The James Hardie scandal gained a lot of attention, not only in the nation, but across the globe. This incident led to a number of cases been contended in the courts of Australia, and one of the cases which was born out of this scandal was the case of Peter James Shafron v Australian Securities and Investments Commission (2012) HCA 18; 286 ALR 612. In this case, the court decided upon the limits of obligations put under section 180(1) of the Corporations Act, 2001 (Cth). This case highlighted the manner in which an officer of the company could be held liable for the breach of duty, which is imposed upon them through the governing act (Jacobson, 2012).
After the case was thoroughly analyzed by the court, they held that Shafron had indeed breached the provisions of the Corporations Act (Sainty, 2012). The High Court also rejected the appeal made to it by Shafron unanimously, as they upheld the decision taken by the Court of Appeals. In the following parts, this very case has been analyzed, and the duties breached, along with the decisions given by the judges has been summarized.
Shafron v ASIC (2012)
Shafron was appointed as the company secretary, as well as, the general counsel of James Hardie Industries Limited, i.e., JHIL, in August of 1998. However, till November 1998, he was not appointed as the company secretary in a formal manner. Along with Shafron, Donald Cameron was appointed in November 1999, as the joint company secretary of JHIL. The Board of JHIL decided to meet in February 2001 for carrying out a discussion and consider the proposal regarding the separation from JHIL of two of the group companies, which had major liabilities due to the asbestos issue (Boyce and Macinnis, 2012).
It was held that Shafron had contravened the sections of Corporations Act, particularly the section 180(1). This was due to the fact that he had failed in giving the advice to the JHIL’s chief executive, or even to the board of JHIL for that matter regarding some additional information relating to the proposal pertaining to separation, to be disclosed to the Australian Securities Exchange, i.e., ASX.
Another reason for holding him in contravention of the quoted section is that Shafron failed to provide the board of JHIL with the advice that the actuarial report, which was being relied upon by the company’s board, for deciding upon the proposal of separation, which did not contain the superimposed inflation, which would have been present in a reasonably prepared report. The superimposed inflation denotes the costs of claims which rise at a yearly rate, which is higher than the rate of inflation. So, on the ASX issue and the actuarial issue, Shafron was said to have contravened section 180(1) of the Act (Kemp Strang Lawyers, 2012).
Duties Breached
Corporations Act, through its various sections, imposes different duties over the officers and the directors of the company (References Armstrong Lawyers, 2007). One of such duties imposed over the directors and the other officers of the company, which gives rise to civil obligations, is the duty to act in a careful and in a diligent manner (WIPO, 2015). As per section 180(1) of this act, when an officer discharges their obligations, or when an officer uses their powers which they have by being in such position, they have to undertake a degree of diligence, along with a degree of care, which would be exercised by a reasonable individual in case they held the same position as the officer has in the company or in case they occupied the same office with the same responsibilities as the officer has (ICNL, 2017).
In case an officer fails to fulfill the conditions contained in this particular section, the court has the power of making a declaration of contravention, under section 1317E of this act, against the officer violating the quoted section. And in this declaration of contravention, the civil penalties are also stated, along with providing the details of the conduct, which led to the contravention of this section (Baxt, 2007).
The court went on to consider if his role could be split up or divided to affect the outcome. The word responsibilities under section 180(1) were emphasized upon by the court and referred it as the actual responsibilities of an actual officer. So, in this case it refereed to Shafron’s responsibilities towards JHIL. And they did not simply refer to the stator responsibilities of an individual holding the company secretary position (Boyce and Macinnis, 2012).
The findings of the Court of Appeal were upheld by the High Court regarding the area of responsibility of Shafron in the ASX and the actuarial issues. This was because the court believed that an individual having the qualifications and legal background of a company secretary would have raised these issues. And also because Shafron had a close involvement with regards to the cash flow modeling which was the basis of the actuarial report and this made him responsible for bringing it to the notice of the board that the cash flow modeling had certain limitations. Hence, the responsibilities, as stated under the quoted section, on part of Shafron, by being the company secretary of KHIL were enough to support the findings that a duty of care was owed by him in the two quoted issues (Boyce and Macinnis, 2012).
Decision of the Court
The key issue in this case was whether this section could be applied to Shafron, being an officer of the company. In this regard, section 9 of the Corporations Act, 2001 was taken to be of assistance by the court (Cassidy, 2006). As per this section of the act, an individual is deemed as being an officer of the company when that person holds a senior position in the company, which is just below the level of the board (Australasian Legal Information Institute, 2017). An individual who acts as an officer and participates in the decision making of the company is also included in the definition of being an officer under this section (Federal Register of Legislation, 2017).
It was held by the Court of Appeal of NSW that on two different bases, Shafron could be deemed as the officer of the company (Hunt, 2012). The first one was due to the reasons that he was the company secretary of JHIL. And the second one was that Shafron was an individual who participated or made the decisions which had partly or substantially affected the business of JHIL. Shafron had raised an argument, that being the company secretary, his duties were limited to the functions of a company secretary and hence, they could not be extended to the general counsel functions, for instance the forwarding of advice to the board over the actuarial or the ASX issue (Scott, 2012).
He tried to restrict his company secretarial functions by making an argument that the same had to be put equivalent to the functions of Cameron, who was the joint company secretary and whose functions were administrative. Another argument put forward by Shafron was that as an individual, he never participated in the decision making process regarding the proposal for separation as that particular decision bested with the board of which he was not a member. And a final contention was put forward by Shafron that as an officer, he had never contravened his duties in either of the two issues highlighted earlier (Czoch and Whalebelly, 2012).
