Exhibit 99.1

21 September 2004

Dear Sir,

Request to Lift Trading Halt

Attached is the NSW Government Special Commission of Inquiry report into the Medical Research and Compensation Foundation (the Report).

The company is informed that the Report will also be accessible from The Cabinet Office’s website (www.cabinet.nsw.gov.au) and that a link will be provided on the NSW Government web page (www.nsw.gov.au).

As the Report is now publicly available, we request the trading halt on all securities of James Hardie to be lifted immediately.

Yours faithfully

/s/ W. (Pim) Vlot

James Hardie Industries NV
By: W. (Pim) Vlot
As: Company Secretary

REPORT

OF THE

SPECIAL COMMISSION OF INQUIRY

INTO THE

MEDICAL RESEARCH AND

COMPENSATION FOUNDATION

D.F. JACKSON Q.C.

September 2004

CONTENTS

VOLUME 1

i

ii

iii

iv

v

vi

vii

viii

ix

Annexures

x

PREFACE

     The Report which follows is in response to Letters Patent issued to me on 12 February 2004 under the Special Commission of Inquiry Act 1983.

     The subject matter of the Inquiry attracted a great deal of public attention. Many members of the public attended. Much of the evidence was reported on by media representatives who followed the course of the Inquiry. Many of the issues were the subject of public discussion.

     The range of matters involved was such that it was necessary to hear oral evidence for many days and to receive voluminous quantities of documentary evidence, and oral and written submissions.

     It would not have been possible to conduct the Inquiry effectively without the assistance of others. I have been fortunate to have as Senior Counsel Assisting Mr John Sheahan SC, whose intelligent, rigorous and fearless dedication to the task has been of the highest order. I thank too his junior counsel, initially Robert Kelly and later in addition Dominique Hogan-Doran and Matthew Darke, and the Solicitor Assisting the Inquiry, Mimi Barbaro, for the skilled and dedicated work they performed, often for long hours.

     The Inquiry proceeded at a rapid pace. To do that effectively required an administrative head of considerable skill and expertise. I was fortunate to have Margaret Lennan to perform that task. She was able to ensure that the Inquiry proceeded expeditiously and economically. I thank her and her deputy Anthony Tarleton. Mr Michael Armitage of the Premier’s Department was of great assistance also in ensuring that arrangements proceeded smoothly.

     Finally I would like to thank my secretary Karen Bassant and my assistant Sally Sanders for their cheerful assistance.

xi

Abbreviations and Acronyms

xii

xiii

Relevant Persons Mentioned in the Evidence

xiv

xv

xvi

xvii

xviii

xvix

xvx

xvxi

xvxii

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INTRODUCTION

A.      Appointment and Terms of Reference

1.      By Letters Patent issued on 27 February 2004¹ by Her Excellency the Governor in Council under s 4(1) of the Special Commissions of Inquiry Act 1983, I was appointed to inquire into and report on the following matters:

“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 reconstructions 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.”

2.      The Letters Patent required me to report by 30 June 2004. The number of issues to which the Terms of Reference gave rise, together with the volume of evidence received, made it necessary to seek an extension of the time within which to report, and by further Letters Patent issued on 30 June 2004² the time for reporting was extended until 21 September 2004.

1		The Letters Patent are contained in Annexure A.
2		Also contained in Annexure A.

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B.      Conduct of the Inquiry

3.      The steps taken in conducting the Inquiry are set out in Annexure B. The professional and administrative staff who provided so much assistance in the conduct of the Inquiry are identified in Annexure C. My thanks to them are recorded in the Preface.

C.      Conclusions on Terms of Reference

4.      Chapter 1 contains conclusions on Terms of Reference 1 and 3 and my views on the matters most directly answering Terms of Reference 2. It is difficult to express views on Terms of Reference 4 in a short form, and it is necessary to refer readers to Part 5 of the Report in that regard.

5.      The body of the Report, in addition to the matters mentioned in Chapter 1, deals (and sometimes declines to deal) with a large number of matters sought to be raised by the persons and bodies appearing at the Inquiry.

D.      Arrangement of the Report

6.      The Report has five Parts. Part 1 contains Chapter 1 which I have already described, and Chapter 2 which sets out a short version of the asbestos activities of members of the James Hardie Group, and the events which led to the establishment of the Inquiry. Part 2 deals with Term of Reference 1, the financial position of the former James Hardie companies which are now subsidiaries of the Medical Research and Compensation Foundation. Part 3 deals with Term of Reference 3. I deal with Term of Reference 3 before Term of Reference 2 because the events to which Term of Reference 3 relates are earlier in time than those with which Term of Reference 2 is concerned.

7.      Parts 4 and 5 deal with Terms of Reference 2 and 4 respectively.

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E.      Publication of the Report

8.      By s 10(3) of the Special Commissions of Inquiry Act, a Commissioner may make such recommendations relating to the publication of the whole or any part of the Report as the Commissioner thinks proper. I recommend that the whole of the Report be published.

9.      I take that view because:

(a)		The Inquiry has attracted great, and legitimate, public interest.
(b)		The reputations of a number of persons have been put in issue. It is desirable that the allegations be dealt with.
(c)		The future of the Foundation is of importance to many people.
(d)		The position of the James Hardie companies needs to be clarified.

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Part 1 – Introductory Matters

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Chapter 1 - Principal Conclusions

A.

Term 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.”

1.1 Although referring to the financial position of the Medical Research and Compensation Foundation (which I shall call “the Foundation”), it is not in doubt that the Terms of Reference are directed to the financial position of the two former James Hardie companies now controlled by the Foundation, those companies now being named Amaca Pty Limited (“Amaca”) and Amaba Pty Limited (“Amaba”).

1.2 The net assets of Amaca and Amaba total approximately $179.2m as at 30 June 2004. Against that, however, must be set the amounts which are the present provision for meeting currently notified asbestos-related claims, some $63.01m. Against that also should be put the estimate of likely asbestos-related claims in future years, a sum the net present value of which is about $1.5 billion. I do not think it will be less. If a lump sum were to be set aside to make more certain that those liabilities could be paid, it would be much higher.

1.3 Amaca and Amaba have entitlements to recover from insurers some amounts in respect of the present and future claims. I estimate that the amounts recoverable have a net present value of about $160m. The possible insurance recoveries have a somewhat theoretical aspect because most of the amounts involved would not be payable before, as I mention in the next paragraph, the Foundation’s funds were exhausted.

1.4 The Foundation’s funds are being quickly used up in the payment of current claims against Amaca and Amaba. In my opinion, they will be exhausted in the first half of 2007 and it has no prospect of meeting the liabilities of Amaca and Amaba in either the medium or the long term.

1.5 Submissions have been made that the conduct of members of the James Hardie Group, their officers, their actuaries, and various firms of solicitors, may give rise to causes of action which might augment the funds of Amaca, Amaba or the

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Foundation. I deal with these contentions in various Chapters in Parts 3 and 4. I regard some of these causes of action as speculative, others perhaps not, but I regard them all as unlikely to result in any significant increase in the funds of Amaca, Amaba or the Foundation.

B.

Term of Reference 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.”

1.6 Amaca (formerly James Hardie & Coy Pty Ltd) and Amaba (formerly Jsekarb Pty Ltd) had been subsidiaries of James Hardie Industries Limited (“JHIL”). They ceased to be so, and were separated from the James Hardie Group, on 15 February 2001. Amaca and Amaba had previously been manufacturers of products made from asbestos. They have had, have, and will acquire, legal liabilities to many persons affected by asbestos and asbestos products. My estimate of the present value of such liabilities, as I have said, is that they will be not less than $1.5 billion. The James Hardie Group had moved its senior management to the United States. That country was seen as the focus of the Group’s business for the future. The principal purpose of separation was to enable the Group thereafter to obtain capital or loan funding or to use its own share capital for future acquisitions without the stigma of possible future asbestos liabilities.

1.7 Amaca and Amaba were acquired by the Foundation for no monetary consideration. Their net assets amounted to about $214m. JHIL agreed to provide additional sums, over time, in return for the execution of a Deed of Covenant and Indemnity by Amaca and Amaba so that the stated present value of the total assets acquired by the Foundation was $293m. The public announcements made by JHIL at the time of separation emphasised that JHIL had provided for a Foundation which had sufficient funds to satisfy all future legitimate asbestos-related claims.

