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					Submissions of Counsel Assisting the Special Commission of Inquiry                        5-1
into the Medical Research and Compensation Foundation – Section 5



                    SUBMISSIONS OF COUNSEL ASSISTING
                  THE SPECIAL COMMISSION OF INQUIRY

                          INTO THE MEDICAL RESEARCH

                           COMPENSATION FOUNDATION

                                               SECTION 5
                                                  Glossary
Allens                        Allen Allen & Hemsley, then Allens Arthur Robinson

Amaba                         Amaba Pty Ltd, known as Jsekarb Pty Ltd

Amaca                         Amaca Pty Ltd, to February 2001 known as James Hardie &
                              Coy Pty Ltd
Coy                           James Hardie & Coy Pty Ltd to February 2001
Current Data                  James Hardie‟s asbestos claims data for the period 1 April
                              2000 to 31 December 2000
DOCI                          Deed of Covenant and Indemnity dated 15 February 2001
                              between JHIL, Coy and Jsekarb (Ex 1, vol. 6, tab 60)
DOCIA                         Deed of Covenant, Indemnity and Access dated 31 March
                              2003 between JHINV and ABN60 (Ex 122, PGM2, vol 1, tab
                              49)
February Report               The Trowbridge letter report dated 13 February 2001
JHA                           James Hardie Australia Pty Ltd
JHFC                          James Hardie Fibre Cement Pty Limited
JHIL                          James Hardie Industries Limited to October 2001, thereafter
                              ABN 60 Limited
JHINV                         James Hardie Industries NV (formerly RCI Netherland
                              Holdings BV)
JHNV                          James Hardie NV
Chapter 1 JHR                 James Hardie Research Pty Ltd
Jsekarb                       Jsekarb Pty Ltd to February 2001, thereafter Amaba Pty Ltd
KPMG                          KPMG Actuaries Pty Ltd
MRCF                          Medical Research & Compensation Foundation
Trowbridge                    Trowbridge Consulting Ltd, later Trowbridge Deloitte Ltd.




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   L: FUTURE MANAGEMENT OF THE MRCF’S LIABILITIES


ISSUE 74
Are the mechanisms under the Corporations Act adequate for the administration of MRCF’s
liabilities - in particular, in circumstances where present, but not all expected future, claims can be
met is it possible to achieve a fair adjustment of the rights of past and unknown future claimants on
an inadequate fund? Is:
           (a)      liquidation;
           (b)      voluntary administration; or
           (c)      a scheme of arrangement
           an adequate mechanism in the circumstances?
           (I)      If not, what reforms, if any, should occur?
           (II)     Do laws in other jurisdictions offer any valuable guides?
           (III)    Would introduction of reforms along the lines of Chapter 11 of Title 11
                    (Bankruptcy) of the United States Code offer better mechanisms to deal with the
                    problems that arise?
           (IV)     Should legislation specifically aimed at either the particular circumstances of the
                    MRCF, or of asbestos claims generally, be adopted in preference to reform of the
                    Corporations Act that might operate more generally?
           (V)      Having regard to:
           (a)      the reasons and recommendations in Chapter four of the Companies and
                    Securities Advisory Committee’s Final Report on Corporate Groups (May 2000);
           (b)      the treatment of corporate groups in existing state legislation (eg. concerning land
                    tax, payroll tax, and workers compensation);
           (c)      any other relevant matters;
           should the Commission recommend reform of the Corporations Act, or other legislative
           change, which would have the effect of restricting the application of the limited liability
           principle in the context of tortious claims relating to corporate groups? Would it be
           appropriate for such purposes to confine the benefit of limited liability to members of the
           ultimate holding company.




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Existing mechanisms under the Corporations Act
1. The current mechanisms under the Corporations Act 2001 (Cth) are inadequate for
    the administration of the MRCF‟s liabilities because those mechanisms cannot
    equitably provide for the expected future claims.
2. The first problem is a threshold one: presumably directors of the MRCF believe
    they are not presently able to trigger the corporate insolvency procedures under
    the Corporations Act 2001 (Cth) (“CA”) because neither Amaca or Amaba is or is
    likely to be insolvent within the meaning of the traditional test of solvency of
    s95A CA, since the financial stress test embodied in any cash flow analysis would
    not encompass a calculation of the estimated liabilities of future unknown
    claimants (see s436A CA).
3. The second is a substantive one: even if the MRCF were to take steps to wind up
    Amaca and Amaba, unknown (even though expected) future tort claimants will
    not count as creditors in the administration. Present claimants would continue to
    be paid in full by the liquidator until insolvency (on a cash flow test) occurred.
    Thereafter, claimants would receive only a small dividend, if anything at all.
4. Third, even if the MRCF sought to rehabilitate Amaca and Amaba by initiation of
    a voluntary administration with a view to executing deeds of company
    arrangement for Amaca and Amaba, complex as they are likely to be, these deeds
    would bind all pre-commencement unsecured creditors, but not future unknown
    tort claimants.
5. Fourth, any statutory scheme of arrangement under Part 5.1 would suffer the same
    deficiency.


Considerations for Reform
6. The difficulty, then, is to provide a mechanism for the equitable treatment of
    ascertained present and unascertained future creditors on a fund that is not large
    enough to satisfy them all. Any suggestion for reform must be informed by an
    appreciation of the overriding objectives of Australian corporate insolvency
    framework. As the Parliamentary Joint Committee (“PJC”) observed in the
    preface to their Issues Paper of May 2003 (at p2):




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         The corporate insolvency provisions of the Corporations Act are arguably the
         most important provisions of the Act and the most important set of laws
         governing the corporate sector. Effective insolvency laws and processes are
         an indispensable part of any well functioning economy and are one of the
         primary means for maintaining financial discipline and ensuring efficient
         allocation in an economy.

         Insolvency laws also enhance corporate governance and corporate ethics.
         They commonly allow private creditors to replace the management of troubled
         firms and in this way create incentives for prudent corporate behaviour. They
         permit an examination to be made of the circumstances giving rise to
         insolvency and the conduct of officers of a company in its failure, perhaps
         revealing culpable behaviour on the part of those responsible for the
         company’s failure and transfers of assets or property that is potentially
         recoverable.

