Dunn, Edwina --- "James Hardie: No Soul to be Damned and No Body to be Kicked" [2005] SydLawRw 15; (2005) 27(2) Sydney Law Review 339

• Cases And Comments

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Cases and Comments

James Hardie: No Soul to be Damned and No Body to Be Kicked

EDWINA DUNN[*]

1.	Introduction

The Medical Research and Compensation Foundation (MRCF/the Foundation) was set up by James Hardie Industries Limited (JHIL) in February 2001, supposedly with ‘sufficient funds to meet all legitimate compensation claims anticipated from people injured by asbestos products that were manufactured in the past by two former subsidiaries of JHIL.’[1] In October 2003, the Foundation revealed that it faced a significant shortfall in funds[1] such that in its present financial position it would be unable to meet claims beyond the first half of 2007.[2] In February 2004, David Jackson QC was commissioned to inquire into and report upon the following terms of reference:

1. the current financial position of the Medical Research and Compensation Foundation (“the MRCF”), and whether it is likely to meet its future asbestos related liabilities in the medium to long term;
2. the circumstances in which MRCF was separated from the James Hardie Group and whether this may have resulted in or contributed to a possible insufficiency of assets to meet its future asbestos related liabilities;
3. the circumstances in which any corporate reconstruction or asset transfers occurred within or in relation to the James Hardie Group prior to the separation of MRCF from the James Hardie Group to the extent that this may have affected the ability of MRCF to meet its current and future asbestos related liabilities; and;
4. the adequacy of current arrangements available to MRCF under the Corporations Act to assist MRCF to manage its liabilities, and whether reform is desirable to those arrangements to assist MRCF to manage its obligations to current and future claimants.[3]

The aim of this article is to consider what impact the availability of limited liability in corporate groups may have had on the ability of MRCF, and that of companies in analogous circumstances, to manage their liabilities, to examine the responses of the Commission and interested parties to the fourth term of reference, and to consider the implications this has for the continued existence of limited liability in its current form.

The circumstances of the separation of the asbestos-related liabilities from the rest of the James Hardie Group have raised important questions about continued community acceptance of a legal doctrine which suspends the natural consequences of tort law[4] in favour of companies and their shareholders to the detriment of involuntary tort creditors. While a more detailed response from the Commission to the fourth term of reference was somewhat pre-empted by the decision of the James Hardie Group to voluntarily fund the future asbestos liabilities of its former subsidiaries,[5] the inquiry has brought to light fundamental inadequacies of our corporate law[6] providing the opportunity to examine and address these deficiencies.

The first part of this article will look at the background and events leading up to the Inquiry in order to place the Inquiry in its corporate and historical context. The second part will examine the consequences of applying the principle of limited liability to corporate groups and whether the principle is justified in its application to corporate groups, particularly when a subsidiary of the group faces claims in respect of persons killed or physically injured as a result of its negligent acts.[7]

2.	Inquiry into the MRCF
A.	Background
(i)	From Subsidiaries to Trust Fund

The dangers of inhaling asbestos fibres were first documented in 1907.[8] The James Hardie Group was actively involved in the manufacture, distribution and the mining of asbestos. Three companies in particular were involved in these businesses and formed the subject of the Inquiry. JHIL (later ABN 60), originally an importer of asbestos products, first began manufacturing asbestos products in 1916.[9] In 1937 JHIL formed James Hardie & Coy Pty Ltd (Coy), a wholly owned subsidiary set up to carry out the manufacturing branch of the business, later known as Amaca Pty Ltd (Amaca). The third company, Amaba Pty Ltd (Amaba), another wholly owned subsidiary, was born of a joint venture to produce brake linings and friction products in 1963. In 1978, it acquired both shares in the venture and later became known as James Hardie Brakes Pty Ltd, then Jsekarb Pty Ltd (Jsekarb) and finally, Amaba.[10] Amaca and Amaba have been held liable in relation to numerous asbestos-related claims and many such claims will also arise in the future.[11]

The first reported claim for compensation for respiratory illness by an employee of James Hardie was in the matter of Jones v James Hardie and Co Pty Ltd (1939) WCR (NSW) 129. The James Hardie Group ceased manufacturing asbestos in 1987.[12] As the Group’s focus shifted to the United States market, there was a growing concern to separate the asbestos liabilities from the rest of the Group so they would not hinder the Group’s ability to obtain capital or funding there.[13] After selling off Amaba’s business to interests outside the Group in 1987 and transferring Amaca’s operating businesses away from the former asbestos subsidiary to James Hardie Australia Pty Limited (JHA) (a new operating company) during the period 1995–98, the Group decided that the strategy most likely to succeed in effectively quarantining its asbestos liabilities was a trust.[14] Under this structure, Coy and Jsekarb would continue to meet asbestos-related claims via their existing assets and ownership would pass from JHIL to a new, unrelated company in the form of a trust.[15]