1.8 There was no legal obligation for JHIL to provide greater funding to the Foundation, but it was aware – indeed, very aware because it had made extensive efforts to identify and target those who might be “stakeholders”, or were regarded as having influence with “stakeholders” – that if it were perceived as not having made adequate provision for the future asbestos liabilities of its former subsidiaries there

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would be a wave of adverse public opinion which might well result in action being taken by the Commonwealth or State governments (on whom much of the cost of such asbestos victims would be thrown) to legislate to make other companies in the Group liable in addition to Amaca or Amaba.

1.9 The dominant purpose of supplementing the assets available to the Foundation from $214m to $293m was to enable the Group to say that the assets available to the Foundation exceeded the “Best Estimate” contained in an actuarial report of Amaca/Amaba’s asbestos liabilities as at 13 February 2001. That estimate was that the liabilities had a net present value of $286m.

1.10 The actuarial report had been produced by Trowbridge Deloitte Limited (“Trowbridge”). Trowbridge’s report (“the February 2001 Trowbridge Report”) in my opinion provided no satisfactory basis for an assertion that the Foundation would have sufficient funds to meet all future claims. Amongst other reasons the Report was not directed to the issue of separation. The Report, it was also known, did not take into account the most recent James Hardie asbestos litigation figures, which showed a significant increase in outgoings for asbestos claims. The Trowbridge assessments were also subject to many qualifications not stated in that Report.

1.11 The assertion that the Foundation would have sufficient funding to meet all legitimate future asbestos claims, based on Trowbridge’s Best Estimate was also based on a financial model prepared by JHIL, and described as the Twelfth Cash Flow Model. It reflected the fact that the assets of Amaca and Amaba at separation were not cash or its equivalent. They consisted of real estate the subject of leases to James Hardie operating companies, loans to James Hardie companies repayable over time at 8.13 per cent per annum, and the additional amount made available in return for giving the Deed of Covenant and Indemnity. That amount was itself payable over time. To demonstrate that the funds being provided were sufficient a constant earnings rate of 11.7 per cent per annum for 50 years was adopted on that part of the Foundation’s funds available for investment from time to time. Such a rate was in my opinion selected simply to achieve the result that the model showed significant surpluses of funds over its life. Warnings from independent experts as to the assumptions in the model were not followed up.

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1.12 The James Hardie Group management, in my opinion, had taken the view that the resolution of the problems occasioned by the Group’s asbestos associations had gone on for too long, that a trust of the nature established in connection with the Foundation was a solution, that the Board of JHIL should be urged to adopt that course, and to do so quickly. A reason for urgency was thought to be the impending introduction in Australia of an Accounting Standard which would have required JHIL to state in its group financial statements and the net present value of all likely future asbestos liabilities. This would involve attributing to them a far higher figure than it had been thought necessary to indicate in such documents in previous years.

1.13 At first the management of JHIL had endeavoured to persuade the Board of JHIL, at its January 2001 meeting, to establish the Foundation with only the net assets of Amaca and Amaba, the $214m. The Board had declined to do so, asking management to see if further funds could be found, so that the Trowbridge Best Estimate could be met.

1.14 No doubt management and the Board were entitled to seek to achieve, if they could, separation of JHIL from Amaca and Amaba and thus from the shadow thought to be cast from those companies’ emerging asbestos liabilities. But I find it difficult to accept that management could really have believed that the funds of the Foundation would have been sufficient to enable it to pay all future legitimate asbestos-related claims against Amaca and Amaba. Yet that was the message that JHIL propounded on 16 February 2001, the day after separation, to the Australian Stock Exchange (“ASX”), to government, the media, its shareholders, unions, plaintiffs’ solicitors, asbestos victims and anybody it felt the need to convince.

1.15 I set out the terms of the Media Release sent to the ASX in Annexure R. In my opinion, its terms conveyed that the Foundation had been provided with sufficient funds to meet all legitimate future asbestos-related claims, and that accordingly there was “certainty” for persons who might suffer from such diseases and for JHIL shareholders. They also conveyed the impression that JHIL’s determination of the amount of funding needed for the Foundation had been checked by independent experts. In each of these respects they were seriously misleading.

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1.16 Shortly after the establishment of the Foundation, steps were taken which would have the effect of distancing Amaca and Amaba further from the operating arms of the James Hardie Group.

1.17 In October 2001 a Scheme of Arrangement was approved whereby the holding company of the Group became James Hardie Industries NV (“JHI NV”), a Dutch company. Shareholders in JHIL became shareholders in JHI NV; the shares in JHIL were held by JHI NV. Those shares were principally partly paid shares. Under their terms JHIL could call on JHI NV for up to about $1.9 billion if needed to maintain solvency.

1.18 It became apparent to the Foundation quite rapidly that the level of outgoings of Amaca and Amaba on asbestos claims was far beyond that represented at the time of its establishment, and that the Foundation’s funds would be exhausted well before ten years of its life. Attempts to obtain further funding from the James Hardie Group were rebuffed, except that first $10m, then $18m, was proposed to be provided if the Foundation acquired JHIL, in which case the partly paid shares would be cancelled.

1.19 The Foundation would not agree to this course and in March 2003 JHI NV and JHIL (by then known as ABN 60 Pty Limited (“ABN 60”)) agreed to cancel the partly paid shares. A new Foundation (“the ABN 60 Foundation”) was then made the sole shareholder in ABN 60. The only legal connection between ABN 60 and JHI NV is now a Deed of Covenant, Indemnity and Access. The net assets of ABN 60 at the time of separation of ABN 60 from the Group were about $20m.

1.20 The preceding paragraphs dealing with this Term of Reference have dealt with its first part, “the circumstances in which MRCF was separated from the James Hardie Group”. The Term of Reference also asks whether the circumstances of separation “may have resulted in or contributed to a possible insufficiency of assets to meet its future asbestos-related liabilities”.

1.21 As I have mentioned there was no legal obligation on JHIL to provide Amaca or Amaba, on separation, with any funds in addition to the assets of those companies. Amaca and Amaba were not stripped of assets; they retained them. Indeed they obtained more than those assets by reason of the additional periodical

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payments. It is thus not possible, in money terms, to say that separation directly resulted in or contributed to a possible insufficiency of assets to meet the future asbestos-related liabilities of Amaca and Amaba. But in practical terms separation was, in my opinion, likely to have an effect of that kind. If separation had not taken place in February 2001 it seems likely that, for the indefinite future, the asbestos liabilities would have been treated, as they had been for years, as one of the annual expenses of the Group. It may well have been that consideration would be given to different schemes for dealing with the emerging asbestos liabilities, but whatever was done would have been likely to involve significantly greater funding from the Group.

1.22 I have mentioned that after the establishment of the Foundation, the James Hardie Group was adamant that no further substantial funds would be made available to the Foundation, and that it had taken all proper steps at the establishment of the Foundation. In July 2004, after the Inquiry had been in progress for some months, JHI NV accepted that the Foundation had been underfunded, and to a very significant degree. In my opinion it was correct in accepting that that was the position. The evidence demonstrated that the February 2001 estimates of future liabilities were far too low and that the results of the financial modelling were wildly optimistic.

1.23 The James Hardie Group has also indicated, subject to various matters dealt with in discussing Term of Reference 4 (including that it is under no legal obligation to do so), that it is prepared to fund the future asbestos liabilities of Amaca, Amaba and JHIL. In my opinion it is right that it should do so. There may have been no legal obligation on JHIL to fund the liabilities of Amaca and Amaba simply because they were its subsidiaries, but if it were thought, in the interests of JHIL, for it to be separated from those subsidiaries because of the shadow of asbestos liabilities they brought with them, it is hard to see why it would not have been in the interests of JHIL to provide the funding which was necessary to enable that to be done effectively. To do it effectively meant to do it in a way which would not result in the issue rearing its head again, as has happened here, with very adverse results to the public standing of James Hardie. If the interests of JHIL’s shareholders were thought to lie in cutting loose the asbestos liabilities, what seems to have been

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overlooked,³ is what Mr Peter Shafron (the Group’s Chief General Counsel) had said to the Board some twelve months before in his paper “Asbestos”:⁴

“The overall US experience on reorganisations, as described by JH’s US attorneys, has some admittedly fairly obvious lessons for us:

In sum, the US experience has shown thus far that a carefully planned reorganisation that makes fair provision for the asbestos claims has some chance of succeeding. But any attempt at reorganisation that does not leave significant assets for the asbestos claims will, at a minimum, spawn lengthy and costly litigation with the plaintiffs’ bar, and may ultimately be unsuccessful.”

