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Rule of law upheld in ASIC and Hardie case: experts

Rule of law upheld in ASIC and Hardie case: experts

An Australian association dedicated to upholding the rule of law has welcomed the blow-up at the NSW Court of Appeal in December.

AN Australian association dedicated to upholding the rule of law has welcomed the blow-up at the NSW Court of Appeal in December in which seven former non-executive directors of James Hardie had their civil banning orders and fines overturned. 


The judges ordered ASIC pay the legal fees of the seven directors whose appeals were upheld, though ASIC did uphold its case that the James Hardie Company broke the law by sending out a misleading press release in 2001. 


The press release had claimed the company had enough money for its asbestos compensation fund. The fund had in fact been $1.8 billion short.  


The Court found, however, that ASIC had failed to call an important witness as part of its case. 


ASIC chairman Tony D'Aliosio said the case was important for examining the fundamental responsibilities of public companies, and for both executive and non executive directors "who are ultimately responsible for significant public company decision and the release of information concerning these decisions to the share market, to employees, creditors and the public". 


"The case has done that and has provided important findings for public companies and executive officers and non-executive directors in these and similar situations. The appeal court has also provided analysis of the evidentiary burden on ASIC in a civil penalty case, and the obligation on ASIC to call witnesses," D'Aloisio said. 


ASIC is now assessing the judgement and will announce whether it will seek special leave to appeal to the High Court from all or any aspects of the judgment. 


But while the decision has been slammed by those who have championed the cause for asbestos victims, The Rule of Law Institute of Australia in December welcomed the decision.


The Institute said it applauds the new light that has been shone on a previously unclear area of regulators' responsibilities.


The proceedings by ASIC against the directors of James Hardie were civil penalty proceedings not criminal proceedings, it said in a statement. 


"This has two important implications. Firstly ASIC only has to prove its case on the balance of probabilities and not beyond reasonable doubt. Secondly there was no obligation on ASIC of prosecutorial fairness. In criminal proceedings a prosecutor must ensure a trial of an accused is fair, always act in a detached manner and with the objective of establishing the whole truth. By bringing civil penalty proceedings, this obligation did not apply to ASIC."


According to the Rule of Law organisation, the central premise of the argument against the non-executive directors of James Hardie was that they approved a crucial misleading ASX announcement at a directors meeting. 


"That announcement stated that a fully-funded foundation had been set up to pay compensation to asbestos victims. The basis for the statements were actuarial reports which showed that in very limited circumstances the fund would be capable of paying the requisite compensation but if any slight change in circumstances occurred it would not cover the payments. The trial judge found the directors did discuss the announcement at the meeting and either did know or should have known it was misleading because it clearly stated the foundation was fully-funded when realistically the actuarial reports were not a reliable basis for the announcement.


"The non-executive directors of James Hardie gave evidence that either they did not recall whether the ASX announcement was discussed at the meeting or they did not think it was. They gave evidence that they would not have approved the announcement had they discussed it. A lawyer who attended the meeting and may also been involved with the drafting of the announcement before the meeting was compelled by ASIC powers to give a statement to ASIC about the matter. The defendants had no power to require the lawyer to give the statement to them. 


"ASIC did not call the lawyer at trial and the defendants were denied the possible benefit of his evidence. The defendants had no way to compel the witnesses to speak to them before the trial and could not readily subpoena the lawyer as a witness at the trial whilst being unaware of what the lawyer might say in court," it said. 


Under the Australian Attorney-General’s Legal Services Directions 2005, ASIC and other regulators are required to behave as a ‘model litigant’ when conducting litigation, The Rule of Law Institute said. A question arose for the judges to determine whether ASIC owed a duty of fairness and should have ensured the lawyer gave evidence.


ASIC must now ensure that in any civil proceedings it conducts that the true facts are revealed. The Rule of Law Institute said this has significant implications for ASIC and all other regulators conducting civil penalty litigation. 


"It goes some of the way to balance the inequity between ASIC and other regulators’ coercive fact- finding powers and the resources of individual litigants. 


"For example, ASIC can compel a witness to appear at interview; obtain search warrants to conduct searches of premises; require a witness to turn over relevant documents; obtain a telecommunications warrant for phone-tapping of suspects; and require a witness to give all reasonable assistance. An ordinary litigant has none of these powers.

Under the rule of law, fairness in litigation is crucial. 


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