Australian Securities and Investments Commission v King  HCA 4
On 11 March 2020, the High Court of Australia unanimously held that the definition of ‘an officer of a corporation’ in the Corporations Act 2001 (Cth) (the Corporations Act) is not limited to someone who holds or occupies a named office within a corporation or a recognised position.
This decision provides long-awaited clarification of the meaning of an ‘officer’ of a company and importantly, who may potentially be personally liable for penalties under the Corporations Act.
Mr King was the CEO and executive director of MFS Ltd, which was the parent company of the MFS Group of companies. The MFS Group was a group of funds management and financial services businesses.
Premium Investment Funds (PIF) was the largest management investment scheme in MFS Group. MFSIM was the responsible entity of PIF. A ‘responsible entity’ is a licenced body that manages an investment scheme and has duties under the Corporations Act.
Mr King was once a director of MFSIM but left that position in February 2007.
In June 2007, MFSIM, in its capacity as the responsible entity for PIF, entered into a loan agreement with the Royal Bank of Scotland (the loan). The loan was for $200 million and was to be used for the sole purposes of PIF and could not be used for other companies in the MFS Group.
In November 2007, MFSIM used $150 million of the loan to pay the debts of other MFS Group companies for which PIF was not actually or contingently liable. In particular, $130 million of the loan money was paid without any agreement, consideration or security.
As there was no agreement in place, there was no guarantee that the loaned money would be repaid to PIF. MFS Group later collapsed leaving PIF investors with a significant loss.
Trial and the Appeal
In 2009, ASIC brought an action against MFISM and the senior executives of MFS Ltd, including Mr King, alleging that they had breached their duties under the Corporations Act.
ASIC alleged that MFISM and Mr King had breached their duties under section 208(1) and 601(FC) of the Corporations Act. Section 601FC required MFSIM, as a responsible entity, to carry its duties in a certain way (i.e. act honestly, exercise a degree of care and diligence of a reasonable person, act in the best interests, etc.)
At trial, the Supreme Court of Queensland held that MFISM had breached its duties under section 208(1) and 601FC of the Act as the responsible entity of PIF. The Court held that MFISM had breached its duties under section 601FC of the Corporations Act.
Mr King was also found to have been knowingly concerned with MFSIM’s contraventions of the Act and consequently had also contravened those sections of the Corporations Act
However, ASIC also alleged that Mr King was liable for breaching his duties under section 601FD of the Corporations Act. Section 601FD(1) states:
An officer of the responsible entity of a registered scheme must:
act honestly; and
exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer’s position; and
act in the best interests of the members and, if there is a conflict between the members’ interests and the interests of the responsible entity, give priority to the members’ interests; and
not make use of information acquired through being an officer of the responsible entity in order to:
gain an improper advantage for the officer or another person; or
cause detriment to the members of the scheme; and
not make improper use of their position as an officer to gain, directly or indirectly, an advantage for themselves or for any other person or to cause detriment to the members of the scheme; and
take all steps that a reasonable person would take, if they were in the officer’s position, to ensure that the responsible entity complies with:
this Act; and
any conditions imposed on the responsible entity’s Australian financial services licence; and
the scheme’s constitution; and
the scheme’s compliance plan.
Whilst section 601FD contains similar duties to section 601FC of the Corporations Act, the duties (listed in section 601FD) are placed on an officer of the responsible entity, rather than the responsible entity itself.
ASIC contended that Mr King had breached his obligations as an ‘officer’ of the responsible entity (MFSIM) by not acting honestly, or failing to exercise the required degree of care and diligence and not acting in the best interests of the members of PIF. This is even though Mr King did not hold any formal office within MFSIM.
Consequently, at issue was whether Mr King could be considered an officer of MFSIM.