1.24 I add two observations.

1.25 The first is that I can understand how, the manufacture of asbestos products having ceased in the 1980s (finally in 1987), asbestos liabilities came to be described within the James Hardie Group as “legacy issues” or part of the “rump”. That mode of thought, however, tends to obscure the true legal situation. The negligence of the James Hardie companies occurred in the past, but the liabilities flowing from that negligence only arise day by day, now and in the future, as the diseases are acquired or manifest themselves. The exposure to asbestos may not even yet have occurred. The position in February 2001 was, as it remains, that members of the public will contract asbestos-related diseases over many years because of the negligence of Amaca and Amaba. The notion that the holding company would make the cheapest provision thought “marketable” in respect of those liabilities so that it could go off to pursue its other more lucrative interests insulated from those liabilities is singularly unattractive. Why should the victims and the public bear the cost not provided for?

1.26 The second observation concerns the quite misleading statements made on behalf of JHIL at the time of separation, and the culture of denial adopted as the shortcomings in the Foundation’s funding began to emerge. For nearly thirty years in this country we have had standards for business communications. Such communications are not to be misleading or deceptive. Those standards appear in the Trade Practices Act 1974 (Cth) and in its State and territorial equivalents, in the Corporations Laws and in the Corporations Act 2001. They have been maintained by governments of all political colours. In my opinion they were not here observed.

³ Including by Mr Shafron.

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1.27 No question arises in relation to Amaba. Its business was sold to interests outside the James Hardie Group in 1987. Amaca, however, was the principal operating company until 1998. It ceased to be so in 1998 when the new operating company became James Hardie Australia Pty Ltd (“JHA”).

1.28 The “corporate reconstructions” and “asset transfers” which have been considered in the Inquiry are:

(a)		the 1995 sales of Amaca’s “core technology” and of some other businesses which it controlled;
(b)		the declaration of dividends of $100.9m in 1995–1996 and of $43.5m in 1996–1997;
(c)		the levels of management fees paid by Amaca to JHIL in the years 1990–1998;
(d)		the transfers of assets by Amaba in 1998 and the rental levels at which Coy leased its premises to this new operating company.

These are the only transactions to which Term of Reference 3 would appear to apply.

1.29 The 1995 sale of the core technology occurred for perfectly sensible business reasons. The 1995 sales of the other businesses are in a similar category.

1.30 There are arguments that the two dividends should not have been paid, in the light of the emerging asbestos liabilities. The argument is stronger in the case of the $43.5m dividend, but in the end I am not satisfied that the declaration of either dividend would be impugned successfully.

⁴ Ex 283, Vol 5, Feb 00 Tab, p. 15.

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1.31 The management fees charged in the years 1995–1998 were high, and in some respects arbitrarily set. The evidence did not allow for me to form a concluded view as to the levels of a “proper” management fee.

1.32 I am not satisfied that the sale of Amaca’s assets in 1998 occurred at other than fair value.

1.33 One of the terms of the sale of Amaca’s non-Queensland assets was to the effect that Amaca would lease to JHA five premises formerly used by Amaca. A criticism made in the Inquiry was that the rentals fixed for the leases were too low. There may have been some substance in this criticism, but I was unable to be satisfied that in the events which had happened, both before and after the establishment of the Foundation, it would have made any significant difference to Amaca’s financial position.

1.34 I have also considered the effect of those transactions as a whole. The effect of them was that Amaca moved from being an operating company carrying on a substantial business to a company which owned land, lent money within the Group, had some other investments and carried the asbestos liabilities. The suggestion made was this was done so that the business assets would not be available to asbestos claimants. The 1998 transactions in particular were said to have that quality, and it was contended that there was a breach of duty by JHIL’s directors in so doing.

1.35 That the operating assets of the Group would not be available to asbestos claimants was a purpose of these changes, but not their only purpose. At the same time, however, a holding company is not obliged to keep a particular subsidiary operating a particular business. Amaca had quite adequate funds to pay its creditors as their debts fell due, and was doing so. There was nothing to suggest it would not continue to do so. I do not consider that there was any breach of director’s duties in this regard.

1.36 The transfers of assets which took place within the James Hardie Group prior to February 2001 have not so far affected the ability of the Foundation to pay asbestos-related liabilities.

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D.

Term of Reference 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.”

1.37 It seems clear that current arrangements available to the Foundation under the Corporations Act will not assist the Foundation to manage its liabilities.

1.38 A consideration of the future position has been overtaken to a significant degree, by the events to which I have referred to in paragraph 1.23. The best long-term solution for satisfying the asbestos liabilities of Amaca, Amaba and ABN 60 would be a scheme, for which that proposed by JHI NV might be a starting point. The proposal, however, is presently in an embryo, and sometimes contradictory, form. More clarification is required. So too is much detailed consideration.

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Chapter 2 – Background To The Inquiry

A.

Asbestos and the James Hardie Group

Asbestos: Uses and Consequences

2.1 Asbestos was used in Australia during a large part of the last century in the manufacture of building products (particularly sheeting and roofing), pipes, insulation materials, brake linings and other friction products, and other materials. Asbestos, however, carries with it problems. Its fibres can give rise to asbestosis, lung cancer, asbestos-related pleural diseases and mesothelioma. Asbestos-related diseases may take many years after exposure to manifest themselves. Mesothelioma is especially insidious: very slight exposure to asbestos fibre may cause it, the disease may not manifest itself until 40 or more years after the exposure but when it does the course of the disease is most often short, very painful and fatal.

The James Hardie Group: “JHIL”, “Coy” and “Jsekarb”

2.2 Companies in the James Hardie Group were major participants in the manufacture and distribution of asbestos products. For a time the Group also mined asbestos ore. There have been many changes in the identity and names of the James Hardie companies,¹ but three companies are principally involved.

2.3 The first is James Hardie Industries Ltd, now ABN 60 Pty Limited. I describe it either as “JHIL” or as “ABN 60”.

2.4 At first JHIL was an importer of asbestos products, but it became a manufacturer in the 1920s. It continued as such until 1937 when manufacture was carried on instead by the second principal company, its new subsidiary James Hardie & Coy Pty Ltd (“Coy”). Coy was a very substantial producer. It had plants in New South Wales, Victoria, Queensland, South Australia and Western Australia. In the 1980s, however, it ceased manufacturing asbestos products, the last production being

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at Welshpool in Western Australia and Meeandah in Queensland in March 1987.² Coy’s name changed to Amaca Pty Limited on 23 February 2001. I describe it either as “Coy” or as “Amaca”.

2.5 Coy had earlier manufactured brake and friction products, but in 1963 the James Hardie Group entered into a joint venture to produce brake linings and friction products. The joint venture company was Hardie Ferodo Pty Ltd. The Ferodo interest sold out, however, in 1978 and the company was thus wholly owned by the James Hardie Group. It later became James Hardie Brakes Pty Ltd, Jsekarb Pty Ltd, and Amaba Pty Limited. I describe it as “Jsekarb” or as “Amaba”. Its business was sold to interests outside the James Hardie Group in 1987 for $12m. It is the third company. It was a relatively minor player in events.

2.6 Australia was a very heavy consumer of asbestos products and their production appears to have reached its peak in the 1970s.³ The propensity of asbestos to cause diseases had been well known for years⁴, however, and there was a search to develop satisfactory products which could be substitutes. A discussion of asbestos in Australia and the James Hardie involvement is in Annexure D.

B.