To this end, the MRCF, a company limited by guarantee, was set up in February 2001 taking over Coy and Jsekarb and assuming responsibility for the management of their asbestos-related liabilities. In addition, JHIL quarantined any potential asbestos-related liabilities of its own by making payments to Coy and Jsekarb in exchange for which JHIL was to be indemnified against any future asbestos-related liabilities.[16] JHIL CEO Mr Peter MacDonald said that, with starting assets of $293 million, the establishment of the MRCF:

provides certainty for people with a legitimate claim against the former James Hardie companies which manufactured asbestos products...Its establishment has effectively resolved James Hardie’s asbestos liability and this will allow management to focus entirely on growing the company for the benefit of all shareholders.[17]

Fundamental to this claim was the ‘Best Estimate’ of current liabilities as $286m contained in the Trowbridge Deloitte report of February 2001.[18] Later that year, Trowbridge was commissioned to carry out an updated report on the future asbestos liabilities of the Foundation. Its report valued Amaca’s asbestos-related disease liabilities at $574.3 million — a substantial increase on the previous estimate.[19] Trowbridge attributed the discrepancy to the fact that JHIL had not provided it with all available information, allegedly having withheld its claims data for the 9 months to December 2000.[20] Later reports saw the estimates of potential liabilities only escalate and estimates available at the time of the inquiry clearly indicated that the Foundation would be unable to meet its future asbestos-related liabilities in the medium or long term.[21]

(ii)	From Australia to the Netherlands

In October 2001, the head office of James Hardie moved from Australia to the Netherlands ‘to position the Group for further international growth and to improve the after-tax returns to shareholders.’[22] This was carried out under a Scheme of Arrangement whereby a new Dutch company, James Hardie Industries NV (JHI NV) became the Group’s holding company. JHIL became a wholly owned subsidiary of JHI NV and shareholders in JHIL became shareholders in JHI NV.[23] The majority of shares which JHI NV held in JHIL were partly-paid shares on which JHIL could call for up to approximately $1.9 billion at any time, when necessary.[24]

During the process of approval, Justice Santow of the Supreme Court of NSW was particularly concerned about the impact of the move upon JHIL’s ability to meet its future asbestos liabilities. In response to his query, he was assured that JHIL’s ability to call on the partly-paid shares would ensure that liability was met. However, Justice Santow was not informed that the directors of JHIL had already been notified of the significant shortfall in funding which the Foundation faced; he was not made aware of the ‘put option’ which had been put in place via a Deed of Covenant and Indemnity so that Amaca, at any time, could be required to buy out all the issued shares in JHIL for nominal consideration; nor was he told of the intention, if it existed at that stage, to cancel the partly-paid shares.[25]

In 2003, JHIL, then known as ABN 60, was also completely removed from the Group by way of another foundation established to acquire the shares in ABN 60 and use its funds to finance payment to Amaca and Amaba under the Deed of Covenant and Indemnity.[26]

B.	Possible Causes of Action Assisting the MRCF

Various parties to the inquiry raised the question of whether the conduct of the directors of the various companies involved in the above restructuring gave rise to causes of action under Australian corporations legislation.[27] In particular, it was alleged that the directors of Coy breached their duty to act in good faith for the best interests of the company as a whole by paying improper dividends and excessive management fees; in transferring Coy’s operating assets and core business; and in charging JHA less-than-market rentals for the various properties it leased from Coy.[28]

Also challenged were the use of deficient actuarial advice in setting up the MRCF; the misleading media release following the MRCF’s establishment; the lack of disclosure during the Supreme Court proceedings concerning the Scheme of Arrangement; and the legality of the Deed of Covenant, Indemnity and Access.

These causes of action were argued in the hope that they might eventually secure further monies for the MRCF or that they would lead to the setting aside of the separation of JHIL, Coy and Jsekarb.[29] However, the Commission found that most of the actions considered would be unlikely to succeed and others with some prospect of success would be unlikely to result in damages being awarded to the MRCF and could well be barred by the Deed of Covenant and Indemnity.[30] In addition, many successful causes of action would be dependent on the defendant’s ability to pay which, in the case of natural persons or of ABN 60, would be very limited. Furthermore, judgments in favour of MRCF might even not be enforceable insofar as they would apply to entities outside Australia.[31]

Under the present Corporations Act 2001 (Cth) (hereafter Corporations Act), the MRCF is doomed to insolvency by 2007.[32] Consequently, the threat of negative publicity and the dark cloud of unresolved, potential liabilities have compelled the Hardie parent, JHI NV, to make undertakings to the effect that it will fund all future asbestos-related compensation claims.[33] However, notwithstanding Hardie’s willingness to compensate victims in this case, the Commissioner was of the opinion that ‘the circumstances that have been considered by this inquiry suggest there are significant deficiencies in Australian corporate law.’[34] In particular, there is concern that ‘under the current Corporations Act, there is the potential for other companies to attempt to divest themselves of liability by hiding behind the corporate veil’.[35]

In response to the Jackson Inquiry and the restructuring of the James Hardie Group, there have been calls to amend the Corporations Act by ‘lift[ing] the corporate veil on companies that strip assets from subsidiaries or move offshore to avoid liability.’[36] While there are many economic arguments in favour of the separate entity principle and the related doctrine of limited liability, public sentiment[37] suggests that allowing further exceptions to be made to the principle of limited liability in corporate groups may be timely and appropriate.

