A recent decision by the NSW Court of Appeal clarifies four important principles on an individual officer’s disclosure liability to third parties, writes Professor Pamela Hanrahan.
Mandatory climate-related financial disclosure is the most significant transformation to corporate reporting in decades. Growing expectations that companies will be transparent on other important environmental, social and governance (ESG) issues mean there will be more to come. As these changes are legislated, the focus on corporate officers’ potential personal liability for inaccurate disclosure will sharpen.
Often, that focus is on the potential for enforcement action by the Australian Securities and Investments Commission (ASIC). For example, if an officer’s negligence exposes the company to a foreseeable risk of harm — such as a risk of being sued for misleading conduct — ASIC can bring civil penalty proceedings to enforce the duty of care under the Corporations Act 2001 (Cth). If disclosures are required in the annual report, directors can face civil penalty proceedings if they fail to take reasonable steps to ensure relevant parts of the disclosure law are complied with. If there is a material error in disclosures made by the company in documents filed with ASIC, or in information given to shareholders or the market, ASIC can also take action against a director who failed to take reasonable steps to ensure that information was accurate.
But it is also important to focus on the risk of individuals being sued directly by third parties who rely on corporate disclosures. A recent decision by the Court of Appeal in New South Wales, handed down in May, brings some further clarity to the law about when a corporate officer can be personally liable in these situations.
The case, Anchorage Capital Master Offshore Ltd v Sparkes  NSWCA 88 (Sparkes), arose out of the $2.8b collapse of the Arrium steelmaking business in April 2016. Lenders that had advanced money or rolled over existing loans to Arrium between December 2015 and February 2016 sued for allegedly incorrect representations — made in drawdown and rollover notices — about the then financial position and solvency of the group. The defendants included companies in the Arrium group, its CFO Robert Bakewell MAICD and group treasurer Delia Sparkes.
The lenders argued various bases upon which the individual officers might be liable for the representations made over the critical months. Some of these involved novel legal arguments. They included whether Arrium owed a duty of care to the lenders in relation to the representations and, if so, whether the individuals were liable “as accessories” for a breach of that duty. They also included whether Sparkes owed a duty of care directly to one of the lenders — Morgan Stanley — in connection with what was said during a telephone call on New Year’s Eve 2015. The Court of Appeal was also asked whether Sparkes and Bakewell could be liable under the statute, on the basis that they were “knowingly concerned” in Arrium’s contravention of the misleading conduct laws, or they had made the representations personally.
Four important principles emerge from the joint judgment of President Julie Ward and Justices Paul Brereton and John Griffiths. The first two concern the officers’ potential liability in tort, while the third and fourth are about statutory liability for misleading conduct.
Liability to third parties in tort
In Sparkes, the Court found that Arrium did not owe a duty of care to the lenders. It went on to explain that even if Arrium had owed a duty to the lenders, it was not appropriate to ask whether Sparkes and Bakewell were “accessories” to the company’s negligence. In thinking about the potential liability of corporate officers in connection with a tort — including negligence — committed by a company, the proper question is whether the individual’s conduct makes them a “joint tortfeasor” with the company. This “is not the same as accessorial liability in the criminal law (to which accessorial liability under statutory provisions such as the Australian Consumer Law is closely analogous).”
In tort law, the question whether a person is liable as a joint tortfeasor is complicated. After reviewing the relevant case law, the Court in Sparkes concluded with the first important principle, that “the liability of a director for procuring a tort of the company is a form of joint liability... Where the director or officer is merely acting as a corporate organ in the ordinary way, no such liability arises, just as a director of a company is not liable for inducing a breach of contract by the company where the director is no more than the individual through whom the company acts. In order to incur liability as a joint tortfeasor, the director must be so personally involved in directing or procuring the tort as to ‘make it his or her own’ tort, above and beyond reasonably and in good faith directing the company’s decision-making as a director.”
The second important principle concerned whether Sparkes owed a personal duty of care to Morgan Stanley. At first instance, Justice Bell held that she did. However, the Court of Appeal disagreed. It decided that “Sparkes was acting only in her capacity as an officer of Arrium. The request for information was addressed to her in that capacity. Morgan Stanley would or ought to have understood that she was acting in that capacity. Sparkes did nothing to take herself outside the role of so acting, such as to make any such representation as she might have made her own, rather than one by or on behalf of her employer.”
Liability for misleading conduct
In Sparkes, the lenders also argued that Sparkes and Bakewell were liable, either because they were “knowingly concerned” and therefore involved in a contravention by Arrium of the misleading conduct laws, or contravened them personally.
The third important principle is that in order to be knowingly concerned in a company’s misrepresentation, the officer must have actually known what the company said was false. Therefore, “a person who knows that another is going to make certain representations, but does not know that they are misleading, cannot be said to be knowingly concerned in the other engaging in misleading conduct”.
The fourth principle is that neither Sparkes nor Bakewell made the representations personally. As the Court confirmed, “the status of an employee or officer does not necessarily immunise one from personal liability for contravening conduct engaged in in that capacity; but the question is whether the role of the individual was more than merely ministerial. Unless it is, the conduct is not attributable to the individual, but only to the company”.
In Sparkes, the Court of Appeal has provided clear guidance on circumstances in which individual corporate officers may be liable to third parties in connection with inaccurate or incomplete corporate disclosure. That guidance will be increasingly valuable as expectations — and legal requirements — for corporate disclosure in all its forms continue to rise.
This article first appeared under the headline 'Where Responsibility Lies’ in the September 2023 issue of Company Director magazine.
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