Separating the asbestos liabilities from the “core businesses”

2.7 The substitutes developed, and new products, proved commercially very successful for the James Hardie Group, especially in the United States market. More and more the focus of the Group’s activities became the United States.⁵ A difficulty in that country, however, was that companies with asbestos liabilities had been in dire straits because of litigation for such claims and the existence (and possible extent) of the potential asbestos liabilities of companies in the Group was perceived as likely to impede attempts to obtain capital, or funding, there, or to use shares for the purposes of acquisitions.

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2.8 With the passage of time after the Group finally stopped manufacturing asbestos products, with changes in personnel and with the focus on the newer and profitable businesses, the Group’s liabilities in respect of asbestos came to be regarded as something reflecting the past. They came to be described, and regarded, as “non-core issues”, “part of the rump”, “legacy issues”. They were issues which were a source of “management distraction”, which it would be desirable to “separate”.⁶

2.9 “Separating” the asbestos liabilities, however, was a problem. Attempts to do so in the United States and the United Kingdom had a poor success record.⁷ One difficulty was the likely amount of such liabilities. Another was how separation might be effected and effective.

2.10 In relation to the likely amount of the liabilities, descriptions such as “legacy issues” tended to obscure the fact that although the Group’s negligence in the manufacture or distribution of the asbestos products⁸ had ceased years before, the liabilities consequent upon such negligence were accruing, and would continue to accrue, for many years.⁹ Nor could the persons to whom the companies might be liable be identified, other than in very generalised terms.

C.

The first actuarial assessments

2.11 Until 1996 the Group’s asbestos liabilities – judgments, settlements and legal costs – had been met as they became due.¹⁰ The amounts had been (excluding recoveries):¹¹

6		These phrases can be seen in, for example the Project Chelsea Board Presentation, Ex 61, Vol 3, Tab 11, pp. 101–102,125; SBC Warburg Dillon Read re “Project Chelsea Rump Strategy”, Ex 61, Vol 1, Tab 23, the Project Green Board Paper prepared for the JHIL Board meeting on 15 February 2001, Ex 75, Vol 8, Tab 120, pp. 2735, 2740, Project Green Board Presentation. February 2001, Ex 75, Vol 8, Tab 123, pp. 2844, 2845, 2858. JHIL Board Papers, February 2000, Ex 283, Vol 5, Feb 00 Tab, pp. 13–15; Ex 175, para. [12] and Annexure C; Ex 61, Vol 3, Tab 24, p. 245 – James Hardie Media Release of 2/7/98 re: Corporate Restructure; Ex 1, Vol 3, Tab 35, p. 716 – Information Memorandum re: New York Stock Exchange Listing.
7		Ex 283, Vol 5, Feb 00 Tab, pp. 11–15.
8		An essential element in there being any liability.
9		Liability in tort does not arise until the occurrence of “damage”, relevantly the suffering of the asbestos-related disease.
10		Ex 57, Vol 1, p. 35.
11		Ex 2, Vol 3, Tab 12, p. 667.

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and in a business of Coy’s size, amounts of this order of magnitude might be regarded as manageable. The amounts were increasing, however, and it also must have been obvious that the lead time with mesothelioma was such that much greater liabilities would exist.

2.12 The first step to obtain a professional actuarial assessment of the total asbestos-related exposure to liability of the James Hardie companies was taken in 1996, when John Trowbridge Consulting Pty Ltd was engaged by Mr Stephen Gellert, then JHIL’s General Counsel. (Trowbridge Consulting became Trowbridge Deloitte Limited in May 2000. I refer to each as “Trowbridge”.) Trowbridge produced its report (the “1996 Trowbridge Report”) on 10 October 1996. The Report¹³ “an actuarial assessment of the potential liability of the company and its subsidiaries for personal injury claims arising from asbestos-related diseases” – assessed those liabilities at a net present value, discounted at 8 per cent per annum of $230m¹⁴ as at 31 March 1996.

2.13 Two years later Trowbridge carried out a review of the same question as at 31 March 1998, its report of 10 September 1998 (the “1998 Trowbridge Report”)¹⁵ assessing the liabilities at a net present value, discounted this time at 7 per cent per annum of $254m.¹⁶

12		For years commencing 1 April.
13		Ex 2, Vol 3, Tab 12.
14		Gross present value was $258m; the figure of $230m assumed insurance recoveries of $28m: Ex 2, Vol 3, Tab 12, p. 589.
15		Ex 2, Vol 3, Tab 13.
16		Gross present value was $281m; the figure of $254m assumed insurance recoveries of $27m: Ex 2, Vol 3, Tab 13, p. 702.

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2.14 There are difficulties in endeavouring to compare, directly, the estimates of liability in the 1996 and 1998 Trowbridge Reports. Table 4.7 in Mr Whitehead’s Report¹⁷ provides a comparison of the liabilities estimated in the various Trowbridge Reports on a like-for-like basis:

“Table 4.7: Comparison of Calculated Discounted Values of Projects Payments after 31 March 2003 as at 31 March 2003, Discounted at 5% pa

Note:

The projected cash flows for later reports are for year ending 30 June rather than 31 March. For the purposes of this comparison, we have treated all projected cash flows as being for years ending 31 March. We do not expect this approach to create any material distortions in the results presented.”

2.15 There were later Trowbridge actuarial reports. They are discussed below.

A. Coy disposes of its business. The 1998 IPO.

Introduction

2.16 Coy itself underwent dramatic change in the period 1995–1998. Its assets, apart from land, were sold. It was no longer a manufacturer and producer; rather its activities were limited to being a landlord and lender to other James Hardie companies, and a company defending and settling the asbestos-related claims. This came about in the following way.

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Sale of core technology and other businesses

2.17 In the year ended 31 March 1995 Coy’s technology” was sold to a new member of the Group, James Hardie Research Pty Ltd (JH Research), for $75m. This was in implementation, it is said, of a policy that the Group’s core technology and other industrial property, and research and development activities, should be conducted by one entity only in the Group. Thereafter Coy would pay JH Research a royalty in order to use the technology.

2.18 In 1995 Coy also sold a number of companies which it controlled for a net profit of $38.255m.

1995–96 and 1996–97 dividends

2.19 The sales referred to in paragraphs 0 and 0 were included in “Abnormal Items” in Coy’s financial statements for the year ended 31 March 1996. Dividends totalling $100,900,000 were paid during that year, a large part of which effectively came from the proceeds of these sales.¹⁸

2.20 A further half-yearly dividend of $43.5m was declared from retained profits the next year, on 2 October 1996. During that financial year Coy made an operating loss after income tax of $33,597,000. This was Coy’s last dividend. It was declared a short time before the 1996 Trowbridge Report was received, but at a time when a draft of that Report¹⁹ may have been received.

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Transfer of other Coy assets

2.21 In 1998 a number of transactions occurred involving the transfer of assets from Coy to other companies in the James Hardie Group:²⁰

(a)		In March, a considerable quantity of Coy’s plant and equipment was sold to James Hardie Fibre Cement Pty Ltd for $37,065,498.
(b)		In June, Coy transferred trademarks used by it to JH Research Pty Ltd for $139,500,000.
(c)		In October, the remaining assets used to carry on the fibre cement business in Australia were sold to a new operating entity, JHA. Those sales resulted in a total purchase price in favour of Coy of $30,130,675 including $16.5m for goodwill.

The proceeds of the sales were used to repay loans due from Coy to other members of the Group and to make loans to other members of the Group.

JHA and the IPO

2.22 The new operating entity, JHA, was not a subsidiary of JHIL. Rather it was a subsidiary of a new Dutch company, James Hardie NV (“JH NV”). At that point there was in contemplation an initial public offering (“the IPO”) of 15 per cent of the shares of JH NV on the New York Stock Exchange. Despite considerable marketing efforts in the United States, that offering did not meet expectations, and was aborted.²¹ I would note that a significant difficulty which would have existed if it were attempted to make JHIL (rather than JH NV) a US-based company was that generally accepted accounting principles in the United States (“US GAAP”) may well have required JHIL to indicate the full extent of the Group’s asbestos liabilities, in an undiscounted amount.

2.23 The attempted 15 per cent IPO in the United States reflected the fact that in the period 1997 until 2000, much consideration was given to proposals for

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restructuring the Group to make it US-based “to fully realise the value of JHIL, and for its growth prospects to be realised”.²² This was done by a number of proposals which were investigated under various project names: Project Blue Sky, Project X²³, Project Scully, which became Project Chelsea, Project Monica and Son of Chelsea, which appears to have become known as Project Green.²⁴

E.

