Question:
Discuss about the Company Law Shafron v ASIC.
Peter James Shafron v Australian Securities and Investments Commission (2012) HCA 18; 286 ALR 612 is amongst the leading cases of present times which sets out an example of what happens when the directors or the key officers of the company, fail to fulfil their obligations covered under the Corporations Act, 2001 (Cth), particularly the ones given in Part 2D.1 (Paolini, 2014). This part covers the duties and responsibilities of directors and other officers of the company. This case was the one in which the court held that there had been contravention of the provisions of this act and so Shafron was made liable. The case became famous as the same was brought to the attention of the world after the scandal of James Hardie. The appeal made by Shafron had also been rejected by the High Court, whereby the decision of the Court of Appeal was deemed as the correct one and hence upheld (Jacobson, 2012). This discussion would elucidate this case in an IRAC based style, where the arguments made by the parties would be highlighted, along with the judgment of this case.
Peter James Shafron had been associated with James Hardie Industries Limited (JL) as a company secretary and general counsel since the period of August 1998. However, he was not appointed on the post of company secretary in a formal manner till the period of November 1998. In 1999, the joint company secretary for JL was brought on roll and this was Donald Cameron. During the middle of February 2011, a meeting of the board of the company was held for discussing and considering on the proposal which separated the company, specifically the two of the group companies, and this was done in the backdrop of the liability being faced by the company due to the asbestos issue (Boyce and Macinnis, 2012).
The key issue of this case was related to the breach of duties of an officer by Shafron on the two key claims of ASIC regarding the ASX matter and in the actuarial issue.
The Corporations Act, 2001 is a key piece of legislation in Australia which provides the duties for the officers of the company and also gives them certain responsibilities, which need to be followed in a strict manner (Armstrong Lawyers, 2007). A contravention of these duties not only results in civil but criminal liabilities as well. Part 2D.1 of this act has the first section which deals with the duty of the officer to act in a diligent and a careful manner (WIPO, 2015). Section 180(1) of this act provides that the officers of the company have to use their powers and discharge their duties in a manner where care and diligence is shown, in such a manner which would be considered as reasonable by a person holding such position and was faced with similar situation as the one faced by the officer in question (ICNL, 2017).
A contravention of this section results in civil liabilities being attracted which are covered under section 1317E of this act (Federal Register of Legislation, 2017). Through this section, the court gets the declaration making power whereby it makes a declaration of contravention against the violators of different sections including section 180(1) (Cassidy, 2006). Upon this declaration being made by the court, the ASIC attains the power of making an application for a disqualification order to be passed against the officer based on section 206C, in addition to making an application under section 1317G for pecuniary penalties against the violator. This declaration of contravention covers the reasons for which the breach had been construed to have been made (Baxt, 2007).
The case revolved around the allegations made by the ASIC where they deemed Shafron as the officer of the company, as a result of which, the duties stated under section 180(1) of the Corporations Act became applicable on him. The base of this claim was the incompetence of Shafron where he did not give the proper advice to the chief executive of JL or to the board of the company regarding the additional information in the matter of separation proposal, which as per the requirements of the Australian Securities Exchange (ASX), had to be disclosed. Apart from this, Shafron was also claimed to have failed in his duties as an officer for not providing the JL’s board the reasonable advice on the matter of the actuarial reports, on which reliance had been placed by the board while deciding on the separation proposal in which there was a lack of the superimposed inflation. The claim regarding this particular violation was based on the requirement of reasonableness in which a reasonable person would prepare a report which would have shown the truth in place of depicting superimposed inflation. The superimposed inflation depicted that the claim costs had been born on yearly rates, which was higher than the rate of inflation. Thus, there had been a clear violation of the duties of office by Shafron in ASX matter and in the actuarial issue (Kemp Strang Lawyers, 2012).
It was contended by Shafron that the applicability of section 180(1) had to be restricted to his functions as a company secretary. He further stated that the violations which had been alleged against him were that of a general counsel and not that of an officer of the company (Jacobson, 2012). He also argued that he had to be put in same light as David as his functions were strictly administrative. He also stated that he had never participated in the decision making of the company, let alone in the separation proposal. And so, he claimed that in both the claimed instances, he had not contravened any duty (Czoch and Whalebelly, 2012). He also contended that he had placed reliance on external lawyers of JL regarding the additional disclosure requirements in context of ASX issue. As the decision was given against him by the NSW Court of Appeal, he made an appeal in the High Court of Australia (High Court of Australia, 2012).
Conclusion (judgment and role of court)
Even though the parties did not claim on the satisfaction of section 9 of this act for holding Shafron as the JL’s company secretary, the same was still analysed by the NSW Court of Appeal. The wordings of section 9 were analysed for this purpose where it was shown that an individual had to be deemed as an officer of the company only when the person holds a senior post in the company, which is just below the level of the board. An individual participating in the decision making of the company would be deemed as an officer of the company for the purpose of section 9 (Austlii, 2017). Two grounds were held for holding Shafron as an officer of the company (Hunt, 2012). The first one was related to his position as a company secretary of JL; and second was due to his participating in the decision-making of JL in a substantial way (Scott, 2012).
For showing that there had been a contravention by Shafron, there was a need to analyse the possibility of the role of Shafron to be divided for having the capacity of impacting the results. In this regard, there was a need to analyse the wording of section 180(1) of this act where it was covered that the actual responsibility of the actual company officer had to be analysed. For this, reference was made to the general counsel of JL. Hence, the reference was not solely based on him being a company secretary but him being the office of JL (Boyce and Macinnis, 2012).
