Can an actuary be found to be a shadow director of a corporation?

This article sets out how you can be found to be an Officer of a company, the types of roles and functions that have resulted in people being found to be Officers of companies, the duties Officers and Directors are required to comply with under the Corporations Act 2001 (the Act), and potential liabilities if an Officer or Director breaches their duties under the Act.

     Who is a shadow director?

Under the Act you can be bound by the duties of an Officer of a corporation even if you are not a formally appointed Director of a corporation. Such persons are known as “shadow directors” of a company.

Under the Act an Officer of a corporation is a person:

• Who makes, or participates in making decisions that affect the whole, or a substantial part, of the business of the corporation; [1] or
• Who has the capacity to affect significantly the corporation’s financial standing; [2] or
• Whom the directors were accustomed to acting in accordance with their recommendations or advice. [3]

It follows that a person can be held to be an Officer of a corporation even if they are not an employee or one of the formally appointed directors  and the definition of an Officer can encompass external advisers such as actuaries in certain circumstances as outlined below.

     When have individuals been found to be an Officer of a corporation?

Individuals have been found to be officers of a corporation when they have participated in making decisions or have the capacity to affect a substantial part of the financial standing of a corporation.

In Shafron v ASIC,[4] Mr Shafron was employed as the company secretary and legal counsel of James Hardie Industries Limited (JHIL). Mr Shafron was involved in the creation of actuarial reports using a cashflow model that did not take into account superimposed inflation in estimating the amount JHIL needed to fund asbestos related claims. Mr Shafron selected and presented reports to the board of JHIL and failed to disclose the fact the estimates did not include superimposed inflation.  The board made the ultimate decision on the preferred report. 

The Australian Securities and Investment Commission (ASIC) successfully commenced proceedings against Mr Shafron on the basis that he was an Officer of JHIL and breached his duty as an Officer under the Act.

The High Court subsequently found Mr Shafron was an Officer of JHIL because he had participated in making decisions that affected a substantial part of the business of JHIL by vetting the reports he presented to the board. Having found Mr Shafron to be an Officer of JHIL, the High Court found Mr Shafron had failed to exercise his powers and discharge his duties with a degree of care and diligence that a reasonable person would exercise as an Officer of a corporation, as required under s180 of the Act., by failing to disclose the key omissions in the estimates to the board.

Mr Shaffron was disqualified from managing corporations, acting as an Officer of a corporation,[5] and ordered to pay JHIL compensation. Apart from the Court’s findings as outlined above, the case of Shaffron v ASIC also provides a poignant reminder to actuaries to ensure all work is properly represented to directors and boards by expressly setting out the following:

• Any assumptions and omissions made in preparing any estimates or recommendations contained in any report or recommendation, and
• The significance of any assumptions or omissions contained in any report or recommendation, and
• Disclosing any constraints on the actuary’s independence, and
• The actuary’s understanding of the nature, scope and completeness of the works he or she has been directed to perform

In Dwyer v Lippiatt [6] the Supreme Court of Queensland found a self-described consultant was an officer of a corporation because he was involved in all of the important decisions affecting the business, he was involved in key negotiations of the business, and he was accustomed to the directors acting in accordance with his recommendations or advice.

In ASIC v Adler [7] the Court found Mr Adler was an Officer of a subsidiary corporation because he participated in making investment decisions that affected the subsidiary and he had the capacity to significantly affect the activities of the subsidiary.

While the case of AAT v Slee,[8] did not involve the finding of an actuary as an Officer of a corporation, the case does highlight the importance of fulfilling the professional obligations of an actuary. Mr Slee was a consulting actuary for HIH Insurance Limited. The Australian Prudential Regulation Authority (APRA) disqualified Mr Slee for holding any appointment as an actuary of a general insurer, for failing to give adequate consideration to the validity or accuracy of certain assumptions, data and techniques in actuarial reports, providing assumptions that Mr Slee knew or ought to have known were not open, failing to discuss whether assumptions in reports were consistent with professional standards, and making calculation errors. Mr Slee appealed the disqualification to the Administrative Appeals Tribunal (AAT).  In upholding the disqualification the AAT found Mr Slee had failed to comply with the relevant professional standard, his work was devoid of the appropriate degree of care, he had made significant errors that should not have been made, and he displayed a gross disregard for his professional obligations.

       In what circumstances can an actuary be found to be an Officer of a corporation?

Whether a person is an Officer of a corporation depends on the facts and circumstances of each case.

It is the role an actuary plays in the corporation, not the distinction between whether an actuary is performing an actuary’s statutory duties or non-statutory duties, that determines whether he or she is an Officer of a corporation. [9] While there has been no case in Australia to date where an actuary has been found to be a shadow director/Officer of a corporation, and the following is simplified and there’ll be many cases where it may be difficult to decide if an actuary was a shadow director or not, the functions and role that may lead to an actuary being found to be an Officer of a corporation include:

• Choosing which proposals to present to a corporation for the Board to make their decision; [10]
• Recommending particular proposals (pricing models, forecasts etc) over other proposals; [11]
• Frequently participating in decisions that significantly affect the corporation, even if the ultimate decision is made by someone else; [12]
• Doing more than simply proffering advice and information in response to particular requirements of a corporation; [13]
• Participating in negotiations that affect the whole or a substantial part of the business [14]; and
• Giving recommendations or advice to the directors in circumstances where the actuary is accustomed to the directors acting in accordance with those recommendations.

What are the duties of an Officer of a corporation and what are the potential penalties?