2000: Movement towards the Foundation

Introduction

2.24 The situation which obtained in 2000, following the unsuccessful attempt to sell the 15 per cent interest in JH NV in the United States, was:

(a)		Coy and Jsekarb, owned by JHIL, bore the asbestos liabilities;
(b)		JHA, owned by JH NV, carried on the current business.

Consideration of ways in which the affairs of the Group might be restructured continued and in the period 2000–2001 the issue was dealt with as Project Green.

The 2000 Trowbridge Report

2.25 Whilst these issues were under consideration, Trowbridge had been engaged to prepare a further actuarial report on the Group’s asbestos liabilities, this time as at 31 March 2000. A reason for the report was an endeavour by the Group to ascertain the cost of insurance to cover the outstanding asbestos liabilities.

2.26 The resulting Trowbridge Report remained in draft form because, it is said, of differences of view between officers of James Hardie and Trowbridge as to aspects of it, particularly the “Sensitivities”.25 Subject to the Sensitivities, Trowbridge’s estimate of the net present value of the Group’s asbestos liabilities

21		Barton, Ex 175, para. 14.
22		Project Chelsea Board Sub-Committee meeting 3 February 1998 (Ex 61, Vol 1, Tab 21, p. 139) under the heading “2. Review of Rationale for Project Chelsea”.
23		Ex 61, Vol 1, Tab 5.
24		Barton, T 2745.39–52, P. Cameron Ex 224, paras 14–15.
25		The Sensitivities indicated the extent to which the estimate might vary with changes in assumptions and conditions: see Ex 2, Vol 4, Tab 14, Section 9.3 and Table 9.4.

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discounted at 7 per cent pa, was $294m.²⁶ The Report (“the 2000 Trowbridge Report”) was produced in June 2000.

2.27 In late 2000 those involved in Project Green became interested in a trust structure as the means of separating the asbestos liabilities from those of the Group as a whole. Soundings took place of prospective directors of the trust, including those who ultimately became its directors (Sir Llew Edwards, Mr Peter Jollie, Mr Michael Gill and Mr Dennis Cooper). The concept of the trust was that Coy and Jsekarb would remain responsible to claimants in respect of asbestos-related liabilities, to the extent of their existing assets, but ownership of Coy and Jsekarb would pass from JHIL to a new company unrelated to JHIL, which would operate as a trust, the principal purpose of which was to compensate victims of asbestos-related diseases.

2.28 A difficulty was that the net assets of Coy and Jsekarb appeared to be only $214m, insufficient by $80m to meet the estimate of liabilities in the 2000 Trowbridge Report. That was ameliorated to a degree by the fact that the 2000 Trowbridge Report estimate did not take into account the settlement of an insurance dispute which the Group had with QBE Insurance Ltd, which would produce payments by QBE totalling $47.5m.²⁷ It was exacerbated, however, by the publication in late November 2000 at an Accident Compensation Seminar of the Institute of Actuaries of Australia of a presentation which suggested that the methods currently used to estimate the numbers of persons likely to form asbestos-related diseases were likely to result in significant underestimation. The presentation (“Watson and Hurst”²⁸) was prepared by Bruce Watson and Mark Hurst, Trowbridge actuaries.

2.29 Two further factors came into play. One was that there was in being an Exposure Draft (“ED 88”) for a new Australian Accounting Standard. ED 88 was likely to come into force at the end of October 2001.²⁹ It would require that the total of the Group’s estimated asbestos liabilities, discounted to present value, would have

26		Gross present value was $329m; insurance recoveries were $35m.
27		Hutchinson, Ex 218, Vol 1, para. 42. The $47.5m was by way of 15 annual payments of $3.1m. Its net present value at February 2001 was $29.8m – Ex 339.
28		Ex 3, Vol 3, Tab 1.

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to be disclosed in its accounts.³⁰ This gave a degree of urgency to the need to separate out the asbestos liabilities from the Group. The second factor was a public relations aspect: if the separation could be effected at the same time as the announcement of the Group’s Third Quarter results, the inclusion of information about the Group’s cutting loose its asbestos liabilities – a matter which might otherwise attract undesirable publicity – would be muted by its mingling with “business news”.

February 2001 Trowbridge Report

2.30 Discussions took place with proposed directors of the trust – ultimately named the Foundation – in December 2000 and in January 2001. The proposed directors of the Foundation had sought access to the 2000 Trowbridge Report, a request to which James Hardie was unwilling to accede. Instead Trowbridge was engaged to provide an update based on applying to the figures in the 2000 Trowbridge Report the approach taken by Watson and Hurst.31 In the result Trowbridge produced the February 2001 Trowbridge Report in which it assessed total asbestos liabilities over periods of 10, 15 and 20 years, discounted at 7 per cent p.a., as follows:³²

29		Ex 264.
30		As at 1999 the position that JHIL had adopted in their statutory accounts in respect of asbestos liabilities was summarised in the letter from PricewaterhouseCoopers to Allen Allen & Hemsley dated 5 November 1999 (Ex 61, Vol 4, Tab 5, pp. 19–21) as follows:
“		.     subsidiaries of JHIL have a liability for known asbestos related claims which results from past events and that such subsidiaries recognise that they will be named as defendants in litigation in Australia as a result of past manufacturing and marketing of products containing asbestos.
		.     it is probably that, in future, sacrifice of economic benefits will be required
		.     a provision for known claims has been recognised
		.     a note has been included in the statutory accounts with respect to future asbestos claims which states that a contingent liability exists in respect of the ultimate cost of any claims yet to be made which cannot reliably be measured at the present time.” (Also see Ex 277, Vol 2, Tab 1999, pp. 49, 57 and 64).
The provision made in the 1999 accounts was $43m (see Ex 61, Vol 4, Tab 5, p. 19)
31		There is a serious dispute as to the manner in which this came about. It is dealt with in Chapter 24.

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The estimates for 50 years were significantly higher³³:

(a)		best [i.e. median] estimate - $322,630,453
(b)		high estimate - $378,408,816

Additional funding

2.31 The proposal came before JHIL’s Audit Committee on 16 January 2001³⁴ and Board of Directors on 17 January 2001.³⁵ The proposal from management at that time was for the Foundation’s funding to be limited to the net assets of Coy and Jsekarb, a total of approximately $214m.³⁶ Some directors thought that more funding should be made available. In the end the Board’s resolution was that:³⁷

“The Chairman noted that the concept appeared to have some merit, but that the question of funding for the Company required more work. He requested management to continue to developing the concept and to report progress, particularly in relation to funding, at the February meeting.”

2.32 Both before and after that decision considerable effort had been expended in considering whether any of the past dealings between Coy and Jsekarb on the one hand, and JHIL on the other, might thereafter be susceptible to challenge. One reason was that Coy and Jsekarb would no longer be under the control of JHIL after the separation. Another reason had point after the January Board meeting. It was that, to the extent to which it might be found that any payment made in the past was improperly or doubtfully made, that might provide a reason to justify the payment to the Foundation of money, in addition to the value of Coy and Jsekarb’s assets. The only one thought possibly so susceptible was the 1996 $43.5m dividend, the reason being its declaration at a time when the likely results of the 1996 Trowbridge Report may have been known. The value of the $43.5m, with compound interest to 2001, would be $57m. It would increase the fund to $271m.

33		Ex 50, Tab 18, p. 163.
34		Ex 121, Vol 5, Tab 60, p. 2235 and Tab 85 and Ex 123 p. 4.
35		Ex 75, Vol 7, Tabs 95 and 95A.
36		Ex 75, Vol 7, Tab 95A, p. 2511.
37		The discussion at the Board is referred to in the evidence of Mr McGregor, Ex 80, para. 22 and at T1533.13–52 and T1576.54–58. The Board’s resolution is at Ex 75, Vol 7, Tab 95, p. 069.

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2.33 In the event, but without explicit reference to the $43.5m dividend, the figure announced as the funding for the Foundation was $293m.

F.

