL (1996) 20 ACSR 525 133 “This court is invested with jurisdiction by the Corporations Act 2001 (Cth) in relation civil matters arising under the Corporations legislation of the Commonwealth. That jurisdiction is comprehensive and without territorial limit and, in referring to matter to which the court’s jurisdiction does not extend, I do not suggest that the jurisdiction with respect to matters presently relevant is in any way restricted. It is unrestricted from the perspective of our law. I merely intend to say that effective exercise of this jurisdiction in foreign places may be hampered by lack of recognition in those places. It is the resolution of that difficulty at which s 581 is directed.” 11.36. In that case his Honour made orders that the registrar sign, seal and dispatch to the proper officer of the High Court of Justice, Chancery Division a letter whereby the English Court was requested pursuant to its own insolvency legislation to assist by making orders giving effect to and recognising the orders of the Australian Court. 11.37. All this having been said, notwithstanding a possible channel for attachment to JHI NV’s American assets, it is dependant upon success in sheeting liability home to JHI NV according to recognized principles and the outcome of its pursuit is unpredictable and costly. 11.38. The main assets of JHI NV reside within a 100% owned US entity called “James Hardie Building Products Inc”. This entity was incorporated on 28 September 1984 and resides in the State of Delaware. This entity was at the time of the scheme of arrangement 100% owned by JHIL, and upon approval of the scheme was, and is currently, 100% owned by JHI NV. 11.39. According to JHI NV’s 2004 annual report the assets of James Hardie Building Products Inc located in the US are of the order of $550 million US. 11.40. Under the Delaware Code408 that governs James Hardie Building Products Inc, a foreign judgment is enforceable if it is deemed conclusive. 11.41. Two hurdles exist under the Delaware Code: (a) the existence of a conclusive judgment; 407 43 ACSR 60 at para 9; see also HIH Insurance Ltd (In Liquidation) & Ors  NSWSC 454 408 Title 10, Part III, Chapter 48, Clauses 4802-4804. 134 (b) the need to lift the corporate veil in the USA to ascribe JHI NV’s behaviour to its wholly owned subsidiary, James Hardie Building Products Inc. THE LIFTING OF JHI NV’S CORPORATE VEIL 11.42. It is appropriate for the legislature to adopt a single enterprise approach to make the parent company, JHI NV, liable for the wrongs of the company that has been installed as its wholly own subsidiary, JHIL. 11.43. Absent issues of control, the law as it currently stands, with some statutory exceptions that have no application here,409 does not recognise the liability of a holding company for the acts of a group company, even if it be a wholly owned subsidiary.410 11.44. Although there appears to be no recognised uniform approach to be derived from the English authorities concerning the lifting of the corporate veil411, there are instances in which a piercing does occur. 11.45. A notable instance seems to be where incorporation of a group company to assume an existing liability has been effected by a holding company in order to shield itself from that liability.412 The notion underlying such exceptions is that the doctrine of limited liability is being abused in its use as an instrument of fraud. 11.46. The United States approach to limited liability problems appears to be characterised by a far greater degree of flexibility than that permitted by the English courts. In a broad statement of principle formulated by Sanborn J in US v Milwaukee Refrigerator Transit Co413 his Honour said: “If any general rule can be laid down … it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient 409 See for example s 588V (liability of holding company for insolvent trading of its subsidiary); s 588G Corporations Act (directors’ liability for debts incurred during insolvent trading) 410 James Hardie & Co Pty Limited v Hall (Admin of Putt estate) (1998) 43 NSWLR 554; Banque Financiere de la Cite v Parc (Bettersea) Ltd  1 All ER 737 411 Briggs v James Hardie & Co Pty Limited & ors (1989) 7 ACLC 841 412 Re a Company  BCLC 333 413 142 Fed 247, 255; see also Bangor Punto Operations Inc v Bangor & Aroostook Railroad Co (1974) 417 US 703 at pg 713 135 reason to the contrary appears but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crimes, the law will regard the corporation as an association of persons.” (emphasis added) 11.47. The last quoted words aptly describe the current circumstances involving JHI NV. A strict application of the Saloman doctrine has been utilized by the JHIL interests to defeat public convenience and justify a wrong that ordinary processes available under the common law cannot rectify. 