         The central role that insolvency systems play in the operations of capital
         markets and the economy as a whole underlines the importance these laws
         have for Australia.

7. Insolvency legislation is a fundamental component of the institutional framework
    in every market economy. It creates financial discipline in enterprises, provides a
    mechanism for the orderly enforcement of creditor rights and allows for the re-
    allocation of productive assets in the economy (see International Monetary Fund,
    Legal Department, Orderly & Effective Insolvency Procedures 1999;1 World Bank
    Principles and Guidelines for Effective Insolvency and Creditor Rights Systems
    2001;2 Organisation for Economic Co-operation and Development (“OECD”),
    Corporate Insolvency Procedures as a Tool for Privatisation and Enterprise
    Restructuring, 1994)3. OECD empirical evidence suggests that the main factor
    behind increases in productivity in an economy is the exit of business whose
    productivity is poor rather than the entry of businesses whose productivity is
    high.4

8. It has been observed that insolvency law acts like a form of compulsory insurance,
    with the creditors as insurers who ask for a premium on their lending to cover
    their increased risk, in return for which the debtor (insured) faces limited liabilities
    on failure (see Australian Productivity Commission, Business Failure & Change:


1
  http://www.imf.org/external/pubs/ft/orderly/index.htm
2
  http://www.worldbank.org/gild
3
  http://www.oecd.org/dataoecd/49/11/1929884.pdf
4
  http://www.oecd.org/dataoecd/30/22/2079019.pdf




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      An Australian Perspective, Staff Research Paper, December 2000,5 at p79). On
      this approach, it follows that creditors ought be treated in a way that “reflects the
      different bargains that they have struck with the debtor” (United Nations
      Commission on International Trade Law, Working Group on Insolvency, Possible
      future work on insolvency law, 1999, p 9). A corollary of that observation is that
      unsecured creditors accept a lot more risk and can charge higher premiums
      (Productivity Commission, Business Failure, p 79, n.8). However, involuntary
      unsecured creditors such as asbestos victims are not readily catered for by the
      analysis.

9. A special scheme that seeks to achieve a fair and equitable distribution of a
      limited fund for tort claimants (both current and future) would be one that gave
      proper regard to the inability of such claimants feasibly to take into account the
      risk of insolvency and bargain an appropriate premium in return, and which
      acknowledged their relative inability to pay or (more accurately) withstand the
      loss of money arising from a failure to fund the expected liability (cf Productivity
      Commission, Business Failure, p 84). Since the over-riding purpose of insolvency
      law is to fix default rules where the order in which creditors will be paid on
      insolvency is determined, insolvency law is the most crucial indicator of the
      attitudes of a legal system as to whom the law chooses to pay. (See New Zealand
      Law Commission, Insolvency Law Reform: Promoting Trust and Confidence – An
      Advisory Report to the Ministry of Economic Development, May 2001, p2,
      approving P Wood, Law and Practice of International Finance: Principles of
      International Insolvency, Sweet & Maxwell, London, 1995, 1)6.

Chapter 11 US Bankruptcy Code

10. The Australian VA procedure is commonly contrasted with Chapter 11 of the US
      Bankruptcy Code, both procedures offering mechanisms for the reorganisation
      and possible rehabilitation of companies in financial difficulties. (A detailed
      comparison was made by CAMAC in its Discussion Paper Rehabilitating Large
      and Complex Enterprises in Financial Difficulties, September 2003, at para 1.73.)
      Chapter 11 is commonly used in the United States to provide mechanisms for

5
    http://www.pc.gov.au/research/staffres/bfacaap/bfacaap.pdf
6
    www.lawcom.govt.nz




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    balancing the interests of present and future claimants in asbestos cases. The
    policy of Chapter 11 of the US Bankruptcy Code is to permit successful
    rehabilitation of debtors (NRLB v Bildisco & Bildisco, 465 US 513, 527 (1984)).

11. Although CAMAC has not yet reported, the PJC in its report, Corporate
    Insolvency Laws: A Stocktake recently tabled out of session on 30 June 2004, was
    not persuaded to the view that an insolvency procedure modelled on of the US
    Bankruptcy Code was appropriate for the Australian corporate sector (at para
    2.35- 2.37).

12. It is necessary to examine the basis for that conclusion. Chapter 11 of the US
    Bankruptcy Code is used primarily by commercial enterprises seeking to continue
    operating a business and to repay creditors through a court approved
    reorganisation plan. Ordinarily, the debtor remains in possession under Chapter 11
    and has the first opportunity to propose a reorganisation plan. The ongoing role of
    the corporations‟ directors and managers was a key objection raised by the PJC
    (see para 5.58-5.72). By contrast, under voluntary administration, an independent
    administrator is appointed to report on the affairs of the company to the creditors,
    and control of the company and supervision of the process passes from the
    directors to the administrator.

13. VA and Chapter 11 procedures are similar in that both effect a moratorium on
    creditors to enable negotiations with creditors over a plan of reorganisation to take
    precedence. However, whilst the moratorium under a VA is temporary (and
    subject to possible carve outs for secured creditors: see s440B, Division 7 CA),
    the Chapter 11 stay is open ended. The filing of the petition under Chapter 11
    operates as an automatic stay of all lawsuits against the debtor (11 USC
    §362(a)(1)) and all efforts to collect on any pre-petition obligation of the debtor
    (11 USC s§362(a)(2)). The length of time it takes to conclude most Chapter 11
    procedures – the second key objection raised by the PJC7 - may be said unfairly to




7
 The Parliamentary Joint Committee accepted evidence that the average duration of Chapter 11
proceedings is 18 months and when a firm moves from Chapter 11 to Chapter 7 liquidation the further
process takes on average 14 months (see Report para 5.27, citing Vanessa Finch, Corporate Insolvency
Law: Perspectives and Principles Cambridge University Press, 2002, p.200).




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    interfere with creditors‟ rights, in particular the rights of holders of full, fixed and
    floating charges over the assets of the company.8

14. Critically for this Commission‟s purposes, the PJC did not give consideration to
    the features of asbestos bankruptcies (or others driven by long tail liabilities) that
    distinguish them from the usual case. The result was that the PJC did not have
    regard to the ability of reorganisations under Chapter 11 to provide a mechanism
    for dealing with such cases.