Establishing the Foundation

2.34 On 15 February 2001 the JHIL Board resolved to proceed with separation. The formal steps necessary to establish the Foundation commenced late on that day and concluded on the morning of the next. A great deal of prior preparation had occurred. The events which took place were in essence:

(a)		Medical Research and Compensation Foundation Ltd (“MRCF”), a company limited by guarantee, became the trustee of the MRCF Trust.
(b)		MRCF held 50 per cent of the shares in Coy, with another new company MRCF Investments Pty Ltd holding the other 50 per cent. MRCF Investments was a wholly owned subsidiary of MRCF.
(c)		Coy owned all the shares in Jsekarb.
(d)		In return for payments to be made over time by JHIL to each of Coy and Jsekarb, JHIL was to be indemnified by Coy and Jsekarb against any asbestos-related liabilities which JHIL might have, and Coy and Jsekarb could make no claim against JHIL arising from any past dealings with it (including payment of dividends or management fees).
(e)		Inter-company loans from Coy to JHIL were formalised.
(f)		New directors were appointed to the trust, Coy and Jsekarb.

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Announcement of the separation

2.35 This was done on 16 February 2001 at the time of the announcement of JHIL’s third quarter results. JHIL’s Media Release,³⁸ a copy of which was sent to the ASX, included the following:

“16 February 2001

James Hardie Resolves its Asbestos Liability Favourably for Claimants and Shareholders

James Hardie Industries Limited (JHIL) announced today that it had established a foundation to compensate sufferers of asbestos-related diseases with claims against two former James Hardie subsidiaries and fund medical research aimed at finding cures for these diseases.

The Medical Research and Compensation Foundation (MRCF), to be chaired by Sir Llewellyn Edwards, will be completely independent of JHIL and will commence operation with assets of $293 million.

The Foundation has 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.

JHIL CEO Mr Peter Macdonald said that the establishment of a fully-funded Foundation provided certainty for both claimants and shareholders.

“The establishment of the Medical Research and Compensation Foundation provides certainty for people with a legitimate claim against the former James Hardie companies which manufactured asbestos products,” Mr Macdonald said.

“The Foundation will concentrate on managing its substantial assets for the benefit of claimants. 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.”

...

In establishing the Foundation, James Hardie sought expert advice from a number of firms, including PricewaterhouseCoopers, Access Economics and the actuarial firm, Trowbridge. With this advice, supplementing the company’s long experience in the area of asbestos, the directors of JHIL determined the level of funding required by the Foundation.

“James Hardie is satisfied that the Foundation has sufficient funds to meet anticipated future claims,” Mr Macdonald said.

...

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When all future claims have been concluded, surplus funds will be used to support further scientific and medical research on lung diseases.

...”

2.36 Other statements about the effect of separation were made in accompanying documents,³⁹ and in the oral presentation to the media by Mr Macdonald, JHIL’s Chief Executive Officer⁴⁰ and a member of the Board of Directors.

G.

The increase in the asbestos liabilities

2.37 The confidence expressed in the Media Release was shortlived. Trowbridge was engaged by the Foundation to provide actuarial services to Amaca and Amaba. Its first report to the Foundation was given to the Foundation in draft form⁴¹ on 5 August 2001. On 16 August 2001, the final version of this report was sent to the Foundation (“the August 2001 Trowbridge Report”).⁴² The final report valued the asbestos related disease liabilities of Amaca, as at 30 June 2001, at a net present value of $574.3m at a discount rate of 6 per cent per annum.

2.38 This was an enormous increase from the figures contemplated in the February 2001 Trowbridge Report. If they are compared on the basis of the same discount rate, the value of all future payments increased by 65 per cent.⁴³ Trowbridge, when asked why there was such a difference, said that if it had been provided by JHIL with its claims data for the 9 months to December 2000, the figures would have been much higher. In particular, at a 6 per cent per annum discount rate the figure for all future payments would have been $486,035,000 rather than $355,267,000.⁴⁴

39		Ex 1, Vol 7, Tab 66, pp. 2124–2125 and 2162–2168.
40		Ex 300 and 301.
41		Ex 50, Tab 31, p. 257. The total liabilities were assessed at $640.9m; $574.3m was arrived at after deducting $66.6m for insurance recoveries. The insurance recoveries did not include the QBE settlement amounts.
42		Ex 3, Vol 3, Tab 8.
43		Ex 3, Vol 3, Tab 4, p. 466.
44		Ex 3, Vol 3, Tab 6, p. 472.

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2.39 A further deterioration in the actuarial estimation of the prospects of the Foundation was seen in Trowbridge’s report of 28 October 2002 (“the 2002 Trowbridge Report”⁴⁵). It estimated the potential liabilities of the Foundation at $751.8m discounted at 6 per cent per annum.⁴⁶

2.40 Trowbridge’s next report was made in September 2003 (“the 2003 Trowbridge Report”⁴⁷). It dealt with the situation as at 30 June 2003, and estimated the potential liabilities at $1,089.8m discounted at 5 per cent per annum.⁴⁸

H.

Foundation’s actual outgoings

2.41 In addition to actuarial assessments predicting the long term future, the net litigation costs of the Foundation – its actual outgoings – have much exceeded the figures estimated. The Foundation’s financial year now ends on 30 June, and its net litigation costs for Amaca have been:⁴⁹

It is obvious that if the Fund continues to pay out at that rate, it will be exhausted in a few years, even taking into account the income which it might earn on the diminishing assets.⁵⁰

2.42 It should be borne in mind that the funds of Amaca/Amaba were not $293m in money in hand. About a sixth was in that category, the remainder being the value of the leased properties and of the loan to JHIL, together with the present value of the QBE settlement and the amounts payable under the Deed of Covenant and Indemnity. There was also some insurance but its true value has proved difficult to assess.

45		Ex 3, Vol 3, Tab 9.
46		A total of $838m less $86.1m recoverable from insurers: Ex 3, Vol 3, Tab 9, p. 552.
47		Ex 3, Vol 3, Tab 9.
48		A total of $1,205m, amounts recoverable from insurers being assessed at $115.2m. Ex 3, Vol 3, Tab 10, p. 613.
49		Ex 339.
50		Towers Perrin letter of 17 February 2004 to Mr Cooper, Ex 9, p. 3.

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I.

The move to the Netherlands: JHI NV replaces JHIL

Introduction

2.43 During 2001, but after the establishment of the Foundation and the separation of Amaca/Amaba from JHIL, steps were taken to substitute a new Dutch company JHI NV for JHIL as the holding company in the Group. This was effected pursuant to a scheme of arrangement under s 411 of the Corporations Act 2001(Cth).⁵¹

The scheme of arrangement

2.44 The main features of the scheme of arrangement and related reduction of capital were summarised in the materials before the Supreme Court⁵² as being:-

(a)		All members of JHIL whose address in the register of members was Australia, New Zealand, the United Kingdom or the United States of America were to receive an interest in shares in JHI NV in exchange for their shares in JHIL. The interest in JHI NV was to be held in the form of CHESS Units of Foreign Securities (CUFS) to allow trading on the ASX.
(b)		All other members of JHIL would receive the cash proceeds from the sale of their entitlement to interests in JHI NV. There were said to be approximately 100 such members with a combined holding of approximately 0.1 per cent of JHIL’s issued capital.
(c)		JHIL would become a wholly owned subsidiary of JHI NV;
(d)		JHIL would transfer all its shares in JH NV, the owner of the operating businesses and assets of JHIL and its controlled entities, to JHI NV at market value (based on the market value of the James Hardie Group).

51		The Corporations Act 2001 had come into force on 15 July 2001.
52		See affidavit of Donald Ewen Cameron sworn 9 August 2001, para. 14: Ex 278, Vol 1, Tab 2, p. 5.

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(e)		JHIL would declare and pay a dividend to JHI NV and would effect a reduction of capital in respect of all its shares then held by its new parent, JHI NV, under which $775,326,261.04 ($1.72 per share) was distributed to JHI NV. The reduction was conditional on JHI NV subscribing for partly paid shares, and would be effected without cancelling any shares.
(f)		JHI NV would subscribe for partly paid shares in JHIL. Under the terms of issue of the partly paid shares, JHIL could call on JHI NV to pay any or all of the remainder of the issue price of the partly paid shares at any time in the future and from time to time. The callable amount under the partly paid shares would be equal to the market value of the James Hardie Group less the subscription monies already paid up.

