Jackson: Allens didn’t mean it
David Jackson QC has found that Allens Arthur Robinson breached a duty of disclosure to Justice Santow when seeking approval for the restructure of James Hardie Industries.

He went on to save the firm’s bacon by adding that the breach was “not deliberate”.

Nonetheless, Allens is likely to have breached its duty of care to James Hardie Industries Ltd but whether that breach caused any loss to the company is not clear.

In August 2001, and subsequently, Justice Santow was assured that the shares issued by James Hardie Industries Ltd, the Australian shell, to the new Dutch company were the basis of the capital to “fully fund” the asbestos liabilities.

During the hearing Santow probed the strength of the lifeline. For instance, he wanted to know whether the call on the shares could be resisted by a Dutch company under Dutch law.

Jackson pointed to the matters that were NOT disclosed in the proceedings before Santow J:

“The communications from the Medical Research and Compensation Foundation concerning its inadequate funding.
The put option contained in the deed of covenant and indemnity.
The possibility that the partly paid shares might be cancelled.
The commissioner said that if there was any doubt as to whether the company and Allens had a duty of full disclosure in how the scheme would impact on creditors, “it would have been resolved by the questions asked by Santow J … which made clear he regarded the practical efficacy of the partly paid shares as a protection for JHIL’s creditors as an important matter”.

Jackson spelled out the history of Hardie’s course of separating its operating activities from its asbestos liabilities.

“After the creation of the (Medical Research and Compensation) Foundation in February 2001, separation of James Hardie Industries (the Australian “rump”) was the last remaining step in that process.”

It was quite evident in the thinking of all involved in the restructure that the Australian “legacy” would be drowned in a shallow bucket of water.

There was a file note dated January 4, 2001 from Julian Blanchard of Allens that said: “… may want to give up JHIL to trustee. Make sure nothing precludes this from happening.”

At a meeting on February 1, 2001 a James Hardie representative (probably CEO Peter Macdonald) said: “Do want to liquidate JHIL down the line.”

On February 5, 2001 Macdonald instructed David Robb from Allens to include an option to “put” (sell) JHIL to another subsidiary. The exercise of the put “could almost inevitably have involved the prior cancellation of the partly paid shares”.

Also on February 5, 2001, Michael Quinlan from Allens noted a conversation with Robb which mentioned: “liquidation of JHIL within 12 months.”

These views were all recorded before the company and its lawyers approached the Supreme Court of NSW for approval of the restructure.

Those notes and conversations are at odds with the submission made to Santow by Hutley SC, for the company, which said:

“James Hardie Industries is in a position to meet all claims, any claims from whatever source … because it has access to the capital of the group through the partly paid shares …”

Peter Shafron, Hardie’s senior in-house lawyer, in a revealing memorandum written in March 2001 said:

“[Stakeholders] may argue that JHIL could cancel the partly paid shares shortly after the scheme was approved – to which the reply would be that the then JHIL directors are still subject to the Corporations Law and the risk of suits if they breach their directors duties involving creditors.”