Shafron v Australian Securities and Investments Commission

Shafron v Australian Securities and Investments Commission

On appeal from the Supreme Court of New South Wales

B W Walker SC with R P L Lancaster SC and N J Owens for the appellant (instructed by Middletons Lawyers)

S J Gageler SC, Solicitor-General of the Commonwealth with A J L Bannon SC, R T Beech-Jones SC and S E Pritchard for the respondent (instructed by Clayton Utz Lawyers)

Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

Shafron v Australian Securities and Investments Commission

Corporations - ­­Duties and liabilities of directors and officers - Section 180(1) of the Corporations Act 2001 (Cth) ("the Act") required directors and officers of a corporation to discharge duties with degree of care and diligence that reasonable person in their position and with their responsibilities would exercise - "Officer" defined in s 9 of the Act ­- Paragraph (a) of definition provided that secretary of a corporation is an "officer" - Paragraph (b)(i) of definition provided that person who "participates in making" decisions that substantially affect business of corporation is an "officer" - Appellant was company secretary and general counsel of corporation - Whether appellant participated in making decisions substantially affecting business of corporation - Whether s 180(1) applied to all tasks that officer of corporation performed within that corporation - Whether responsibilities of company secretary and general counsel divisible - How scope of "responsibilities within the corporation" of an officer to be determined.

Words and phrases - "in the capacity of", "occupied the office held by", "officer", "participate in making", "real contribution", "responsibilities within the corporation".

Corporations Act 2001 (Cth), s 9 (definition of "officer"), s 180(1).

1. FRENCH CJ, GUMMOW, HAYNE, CRENNAN, KIEFEL AND BELL JJ. This appeal arises out of the same circumstances as, and was heard immediately after, the appeals brought by the Australian Securities and Investments Commission ("ASIC") against Meredith Hellicar and others including the appellant in this matter, Peter James Shafron. The reasons in this matter should be read with the reasons in those other matters[1] for it is there that the facts and circumstances giving rise to this appeal are fully described. It is convenient, however, to set out shortly some of the more important facts relevant to this appeal.
2. In August 1998, Mr Shafron was employed as "general counsel and company secretary" of James Hardie Industries Ltd ("JHIL"). He was appointed company secretary on 13 November 1998. Just over a year later, on 17 November 1999, Mr Donald Cameron was appointed joint company secretary of JHIL with Mr Shafron.
3. The Court of Appeal found[2] that Mr Shafron had contravened s 180(1) of the Corporations Law, and thus incurred a liability under the equivalent provision of the Corporations Act 2001 (Cth) ("the Corporations Act")[3], in two respects that are put in issue in this appeal. Both contraventions were contraventions by omission: failing to give certain advice, in the one case, to the chief executive officer (Mr Macdonald) or the board of JHIL and, in the other, to the board of JHIL. To paraphrase the provisions of s 180(1), the Court of Appeal found that Mr Shafron, an officer of JHIL, did not exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise if that person were an officer of a corporation in JHIL's circumstances and occupied the office held by, and had the same responsibilities within the corporation as, Mr Shafron.
4. The advice which the Court of Appeal found[4] should have been given either to Mr Macdonald or to the board of JHIL was advice to the effect that certain information about the Deed of Covenant and Indemnity which was to be given by James Hardie & Coy Pty Ltd ("Coy") and Jsekarb Pty Ltd ("Jsekarb") to JHIL should be disclosed to the Australian Stock Exchange ("the ASX"). It will be convenient to call this information the "DOCI information". The other contravention found[5] was his failing to advise the board of JHIL that material (referred to as the "February 2001 Trowbridge Report" and the "Trowbridge 50 Year Estimate") provided by actuarial consultants retained by Mr Shafron on behalf of JHIL - Trowbridge Deloitte Ltd - mentioned to the board and used as the basis for a cash flow model considered by the board at its February 2001 meeting in relation to the proposal for separation of Coy and Jsekarb from JHIL did not take into account "superimposed inflation" and that a prudent estimate would have done so. (As the Court of Appeal observed[6], "superimposed inflation" is "an actuarial concept referring to the potential for the cost of claims to increase at a level above the general rate of inflation"; it was a concept with which the Court of Appeal said[7] Mr Shafron was "acquainted".)