3.	Rethinking Limited Liability in Corporate Groups

Does the law make adequate provision for a company which cannot meet claims against it arising from its tortious conduct, to obtain indemnity or contribution in respect of those liabilities from a parent company, or for those liabilities to be reduced by permitting claimants to make claims directly against the parent?[38]

A.	The Raison d’Être of Limited Liability
(i)	The Unforeseen Consequences of Salomon

It is now well established that a corporation is a legal entity entirely separate from its members, officers and directors. The implications of the separate legal entity doctrine were realised by the House of Lords in Salomon v Salomon and Co Ltd[39] although perhaps not the full implications since, at that time, corporate groups remained uncommon.[40] The significance of Salomon’s case lies in its recognition of the separate entity principle and of the principle that the debts of a corporation are not the debts of its members, officers or directors.[41] As a consequence, a company’s liability is effectively limited so that its creditors may look only to the assets of the company itself and not to those of its members or controllers. Part of the justification for the decision of the House of Lords lies in the argument that the creditors who traded with Salomon and Co Ltd ‘only had themselves to blame’ since they freely chose to trade with what they knew to be a company, the liability of which was limited to its own assets.[42] The theory behind this is that creditors are more efficient in evaluating and bearing particular risks since they can raise their prices to reflect the risk or seek security.[43]

The separate entity principle has since been applied strictly in Australia in cases involving corporate groups.[44] As a result, both single corporate entities and corporate groups have benefited from limited liability, the application of limited liability to the latter resulting in multiple layers of protection in what some commentators have described as an accidental and unjustified extension of the doctrine ‘without any adequate reasoning in terms of principle and policy other than a dogmatic application of Salomon itself’.[45] In Briggs v James Hardie & Co Pty Ltd, Rogers AJA notes that adherence to the principle in Salomon in the context of corporate groups tended to ignore commercial reality despite legislative recognition that a group of companies could be treated as a single unit.[46]

In the United States, Blumberg explained that limited liability was established at a time when corporate groups were relatively unheard of and only the ultimate investors were protected by the principle.[47] No recognition or analysis of the very different questions involved in applying principles of limited liability to single corporate entities to protect individual investors and those concerning its application to corporate groups was entered into by the courts, so that the rule’s extension appears to have been ‘an historical accident’, which merits re-examination in its application to corporate groups.[48]

(ii)	Justifications of Limited Liability

Various policy arguments exist in justification of the principle of limited liability as ‘beneficial to the trade and industry of the country and essential to the prosperity of the nation as a whole’.[49] Many of these arguments are based on the behaviour typical of the hypothetical individual investor, taking account of, for example, the positive effects of limited liability on: the incentives for investment, diversification of portfolios and efficient operation of security markets. Often these justifications fail to consider the very different circumstances involved when the hypothetical shareholder is not an individual investor, but the parent company of a wholly owned subsidiary, as JHIL was to Coy and Jsekarb.

In large corporations there is typically a separation of ownership and control so that the many investors in a company cannot be expected to oversee all the business activities undertaken. Limited liability protects shareholders, who cannot be personally involved in monitoring and controlling the type and amount of exposure to risk, from losing all their assets.[50] The parent-subsidiary relationship, however, typically involves only (or principally) one corporate investor who also acts in a managerial role, controlling business and policy direction, determining the company budget and undertaking, or strongly influencing, decision-making processes.[51] The parent company, therefore, is usually aware, informed and in control of the risks undertaken by the subsidiary and in a good position to avoid unnecessary risk. Nonetheless, limited liability does remain a strong source of encouragement in corporate groups for the risk-taking necessary to pursue large-scale, high-risk projects.

As the sole shareholder a parent of a wholly-owned subsidiary cannot claim that limited liability is necessary to encourage wide distribution of shares.[52] Nor, according to Murphy, is it necessary to encourage diversified investment portfolios to reduce investor risk since investors have the possibility of diversification at the holding company level.[53]

Another argument in support of limited liability is the idea that it enhances the ready transferability and uniform pricing of shares. Again, the significance of this argument is diminished where there is a single parent company shareholder since there is no market for shares in the subsidiary.[54]

Limited liability is also said to avoid the costs of litigation and bankruptcy associated with bringing an action against thousands of shareholders to enforce shareholder liability. Again, this argument is equally inapplicable where creditors are able to sue the parent company directly.[55] One area where the principle is equally applicable to corporate groups is in the avoidance of the cost of contracting around liability although Murphy raises the point that this argument assumes that limited liability is the desired negotiated outcome.[56]

