An NSW Government inquiry, headed by top constitutional lawyer David Jackson, QC, found the former asbestos manufacturer misled the public and knowingly underfunded a foundation it established to compensate future victims of asbestos-related diseases. In particular, a press release issued to the Australian Stock Exchange in February 2001 which claimed the foundation had sufficient funds to meet all legitimate claims was “seriously misleading”, the Jackson Report said.

The report found the release may have contravened misleading and deceptive conduct provisions of the Corporations Act (and the Corporations Law which preceded it). This could lead to penalties of up to $10,000 or a two year jail term.

However, the inquiry also noted that James Hardie’s transferring of its former asbestos manufacturing subsidiaries into the new foundation was not illegal, nor was a parent company liable, under normal circumstances, for the debts of its subsidiaries. But while the company was not legally liable for the shortfall — currently estimated at $2 billion and based on asbestos-related claims for decades to come — Jackson said he believed it was right that James Hardie should foot the bill. Victims groups and unions are by no means the only ones to agree with him.

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Securing a legal fix that will deliver adequate compensation to victims is, however, likely to be fraught with difficulty. Jackson was not optimistic that pursuing the company through the Australian courts would work and would likely lead to insolvency. Another option was government legislation aimed at making James Hardie liable for the debts of its former subsidiaries. However, Jackson — who should know as well as anyone — suggested such a move would likely face constitutional challenges. Overseas governments might also refuse to recognise a retrospective law directed at James Hardie — which would scupper any sort of legislative efforts because since late 2001 the company has been legally based in the Netherlands.

At present, the best option appears to be one proposed by James Hardie itself: that the company make voluntary payments to a government-administered scheme. While describing such a move as “tentative”, Jackson nevertheless has concluded this represents the best bet for the moment. Shares in James Hardie rose to a two month high, following Jackson’s cautious nod to a scheme that could save the company hundreds of millions of dollars in court and related costs. Some commentators have even suggested this indicates the worst is now over for James Hardie, despite the predicament in which the company remains.

The NSW Government, however, has said it will hold off on endorsing a statutory scheme until satisfied by unions and victims groups that the scheme will bring in more money for victims.

In its response to the report, the Law Council of Australia warned that however matters were to proceed, they should not lose sight of the legal rights of the victims. “Any scheme for compensating the James Hardie victims should ensure that their common law rights are fully maintained and that they are entitled to be legally represented,” newly-appointed president of the Law Council, Stephen Southwood, QC, said in a statement.

“However, further consideration should be given to procedural reforms which would make the processing of claims quicker and more efficient and which would minimise the legal costs of such proceedings.”

ASIC last week announced it had begun investigations into James Hardie’s establishment of the foundation’s compensation fund. “ASIC is deeply concerned about the serious corporate governance issues that have been raised by Mr Jackson, QC, and the community can be assured that we will vigorously pursue breaches of the law,” ASIC Chairman Jeffrey Lucy said in a statement.

Put simply, the James Hardie case reveals serious shortcomings in Australian corporate law, both in the areas of corporate governance and in the treatment of insolvencies where substantial future obligations are involved. While acknowledging that there was an issue, the Council, however, stopped short of calling for specific reforms. “The Law Council supports further examination of the voluntary administration and liquidation provisions of the Corporations Act in order to consider reforms aimed at taking into account long tail claims in instances of corporate insolvency,” Southwood said.

Regarding the proposals for reform suggested by the Jackson Report, the Law Council said it believed further detailed enquiry should be undertaken before any amendments are made to the Corporations Act which would enable the corporate veil to be pierced. “Even the recommendation that any piercing of the corporate veil should be confined to personal injuries and death and would apply to holding companies and not other shareholders, will require careful consideration,” the Council said in a statement. “In particular, consideration should be given to the impact that any such reform may have on investment in the Australian economy.”