2.45 The purposes of the scheme were said to be to position the Group for further international growth and to improve the after tax returns to shareholders. Grant Samuel & Associates Pty Limited (“Grant Samuel”) had been retained to provide an independent expert’s report on the proposed restructure and its view, in summary, was⁵³:

“In Grant Samuel’s opinion, the proposed restructure is, on balance, in the best interests of James Hardie Industries’ shareholders as a whole. The transaction is essentially neutral insofar as shareholders will have the same underlying economic interest in the business of James Hardie Group before and after the proposed restructure. The primary benefit of the proposed restructure is an increase in after tax returns to shareholders. This benefit is a tangible and material gain relative to the status quo. IN the absence of some form of restructuring, James Hardie Industries faces an increasing corporate tax rate that could reach almost 50% in the near future. A “do nothing” approach would ultimately have negative consequences on shareholder value.

There are other benefits such as a more attractive “currency” for scrip acquisitions but these are not regarded as substantial. There are a number of costs, disadvantages and risks arising from the proposed restructure. Key issues for shareholders will be impacts on corporate governance and liquidity. While these factors are not inconsequential, and some may be significant for some shareholders, they do not, in Grant Samuel’s opinion, outweigh the benefits for shareholders as a whole.”

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The proceedings in the Supreme Court of New South Wales

2.46 On 23 August 2001 Justice Santow ordered the convening of a meeting of members of JHIL, to be held in Sydney on 28 September 2001. The resolution was passed on that day by a very substantial majority, notwithstanding that much of the apparent justification for it had gone because of the announcement, on the evening before the meeting, of proposed changes reducing to zero the withholding tax on dividends paid from the United States to Australia.

2.47 The application was finally approved by Justice Santow on 11 October 2001. The result was that the shares in JHIL were all held by JHI NV, and consisted of⁵⁴:

(a)		270 fully paid ordinary shares
(b)		100,000 ordinary shares paid to $50, but on each of which JHIL was liable to pay a sum to be calculated as:

This sum was likely to be in the order of $1.9 billion.

2.48 During the hearing Justice Santow had raised the question of JHIL’s ability to satisfy any asbestos-related liabilities, and had been assured that JHIL’s ability to call on the partly paid shares would satisfy that liability.

Matters not drawn to Justice Santow’s attention

2.49 There are matters which were not drawn to Justice Santow’s attention but which it is said should have been. Three are of some importance.

2.50 The first concerns the communications from the Foundation about the inadequacy of its initial funding, culminating in the Foundation’s letter dated 24 September 2001. That letter, from Sir Llew Edwards to Mr Macdonald, contended that the Foundation, in light of the August 2001 Trowbridge Report, was not “fully

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funded” and that it would not be able to meet the claims of all asbestos victims. There is a dispute about the date the letter was sent, and received, and in particular whether it had been received well before the time when the order approving the scheme of arrangement was made on 11 October 2001.

2.51 The second matter was the existence of the Deed of Covenant and Indemnity executed on 16 February 2001 and the existence in that document of a “put” option, i.e. an arrangement whereby Amaca could be required to acquire for a nominal consideration all the issued shares in JHIL. There was no way, of course, that Amaca would ever have the funds to satisfy the amount which might become payable on the partly paid shares in JHIL.

2.52 The third matter was whether JHIL then had in mind, either as a formed intention or as a real possibility, the intention to cancel the partly-paid shares.

J.

The attempts to resolve matters between the Foundation and JHI NV/JHIL

2.53 In the period after the implementation of the scheme of arrangement in late 1991 until March 2003, the Foundation made a number of endeavours to persuade the James Hardie Group to recognise an obligation to provide further funds to it, and to pay a substantial amount. James Hardie was unwilling to pay anything, but was prepared to offer sums, variously described, effectively reaching $20m, in order to arrive at a “negotiated settlement” of the claims by the Foundation.

2.54 During that period JHI NV came under pressure to separate itself even more from the Foundation, and asbestos claims. In a paper prepared for the JHI NV Board meeting of 11 March 2003, Mr Shafron said:⁵⁵

“... recent experience (June to October 2002) in renegotiating the terms of the Company’s long term notes indicates that the mere existence of arrangements with the Foundation causes anxiety among certain lenders at least and prejudices the position of and the terms available to the Company.”

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2.55 There was a sense of urgency to resolve the position before the end of JHI NV’s financial year on 31 March 2003. Two proposals were considered:

(a)		An agreement with the Foundation whereby it (via Amaca/Amaba) would acquire the shares in ABN 60, and indemnify JHI NV in respect of any asbestos liabilities of ABN 60, in return for an increase in the funds of ABN 60 of the order of $20m.
(b)		If necessary, an exercise of the put option in the February 2001 Deed of Covenant and Indemnity.

2.56 Whilst the negotiations with the Foundation were proceeding, JHI NV and ABN 60 agreed to cancel the partly paid shares. Notification was given to the ASIC. It would take effect on 31 March 2003,⁵⁶ but JHI NV and ABN 60 did not otherwise make it public.

2.57 JHI NV’s desire to hand control of ABN 60 over to the Foundation foundered on 17 March 2003 when the Foundation’s solicitors advised⁵⁷ that the Foundation was not prepared to accept the proposal then in mind, and would very carefully scrutinise “any earlier actions taken by ABN 60 if the put option were exercised”.

2.58 A flurry of activity followed to seek an alternative course. In the event a new Foundation was established on 31 March 2003 to acquire the shares in ABN 60, and to use that company’s funds to pay the amounts due to Amaca/Amaba under the Deed of Covenant and Indemnity. The funds of ABN 60 were augmented by JHI NV to the extent of about $18.5m. Mr Morley, JHI NV’s Chief Financial Officer, calculated that on a “worst case scenario” the possible liability for asbestos-related claims by former employees of ABN 60, not covered by insurance, was approximately $10.76m, “leaving a surplus” of approximately $7.73m.⁵⁸ This calculation makes no allowance for any liability to the Foundation or Amaca/Amaba.

⁵⁷ Ex 187, Vol 3, Tab 70.

⁵⁸ Morley, Ex 121, p. 49, para. 323.

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2.59 The result was that ABN 60 was now completely removed from the James Hardie Group. Its parent, its only corporate relative, was the ABN 60 Foundation.

K.

Deed of Rectification

2.60 During the remainder of 2003 the relationship between the Foundation and JHI NV soured further. An examination of the documentation executed at the time of the creation of the ABN 60 Foundation indicated that JHI NV might be liable to indemnify ABN 60 for claims made by Amaca/Amaba. In the result a Deed of Rectification⁵⁹ was entered into between JHI NV and ABN 60 on 3 February 2004 to cure supposed errors in the drafting of a Deed of Covenant, Indemnity and Access between those parties entered into at the establishment of the ABN 60 Foundation.

L.

The Inquiry

2.61 The very large discrepancy between the initial funding of the Foundation and the actuarial assessments of its liabilities, gave rise to controversy resulting in the establishment of this Inquiry.

2.62 As I have noted, although the contention of inadequacy in the initial funding was much in contest at the commencement of the Inquiry, it is now accepted that there is a very significant inadequacy, although the legal obligation to provide for it is not accepted.

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Page 38

Part 2 – Term Of Reference 1

Page 39

Page 40

Chapter 3 – The Foundation’s Present Financial Position

A.

Issues

3.1

This Chapter discusses Term of Reference 1:

“The current financial position of the Medical Research and Compensation Foundation (“MRCF”), and whether it is likely to meet its future asbestos related liabilities in the medium to long term;”

There are five aspects to which it is necessary to direct attention:

(a)		the present assets of Amaca and Amaba, leaving out of account potential recoveries under, or in respect of, insurance policies;
(b)		the amount which may be expected to be recovered under, or in respect of, insurance policies;
(c)		the extent of the liabilities of Amaca/Amaba;
(d)		the likely life of the Foundation;
(e)		additional assets, if any.

B.

