Corporations Law (SBM3310)

Semester Two, 2018

Back in May, 2012, Australian High Court dismissed the appeal made by the Peter Shafron

against the judgment of the NSW Court of Appeal, in which he was proven guilty of breaching

180 of the Corporations Act 2001 (Cth). NSW Court of Appeal further clarified that Mr.

Shafron failed in performing his duties under his capability as a secretary and officer of the

James Hardie Industries Limited (JHIL), with great care and persistence. The Australian High

Court’s decision sheds light on that case in a greater extent. The High Court clarified the scope

of the director’s domain that up to what extent a director can perform duties in Shafron v

Australian Securities and Investments Commission (2012) 286 ALR 612. This case further

defines the limits of responsibilities and duties, mentioned in section 9 of the Corporations Act

2001 (Cth) (‘the Corporations Act’), which allows to take the dual role within an organization.

Shafron worked as the company secretary and general counsel for JHIL. But in this case,

severability of both roles for performing the duty with care and diligence by the officer under

s 180(1) of the Corporations Act was irrelevant. Shafron tried to convince the Australian High

Court that s 9(b)(i) of the Corporations Act, allows him to participate in decision making (Peter,

2012).

2. BACKGROUND TO THE APPEAL

The climax of the James Hardie Cases: Mr. Shafron, the appellant, was working as the general

counsel member and company secretary for JHIL, in late 1998. Shafron was accused guilty of

misleading ASX, some of Shafron’s statements mislead ASX about the capability of the

foundation set up by James Hardie Industries Ltd (‘JHIL’). That foundation was set up by the

James Hardie Industries to fulfill the reimbursement claims of asbestos victims. Mr. Donald
Cameron joined, Shafron in his role in 1999.JHIL had the two subsidiaries, because of the activities

of these two subsidiaries, JHIL became vulnerable against the liabilities and finally exposed and

had to pay the compensation to the asbestos victims. In order to fulfill these claims JHILL

established a new foundation back in 2001, the company started to transfer the compensation

money from the two subsidiaries to the newly created foundation. Hence entered an endeavor of

covenant and indemnity (‘DOCI’). False statements, fake balance sheets and due to the heavy

irregularities in the cash flow made to the ASX became the major causes and resulted as the lawsuit

for JHIL Ltd industries. After examining the role of Mr. Shafron in that mess, The NSW Court of

Appeal had found Mr. Shafron guilty of breaching and neglecting the section 180(1) of the

Corporations Act. There were two main reasons, which gave birth to all these violations and

contraventions. First, Mr. Shafron was unable to give any constructive and effective advice to the

board of directors of the JHL private ltd, including the CEO Peter McDonald, regarding the matter

of deed of covenant and indemnity, whether there is need to disclose the information or not.

Secondly, Mr. Shafron was not able to convey the concerns to the board regarding the integrity

and quality of the report prepared by the actuaries, which did not include superimposed inflation

to consideration, something which a prudential actuarial report would have done given the effect

that this had on cash flow predictions. After decision made by the NSW Court of Appeal, Mr.

Shafron decided to challenge that decision in the high court. The High Court took over the case

and started the proceedings on priority bases. Now it was up to the High Court to decide whether

Mr. Shafron was guilty and had played any part in the decisions making or effected the process of

the decision making in any possible way. Secondly, whether he falls in that parameter of the

violation of the section 180(1).

3. THE DECISION
The bench was consist of French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ. Apart from

that, the judgment of Heydon J was also included, who also admitted and agreed to the outcome.

The tow judgments of the two respective institutes are same in substance and will be considered

and discussed together. The crux of the decision is given below. “The High Court held Mr. Mr

Peter James Shafron, the secretary and general counsel of the James Hardie Industries Ltd

("JHIL"), guilty of breaching the section 180(1) of the Corporations Act 2001 (Cth) ("the Act").

Mr. Shafron could not perform his duties with the certain degree of care and diligence as the officer

of the JHIL and he mislead his company” (H I G H C O U R T O F A US T R ALI A , 2012).

A Was Mr Shafron an ‘Officer’?

Under the section 9 (a) of the Corporations Act, Mr. Shafron was perceived as an officer working

as company secretary by the court. Mr. Shafron also admitted that he was an office in the JHIL

private ltd. But section s 9(b)(i), does not include the wider sense of labeling someone as officer,

which were the findings of the Court of Appeal. Mr. Shafron also argued and tried to take the plea,

he argued that he only the secretary of the company and his duty was to take care and look after

the company’s administrative matters and similar to other secretary of the company, Mr. Cameron.

If we compare this argue to the s 9(b)(I), which states that employee, who actively takes part in

the process of the decision making in the company, that effects the whole company or a large part

of the business organization, is being considered as the “officer” of that specific company. In this

case Mr. Shafron had the direct influence on the process of decision making. After s 9 (a) definition

of an officer, Mr. Shafron tried to separate both of his roles, he argued that his roles as company’s

secretary should be looked separately from the role of the general counsel, if his obligation is being

assessed under the s 180(1). Mr. Shafron then capitalized on the same argument and argued that

he was not obliged to give any legal advice as it was not in his capacity as the secretary of the
company, he had that capacity as general counsel. The court made it clear that it was impossible

to separate these two roles performed by the Mr. Shafron at JHI (Rose, 2012).