15. The advantages available under Chapter 11 are that it can employ mechanisms
    that both provide for and bind future unknown creditors. It can provide for them
    by the establishment of a statutory Trust pursuant to 11 USC §524(g)9 usually
    vested with substantial consideration (eg cash, securities, future payment stream,
    insurance proceeds) from the debtor, and sometimes its affiliates, insurers and
    parents, which holds assets for present and future claimants, whether known or
    unknown. It binds them by granting to the debtor (and where consideration has
    been provided, its affiliates insurers and parent) a broad “channelling” injunction
    against all future asbestos claims that compels all present and future asbestos
    claims to the resort only to Trust assets for payment. (See S Johnston & K Porter,
    “Extension of Section 524(g) of the Bankruptcy Code to Nondebtor Parents,
    Affiliates and the Transaction Parties” (2004) 59 Bus. Lawyer 503).

The Johns Manville Trust

16. The experience of the Johns-Manville Trust bears some consideration, as it was
    the model for the current statutory procedure introduced in 1994.

17. In 1982 the Johns-Manville Corporation, a leading US manufacturer of building
    and fire proofing materials established in 1858, filed for Chapter 11 bankruptcy. A

8
  That being said, the truncated VA timetable for resolution of issues (administrator must hold a first
meeting of creditors within five business days of appointment to appoint a committee of creditors
(s463E) CA) and convene the major meeting of creditors to decide the company‟s future within 21 days
(s439A(1) CA) even if extended by a court (s439A(6) CA; see Re Pan Pharmaceuticals Ltd [2003]
FCA 598; Re Ansett Australia and Others (all admin apptd); Mentha and Another (as admins) v Sydney
Airports Corporation Ltd (2002) 41 ACSR 352) would provide insufficient time to agree deeds of
company arrangement or decide to wind up Amaca and Amaba (s439C CA). Even with the small
extensions proposed by the Parliamentary Joint Committee (see Report para 6.24, 6.37), these are
unlikely to be sufficient for the purposes of reorganising the MRCF.
9
  Modelled on the Johns-Manville Personal Injury Settlement Trust.




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     plan of reorganisation was approved in December 1986 by the US Bankruptcy
     Court for the Southern District of New York (In re Johns-Manville Corp, 86 B.R.
     618, 624 (1986), aff’d in part 78 B.R. 407 (1987), aff’d sub nom Kane v Johns-
     Manville Corp 843 F.2d 636 (B.A.P. 2d Cir. 1988). The Manville Personal Injury
     Settlement Trust was created, whose mission was to “deliver fair, adequate and
     equitable compensation” to claimants “whether known or unknown”, sought to do
     so without the need to litigate. During its first nine months in 1988, over 12,600
     claims for about $500 million were settled according to a Trust Distribution
     Process that established payment of claims on a scheduled basis in accordance
     with certain disease categories.10

18. The Trust had to be redefined in 1995 as a limited fund for insufficiency of funds,
     and its claim settlement and distribution process was amended, with claims paid
     on a scheduled basis in accordance with 7 disease categories at an initial level of
     10%. This Trust Distribution Process (“TDP”) was again revised in 2002,11 and
     claims are now paid at 5%.

19. The Manville Trust‟s most recent Financial Statements and Report for the quarter
     ending March 31 2004 revealed a significant decline in claim filings, believed to
     be partly due to the more stringent exposure and medical criteria defined in the
     TDP and lower scheduled values for almost all non-malignancy claims. (The Trust
     received only 4000 new claim filings in the first three months of 2004 compared
     to approximately 18,000 claims filed under the 1995 TDP during the same first
     three months of 2003). The Trust has also made a substantial investment in
     establishing an effective and efficient e-Claims system that has reduced staff and
     per claim costs.12

Chapter 11 and Asbestos Bankruptcies

20. Generally, asbestos bankruptcies have the following features:

     (a) The official committee of asbestos claimants (for current claimants, appointed
         by the US Trustee: 11 USC §1102(a)) and the Future Claimants‟
         Representative (appointed by the Court) owe fiduciary duties to act in their
10
   http://www.mantrust.org/history.htm.
11
   http://www.mantrust.org/FTP/C&DTDP.pdf
12
   http://www.mantrust.org/FILINGS/Q1_04/1STQTR04.pdf




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         beneficiaries best interests, but share a common interest in ensuring a debtor
         contributes as much cash and stock as possible to the Trust;
     (b) Current claimants can emphasise the requirement of a supermajority of 75 %
         of voting asbestos claimants (11 USC §542(g)(2)(B)(ii)(IV)(bb)) to favour the
         plan to extract concessions from the debtor;
     (c) Whilst creditor classes have opposing interests when it comes to dividing that
         contribution between them, they can together demand extra consideration for
         agreeing to the parent and affiliates of the debtor obtaining the protection of
         the channelling injunction. This gives the Future Claimants‟ Representative
         some bargaining power.
     (d) Both classes can engage professionals (lawyers, accountants) to represent
         them in court and in negotiations, their fees being paid by the estate subject to
         the approval of the bankruptcy court (11 USC §1103, §328, §331).

21. More than 30 companies involved in asbestos-related litigation have voluntarily
       filed for Chapter 11 since 1982, and at least 10 since January 1, 2000. As more
       and more asbestos defendants have sought bankruptcy protection, the remaining
       defendants have faced pressure to join them, due to their increased exposure to
       liability and legal costs in a context where fewer remain to pay their share of any
       settlement or judgment.13

22. There is evidence that the procedure has worked well. A financial analysis of
       seven companies that filed for Chapter 11 Bankruptcy in 2000 and 2001 as a
       result of asbestos obligations concluded

         “on the whole, they essentially have increased or stabilized their sales, assets,
         employment, and profitability, and have projected increases. It is fair to say
         that they are viable and likely to be increasingly successful companies that
         should generate funds to exit bankruptcy significantly stronger than when they
         went in”.14

23. A relatively recent development has been the emergence of expedited “pre-
     packaged” Chapter 11 asbestos bankruptcies (a matter that may be apposite to the
13
   http://www.federal-
mogul.com/cda/content/front/0,2194,2336_1780199_3619288,00.html#FINANCIAL
14
   See paper by Emory University‟s John H. Harland Professor of Finance, Accounting, and Economics
Prof George J Benston dated October 30, 2003 available at
http://www.ewg.org/reports/asbestos/documents/pdf/Benston4_14_04.pdf. The seven companies were
Babcock & Wilcox Co, Owens Corning, Armstrong World Industries, Building Materials Corporation
of America, WR Grace & Co, US Gypsum Corporation and Federal-Mogul Corporation.




