• Internal Code :
  • Subject Code : BAC111
  • University : Melbourne Polytechnic
  • Subject Name : Business and Corporate law

Case Study Analysis: Shafron V ASIC 

Table of Contents

Case name

Factual background

Issue

Rule of Law

Application and Analysis

Conclusion

Bibliography

Case name

Shafron v Australian Securities and Investments Commission [2012]1

Factual background

The factual background of the case develops on the aspect of the failure on the part of a company secretary, that is aforementioned appellant Mr Peter James Shafron, of James Hardie Industries Ltd. The allegations as against Mr Shafron was based on the non- compliance of the mandates designated under section 180(1) of the Corporations Act 2001. Australian Securities and Investments Commission during 2007 initiated civil penal measures against the nonexecutive directors, executive directors and the company secretary or the general counsel of James Hardie Industries Ltd. for breach as provided under section 180(1) of the Act. The allegations were not exercising the due care and diligence with regards to the information released to the share market i.e. Australian Securities Exchange about the fully financed compensation for the asbestos victims.

It further revealed that the so-called fully financed was actually underfunded with a hefty amount. The present case study arose from an appeal made by Mr Peter Shafron, occupying the position of General Counsel and Company Secretary and his omissions towards the disclosure of the information. The statements put forth by Shafron was alleged as misleading statements. For compensating the victims of the mesothelioma or asbestosis a covenant and indemnity deed was entered into, but due to the discrepancies arising out of the cash flow modelling and that of the misleading statements made to the Australian Securities Exchange, the resultant effect is the litigation.

Issue

Whether the statutory definition of the word officer is applicable to the appellant Mr Peter James Shafron.

Rule of Law

Section 180(1) of the Corporations Act 20012 states that reasonable care and diligence is required as mandatory for the directors and other officers. On the other hand, section 9(a) defines an officer as the one who is either a director or the secretary of the corporation, however, section 9(b) defines officer as a person who is into decision making and in so doing the person takes a substantial role in the process of it. Furthermore, the same subsection also highlights that an officer can be the person having the capacity of affecting the financial standing of the corporation in a significant way and based on that capacity the directors become accustomed to taking instruction from that person, provided that the person is not instructing from his/ her professional expertise.

Application and Analysis

The particular case is the culmination of Australian Securities and Investments Commission v Hellicar [2012] 3, Morley v Australian Securities and Investments Commission [2010]4, Australian Securities and Investments Commission v Macdonald (No 12) [2009] 5, James Hardie Industries NV v Australian Securities and Investments Commission [2010] 6, Australian Securities and Investments Commission v Macdonald (No 11) [2009]7. The allegations against the appellant Mr Peter Shafron concerned the statement he made to the Australian Securities Exchange regarding the company James Hardie Industries Ltd.’s ability towards satisfying the damages claim by the victims of the mesothelioma or asbestosis.

The previous Court’s findings were in relation to the noncompliance and the contravention of the mandatory obligation of acting with care and utmost due diligence. The Court was of the opinion that, the mandatory obligations as devised under section 180(1) of the Act, suffered two omissions by Shafron. According to the Court, the foremost failure by Shafron concerned the advice about the information disclosure regarding the covenant and indemnity deed that was entered into, which must have been given to the board of the company including the chief executive officer. Secondly, the Court opined that the failure done by Shafron was in not voicing the inaccurate actuarial report thereby indulging the superimposed inflation.

However, Shafron contended that his position was that of the company secretary as well as that of the general counsel, and hence from that perspective, he was not bound by section 180(1) in providing the legal advice to the board. Mr Peter Shafron, being the General Counsel and Company Secretary, was found to be within the statutory definition of the officer as provided under section 9 of the Corporations Act 2001. The High Court was of the opinion that Mr Shafron poised inadvertent failure in not advising the board or the CEO about the particular disclosure the company is mandated to make before the stock exchange. The disclosure is with regards to the deed of covenant and the indemnity which was sought by the company for compensating the claims by asbestos victims. The Court also found that Mr Shafron did not advise the board as to the shortcomings entailed under the actuarial study and hence disqualified Shafron from the position along with fine as the penalty.

