Your Knowledge June 2009

Ignorance is not Bliss

In the wake of the Supreme Court decision in the case of ASIC v Macdonald, you, along with many company directors may be doing a quick check of your recent actions.

While the main concerns to come out of the case were regarding announcements made to the market, the underlying message is that the role of company directors is not passive. It is your duty, as a company director, to ensure you are fully informed about any decisions the board makes. Not remembering seeing the paper or staff not providing you with information is not a valid excuse.
ASIC v Macdonald brings to light just what obligations executives have when disclosing information to the board, or to market, and what obligations non-executive directors have when making strategic decisions.

The James Hardie case arose from a restructure within the James Hardie group of companies that saw James Hardie Industries Limited (JHIL was then an ASX listed company) become a subsidiary of James Hardie Industries NV, a Netherlands company.  JHIL was responsible for the Medical Research and Compensation Foundation, the fund established to manage the asbestos related personal injury claims faced by James Hardie as a result of the asbestos related products previously manufactured by the company.  As one legal firm put it, the restructure “effectively severed” the MRCF from the remainder of the James Hardie Group.

On 16 February 2001, James Hardie released a final ASX announcement stating that a foundation had been formed to compensate sufferers of asbestos related diseases (who had claims against two former James Hardie subsidiaries) and to fund medical research aimed at finding cures for these diseases.  Further, the statement claimed that “The Foundation has sufficient funds to meet all legitimate compensation claims anticipated...”  and quoted the Managing Director, Peter MacDonald as saying “the establishment of a fully-funded Foundation provided certainty for both claimants and shareholders.”  Further, the statement added that James Hardie had sought the expert advice of a number of firms including PriceWaterhouseCoopers, Access Economics and the actuarial firm Trowbridge, adding “with this advice and supplementing the company’s long experience in the area of asbestos, the directors of JHIL determined the level of funding required by the Foundation.”

The minutes from the board meeting which preceded the announcement noted that the directors had approved the draft announcement.

ASIC launched action against seven former directors and three former company officers in February 2007 claiming, amongst other things that: “there were no reasonable grounds” for stating that there would be sufficient funds to meet all legitimate present and future asbestos claims brought against the former subsidiaries; and “JHIL had not received expert advice” from PwC or Access Economics to support the assertion that the amount of funds available in MRCF was enough to meet all legitimate present and future asbestos claims.

The Supreme Court upheld many of ASIC's claims. In particular, the Court found the Mr Macdonald had breached his duty of care by not telling the board that the draft market announcement was “expressed in too emphatic terms concerning the adequacy of the funding.”

Mr MacDonald, Mr Morley (the Chief Financial Officer), and Mr Shafron (the Group Legal Council), were also found to have breached their duties by failing to advise the Board that “the review of the Cashflow Model by PwC and Access Economics was limited to reporting on logical soundness and technical correctness and they had been specifically instructed not to consider other key assumptions adopted by the Cashflow model.”

Non-executive directors will be interested to note that the non-executive directors of James Hardie were found to have also breached their care of duty by approving the draft ASX statement. Five of the non-executive directors challenged the accuracy of the Board minutes which stated that the announcement had been approved. However the judge did not accept the “chorus of non-recollection.” And despite the fact that two of the non-executive directors live in the USA, the Court found they had breached their duty of care by not asking to view the announcement or not abstaining from the vote.

The Court also rejected a board member's argument that as he was not a public relations expert, he was entitled to leave the decisions regarding public announcements to people in a better position to make those decisions. Your duties as a director are not limited to your area of expertise, and in this case the judge stated that once  management brought the draft ASX statement to the Board, none of them was entitled to “abdicate responsibility by delegating his or her duty to a fellow director."

So, be warned those of you who have not fully participated in a board meeting, not read the required information before a meeting or have signed documents that you have not thoroughly read. Ignorance is not an excuse.

June tax tips

With the end of financial year now just around the corner, here are few tips for making the most of your tax deductions and increasing your tax savings.

Increase your deductions

  • If you are planning on claiming the tax break for small businesses, you will need to have the asset installed and ready for use by 30 June
  • If your cashflow is in a good enough position, make payments by 30 June for repairs and maintenance, office supplies, subscriptions or donations. That way you can claim the tax deduction in the current year. There are special rules for small businesses that give them access to higher immediate deductions for prepayments and depreciable assets, so ask us for advice if you think you may be eligible.
  • If you want to claim your employee super contributions for the June quarter in the current year, pay them by 30 June.
  • If your company is completely committed to paying their Director’s fees and bonuses, you can claim these in the current year, even if they have not been paid.

Write off anything you don’t need

  • Write off bad debts. Any amount outstanding that you’ve made every effort to collect on can be written off in your debtors ledger.
  • Write off any inventory that is damaged or obsolete.
  • Write off plant and equipment which is obsolete but still on your depreciation register in the asset register.

Manage your administration

  • Balance any capital gains made during the year by realising capital loss.
  • If you are operating a discretionary trust, the trustee should resolve how the income of the trust will be distributed and minute the decision.
  • Where management fees are being charged between related entities, make sure that the charges have been raised by June 30.

Quote of the month

“Well done is better than well said.”
Benjamin Franklin