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    situation of the MRCF). In such a “pre-pack”, the plan of reorganisation is
    negotiated, disclosure statements distributed, and the plan voted on before the
    company actually files its bankruptcy petition, the aim being to have only a short
    stay in Chapter 11 – perhaps as few as 30 to 45 days. In focussing on the lengthy
    delays experienced in many Chapter 11 procedures, the PJC may have overlooked
    this development.

24. This is not to say that the results are ideal. Pre-packaged plans in particular have
    their critics. Pre-packaged asbestos bankruptcies are commonly characterised by a
    two-part structure, which involves a pre-petition trust paying a subset of current
    claimants nearly full value for their claims, followed by a post-petition trust that
    pays other current claimants and future claimants a much smaller percentage of
    their claims, with stricter qualifying requirements. This might not be thought
    entirely equitable.

25. Pre-pack §524(g) trusts are often funded by all of the debtor‟s cash, all of the
    rights of the debtor and its affiliates to insurance for asbestos bodily injury claims,
    and any undistributed assets from the pre-petition trust (which may have been
    funded by, eg half of the debtor‟s assets plus a sizeable note from the ultimate
    parent). However, whilst traditional asbestos bankruptcies require the company to
    contribute at least 50% of its equity to the claimants and to make future payments
    to the trust, including dividends in return for the channelling injunction (see 11
    USC §524(g)(2)(b)(i)(II) and (III)) most recent pre-packaged asbestos
    bankruptcies have seen ownership of the debtors remain with their parent
    companies – a development that has drawn sharp criticism (see Mark D. Plevin,
    Robert T. Ebert, Leslie A. Epley “Pre-Packaged Asbestos Bankruptcies: A Flawed
    Solution” (2003) 44 South Texas Law Review 883 at 917).

26. The utility of pre-packaged asbestos bankruptcies as a vehicle for expedition has
    been further doubted, the biggest risk being that all persons asserting claims or
    otherwise concerned in the plan of reorganisation are not properly consulted and
    solicited to vote (thus, for example, the Combustion Engineering Chapter 11
    expedited plan was derailed when its insurers objected to the company‟s plan to
    use policy proceeds to fund the Trust without their consent: see Johnston & Porter
    (2004) 59 Bus. Lawyer 503 at 526.



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27. Further, more substantive concerns have been voiced about private negotiations,
     conflicts of interest and favourable treatment for some classes of claimants to
     induce them to vote in favour of the plan to meet the 75% supermajority
     requirement of 11 USC §542(g)(2)(B)(ii)(IV)(bb) that cannot occur in the
     traditional Chapter 11 process (see 11 USC §1126(c)). Some pre-packaged
     asbestos plans grant special voting claims to asbestos claimants who are paid
     mostly out of the pre-petition Trust but with a portion left over to make them
     eligible (and with an incentive) to vote in favour of the plan for reorganisation
     (see Plevin et al, (2003) 44 Sthn Tex L Rev at 911-914).

Incorporation of New Threshold Test

28. A determination that protection of the fund, prior to actual or likely insolvency,
     would increase the chances of future unknown claimants receiving some
     compensation would satisfy a purposive “good faith” threshold test modelled on
     the US Chapter 11 for initiation of a rescue procedure. Such a threshold test would
     overcome one of the difficulties of the existing Australian regime.

29. An alternative approach would be a moderation of the threshold test to one that
     the company is “insolvent or may become insolvent”, as proposed by the PJC (at
     para 5.52).

30. However, introduction of a modified statutory threshold would by itself be an
     incomplete answer to the issues facing the MRCF.

Role of Directors and Managers of the Foundation

31. An objection frequently made to Chapter 11 processes is that leaving the company
     under the control of the directors and managers who operated it into insolvency is,
     as the saying goes, like putting the lunatics in charge of the asylum. 15 However in
     the context of a reorganisation to deal with long tail tort liabilities this
     consideration has much less weight, because the managers and directors whose
     decisions caused the problem are likely to be long gone.



15
  Or perhaps “like leaving an alcoholic in charge of a pub”: G Moss, “Chapter 11: An English
Lawyer‟s Critique” (1998) 11 Insolvency Intelligence 17 at 19.




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Formal recognition and credence given to Future Claimants’ Interests

32. The interests of current claimants differ absolutely from those future claimants in
    circumstances of an inadequate fund.                          A feature of Chapter 11 asbestos
    bankruptcies is the appointment of a future claimants‟ representative to negotiate
    on behalf of and represent the interests of putative asbestos disease victims. The
    Corporations Act does not presently extend any formal recognition to the interests
    of future claimants. Similarly, under the VA procedure, there is no obligation on
    administrators to notify or negotiate with future claimants or their likely
    representatives.

Supervisory not Ancillary Role for the Court

33. The Chapter 11 process also involves a more substantive role than the traditional
    supervisory role allocated to Courts in the VA process (see eg ss447A – 444F
    CA). There is much greater court involvement in Chapter 11 process.                    Prior to
    confirmation of plan, there are several activities that my take place in a chapter 11
    case. The continued operation of the debtor‟s business may lead to the filing of a
    number of contested motions. The most common are those seeking relief from the
    automatic stay, or orders concerning the use of cash collateral, or obtaining credit.
    There may also be litigation over executory contracts and unexpired leases and the
    assumption or rejection of those executory contracts and unexpired leases by the
    debtor in possession. (see 11 U.S.C. §365.) Delays in formulating, filing, and
    obtaining confirmation of a plan often cause creditors to file motions for relief
    from stay or motions to convert the case to chapter 7 or to dismiss the case
    altogether.

