PARLIAMENTA RY LIBRARY DEPA RTMENT OF PA RLIA MENTA RY SERV ICES

RESEARCH NOTE

INFORMATION, ANALYSIS 2004–05 A ND ADV ICE FO R THE PA RL IA MENT No. 12, 10 August 2004

In the shadow of the corporate veil: James Hardie and asbestos compensation Significant fallout is likely from the major difficulty for compensation assisting the NSW inquiry NSW inquiry into the treatment of planning. Mesothelioma (cancer of estimated the total claim against the Australian asbestos victims by the chest cavity) can emerge 40 Hardie Group could amount to 10 ('the Hardie years after exposure. Since 1945 $2.24 billion. about 7000 Australians have died Group'). The NSW Special In October 2001 the Hardie Group from this disease, estimated to rise Commission will not report until 21 assured the NSW Supreme Court to 18 000 by 2020. Other asbestos September this year but federal and that ABN 60 could call on $1.9 related cancers may be around 30— state governments are already billion owed by JHI NV for partly 40 000 by the same time. considering legislation to access the paid shares to meet future asbestos 1 Hardie Group's overseas assets. A major problem for the Hardie claims. This assurance was 'pivotal Construction unions in Victoria Group is the range of products it to the court giving approval for the have banned James Hardie made with asbestos. It faces transfer of ABN 60's assets' to JHI 2 materials, and the NSW growing claims from users of these NV in the Netherlands.11 But in Government may do likewise for products. Over half the claims made March 2003 ABN 60 cancelled the 3 state projects. And there are to the NSW Dust Diseases Tribunal partly paid shares 'without growing calls to 'lift the corporate in 2002 were against the Hardie informing the court or the stock veil'– fundamental to corporations Group. exchange'.12 law for 140 years – by restricting 'limited liability' in cases of The James Hardie restructure According to the Secretary of the physical injury. As the Weekend Australian noted ACTU, Greg Combet, the movement of the Hardie Group's 4 recently: The asbestos problem assets overseas —out of reach of While rival manufacturer CSR The Hardie Group manufactured asbestos victims in this country—is capitulated to legal and public asbestos products (cement, piping, 'one of the most morally and legally pressure in the '90s and opted to repugnant acts in Australian insulation and brake linings) for meet victims' claims as they arose, 13 over 70 years in NSW, Queensland Hardie pursued a different route.7 corporate history'. and Western .5 It is not Between 1937 and 1986 asbestos The Jackson Inquiry alone in facing asbestos products were manufactured by two compensation claims. Estimates of In December 2003 the Foundation subsidiaries of James Hardie Australia's total liability for future warned that it faced a serious Industries Limited (JHIL): now asbestos claims start around $6 funding shortfall. Within a few 6 known as Amaca (building and billion. Fellow corporate heavy years it would be unable to pay construction products) and Amaba 14 weights CSR and BHP Billiton are asbestos compensation claims. In (brake linings).8 Between 1996 and targets, and federal and state February 2004 NSW Premier Bob 2001 the assets of Amaca and governments also have substantial Carr appointed David Jackson QC Amaba were transferred to JHIL asbestos liabilities. Claims are not to investigate the relationship (now 'ABN 60'), then to a limited to those who worked in between the funding shortfall and Netherlands based company - James asbestos mines and factories. the Hardie Group restructure, Hardie Industries NV (JHI NV). In Former power station, shipyard and including whether changes to February 2001 ownership of Amaca dock workers, railway labourers and corporations law were needed to and Amaba was transferred to a new members of the defence force, ensure future claims were met. body, the Medical Research and especially the Navy, are at The Hardie Group and its advisers Compensation Foundation ('the significant risk from asbestos- deny any wrongdoing in relation to Foundation'), which was given $293 related diseases. These diseases these events. Moreover, according million to fund asbestos injury can take decades to develop—a to The Age: claims.9 In July 2004 counsel

