What seems to be the problem, officer? | The impact of ASIC v King

On 11 March 2020, the High Court of Australia unanimously held that the term 'officer' under the Corporations Act 2001 (Cth) (Act) is not limited to individuals who hold official positions within a company. ASIC Commissioner John Price said that the High Court decision has sent "a clear signal to anyone running a company – in name or in effect – that they should be responsible and held accountable for their actions".

Background

Mr King was the chief executive officer and executive director of MFS Ltd, a parent company of the MFS Group of companies (MFS Group). MFS Group's business included the management of a Premium Income Fund (PIF). MFS Investment Management Pty Ltd (MFSIM), as a responsible entity of PIF, entered into a $200 million facility with the Royal Bank of Scotland (RBS Loan Agreement), to be used solely for the purposes of PIF. On 27 November 2007, MFSIM and senior personnel in the MFS Group (including Mr King) arranged for a $150 million draw down under the RBS loan agreement, which was used to pay the debts of other MFS Group companies (including MFS Administration Pty Ltd). MFS Administration, as the treasury of the MFS Group, used $103 million of those funds to pay an outstanding debt. There was no agreement by which MFSIM received any consideration for this payment. Without evidence of any promise of repayment, PIF (and retail investors of the fund) were therefore at risk that PIF's money would not be repaid.

In 2009, ASIC commenced civil proceedings against a fund manager and officers of MFSIM, including Mr King, alleging breaches of the Act,1 despite the fact that Mr King had ceased to be a director of MFSIM on 27 February 2007. ASIC's case against Mr King was that he remained an "officer" of MFSIM until 21 January 2008 because he fell within paragraph (b)(ii) of the definition of "officer of a corporation" in section 9 of the Act. Another argument put forward by ASIC, was that Mr King directed and authorised, on behalf of MFSIM, the use of the PIF funds, in a prohibited related party transaction. In 2016, the Queensland Supreme Court found in favour of ASIC, holding that the former directors had committed a total of 217 contraventions of the Act. The Queensland Court of Appeal overturned that decision, finding in favour of Mr King.

 

Relevant Statutory Provision

The term "officer of a corporation" is defined by s 9 of the Act as follows:

"officer of a corporation means:

  1. a director or secretary of the corporation; or
  2. a person:
    1. who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
    2. who has the capacity to affect significantly the corporation's financial standing; or
       
      ….
      (emphasis added)

High Court Decision

In a unanimous decision, the judges concluded that the Court of Appeal had erred in construing the sub paragraph by reference to the ordinary meaning of "officer" as the holder of an office. Their Honours concluded that the term "officer" is not limited to "those who hold or occupy a named office in a corporation or a recognised position with rights and duties attached to it".2 Rather, they said, the sub paragraph is intended to capture those who do not hold such an office, and therefore defines "officer" by reference to the relationship between an individual and a corporation in relation to the affairs of the corporation. Their Honors held that for a CEO of a parent company to act and manage the affairs of a group of companies, while avoiding responsibility for their conduct by simply eschewing any formal designation, would be beyond the legislative purpose of the Act. The joint judgment of Chief Justice Susan Kiefel, Justice Stephen Gageler and Justice Patrick Keane, said it was plainly intended to extend beyond the ordinary meaning of the word:

"It is impossible to discern from the Act the intention that an officer of a holding company should fall outside para (b)(ii) of the definition in relation to a subsidiary if, as a matter of fact, that individual has the capacity to affect significantly the financial standing of the subsidiary, particularly where that individual has demonstrated that capacity by exercising it to the detriment of the subsidiary and its creditors and shareholders..."3

Notably, Nettle J and Gordon J, who agreed with the joint judgement, outlined various factors that will affect the determination as to whether a person is likely to fall within paragraph (b)(ii), including:4
  • the role the person played in the management of the corporation;
  • the inquiry is not limited to any particular issue or act which the person was involved in;
  • the individual's capacity to affect significantly a corporation's financial standing, not just any capacity will suffice;
  • identification of the individual's role in relation to the corporation, what they did or did not do, and the relationship between their actions or in actions and the financial standing of the corporation; and
  • the size of a corporation, the corporate structure, the management structure, and the identity and nature of the persons involved.
 

Although the issue did not arise in this proceeding, all judges raised the question as to whether bankers, consultants or other third parties fall within the reach of the definition of "officer". Kiefel CJ, Gageler J and Keane J held that such a question depends on whether the advisor or consultant is, in fact, involved in the management of the corporation, and whether such involvement leads to implementation of the advice.5

Effect of the Decision

The decision provides further guidance and clarity as to who is likely to be caught by the definition of "officer", and therefore, who will be subject to the corresponding duties and responsibilities outlined in the Act. The High Court's confirmation of the extended use of the term is likely to capture a range of individuals, who may not have previously been subject to the relevant obligations under the Act. The decision is also likely to give ASIC more confidence in its pursuit of civil penalties against officers' misconduct. The extended definition of the term should always be read in the context of the factors outlined by Nettle J and Gordon J above.

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1 Specifically, it was alleged that Mr King had breached section 601FD(1) - "Duties of officers of responsible entity".
2 Australian Securities and Investments Commission v King & Anor [2020] HCA 4, [185] (ASIC v King).
3 ASIC v King, [47].
4 ASIC v King, [91].
5 ASIC v King, [42].

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