34. Applications by representative groups for future asbestos claimants may well be
    better managed by a Court, which can exercise powers to do such things as
    appoint an examiner to mediate disputes than by an insolvency practitioner. The
    evidence before this Commission as to the consequences of the essentially private
    solutions adopted by James Hardie to resolve its asbestos issues suggests the
    desirability of a public, court focussed process in such cases.




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Other Legislative Resolutions for Future Asbestos Victims

35. It may assist to sketch briefly the position in some overseas jurisdictions overseas
       where alternative legislative solutions to asbestos liabilities have been
       implemented.

36. A number of European countries compensate asbestos victims through their social
       security systems (see generally L Kazan-Allen, A Comparative Review of
       European Asbestos Compensation16). Two recent state-funded institutional
       developments are worthy of note. In France in 2002 court proceedings were stayed
       with the introduction of a no fault benefit system and fund (FIVA - fonds
       d'indemnisation des victimes del'amiante aka Compensation Fund for Victims of
       Asbestos Exposure) financed 25% by the Employment ministry and 75% by the
       industrial accidents and occupational diseases branch of Social Security (Santoni,
       Asbestos: the Current Situation in Europe17 at p15). In the Netherlands, the
       Institute of Asbestos Victims established in Jan 2000 to streamline and speed up
       the compensation process with agreed levels of indemnification makes lump sum
       payments to mesothelioma cases with traceable employment exposure. For others
       compensation is obtainable via social security (Government Asbsestos Institute) or
       private action (Santoni at p 25-26, Kazan Allen at p6).

37. Despite express calls by the US Supreme Court for national legislation to address
       the “elephantine mass of asbestos cases” (see Ortiz v Fireboard Corp, 527 US
       815 (1999) at 821), Congressional committees have recently debated the proposed
       Fairness in Asbestos Injury Resolution Act of 2003, S 1125. This proposes a
       privately-funded, publicly-run administrative procedure for compensating asbestos
       victims. Asbestos defendants and insurers companies must contribute to the fund
       over a period of years, with assets from existing asbestos compensation trusts
       being transferred to the fund. Defendants would pay either a proportion of their
       revenue or a flat dollar amount to the fund each year, with the obligation
       depending on the defendant‟s size and past asbestos liabilities. Small business and
       firms with no previous asbestos expenditures would be exempt. For insurers, a



16
     www.andeva.free.fr/international/2003_0515_laurie_comparative%20review.htm
17
     www.astin2003.de/img/papers/santoni.pdf




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    commission          would be established to                   determine individual companies‟
    assessments, which are to depend on past exposure to asbestos liabilities.

38. Claimants must provide evidence showing that they had particular levels of
    exposure to asbestos for at least a minimum number of years together with
    medical evidence to prove they have a qualifying asbestos disease.

39. Perhaps unsurprisingly, this legislative proposal has presently stalled over three
    key elements:

    (a) the relative amount to be contributed by defendants and insurers; and
    (b) the proposed compensation levels; and
    (c) the overall likely adequacy of the Fund.


Recommendation

40. That a further consideration be given to the introduction of mechanisms based on
    US Chapter 11 processes, even if confined to cases where the existence of long
    tail future liabilities that are uncertain in amount makes existing insolvency
    processes unworkable.


Limited Liability – Existing Law and Rationale

The separate entity principle and corporate groups

41. It is a fundamental principle of Australian corporate law that a company is a legal
    entity separate from the legal persons who became associated for its formation or
    who are now its members (see Ford’s Principles of Corporations Law at [4.140]).
    For the most part, there is a „corporate veil‟ shielding the members from the
    company‟s liabilities. This separate entity principle, first enunciated by the House
    of Lords in Salomon v Salomon & Co Ltd [1897] AC 22, was explained by Lord
    Sumner in Gas Lighting Improvement Co Ltd v IRC [1923] AC 723 at 740-1 as
    follows:

         Between the investor, who participates as a shareholder, and the undertaking
         carried on, the law interposes another person, real though artificial, the
         company itself, and business carried on is the business of the company, and
         the capital employed is its capital and not in either case the business or the




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         capital of the shareholders. Assuming, of course, that the company is duly
         formed and is not a sham … the idea that it is mere machinery for effecting the
         purposes of the shareholders is a layman’s fallacy. It is a figure of speech,
         which cannot alter the legal aspects of the facts.

42. The separate legal entity principle does not of itself „impose‟ limited liability.
    However, the formation of the company as a separate entity capable of acquiring
    obligations separate from those of its members makes it possible for the members
    to derive the privilege of limited liability; limited in the sense that recourse by the
    company‟s creditors is only to the company‟s assets rather than the totality of the
    members‟ personal assets.

43. Applied to corporate groups, the principle means that they can determine the size
    and choose the limits of their legal responsibilities by the relatively simple
    mechanism of making one company (the „parent‟ or „holding‟ company) a
    member of another company or companies (the „subsidiary‟/„subsidiaries‟) in the
    group. That is: they are able to determine the limits of their „capital boundary‟
    (see H Collins, „Ascription of Legal Responsibility to Groups in Complex Patterns
    of Economic Integration‟ (1990) 53 Mod Law Rev 731 at 736-737). In economic
    terms, companies may by this technique externalise the risk of their operations by
    exposing third parties to the risk of uncompensated losses where the subsidiary‟s
    assets are insufficient to satisfy its liabilities.

Justifications for limited liability

44. Limited liability is justified by its economic benefits, which include:

    (a) the decreased cost to shareholders of monitoring the actions of managers;

    (b) the increased incentive to managers to act efficiently and in the interests of
         shareholders by promoting the free transfer of shares;

    (c) the increased efficiency of securities markets since share trading does not
         depend on an evaluation of the wealth of individual shareholders, only the
         company itself;




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    (d) its encouragement to shareholders to hold diverse share portfolios, thereby
         permitting companies to raise capital at lower costs because of the
         shareholders‟ reduced risks; and

    (e) the facilitation of optimal investment decisions by managers by pursuing
         projects with positive net present values rather than being concerned with the
         risk to shareholders that such projects may bring.