11.48. Consistent with that approach an exception to the limited liability principle is recognised by American Courts in cases of undercapitalisation: “If a corporation is organized and carries on business without substantial capital in a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable to set up a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. …” 414 11.49. In the Australian context, much has been said in opposition to the lifting of the corporate veil to impose direct liability on parent companies for the acts of their subsidiaries.415 Amongst the reasons given are that: (a) the separate entity doctrine is not only a fundamental legal principle but a commercial expectation entrenched within commercial investment practice; (b) making a parent company liable for the torts of a group company would commercially weaken the central economic foundation for other group companies; (c) the lifting of the veil would give rise to increased litigation, particularly against larger corporate groups; 414 Ballantine on Corporations – referred to in Inequitable Incorporation – the Abuse of a Privilege by M Whincup (1981) 2 The Company Lawyer at 158 415 See the submissions listed in para 4.18 of Chapter 4 of the Companies and Securities Advisory Committee Final Report on Corporate Groups (May 2000) 136 (d) the common law can accommodate the interests of individual justice; (e) the interests and profiles of different group companies may differ significantly. 11.50. The submissions made on behalf of the victims do not disturb these views. They do not advocate a radical and across the board change to entrenched legal doctrines of limited liability. They do however advocate the need for legislative intervention specifically aimed at the circumstances of this case. 11.51. The effect of what has occurred has permitted them to deploy the Saloman doctrine in a manner which, in the public interest, the legislature should not and cannot permit. To allow what has occurred to go unassisted by the legislature would be to substantially weaken the integrity of the legal system in the eyes of the public. 11.52. The specific effect of the legislative reform called for would be to: As to the misleading conduct by JHIL before Santow J of 2001 (a) deem JHI NV to have been the plaintiff before the Supreme Court of New South Wales416 in which JHIL sought approval of a Scheme of Arrangement pursuant to section 411 of the Corporations Act, 2001 (“the Scheme Application”); (b) render JHI NV liable to compensate aggrieved persons for all loss or damage caused by any and all wrongdoings of JHIL (whether constituted by or arising from statutory breach or the application of common law principles) in and arising out of the Scheme Application; (c) enable, to the extent that current legislature does not, the attachment of the American based assets of JHI NV for the purpose of satisfying that liability; As to the unconscionable conduct involving the cancellation of shares in March 2003 (d) on the footing, as should be found to have occurred, that JHI NV: 416 James Hardie Industries Limited (ACN 000 009 263) and the Corporations Law, plaint No. 3967 of 2001 137 engaged in unconscionable conduct; is liable to compensate aggrieved persons for all resultant loss or damage; enable, to the extent that current legislature does not, the attachment of the American based assets of JHI NV for the purpose of satisfying that liability; OTHER MEASURES Suspension of JHI NV trading on the ASX 11.53. The intervention called for above involves specific legislation aimed at a piercing of JHI NV’s corporate veil together with legislation as would assist in enabling the attachment of its American assets. 11.54. Such measures however do not work to abridge the time between commencement of curial processes and their conclusion. Whether the corporate veil of JHI NV is lifted or not, the litigation likely to result from the Commission’s findings will be protracted and costly. During this time the public will see a sharp diminution of the Fund to the point of its exhaustion. 