While certain commentators advocate the reintroduction of a system of pro rata unlimited liability,[57] the ability of investors to evade a pro rata regime, the problems of extraterritorial enforcement[58] and the opposition which such reforms would face mean a qualified version of the limited liability principle might be a better and more achievable solution. If limited liability is to be retained, however, corporate Australia must be re-educated as to its original purpose and accept that limited liability is a privilege carrying social responsibilities, not an inherent corporate right.[59]

B.	The Boundaries of Limited Liability

The purpose of incorporation and the privilege of limited liability was intended to encourage and promote exploration, manufacturing and trading activities which were to the benefit of the commercial community and the nation, but which it would have been too risky to carry on without some limit being placed on the liability of the participants.[60]

(i)	Abuse of Privilege

The idea that limited liability is a privilege accorded upon incorporation dates back to the 17th century when companies were incorporated by Royal Charter and were seen almost as another arm of the government.[61] Tax incentives and the ease with which companies may now be incorporated has meant that, in the past 30 years, incorporation has proliferated in Australia,[62] while the idea that incorporation is a privilege carrying social responsibilities to the community declined, at least until its recent revival with ‘CSR’ (corporate social responsibility) and triple-bottom-line reporting.

The actions of the James Hardie Group in its attempt to use the corporate form to quarantine its asbestos liabilities has revived the issue of whether corporations abuse the privilege of limited liability, making it an issue of concern not only for the legal and business communities but for the wider community. With Hardie’s board being described as ‘one of the worst identifiable examples of the problems resulting from lack of corporate social responsibility’,[63] directors have good reason to heed the warning that they ignore their social and community responsibilities at their peril since, according to Catherine Walter, ‘the limited liability company, however fundamental to an entrepreneurial economy, is not a natural creature. It is a legislative construct that can be legislated away if we are careless of its benefits and responsibilities.’[64]

While limited liability encourages economically desirable high-risk projects, the reality is that it is a method of shifting risk and when risk results in loss, that loss must inevitably fall somewhere.[65] This raises the question of the extent to which corporations should be permitted to shift risk and who ought to bear that risk: tort victims, the corporate group or society itself?[66]

As seen in the case of James Hardie, limited liability enables corporate groups to structure themselves so the group and its various levels of shareholders are insulated from loss, instead shifting the risk onto involuntary creditors such as tort victims. Corporate groups should not be allowed to manipulate capital boundaries in order to avoid potential legal liability.[67] Commentators regard, and indeed the community has come to perceive, such conduct as an abuse of the corporate form and of the privilege of limited liability since it allows parent companies to avoid liability for injuries from dangerous products merely by forming a subsidiary to produce and distribute them,[68] otherwise known as hiding behind the corporate veil. Courts, on the other hand, while not necessarily approving of the result, have long accepted such conduct as the logical outcome of the strict application of the separate entity principle, to which they rarely make exception.[69]

(ii)	Limitations: Piercing the Corporate Veil

In certain circumstances, courts have been prepared to pierce the corporate veil, holding parent companies liable for the debts of their subsidiaries. These include cases of fraud or improper conduct, such as where a company is established to avoid an existing legal obligation,[70] as well as cases where a relationship of agency is established between a company and its controller.[71] In the context of corporate groups, English courts have been prepared to pierce the corporate veil in cases where a group of related companies was in fact being run as a partnership.[72] However, Australian courts have taken a much stricter approach to the application of separate legal personality in corporate groups, demonstrating a persistent reluctance to pierce the corporate veil be it for the benefit of the parent company or of creditors[73] with a limited exception in negligence cases where it could be inferred that the parent owed a direct duty of care to the plaintiff creditor — better interpreted as a direct result of tort law rather than an exception to corporations law.[74]

The case law on piercing the corporate veil is largely unhelpful in predicting whether it might assist tort creditors of the James Hardie Group since,

there is no common, unifying principle, which underlies the occasional decision of the courts to pierce the corporate veil. Although an ad hoc explanation may be offered by a court which so decides, there is no principled approach to be derived from the authorities.[75]

This, combined with the fact that what little guidance is given by the courts is stated in terms far too broad to be of great use to future litigants, means attempts to pursue actions against a parent company on the basis that the court might decide to pierce the corporate veil would face enormous uncertainty and unpredictable litigation costs. Furthermore, empirical studies in both Australia[76] and the United States[77] have demonstrated that courts pierce the veil less often in torts cases than in contract cases and a piercing decision is more likely when the entity behind the veil is an individual rather than another corporation, despite the above analysis which suggests courts ought to be more willing to pierce the veil in respect of parent companies in corporate groups.

