New Zealand: The importance of being frank (with the board)

Brief Counsel
Last Updated: 8 March 2011
Article by Geof Shirtcliffe, Roger Wallis and John Holland

Most Read Contributor in New Zealand, September 2016

The New South Wales Appeal Court recently upheld penalties for breach of directors' duties against two former executives of James Hardie Industries Limited (JHIL). Although, unlike Australia, New Zealand law does not expressly impose directors' duties on company "officers", it would be a mistake to think that the judgment is therefore not relevant to New Zealand.

In particular, chief executives and members of board committees should understand its implications – and ensure that they provide the board with all information material to its decisions.

The context

JHIL was under intense pressure at the start of the new millennium to insulate the company's asbestos-related exposure from the rest of the business because proposed accounting standard changes would have required JHIL to include in its balance sheet a provision for future asbestos claims.

Senior management had been exploring restructuring options for some time and were under direction from the board that they needed to be able to satisfy the market and asbestos victims that there would be sufficient funding to meet present and future claims.

The final proposal, approved by the board on 15 February 2001, was to create a trust - the Medical Research and Compensation Foundation – in which the shares of the two subsidiary companies responsible for the group's historic asbestos production would be vested, together with other assets to a net value of $293 million. In return, a Deed of Covenant and Indemnity (DOCI) would be entered into, indemnifying JHIL from any further liability.

However, the strategy bombed spectacularly. Within two years of implementation, the Foundation was reporting a serious shortfall in funds. Within four years, JHIL was the subject of a judicial Commission of Inquiry. Within nine years, disqualification orders and penalties had been awarded against the CEO, the CFO, the General Counsel and the seven non-executive directors who participated in the 15 February board meeting.

All parties except the CEO appealed. The breaches against the non-executive directors were discharged by the Appeal Court but the appeals by the CFO, Phillip Morley, and the General Counsel, Peter Shafron, largely failed.

Appeal Court findings against Morley and Shafron

Shafron was found to have contravened his duty of care and diligence on two counts:

  • failure to advise the CEO and the board that the DOCI should be notified to the market under the continuous disclosure requirements, and
  • failure to inform the board that the actuarial assessment underpinning the funding allocation to the Foundation was not based on the most recent data and had only a 50% probability of being achieved.

Morley was found in contravention for failing to advise the board that the reviews of the cash flow modelling by external experts were restricted to the logical soundness and technical correctness of the model and explicitly excluded consideration of the model's key assumptions, including an assumed 11.7% return on investments.

Implications for New Zealand

The Australian Corporations Act places the same duties of care and diligence on "officers" of the company as on directors. The New Zealand Companies Act does not. But this does not mean the case can be ignored on this side of the Tasman. In particular, it is relevant to chief executives and directors who sit on board committees.

  • Chief executives. Under the New Zealand Companies Act, "director" includes (for the purposes of core directors' duties) "a person to whom a power or duty of the board has been directly delegated ... with that person's consent or acquiescence". This will typically be the chief executive (and may sometimes include others, such as the CFO). A chief executive who is required to play a role in relation to a transaction (analysis, negotiation, entry under delegated authority) might be regarded as a "deemed director" and accordingly required to exercise the care, diligence and skill of a reasonable director in respect of that role.
  • Board committees. Under the Companies Act, a director must exercise the degree of care, diligence and skill which a reasonable director would exercise in the circumstances taking into account (amongst other things) "the nature of the responsibilities undertaken" by him/her. A director who has agreed to sit on a board committee – for example, an ad hoc committee established to play the lead governance role for a major transaction – may well have more extensive obligations than those which apply to non-committee members.

In either case, failure by the chief executive or committee members properly to inform the main board of all matters material to the decision might mean they are found liable for breaching their duty of care (as directors), even if the other board members (who relied on them) were not.


As with most (all?) other recent cases involving liability for alleged breach of disclosure obligations, this case is very fact-specific. It nonetheless provides some useful lessons/reminders for directors (and direct board delegates).

  • Ensure that you understand the full extent of your responsibilities. (Shafron sought to use as a defence the fact that he had not actually participated in the decision-making, but the Court found that "it is a reality of corporate life that board and other important decisions involve many persons other than the ultimate decision-makers".)
  • For important or sensitive decisions, err on the side of caution – even to the extent of telling the board things you think are obvious or that they already know. (Shafron failed to advise the board that a draft ASX release was "too emphatic" regarding the sufficiency of the Foundation's funding. He argued that this was not necessary as he had told the board many times that the actuarial estimates were subject to qualifications and uncertainty. In the event, no contravention was made against him for this lapse, but only because the Court of Appeal found that the board had not approved the statement.)
  • Do not rely blindly on the presence of external advisers. (The Court of Appeal rejected Shafron's argument that an external law firm represented at the board meeting should have advised that the DOCI came within the continuous disclosure rules, saying that the obligation did not apply as JHIL had not explicitly sought the firm's advice on the issue.)
  • As a corollary, carefully consider the information and advice received as a whole and ensure that any "gaps" (such as untested assumptions or material limitations on advice) are identified to the board for it to consider.

Other commentaries

An earlier, more general Chapman Tripp commentary on the Appeal Court decision is available here.

We have also written an article for the Institute of Directors on the implications of the case for non-executive directors.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Roger Wallis
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.