Ithaca Group

Scenario 1

During the 1980s and 1990s shezen was used extensively in the manufacture of air-conditioning and computer components, particularly providing linings for air-conditioning units, mobile phones, laptop computers and ipods in Australia. However, exposure to untreated shezen fibres can give rise to the development of tumours, or cancer. Unfortunately these diseases may take many years after exposure to manifest. The development of cancers may not manifest itself until 40 or more years after the exposure. Once manifest however, the course of the disease is most often short, very painful and fatal.

During the 1980s and 1990s, Thor Pty Ltd, a wholly owned subsidiary company of the Ithaca Group was a very substantial manufacturer of shezen products, with plants throughout New South Wales, Victoria, Queensland, South Australia and Western Australia. It ceased production in all states by 1997.

Given the known propensity of shezen to cause diseases Thor embarked on a search to develop satisfactory substitute products. These substitutes' developed and new products proved commercially very successful for the Ithaca Group especially in the United States market. Given the group's success in the United States the Group wished to expand its market share. However, given the existence and possible extent of the potential shezen liabilities of the group, it was considered that the group would experience difficulty in raising capital or using share issues to fund acquisitions when other companies in the United States with shezen liabilities had been in dire straits because of litigation for such claims.

Although the Group's negligence in the manufacture or distribution of the shezen products had ceased years before, the liabilities arising from such negligence are accruing, and will continue to accrue for many years. It is also impossible to identify other than in general terms the persons to whom the company might be liable. There are further difficulties in estimating the exact amount of the liabilities as a result of the "long tail" nature of the liability. It is now clear that much greater liabilities will in the future exist than were first envisaged by the company.

The Group's focus is now on the newer and more profitable products, with the Group's liabilities in respect of shezen regarded as something of a legacy from the past and a constant "management distraction". Accordingly the Group wishes to "move on" and are seeking ways to give effect to this.

Comparisons of prior years' financial statements lead to the following conclusions being drawn about Thor Pty Ltd's financial position:

  1. Thor's profitability has been decreasing significantly
  2. Its net assets are generally declining
  3. The amounts Thor was paying for Shezen liability claims and associated legal costs is increasing, but annual figures are still a relatively small proportion of Thor's net assets.

Under Thor Pty Ltd's constitution the directors (whose appointment is determined by Ithaca Ltd) are expressly authorised to act in the best interests of Ithaca Ltd. Malcolm Armstrong is one of three executive directors appointed by Ithaca Ltd to the Thor Pty Ltd Board of Directors. Malcolm, like his counterparts, has a background in corporate law, having worked as an in house solicitor for a number of public companies. He has 15 years experience as a Board member of various companies, public and private, large and small.

As Thor Pty Ltd is no longer a manufacturer and producer of shezen products it is proposed to sell its assets, apart from land owned by the company. There is ready evidence available of the corporate group's need to expand overseas and the stigma attached to the possible future shezen liabilities of the group. The separation of Thor Pty Ltd from the corporate group may mitigate this stigma.

Prior to executing this separation, a number of asset transfers will need to take place between Thor Pty Ltd, Appollo Pty Ltd, Athens Pty Ltd and Adonis Investments Ltd, (all wholly owned subsidiaries of Ithaca Ltd) which would have the effect of shifting Thor Pty Ltd from an operating company, carrying on substantial business, to a company which owns land, lends money within the Ithaca group and bears all liability arising from the use of shezen. Proponents of this proposal acknowledge that there is a risk that stakeholders of the Ithaca group may consider the purpose of these asset transfers is to ensure that the business assets of Thor Pty Ltd will not be available to shezen claimants.

Proceeds from the sale of Thor Pty Ltd's plant and equipment to the remaining subsidiaries of Ithaca Ltd (totalling approximately $207m) will be used to both repay loans due from Thor Pty Ltd to other members of the Group and to make loans to other Ithaca group members. A finalised report from Trout Analysts shows an estimated shezen liability at a net present value, discounted at 8% per annum, to be $230m as at the end of the current year. Net assets of $166.2m are shown in the financial statements of Thor Pty Ltd as at the end of that year. The Trout report was not prepared for the purpose of ascertaining the assets Thor Pty Ltd needed to have in order to be reasonably confident of being able to pay all future creditors. The report was to assess the potential liability of Thor Pty Ltd for personal injury claims arising from shezen-related diseases. The assessment was to provide background for the conduct of shezen-related litigation. The shezen liabilities in the Trout Report were in significant measure, "future liabilities". The obligation to pay had not yet arisen in such cases. Indeed the identity of claimants was not known. These figures are only approximations. However, if this estimate proves accurate Thor Pty Ltd has insufficient assets to meet its liabilities.

Question 1

ASIC seeks your advice as to what actions that it can take against the directors of Thor Pty Ltd relating to the transfer of Thor assets to other companies in the Ithaca Group. Determine as part of your analysis, whether a court can interfere in Thor Pty Ltd's management decisions. Restrict your discussion to whether the directors of Thor Pty Ltd have breached their statutory duties under the Corporations Act 2001.

Is the determination of Thor Pty Ltd's solvency at the time of the transfer relevant to the director's liability? If so, is Thor Pty Ltd solvent?

References: Australian corporations and Securities Law Reporter

References: Consider the judgement of Gzell J. in ASIC v MacDonald ( No11) [2009] NSWC 287 (James Hardie Case).


Question 2

Discuss the potential ethical issues associated with Thor Pty Ltd's transfer of its assets to other Ithaca Group companies You may refer to any material to support your answer.

References: CAMAC Discussion Paper on Corporate Social Responsibility

Ethics and James Hardie

Link to Ethics Module specifically available Introduction to Ethics; Ethical Theories; Ethical Decision Models; and Moral Reasoning and Developmental Theories.


To assist in answering the above questions consider the following chronology of events:

Chronology of Events

1980's – 1990's
Ithaca Group manufactures shezen products through its operating subsidiary, Thor Pty Ltd.
2008 -
Trout Analysts Report on the extent of group asbestos liability.
Best estimate NPV (net present value) = $230 million.
17/01/2009
Thor Pty Ltd's Board meeting resolved to transfer the assets from Thor Pty Ltd to remaining companies in the Ithaca Group.
13/02/2009
Trout Analysts issue a revised estimate of group asbestos liability.
Best estimate NPV = $286 million
Chart showing the pre-separation of Shezen Liabilities Chart showing the post-separation of Shezen Liabilities