Express law No. 151

8 May 2012

High Court decision on the duties of corporate officers

A recent decision of the High Court deals with the extent to which an officer's duty of reasonable care and diligence in discharging his or her functions applies where the officer has multiple capacities within a corporation.

The decision in Shafron v Australian Securities and Investment Commission [2012] HCA 18 (Shafron) has important implications for officers of Commonwealth authorities and Commonwealth companies under the Commonwealth Authorities and Companies Act 1997 (Cth) (CAC Act). It may also have implications for the broader range of agencies with obligations under the Work Health and Safety Act 2011 (Cth) (WHS Act).

High Court decision

Shafron was an appeal by Mr Shafron, the company secretary and general counsel of James Hardie Industries Ltd (JHIL), of a 2010 New South Wales Court of Appeal decision that Mr Shafron had contravened s 180(1) of the Corporations Law (and thus s 180(1) of the Corporations Act 2001 (Cth)). The Court held that, by failing to give certain advice to the CEO and board of JHIL relating to the sufficiency of finding for compensating sufferers of asbestos-related diseases, Mr Shafron failed to discharge his duties with the degree of care and diligence required by s 180(1).

'Officer' is relevantly defined in s 9 of the Corporations Act as including:

• a director or secretary of a corporation (para (a)); and
• a person who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of a corporation (sub-para (b)(i)).

It was not disputed that Mr Shafron was an officer in his capacity as company secretary. However, he argued that the contraventions alleged against him concerned his responsibilities as general counsel, which were distinct from his duties as company secretary, and that the obligation to act with the requisite degree of care and diligence, as an officer of the company, only extended to work he performed as company secretary. He further argued that he was not an officer by virtue of the wider category in sub-para (b)(i).

Mr Shafron's appeal was dismissed by the High Court in a 7:0 decision (Heydon J writing separately).

The plurality found that no distinction could be drawn between the two capacities in which Mr Shafron claimed he was working. The Court held that the responsibilities of a company secretary were to be determined as a matter of fact, and that there was no evidence that Mr Shafron performed certain tasks in one capacity and other tasks in another.

Additionally, even if such a distinction were proven, the majority held that it would be irrelevant to the operation of s 180(1). The Court construed s 180(1) as requiring care and diligence in the performance of all the responsibilities a particular officer has within a corporation, not just those responsibilities the officer has in a particular capacity.

The plurality also discussed the proper construction and application of sub-para (b)(i) of the definition of 'officer' in s 9. In particular, their Honours noted that sub-para (b)(i) distinguished between making decisions (jointly or otherwise) and participating in making decisions. While the plurality agreed with Mr Shafron that merely proffering advice or providing information for the board's consideration is not on its own sufficient to constitute participation, they found that, as a factual matter, the relationship between his actions and the board's decision to adopt a proposal did constitute 'participation' in making the decision.

Implications for officers of CAC Act bodies

Officers of Commonwealth companies are subject to Corporations Act duties. Officers of Commonwealth authorities are subject to similar officers' duties as Corporations Act company officers, including, in particular, an equivalent duty of care and diligence to s 180(1) of the Corporations Act (see s 22 of the CAC Act).

An 'officer' under the CAC Act includes a director or a 'senior manager'. Drawing on the same Corporations Act paragraph discussed in Shafron, senior managers include persons who make, or participate in making, decisions that affect the whole, or a substantial part, of the operations of the authority.

Accordingly, the decision in Shafron has implications for the duties of officers of all CAC Act agencies. Specifically, the Court's discussion of the scope of sub-para (b)(i) of the definition of 'officer' will be relevant to determining who is a 'senior manager' of a CAC authority, or who is an officer of a Commonwealth company. Additionally, officers of CAC bodies should be aware that a court will not distinguish between multiple roles or duties held by a person; if one capacity in which the person acts brings them within the definition of 'officer', they will be regarded as an officer for all purposes and will be subject to officers' duties in respect of all of their functions.

Work health and safety implications

The Commonwealth, including all agencies that are legally part of the Commonwealth (that is, most agencies under the Financial Management and Accountability Act 1997) and public authorities (including CAC Act authorities) have certain obligations under the WHS Act.

In particular, an officer under the WHS Act has a duty in s 27 to exercise 'due diligence' to ensure compliance by the Commonwealth or public authority with its work health and safety obligations. 'Officer' is defined in ss 247 and 252 in very similar terms to sub-para (b)(i) of the definition of 'officer' in the Corporations Act.

Accordingly, the discussion in Shafron may have implications for persons who participate in decision-making in Commonwealth bodies. In particular, a person may be an 'officer' within this definition even if they do not participate in decisions that relate to work health and safety, and even when acting in aspects of their role that do not involve decision-making on the required scale.

Important: The material in Express law is provided to clients as an early, interim view for general information only, and further analysis on the matter may be prepared by AGS. The material should not be relied upon for the purpose of a particular matter. Please contact AGS before any action or decision is taken on the basis of any of the material in this message.