Directors warned to fulfil responsibilities following High Court decision in James Hardie case

Workplace directors must ensure they go the extra mile and investigate ambiguous statements or documents, experts say, in response to the High Court’s ruling in the James Hardie case.

The warning comes as the Institute of Company Directors criticised a proposed bill that would make directors personally liable for unpaid superannuation and other entitlements, saying it would affect all directors and not just those the bill intends to target.

“The Bill offends the rule of law, largely imposes automatic liability on directors regardless of their culpability, and gives the ATO wide ranging powers in circumstances where directors are not suspected of dishonesty,” AICD chief executive John Colvin said in submission to Treasury.

But it’s the James Hardie case that is the most pressing, experts say. Freehills partner Robert Baxt, who is a former chairman of the Trade Practices Commission and former Dean of Law at Monash University, says SMEs will be affected by the outcome of the case.

Baxt says non-executive directors in small businesses need to understand they have an onus to delve into topics they don’t understand, particularly when these matters are of a critical importance to the company’s performance.

The High Court ruled unanimously in ASIC’s favour yesterday, finding that James Hardie’s non-executive directors neglected their duties in signing off on an incorrect statement regarding a fund for asbestos victims.

Baxt says small businesses have the same obligation.

“It’s not good enough to say you’ve been appointed to do something, and that’s all you do. If you don’t understand something, you need to get a second opinion. They need to pursue if something is wrong.”

“Even if the company doesn’t have a profile with the public, but with creditors, there is an obligation. Customers and creditors can still ask ASIC to take action.”

Baxt says SME directors must “work for themselves”.

“If you don’t understand something, then you can’t just rely on the statement of accountants or whoever else. You need to get a second opinion.”

Meanwhile, the AICD said in a submission to Treasury that the amendment to the Tax Laws bill that would make directors personally liable for unpaid entitles wouldn’t attack phoenix directors, but all directors in general.

Colvin points out research from the organisation suggests 40% of directors believe the legislation would have a negative impact on business decisions.

“Of great concern, is the fact the bill makes new directors personally liable for the actions of the company even when the person was not a director at the time of the company’s breach,” he said.

The bill was proposed by Treasury late last year, but was recalled due to feedback from industry. However, the Government has put the bill forward again, with experts saying it’s essentially the same legislation.

“We are firmly of the view that if new legislation is being introduced to target a specific problem, then the legislation must clearly define the issue sought to be addressed and specifically regulate that problem.”

“If the Bill did this, and actually contained an appropriate definition of fraudulent phoenix activity

and had the usual safeguards, we would be less concerned about its introduction.”

Insolvency experts have criticised the bill, saying that it should focus more on people who run phoenix operations, not just place a blanket decision on all directors.

Colvin says a two-week consultation period is not good enough.

“We are of the view that such a consultation period is inadequate. When governments are considering new laws impacting business, there should wherever possible be appropriate consultation with business to ensure that issues of principle, unintended consequences and practical problems can be identified and dealt with.”