There are, of course, statutory restrictions on limited liability, such as s588V of the Corporations Act, which can expose holding companies to liability for the debts of their subsidiaries if the subsidiary incurs a debt while insolvent or becomes insolvent upon incurring the debt. It is unclear whether a negligence action brought against a company would be considered a debt for the purposes of s588V. Given that liability is usually not characterised as an intentional debt, nor is it of a quantifiable amount, it is arguable that it would not satisfy s588V.[78] Even presuming the contrary, the insolvency provisions would be of little use in the circumstances of substantial long-tail liabilities where many of the victims concerned are future, unascertained tort creditors.[79] Indeed, this problem is particularly severe in the case of asbestos liabilities, where, as a result of long latency periods, many future tort victims have not yet been diagnosed or even contracted the asbestos-related disease.[80]

C.	Reining in Limited Liability
(i)	Solutions Proposed

Parties to the commission put forward various recommendations for law reform measures to deal with the shortfall in funding of the MRCF and the broader issue of limited liability in corporate groups. Solutions proposed ranged from general legislative provisions that would make parent companies liable for the debts of a subsidiary,[81] advocated by the Australian Plaintiff Lawyers Association (APLA), to specific legislation proposed by the Unions and Asbestos Support Groups, effectively piercing Hardie’s corporate veil, but without advocating ‘a radical and across the board change to entrenched legal doctrines of limited liability.’[82] While the MRCF supported APLA’s recommendation, it preferred a more cautious recommendation of limited special-purpose legislation due to fears that the passage of general legislative reform on limited liability would be contentious and therefore likely to suffer delays (or, indeed, ultimate failure).[83]

The MRCF also submitted that principles similar to the US doctrine of undercapitalisation should be adopted in Australian law. This doctrine would hold parent companies liable for the debts of their undercapitalised subsidiaries on the grounds that undercapitalisation is a form of misleading creditors. In the US jurisdictions, the existence of a duty to adequately capitalise the corporation is said to depend on the court’s willingness to recognise a public policy obligation to adequately capitalise the corporation ‘as the “price” for limited liability’.[84]

The most detailed examination of potential reforms to limited liability was undertaken by Counsel Assisting who recommended that the Corporations Act be amended in order to restrict the application of the principle of limited liability in relation to actions for damages for personal injury or death caused by a company which is part of a corporate group.[85] This way only the investors in the ultimate holding company would be protected by limited liability. Counsel Assisting also recommended that the reform ought to be made retrospective so that it would apply to corporations that no longer form part of the group to which the company in question belongs.[86] This type of reform would distinguish between the different positions of tort victims and contract creditors, something Australian corporate law has failed to do thus far.[87] Indeed, Hansmaan and Kraakman argue that shareholder liability should be viewed as a problem of tort law and not as a problem of corporate law.[88]

In contrast, the Law Council of Australia did not recommend reforms to the principle of limited liability and submitted that a response by the Commonwealth to permit ‘lifting the corporate veil’ was inappropriate in the circumstances.[89] Certainly, any indiscriminate reform to the principle of limited liability within corporate groups was rejected by the Corporate and Markets Advisory Committee (CAMAC) that submitted relevant chapters from its 2000 Report on corporate groups to the Inquiry.[90] Among the objections were arguments that such reforms would put Australia out of step with overseas jurisdictions; discourage investment; weaken the central economic foundation of all the other group companies; and increase litigation, all having directly or indirectly detrimental effects on the economy.[91] Also in opposition to such reform were the arguments that the common law can accommodate the interests of individual justice and that the interests and profiles of different group companies often differ significantly.[92] The Committee did, however, endorse specific ‘see through’ liability legislation, which would ‘lift the corporate veil’ and impose direct liability on holding or other group companies where considered ‘necessary in the public interest’.[93]

(ii)	In Support of Reform

To say that restricting limited liability would put Australia out of step with overseas jurisdictions is perhaps an oversimplification. While there may be no blanket exceptions from limited liability in corporate groups, other jurisdictions have significant safeguards in place to mitigate the effects of limited liability on creditors. Examples include the United States and European Union requirements for minimum capital and the US doctrine of ‘successor liability’ as well as the New Zealand and Irish provisions allowing courts the discretion to make contribution and pooling orders in the case of related companies.[94]

In response to the economic arguments that the principle of limited liability stimulates investment and that its reform would commercially weaken the economic foundation of the other group companies, Counsel Assisting considered that they overlooked the economic inefficiencies created by the principle due to poor risk allocation for torts and the special case of involuntary tort victims who have suffered personal injury or death.[95] If reforms were to discourage shareholder investment, this would only affect firms that, under current tort law, impose net costs on society.[96] Public sentiment would seem to suggest that the community is not prepared to see innocent tort victims go uncompensated on the basis that their suffering will somehow eventually be recompensed by the ultimate trickling down of society-wide economic benefits from corporate success.