1. Mr Shafron presented his appeal as raising three questions:

(a) In what respect or respects did the statutory definition of "officer" apply to him?

(b) Having regard to the answer given to the first question:

(i) Did he fail to exercise the relevant standard of care by failing to advise either the chief executive officer or the board that the DOCI information should be disclosed to the ASX?

(ii) Did he fail to exercise the relevant standard of care by failing to advise the board that the Trowbridge material did not take account of superimposed inflation but should have?

These reasons will demonstrate, however, that regardless of whether any other element of the definition of "officer" applied to Mr Shafron, s 180(1) of the Corporations Law (and thus the Corporations Act) applied to him because he was a company secretary of JHIL. Because this is so, the relevant statutory inquiry was what were the responsibilities he had within JHIL, not an inquiry which sought to divide the capacities in which those responsibilities were undertaken: whether between a role of company secretary and some other role, or otherwise.

1. The term "officer" of a corporation was defined by s 9 of the Corporations Law (and is defined by s 9 of the Corporations Act) as:

"(a) a director or secretary of the corporation; or

(i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or

(ii) who has the capacity to affect significantly the corporation's financial standing; or

(iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation); or

(c) a receiver, or receiver and manager, of the property of the corporation; or

(e) an administrator of a deed of company arrangement executed by the corporation; or

(g) a trustee or other person administering a compromise or arrangement made between the corporation and someone else." (emphasis added)

1. At no stage of the litigation has it been disputed that, as company secretary of JHIL, Mr Shafron was an officer of JHIL within par (a) of the definition. The Court of Appeal also concluded[8] that Mr Shafron was a person who, at the relevant times, participated in making decisions that affected the whole, or a substantial part, of the business of JHIL and thus was an officer within par (b)(i) of the definition.
2. Mr Shafron submitted, in effect, that his obligation of care and diligence was limited to performance of those responsibilities that attached to the office held or the circumstances that made him an "officer". That is, if he was an officer only because he was company secretary, his obligations under s 180(1) were limited to the exercise of powers and discharge of duties as secretary, without regard to any powers or duties as general counsel. Thus, Mr Shafron further submitted, only if he fell within par (b)(i) of the definition of "officer" might it be said that a reasonable person, being an officer of a corporation in JHIL's circumstances and occupying the office held by and having the same responsibilities within the corporation as Mr Shafron, would have tendered the advice which the Court of Appeal found that he should have tendered but did not. He submitted that his responsibilities as company secretary did not extend to tendering that advice. Rather, he argued, "his conduct at issue in these proceedings was not done in his capacity as company secretary, but rather was done in his capacity as general counsel".
3. Mr Shafron's arguments can be seen to have proceeded by three steps: first, there should be a division of his duties and responsibilities between those undertaken "in the capacity of" general counsel and those undertaken "in the capacity of" company secretary; second, he denied that his duties and responsibilities as company secretary extended to tendering advice of the relevant kind; and third, he denied that he was an "officer" of the company on another and wider basis that would have carried duties and responsibilities that did extend to tendering such advice.
4. The first of these steps assumed that it was possible to divide the duties and responsibilities of a person engaged by a company as "general counsel and company secretary" between the two elements of the single, composite description given to the job. The first step in Mr Shafron's argument further assumed that the making of such a division was relevant to the application of s 180(1). Neither assumption can be made. The first step in Mr Shafron's argument was not made good.

"A director or other officer 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:

(a) were a director or officer of a corporation in the corporation's circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer."

The degree of care and diligence that is required by s 180(1) is fixed as an objective standard identified by reference to two relevant elements - the element identified in par (a): "the corporation's circumstances", and the element identified in par (b): the office and the responsibilities within the corporation that the officer in question occupied and had. No doubt, those responsibilities include any responsibility that is imposed on the officer by the applicable corporations legislation. But 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.