Amaca and Amaba’s assets

3.2 At the establishment of the Foundation the assets of Amaca totalled $293.5m and consisted of cash, securities and working capital ($47.9m), property ($66.8m), the discounted values of the settlement amount from QBE Insurance ($29.8m) and the amount payable under the Deed of Covenant and Indemnity ($80.3m)1 and the amount of the loan to JHIL ($68.7m).

3.3 Since then the properties have been sold to Multiplex Limited, the sale being completed on 24 March 2004 for $70m.² The price was payable in

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instalments, those remaining being payable in December 2004 and March 2005³ with interest payable in the interim.⁴

3.4 The loan to JHIL was repaid in mid-2001.⁵

3.5 The assets of Amaca at various dates since the establishment of the Foundation appear from a summary extracted from the unaudited balance sheets for Amaca and Amaba as at 30 June 2004, prepared by Mr Cooper.⁶

     Notes:

1.		These extracts from Amaca’s balance sheet at each of these various dates have been adjusted to clearly reveal the net present value of the C&I Deed and QBE income streams. To comply with accounting standards, the balance sheets in Amaca’s audited financial statement accrue a liability for deferred income equivalent to the NPV of these income streams. In order to make the NPV of these income streams visible at each relevant balance date, the liabilities for deferred income have been excluded.
2.		The payment streams for QBE and C&I are discounted at the then prevailing bond rate to calculate an NPV for the accounts.
3.		JHIL paid back the loan in 2001.
4.		In the 2001/2 financial year, accounting advice was received that the C&I payment stream could not be booked as an asset; this was reversed in 2003 following legal advice.
5.		A settlement receivable for $3m has been included in Securities for 2003 and 2004.
6.		From 2002, properties were no longer depreciated.
7.		Deferred settlement of property sale to Multiplex.
8.		Provisions for notified claims to be updated for June 30, 2004 financial year end however preliminary figure is $69m.”

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3.6 Amaba’s summarised Balance Sheet for the same period is:⁷

            Notes:

1.		Accounting treatments are as for Amaca.
2.		Amaba’s entitlement to QBE receipts was formalized and implemented in financial year 2002.”

3.7 In the result my view is that, as at the end of June 2004:-

(a)

the total assets of Amaca and Amaba were:

(b)

provision by each company for claims already notified was:

(c)

the net assets of the companies, after taking into account the provisions for claims already notified, were:

3.8 This is, of course, a disastrous position for the Fund. It means that almost 40 per cent of the Fund’s net assets have been used up in 3½ years of the Fund’s life. Another 20 per cent is provision for claims already notified. The consequences for the life of the Fund are very serious.

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C. Insurance recoveries

Background

3.9 In February 2001 the MRCF “inherited” the extant insurance arrangements pertaining to Coy and Jsekarb.⁸ The Group’s insurance program was “run and controlled” by JHIL. Subsidiaries did not obtain separate insurance cover and “Insurance for asbestos risks was part of the Group’s general liability cover”.⁹ The documentary records available to the Foundation in relation to these arrangements remain incomplete.¹⁰

3.10 On 19 January 2001, prior to the separation of Coy and Jsekarb from JHIL, Mr Attrill retained Phillips Fox to “undertake a process of identifying, collating and advising on the non-QBE insurance policies”.¹¹ Phillips Fox continued with that project after the establishment of the Foundation¹² and in subsequent advice dated 1 March 2001 alerted the Foundation to a number of “gaps” in JHIL’s insurance arrangements, including:

“(a)		gaps in insurance records: the underwriters were not identified or were not clearly identified for every period of insurance;
(b)		the structure of the insurance program was not clear from the available documents;
(c)		only limited information was available on policy coverage in the 1981– 1982 and 1985–1986 policy periods and relevant wordings were missing; and
(d)		in some years (particularly, the 1986/87 policy period) there were significant doubts as to whether the contracts were ever fully placed.”13

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3.11 Mr Gill resigned as a director of the Foundation on 26 February 2003 and Mr Hutchinson was appointed a director on that date.¹⁴ Mr Hutchinson made a suggestion prior to joining the Foundation that a review of the Foundation’s insurance portfolio be undertaken. Mr Marshall Phillips (an experienced former insurance broker) was appointed to assist with this task.¹⁵ Since his appointment Mr Phillips has been co-ordinating the reconstruction of the Foundation’s insurance records and other aspects of its Insurance Recovery Project.¹⁶

3.12 For present purposes, the insurance policies relevant to the Foundation date from 1930, and fall into five periods:

“(a)		from the early 1930s to 1976, when the James Hardie companies were predominantly insured by QBE and its predecessor, the Queensland Insurance Co Ltd.;
(b)		from 1976 to 1981 when insurance was placed with various insurers being VACC, AIU (now AIG), GRE (now Zurich), Preservatrice (now HIH, in liquidation), Cigna (now ACE), INA (now ACE) and HIH (in liquidation);
(c)		from 1981 to 1986, when insurance was placed with various Lloyds syndicates and companies in the London market from time to time on an occurrence basis;
(d)		from 1986 to 1997 when insurance was apparently placed [with] various Lloyds syndicates and companies in the London market on a claims made basis; and
(e)		post-1997 when no insurance cover for asbestos claim made against James Hardie exists.”17

3.13 In relation to these periods:

(a)

From 1930 to 1976, “James Hardie” companies were insured “mainly under various policies issued by QBE” (and its predecessor the Queensland Insurance Co Ltd). JHIL’s rights under these

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		policies were the subject of a commutation in June 2000 with QBE18 for a sum of $47.5m which will continue to be payable to the Foundation in annual instalments of $3.1m until 2014.19
(b)		From 1976 to 1981, insurance was placed with “various Lloyds syndicates and companies in the London market”. These policies are on “an occurrence” basis and are more complex than the previous arrangements with different “layers” of cover with different insurers accepting different percentages of risk.
		The prima facie consequence of having “occurrence-based” policies is that only claims by persons who were exposed to (in the sense of inhaled) asbestos fibres during the period of insurance would fall within the policies. The investigation carried out by the Insurance Recovery Project team indicates that only $28m of available cover exists and this is limited by a “time on risk” practice.20 The Foundation does not have any knowledge of how this “time on risk” practice developed and the extent to which it is legally obliged to accept the practice, and is seeking legal advice on the matter.21 The balance of cover is either exhausted or with insolvent insurers such as HIH.22
(c)		From 1981 to 1986, cover was placed with CE Heath and various Lloyds syndicates and companies in London on “an occurrence” basis. According to Mr Hutchinson it appears that the aggregate

“(a)		only a percentage of each claim will be compensated under each policy. If a plaintiff has been exposed to asbestos over many years, possibly decades, the percentage paid out under each policy will be small; and
(b)		the number of claims which will need to be indemnified will need to be very large to exhaust the available indemnity under a policy.” See Ex 218, pp. 2–21, para. 64.

21		Hutchinson, Ex 218, p. 20, para. 63; p. 21, para. 68.
22		Hutchinson, Ex 218, p. 17, para. 49.

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		value of cover for this period is $475m.23 Approximately 50% of this cover is underwritten by Equitas.24 Additional factors of concern relate to identification of insurers, inability to locate policy documents and indeed whether insurance was actually placed. The “time on risk” practice is also a limiting factor.
(d)		From 1986 to 1997, the policies are “claims made” policies which only respond to claims made by asbestos victims during the period of insurance. Accordingly, the time to notify any claims expired well before the establishment of the Foundation. It is suggested that there may be some relief available to “out of time” claimants by virtue of Insurance Contracts Act 1984 (Cth) s 54. This view is untested. In addition, insurers adopted a further protective measure of introducing retroactive clause into policies requiring both an occurrence after the retroactive date and a claim within the currency of the policy.25
		There is a further issue as to whether the insolvency of HIH presents difficulties with regard to “claims made” policies, namely, the application of s 562A of the Corporations Act 2001 (Cth).26 It is suggested also that there are difficulties in gaining access to the relevant policies from the joint liquidator of HIH.27
		In any event, Trowbridge has estimated the total expected settlement costs for all claims reported in this period at $64.8m and total expected legal costs for the period at $22.37m.28
(e)		Post-1997. The Foundation has been advised by its brokers that there are no policies which respond to asbestos related claims due to

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