Scott, Peter Dominick --- "Shafron v Australian Securities and Investments Commission (2012) 286 ALR 612" [2012] UTasLawRw 16; (2012) 31(2) University of Tasmania Law Review 155

• I INTRODUCTION
• II BACKGROUND TO THE APPEAL
• III THE DECISION
• A Was Mr Shafron an ‘Officer’?
• B Liability Under s 180(1)
• IV CONCLUSION AND SIGNIFICANCE OF THE DECISION

---

Case Notes

Shafron v Australian Securities and Investments Commission (2012) 286 ALR 612

I INTRODUCTION

In May this year the High Court of Australia handed down an important clarification of the scope of directors’ duties in Shafron v Australian Securities and Investments Commission (2012) 286 ALR 612 (‘Shafron’).^[1] This case defines the extent of responsibility of officers, within the definition of s 9 of the Corporations Act 2001 (Cth) (‘the Corporations Act’),^[2] where they undertake dual roles within a corporation. In these cases the two roles are not severable for the purposes of examining the duty of care and diligence owed by the officer under s 180(1) of the Corporations Act. Shafron also clarifies what constitutes ‘participation in decision making’ for the purposes of the definition of ‘Officer’ in s 9(b)(i) of the Corporations Act.

II BACKGROUND TO THE APPEAL

The culmination of the ‘James Hardie Cases’,^[3] Shafron concerns misleading statements to the ASX about the ability of the foundation set up by James Hardie Industries Ltd (‘JHIL’), to satisfy the compensation claims of asbestos victims. Peter Shafron, the appellant, was employed as both general counsel and company secretary for JHIL, beginning in late 1998. He was joined in this role by Mr Donald Cameron in late 1999. Due to the activities of two subsidiaries, JHIL was exposed to liability to compensate asbestos victims. In 2001 JHIL planned to establish a foundation to deal with these claims transferring the equity of the two subsidiaries to the foundation and entered a deed of covenant and indemnity (‘DOCI’). Litigation resulted from inaccuracies in the cash flow modelling and statements made to the ASX.

The NSW Court of Appeal found Mr Shafron had acted in contravention of s 180(1) of the Corporations Act. ^[4] These contraventions arose from two omissions. The first, a failure to give advice to the board of JHIL and its chief executive officer Peter McDonald, regarding the need to disclose information about a deed of covenant and indemnity. And secondly, a failure to voice concerns to the board about the accuracy of an actuarial report which failed to take into account superimposed inflation, something which a prudential actuarial report would have done given the effect that this had on cash flow predictions. Special leave to appeal to the High Court was granted and the appeal proceeded firstly, on the issue of whether Mr Shafron was an ‘officer’ and the meaning of ‘participation in decision making’. And secondly, whether Mr Shafron was liable under s 180(1).

III THE DECISION

The court handed down a majority judgement per French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ, as well as the judgement of Heydon J, who agreed with the outcome. The two judgements are the same in substance and will be discussed together.

A Was Mr Shafron an ‘Officer’?

Mr Shafron conceded that he was an officer under s 9(a) of the Corporations Act as company secretary, but not the wider sense provided in s 9(b)(i), which was the finding of the Court of Appeal.^[5] The relevance of this is that Mr Shafron sought to argue that as he was only the company secretary his responsibilities were administrative and similar to those of the other company secretary, Mr Cameron. This is in contrast with a s 9(b)(i) officer ‘who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation.’ Based on a s 9(a) definition of ‘Officer’, Mr Shafron then sought to separate his role as company secretary from his other role as general counsel for the purposes of assessing his obligations under s 180(1). Proceeding on this assumption, Mr Shafron then argued that he was under no obligation to tender legal advice in his capacity as the company secretary, rather this was reserved for his role as general counsel. It was held that it is not possible to divide the two roles undertaken by Mr Shafron at JHIL.^[6]

1 The Meaning of ‘participation in decision making’

Also relevant here is the finding that Mr Shafron was not only an officer by virtue of his role as secretary^[7] but also under the wider definition in s 9(b)(i) as someone who participated in the making of decisions. The court held that whether an individual falls within the definition in s 9(b)(i) requires analysis of the role that the person plays in the corporation. Participating requires the individual being closely involved in the formulating of significant decisions and does not require the individual to be the ultimate decision maker. It was found that, as one of the top three executives at JHIL and due to his high level of involvement in the formulation of the separation proposal, Mr Shafron fell within s 9(b)(i). It was also relevant that Mr Shafron was an employee of the company and not an external advisor.^[8]

B Liability Under s 180(1)

Section 180(1) of the Corporations Act provides for liability where an officer or director fails to discharge their duties with the degree of care and diligence that a reasonable person would if: they were a director or officer of a corporation in the corporations circumstances; and occupied the office held by and had the same responsibilities within the corporation as, the director or officer in question. Whilst this is largely an objective test,^[9] the High Court reconfirmed that the responsibilities referred to in s 180(1) are not confined to statutory responsibilities; they include whatever responsibilities the officer concerned had within the corporation, regardless of how or why those responsibilities came to be imposed on that officer.^[10] Therefore the knowledge of Mr Shafron in his capacity as general counsel and other expertise, notably his knowledge of cash flow modelling, was relevant in assessing the applicable standard required under s 180(1).