11.55. Under Rule 17.3.4 of the Listing Rules the ASX may at any time suspend an entities securities or a class of them from quotation if in its opinion it is appropriate to do so. 11.56. Having regard to the evidence adduced before the Commission, the Commissioner would be justified in: (a) finding that JHIL in concert with JHI NV behaved unconscionably in the course of the Scheme Application and in the subsequent cancellation of the partly paid shares; (b) finding that by so doing JHIL and JHI NV conducted themselves by showing a conscious and contumelious disregard for the interests of their creditors; 138 (c) recommending to the ASX that it suspend JHI NV from quotation until such time as the ASX is satisfied that the MRCF has sufficient funds to enable it to meet all legitimate claims of asbestos sufferers. Reform to statutes of limitations The law as it now stands 11.57. Notwithstanding the rejection by the High Court in Wardley417 of the law as articulated in the Forster v Outred & Co line of cases418, in the context of possible relief available against the JHIL interests for misleading and deceptive (and unconscionable) conduct, the various statutory time bars419 work substantial injustice having regard to the time that has already gone by since the events of 2001. 11.58. As expressed in Wardley by Mason CJ, Dawson, Gaudron and McHugh JJ in their principal judgment: “If, contrary to the view which we have expressed, the English decisions properly understood support the proposition that where, as a result of the defendant’s negligent misrepresentation, the plaintiff enters into a contract which exposes him or her to a contingent loss or liability, the plaintiff suffers loss or damage on entry into the contract, we do not agree with them. In our opinion, in such a case, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred” (emphasis added) 11.59. Accordingly the entitlement to damages does not arise at the stage of the potentiality of loss; it only arises when the damage actually occurs420. 417 (1992) 175 CLR 514 418 See Forster v Outred & Co  1 WLR 86; D W Moore & Co Limited v Ferrier (1988) 1 WLR 267; Gillespie v Elliott (1987) 2 Qd.R. 509, Jobbins v Capel Court Corporation Limited (1989) 25 FCR 226, Keen Mar Corp Pty Limited v Labrador Park Shopping (1988) 10 ATPR 40-853 and the cases therein cited. 419 Sections 12GF(2) of the ASICA (3 years), 1005(2) of the Law (6 years) and s 68(2) of the FTA (3 years) 420 See also Iken v Same & Lamborghini Tractors of Australia Pty Ltd (1985) ATPR 40-595 at 46,823; SWF Hoists and Industrial Equipment Pty Ltd v State Government Insurance Commission (1990) ATPR 41-045; E v Australian Red Cross Society (1991) 31 FCR 299, Murphy v Overton Investments Pty Limited  FCA 500. 139 Injustices worked by the law as it now stands 11.60. In the case of the MRCF and asbestos victims, the reasoning in Wardley may work a substantial injustice. On one view the damage to them occurred the moment the Fund was established in circumstances in which it was inadequate for its stated purpose. 11.61. If that be so, causes of action accrued to the MRCF at that time and the limitations period has been running ever since. Indeed one of the complaints against the directors of the MRCF is that they should have taken available action years ago, that there were causes of action to be pursued and that they were delinquent in failing to do so. 11.62. If this analysis proves correct there is a real prospect that in any action pursued now by the MRCF (for the benefit of the victims or otherwise) it may be statute barred. Legislative intervention 11.63. Section 12A(1) of the Dust Diseases Tribunal Act, 1999 (NSW) has been enacted in order to avoid the injustice worked upon belatedly diagnosed asbestos victims by conventional limitation periods. It is relevantly in the following terms: “ The purpose of this section is to enable proceedings to be brought before the Tribunal in relation to dust-related conditions at any time.” 11.64. In a similar vein legislation should be introduced to enable proceedings to be brought at any time by persons aggrieved by the conduct of: (a) JHIL; (b) JHI NV; (c) Amaba; (d) Amaca; and/or 140 (e) any “related entity” of (a) to (d) as that term is defined in s 9 of the Corporations Act 2001 (Cth); in connection with and arising out of: the establishment in 2001 of the Medical Research and Compensation Foundation; the Scheme Application. the cancellation of the partly paid shares in March 2003.
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