Shafron v ASIC: Directors' Duties and Responsibilities

The case of Shafron v ASIC highlights the duties and responsibilities of directors and officers in a company, particularly those who take part in decision-making. The court upheld the violation of section 180(1) and imposed liabilities on Shafron for failing to consider all facts that impacted an actuarial report. The case emphasizes the importance of proper consideration and disclosure by senior executives, and that relying solely on others' work may not excuse them from their own duties.

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Contents
Introduction...................................................................................................................................3
Background of the Case.................................................................................................................3
Duties and Responsibilities Breached............................................................................................4
Analysis of the Court Decision.......................................................................................................5
Implications and Conclusion..........................................................................................................7
References..................................................................................................................................... 9

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Introduction
Peter James Shafron v Australian Securities and Investments Commission (2012) HCA 18; 286
ALR 612 or the case of Shafron v ASIC is a case which was brought out after the James Hardie
scandal came to the attention of the authorities, which shook the world for the level of
breaches conducted in this scandal. Shafron v ASIC was a case in which the officer was held for
breaching his officer duties as are provided under Part 2D.1 of the Corporations Act, 2001 (Cth),
herein referred to as CA. This section not only imposes certain obligations over the directors of
the company, but on the officers as well. And the case of Shafron v ASIC threw light on the
manner by which the company’s officer is made liable for breaching these duties (Jacobson,
2012).
In order to give their ruling in this case, the court looked into the facts of the case, which have
been summarized below, and concluded that there was indeed the breach of section 180(1) of
the CA (Sainty, 2012). The appeal which was made by Shafron was also rejected by the High
Court in a unanimous manner and the decision of the Court of Appeals was upheld. This
discussion would focus on the background off this case, the duties which were contravened,
and the court’s decision to understand the implications of this case, before drawing the
conclusion.
Background of the Case
Peter James Shafron was working with James Hardie Industries Limited, herein referred to as
Industries since Aug 1998 on the post of general counsel and company secretary. Though, the
appointment of Shafron as a company secretary was not formally undertaken till Nov 1998. The
joint company secretary of Industries was appointed a year later and the name of this person
was Donald Cameron. In Feb 2011, the Board of Industries met for discussing and for taking into
consideration, the proposal for Industries separation, particularly of its two group companies,

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and the company owed key liabilities due to the asbestos issues faced by the group (Boyce and
Macinnis, 2012).
The claim which was made in this case was that the officer of the company, i.e., Shafron
breached his duties covered under section 180(1) of CA. The reason given for this contravention
was stated as the failure of Shafron in advising the chief executive of Industries, and its board in
the matter of the additional information which was related to the separation proposal, and
which was required to be properly disclosed to ASX (Australian Securities Exchange). This was
not the only reason for holding the officer responsible. The other reason was the failure of the
officer in providing the Industries Board regarding proper advice on the actuarial report, which
the board of the company relied when they decided on the matter of separation proposal
where the superimposed inflation was not covered. The reason for this contravention was the
reasonableness requirement, whereby a reasonably prepared report would have properly
highlighted the truth, instead of superimposed inflation. This super inflation shows the claims
costs which were born on yearly rate, and this particular rate was a lot high in comparison to
the rate of inflation. Hence, the officer duties which were claimed to have been contravened by
Shafron were related to the actuarial and ASX issue (Kemp Strang Lawyers, 2012).
Duties and Responsibilities Breached
As has been stated in the introductory segment, the directors and the other officers of the
company have been granted certain responsibilities and duties by the CA, which have to be
strictly followed (References Armstrong Lawyers, 2007). The very first duty which is covered
under this part is the duty of acting in a diligent and in a careful way by these individuals (ICNL,
2017). Under section 180(1) of CA, the directors and the other officers of the company have
been given the responsibility of using their powers, as well as, discharging their obligations, in
such a way where diligence and care is depicted, as an individual deemed as reasonable would
undertaken when holding the same position as the person in question and in the similar
situation as the individual in question was in (WIPO, 2015).

