Business & Commercial

Duties of Company Officeholders


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Duties of Company Officeholders - Duty of Care and Diligence

Two recent judgments by the High Court in relation to James Hardie Industries Ltd (JHIL) have given a broad reading of an officeholder’s statutory duty of care and diligence.

The cases concerned the separation by JHIL of two subsidiary companies that were wholly owned by JHIL and had manufactured and sold products containing asbestos. These companies were the subject of claims for damages for personal injury by those who had come into contact with the asbestos products. In 2001 JHIL anticipated that these two subsidiaries would be the subject of further claims regarding the asbestos products and a decision was made by the board of JHIL to separate these subsidiaries from the rest of the JHIL group.

In the meeting held to discuss this proposed separation, an ASX announcement was drafted making claims to the effect that these subsidiaries had sufficient funding to pay out any further claims in regards to the asbestos products - which was untrue. ASIC alleged that under s180 of the Corporations Act 2001 (Cth) each director of JHIL failed to discharge their duty to JHIL with the “degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in JHIL's circumstances, and had the responsibilities which the director in question had”.

Of particular interest is the decision regarding Peter Shafron, as it highlights the breadth of the statutory duties imposed on an “officer” as defined by s9 of the Corporations Act. Peter Shafron was the general counsel and company secretary for JHIL and it was alleged that he should have advised the board that the ASX statement did not take into consideration superimposed inflation of the cost of meeting medical claims and that he failed to advise the board that certain information in a deed concerning the separation should be disclosed to the ASX.

Peter Shafron argued that he could not be held liable for breach under s180 because at the time of these alleged contraventions, he was acting in his capacity as general counsel and not as company secretary. The High Court dismissed this argument, as it was held that Mr Shafron failed to provide evidence that he performed certain tasks in one role and other tasks in the other role. Furthermore he was qualified as a lawyer and it was determined that his responsibilities were wider than administrative and extended to the provision of necessary advice.

The reasoning of the High Court in relation to their interpretation of s180 was provided clearly in paragraphs [18] to [20] of the judgment:

”...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.

In this case, Mr Shafron's responsibilities were found by both the primary judge and the Court of Appeal to have included the tendering of relevant advice (including legal advice) about disclosure requirements.  As the Court of Appeal rightly said:

"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)

For these reasons it was held that Peter Shafron did breach his duty under s180 of the Corporations Act.

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