Section 9 of the Act defines ‘officer of a corporation’ as follows:
“officer of a corporation means:
a director or secretary of the corporation; or
who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
who has the capacity to affect significantly the corporation’s financial standing; or
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); or…”
As Mr King ceased being a director of MFSIM in February, ASIC alleged that Mr King met 9(1)(b)(ii) of the definition set out above because he could affect significantly MFSIM’s financial standing.
At first instance, the primary judge agreed that Mr King was an officer of MFISM because he could significantly affect MFSIM’s financial standing.
On Appeal, the Queensland Court of Appeal agreed with the primary judge’s findings of fact regarding Mr King’s involvement in the operations of MFSIM and that as the executive director of MFS Ltd, Mr King acted as the overall boss of the MFS Group and assumed overall responsibility for MFSIM.
The Court of Appeal, however, was not persuaded that Mr King was an officer of MFSIM. The Court of Appeal held that any capacity Mr King had to affect MFSIM’s financial standing did not come from his occupation of an ‘office’ within MFSIM, and consequently, he did not meet the definition of officer contained in section 9(b)(ii).
By grant of special leave, ASIC appealed to the High Court.
Issue considered by the High Court
Was Mr King an officer of MFSIM because he had the capacity to affect significantly MFSIM’s financial standing?
The High Court unanimously held that Mr King met the definition of an officer because he had the capacity to affect significantly MFSIM’s financial standing.
The High Court held that the Court of Appeal erred in requiring that ASIC to establish that Mr King held an actual office within MFSM for him to be considered an officer and that their reasoning had departed from the literal meaning of the definition of officer in the Corporations Act.
The High Court held that the textual differences between paragraphs (a) and (b) of the definition of officer anticipated two categories of people; namely, paragraph (a) captures those who hold a named office within a corporation, whereas paragraph (b) captures a wider class of persons, namely those who do not hold such an office.
Further, the High Court held that an interpretation that allowed the head of a parent company to act for its group companies without the consequences of this provision would be contrary to the purpose, legislative context and history of the provision.
Mr King raised a concern that if paragraph (b)(ii) applied in the way ASIC contended, then unintended consequences would follow as it could capture anyone, unrelated to the management of the company, such as consultants and other advisors
The High Court stated that although individuals such as advisors and consultants may give advice, which, if implemented could affect the financial standing of the corporation, the capacity to effect this change lies with the person to whom the advice is given. The change only occurs if that person decides to accept/implement the advice.
The High Court, however, noted that some advisers or consultants could be considered a company officer when they are involved in the management of the company and are able to ensure that the advice is taken.
In reaching its conclusion, the High Court noted that the process of determining whether or not someone falls within paragraph (b)(ii) of the definition of officer, requires the consideration of the several factors, including:
- identifying their role within the organisation;
- determining what they did or did not do (whether on a particular occasion or over time); and
- the relationship between their actions or inaction and the financial standing of the corporation
The Court noted that these considerations would apply on a case by case basis.
This decision has provided much needed guidance on the interpretation of an ‘officer’. The definition has been expanded to anyone providing they have the capacity to affect significantly the financial standing of the company, regardless of whether they hold a formal position in the said company.
As such, the decision reinforces the existence of category of officer known as a ‘shadow officer’. The case also serves to further erode the corporate veil, as those who hold the requisite influence over an organisation will not avoid liability simply by formally distancing themselves from the organisation.
The decision should serve as a caution to those that hold the requisite influence over a company, since whether or not they hold a formal position, will not be relevant as to whether they will be considered an officer and may be held personally accountable for corporate misconduct.
It is also noteworthy that the High Court left open the definition of an officer to include certain advisers/consultant arrangements who are involved in the management of the company. This could have implications for several professions who often hold influence over a company, including legal advisers, management consultants and accountants. These people should be aware that simply because of their position title, which may not traditionally considered an ‘officer’, they will not necessarily avoid personal liability for corporate misconduct.
Organisations may also need to consider the types of cover offered by their insurance to ensure that it is sufficient when taking into account the expanded definition of an officer.
For further information please contact the Law Compliance team:
Phone: 1300 862 667