… the legal structure Hardie created Despite the above view in The Age for reciprocal enforcement of appears to be solid. Under the about the solidity of the restructure, judgments,25 negotiating corporate law concept of the counsel assisting the inquiry agreements with the US would not corporate veil, companies and not suggested that JHI NV was a appear to involve the same their shareholders are individually 'shadow director' of Australian obstacles as with the Netherlands. responsible for liabilities, even if company ABN 60.19 So successful they are part of a larger group. This If 'statutory' action under the claims in Australia against ABN 60 means that Hardie's new, Foreign Judgments Act is not may be enforceable against JHI NV. Netherlands-based, Australian-listed available, action could also be taken parent company and the old If, for example, JHI NV and/or its overseas at 'common law' against Australian parent are protected from directors contravened the JHI NV. But as a Government claims against Amaca and Amaba.15 Corporations Act in relation to the spokesman said: Nevertheless, counsel assisting the cancellation of partly paid shares: What in effect would have to Jackson Inquiry identified a string a court may order the contravenor to happen is that if there was a compensate ABN 60 for damage of possible offences against the judgment here, they would virtually suffered by reason of the Corporations Act 2001, the Trade have to part-hear it again to make contravention … Damage would Practices Act 1974 and the common sure it complied with their laws … arise, for instance, if a claim were law in relation to the setting up and Either way you are talking many made against ABN 60 which it funding of the Foundation, and the years.26 could not meet, but would have cancellation of the partly paid been able to meet had the partly In addition, in the case of the 16 shares. paid shares not been cancelled. In United States, foreign plaintiffs It has been suggested to the inquiry such a case, it would be arguable seeking damages from US-based that ABN 60 could seek to recover that: defendants for personal injuries face from the contravenor the amount of a restrictive forum non conveniens • the managing director of the the liability it is unable to meet.20 doctrine, under which a US court Hardie Group could be Even if an Australian court found will refuse to hear a matter if most prosecuted over a 2001 JHI NV or its directors liable, of the circumstances of the case statement that the Foundation however, gaining access to James involve a foreign country.27 could meet all future claims Hardie's Netherlands based assets If the current inquiry leads to • legal adviser to the Hardie would be difficult. Under the successful criminal prosecutions, Group, Allens Arthur Robinson, Foreign Judgments Act 1991, the Mutual Assistance in Criminal may have breached its 'duty of 'money judgments' of Australian Matters Act 1987 could be used to care' in relation to the courts can be enforced overseas if access overseas property and other restructure and the cancellation Australia has a reciprocal agreement assets. Australia has agreements of partly paid shares, and with a particular country.21 with both the Netherlands and the Australia has no agreement with the • actuarial adviser Trowbridge United States in relation to this Act. Netherlands. After a request from may have been negligent in the ACTU to the Prime Minister,22 Lifting the corporate veil underestimating the the Federal Government announced Foundation's future funding The term 'corporate veil' refers to that new approaches had been made needs17 the protection given by the principle to the Dutch government. As a of 'limited liability'. Under this Counsel assisting the inquiry also spokesman for the Attorney- principle, companies are legal suggested that the cancellation of General said, however, 'we aren't entities separate and distinct from partly paid shares was expecting an answer quickly'. their individual members. Hence 'unconscionable', and that the Referring to the Netherlands' liability to a company's creditors is Supreme Court's approval for the obligations to the European Union, limited to the company's assets and transfer of Hardie Group assets to he noted that negotiations could does not extend to the personal 23 the Netherlands could be rescinded take years. assets of company members. because the court was misled.18 However JHI NV also has Counsel assisting the Jackson Recovering overseas assets substantial assets in other countries. Inquiry explains that: Given the shortfall facing the Its operational head office is in Applied to corporate groups, the Foundation, an important issue is California, it is registered in principle means that they can the extent to which liability from Delaware and most of its revenue is determine the size and choose the limits of their legal responsibilities any prosecutions could be traceable generated in the United States, 24 by the relatively simple mechanism to the Hardie Group's overseas where 'business is booming'. While Australia also has no of making one company (the 'parent' assets, including those of or 'holding' company) a member of Netherlands-based parent JHI NV. agreement with the United States

