The NSW Government’s commission of inquiry into whether James Hardie Industries remains liable in cases brought by the victims of asbestos-related diseases has begun to focus attention on the question of a parent company’s position where its subsidiaries are faced with liabilities. James Hardie’s managing director, Peter Macdonald, along with the company’s lawyers appear sure there is no issue here — and that no liability exists for Hardie. But as the case unfolds, that proposition is increasingly being brought into doubt.

The inquiry is investigating whether James Hardie under-funded the body that it set up to meet anticipated claims associated with asbestos-related diseases. The Medical Research and Compensation Foundation (MRCF) was established with $293 million, but the foundation claimed that amount represented a shortfall of up to $800 million. That was in October 2003, however, when the inquiry was announced; an updated estimate by KPMG earlier this month put the foundation’s unfunded liability at $1.3 billion.

The inquiry is now looking into whether the company failed to disclose key documents to the NSW Supreme Court’s Justice Kim Santow prior to his approval in late 2001 of James Hardie’s corporate restructure. That restructuring involved the company folding its former main asbestos business into the foundation and moving its corporate offices to the Netherlands, leaving only an Australian shell company.

According to NSW Premier Bob Carr, the aim of the inquiry was to establish whether the funds put aside for the MRCF truly reflected what James Hardie knew about the company’s likely liabilities in dust-related disease claims. Did executives really believe the $293 million would cover them, or did they suspect the bill would be considerably more?

Some analysts are now suggesting the restructure was carefully planned in order to cap legal liabilities at the amount first put into the trust, allowing the company itself to start anew elsewhere. James Hardie may still be listed on the Australian Stock Exchange, but the company is registered in the Netherlands and its business is transacted largely in the US.

Early last week, former legal adviser Peter Cameron told the inquiry James Hardie’s claims that asbestos victims would be unaffected by the proposed restructuring had not misled the court. Cameron, also a former head of M&A at Allens, became a director of the company’s Netherlands-based parent company in late 2003.

Jack Rush, QC, counsel for groups representing asbestos victims, said that failing to inform the court the shell company might either be liquidated or put into trust, or that cancelling $1.9 billion worth of shares — understood at the time to be available to creditors — was “by omission a misleading of the court”. Cameron agreed these matters had not been raised, but rejected absolutely that the court had been misled.

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James Hardie executives had also been advised that cancelling the shares too soon after the restructuring might attract unwelcome attention from the Australian Securities and Investments Commission. The shares were eventually cancelled in March 2003, removing a source of compensation for future victims of asbestos-related diseases, who will keep growing in numbers for a few decades yet. The foundation, however, is likely to run out of assets long before those numbers start to decrease.

A matter of concern — and one that worried David Robb, partner with Allens, James Hardie’s legal advisers — was that virtually no one got to hear about the cancellation of the share scheme: not ASIC, not the ASX, and not the Supreme Court of NSW. Robb’s concerns were not delivered to the board in their entirety.

The bigger picture emerging here, however, is one of shortcomings in legislation and in the powers available to regulators to prevent a company from shifting its liabilities onto a subsidiary and then escaping. A comment from Vicki Hamilton, secretary of a Victorian asbestos diseases support group, will resonate not just with victims and their families, but with those within the corporate world who have seen a legal and regulatory inadequacy: “This company has exposed people to their products knowing they were dangerous and then they covered it up and nicked off,” Hamilton told Melbourne’s The Age.

Managing director Peter Macdonald, has said on a number of occasions that as a parent company Hardie has no legal obligation to meet the liabilities of MRCF, claiming this was a position that the NSW Government fully recognised.

Of particular interest to legal observers, however, would be any class action suit that might be launched on behalf of victims of asbestos-related diseases. Such action would require plaintiffs to sue a related company overseas, an area of cross-border law that is very underdeveloped. As such, it would likely be watched with considerable interest.