In addition, Counsel Assisting argued that where an entire corporate group was forced into liquidation because its subsidiaries caused widespread injury, the negative effects would be attributable to the tortious injuries caused rather than the liquidation. As for the negative effects on the economy, these would presumably be minimised by the safe and profitable businesses of the group continuing under new ownership.[97] Furthermore, it is difficult to see how the protection and survival of a company which has profited from an activity causing widespread injury to others can be justified on an economic basis considering that a substantial proportion of the economic burden of those injuries is likely to ultimately fall on the taxpayer.[98]

Finally, when the source of the objections to the reining in of limited liability is made up of major corporations, commercial lawyers, and the Australian Institute of Company Directors, it is hardly surprising that they oppose change to the existing principles of tort liability for parent companies in corporate groups[99] especially where the common law’s so-called accommodation of the interests of individual justice has tended to favour corporations over their creditors, piercing the corporate veil to confer a benefit more frequently on the company than on its creditors.[100]

4.	Conclusion

While, to some, wholesale reform to the application of the principle of limited liability to corporate groups may be desirable, in light of the detailed arguments against this action contained in the CAMAC report and other difficulties highlighted above, any attempt at legislative reform in this area would be likely to be extremely difficult and subject to a great deal of opposition.[101] However, the problem faced by current and unascertained future creditors of the MRCF is of a far narrower scope. It requires neither the abolition of the principle of limited liability generally nor its abolition in relation to tort liability. Rather, the problem relates to the narrower category of tortious claims where the damage suffered is death or physical injury, circumstances which could arguably fall under the ‘public interest’ exception outlined by CAMAC.[102]

It is surely time to reconsider the principle in Salomon and recognise that, unlike the trade creditors in that case who ‘only had themselves to blame’,[103] tort victims have no choice in the selection of the corporation that causes them harm.[104] With public disapproval likely to weigh heavily in cases where parent companies fail to meet the obligations of an insolvent subsidiary to claimants having suffered death or injury, there is good reason to reform the Corporations Act so as to restrict the application of the limited liability principle to members of the ultimate holding company in these specific circumstances.[105]

In answer to Lord Chancellor Thurlow’s question, ‘did you ever expect a corporation to have a conscience, when it has no soul to be damned and no body to be kicked?’,[106] society today may well respond with an indignant, ‘yes’. There is no doubt that in exchange for the great privilege conferred upon corporate groups, which allows them to structure themselves in such a way that they may cause death and injury while avoiding liability, we should demand nothing less than socially responsible behaviour, failing which, such privilege ought to be legislated away.

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[*] Final Year student (BA/LLB) at the University of Sydney. The author wishes to thank Jennifer Hill and Andrew Tuch for their valuable comments on the draft of this article. All opinions, and any errors, remain my own.

[1] James Hardie Industries Limited, Media Release: James Hardie Resolves its Asbestos Liability Favourably for Claimants and Shareholders (16 February 2001).

[1] Sir Llew Edwards, Chairman MRCF, Media Release: Financial Statements of MRCF (29 October 2003).

[2] David Jackson QC, Report of the Special Commission of Inquiry into the Medical Research and Compensation Foundation (2004) (hereafter Report).

[3] Contained in Letters Patent issued to David Jackson QC on 27 Feb 2004 under the Special Commission of Inquiry Act 1983.

[4] Catherine Walter, ‘Directors Can Shape Regulation or Get Hemmed In’ Australian Financial Review (28 Sept 2004) at 63.

[5] Report at 12.

[6] John Sheahan SC, Senior Counsel Assisting, ‘Submissions in reply dated 26 July 2004’, Special Commission of Inquiry into the Medical Research and Compensation Fund, s5 at para 10.

[7] Id at paras 41–67.

[8] Montague Murray, Commission on Compensation of Industrial Diseases (1907).

[9] Report at 17; Peta Spender, ‘Blue Asbestos and Golden Eggs: Evaluating Bankruptcy and Class Actions as Just Responses to Mass Tort Liability’ (2003) 25 SLR 223 at 235.

[10] Report, above n3 at 17–18.

[11] Report, above n3 at 8.

[12] Spender, above n10 at 235; Anne Lampe, ‘Actuary May Face Action over Liability Estimate that Grew’ Sydney Morning Herald (29 July 2004) at 4.

[13] Report, above n3 at 18.

[14] Report, above n3 at 14 and 159–162.

[15] Report, above n3 at 25.

[16] Report, above n3 at 28.

[17] James Hardie Media Release, above n1.

[18] Report, above n3 at 9.

[19] Report, above n3 at 30.

[20] Ibid.

[21] Report, above n3 at 31 and 7.

[22] Report, above n3 at 33.

[23] See diagram of new structure extracted from Report in Annexure I: The James Hardie Companies: Group Structure Diagrams at 110–111.

[24] Report, above n3 at 11.

[25] Report, above n3 at 34–35.

[26] Report, above n3 at 36.

[27] See, for example, Amaca Pty Limited and Amaba Pty Limited; Unions and Asbestos Support Groups; Counsel Assisting. Submission to the Inquiry of the Medical Research Compensation Foundation, MRCF (Investments) Pty Limited.

[28] Report, above n3 at 100, 111 and 123.

[29] Report, above n3 at 553.

[30] Report, above n3 at 553.

