Director’s duties become more onerous

Carefully consider your responsibilities.

Many of us are company directors and often sit on boards to assist in the efficient management of the business operations.

Below are a couple of cases worth noting as they have wide implications for those bold enough to put themselves up as an ‘officer’ of a Corporation.

Shafron v. Australian Securities and Investments Commission [2012] HCA 18 considered the extent of the duty owed under s.180(1) of the Corporations Act 2001 (Cth). In particular, it considered the extent of the phrase ‘in their position and with their responsibilities’ and the definition of ‘officer’ under the Corporations Act. The applicant was the company secretary and general counsel of James Hardy Industries Ltd (JHIL) and it was alleged that he had failed to display an appropriate degree of care and diligence in that he failed to give appropriate advice to the board of JHIL on two separate occasions, and on one occasion also failed to give appropriate advice to the chief executive officer.

The principle question before the trial judge, Court of Appeal and High Court was whether the applicant’s responsibilities under s.180(1) extended to his duties as general counsel or were limited to his responsibilities as company secretary. There was no argument that, as company secretary, the applicant was an officer of JHIL, but the applicant argued that his ‘responsibilities’ as an officer should be limited to the role that made him an officer, i.e. his position as company secretary. Notwithstanding that the Court ultimately found him to be an officer in either capacity, the High Court held that the duties of an officer under s.180(1) extends to all roles undertaken by the officer within the corporation unless there is a clear distinction between actions undertaken in one capacity and actions undertaken in another. The applicant was not able to demonstrate any such distinction.

It was further argued by the applicant that his duties as company secretary did not extend to the provision of legal advice and that it was not, therefore, a breach of s.180(1) for him to fail to give that advice. The trial judge, Court of Appeal and the High Court all rejected this assertion, concluding that a company secretary with a legal background would be expected to raise legal issues to the board. Even if the applicant was not the general counsel of JHIL, he would still owe this responsibility.

The applicant claimed that he was not, as general counsel, an officer of the company (admitting to being an officer as company secretary) because the general counsel did not make, or participate in making, decisions that affected the whole or a substantial part of the company, as required by s.9(b)(i) of the Corporations Act 2001 (Cth). He submitted that a person participates in making a decision only if they had a part in actually making the decision.

The High Court rejected this argument. The Court held that participating in making a decision required more than simply offering advice and information, but found that the applicant, as a senior executive of JIHL had gone beyond the mere offering of advice. He had played an active part in formulating the proposals that went before the board so, though it was the board that ultimately made the decision, he participated in making it. This was deemed sufficient to make him an officer in his role as general counsel of JIHL.

Omnilab Media Pty Ltd v. Digital Cameras Network Pty Ltd [2011] FCAFC 166 considered both the duty of directors to not disclose business opportunities to a rival company and the accessorial liability of that rival company for the loss occasioned by the first company.

In regards to the duty owed by the director, the Federal Court found that the means by which the business opportunity had been acquired was irrelevant, as was any reluctance by the person giving the business opportunity to grant it to Digital Cinema Network Pty Ltd (DCN). What was important is that it was a maturing business opportunity that DCN was actually pursuing. By diverting the business opportunity to another company with which he was associated, the director breached his duty. There was significant evidence that Omnilab Media Pty Ltd (Omnilab) knew that the director was breaching his duty by diverting the business opportunity to them and they therefore had accessorial liability for his breach.

Australian Securities and Investments Commission v. Healey and Others [2011] FCA 717 considered the duty of directors in relation to annual financial reports.

The directors in that case had relied on management and external advice when adopting and approving the 2007 financial statements. The 2007 statements contained misclassifications and failed to make full disclosure. As a result, the company suffered loss. The Federal Court found that the directors were required to exercise due care and diligence under s.180(1) of the Corporations Act 2001 (Cth) when considering the financial statements and, further, under s.344 then had to take all reasonable steps to ensure the financial statements complied with financial reporting provisions. The Court held that the directors were not entitled to delegate their responsibilities under these sections and, by failing to read, understand and consider the financial statements they had each breached their duties to the company.

This certainly raises the bar for the level of compliance for company officers and all directors or secretaries should take notice!

Article originally published in All Things Considered Digest Edition #87