    (See Easterbrook and Fischel The Economic Structure of Corporate Law, Harvard
    University Press, 1991, pp 41-4, summarised in Ford’s Principles of Corporations
    Law at [4.160]). In short, limited liability encourages entrepreneurial risk-taking,
    which encourages economic growth.

45. These benefits come at a price, a price that is felt keenly by creditors in respect of
    whom risks are successfully „externalised‟. The question of present concern is a
    narrower one however – namely, the proper role of limited liability within a
    corporate group in relation to claims in respect of persons killed or physically
    injured as a result of wrongs committed by a company in the group. In answering
    that question it is necessary first to outline briefly the established limits of the
    limited liability principle in this context.

The boundaries of limited liability

46. It must be noted that some common law and statutory exceptions exist, which
    allow the lifting of the corporate veil in certain limited circumstances.         The
    common law already imposes some limits on the doctrine of limited liability in
    relation to torts committed by a group company (even if wholly owned). The
    main ones are:

    (a) cases of agency, partnership or trust between the subsidiary and parent
         company (eg Spreag v Paeson Pty Ltd (1990) 94 ALR 674; cf Adams v Cape
         Ind PLC [1990] Ch 433 at 545-49; Briggs v James Hardie & Co Ltd (1989) 7
         ACLR 841 at 845-846);

    (b) attribution of direct liability by reason of the parent company and subsidiary
         both owing a duty of care to the tort claimant according to the limiting tests of




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         reasonable foreseeability and proximity, chiefly demonstrable by a level of
         actual control over day-to-day operations of the subsidiary (eg CSR Ltd v
         Wren (1998) Aust Tort Rep 81-461; CSR Ltd v Young (1998) Aust Tort Rep
         81-468) akin to the subsidiary being a mere façade (see James Hardie & Co
         Ltd v Hall (1998) 43 NSWLR 554 at 579-84).

47. The most notable statutory exception is under ss 588V to 588X of the
    Corporations Law, which provides that where a holding company ought to have
    suspected its subsidiary‟s insolvency, it may be liable for debts the subsidiary
    incurred whilst insolvent.

48. It will be observed that the exceptions are quite narrow in compass. Moreover
    they depend on the resolution of factual issues that are costly and risky to litigate.
    It is rare for assaults on the corporate veil to succeed.

49. It follows that the existing exceptions to limited liability do not provide adequate
    protection for victims of torts committed by insolvent subsidiaries of wealthy
    holding companies. That raises the question of the strength of the objections to
    qualifying the principle in such cases, and of the justifications for doing so.

Consideration of Reform

50. There are four primary grounds for justifying restricting the application of the
    limited liability principle as regards liability for damages for personal injury or
    death caused by a company that is part of a corporate group and confining the
    benefit of limited liability to the members of the ultimate holding company. First,
    unlike other creditors, involuntary tort claimants dealing with a corporate group
    entity do not voluntarily assume the risk of the subsidiary‟s insolvency. Secondly,
    leaving the involuntary tort claimant to bear the risk of uncompensated loss is
    economically inefficient. Thirdly, limiting the liability of the tortfeasor company
    results in ineffective deterrence of harm-causing behaviour in a corporate group
    context. Finally, there is an ethical question – should companies be able to profit
    from business operations without bearing the costs if wrongful death or injury
    ensue from them?




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Tortfeasor’s involuntary assumption of risk and inefficient allocation of risk

51. The first and second points are related. In the context of tort claims there is a
    consideration of economic efficiency which weighs in favour of piercing the
    corporate veil. This is based on the proposition that liability is most efficiently
    assigned to the one who is able to avoid risk at the least cost (see K Hoftstetter,
    „Multinational Enterprises Parent Liability: Effective Legal Regimes in a World
    Market Environment‟ (1990) 15 Nth Carolina J Int L & Comm Reg 299 at 307).

52. Tort claimants generally are the least likely of all persons dealing with a company
    to be able to protect themselves against the risk of harm by it because:

    (a) with no contractual nexus, they have no mechanism to ensure compensation
         for assuming a risk of injury, such as by obtaining intra-group securities or
         cross guarantees that may be secured by voluntary creditors;

    (b) they are in a poor position to assess creditworthiness prior to commission of
         the tort, since they have limited access to such information, and are unlikely to
         use or be aware of information otherwise made available through enhanced
         financial disclosure requirements on companies; and

    (c) they are not effective monitors of managers of a company in ways that other
         creditors (such as financiers and banks) or the controlling shareholder can be.

53. The difficulty faced by the involuntary tort claimant dealing with a corporate
    group entity was accepted by Rogers AJA in Briggs v James Hardie & Co Ltd
    (1989) 7 ACLR 841 at 863-864:

                   Generally speaking, a person suffering injury as a result of the tortious
                   act of a corporation has no choice in the selection of the tortfeasor.
                   The victim of the negligent act has no choice as to the corporation
                   which will do him harm. In contrast, a contracting party may readily
                   choose not to enter into a contract with a subsidiary of a wealthy
                   parent. The contracting entity may inquire as to the amount of paid up
                   capital and, generally speaking, as to the capacity of the other party to
                   pay the proposed contract debt and may guard against the possibility
                   that the subsidiary may be unable to pay.




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54. By contrast, a holding company is in a better position relative to an involuntary
    creditor – and, arguably, in the best position overall – to „avoid the risk at least
    cost‟. This is clearly so in the present context. For example, JHIL could, and did,
    obtain insurance for forecast liabilities in order to offload the risk. There can be
    no doubt that at all times it was within the power of JHIL to cease the use of
    asbestos by its subsidiaries, or to set standards for the conduct of their businesses,
    or to require them to issue appropriate warnings to consumers and end users. It
    was JHIL‟s economic interests that were likely to determine the extent to which
    any of these things happened.

55. There is much to be said for the proposition that development of the principle of
    limited liability enunciated in Salomon v Salomon & Co Ltd [1897] AC 22 failed
    to give due weight to whether all claimants can be said to have voluntarily
    accepted the risk of limited liability.