another company or companies (the Such a proposal is controversial. US proposal is for a 'privately 'subsidiary'/ 'subsidiaries') in the The Law Council of Australia is funded, publicly run' process for group. In economic terms, opposed to the idea: compensating asbestos victims. companies may by this technique Asbestos defendants and insurance externalise the risk of their The Law Council does not believe companies would contribute to a operations by exposing third parties that a response by the to the risk of compensated losses Commonwealth to permit 'lifting the compensation fund, with assets where the subsidiary's assets are corporate veil' is an appropriate from existing asbestos insufficient to satisfy its liabilities.28 response to the issues raised by this compensation trusts being inquiry, particularly given the transferred to the fund. Defendants The principle has a number of uncertainty and risk of claimants would pay either a proportion of benefits, not least promoting successfully recovering their revenue or a flat dollar amount compensation against James Hardie 'entrepreneurial risk taking which to the fund each year, with the 29 group companies outside Australian encourages economic growth'. Its amount depending on the jurisdictions.33 downside, however—highlighted defendant's size and past liabilities. starkly by the James Hardie In 2000 the Companies and For insurers, a commission would imbroglio—is that in some cases Securities Advisory Committee determine individual companies' creditors will be unable to recover (CASAC) rejected proposals for the contributions depending on past the amount they are owed. This is imposition of general liability for exposure to asbestos liabilities.37 the prospect facing Australian parent companies in corporate The US proposal has stalled over asbestos victims seeking groups for personal injuries and disagreements about the amount of compensation from the Foundation other legal 'torts'. CASAC did contributions, the level of – despite its association with the however recommend that: 'booming' James Hardie business. compensation, and the adequacy of 38 Some exceptions to the limited …this area could be dealt with by the fund. specific legislation where the liability principle already exist, but extension of liability beyond the A statutory scheme would 'cut out 39 they 'do not provide adequate tortfeasor company is desirable in the lawyers'. The Hardie Group protection for victims of torts the public interest.34 has calculated that this could reduce committed by insolvent subsidiaries its future asbestos compensation bill 30 Even if the Corporations Act was of wealthy holding companies'. by $430 million.40 John Gordon, on amended to 'lift the corporate veil' John Gordon from the Australian the other hand, says that: Plaintiff Lawyers Association says in cases of personal injury— it is clear that the principle of requiring JHI NV to compensate there is no evidence that a statutory scheme would be quicker than limited liability needs to be Australian asbestos victims – there what's currently available and reconsidered, and he is blunt about would remain the problem discussed above of accessing the certainly the benefits would be less. who is to blame. In his view, the Today someone could be diagnosed foreign assets held by the company. concept: one day, see a lawyer the next day and the next day they ought to be needs a very thorough review and Statutory compensation able to receive compensation for an corporate Australia will have James JHI NV has offered to provide an amount that the courts have Hardie to thank if that protection is unspecified amount of money for 31 determined is equitable. There's no lost in the future. compensating Australian asbestos reason why that should be changed Counsel assisting the Jackson victims if the NSW Government just because James Hardie has taken Inquiry suggests that where death or establishes a statutory compensation their assets offshore.41 personal injury is caused by a scheme. Details of how that ANU Reader in Law and corporate company that is part of a larger scheme would work are not yet liability specialist Peta Spender corporate group, the limited liability available. However it is likely to states that: principle should be restricted to involve caps on award payouts and members of the ultimate holding a cap on JHI NV's own liability The case studies reveal that the company.32 If applied to the James under the scheme. The ACTU has creation of a limited fund generally Hardie case, this would mean the rejected the proposal, calling it 'an results in the under-compensation of tort victims, particularly future personal assets of JHI NV members attempt to blackmail the dying'.35 claimants. This may be acceptable would still be protected, but the A similar scheme was established in upon a genuine insolvency, but not company's assets would be France in 2002, financed by the by unilateral acts of the corporate available to asbestos compensation 42 employment and social security defendant. claimants. 36 ministries. A proposal for a Other proposals statutory scheme is also being The Law Council of Australia has debated in the United States. The proposed the creation under State legislation of a 'nominal defendant' Further reading: to handle asbestos claims, funded See endnote 42 below for Peta 31. Transcript, Business Sunday, 1.8.04. by levies on relevant insurance Spender's article discussing 32. ibid. policies such as workers appropriate legal responses to compensation and occupiers' 33. Law Council of Australia, situations of 'mass tort liability'. 'Submission to the Special liability. The nominal defendant Commission', p. 2. would be able to pursue claims 1. Morning Herald, 30.7.04, 34. Companies and Securities against other entities, and would p. 7. Advisory Committee, Corporate add any recovered amounts to the Groups, Final Report, May 2000, 2. The Age, 30.7.04, p. 1. p. 122. compensation fund. The claims 3. The Australian, 3.8.04, p. 5. 35. The Australian, 29 July 2004. work could be outsourced to an 4. Source: Beth Quinlaven, 43 36. Salvatore, Santino and Michaels, insurance company. 'Asbestos: Powder traces', 'Asbestos: The current situation in Business Review Weekly, 2 June Alternatively, the Law Council Europe', 2004. http://www.astin2003.de/img/pap proposes amending Commonwealth 5. Sydney Morning Herald, 19.6.04, ers/santoni.pdf legislation to allow 'anticipated but p. 45. 37. Submissions of Counsel assisting as yet unascertained claims' to be 6. Quinlaven, op. cit. op. cit., p. 5–14. brought against an insolvent 7. Weekend Australian, 3.7.04, 38. ibid. company. As the Council notes: p. 27. 39. The Age, 31.7.04, Business 1. 8. The Age, 31.7.04, Business 1. 40. ibid. Unascertained future claims [are] a 9. Weekend Australian, 3.7.04, 41. Transcript, 7.30 Report, 28.7.04 particularly acute problem in p. 27; The Age, 31.7.04, Business relation to asbestos liabilities given 1–2. 42. Peta Spender, 'Blue Asbestos and Golden Eggs: Evaluating the long latency periods and short 10. The Age, 30.7.04, p. 1. 44 Bankruptcy and Class Actions as life expectancies of sufferers … 11. Weekend Australian, 3.7.04, Just Responses to Mass Tort p. 27. Liability', 25 Sydney Law Review, If the Foundation or other James 12. The Australian, 3.8.04, p. 5. 223 at 254. Hardie entities went into liquidation 13. Transcript, 7.30 Report, 28.7.04. 43. Law Council of Australia, op. cit., because of insufficient funds, 'many p. 2. 14. The Age, 31.7.04, Business 1. potential claimants could be left 44. ibid, p. 6. 45 15. ibid. with no compensation at all'. 45. ibid. 16. Submissions of Counsel assisting The Law Council proposes a quasi- the Special Commission of 46. ibid, pp. 6–7. Inquiry, see e.g. pp. 1–28 and judicial tribunal to assess 47. MCRF, Attachment A to 2–58. unascertained future claims, submission to Special 17. The Age, 31.7.04, Business 2; Commission of Inquiry. together with amendments to the Weekend Australian, 3.7.04,