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Where a director or an officer of the company is unable to fulfil the obligations covered under
this section, civil liabilities presented under section 1317E of CA are attracted (Federal Register
of Legislation, 2017). Under this section, the court has the power of making a declaration of
contravention for violating the duties presented under Part 2D.1 of CA (Cassidy, 2006). Once
this declaration is made, the ASIC gets the power of applying for a disqualification order based
on section 206C of this act and can also apply for pecuniary penalties based on section 1317G of
CA. The declaration of contravention clearly provides the conduct which resulted in the breach
of these duties (Baxt, 2007).
In order to hold Shafron liable, the court considered the possibility of the role to be divided or
cracked for having an affect over the results. The courts emphasized over wordings of section
180(1) and ad stated it as being the real responsibility of the actual company officer. And in this
regard, the liability of the general counsel towards Industries was referred to. Thus, the
reference was not just made to duties of Shafron by being a company secretary, but an officer
of the company (Boyce and Macinnis, 2012).
The High Court, as has been stated earlier, upheld the ruling given by Court of Appeals on both
the ASX issues and the actuarial issues against Shafron. The reason for this was that Shafron
held the requisite law background and the qualification of being a company secretary, to have
raised such issues. Further, there was a very close involvement of Shafron in the matter of
modelling of the cash flow based on the actuarial report. As a result of this, it was the
responsibility of Shafron, for the reasons of being a company secretary, to bring this matter to
the Board’s notice and tell them clearly that the modelling of cash flow contained some
limitations. These responsibilities were enough to show that Shafron owed a duty of care in ASX
and actuarial issue by being the company secretary of Industries (Boyce and Macinnis, 2012).
Analysis of the Court Decision
This case garnered high interest from the general public, as this case was related to the James
Hardie matter. The first issue which the court took into consideration was the satisfaction of
section 9 of CA to hold Shafron as the company secretary of Industries. For this purpose, the

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court looked into the wordings of this section which provides that a person is to be taken as the
company’s officer in case such person is on a senior position in the particular company and this
position is just below the Board level. Such a person who participates in the company’s decision
making and acts as company’s officer is covered under the definition of this section (Austlii,
2017).
The NSW Court of Appeals stated that there were two clear grounds for holding Shafron as the
company officer (Hunt, 2012). The first reason was given as the position held by Shafron as
being the company secretary of Industries. The other reason was that Shafron participated in
the decision making of the business of Industries in substantially and partly manner. It was
contented by Shafron that as a company secretary the duties which the defendant owed were
limited to this post’s functions and these could not be extended to the functions of the general
council, whereby the defendant was required to give the board the advice on the ASX and
Actuarial issue (Scott, 2012).
Shafron also made an attempt to restrict the functions of company secretary by arguing that
these were to be seen in equal light as the ones owed by David who played the role of joint
company secretary and where his functions were strictly limited to being administrative in
nature. Shafron raised another contention that there was no participation in the decision
making of the company particularly of the separation proposal. This was because of the reason
that this decision was only present with board of Industries and the defendant was not a
member of it. Finally Shafron stated that his duties of an officer were never breached in ASX
and Actuarial matter (Czoch and Whalebelly, 2012).
Shafron made an application to the High Court after the NSW Court of Appeals ruled against
him (High Court of Australia, 2012). The court held that the majority believed that it was highly
doubtful that the plaintiff could take part in certain functions as being the company secretary
and the others as being a general counsel. Heydon J opined that the responsibilities of playing
two roles by Shafron could not be easily differentiated and there was nothing which could
establish that something was being done by Shafron in one capacity and the other thing was
being done in another. And so, the severance of functions of Shafron from that of functions of

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David could not be established and it could not be held that Shafron was the holder of the same
administrative functions as of David (Boyce and Macinnis, 2012).
The role which Shafron played in the decision making of the company was also taken into
consideration by the board. The court denied the requirement of showing that Shafron was an
officer of the company due to the role which was played by Shafron. The court also rejected the
contention raised by Shafron that the person was required to be a decision maker for
participating in the process of decision making. In Industries, Shafron held a seniority level
which could be stated as the company’s 2nd or 3rd level, which is amongst the top tier levels.
Hence, even when the separation proposal was conducted by the board, there was an active
role of Shafron in forming this proposal. Shafron’s participation in the decision making was
apparent from his actions and the board’s decision to accept the separation proposal. So,
Shafron owing the duty of care to Industries as the company officer were successfully upheld by
the court (Boyce and Macinnis, 2012).
In essence, all of the contentions of Shafron were rejected and the violation of section 180(1)
was upheld (Paolini, 2014). Shafron raised an issue in the ASX matter that reliance was placed
on the external lawyers of the company for the additional disclosure requirements. Though, the
same was not upheld by the High Court due to the fact that the attorneys did not extend the
consideration to this matter in an express or implied manner. In the actuarial matter, it was
stated by Shafron that there was a lack of required knowledge and so, the superimposed
inflation provisions could not be known. The High Court quashed this argument and stated that
Shafron held the clear knowledge about the claims cost and that these were being raised in a
faster manner in comparison to the inflation rate and so, the defendant was considered to have
the needed knowledge. The court stated that there was a failure on part of Shafron in
considering all the facts which impacted the actuarial report. And these were required to be
brought to the attention of the board, which was not done (Boyce and Macinnis, 2012).