56. It should be stressed that, for practical purposes, the present context largely
    involves the risk of injury to complete strangers to the corporate group.
    Employees of the group company are given some protection against its insolvency
    by various statutory regimes. Leaving them aside, the typical personal injury
    plaintiff will be an ultimate consumer of a good or service provided by the
    company. Often the relationship will be completely involuntary, as it was in the
    case of many victims of James Hardie‟s asbestos products – eg, employees of
    other businesses which chose to use or deliver the products; members of the
    family of such persons; visitors to worksites where asbestos was being used; home
    renovators who come across asbestos sheeting inside a wall or door, or as lagging
    on old pipes, etc; workers in environments where asbestos had previously been
    deployed.        In such cases the information and control asymmetry as between
    holding company and tort victim is extreme. Accordingly, considerations of the
    efficiency of risk allocation – that is, of „who is able to avoid the risk at least
    cost?‟ – operate in a particularly strong way in this context.




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Ineffective deterrence of harm-causing behaviour

57. One of the main public policy objectives of tort law is to discourage activity that is
    needlessly harmful to people, by imposing the cost of compensation on the
    wrongdoer.          That policy objective is undermined where wrongdoers can
    externalise their risk. In reality, it is substantially undermined if a company about
    to undertake an activity that poses serious health risks for mere bystanders or
    ultimate consumers, can ensure it will never have to satisfy any claims for
    compensation by the simple technique of carrying on the operations through a
    company with no capital, funded by loans from the parent secured by a debenture
    over its assets. Indeed, the limited liability principle as it presently operates
    actually encourages managers so to act, because it is in the „shareholders‟
    interests‟ to do so.

Ethical problem of group companies deriving benefit without bearing the burden

58. Clearly, the problem of lack of deterrence of wrongful behaviour is closely related
    to the issue of group companies gaining benefit while avoiding burden. In Re
    Southard & Co Ltd (1979) 1 WLR 1198 at 1208, Templeman J described how the
    doctrine of separate legal personality in corporate groups could give rise to this
    problem:

         A parent company may spawn a number of subsidiary companies, all
         controlled directly or indirectly by the shareholders of the parent company. If
         one of the subsidiary companies, to change the metaphor, turns out to be the
         runt of the litter and declines into insolvency to the dismay of its creditors, the
         parent company and the other subsidiary companies may prosper to the joy of
         the shareholders without any liability for the debts of the insolvent subsidiary.

59. It has been argued that in its application to corporate groups the limited liability
    principle is better understood as an „historical accident‟ (Blumberg, „Limited
    Liability in Corporate Groups‟ (1986) J Corp Law 573 at 605) which confuses
    separate legal personality and limited liability so that within corporate groups
    there is the possibility of limited liability within limited liability (see JH Farrar,
    „Legal Issues Involving Corporate Groups‟ (1998) 16 Aust Co & Sec L J 184 at
    189).

Possible Objections To Reform




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60. The May 2000 Companies and Securities Advisory Committee‟s Final Report on
    Corporate Groups (see Final Report at paras [4.16, 4.20]) rejected wholesale
    reform to the principle of limited liability within corporate groups.                   It did,
    however, countenance specific „see through‟ liability legislation lifting the
    corporate veil and imposing direct liability on holding or other group companies
    for the negligence of subsidiaries where to do so was „desirable in the public
    interest‟ (see Final Report at paras [4.16, 4.20].

61. A number of reasons, based on submissions to the Committee, were given for
    opposing a more wide-ranging reform. As some may be regarded as relevant to
    the present proposal, they must be considered here.

        It would put Australia out of step with overseas jurisdictions.

         (a)          This proposition requires very careful analysis. In the United States
                      for example, the corporate veil doctrine has, in broad outline, very
                      similar operation to the doctrine here.               However, its effect is
                      mitigated in many cases by doctrines unknown to Australian law (eg,
                      the „successor liability‟ doctrine) and doctrines which operate
                      somewhat differently there (eg, fraudulent transfer rules – see USC
                      s.548(a), UFTA s. 7(a)(1)).

        The separate entity doctrine is not only a fundamental legal principle but a
         commercial expectation entrenched within commercial investment practice.
         Coupled with limited liability it stimulates investment. The revenue from such
         investment allows further research and development.                    Within a corporate
         group, the separate entity doctrine can promote the provision of diverse goods
         and services. This aids competition in all industries and promotes growth and
         development.

         (b)          This second proposition overlooks the extent to which statute already
                      intrudes on the doctrine, the economic inefficiency of poor risk
                      allocation for torts, and the special concerns raised by the case of
                      claimants who have suffered personal injury through involuntary
                      dealings with the company.                  It is unlikely the Committee was
                      intending to suggest that stimulation of commercial investment,



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                      diversity, growth and research and development could legitimately
                      be founded upon the opportunity to injure and kill by negligence,
                      with impunity.

        Making a parent company liable for the torts of a group company would
         commercially weaken the central economic foundation of all the other group
         companies. If the tort claims are large or numerous enough, they could
         ultimately destroy an entire corporate group comprising vastly differing
         interests, with negative effects on the economy.

         (c)          It is of course possible that an entire corporate group might be
                      liquidated if its subsidiaries caused widespread injury. However, the
                      negative effects in that case would not arise from the liquidation, but
                      rather from the tortious injuries caused by the subsidiary. This is all
                      the more reason to ensure that the law operates as an effective
                      deterrent.

         (d)          As to the negative effects on the economy at large, it should be noted
                      that, in the usual course of a liquidation, safe and profitable arms of
                      the business would continue to exist, albeit under new ownership.
                      More importantly, if the corporate citizens who have profited from
                      an activity that causes injuries can lawfully refuse to pay just
                      compensatory damages, it is likely that a substantial portion of the
                      economic burden of those injuries will fall on the public purse (that
                      is, the taxpayers). Where the injuries are of such a magnitude that
                      the compensatory damages could destroy the entire corporate group
                      in question, the drain on public revenue – particularly in the form of
                      increased demands for medical and hospital services – is likely to be
                      very significant.

        The imposition of this tort liability may give rise to increased litigation,
         particularly against larger corporate groups. Settlement of actions involving
         these groups will be less probable, given their size and pool of funds.

