The High Court delivered judgment today in ASIC’s regarding the directors of James Hardie Industries Ltd (JHIL) (link).  The Court also delivered judgment in a related appeal by the “General Counsel and Company Secretary” of JHIL at the time,  Peter Shafron, against ASIC (link).

These appeals involve the infamous separation by JHIL of certain asbestos making subsidiaries that had significant exposure to asbestos related diseases.  Readers may recall that JHIL represented at the time of the separation occurring that the subsidiaries had sufficient funding to cover future claims against them.  It turned out they did not, by a long shot.

ASIC pursued the directors and officers of JHIL for breaches of various statutory duties arising out of the transaction.  He was subject to various penalties as a result.

The decision regarding Peter Shafron is interesting because it illustrates the breadth of the statutory duties imposed on an “officer” as defined in section 9 of the Corporations Act (link).  The Court has made clear that it is the actual responsibilities of the office holder and their skill set in that field that define the area within which duties of care and diligence apply.

In brief terms, Shafron was found at trial and affirmed on appeal to have breached his duties under s180(1) (link) to JHIL as its “joint General Counsel and Company Secretary”.  Two breaches were the subject of the appeal.    The first breach was that he failed to give the board of JHIL advice that certain information in a deed involved in implementing the separation should have been disclosed to the ASX.  Second, he failed to advise the board that cash flow modelling used to estimate JHIL’s exposure did not take into account superimposed inflation of the cost of meeting medical claims (being medical costs inflation over and above the general level of price inflation), and accordingly was not an adequate guide to the required level of provisions.

Shafron argued that his alleged contraventions could not give rise to a breach of s180(1) because they arose from work he did in his capacity as General Counsel, and not in his capacity as a statutory officer.  He argued that he could only be liable for a breach of his statutory responsibilities as company secretary, which he argued were generally administrative and did not involve providing legal advice.  He argued that whatever duties he had as in the role of General Counsel were not within the statutory responsibilities of a company secretary.

The High Court disposed of this argument swiftly by means of the construction of s180(1).  The Court held that on any reading of s180(1)(b), the duties of care and diligence on the office holder are in respect not only of the statutory responsibilities of the office, but also in respect of whatever responsibilities that particular office holder has been given or has assumed within the corporation.   The High Court’s analysis is at paragraphs [18] to [20] of the judgment.  In particular at para [19] the Court held:

…..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)

That is, Mr Shafron’s “responsibilities within the corporation” 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.

Regards

Mark