1. Contrary to Mr Shafron's submissions, reading s 180(1) in this way does not render the opening words of par (b) - "occupied the office held by" - otiose. The effect of par (b) of s 180(1) is to require analysis of what a "reasonable person" in the same position as the officer in question would do. His or her position is not adequately described unless regard is had both to the office held and to the responsibilities that the person has. Further, Mr Shafron's submissions ignored the evident difficulty in defining, for the purposes of limiting the conduct considered, the content of "the office held" where a person is an officer by virtue of par (b)(i), (ii) or (iii) of the definition of "officer" in s 9. A construction which avoids that difficulty, and avoids a more limited operation of s 180(1) in relation to some officers than in relation to others, is to be preferred.
2. In this case, Mr Shafron's responsibilities were found by both the primary judge[13] and the Court of Appeal[14] to have included the tendering of relevant advice (including legal advice) about disclosure requirements. As the Court of Appeal rightly said[15]:

"A company secretary with legal background would be expected to raise issues such as potential misleading statements (in relation to the draft ASX announcement) and disclosure obligations (in relation to the DOCI) with the board. Ordinarily it might not be the same with respect to a matter such as the JHIL cash flow modelling, which required particular expertise. But Mr Shafron had a quite close involvement with the cash flow modelling, and raising the limitations of the cash flow model [based on the material Mr Shafron had obtained from Trowbridge] is by no means a legal matter for the attention of general counsel; the involvement, and raising the limitations, in our view fell within Mr Shafron's responsibilities as company secretary." (emphasis added)

That is, Mr Shafron's "responsibilities within the corporation"[16] extended to the several subjects identified. Once it was found that his responsibilities extended to those subjects, the question became whether Mr Shafron undertook those responsibilities with the requisite degree of care and diligence.

1. This being so, it is not strictly necessary to consider the arguments advanced by Mr Shafron about the engagement of par (b)(i) of the definition of "officer". It is as well, however, to say something shortly about the question.

1. The proposition central to Mr Shafron's argument about the application of par (b)(i) of the definition of "officer" - that he was not a person who participated in making decisions that affected the whole, or a substantial part, of the business of JHIL - was that "in order to 'participate in making a decision' a person must have a role in actually making the decision" (emphasis in original). While Mr Shafron accepted that this "does not mean that a person must have 'ultimate control'", the idea of participating in making a decision was, it was submitted, "quite different from being concerned in or taking part in the management of a company". Mr Shafron argued that the fact that he "provided information and advice to the board to assist it in its decision making" did not mean that he "participated" in that decision making, even if it could be said that he made a "real contribution" to it. That is, Mr Shafron submitted, demonstrating a "real contribution … to the making of the decisions"[17] was not sufficient to establish participation in the making of the decisions, and it was the board (not he) who decided whether the separation proposal should be adopted and what information should be given to the ASX.
2. Several points should be made about the proper construction and application of par (b)(i) of the definition of "officer". First, the inquiry required by this paragraph of the definition must be directed to what role the person in question plays in the corporation. It is not an inquiry that is confined to the role that the person played in relation to the particular issue in respect of which it is alleged that there was a breach of duty. Thus in this case the inquiry to be made about Mr Shafron's role was not confined to what he did in connection with the separation proposal. Of course, the role he played in connection with the separation proposal may itself demonstrate that he made or participated in making decisions of the requisite character, but that need not be the only material to which attention may be directed.
3. Second, in a case like the present, where the breaches of duty alleged were omissions to provide advice, it is evident that determining how a reasonable person occupying the same office and having the same responsibilities would exercise the powers and discharge the duties of that office may be assisted by consideration of how the officer in question acted on occasions other than the one which is alleged to give rise to a breach of the duties imposed by s 180(1). It was, therefore, relevant for the Court of Appeal to notice[18] what Mr Shafron had done at JHIL in connection with matters other than the separation proposal and, contrary to Mr Shafron's submission, there was no denial of natural justice in its doing so.

1. There remains for consideration so much of Mr Shafron's appeal as alleged that he had not been shown to have acted without due care and diligence in respect of either the DOCI information or the question of superimposed inflation. More particularly he alleged, first, that the Court of Appeal was wrong to have found[28], as had the primary judge[29], that he breached s 180(1) by not advising Mr Macdonald or the board that they needed to consider whether disclosure of the DOCI information to the ASX was required, by not obtaining advice for Mr Macdonald or the board or giving his own advice to the board about that matter, or by not advising Mr Macdonald or the board to decide to disclose the information. Second, he alleged that the Court of Appeal was wrong to find, as it did[30], that in making a presentation to the board about the material provided by Trowbridge which formed the basis of the cash flow model considered at the February 2001 board meeting he did not advise the board that the Trowbridge material did not allow for superimposed inflation and prudence warranted making that allowance.
2. As to the first of these matters it is enough to say that there is no reason to doubt the correctness of the factual findings made in relation to this aspect of the matter by both the primary judge and the Court of Appeal. It follows that Mr Shafron's argument in this Court, that he "was entitled to assume that Allens [JHIL's solicitors] would have advised him if disclosure of the DOCI [i]nformation to the ASX was required", founders on the rock of the finding at trial[31], not disturbed on appeal[32], that Allens' retainer neither expressly nor impliedly extended to considering that question.
3. As to the second matter, there is again no reason to doubt the correctness of the conclusion reached by the Court of Appeal. As the Court of Appeal recorded[33]:

"Mr Shafron had a primary involvement with Trowbridge's estimates, including knowledge of the significance of superimposed inflation. He made the slide presentation concerning Trowbridge's estimates at the February meeting. In the June [2000] draft report Trowbridge had pointed out that their estimates of asbestos liabilities did not allow for superimposed inflation, and the significant difference which such an allowance could make. It was not a matter of Mr Shafron second‑guessing Trowbridge. He 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 made sure that the board knew of those matters, and in our opinion, would have drawn to the board's attention, as a matter highly significant to the reliance to be placed on the cash flow modelling, that no allowance had been made for superimposed inflation and that prudence warranted that an allowance should be made." (emphasis added)

1. Contrary to Mr Shafron's submissions in this Court, the conclusion reached by the Court of Appeal did not depend upon Mr Shafron bringing to bear any expert actuarial knowledge about what was an appropriate rate for superimposed inflation. What the Court of Appeal decided was that a reasonable person with his responsibilities (which included commissioning the Trowbridge material) would have drawn to the attention of the board a matter of which he knew (that the cost of claims was increasing at a much higher rate than the general inflation rate) and that, as Trowbridge had shown in its June 2000 draft report on JHIL's potential exposure to asbestos‑related claims, an allowance for superimposed inflation could make a significant difference to the estimates that Trowbridge made and upon which the board relied.
2. The findings of breach should not be disturbed.

1. For these reasons, Mr Shafron's appeal should be dismissed with costs.
2. HEYDON J. The Court of Appeal was right to dismiss Mr Shafron's appeal against the trial judge's orders. It is thought that the following are sufficient reasons to justify that conclusion.
3. The background circumstances of this appeal are set out in Australian Securities and Investments Commission v Hellicar[34].

1. Mr Shafron was "General Counsel and Company Secretary" of James Hardie Industries Ltd. He therefore fell within par (a) of the definition of "officer" in s 9 of the Corporations Act 2001 (Cth) ("the Act").
2. Mr Donald Cameron was joint Company Secretary with Mr Shafron. Mr Shafron submitted that Mr Cameron's duties were of an administrative character only. Even if that is so, it does not follow that Mr Shafron's duties as Company Secretary were also of an administrative character only. It is not possible to sever Mr Shafron's responsibilities into watertight compartments, one marked "Company Secretary" and the other marked "General Counsel". The expression "company secretary" is not a term of art. The responsibilities of company secretaries can vary from company to company, within companies, and over time. They have tended gradually to wax over many decades. From Mr Shafron's behaviour in practice, it may be inferred that his responsibilities were much more than mere administrative duties. He advised the board on substantive matters, particularly in respect of James Hardie Industries Ltd's exposure to asbestos litigation. He was one of its three most senior executives. He had assisted in devising proposals for separating its subsidiaries exposed to asbestos claims from the rest of the group[35].

What is the test for the liability of an officer under s 180(1) of the Act?

1. For the purposes of this appeal, it is sufficient to say that the obligation of care and diligence that s 180(1) imposed on Mr Shafron is measured by what a reasonable person would do if that person occupied the office of company secretary and had the same responsibilities as those Mr Shafron had in that office. The responsibilities which he had are those which he ordinarily carried out.
2. James Hardie Industries Ltd had legal obligations to make disclosures to the Australian Stock Exchange ("the ASX"). Mr Shafron had a duty to take care and employ diligence to protect the company from legal risk in relation to those obligations. The company would be exposed to legal risk both from non-disclosure of information in the Deed of Covenant and Indemnity and from any failure of actuarial consultants to take into account "superimposed inflation". For Mr Cameron the position might well be different, because his responsibilities, on Mr Shafron's submission, were much narrower.