         (e)          It must be emphasised that the reform proposed here does not create
                      a new head of tortious liability nor any new class of claimants. All



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                      the proposed reform does is allow citizens who have legitimate
                      claims under the law to be justly compensated by enabling them to
                      recover the damages to which they are lawfully entitled from all
                      those companies which, directly or indirectly, have profited from the
                      activity which caused their injuries.

         (f)          As for settlements being less probable, this seems to be an argument
                      that corporate groups should be able to pressure their victims into
                      unsatisfactory settlements because of a threat of subsidiary
                      insolvency. This seems unconscionable.

        The common law can accommodate the interests of individual justice. The
         courts can analyse the conduct of companies with common directors and
         differentiate between the effects of director control and control by ownership
         of shares by a parent company.

         (g)          As for the common law, the circumstances of the present case appear
                      to suggest that it does not produce satisfactory outcomes.

        The interests and profiles of different group companies may differ
         significantly.

         (h)          This may be so, but it is unclear what significance it has.

62. While the considerations relied on by CAMAC might have weight in the context
    of the risk of purely economic loss being suffered by third parties, they may not be
    an adequate answer in the context of deterring torts causing death or injury and
    compensating victims when they occur. Apprehension that over-deterrence will
    discourage economic development gives insufficient weight to the other
    considerations outlined above – particularly, to the special position of tort
    claimants when compared to shareholders, managers and secured creditors.

63. Ultimately, economic objections may be outweighed by the combination of ethical
    and efficiency concerns raised by the prospect of permitting companies to transfer
    the cost of wrongful death and injury from the company to the injured themselves
    – and indirectly to the taxpayer - by utilisation of an interposed subsidiary.




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64. It should also be observed that subjecting parent companies to liability for the
    personal injuries caused by the wrongs of their subsidiaries does no more than put
    them in the same position, so far as exploiting the corporate veil is concerned, as a
    sole trader. Small business proprietors may shield themselves from liability to the
    general run of creditors by the use of an interposed company. However they
    cannot by that device shield themselves from liability for tortiously inflicting
    injury – for what they do themselves they remain liable in tort, even though they
    act as agent for a company.

    Statutory Precedents

65. There are statutory precedents for ascribing further limits to the principle of
    separate legal personality. Noteworthy examples are fiscal measures, such as:

    (a) grouping of related companies for the purpose of assessing land tax payable by
         such companies (see s 29 Land Tax Management Act 1956 (NSW) (as
         amended in 1983) as explained in Office of State Revenue Ruling LTO3, 21
         July 1986); and

    (b) capacity for members of a group to designate one or more qualified members
         of the group (whose financial year wages exceed $600,000) to be the
         designated group employer for the group for the purposes of payment of pay
         roll tax (see s16I Payroll Tax Act 1971 (NSW); see also Pt 10A Taxation
         Administration Act 1996 (NSW)).

66. It does not seem a large step to treat the interests of those killed or injured by
    corporate torts as being at least as worthy of special treatment as the revenue.

    Recommendation

67. The Commission should recommend reform of the Corporations Act so as to
    restrict the application of the limited liability principle as regards liability for
    damages for personal injury or death caused by a company that is part of a
    corporate group, confining the benefit of limited liability to members of the
    ultimate holding company.




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68. Consideration should be given to making the reform retrospective, so that it
    extends to corporations that were once but are no longer in the same group as the
    company in question.




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ISSUE 75

If there are claims potentially available to MRCF, Amaca/Amaba or their creditors, or which would
be available to a liquidator, arising out of the matters raised in the issues listed above which would
assist to ensure that legitimate claims against Amaca/Amaba were ultimately satisfied, should the
Corporations Act be amended to permit or facilitate any such claims or to qualify or remove defences
which might be available to them? Would it be preferable to amend other laws rather than the
Corporations Act?


69. The discussion of the Issues thus far has identified a number of claims potentially
       available to Amaca and Amaba which would, if successful, assist it to meet its
       liabilities.

70. What the discussion suggests is that these claims, though substantial, would be
       unlikely to realise sufficient funds to satisfy the present actuarial assessment of
       Amaca and Amaba‟s liabilities, even if all were successful, and success resulted in
       judgments that were satisfied by payment.

71. The issue of satisfaction is a difficult one. The primary claims are claims against
       ABN60. That company now has negligible assets, compared to the size of the
       claims in contemplation.           Effective remedies against it would depend on the
       claims that it might have in turn against credit worthy defendants. In practical
       terms, this would require that a means be found to set aside the cancellation of the
       partly paid shares, or for ABN60 to obtain a judgement against JHINV. This
       would require success in respect of claims concerning the cancellation of the
       partly paid shares, or the rectification of the DOCIA. It would also require the
       enforceability of such a judgment against JHINV, a company registered in the
       Netherlands. Insofar as JHINV has assets in Australia a money judgement would
       be enforceable. However Australia has no treaty with the Netherlands for the
       recognition of civil judgements and the Netherlands Courts generally do not give
       effect to foreign judgements in the absence of a treaty.                 However, foreign
       judgements may nevertheless be given some effect there (see Rosner, “The
       Requirements for Execution of Foreign Money Judgments in the Netherlands
       Absent a Treaty” (2 Jan. 2003)).18


18
     http://www.llrx.com/features/novel.htm




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72. Rather than leave those interested in the fate of Amaca and Amaba to a quagmire
    of litigation, a legislative solution provides the best possible outcome for all
    parties. It is appropriate that those most concerned (the MRCF, and JHINV and
    the parties represented by Mr Rush QC) formulate the details of any such
    proposal, at least in the first instance. The reforms recommended in Issue 74 are
    of general application. They may not solve the problems of Amaca and Amaba.




Dated: 15 July 2004




                                                                                John Sheahan S.C.
                                                       Senior Counsel Assisting the Commission




                                                                          Dominique Hogan-Doran
                                                                  Counsel Assisting the Commission




                                                                                     Robert Kelly
                                                                  Counsel Assisting the Commission




                                                                                   Matthew Darke
                                                                  Counsel Assisting the Commission




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