If you are interested in developing your career by taking a senior position with a corporation, such as a directorship or board role, you should familiarise yourself with the duties of Directors and Officers of a corporation under the Act, to ensure you comply with those obligations. Further even if you are not formally appointed a Director or Officer, it may be prudent to comply with the duties set out below as if you are, in case you are later found to be a shadow director.

Under the Act Officers and Directors have the following duties:

Duty to act with care and diligence

Officers and Directors must exercise their powers and discharge their duties with the care and diligence, which a reasonable person would exercise if they were in the same role.[15] 

Duty to act in good faith and in the best interest of the company

Officers and Directors have a duty to act in good faith, in the best interest of the company and to further the purposes of the company at all times. [16]

An Officer or Director must not use their position for an improper purpose such as entering into transactions which prefer the interests of the Officer or Director personally, or other parties, over the interests of the company.

Duty not to misuse position

An Officer or Director must not misuse their position in the company to gain an advantage for themselves or someone else, or cause detriment to the corporation. [17]

Examples of misusing the position include causing the company to enter into transactions or other business dealings which, either directly or indirectly, benefits the Officer or Director personally or break the law. 

Duty not to misuse information

An Officer or Director must not improperly misuse information they have obtained from a corporation because they are or were an Officer or Director of the Corporation, to gain an advantage for themselves or someone else, or cause detriment to the corporation. [18]

Duty to not trade whilst insolvent

A Director must not allow the company to trade while insolvent. [19]

A company is insolvent when it cannot pay its debts as and when they fall due. [20] Indicia of insolvency include dishonoured cheques, substantially aged creditors, continually failing to meet creditor’s normal trading terms, special arrangements with creditors, and continuing losses. [21]

If a Director suspects that the company cannot pay all its debts as and when they fall due, then the director must take all reasonable steps to prevent the Company from taking on more debt. [22] In order to comply with this legal obligation, the Director should regularly review the company’s financial position and ensure there are sufficient funds to pay for its staff and creditors.

Persons who are an Officer or Director of a Corporation are subject to significant legal duties, and to associated liabilities (civil and criminal) if those duties are breached.

If an Officer of a Corporation fails to discharge their duties with care and diligence, or in good faith and for a proper purpose, or in the best interests of the corporation, they can be liable for a civil penalty of up to $200,000. [23]

They can also be ordered to compensate the corporation for any loss and damaged caused by their wrongful conduct.

It is a criminal offence if an Officer of a corporation either:

• Intentionally or recklessly breaches their duty to exercise their powers and discharge their duties in good faith and in the best interests of the corporation for a proper purpose, or
• Is recklessly or intentionally dishonest. [24]

ASIC can disqualify a person from managing a corporation, for breaching the relevant provisions of the the Act. [25]

While disqualified the person cannot manage a corporation, or participate in making decisions that significantly affect a corporation. [26]

    How can an actuary protect themselves?

While disclaimers of themselves have no bearing on whether an actuary is found to be a director or an officer of a corporation under the Act, and will not prevent an actuary from being bound by duties under the Act, they can act as a bar against any claim for loss or damaged suffered by the corporation in reliance on the actuary’s report or recommendation, subject to the facts of the particular case.

If you are interested in acting as an Officer or Director of a corporation you would be wise to obtain professional indemnity insurance, and Officer and Director’s insurance, to protect yourself from claims for loss or damage caused in the performance of your duties.

    Questions

If you would like any further advice on this matter please contact Tim Castle of Sparke Helmore Lawyers on 02 9373 3576.

[1] Shafron v Australian Securities and Investments Commission [2012] HCA 18 (3 May 2012)

[2] Australian Securities and Investment Commission v Adler (2002) 168 FLR 253

[3] Definition of an Officer, s9 Corporations Act 2001; Dwyer v Lippiatt (2004) 50 ACSR 333.

[4] Shafron v Australian Securities and Investments Commission [2012] HCA 18 (3 May 2012)

[5] Shafron v Australian Securities and Investments Commission [2012] HCA 18 (3 May 2012); T Bednall and V Ngomba, “The High Court and the c-suite: Implications of Shafron for company executives below board level” (2013) 31 C&SLJ6

[6] Dwyer v Lippiatt (2004) 50 ACSR 333

[7] Australian Securities and Investment Commission v Adler (2002) 168 FLR 253

[8] [2006] AATA 206

[9] Shafron v Australian Securities and Investments Commission [2012] HCA 18 (3 May 2012); T Bednall and V Ngomba, “The High Court and the c-suite: Implications of Shafron for company executives below board level” (2013) 31 C&SLJ6

[10] Shafron v Australian Securities and Investments Commission [2012] HCA 18 (3 May 2012) at para 28 and 29

[11] IBID

[12] Shafron v Australian Securities and Investments Commission [2012] HCA 18 (3 May 2012)

[13] IBID at para 26

[14] Dwyer v Lippiatt (2004) 50 ACSR 333

[15] S180 (1) Corporations Act 2001; Australian Securities Investment Commission v Vines (2003) 48 ACSR 291

[16] S181 (1) Corporations Act 2001; Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821

[17] S182 (1) Corporations Act 2001

[18] S183(1) Corporations Act 2001

[19] S588G Corporations Act 2001;

[20] ASIC v Plymin (No 1) (2003) 175 FLR 124

[21] IBID

[22] Hall v Poolman [2007] NSWSC 1330

[23] s1317G(1) Corporations Act 2001

[24] s184(1) Corporations Act 2001

[25] s206C Corporations Act 2001

[26] s206A Corporations Act 2001

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