[31] Report, above n3 at 554. See Norel Rosner, The Requirements for Execution of Foreign Money Judgments in the Netherlands Absent of Treaty, 2 Jan 2003: <http://www.llrx.com/features/norel.htm> (25 October 2004).

[32] Report, above n3 at 7.

[33] Annabel Hepworth, ‘Lawyers Attack Hardie’s Proposal on Asbestos’ Australian Financial Review (16 August 2004) at 3.

[34] David Jackson QC, cited in Marcus Priest & Fiona Buffini, ‘Carr Rejects Asbestos Compo Scheme’ Australian Financial Review (22 September 2004) at 6.

[35] Bob Debus, NSW Attorney–General, cited in Chris Merritt & Fiona Buffini, ‘States Push for Tougher Liability Laws’ Australian Financial Review (30 July 2004) at 1, 8.

[36] Rob Hulls, Attorney–General Victoria, Id at 8.

[37] Catherine Walter, ‘Directors Can Shape Regulation or Get Hemmed In’ Australian Financial Review (28 September 2004) at 63. Walter suggests that the question of the preservation of limited liability is becoming the domain not only of judges and legislators but of the community.

[38] Issue that parties to the Commission were invited to consider: Law Council of Australia, ‘Submissions in reply dated 14 July 2004’, Special Commission of Inquiry into the Medical Research and Compensation Fund at 4.

[39] [1897] AC 22 (hereafter Salomon).

[40] While corporate groups have existed in England since 1867: In re Barned’s Banking Company [1867] Ch 105 and in the United States since 1889: Act of April 4, 1888, Ch 269, § 1, 1888 N J Laws 385–386, even by 1977, corporate groups were seen as ‘a relatively modern concept’: The Albazero [1977] AC 744 at 807 (Roskill LJ); see also Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1 at [6] (Mason J).

[41] Salomon, above n40 at 51 (MacNaghten LJ).

[42] Id at 53.

[43] Robert Thompson, ‘Piercing the Corporate Veil: An Empirical Study’ (1990–1991) 76 Cornell LR 1036 at 1039–1040.

[44] See Industrial Equity Limited v Blackburn [1977] HCA 59; (1977) 137 CLR 567.

[45] John Farrar, ‘Frankenstein Incorporated or Fools’ Parliament? Revisiting the Concept of the Corporation in Corporate Governance’ (1998) 10 Bond LR 142 at 147. See also Phillip Blumberg, ‘Limited Liability and Corporate Groups’ (1986) J Corp L 573 at 623–626.

[46] (1989) 16 NSWLR 549 at 576.

[47] Blumberg, above n46 at 605.

[48] Id at 605, 610–611.

[49] Lionel Cohen, Report of the Committee on Company Law Amendment (1945).

[50] Damien Murphy, ‘Holding Company Liability for Debts of its Subsidiaries: Corporate Governance Implications’ (1998) 10 Bond LR 241 at 250.

[51] Blumberg, above n46 at 623.

[52] Id at 624.

[53] Murphy, above n51 at 252.

[54] Id at 251; Blumberg, above n46 at 624.

[55] Blumberg, above n46 at 624; Murphy, above n51 at 252.

[56] Murphy, above n51 at 252.

[57] Henry Hansmaan & Reinier Kraakman, ‘Toward Unlimited Shareholder Liability for Corporate Torts’ (1991) 100 Yale LJ 1879.

[58] Henry Hansmaan & Reinier Kraakman, ‘Do the Capital Markets Compel Limited Liability? A Response to Professor Grundfest’ (1992) 102 Yale LJ 427 at 427. See also Joseph Grundfest, ‘The Limited Future of Unlimited Liability: A Capital Markets Perspective’ (1992) 102 Yale LJ 387.

[59] Farrar, above n46 at 161.

[60] Andrew Rogers, ‘Reforming the Law Relating to Limited Liability’ (1993) 3 AJCL 136 at 137.

[61] Paul Redmond, Companies and Securities Law (3rd ed, 2000) at 37.

[62] Rogers, above n61 at 137.

[63] John Durie, ‘Hardie: A Stench Until Heads Roll’ Australian Financial Review (22 September 2004) at 64.

[64] Walter, above n38.

[65] Murphy, above n51 at 250–251.

[66] Jennifer Hill cited in Fiona Buffini, ‘Law Inadequate to Protect Victims of Negligence’ Australian Financial Review (31 July) at 21.

[67] Hugh Collins, ‘Ascription of Legal Responsibility to Groups in Complex Patterns of Economic Integration’ (1990) 53 Mod LR 731 at 738.

[68] Ann Heitland, ‘Survival of Products Liability Claims in Asset Acquisitions’ (1979) 34 Bus Law 489 at 498. See also Farrar, above n46; Blumberg, above n46.