The Court of Appeal had held that there had indeed been a contravention of the quoted section by Shafron and this was in both the matters, i.e., the ASX and the actuarial matter. This was because Shafron had a law background and owing to his qualifications of being a company secretary, he was required to raise these matters before the board of JL. He was also closely linked in the modelling of cash flow which was based on actuarial report which made it his responsibility for brining the issue to the notice of the board as he was the company secretary, and also to inform that about the limitation covered under the modelling of cash flow. These contraventions were deemed as ample by the Court of Appeal which led them to believe that Shafron owed a duty of care in both the issues as JL’s company secretary and that he same had been breached. This decision was appealed against by Shafron in High Court, which upheld the decision of the Court of Appeal For showing that there had been a contravention by Shafron, there was a need to analyse the possibility of the role of Shafron to be divided for having the capacity of impacting the results. In this regard, there was a need to analyse the wording of section 180(1) of this act where it was covered that the actual responsibility of the actual company officer had to be analysed. For this, reference was made to the general counsel of JL. Hence, the reference was not solely based on him being a company secretary but him being the office of JL (Boyce and Macinnis, 2012).
When the matter reached the High Court, they held that the majority of the bench was of the view that Shafron did indulge in some functions which were that of company secretary and in other instances as a general counsel. In the opinion of Justice Heydon, the two roles played by Shafron could not be bifurcated and it could not be shown that he could do some things as general counsel and some things as a company secretary. The severance of the functions could not be established between Shafron and David and it also could not be shown that Shafron had the same administrative functions as that of David (Boyce and Macinnis, 2012).
The court also took into consideration the decision making of Shafron as he was participated in the decision making process of the company. He was at a senior level which was amongst the top levels of the company. This separation proposal being conducted by the board had a major role of Shafron as he was the one who formed the proposal. So, his actions made it apparent that he was participating in the decision making of the company. Hence, a duty of care was owed by him towards JL in the view of the High Court (Boyce and Macinnis, 2012).
The court thus rejected all of the objections and allegations made by Shafron and came to the conclusion that there had indeed been a contravention of section 180(1) of the Corporations Act, as was provided by the NSW Court of Appeal. The High Court rejected his claim of reliance on external lawyers as they were not extended to the matter at hand in either express or implied manner. The lack of requisite knowledge about the superimposed inflation was also rejected by the High Court. The reason for quashing this contention was based on the clear knowledge which Shafron held regarding the cost claims and these were shown to be rising at a faster pace in comparison to the rates of inflation, which showed that he held the requisite knowledge. The failure of Shafron in upholding his duties thus impacted the actuarial issues, where he had to bring forth this matter before the board of JL, which Shafron failed to do (Boyce and Macinnis, 2012).
The verdict of the High Court shows the need of the directors and officers of the companies in Australia to follow the provisions of the Corporations Act and to follow these strictly. The case also showed an example of the hierarchy structure of the judiciary in the nation, where the matters are first refereed to lower courts and then to the highest court in hierarchy to decide on the matter at hand.
References
Armstrong Lawyers. (2007) Directors’ Duties. [Online] Armstrong Lawyers. Available from: https://www.vcta.asn.au/documents/item/400 [Accessed on: 24/11/2017]
Austlii. (2017) Corporations Act 2001. [Online] Austlii. Available from: www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/ [Accessed on: 24/11/2017]
Baxt, R. (2007) Duties and Responsibilities of Directors and Officers. 19th ed. Sydney, New South Wales, Australia: The Australian Institute of Company Directors.
Boyce, L., and Macinnis, A. (2012) Shafron v ASIC – general counsel, or counsel of perfection?. [Online] Dibbs Barker. Available from: https://www.dibbsbarker.com/publication/Shafron_v_ASIC_-_general_counsel__or_counsel_of_perfection.aspx [Accessed on: 24/11/2017]
Cassidy, J. (2006) Concise Corporations Law. 5th ed. New South Wales, Australia: The Federation Press.
Czoch, K., and Whalebelly, R. (2012) Australia: The James Hardie Decisions: ASIC v Hellicar & Ors [2012] HCA17; Shafron v ASIC [2012] HCA 18. [Online] Mondaq. Available from: https://www.mondaq.com/australia/x/176336/Directors+Officers+Executives+Shareholders/The+James+Hardie+Decisions+ASIC+v+Hellicar+Ors+2012+HCA17+Shafron+v+ASIC+2012+HCA+18 [Accessed on: 24/11/2017]
Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 24/11/2017]
High Court of Australia. (2012) Peter James Shafron v Australian Securities and Investments Commission. [Online] High Court of Australia. Available from: https://www.hcourt.gov.au/assets/publications/judgment-summaries/2012/hcasum18_Shafron_v_ASIC.pdf [Accessed on: 24/11/2017]
ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 24/11/2017]
Jacobson, D. (2012) ASIC v Shafron: Liability Of Company Secretary (James Hardie). [Online] Bright Law. Available from: https://www.brightlaw.com.au/asic-v-shafron-liability-of-company-secretary-james-hardie/ [Accessed on: 24/11/2017]
Kemp Strang Lawyers. (2012) James Hardie decisions – implications for general counsel and company secretaries. [Online] Kemp Strang Lawyers. Available from: https://www.kempstrang.com.au/publication/james-hardie-decisions-implications-general-counsel-and-company-secretaries [Accessed on: 24/11/2017]
Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, Massachusetts, United States: Edward Elgar.
Scott, P.D. (2012) Shafron v Australian Securities and Investments Commission. University of Tasmania Law Review, 31(2).
WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 24/11/2017]
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