multitasking manSummary – The High Court has recently ruled on the obligations of company officers wearing two hats.

The High Court has recently shed further light on the obligations of care and diligence in respect of company officers who occupy multiple roles.

In the case of Peter James Shafron v Australian Securities & Investments Commission the High Court held that Mr Shafron, contravened s.180(1) of the Corporations Act 2001 (Cth) (Act) by failing to discharge his duties as an officer of James Hardies Industries Limited (James Hardie) with the degree of care and diligence that a reasonable person in his position would have exercised.

Section 180(1) of the Act provides that directors and officers 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:

  • were a director or officer of a corporation in the corporation’s circumstances; and
  • occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Mr Shafron was employed as “general counsel and company secretary” of James Hardie in 1998.

In February 2001 James Hardie approved a controversial separation proposal which included the creation of a fund to compensate claims against it in respect of asbestos related liabilities.  This separation proposal was announced to the ASX in a form that was later found to be misleading in terms of sufficiency of the funds available to finance present and future asbestos related claims.

ASIC was successful in claiming that Mr. Shafron breached his duty of care under s.180(1) of the Act by, among other things, failing to advise the James Hardie board that the draft ASX announcement was expressed in terms that were not misleading and failed to advise about the limitations associated with the financial modeling of the asbestos compensation fund.

The NSW Court of Appeal subsequently upheld the decision that Mr. Shafron breached his duty of care by contravening s.180 (1) of the Act.

Mr. Shafron appealed this decision to the High Court on the basis that the application of s.180 (1) should be restricted to those functions he performed only in his capacity as company secretary.  Mr. Shafron argued that the contraventions alleged against him concerned his responsibilities as general counsel, not his responsibilities as an “officer” of the company, and thus should not be subject to the standard set out in s.180(1) of the Act.

The High Court in May 2012 rejected this argument of Mr. Shafron.  Rather it held, by unanimous decision, that Mr. Shafron could not divide his responsibilities and capacities and that they must be viewed as a composite whole.  The scope of the responsibilities of a particular officer is to be determined by an examination of all of the tasks in fact performed for that company by that officer.

Implications of the Decision

This decision has implications for senior employees and executives, in particular, where they wear two hats when discharging their duties to a company or other similar entity.

Some issues to consider:

  • All officers of a company owe a duty of care and diligence to the company they serve;
  • Where an officer which holds another senior role in the company such as company secretary, those responsibilities may not be determinative but rather have some overlap with other roles;
  • In order to determine the scope of responsibility of an officer of a company, the Court will make an examination of all the tasks performed for that company by that officer not a singular role; and
  • Where someone participates in making decisions that affect a business of a corporation while they may not be the ultimate decision maker if a decision maker is reactive to their initiatives or the management group to which that person contributes.

As a likely outcome of this case it is quite possible that larger corporations, particularly listed ones, may seek to have separate roles of company secretary and general counsel.  Persons who hold such positions should closely examine the scope of the coverage of their D&O policies to consider whether adequate coverage is provided.