[69] See for example, Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549; Craig v Lake Asbestos of Quebec Ltd [1988] USCA3 493; 843 F (2d) 145 3rd Cir (1988) at 149. In Adams v Cape Industries Plc [1990] Ch 433, the court found that it was a legitimate use of the corporate form to use a subsidiary to insulate the remainder of the group from tort liability at 537.

[70] Gilford Motor Co Ltd v Horne [1933] 1 Ch 935; Creasy v Breachwood Motors Ltd (1992) 10 ACLC 3,052; Jones v Lipman [1962] 1 WLR 832.

[71] Smith Stone and Knight Ltd v Birmingham Corp (1939) 161 LT 371; Hotel Terrigal Pty Ltd v Latec Investments (No. 2) [1969] 1 NSWLR 676.

[72] DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 1 WLR 852. Compare Woolfson v Strathclyde Regional Council [1978] SLT 159.

[73] Industrial Equity v Blackburn [1977] HCA 59; (1977) 137 CLR 567; Qintex Australia Finance Ltd v Schroders Australia Ltd (1990) 3 ACSR 267; Briggs v James Hardie, above n70.

[74] CSR Ltd v Wren [1998] Aust Torts Rep 64 at 806.

[75] Briggs v James Hardie, above n70 at 567 (Rogers AJA).

[76] David Noakes & Ian Ramsay, ‘Piercing the Corporate Veil in Australia’ (2001) 19 C&SLJ 250 at 263, 265.

[77] Thompson, above n44 at 1038. No cases held members of a public company liable for the company’s debts.

[78] For a definition of what amounts to a debt, see Ogden’s Ltd v Weinberg (1906) 95 LT 567 (Lord Davey), followed in Hamilton v Wright (1980) 5 ACLR 391 at 394; Hussein v Good (1990) 1 ACSR 710 at 718; Hawkins v Bank of China (1992) 7 ACSR 349 at 356—357.

[79] Report, above n3 at 571–72. Long-tail liabilities are those liabilities which arise many years after the events or transactions which give rise to them.

[80] Law Council of Australia, above n39 at 5, 3.

[81] Australian Plaintiff Lawyers Association, ‘Submissions in chief dated April 2004’, Special Commission of Inquiry into the MRCF at 18–19.

[82] Unions and Asbestos Support Groups, ‘Submissions in chief dated 14 July 2004’, Special Commission of Inquiry into the MRCF at 137.

[83] MRCF, ‘Submissions in chief dated 14 July’ Special Commission of Inquiry into the MRCF at 695.

[84] Henry Ballantine, Corporations (Rev ed, 1946) at 302—03, quoted in Jonathan Landers, ‘A Unified Approach to Parent, Subsidiary and Affiliate Questions in Bankruptcy’ (1976) 42 UChiLR 589 at 593. See also Minton v Cavaney 56 C 2d 576, 364 P 2d 473, 15 Cal Rptr 641 (1961). For US cases which have discussed the duty to capitalise the corporation adequately, see Carlesino v Schwebel 197 P 2d 167 at 174 (1984); Costello v Fazio, [1958] USCA9 209; 256 F 2d 903 (9th Cir 1958); International Tel & Tel Corp v Holton, [1957] USCA4 209; 247 F 2d 178 4th Cir (1957); Automotriz del Golfo v Resnick 306 P 2d 6 (1957); In re Lumber Inc, 124 F Supp 302 (D Ore 1954); Re First National Bank of Arthur, Illinois 23 F Supp 255 at 257 (1938).

[85] John Sheahan SC, Senior Counsel Assisting, ‘Submissions in Chief dated 5 July 2004’, Commission of Inquiry into the MRCF, s5, para 27.

[86] Id at para 28.

[87] Hansmann & Kraakman, above n58 at 1925.

[88] Id at 1881.

[89] Law Council of Australia, ‘Submissions in reply dated 27 July 2004’, Special Commission of Inquiry into the MRCF at 2.

[90] Companies & Securities Advisory Committee, Final Report: Corporate Groups (2000).

[91] Id at 43–44.

[92] Id at 44.

[93] Id at 120.

[94] Second European Union Directive 77/91/EEC; 20 OJL 26 31 January 1977; See John Farrar, above n46 at 148; John Farrar, ‘Legal Issues Involving Corporate Groups’ (1998) 16 Bond LR 184 at 185.

[95] Sheahan, above n86 at para 21.

[96] Hansmaan & Kraakman, above n58 at 1933.

[97] Id at 421–422.

[98] Id at 422.

[99] CASAC Report, above n91 at 122.

[100] These categories of participants were the authors of the submissions considered by CAMAC in its Final Report. Noakes & Ramsay, above n77 at 266–267.

[101] MRCF, above n84 at 708.

[102] CASAC Report, above n91 at 120.

[103] Salomon, above n40 at 53 (MacNaghten LJ).

[104] Briggs v James Hardie, above n70 at 863.

[105] Report, above n3 at 572–573.

[106] Lord Chancellor Thurlow (1731–1806) cited in John Poynder, Literary Extracts (1844) Vol 1 at 268.