CSR left bearing the cost of unfinished business

Date: February 5, 2010

Elisabeth Sexton

Buried deep in the federal government’s too hard basket is some unfinished business from the James Hardie asbestos furore in 2004.

Years ago the government received two proposals for changing the Corporations Act to ensure the scandal would not be repeated.

After Wednesday’s Federal Court ruling that CSR’s proposed demerger cannot proceed because of its potential impact on asbestos compensation, maybe it’s time for those suggestions to be unearthed.

Presumably the business community has previously argued, and politicians accepted, there would never be another James Hardie.

After all, the company’s reputation took a hammering unmatched by any other blue-chip in recent memory,

Ten directors and executives were successfully sued for breaching their duties (nine have launched an appeal) and after a three-year negotiation with the NSW government, the shareholders resumed responsibility for an expected $2 billion in asbestos compensation which the company had disavowed in 2004.

But a few short years later, Justice Margaret Stone has blocked CSR’s proposed restructure due to concerns about how it might affect future sufferers of asbestos diseases.

This happened although CSR never copied James Hardie’s refusal to meet claims.

If one of the reform proposals had been implemented, CSR might have been saved the damage to its reputation, the 9 per cent drop in its share price since last Friday’s court hearing, and the vast sums and time it wasted preparing for the demerger.

The government could have clarified the legal status of people yet to fall ill from exposure to products mined or manufactured long in the past, the prime (although not only) example being asbestos.

A second topic which has received little attention since 2004 is the avoidance of personal injury compensation through the use of the so-called corporate veil, the doctrine that parent companies are only rarely responsible for the debts of their subsidiaries.

This was not an issue in CSR’s proposal, but it could be revisited too. At least the government should say where it stands.

In his report into James Hardie’s conduct published in 2004, David Jackson, QC, said these two issues pointed to ”significant deficiencies in Australian corporate law”.

The government referred the legal status of future claimants to its private sector adviser, the Corporations and Markets Advisory Committee, which concluded in 2008 there was ”a case for broadening the interests to which directors must have regard in any capital reduction”. The government has not responded.

In its submissions to Justice Stone, CSR accepted that its directors had a duty to consider the impact of the demerger on people yet to contract asbestos diseases.

But it also argued that when it came to a decision to reduce CSR’s capital, the Corporations Act only required directors to ensure the proposal ”does not materially prejudice the company’s ability to pay its creditors”. The act’s definition of creditors did not extend to people yet to fall ill, CSR said.

The company argued that the court had no role in protecting creditors in a capital reduction, let alone unidentified future claimants.

The Australian Securities and Investments Commission, perhaps reflecting Canberra’s unwillingness to buy into the debate, declined to make a submission to Justice Stone on whether the demerger should proceed. Instead, ASIC assured the judge that, contrary to CSR’s submission, she had a wide discretion to intervene on behalf of future asbestos claimants.

Justice Stone agreed that she had broad powers, and used them on Wednesday to stop the demerger.

The easy argument for politicians is to say that the legal system consists of both statutes and judicial rulings, and Justice Stone has looked after the interests of future asbestos claimants. No change needed.

But the business lobby is always agitating for certainty and most companies would prefer an explicit statement of public policy on corporate law to be inserted into the Corporations Act.

CSR clearly thought it was on strong legal ground in putting so much effort and money into planning a scheme of arrangement which involved a capital reduction whose impact on asbestos claimants was very hard to quantify.

Justice Stone decided there was so much uncertainty that CSR’s proposal was inconsistent with public policy and commercial morality.

She said future asbestos claimants could not be equated with other unknown future creditors. ”Their interest arises not from some future dealing with CSR but from their involuntary exposure to asbestos products supplied by CSR before demerger even if, in some cases, exposure does not occur until after demerger.”

The unfairness of involuntary creditors being put at risk was also behind the second proposal for reform put forward in 2004, which relates to James Hardie’s conduct but not CSR’s.

Counsel assisting the Jackson inquiry, John Sheahan, SC, suggested there should be restrictions on the ability of a parent company to walk away from the debts of its insolvent subsidiaries in cases where ”unlike other creditors, involuntary tort claimants dealing with a corporate group entity do not voluntarily assume the risk of the subsidiary’s insolvency”.

Like Justice Stone, he said the fact that the claims related to past conduct was significant.

James Hardie’s shareholders had received dividends in the past from the asbestos operations of its subsidiaries, so why shouldn’t they bear the cost of compensating people killed or injured by those profitable activities?

It’s a question the government hasn’t answered. But there’s no guarantee another corporate restructure won’t prompt it to be asked again.

Article source: www.smh.com.au