In Gillfillan & Ors v Australian Securities & Investments Commission [2012] NSWCA 370 the NSW Court of Appeal has revised the penalty orders relating to the 7 non-executive directors and company secretary of James Hardie Industries Ltd following the High Court review of the decisions.

In Australian Securities and Investments Commission v Hellicar [2012] HCA 17 the High Court allowed ASIC’s appeals and held that the 7 non-executive directors each breached his or her duties as a director of the company by approving the company’s release of a misleading announcement to the Australian Stock Exchange. (Background)

The 7 matters were remitted to the NSW Court of Appeal for further consideration of remaining issues in the appeals to that Court about claims to be excused from liability, penalty and disqualification.

The 7 former non-executive directors (Mr Brown, Mr Gillfillan, Ms Hellicar, Mr Koffel, Mr O’Brien, Mr Terry and Mr Willcox) included 2 directors located in the United States (Gillfillan and Koffel) at the time of the relevant meeting.

The High Court also remitted to the NSW Court of Appeal the appeal by the former secretary and general counsel of JHIL, Mr Peter Shafron, as related to penalty, together with ASIC’s cross-appeal against Mr Shafron on penalty. (Background)

The NSW Court of Appeal imposed the following penalties.

The director penalty orders replaced the original Orders of the Supreme Court of five years disqualification and pecuniary penalty orders of $30,000 each.

In relation to Mr Shafron, by consent, the Court approved a fine and disqualification of $75,000 and 7 years, the same as the decision of the trial judge.

The Australian directors did not seek relief from liability.

The early end to disqualification of Mr Willcox allowed for the fact that he remained disqualified during the whole process.

The US Directors

Judge Sackville made the following comments about the US Directors:

“The seriousness of the US Directors’ breach of duty lay in their failure to concern themselves with the terms of a critically important document to be released, with Board approval, to the ASX, the media and the public at large. They knew that the Draft ASX Announcement was being discussed by the Board for the purposes of approval and they knew that they did not have a copy of the document. They also knew … that their silence at the Meeting would be taken as a vote in favour of approving release of the Announcement.

Essentially, the US Directors abdicated their responsibility at the Meeting by not asking for a copy of a critical document which the Board was asked to approve for release to the ASX, or at least abstaining from voting on the resolution (thereby dissociating themselves from the Board’s decision to approve release). The US Directors’ position at trial was that the Meeting had not been asked to approve the Draft ASX Announcement. That evidence was not accepted. They provided no explanation of what led them to acquiesce in the vote on such an important matter without discharging their responsibilities as directors of JHIL.

In my opinion, the one significant point of difference between the conduct of the US Directors and that of the Australian Directors is that the former did not have before them the text of the Draft ASX Announcement when they participated in the Board’s vote to approve release of the Announcement. In a sense, reliance on this point of distinction rewards the US Directors for their failure to ask for the Draft ASX Announcement to be read out at the Meeting or to dissociate themselves from the vote. Obviously enough, if they had made this request they, like the other non-executive directors, would have known what representation the Draft ASX Announcement conveyed. On their evidence, had they realised the contents of the Announcement, they would not have approved it. Thus it is by no means obvious (notwithstanding the primary Judge’s finding) that, had the US Directors not breached their duty, the resolution to approve release of the Draft ASX Announcement would have been approved.

In my opinion, the contraventions by the US Directors, although very serious, were not quite as grave as the contraventions by the Australian Directors. The former, through no fault of their own, did not have the text of the Draft ASX Announcement before them when they attended the Meeting by telephone. Nor did they have notice that the Meeting would be asked to approve release of the Draft ASX Announcement. When the topic of the Announcement was raised at the Meeting, the onus was on them to request a copy of the Announcement or, if that was not feasible, to ask the Chairman to have the text read out. The onus was not difficult to discharge – a simple request over the telephone would have sufficed. But the fact is that, unlike the Australian Directors, they did not have the document in front of them and so apparently did not appreciate the unequivocal nature of the representations being made with the imprimatur of the Board.

While I do not think that the gravity of the two sets of contraventions was identical, I do not think that the US Directors’ contraventions were quite as serious as those of the Australian Directors. Nonetheless, the US Directors have not shown that the primary Judge erred in concluding that they ought not be fairly excused from their contraventions and that, in any event, the discretion to relieve conferred by s 1317S(2) should not be exercised in their favour. The primary Judge’s finding that the contraventions by the US Directors were no less serious than those of the Australian Directors was not an essential element in his Honour’s reasoning. What was important was that their contraventions were serious, fell substantially short of the required standard and caused harm to investors and others.

If it were necessary to reconsider whether, in all the circumstances, the US Directors ought fairly to be excused, I would have concluded, for essentially the reasons given by the primary Judge (subject to the modification concerning the precise gravity of the contraventions) that they should not be excused. I also would have exercised the discretion conferred by s 1317S(2) adversely to them. As I have explained, their contraventions were serious, involved what can fairly be described as a blatant departure from their respective duties as directors of JHIL, contributed to the public release of a misleading Announcement and also contributed to the maintenance of a false market in JHIL’s shares. The contraventions cannot be described as merely the product of momentary inadvertence or carelessness. On the evidence, the primary Judge was entitled to find that the breach of duty reflected a serious failure to appreciate and discharge their obligations as directors of JHIL on a matter of great importance to the company, to investors and to the public.

The challenge to the primary Judge’s refusal to relieve the US Directors from liability for their contraventions must be rejected.

While the contraventions by the US Directors were serious, they were different in nature to the contraventions by the Australian Directors. I think that the differences are appropriately recognised by imposing a somewhat shorter period of disqualification.”

Practical issues

In a separate judgement, Judge Barrett made some observations about two matters of company procedure: firstly, the way in which decision-making by a board of directors should be undertaken and secondly, participation in board meetings by telephone, audio-visual link or other like means of communication.

“the required method of decision-making is the passing of a resolution of the body of persons; and the passing of a resolution depends on the casting of individual votes. It follows that procedures actually adopted must be such that each member of the body who is entitled to vote and wishes to do so may communicate his or her vote and have it taken into account.

Value is often attached to collegiate conduct leading to consensual decision-making, with a chair saying, after discussion of a particular proposal, “I think we are all agreed on that”, intending thereby to indicate that the proposal has been approved by the votes of all present.

Such practices are dangerous unless supplemented by appropriate formality.

The aim is not to consult together with a view to reaching some consensus, although it may well be, as a practical matter, that such consultation facilitates the making of the decision that is ultimately required. The aim is rather that the members of the board should consult together so that individual views may be formed and the individual will of each member may be made known in a clearly communicated way.

The culmination of the process must be such that it possible to see (and to record) that each member, by a process of voting, actively supports the proposition before the meeting or actively opposes that proposition; or that the member refrains from both support and opposition. And it is the responsibility of an individual member to take steps to ensure that his or her will is expressed in one of those ways….

The decision whether or not to consent to a particular mode of technology for the purposes of s 248D is a personal decision for each director. Any director giving conscientious consideration to that question is bound to assess whether the proposed technology will satisfy the requirements..”