Justice Margaret Stone has rejected CSR's application for an order convening a shareholder meeting to vote on the demerger, meaning that the scheme of arrangement cannot proceed.

Concerns about the impact of the demerger on asbestos compensation were raised by the Australian Securities and Investments Commission, the NSW Government, the Asbestos Injuries Compensation Fund (a body set up by James Hardie after its compensation trust was found in 2004 to be grossly underfunded, which often shares liability for compensation with CSR) and James Hardie.

The judge said expert evidence put to the court by CSR and these objecting parties showed "divergent" opinions on whether CSR would be able to meet its liabilities to asbestos victims if the spin-off of its sugar business into a new company proceeded.

"It is not the role of the court to resolve such uncertainty however the degree of uncertainty evidenced by the divergent opinions has led the court to conclude that the draft statement explaining the implications of the proposed demerger to shareholders would not adequately disclose those uncertainties," Justice Stone said.

"Moreover, the court has also concluded that the potential disadvantage to those having asbestos related claims is such that the demerger is inconsistent with public policy and commercial morality," she said.

"After demerger CSR would be less likely to be able to meet its future asbestos liabilities."

CSR shares had gone into a trading halt ahead of the ruling, and were last trading at $1.845.

Last month, CSR rejected an approach by China's Bright Food Group, to buy its sugar and renewable energy division for $1.5 billion.