Implications of the James Hardie judgment for directors in Australia



FW speaks to Mike Pryce at Chartis about the implications of the James Hardie judgement for directors in Australia.

FW: Could you provide some general background and an overview of the James Hardie case in Australia?

Pryce: In 2001 the James Hardie Group restructured its business to ring-fence its asbestos liabilities and establish a fund to compensate asbestos claimants. The board approved the proposal and prepared a draft Australian Securities Exchange (ASX) announcement which was released a day later. The announcement stated that the compensation fund was ‘fully funded’ and would be able to meet all of its legitimate asbestos claims. It was ultimately shown this was incorrect and there were insufficient funds to meet the claims. 

FW: How did the case proceed through the courts? What were the key issues that surfaced along the way?

Pryce: The non-executive directors argued that they did not approve the ASX announcement and could not then be held liable for the incorrect announcement. However the Supreme Court of New South Wales found the announcement had been agreed by the board as it was clearly referred to in the minutes of the board meeting. The Court of Appeal overturned the Supreme Court’s findings on the basis that the Australian Securities and Investments Commission (ASIC) had failed to establish that the draft announcement had been approved at the board meeting. In the recent appeal to the High Court, one of the issues addressed was whether the lower court was correct in determining that the directors had not approved the draft announcement at their meeting.

FW: What was the outcome of the recent High Court decision in the matter? How has this decision been received in the corporate community?

Pryce: The High Court found that seven non-executive directors had breached their duties of care and diligence under section 180(1) of the Corporations Act by approving a misleading announcement to the ASX. It also found that the company secretary and general counsel also breached their duty of care and diligence under the same law by failing to advise the board of certain information that should be disclosed to the ASX. Whilst some authors have suggested that this is a landmark decision on how directors should conduct themselves, the reality is slightly different and the findings are no more than a reaffirmation of the laws and duties with which a director and officers must comply.

FW: In what ways does the decision crystallise the duties of directors and other senior personnel of a public company?

Pryce: This case and its findings do not crystallise the duties of directors. These duties existed before this case and continue on after. This case, along with other recent high profile cases, has merely reaffirmed the duties of a director and the legal consequences in failing to execute those duties and obligations. 

FW: Going forward, go you expect to see more cases like James Hardie, considering the current monitoring and enforcement activities of the Australian Securities and Investments Commission (ASIC)?

Pryce: The ASIC is a prudent regulator and act stringently in enforcing regulation. Since Octber 2010, ASIC’s powers have increased as it is now the regulator of the stock exchange, including the ASX. ASIC reports that the number of complaints received continues to climb. As a result, directors continue to see increased regulatory scrutiny. In particular, continuous disclosure is high on its agenda and its actions are a breeding ground for litigation funders looking for class actions. Far too commonly, an ASIC proceeding leads to additional litigation, as was seen in the Centro case and the eventual class action which recently settled for $200m. 

FW: Could you outline the potential liability and penalties for breaches of duty to which board members in Australia may be subject?

Pryce: Research by the Australian Institute of Company Directors has identified over 700 statutes that contain strict liability provisions with which directors must comply. Should the ASIC pursue a matter under the Corporations Act the penalties can be stiff. These include civil penalties of up to $200,000 per breach and compensation orders which can be unlimited in amount. In addition to that, the director can receive a banning order which may be for the rest of their life. If the ASIC were to pursue matters as a criminal breach, penalties depend upon the nature of the charge. For example, a maximum of six months jail per offence, and up to five years for insolvent trading or longer if charged under the criminal code.

FW: Is there a need for greater awareness among board members in Australia of the personal risks and liabilities they face?

Pryce: Whilst most directors are aware of their duties and seek to fulfil them honestly and in good faith, directors are now beginning to realise that they could still face litigation and there is a strong view of “but for the grace of god, that could have been me”. Directors are increasingly aware of the need for risk management around the continuous disclosure process, but there is also a significant need to prepare in advance for the day that these processes fail. What do you do when the ‘horse has bolted’? We have found many directors are not aware of how the mechanics of an aggressive regulatory investigation and ensuing litigation operate and how oppressive and lengthy the process can be. Directors can remain unaware of all the tools available to assist them in dealing with such scenarios.

FW: To what extent does the James Hardie decision reinforce the need for personal indemnity and D&O cover in Australia?

Pryce: Any case, such as James Hardie, reinforces the need for directors to review their deeds of indemnity and to have adequate D&O insurance. Adequate insurance is not merely having a sufficient limit. It must also encompass the broadest terms of cover available to meet the increasingly complex loss scenarios that directors face. However, there is little value in the best policy if the board cannot satisfy themselves of the claims capability of the insurer. An insurer with a high quality claims service and experience in handling these matters is one of the tools available to assist directors as and when a claim is alleged.

FW: How would you describe the D&O insurance market in Australia? When selecting a policy, what issues need to be assessed to ensure the best coverage, terms, pricing, etc?

Pryce: The D&O market in Australia remains competitive. For price sensitive buyers this satisfies their needs. However, directors are becoming more discriminating purchasers of insurance and are increasingly seeking to purchase cover from insurers able to demonstrate their ability to provide both quality cover and claims service. We are increasingly seeing D&Os take a greater focus on how a claim will be handled and the ability of the insurer to ‘add value’ particularly in terms of preventative risk management. What is often not appreciated by directors when purchasing a D&O policy is that in the event of a claim there will be a number of individuals within that insurer handling the claim. It is extremely important that the directors satisfy themselves that those individuals have the requisite level of expertise and appropriate approach to dealing with that claim.

FW: In light of the James Hardie case, what advice would you give to senior executives and directors of Australian companies when it comes to managing their personal risks and liabilities?

Pryce: Our key message to all of our insureds and future insureds is ‘know your insurer’. Whilst the terms of cover being provided are vitally important it is, in our view, even more important that directors satisfy themselves that their insurer has the capacity, appetite and level of expertise required to not only understand the exposures, but to also deal with a potentially catastrophic situation such as those that which occurred to the directors of both James Hardie Group and Centro. We would encourage a board to meet with not only the underwriters but the claims team of their insurer as part of any D&O insurance purchasing decision.


Michael Pryce is Australasia regional manager, Financial Lines, at Chartis, based in Australia. With over 25 years experience in Financial Lines including directors’ & officers’, employment practices liability, mergers & acquisitions and professional indemnity insurance for both commercial and financial Institutions. Mr Pryce’s global experience includes time in London, New York and Auckland. As a broker, reinsurer and insurer, he has seen many of the worlds more complex risks from diversified viewpoints. He can be contacted on +61 2 9240 1730 or by email:

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