#10836 - Implications Of Limited Liability - Business Associations 1

Blake Dawson Waldron, Litigation Update – Judgments in James Hardie appeals handed down today

The article outlines the main findings in the James Hardie appeals:

Non-Executive Directors

• The NSWCCA overturned the trial judge’s findings, setting aside declarations of contravention, pecuniary penalties and disqualification orders made against the non-executive directors

  • Central to this conclusion as that ASIC didn’t prove the NEDs passed a resolution to approve the draft announcement to the ASX and further that ASIC had a duty of fairness to call a relevant witness and failed to do so – undermining the cogency of their case

General Counsel

• The appeal of GC Shafron was allowed in part – the court overturning the finding that he failed to advise the board of the limited nature of reviews of a cash flow analysis. It had not been proven that he knew of this limited nature

• But the Court did find he failed to advise the board of the need to disclose a deed of covenant and indemnity to the ASX and further allowed ASIC’s cross appeal finding that Shafron contravened the CA in failing to advise the gboard about aspects of the actuarial estimates of asbestos liability

The ex-CFO, Morley, unsuccessfully appealed against the finding that he failed to advise the board to he limited nature of the reviews of cash flow analysis.

The former CEO, McDonald, did not appeal his $350,000 penalty and 15 year disqualification order

James Hardie Industries NV

The appeal against the finding by the trial judge that it engaged in misleading conduct and statements likely to affect market behaviour and failure in disclosures was unsuccessful.

Gilford Motor Co Ltd v Horne [1933] 1 Ch 935

Facts: The plaintiff company sold/serviced motor cars. Horne was its managing director and under his service contract was bound not to entice customers away from the plaintiff. After terminating his contract he opened a business under his own name selling parts and servicing cars. His solicitor wrote to the plaintiff seeking a copy of his service contract – a few days after which a company was incorporated under the name J M Horne & Co Ltd which took over Horne’s business (J M H was his wife’s name

Proceedings: The plaintiff sought an injunction restraining Horne, through J M Horne, from attempting to entice away his customer’s. Horne admitted to soliciting clients of the plaintiffs in breach of the agreement prior to the incorporation of the company. But he argued, inter alia, that it might not be enforced against the company.

Lord Hanworth MR:

His honour cited and accepted the findings of Farwell J in the court below that the “defendant company was the channel through which the defendant Horne was carrying on his business” (despite the fact that his ex-colleague and wife were directors of the company).

• On this basis his honour was prepared to conclude that the company was formed “as a device, a stratagem in order to mask the effective carrying on of a business by Mr E B Horne” , to enable him, under a “cloak or sham” to engage in business in respect of which he feared the plaintiff might object

• An injunction must go against the company – the rule in Smith v Hancock states that

• “If the evidence admitted of the conclusion that what was being done was a mere cloak or sham, and that in truth the business was being carried on” by someone else then relief should be granted accordingly

• His hour was prepared to conclude that the company was such a “mere cloak or sham” and a mere device for Horne to continue to commit breaches of the service contract.

Injunction granted against Horne and J M Horne & Co Ltd

Jones v Lipman [1962] 1 WLR 832

Facts: Lipman contracted to sell land to the Joneses, but before completion sold and transferred it to a company, of which he and his clerk were sole shareholders, at a significantly reduced price. The Joneses sought specific performance of the contract against both Lipman and the company.

Russel J commented that two things arose from the evidence

1. The defendant company was always under the complete control of Lipman

2. The acquisition of the company by the defendant and transfer of property was solely to defeat the plaintiff’s right of specific performance to leave them to claim whatever damages claim they might established

He then outlined the plaintiffs argument

1. That SP would be ordered against a party to a contract who has it in his power to compel another person to convey the property in question – and the first defendant had the power to do this

2. That specific performance would also be ordered against the defendant company in such circumstances

• On the first of these points he thought that it follows that SP could not be resisted by a vendor, who by absolute ownership of a company in which the property is vested, is in a position to cause the contract to be completed.

His honour commented on Gilford v Horne – saying it applied in this case. The defendant company being a “device and a sham, a mask which he holds before his face in an attempt to avoid the recognition by the eye of equity” – in such a case an equitable remedy is rightly granted against the company.

Specific Performance of the contract between the plaintiff and first defendant ordered

Smith Stone and Knight Ltd v Birmingham Corporation (1939) 161 LT 371

Facts: SSK was a paper manufacturer owning a factory in Birmingham which it led to a subsidiary (Birmingham Waste Co Ltd – BW) on a yearly tenancy. The municipal authority wished to acquire the premises for construction of a technical college – it served notice on SSK which lodged a claim for compensation for removal costs and disturbance to business. Initially the claim was made on behalf of BW but later its claim was amended to be on its own behalf – alleging that SSK owns all of the capital and profits of BW< and BW carries on its trade as a separate department of an as agents for SSK.

The company and the authority were unable to agree on the terms and hence were referred to arbitration – a preliminary point raised was whether SSK could claim compensation or the claim had to be made by BW. The point was important because the statute denied claims for disturbance for occupiers without a greater interest than 1 year tenancy.

Atkinson J:

His honour, noting the...