Was Mr Shafron in breach of duty in relation to the Deed of Covenant and Indemnity?

1. The trial judge concluded that Mr Shafron was in breach of duty for not advising, or obtaining advice for, James Hardie Industries Ltd's Chief Executive Officer or its board that certain information relating to the Deed of Covenant and Indemnity should be disclosed to the ASX. What that information was need not be investigated. That is because Mr Shafron's sole argument was that he was entitled to assume that James Hardie Industries Ltd's solicitors would have advised him if disclosure of the information to the ASX was required. The argument must be rejected. The solicitors' retainer did not extend to advising on that question.

Was Mr Shafron in breach of duty in relation to "superimposed inflation"?

1. At the board meeting of 15 February 2001, a cash flow model was tabled. It was based in part on two documents provided by actuarial consultants that Mr Shafron had retained. The courts below found that Mr Shafron breached his duty in failing to advise that the actuarial documents did not take into account "superimposed inflation" - the potential for the cost of asbestos claims to increase over time at a rate above the general rate of inflation.
2. The Court of Appeal found that Mr Shafron was "acquainted" with that concept and "aware of its importance in estimating asbestos liabilities." It also found that he knew that the cash flow projections in the actuarial material did not allow for superimposed inflation[36]. Although Mr Shafron was not a trained actuary, he was familiar enough with superimposed inflation to suggest in June 2000 that a different figure for it be used than the one which appeared in an earlier actuarial report[37]. He had had primary involvement with the actuaries' estimates in the past. He conducted the slide presentation of the estimates at the 15 February 2001 meeting. And he knew about the superimposed inflation which James Hardie Industries Ltd had experienced during his time as Company Secretary. These facts are enough to support the conclusions of the trial judge and of the Court of Appeal.

1. Australian Securities and Investments Commission v Hellicar [2012] HCA 17. ↑

2. Morley v Australian Securities and Investments Commission (2010) 274 ALR 205 at 397 [994], 411 [1074]. ↑

3. The Corporations Law of New South Wales as set out in s 82 of the Corporations Act 1989 (Cth) applied at the time of the events relevant to this appeal: Corporations (New South Wales) Act 1990 (NSW), s 7. The Corporations Act 1989 (Cth) was repealed by s 3 and item 2 of Sched 1 of the Corporations (Repeals, Consequentials and Transitionals) Act 2001 (Cth) when the Corporations Act 2001 (Cth) ("the Corporations Act") commenced. Pursuant to s 1400(1) and (2) of the Corporations Act, a person who had incurred a liability for a breach of s 180(1) of the Corporations Law incurred an equivalent liability for breach of s 180(1) of the Corporations Act. ↑

10. Australian Securities and Investments Commission v Macdonald (No 11) (2009) 256 ALR 199 at 290 [557]; (2010) 274 ALR 205 at 396 [983]. ↑

11. (2009) 256 ALR 199 at 270 [402], 271 [411], 291 [560]. ↑

12. (2010) 274 ALR 205 at 383 [926], 395‑396 [982], 404 [1035]. ↑

13. (2009) 256 ALR 199 at 270‑271 [402]‑[406], 290‑291 [559]‑[560]. ↑

21. See, for example, Commissioner for Corporate Affairs v Bracht [1989] VR 821 at 827, referring to s 227(1) of the Companies (Victoria) Code. ↑

24. (2010) 274 ALR 205 at 218 [56], 221‑226 [68], [71]‑[90], 387 [941]; (2009) 256 ALR 199 at 268 [385]. ↑

25. (2009) 256 ALR 199 at 221 [89]; (2010) 274 ALR 205 at 226 [91]. ↑

26. (2010) 274 ALR 205 at 228 [100], 234‑240 [133]‑[166]. ↑

29. (2009) 256 ALR 199 at 290‑292 [555]‑[563], [566]‑[567]. ↑

35. See the Court of Appeal's summary of his activities: Morley v Australian Securities and Investments Commission (2010) 274 ALR 205 at 378 [894]. ↑

36. Morley v Australian Securities and Investments Commission (2010) 274 ALR 205 at 409 [1068]. ↑

37. Morley v Australian Securities and Investments Commission (2010) 274 ALR 205 at 410 [1069]. ↑