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SPECIAL COMMISSION OF INQUIRY INTO THE MEDICAL

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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

2.45.2.44.     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

2.46.2.45.     He did not include this in his original evidence before the Commission.

2.47.2.46.     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

2.48.2.47.     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.

2.49.2.48.     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

2.50.2.49.     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.

3.4.3.2.            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

3.5.3.3.            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

3.6.3.4.       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

3.7.3.5.       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

3.8.3.6.       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

3.9.3.7.       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.

3.10.3.8.       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.

3.11.3.9.       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


3.12.3.10.      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

3.15.3.14.      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

3.16.3.15.      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

3.17.3.16.      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.

3.18.3.17.     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.

3.19.3.18.     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.

3.21.3.19.     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

3.22.3.20.     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


3.24.3.21.     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

3.25.3.22.     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.”

3.26.3.23.     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

3.27.3.24.     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

3.28.3.25.     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

3.29.3.26.     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

5.1.3.27.       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.

5.2.3.28.       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.

5.3.3.29.       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.

5.4.3.30.       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.

5.5.3.31.         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

3.30.3.33.        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.

3.31.3.34.        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.

3.32.3.35.        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.

3.33.3.36.        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


42.1.3.38.         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.

42.2.3.39.         The performance of the actuaries to date sends a clear warning
        against reliance on any of the actuarial assessments provided to the
        Commission.

42.3.3.40.         Trowbridge have attempted to estimate James Hardie’s asbestos
        liabilities on eight occasions with eight completely different results.

42.4.3.41.         Even KPMG’s more complete model places a February 2001 liability
        at 694m. This leave unexplained three years later at least a $1b shortfall.

42.5.3.42.         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

5.8.4.29.          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.

5.9.4.30.          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.

5.10.4.31.         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

5.11.4.32.      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

5.12.4.33.      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

5.13.4.34.     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

5.14.4.35.     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.’

5.15.4.36.     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

5.16.4.40.      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.

5.17.4.41.      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.

5.18.4.42.      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


5.19.4.43.       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

5.20.4.44.       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.

5.21.4.45.       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.

5.22.4.46.       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.

5.23.4.47.       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

6.1.5.1.          JHIL’s misleading conduct comprised a misrepresentation to Santow J        Formatted: Bullets and Numbering

          of an existing fact.

6.2.5.2.          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.

6.3.5.3.          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.

6.4.5.4.          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


6.6.5.5.          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

6.7.5.6.         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

6.8.5.7.         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.

6.9.5.8.         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


6.10.5.9.         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

6.11.5.10.        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




6.12.5.11.        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

6.14.5.12.        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

6.15.5.13.        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




6.16.5.14.        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”)

6.17.5.15.        Each receives separate treatment below.                                         Formatted: Bullets and Numbering


          The fluidity of JHIL’s intentions concerning the partly paid shares

6.18.5.16.        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


6.19.5.17.      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.

6.20.5.18.      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

6.21.5.19.       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.

6.22.5.20.       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

6.23.5.21.       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

6.24.5.22.     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.

6.25.5.23.     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

6.26.5.24.     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) [1999] 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

6.27.5.25.     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.

6.28.5.26.     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

6.29.5.27.     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

6.31.5.29.        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

6.32.5.30.        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.

6.33.5.31.        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

6.34.5.32.      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

6.35.5.33.       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

6.36.5.34.       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

6.37.5.35.       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.

6.38.5.36.       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.

6.39.5.37.    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.

6.40.5.38.    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

6.41.5.39.    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

6.42.5.40.       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


9.4.5.42.      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

9.5.5.43.        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.

9.6.5.44.        His Honour was entirely reliant upon the openness of JHIL, its
        directors and advisors.      In such circumstances the duties imposed upon
        parties abound.

9.7.5.45.        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

9.8.5.46.      The rule is not confined to ex parte injunction applications. It extends
       to practically all ex parte applications.212

9.9.5.47.      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.

9.10.5.48.     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

9.11.5.49.     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 [2000] VSCA 23 (9 March
2000) at para 17; The King v Kensington Income Tax Commissioners, ex p. Princess Edmond
de Polignac [1917] 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


11.1.5.60.        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

11.2.5.61.        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

11.3.5.62.     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


12.1.5.63.     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.

12.2.5.64.     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

12.3.5.65.     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


13.2.6.1.        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.

13.3.6.2.        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.

13.4.6.3.        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.”

13.5.6.4.         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
      [1977] AC 547 at 591
246
      To a like effect see Lord Wilberforce at 570-571, (emphasis added)
                                                                                        74


13.6.6.5.         The evidence adduced before the Commission is sufficient to support
          the stringency of this requirement.

13.7.6.6.         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

14.2.6.7.         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.

14.3.6.8.         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.

14.4.6.9.         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.

