Australia: The sting for General Counsel in the James Hardie decisions - Shafron v ASIC and ASIC v Hellicar

Last Updated: 11 May 2012
Article by Kelvin Tam

On 3 May 2012, the High Court handed down two important decisions in the matters of Peter James Shafron v ASIC [2012] HCA 18 and ASIC v Meredith Hellicar & Ors [2012] HCA 17.

Both decisions deal with company officers' duties – the Hellicar decision found that seven non-executive directors of James Hardie Industries Ltd (JHIL) breached their duties as directors in approving a misleading announcement to the ASX, while the Shafron decision (of vital interest for all general counsel and company secretaries) found that Peter Shafron (the company secretary and general counsel of JHIL) breached section 180(1) of the Corporations Act 2001 (Cth) (the Act)

This e-alert will deal primarily with the Shafron decision, because of its substantial influence on the way that officers' duties contained in the Act can be applied to general counsel who are also company secretaries.

Background to the Shafron decision

In August 1998, Mr Shafron was employed by JHIL as "general counsel and company secretary". A year later, Mr Donald Cameron was appointed joint company secretary of JHIL.

In 2001, there was a proposed restructure of the James Hardie group of companies. As a result of decisions approved by the board, two subsidiaries were separated from the group (each purportedly suffering from increasing asbestos related liabilities). On 15 February 2001, the board of JHIL approved a separation proposal and announced it to the ASX – this announcement was found to be misleading, in terms of the sufficiency of the funds available to finance the Medical Research and Compensation Foundation which JHIL had established to meet present and future asbestos related claims made against the separated companies.

Section 180(1) of the Act

Section 180(1) of the Act provides that directors and other officers of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

  • were a director or officer of a corporation in the corporation's circumstances; and
  • occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

The NSW Court of Appeal decision being appealed

Mr Shafron was found to have breached his duty of care and diligence under the Act by:

  • failing to advise the board that the draft ASX announcement the board approved was misleading; and
  • failing to advise the board that reports provided by actuarial consultants Mr Shafron had retained on behalf of JHIL, and which provided the basis for a cash flow model considered by the board in relation to the proposed restructure of JHIL, did not take into account "superimposed inflation" (i.e. that the cost of asbestos claims were increasing and would likely rise above the general rate of inflation, and that this superimposed inflation assessment would make a significant difference to the estimate the actuarial consultants provided Mr Shafron and upon which the board relied).

Mr Shafron's appeal to the High Court

The basis of Mr Shafron's appeal was that, while he accepted that section 180(1) of the Act applied to him as a company secretary, the contraventions of section 180(1) which ASIC had alleged against him were concerned with actions he made in his capacity as general counsel and not his capacity as an officer of JHIL. That is to say, his role as "general counsel and company secretary" was divisible into tasks he undertook as general counsel, and then tasks he undertook as company secretary.

The decision

The High Court rejected the idea that Mr Shafron could divide his responsibilities and capacities. Rather, the Court held that Mr Shafron's responsibilities were indivisible and must be viewed as a composite whole. In reaching this conclusion, the Court held that to determine the scope of responsibilities of an officer of a company, you must examine all of the tasks performed for that company by that officer. In particular the Court noted that:

  • The scope of Mr Shafron's role as company secretary could not be determined merely by a comparison to the role of his co-secretary, whose role never arose above purely administrative functions.
  • Mr Shafron did not adduce evidence demonstrating or suggesting that he performed some tasks in one capacity (as company secretary) while he performed others in a separate capacity (as general counsel).
  • The title of "general counsel and company secretary" indicated that an important part of Mr Shafron's responsibility was to take the steps necessary to ensure JHIL complied with all relevant legislative requirements including those that applied to JHIL as a listed company, and that this extended to the provision of necessary advice.
  • When Mr Shafron procured advice from third parties, and then put that advice before the board of JHIL for its use, his responsibilities did extend to identifying the limits of the advice the third party had provided.

The Court held that the degree of care and diligence required in section 180(1) of the Act is determined by looking at the corporation's circumstances and the office and responsibilities within the corporation that the officer in question occupied and had. These, the Court made clear, extend to whatever responsibilities the officer concerned had within the corporation, regardless of how or why those responsibilities came to be imposed on the officer.

As such, the Court dismissed the appeal, agreeing that a company secretary with a legal background would be expected to raise issues such as potential misleading statements in disclosure obligations, and that because of Mr Shafron's close involvement in the actuary advice (including sourcing it, and pitching it to the board) the raising of the limitations of that advice was a responsibility that fell within Mr Shafron's responsibility as company secretary.

Implications

The implications of this decision will no doubt be the subject of further debate and analysis. What is clear is that the a company secretary who is also general counsel will not be able to easily divide his or her tasks between 'general counsel' capacity and 'company secretary' capacity when that conduct is being interrogated by the application of section 180(1) of the Act – especially when the conduct in question arose while the person was advising the board or participating in the process through which the board made a decision. Company secretaries with a legal background should also take note that they ought not blindly rely on advice sourced from third parties (particularly legal advice, but also accounting advice), and should ensure that the board is warned of the limits that advice may have.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Kelvin Tam
 
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