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Director’s duties: lessons from the James Hardie case

Company Law News | April 2014

Company directors are bound by certain duties when exercising their directorial powers. The aim of imposing these duties is to ensure that companies do not suffer the adverse effects of decisions made by directors who are in breach of their duties. These duties can best be described as a duty of care and diligence and a duty to act in good faith. Directors must exercise their power and discharge their duties in a manner that is in the best interests of the company and is for appropriate purposes.1 

The James Hardie case put a spotlight on directors' duties and means that directors must now adhere to these duties more stringently. The High Court held that the directors of James Hardie Industries Ltd had breached their duty to the company by approving the release of a statement to the Australian Stock Exchange regarding the funding of an asbestos compensation fund in February 2001. The directors were said to have failed to use the care and diligence required of directors when making decisions with such a heavy impact on a company.

James Hardie case

The minutes of a James Hardie Industries Ltd (JHIL) board meeting on 15 February 2001 noted that a statement to the Australian Stock Exchange (ASX) had received approval from seven directors. 

The statement to the ASX stated that a foundation set up by the company to compensate sufferers of asbestos related conditions was fully funded and that it had sufficient funds to meet any future anticipated claims.  This statement was found to be false as the foundation had a shortfall of $1.3 billion.

As a result, the Australian Securities and Investment Commission (ASIC) brought proceedings against the directors of JHIL in the NSW Supreme Court.  ASIC relied on the minutes from the 15 February 2001 meeting, as well as those of the next meeting in April 2001, which adopted the previous minutes to be the true and correct record of events.  

The directors denied having approved the release of the statement.  In 2007, the Supreme Court found that the directors had approved the statement’s release and in doing so had failed in their duty to use care and diligence. The Supreme Court imposed pecuniary penalties on the directors and disqualified them from acting as directors of a company. 

In 2010, the directors appealed to the NSW Court of Appeal.  The Court of Appeal found that ASIC did not adequately show that the directors had approved the statement to the ASX in the board meeting on 15 February 2001. Further, by not calling JHIL’s solicitor to give evidence at the hearing, ASIC were said to have breached their obligation to act fairly in the conduct of the proceedings.   

ASIC appealed this decision and were successful in 2012 when the High Court overturned the Court of Appeal’s decision, finding that the directors did mislead the ASX.2  The High Court held that the meeting minutes were evidence of the release of the statement being approved by the board.  The High Court also found that ASIC did act fairly during the proceedings and the fact that JHIL’s solicitor was not called to give evidence did not detract from ASIC’s argument regarding the meeting on 15 February 2001.  

Directors' duties

Care and diligence

A key issue in the James Hardie case arose from ASIC's claim that the directors of JHIL had failed in their duty to use care and diligence in the meeting on 15 February 2001.  Whilst participating in decision-making does not equate to making the actual decision, if a director contributes in some way, they owe a duty of care and diligence to the company.  When contributing to the decision being made, a director must use caution and good judgment.

To act in good faith

The power of a director to make decisions that hold serious consequences for a company must be exercised appropriately and in good faith.  A director must ensure that their actions are in the company’s best interests.  The Corporations Act 2001 (Cth) (Corporations Act) states that directors must not use their position, or the information that is provided to them, to gain advantage for themselves or a third party, or to cause detriment to the company.3  

Conflicts of interest

Where a director has a pre-existing interest or duty that conflicts with their duty as director to act in the company’s best interests, the director must preclude themselves from the decision-making process.  The Corporations Act requires that a director with a conflicting interest inform the rest of the directors.4  It is a criminal offence of strict liability under the Corporations Act if a director fails to disclose their conflicting interest.  The offence carries a maximum of 10 penalty units (currently $1,700) and/or three months’ imprisonment.5 

Liability for breach of a duty

Where directors are found to have breached their duties to the company, they may be subject to civil and criminal penalties.  These penalties include fines, orders to pay compensation for damages suffered by the company, disqualification from managing the body corporate, and even imprisonment. 

A director has committed a criminal offence when they have expressly, tacitly or impliedly authorised or permitted an illegal action to occur.  This action will be considered a serious breach of the director’s duties.

A criminal offence committed by a company will usually arise when:

  • The decision to engage in illegal activities has been approved by the board;
  • The corporate culture has either directed, encouraged, tolerated or led to the non-compliance; or
  • The company failed to create or maintain a corporate culture that required compliance with the law. 

Where a director has been intentionally dishonest or reckless in the exercise of their power, criminal penalties can be imposed.  The prescribed penalties under the Corporations Act are 2000 penalty units (currently $340,000), imprisonment for up to five years, or both.6 

No breach will arise where a director’s actions are a result of an obligation under the Commonwealth Authorities and Companies Act (Cth) 1997.  A further exception arises when directors act on the advice of an expert that they reasonably believe to be reliable and competent in their field. 

Key points for directors

The James Hardie decision is a reminder to directors to comply with their obligations under the Corporations Act, including the need to:

  • Properly and fully consider all issues presented to the board;
  • Not rely solely on the advice of management or others when deciding on important matters; and 
  • Abstain from voting on a matter (ensuring that it is properly recorded in the minutes) if the issue is not fully understood or a conflicting interest exists.7 

Importantly, directors must take action when they have concerns about recommendations or announcements to the market.  The case also stresses the need for directors to ensure that meeting minutes are accurate.  Minutes of previous meetings should be reviewed prior to being approved at the next meeting. 

Conclusion

Directors are expected to exercise their power using a high standard of care and diligence. It is crucial to remember that directors’ duties are not mere formalities. Careful assessment of information and advice is necessary for directors to adequately perform their duties and ensure that they are acting in the best interests of the company. 

Minutes are considered to be an official record of proceedings and resolutions of general meetings, as was seen in the James Hardie case.  To ensure accuracy and efficiency and to minimise the risk of breaching their duties, directors should review board meeting minutes, as well as any documents or advice that is put to the board for approval.

If you would like further information about the James Hardie case or about your duties as a director, please contact Forum Law. 

1. Section 181(1) Corporations Act 2001 (Cth)

2. Australian Securities and Investments Commission v Hellicar; Australian Securities and Investments Commission v Brown; Australian Securities and Investments Commission v Gillfillan; Australian Securities and Investments Commission v Koffel; Australian Securities and Investments Commission v Terry; Australian Securities and Investments Commission v O'Brien; Australian Securities and Investments Commission v Willcox; Australian Securities and Investments Commission v Shafron [2012] HCA 17 (3 May 2012)

3. Section 182 Corporations Act 2001 (Cth)

4. Section 191 Corporations Act 2001 (Cth)

5. Section 4AA Crimes Act 1914 (Cth)

6. Section 4AA Crimes Act 1914 (Cth)

7. Section 180 Corporations Act 2001 (Cth)


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