14.5.6.10.        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

14.8.6.11.        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.

14.9.6.12.        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


14.10.6.13.       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

14.12.6.14.       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.”

14.13.6.15.       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 … “

14.15.6.16.       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


14.16.6.17.      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

14.17.6.18.      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

14.18.6.19.      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


14.20.6.20.      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.

14.21.6.21.      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

14.22.6.22.       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.”

14.23.6.23.       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.

14.24.6.24.       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

14.25.6.25.       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.

14.26.6.26.      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

14.28.6.28.       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.

14.29.6.29.      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

19.1.6.30.        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


22.2.6.31.        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

22.3.6.32.        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

22.5.6.33.       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

22.6.6.34.       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

25.1.6.35.       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


25.2.6.36.      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


25.4.6.37.      In his evidence Cameron did not evince the same degree of frankness
       as did Robb.

25.5.6.38.      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.

25.6.6.39.      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

28.1.6.40.       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

28.2.6.41.        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


29.2.6.42.      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


29.4.6.43.      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


29.5.6.44.        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.

29.6.6.45.        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


29.7.6.46.        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.”

29.8.6.47.        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.

29.9.6.48.        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


29.10.6.49.       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


29.11.6.50.       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.

29.12.6.51.       Even where a judgment has been apparently regularly obtained, it
          may be impeached if vitiated by fraud.

29.13.6.52.       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.

29.14.6.53.       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 [1964] 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.

29.15.6.54.   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.

29.16.6.55.   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




30.1.7.1.         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

30.3.7.3.     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.

30.4.7.4.     The “true circumstances of the case” are those previously referred to
       and need not be repeated.

30.5.7.5.     Given the evidence by Cameron and Robb, they were complicit in the
       commission.

30.6.7.6.     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


31.3.8.1.       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).

31.4.8.2.       “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).

31.5.8.3.       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

31.6.8.4.       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
    [1962] 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


31.8.8.5.     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.

31.9.8.6.     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;

31.11.8.7.    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

33.2.8.8.      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

33.3.8.9.         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.

33.4.8.10.        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

33.5.8.11.        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

33.7.8.12.        At the date of cancellation JHIL’s appointed directors were Morley
          and Salter.

33.8.8.13.        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


33.9.8.14.        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.

33.10.8.15.       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 [2000] 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

35.17.8.16.     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)

35.19.8.17.     This portion of the submissions can be briefly stated, given that it
       follows from the evidence referred to above.

35.20.8.18.     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.

35.21.8.19.     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
    [2000] 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


35.22.8.20.      That they participated in the cancellation is beyond challenge.
         Without their active involvement it could not have occurred.

35.23.8.21.      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.

35.24.8.22.      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.

35.25.8.23.      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


35.27.8.24.      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.

35.28.8.25.      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


35.30.8.26.       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.

35.31.8.27.       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)].

35.32.8.28.       Compensation is payable to JHIL under s 1317H(1) should the Court
          so order, for damage suffered resulting from the contraventions.

35.33.8.29.       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

36.2.8.30.     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.

36.3.8.31.     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.

36.4.8.32.     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.

36.5.8.33.     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.

36.6.8.34.     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.

36.7.8.35.     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

36.9.8.36.     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


36.10.8.37.      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.

36.11.8.38.      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.

36.12.8.39.      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.

36.13.8.40.      Both subjectively and objectively Morley and Salter were well aware
       that this would be the effect of the cancellation.

36.14.8.41.      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.

36.15.8.42.      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

36.16.8.43.      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


36.18.8.44.      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.

36.19.8.45.      By orchestrating the cancellation in the way described JHI NV, its
       directors and advisors engaged in like conduct.

36.20.8.46.      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


36.21.8.47.   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

9.14.9.13.       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


9.15.9.14.     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

9.16.9.15.     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.

9.17.9.16.      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

9.18.9.17.      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

9.19.9.18.        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

9.20.9.19.        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

9.21.9.20.        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.

9.22.9.21.      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

9.23.9.22.      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.

9.24.9.23.      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.

9.25.9.24.      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

9.26.9.25.       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.

9.27.9.26.       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.

9.28.9.27.       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.

9.29.9.28.       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


9.30.9.29.     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

9.31.9.30.     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.

9.32.9.31.     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

9.33.9.32.     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

9.34.9.33.     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.

9.35.9.34.       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

9.36.9.35.       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.

9.37.9.36.       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

9.38.9.37.     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

9.39.9.38.     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

9.40.9.39.     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.

9.41.9.40.     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.

9.42.9.41.     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
9.43.9.42.     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


38.9.11.6.       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 [1996] 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 [2004] 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 [1998] 1 All ER 737
411
    Briggs v James Hardie & Co Pty Limited & ors (1989) 7 ACLC 841
412
    Re a Company [1985] 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 [1982] 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 [2001] 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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