The contentions aroused by Mr Shafron was that the breach of duties as enshrined under section 180(1) of the Corporations Act, 2001 can only be connected with his position of general counsel but according to him, section 9 of the Act cannot be drawn since he cannot be considered as the officer, and hence he cannot be subjected to section 180(1) of the Act. He accepted allegations under section 180(1) of the Corporations Act 2001 which concerns the breach by an officer and subsequently contended that his actions were not from the position of an officer but from a general counsel. His arguments were that his duties and responsibilities as being counsel and company secretary must not be jointly considered but must be severed, and hence allegations made cannot include him being the company secretary to provide advice.

He further contended that he cannot be considered as the officer as defined under the Act. However, the High Court did not agree with his contentions and held that the responsibilities Mr Shafron owed as company secretary and general counsel cannot be bifurcated and must be considered as a single position. The Court further held that responsibilities performed by an officer can only be construed from all the tasks done by that person. The Court also interpreted section 9(a) and emphasised that an officer can be either a director or the secretary and according to section 9(b) the officer can be any person involved decision-making process thereby alleviating to a substantial role within it.

The contentions by Mr Shafron was that he only provided information and not participated in the process of decision making. High Court while rejecting this contention, held that Mr Shafron was not a mere person but have had the authority to approve announcements made by the stock exchange and held that there was the administrative arrangement, where he can come up with propositions to get is approved before the board. Hence, the Court opined that any reasonable person with responsibilities of Mr Shafron could have drawn the attention of the board for them to rely on the same.

Conclusion

The High Court concluded that Mr Shafron is an officer as defined under section 9 of the Corporation Act 2001, and based on that the dual capacity he holds also falls under the scope and purview of that provision. Based on that, the duties and the responsibilities which are attached to an officer becomes applicable for him and hence he is estopped from claiming anything detrimental to it. However, the High Court further held that an officer’s scope can only be related to facts of the individual situations and hence no two officers can be held to be same or identical and so it finally concluded that the reliance placed by Shafron, on the duties which are vested on other company secretaries in the same company was not required to be proved and hence is unwarranted.

The decision taken by High Court is quite significant and can be considered as the eye-opener when it comes to issues pertaining to corporate governance from the scope and purview of the joint roles of the company secretaries and that of the general counsel. According to the decision in Shafron v Australian Securities and Investments Commission [2012], when a person becomes appointed for holding the joint roles of the company secretaries and general counsel, then will be considered as the officer as per the provisions of the Corporations Act 2001. Furthermore, it reveals that the dual roles cannot be severed and must be construed as a whole single unit. The liability as affixed to Mr Shafron is tested by Court and it becomes clear that the reasonableness is the only term which can be of help under similar circumstances.

The High Court’s findings as to the term officer are in strict compliance with section 9 of the Corporations Act 2001, where it states that term officer can only be evaluated and assessed from the contributions a person is offering in the decision-making process based on repetitive acts. Company secretaries and general counsel in lacking due care and diligence as the officer actually exposes the litigation risk from the Australian Securities and Investments Commission, which will then result in not only disqualification but also other costs allured with litigation. However, based on the decision in case of Yorke v Lucas (1985)8, it can be perceived that, in order to contravene the elements as devised under the Corporations Act, 2001, the prosecution must prove that, the defendant has had knowledge thereby narrowing the scope of potential accessory liability.

Bibliography

A Articles/ Books/ Reports

B Cases

Australian Securities and Investments Commission v Hellicar [2012] 286 ALR 501

Australian Securities and Investments Commission v Macdonald (No 12) [2009] FCAFC 185

Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287

James Hardie Industries NV v Australian Securities and Investments Commission [2010] NSWCA 332

Morley v Australian Securities and Investments Commission [2010] NSWCA 331

Shafron v Australian Securities and Investments Commission [2012] HCA 18

Yorke v Lucas (1985) 158 CLR 661 (HCA)

C Legislation

Corporations Act 2001

D Treaties

E Other

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