Clayton Utz Insights

29 March 2012

An officer and a defendant

By Geoff Hoffman and David Landy.

Key Points:

By referring to practical aspects of managerial life and corporate structure / decision-making, Hodgson v Amcor goes some way to reducing the considerable grey area in the definition of "officer".

It's not just company directors who face personal liability. Recent court cases – such as last week's Amcor case – show how personal corporate responsibility is increasingly filtering down to the managerial level.

The most obvious example of this is the James Hardie case [1] (currently on appeal to the High Court). There, a corporate counsel/ company secretary was held to have been a company officer because he participated in making decisions affecting the whole or a substantial part of James Hardie’s business. This meant that the general counsel/company secretary was found to have a positive duty to act with due care and diligence (section 180 of the Corporations Act) and that he had contravened that duty by failing to properly advise the board about a potentially misleading statement in an ASX release.

A major issue for corporate managers is how far down the corporate ladder this responsibility can extend.

How low can you go?

To some extent, the legal significance of managerial duties and liabilities has been obscured by the fact that a lot of attention has been focussed on directors and their duties.

As a result it is easy to overlook the fact that the Corporations Act imposes duties on "officers", as well as on directors. In fact, the key provisions (section 180-183 – duty of care and diligence, duty of good faith, duty not to improperly use one's position or knowledge) apply to "directors or other officers" [emphasis added].

In most cases, it is relatively simple to say who is and isn't a director (the board elections are usually a good pointer!). But who is an "officer"?

For present purposes, the Act says that an officer is:

"a person:

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

(ii) who has the capacity to affect significantly the corporation's financial standing; or

(iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation)"

This is clearly not a brightline test. Paragraph (iii) is similar to the statutory test for shadow directors, about which there have been quite a few court rulings. Paragraphs (i) and (ii), on the other hand, are relatively unknown quantities.

That's why it's useful that the Victorian Supreme Court recently devoted some attention specifically to those two paragraphs, in Hodgson v Amcor [2012] VSC 94.

The Amcor case concerned a complicated dispute between a company and a former senior manager. Among other things, the company alleged that the former senior manager had been an officer and had breached sections 180-183 of the Corporations Act.

This required the Court to determine whether the senior manager fell within paragraphs (i) or (ii) of the definition of "officer".

The questions to ask

Although the Court's reasons are limited to the situation of a specific manager in a specific company, the elements that the Court took into account may provide useful guidance for other managers and other companies.

Two obvious factors which separate the officers from the rest are their position within the company (eg. senior management) and their ability to take part in decisions which affect the company's business at a high level.

Other key elements considered by the Court include:

  • What is the manager's capital expenditure authority? In this case, a limit of $250,000 was said to be an indication that the manager might not be an officer (reference should also be made to the 2007 Citigroup case [2], where it was held that a trader who had a $10m trading limit wasn't an "officer").
  • To whom does the manager report? A person may be an officer if they report directly to the board, but even non-direct reporters may be an officer if they are "capable of dealing directly with board members".
  • Does the manager participate in the making of board decisions? Again, they're more likely to be an officer if they do.
  • What is the extent of the manager's domain? In Amcor, the fact that the manager headed and managed the largest division in the company (in terms of staff, resources and revenue) supported the conclusion that he was an officer.
  • Does the manager have direct control over his own budget? Such control is another indication of being an officer.
  • Who are the manager's own direct reports? In Amcor, the fact that the manager had oversight of a significant number of high level general managers supported the conclusion that he was an officer.

The conclusions to draw

Given that officers have many of the same duties and face many of the same liabilities as directors, it is frustrating that the statutory definition of "officer" doesn't really provide much practical assistance.

For that reason, this judgment is very welcome. Although it concerned a specific manager in a specific company, the court's reasoning provides some really useful flesh on the bare bones of the statute. By referring to practical aspects of managerial life and corporate structure / decision-making, the judgment goes some way to reducing the considerable grey area in the definition of "officer".

 

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[1] Morley v Australian Securities and Investments Commission [2010] NSWCA 331

[2] Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (ACN 113 114 832) (No. 4) [2007] FCA 963

For more information, contact...
Email: Geoff Hoffman, Partner
Tel: +61 2 9353 4617
Email: David Landy, Partner
Tel: +61 2 9353 4175
Disclaimer
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
Geoff Hoffman
Geoff Hoffman