2 Failure to advise the board to disclose information regarding DOCI information

Based on the knowledge identified above, the court found that Mr Shafron had a duty to advise the board of JHIL on the ASX disclosure requirements regarding the DOCI. Further, the retainer of the solicitors of JHIL did not extend to providing this information and therefore they could not be relied upon to provide such information. Mr Shafron failed to provide this information and was consequently in breach of s 180(1) in this regard.

3 Failure to advise board that actuarial report did not take into account superimposed inflation

The decision of the New South Wales Court of Appeal was upheld on the basis that,

[Mr Shafron] knew that JHIL’s experience was that the cost of claims was increasing at a much higher rate than the general inflation rate. A reasonable person with his responsibilities... would have drawn [the attention of the board to this].^[11]

The Court found that as Mr Shafron, although not an actuary himself, was ‘acquainted’ with the concept of superimposed inflation and the necessity of this in discounting future cash flows for the purpose of estimating asbestos liabilities he had a duty bringing this to the attention of the board.^[12] He did not discharge this duty.

IV CONCLUSION AND SIGNIFICANCE OF THE DECISION

Shafron has far-reaching implications for those serving both as officer, within the definition of s 9 of the Corporations Act and other roles. The decision states that the two roles are not severable for the purposes of the duty of care and diligence requirements^[13] of the Corporations Act. The role of an officer extends not only to the statutory responsibilities but to the responsibilities actually undertaken by the officer. In the case of Mr Shafron, he could not divide his responsibilities as the company secretary and as general counsel. Further the test of participation for the purposes of s 9(b)(i) is clarified as requiring the individual being closely involved in the formulating of significant decisions and does not require the individual to be the ultimate decision maker. Finally the case reconfirms that the standard of care in s 180(1) as incorporating the actual responsibilities the officer concerned had within the corporation not just the statutory responsibilities.

In their decision in Shafron,^[14] the High Court reaffirms, in no uncertain terms, the tough stance the courts will take in regards to the duty of care and the standard of care owed by officers and directors.^[15] This decision serves as another warning to those who serve on boards covered by the Corporations Act, that a high standard of care is required and subjective knowledge as well as specialised responsibilities may increase this standard further.

Peter Dominick Scott^[∗]

---

^[1] [2012] HCA 18 (3 May 2012). This case was decided contemporaneously with Australian Securities and Investments Commission v Hellicar, (2012) 286 ALR 501; [2012] HCA 17 (3 May 2012) (‘Hellicar’). This case note is restricted to the decision in Shafron.

^[2] The Corporations Act.

^[3] See litigation history: Australian Securities and Investments Commission v Hellicar (2012) 286 ALR 501; Morley v Australian Securities and Investments Commission [2010] NSWCA 331; (2010) 274 ALR 205; (‘Morley’); Australian Securities and Investments Commission v Macdonald (No 12) (2009) 259 ALR 116; James Hardie Industries NV v ASIC [2010] NSWCA 332 (17 December 2010); ASIC v Macdonald (No 11) [2009] NSWSC 287 (23 April 2009).

^[4] Morley [994], [1074].

^[5] Morley [894]-[898].

^[6] Shafron [5], [10], [11], [13], [15], [16] (French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ) and [40]; [41] (Heydon J).

^[7] Under the Corporations Act 2001 (Cth) s 9(a).

^[8] Shafron v Australian Securities and Investments Commission (2012) 286 ALR 612, [30].

^[9] Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287; (2009) 256 ALR 199.

^[10] Shafron v Australian Securities and Investments Commission (2012) 286 ALR 612, [18] (French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ).

^[11] Morley [1035].

^[12] Shafron, [34].

^[13] Corporations Act 2001 (Cth) s 180(1).

^[14] Combined with the decision in Hellicar.

^[15] See the long line of decisions indicating the high standard of care required by s 180(1) of the Corporations Act: ASIC v Adler [2002] NSWSC 171; (2002) 41 ACSR 72; ASIC v Rich [2003] NSWSC 85; (2003) 174 FLR 128; ASIC v Vines [2003] NSWSC 1116; (2004) 22 ACLC 37; ASIC v Rich [2009] NSWSC 1229; (2009) 236 FLR 1; ASIC v Healey [2011] FCA 717; [2011] 196 FCR 291.

^[∗] Fourth year BBus-LLB student at the University of Tasmania, and member of the Editorial Board of the University of Tasmania Law Review for 2012. The author would like to thank Lynden Griggs, a Senior Lecturer at the University of Tasmania, for his helpful comments in the preparation of this case note.