It will take new legislation to provide justice to asbestos victims

In 2001, the James Hardie Group established a non-profit company called the Medical Research and Compensation Foundation (“MRCF”). MRCF was appointed trustee of a fund established to administer the asbestos-related liabilities of the James Hardie Group. Those liabilities are large, James Hardie Group having been one of two major producers and distributors of asbestos in Australia for many years.

The establishment of MRCF took place in the context of a complex restructuring of the Group. A new entity, James Hardie Industries NV (“JHI”) was incorporated in the Netherlands and assets worth billions transferred to it. The trust over which MRCF presides was endowed with about $293 million in assets and cash. The directors of MRCF have since expressed the view that the trust is significantly under funded with liabilities projected to exceed $1 billion.

In February this year, the New South Wales government announced a Special Commission of Inquiry into MRCF. The Commission’s brief is to inquire into the financial position and projected liabilities of MRCF and whether the mode of separation from the Group contributed to the deficit between assets and projected liabilities. Incidentally, the commissioner, Mr David Jackson QC, is to determine whether reform to federal law governing corporations (under which MRCF manages its liabilities) is desirable. Of course, it will be a matter for the federal Parliament whether it accepts any such recommendations from a New South Wales government inquiry.

The “James Hardie solution”, as it has become known, is one of the most contentious uses of the corporate form to have arisen in Australia since the Patrick Stevedores litigation. In that case, a judge found that corporations within a corporate group can escape liability to a workforce dismissed by an undercapitalised member of that group for payouts which the under-capitalised corporation could not make itself. It is a manifestation of what lawyers call “the corporate veil” – in other words the separation of a corporation from its shareholders in terms of legal responsibility.

The whole matter has been quite notorious and attracted of significant media coverage. The chief executive, Mr Peter Macdonald, is alleged to have acted fraudulently. The company has decided (subject to shareholder approval) to pour in extra funds to the extent of more than $1 billon. The cynic might take the view that the company wants to avoid, if at all possible, having to do what it will do if litigation ensues: rely on its Byzantine corporate structure as a means of avoiding liability which, realistically, is inestimable.

At a legal level, the whole matter is noteworthy because it calls us to confront whether the 19th century doctrine of separate entities established in England in Salomon’s case remains appropriate in today’s world. Mass tort liability for latent and debilitating diseases such as asbestosis, mesothelioma and pleural thickening provides an acutely difficult context for consideration of the issue. The fundamental aims of tort and corporations law are in conflict. It has been observed that protection of the vulnerable is the “golden thread” and “core moral concern” of Australian tort law, but the courts also recognise the central economic importance of corporations law. At a moral level, there could hardly be a case in which responsible entities were more deserving of being stripped of the protection offered them by the separate entity doctrine of corporations law than one in which people have suffered terminal illness through the torfeasors’ concealment with knowledge of the real risks of their product.

Put another way, there is what students of jurisprudence identify as a conflict between corrective justice and distributive justice. Corrective justice delivered through the prism of tort law seeks to impose in the community a just distribution of risk whereas distributive justice – of which corporations law is an example – seeks efficiently to distribute risk as a means of encouraging the efficient allocation of (for example) capital. Shareholders are free to invest in business enterprises without having to worry about the day-to-day management of the company and the possibility of others assuming liabilities on their behalf.

This allocation of risk can also be seen as a redistribution of wealth from corporate creditors to shareholders. After all, if a company becomes insolvent, it is the creditors who wear the consequences of that. In such circumstances, members of the joint enterprise would, but for the corporate structure, be obliged to pay money to the creditors. The corporate structure allows them to keep that money.

Creditors are not merely those with whom the company has traded and therefore owes money. There are also involuntary creditors: those whom the company has wronged and to whom it is liable in damages. They bear the consequences of insolvency in equal measure with voluntary creditors.

So if limited liability is a subsidy paid by tort and contract creditors to business, the questions are how big it should be; and whether there should be any difference between voluntary and involuntary creditors. David Millon argues that because limited liability can facilitate opportunistic efforts in the form of potentially harmful activities by shareholders which extract value from third parties, “the scope of limited liability should … be restricted to cases of corporate insolvency that occur in spite of shareholders; good faith efforts to manage their firm in a manner that respects creditor interests.” In the case of victims seeking compensation, shareholders would be taken to act responsibly if they purchase liability insurance against foreseeable risks. In relation to asbestos cases, Peta Spender argues that to use the separate entity doctrine to isolate claims from the main enterprise in a limited fund should be limited to cases of genuine insolvency, rather than mere “enterprise threatening liability”. This would strike a balance, Spender argues, between the objects of insolvency law and corrective justice for tort victims. It also takes account of future victims of latent diseases by acknowledging the need not to destroy the “golden egg” from which compensation is paid.

The Australian courts have, for the most part, adhered much more strongly to the separate entity doctrine than their counterparts in England. Indeed, the term “piercing the corporate veil” represents a doctrinal approach in England largely absent from Australian company law. There are exceptions to the hardline approach taken in Australia. A notable example is that of the decision by the New South Wales Court of Appeal in the case of CSR v Wren. It circumvented the doctrine by relying on an expanded proximity test for the tort of negligence to attach liability to a holding company. Proximity is itself a common law regime limiting liability by requiring that a person only be held liable for negligence if he was sufficiently closely associated with the person wronged.

The Australian courts’ strict adherence to the separate entity doctrine suggests that any litigation against JHI is likely to encounter difficulties. The only remedy may be to seek orders against those company officials of the JHI subsidiaries that contrived to restructure the group so as to make it much less vulnerable at law. Those persons, who were directors of the old subsidiary companies which actually conducted the asbestos businesses, signed away those old companies’ rights to pursue any other JHI company in respect of asbestos claims in return for payments into the MRCF trust totalling $750 million. That litigation would, however, be complex and difficult; not least because of the nightmarish problems of proving loss (and the quantum of it) as a consequence of the directors’ actions.

Given this, my view is that specific legislative intervention by the New South Wales parliament is necessary to protect those who have suffered from the negligence of the JHI group.