James Hardie decision: Liability for general counsel and company secretaries

OPINION

In a decision which sparked widespread concern in Australia, the High Court of Australia has ruled that James Hardie's general counsel and company secretary owed the company a duty of care under the Australian Corporations Act: Shafron v ASIC [2012] HCA 18 (the James Hardie decision).  

What are the implications of the decision for general counsel and company secretaries on this side of the Tasman?

Key points

The James Hardie decision means that Australian general counsel and company secretaries may owe a duty of care to their company, and may be sued by ASIC, shareholders or a liquidator for a breach of that duty.

Although many companies here also have such staff with similar responsibilities, there are key differences between Australian and New Zealand companies law which in our opinion make it unlikely that a New Zealand court would find that they owe similar duties under our Companies Act.

General counsel and company secretaries should bear in mind that although they may not owe duties under the Companies Act, they still owe their employer a duty of care.

The law implies a duty into all employment contracts requiring employees to act with reasonable care. To date, however, this duty has been rarely enforced by employers.

Although they may not owe the same company law duties that their Australian counterparts do, the James Hardie decision should be seen as offering best practice guidance to New Zealand general counsel and company secretaries.

Background

In 2001, James Hardie decided to split the company's operating assets from its asbestos liabilities.

The liabilities were to be moved to a foundation and the company told the Australian stock exchange the foundation was fully funded. However, it turned out that there was an $A1.5 billion funding shortfall.

The trial court found that the directors had breached their duty of care in making the announcement to the stock exchange because they did not have a sufficient basis to conclude that the foundation would be sufficiently funded.

The High Court, the Australian equivalent of our Supreme Court, upheld that decision.

Allegations against general counsel and company secretary

The High Court also considered the potential liability of James Hardie's general counsel and company secretary, Peter Shafron.

It was alleged that Mr Shafron owed a duty of care under the Australian Corporations Act, and that he had breached his duty in two ways.

First, that he failed to advise the board as to whether it needed to disclose to the stock exchange a deed of indemnity concerning the funding.

And second, that he failed to advise the board that an external report concerning funding did not take into account the actuarial concept of "superimposed inflation".

Duty of care?

The High Court ruled that as general counsel and secretary, Mr Shafron owed the company a duty of care under the Corporations Act, for two independent reasons.

First, a secretary is deemed to be an officer of the corporation, and officers owe the same duty of care as directors. Mr Shafron therefore owed a duty because he was company secretary.

However, he argued that the alleged breaches occurred in the course of his role as general counsel, not company secretary, and that he had not breached the duty he owed as company secretary.

The High Court rejected this, ruling that Mr Shafron's duties were indivisible between the two roles.

And second, under Australian law any person who "participates in making" decisions affecting a substantial part of the company's business is also deemed to be an officer who owes a duty a care.

The court ruled that in playing a "large and active part" in formulating the proposal to separate the asbestos liabilities, Mr Shafron "participated" in the decision.

Breach of duty?

The High Court upheld the trial court's ruling that Mr Shafron had breached his duty. Mr Shafron had argued that he was entitled to rely on outside counsel, which had not advised him to disclose the deed.

However, the court found that this issue was beyond the scope of outside counsel's retainer.

Mr Shafron also argued that the trial court's finding required him to have expert actuarial knowledge about superimposed inflation. However, the court said Mr Shafron was "acquainted" with the concept, and so should have raised it with the board.

Implications under New Zealand's Companies Act

Many New Zealand companies also appoint company secretaries and general counsel who, like Mr Shafron, may have considerable management responsibilities.

But there are significant differences between the Australian Corporations Act and the New Zealand Companies Act, and, as a result, we do not expect a New Zealand court to follow the James Hardie decision and rule that New Zealand company secretaries and general counsel owe similar duties under the Act here.

The first key difference is that the office of company secretary was abolished by the Companies Act 1993. Although many companies have in practice retained the office, it has no legal significance under New Zealand's Companies Act.

In addition, unlike Australia, New Zealand does not impose officers liability on individuals who "participate in making" decisions affecting the business.

Instead, New Zealand has a "deemed director" rule with a much higher threshold. Any person owes the same duties as a director if a "power or duty of the board" has been "directly delegated" to that individual.

Although the scope of this provision has not been tested, it is unlikely that it applies to general counsel, company secretaries or other senior management who are delegated management tasks under the overall supervision of the board.

Employees' implied duty of care

Although New Zealand general counsel and company secretaries are unlikely to owe a duty of care under the Companies Act, they continue to owe duties under employment law principles.

Employees, including general counsel and company secretaries, owe their employer a duty of care that is implied in their employment contract.

This implied duty requires all employees to act with reasonable care, and would apply to the same matters at issue in the James Hardie litigation. To date, however, employers have rarely enforced this duty.

Best practice

Although New Zealand general counsel and company secretaries may not owe the same company law duties that their Australian counterparts owe, the James Hardie decision should be seen as setting out best practice guidelines.

They should make sure that they understand the scope of outside counsel's retainer and should raise issues with the board where they have actual knowledge of a problem in a report to the board.

David Friar is a Senior Associate at Bell Gully