Corporations Act and the p. 27.

Bankruptcy Act 1966 concerning 18. The Age, 31.7.04, Business 2. the liability of holding companies 19. Submissions of Counsel assisting, and individuals for the debts of op. cit., pp. 3–16. Peter Prince, Jerome Davidson 20. ibid., pp. 3–22,23. and Susan Dudley insolvent corporations. Changes to Law and Bills Digest Section 21. Foreign Judgments Act 1991, these laws would also be needed to Information and Research section 5. prevent companies making Services 22. Transcript, 7.30 Report, 28.7.04. agreements intended to defeat future General Distribution Papers (GDPs) are prepared for senators and members of the 46 23. AAP, 'Fed: Govt approaches as well as current entitlements. Netherlands over reciprocal court Australian Parliament. While great care is case deal', 4.8.04. taken to ensure that they are accurate and An interesting idea comes from the balanced, papers are written using 24. Sydney Morning Herald, 19.6.04, information publicly available at the time of Foundation itself, which proposes p. 45. production. The views expressed are those adopting the US doctrine of 25. See schedule to Foreign of the author and should not be attributed to 'undercapitalisation'. It suggests a Judgments Regulations 1992. the Information and Research Services (IRS). Advice on legislation or legal policy new provision in the Corporations 26. AAP, op. cit., 4.8.04. issues contained in papers is provided for Act imposing liability for the debts 27. See Peter Prince, 'Bhopal, use in parliamentary debate and for related Bougainville and Ok Tedi: Why parliamentary purposes. The papers are not of a company set up with professional legal opinion. Readers are Australia's Forum Non inadequate funds on those who reminded that GDPs are not official Conveniens Approach is Better', parliamentary or created it where such people have 1998 International and documents. IRS staff are available to discuss engaged in misleading conduct in Comparative Law Quarterly 47, any paper’s contents with senators and 47 573–598 members and their staff but not with relation to the firm's capitalisation. members of the public. 28. Submissions of Counsel assisting, op. cit., 5–15. © Commonwealth of Australia ISSN 1449-8456 29. ibid. 30. ibid., pp. 5–17.