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Implications and Conclusion
Through the case of Shafron v ASIC, the directors and officers of the company have been
imposed with key duties, which have to be strictly adhered to, or which result in a liabilities for
the individual breaching these duties. There is a need to properly consider the manner in which
a person takes part in the decision making of the company. Further, the senior executives of the
company are deemed as company officers and hence, are required to take care while
discharging the duties covered under Part 2D.1. This case is a key example for reliance on
advice of external professionals not being a sufficient measure to discharge the obligations
covered under this part and the individuals have to take steps to ensure that the reliance made
by them on such advice of external professionals has proper backing.

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References
Austlii. (2017) Corporations Act 2001. [Online] Austlii. Available from:
http://www6.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/ca2001172/ definitions
[Accessed on: 11/09/17]
Baxt, R. (2007) Duties and Responsibilities of Directors and Officers. 19th ed. Sydney, NSW: The
Australian Institute of Company Directors.
Boyce, L., and Macinnis, A. (2012) Shafron v ASIC - general counsel, or counsel of perfection?.
[Online] Dibbs Barker. Available from:
http://www.dibbsbarker.com/publication/Shafron_v_ASIC_-
_general_counsel__or_counsel_of_perfection.aspx [Accessed on: 11/09/17]
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
Czoch, K., and Whalebelly, R. (2012) Australia: The James Hardie Decisions: ASIC v Hellicar & Ors
[2012] HCA17; Shafron v ASIC [2012] HCA 18. [Online] Mondaq. Available from:
http://www.mondaq.com/australia/x/176336/Directors+Officers+Executives+Shareholders/
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Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of
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High Court of Australia. (2012) Peter James Shafron v Australian Securities and Investments
Commission. [Online] High Court of Australia. Available from:
http://www.hcourt.gov.au/assets/publications/judgment-summaries/2012/
hcasum18_Shafron_v_ASIC.pdf [Accessed on: 11/09/17]

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ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from:
http://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on:
11/09/17]
Jacobson, D. (2012) ASIC v Shafron: Liability Of Company Secretary (James Hardie). [Online]
Bright Law. Available from:
http://www.saintylaw.com.au/wp-content/uploads/2012/08/Shafron-Vs-ASIC-takeaway-
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Kemp Strang Lawyers. (2012) James Hardie decisions - implications for general counsel and
company secretaries. [Online] Kemp Strang Lawyers. Available from:
http://www.kempstrang.com.au/publication/james-hardie-decisions-implications-general-
counsel-and-company-secretaries [Accessed on: 11/09/17]
Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, MA: Edward Elgar.
References Armstrong Lawyers. (2007) Directors’ Duties. [Online] Armstrong Lawyers. Available
from: http://www.vcta.asn.au/documents/item/400 [Accessed on: 11/09/17]
Sainty, K. (2012) Shafron v ASIC: take-aways for General Counsel. [Online] Sainty Law. Available
from: http://www.saintylaw.com.au/wp-content/uploads/2012/08/Shafron-Vs-ASIC-takeaway-
August-2012.pdf [Accessed on: 11/09/17]
Scott, P.D. (2012) Shafron v Australian Securities and Investments Commission. University of
Tasmania Law Review, 31(2).
Tam, K. (2012) The sting for General Counsel in the James Hardie decisions - Shafron v ASIC and
ASIC v Hellicar. [Online] Hunt Hunt. Available from:
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%20decisionMay2012.pdf [Accessed on: 11/09/17]
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http://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 11/09/17]

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