www.carternewell.com © Carter Newell 2013

By Mark Brookes, Partner

Who requires D&O cover?

Introduction

Following on from our recent newsletters regarding developments relevant to D&O policies, this newsletter looks at the way the Courts have interpreted who is a director and officer for the purposes of the Corporations Act 2001 (Cth) (the Act), and therefore who requires a D&O policy.

The absence of such a policy for liability or for associated defence costs incurred by a director or officer can be catastrophic for the individuals concerned.

Legislation

[A] company itself cannot act in its own person, for it has no person; it can only act through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent.

1

A D&O policy will usually provide cover to the current directors and officers of a company and extend to those persons who become the company’s directors and officers after the policy commences.

Section 9 of the Act provides extensive definitions of director and officer.

‘Director’ is defined as (our underlined emphasis):

(a) a person who:

(i) is appointed to the position of a director; or

(ii) is appointed to the position of an alternate director and is acting in that capacity;

Regardless of the name that is given to their position; and

(b) unless the contrary intention appears, a person who is not validly appointed as director if:

(i) they act in the position of a director; or

(ii) the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes.

The definition of ‘officer’ is similarly defined as:

(a) a partner in the partnership if the entity is a partnership; or

1 Ferguson v Wilson (1866) LR 2 Ch App 77, 89 (Cairns

LJ).

(b) an office holder of the unincorporated association if the entity is an unincorporated association; or

(c) a person:

(i) who makes, or participates in making decisions that affect the whole, or a substantial part, of the business of the entity; or

(ii) who has the capacity to affect significantly the entity’s financial standing.

The title a person is given within the company and whether they are noted as a director or officer in the company records will not necessarily affect whether the legislation considers them to be a director or officer. The Court will instead consider the duties that person undertakes and whether those duties fall within section 9 in the individual circumstances of each case.

Caselaw

In the recent Federal Court decision of Grimaldi v Chameleon Mining NL (No 2)

2, Mr Grimaldi was

engaged as a consultant to assist in the management of a company called Chameleon Mining (“Chameleon”). Mr Grimaldi was also a director of several of Chameleon’s subsidiary companies, and a consultant for another.

In considering whether Mr Grimaldi fell within the section 9 definitions, the Court observed:

“The [Act’s] definition of ‘director’1 extends to a person who though not appointed as a director, nonetheless assumes to act in the position of a director...”

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and

“whether a person has acted in the position of a director is a question of substance, and not simply of how that person has been nominated in, or by, the company.”

4

The Court noted a consultant, provided with a limited and specific scope for consultancy services is unlikely to be caught within the definition of section 9. However, a ‘general and unconstrained [role] which permitted taking an active part in directing the affairs of the company even if not on a full time basis’ will likely be caught.

In this case, the Court was satisfied the role played by Mr Grimaldi in conducting negotiations on the behalf of Chameleon satisfied the section 9 definition of an ‘officer’ pursuant to sub-sections 9(c)(i) and (ii).

2 [2012] FCAFC 6 (‘Grimaldi’). 3 Grimaldi [32]. 4 Grimaldi [68].

FebruaryFebruaryFebruaryFebruary 2013

Shafron v Australian Securities and Investments Commission

5 saw the High Court of Australia recently

consider the not unusual dual role of general counsel and company secretary, held by Mr Shafron. ASIC alleged Mr Shafron had breached his duty of care owed as an officer of the company, in the context of advice he provided to the board of directors. Mr Shafron argued he was acting as general counsel when advising the company‘s board and was therefore not acting as an ‘officer’ in the capacity of providing that advice.

The High Court upheld the decision of the trial judge, affirming Mr Shafron had breached his duty of care as an officer (owed pursuant to section 180 of the Act). Importantly, the Court did not look to separate the two roles held by Mr Shafron, saying those capacities could not be easily severed. Instead, in concluding that the statutory definition of ‘officer’ applied, it was noted Mr Shafron’s role extended beyond administrative duties because he advised the board on significant matters (including for example James Hardie Industries Limited’s exposure to asbestos litigation).

It therefore appears Mr Shafron may have been liable as an officer in his capacity as general counsel, even if he had not also been company secretary.

The High Court provided the following guidance for examining the meaning of ‘officer’:

“1inquiry1must be directed to what role the person in question plays in the corporation. It is not an inquiry that is confined to the role that the person played in relation to the particular issue in respect of which it is alleged that there was a breach of duty.”

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However, participation in any decision of a company will not of itself necessarily be sufficient to deem that person an ‘officer’ for the purposes of section 9. The decision ‘must have significance for the business of the corporation1’

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Auditors

A company’s auditor can also be considered an officer of the company

8; however the auditor will more usually

5 (2012) 286 ALR 612 (‘Shafron’). 6 Ibid, 619, [23]. 7 Shafron (2012) 286 ALR 612, 620, [27]; see also Hodgson v

Amcor; Amcor v Barnes & Ors [2012] VSC 94. 8 Mutual Reinsurance Co v Peak Marwick [1997] Ll Rep 253.

(or coextensively) owe obligations to the company in its professional capacity for which it would ordinarily be expected to be covered by professional indemnity insurance.

In the UK case Stone & Rolls Ltd v Moore Stephens9, a

single director and shareholder company defrauded its bank. The bank, unable to pursue the insolvent company and director, sought to pursue the company’s auditors on the basis the auditors owed the bank a duty of care on behalf of the company to ensure the company’s creditors were not defrauded.

The UK House of Lords considered the proceedings were an indirect attempt by the bank to obtain compensation from the auditors’ professional indemnity insurers, and dismissed the claim (by majority 3:2).

The bank was unable to bring a claim directly against the auditors, because the auditors did not owe a duty of care to third party creditors.

Comment

Any individuals who could potentially be considered directors or officers (including auditors, certain consultants and general counsel) should therefore be careful to ensure they are covered by D&O liability insurance policies in respect of their involvement in the company, which could otherwise result in them having an uninsured personal liability to pay substantial damages and costs.

When considering a proposal form for D&O insurance, it is therefore important for careful consideration to be given to the various roles performed within the company to identify individuals who may owe duties under the Act and require insurance protection, and ensure those roles are properly disclosed.

Author

Mark Brookes Partner

T (07) 3000 8301 E mbrookes@carternewell.com

9 [2009] UKHL 39