1 A WIDER PRESPECTIVE

The thing matters the mist is that Mr. Shafron was not just the secretary who was working in the

company but under the wider definition of the s 9(b)(i), he was the one who played the bigger part

in the company, someone who participated in regularly in the process of the decisions making. The

court made it clear that individual who meets the criteria of s 9(b)(i) requires the analysis that what

role that specific person has played in the company. Participating requires that up to what extent a

person can go, what are his or her powers and influence in company and how his or her decisions

have effected that company. The court had found that Shafron was amongst the top three

executives of the JHIL. His influence and his say had played the significant role in the preparation

of the proposal for separation, that’s why Shafron fall under the criteria set up in the s 9(b)(i).

Hence it was clear that Shafron had played the role of officer of the company (Peter Scott, 2012).

B. Liability Under s 180(1)

1. Section 180(1) of the Corporations Act sates that if person who is working as officer or director

of the company fails to fulfill all of his or her duties with great care, honesty and diligence that

any reasonable person would if: they ever held the director’s office or any other position. Then the

guilty person will be liable to face the consequences. So the Australian High Court made it clear

that the responsibilities which have been stated in the Section 180(1) of the Corporations Act, does

not only includes the statuary responsibilities but all type of responsibilities. So court made it clear

that Mr. Shafron who had the penalty of knowledge regarding his job and also was the expert of

the cash flow modeling had mislead his company and so he was proven guilty in the Australian
Court of Justice. The statements of the both courts substantially and technically were the same

that’s why it was made clear that both judgments will be studied and referred together.

2. Failure in Exposing Information regarding DOCI :

The court had made it clear that Mr. Shafron had the knowledge and it was also in his power and

his ethical duty to guide his corporation about the ASX disclosure requirements concerning with

DOCI, but Shafron ignored his responsibility. As the result JHIL only relied on the half

information provided by the Shafron and so the burden of this lawsuit is on Mr. Shafron. Hence,

once more he violated the s 180(1) in this regard.

3. Failure to Advise Board About Actuarial Report

Mr. Shafron was aware that the amount of compensation that was being asked from the JHIL was

rising at much higher rate than the general rate of inflation. Any responsible person, after getting

this sort of information must have informed the about these rapid fluctuations in the inflation rates.

But Shafron kept his lips silent. Once more he was proven guilty by the court on another matter.

The Court admitted that Mr.Shafron himself was not an actuary. But he was very much familiar

with concepts of superimposed inflation and cash flow models, which are integral component

when it comes to measuring the rate of inflation and extent of fluctuations. Be he did not used his

expertise for the greater interest of his company.

4. SIGNIFICANCE OF THE DECISION

In Shafron’s case, the High Court Decision establishes, that under no circumstance, the

courts will show any leniency towards person who will make criminal negligence regarding his

moral and ethical duties as officers and directors. This judgment of the court is also a very strict

warning for all those individuals who are working as officers and directors in their respective
companies but not putting full attention to their job. The Corporations Act, required the highest

degree of care and honesty as long as one is serving at the top level. Apart from that, a top executive

is responsible for subjective knowledge as well as specialized responsibilities may increase this

standard further. Shafron has tried to make the claim that his powers were just limited to statuary

responsibilities, court has denied all those pleas and held Mr.Shafron accountable for the actions

he performed.
CONCLUSION
Shafron vs Australian Securities and Investments Commission (2012) case is relevant for all those

individuals and professionals working as the officer and general counsel, they are responsible for

company’s wellbeing according to the definition of s of s 9 of the Corporations Act and other

roles. In case of any deliberate negligence they will stand accuse of breaching s 180(1) of the

Corporations Act. The decision of the court clarifies that the both matters when it comes to

performing duty with great care and diligence as these are the requirements of the Corporations

Act. Court has made sure the severability of both roles held by Mr.Shafron. The court had further

extend the domain of the role of the officer by making sure that officer is not only concerned with

the statuary decisions. But he is also responsible for the other decision making procedures, which

have had the direct impact on the performance of a business organization. In this case Mr. Shafron

could not ask from the court see his both roles as an officer and as a general counsel separately.

Finally this case makes it certain that standard of care that is stated in the s 180(1), is not only

applicable on the statuary duties but it is applicable on all the powers and roles you have. Hence,

according to court’s judgment the implication of s 180(1) of the Corporations Act are wider than

what Mr.Shafron assumed (Peter, 2012).

.
References

H I G H C O U R T O F A US T R ALI A . (2012). PETER JAMES SHAFRON v AUSTRALIAN

SECURITIES AND INVESTMENTS. Retrieved from

http://www.hcourt.gov.au/assets/publications/judgment-

summaries/2012/hcasum18_Shafron_v_ASIC.pdfPeter Scott. (2012). Shafron v Australian

Securities and Investments Commission (2012) 286 ALR 612" [2012] UTasLawRw 16; (2012)

31(2) University of Tasmania Law Review 155. Retrieved from

http://classic.austlii.edu.au/au/journals/UTasLawRw/2012/16.html

Rose, N. ( 2012). The James Hardie Decisions: Australian Securities & Investments Commission

v Hellicar & Ors [2012] HCA17; Shafron v Australian Securities & Investments Commission

[2012] HCA 18. Retrieved from

http://www.nortonrosefulbright.com/knowledge/publications/66582/the-james-hardie-decisions-

australian-securities-investments-commission-v-hellicar-ors-hca17-shaf