After the decision was made by the Court of Appeal of NSW, an application was made by Shafron to the High Court (High Court of Australia, 2012). It was held by the court that in the words of majority, it was greatly to be doubted that the plaintiff could undertake certain functions in his capacity of being a company secretary and the other functions in his capacity of being the general counsel. Justice Heydon had even stated that there was a difficulty in demarcating between the responsibilities which Shafron had by being the general counsel and by being the company secretary. Nothing could prove as evidence that a particular task was undertaken in one capacity and the other was taken in another. This was because in a particular company, the responsibilities of a company secretary are a matter of fact and the functions of Cameron could not prove that his company secretarial functions were same as the administrative functions (Boyce and Macinnis, 2012).
The participation of Shafron was also evaluated in the decision making process. The court held that it was not required to establish that he was or was not the officer of the company, as his role justified his position as being that of an officer of the company. The argument of Shafron was rejected by the court regarding the requirement of an individual to be the decision maker for him to be a participant of the decision making process. Shafron was held to have a seniority level in the JHIL, and he was ranked on the second or third level of seniority by the court. So, even though the proposal for separation was made by the board, Shafron had a large, as well as, active role in the formulation of this particular proposal.
This was because out of the three senior executives, one worked on the proposal with external consultants and went beyond giving information and advice to the board as he participated in the promotion of the proposal for separation to the board. The participation of Shafron in the decision making was evident from the actions, as well as, the decisions of the board in accepting the proposal of the separation. Hence, they held that Shafron owed duty of care to JHIL by being an officer of the company (Boyce and Macinnis, 2012).
In the end, the contentions put forward by Shafron were rejected by the Court and they held that Shafron had indeed contravened section 180(1) of the Corporations Act (Paolini, 2014). Regarding the ASX issue, Shafron contended that he had the right to make reliance on the external lawyers of JHIL for raising the requirement of additional disclosures to the ASX. But even this contention was quashed as in view of the Court as the solicitors neither impliedly nor expressly extended to the consideration on this particular matter.
Regarding the actuarial issue, Shafron contended that he did not have the requisite expertise actuarial knowledge and hence could not have been aware about the provisions pertaining to superimposed inflation. This argument was also quashed in the court by the judges as they held that Shafron was aware about the cost of claims; and that they were rising up faster than the inflation rate and hence, he was deemed to have the knowledge of the same. So, it was held that Shafron failed in taking these facts into account, which resulted in the validity of the actuarial report being significantly impacted. Under this statutory duty, he did not have to suggest the suitable provisions, but was required to bring it to the attention of the board that the provisions needed in this case, had not been made (Boyce and Macinnis, 2012).
Conclusion
This case presents certain key lessons, which are crucial for the officers and the corporations in the nation. The first and foremost lesson learnt from this case is that the Court is not strict in making a decision regarding a person being a director or officer, in the strict literal sense of the Corporations Act. They evaluate the participation of an individual in the decision of the company and then make a decision regarding the individual being an officer of the company or not. The senior executives are not excused from the liabilities which are present in sections like 180(1) for the reasons of not being the ultimate decision makers. If they have the capacity of influencing the decisions, it would be sufficient to deem them as the officer of the company for the purpose of these sections (Boyce and Macinnis, 2012).
Another lesson is that when an individual as specific knowledge or sill set, they have to perform their part to the best of their abilities, regardless of their dual position is the company. And lastly, relying upon the advice of external professionals is not sufficient in discharging the duties contained in section 180(1) of this act. The individuals have to take steps to ensure that they cross check the points on which they are relying (Boyce and Macinnis, 2012).
References
Australasian Legal Information Institute. (2017) Corporations Act 2001. [Online] Australasian Legal Information Institute. Available from: https://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions [Accessed on: 19/05/17]
Baxt, R. (2007) Duties and Responsibilities of Directors and Officers. 19th ed. Sydney, NSW: 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: 19/05/17]
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: 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: 19/05/17]
Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 19/05/17]
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: 19/05/17]
ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 19/05/17]
Jacobson, D. (2012) ASIC v Shafron: Liability Of Company Secretary (James Hardie). [Online] Bright Law. Available from: https://www.saintylaw.com.au/wp-content/uploads/2012/08/Shafron-Vs-ASIC-takeaway-August-2012.pdf [Accessed on: 19/05/17]
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: 19/05/17]
Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, MA: Edward Elgar.
References Armstrong Lawyers. (2007) Directors’ Duties. [Online] Armstrong Lawyers. Available from: https://www.vcta.asn.au/documents/item/400 [Accessed on: 19/05/17]
Sainty, K. (2012) Shafron v ASIC: take-aways for General Counsel. [Online] Sainty Law. Available from: https://www.saintylaw.com.au/wp-content/uploads/2012/08/Shafron-Vs-ASIC-takeaway-August-2012.pdf [Accessed on: 19/05/17]
Scott, P.D. (2012) Shafron v Australian Securities and Investments Commission. University of Tasmania Law Review, 31(2).
Tam, K. (2012) The sting for General Counsel in the James Hardie decisions – Shafron v ASIC and ASIC v Hellicar. [Online] Hunt Hunt. Available from: https://www.hunthunt.com.au/SiteMedia/w3svc1265/Uploads/Documents/Shafron%20decisionMay2012.pdf [Accessed on: 19/05/17]
WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 19/05/17].
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