The High Court of Australia has clarified that the meaning of the term “officer” in the Corporations Act 2001 (Cth) (Corporations Act) is not limited to those who hold or occupy a named office or recognised position in a corporation, in the recent decision of Australian Securities and Investments Commission v King  HCA 4 (King). The Court held that a person who has the capacity to affect significantly the financial standing of a company may be held to be an officer even if they do not hold or occupy a named office or recognised position in a corporation.
The term “officer” of a corporation is relevantly defined in section 9 of the Corporations Act to include: “a person…who has the capacity to affect significantly the corporation’s financial standing”.
Persons who fall within the definition of “officer” are subject to a number of duties under the Corporations Act. Officers who breach these duties may be liable for civil and, in some circumstances, criminal penalties.
Mr King was the CEO and an executive director of MFS Ltd, which was the parent company of the MFS Group of companies (MFS Group). The business of the MFS Group included funds management and financial services, including managed investment schemes. The largest registered managed investment scheme in the MFS Group was the Premium Income Fund (PIF). MFS Investment Management Pty Ltd (MFSIM) was the responsible entity (RE) of PIF.
In its capacity as RE, on 29 June 2007, MFSIM entered into a $200 million loan facility with the Royal Bank of Scotland (RBS loan facility). The RBS loan facility was to be used by MFSIM solely for the purposes of PIF, and was not available for the use of the other companies in the MFS Group.
Of the funds from the loan facility, on 30 November 2007, $130 million was paid to the treasury company of the MFS Group, MFS Administration Pty Ltd (MFS Administration). MFS Administration used $103 million of those funds to pay an outstanding debt in the name of MFS Castle Pty Ltd, a wholly owned subsidiary of MFS Ltd. There had been no agreement reached whereby MSFIM received any consideration for this payment, nor was there any promise of repayment. Consequently, PIF and, indirectly, its retail investors, were exposed to the risk that PIF’s money would not be restored to it.
ASIC commenced proceedings against Mr King, contending that he had breached his duties as an “officer” of MSFIM under section 601FD of the Corporations Act. Mr King had ceased to be a director of MSFIM on 27 February 2007 (before the conduct above occurred). However, ASIC contended that Mr King nevertheless fell within the definition of an “officer” in section 9 of the Corporations Act on the basis that he was a person who had the capacity to affect significantly the MSFIM’s financial standing.
The Court of Appeal found in favour of Mr King, holding that he was not an “officer” within the meaning of the Corporations Act because, to the extent he did have capacity to affect significantly MSFIM’s financial standing, that capacity did not derive from his occupation of an “office” within MSFIM. ASIC was granted special leave to appeal to the High Court.
The High Court’s decision
The High Court allowed the appeal, unanimously finding that Mr King was an “officer” within the meaning of the Corporations Act at the relevant times on the basis that he was a person who had the capacity to affect significantly the financial standing of MSFIM. The Court said that the definition is not limited to those who hold or occupy a named office, or a recognised position with rights and duties attached to it. Accordingly, the Court of Appeal was wrong to focus on whether Mr King held a named office in MSFIM.
In reaching its decision, the Court made the observation that it would leave shareholders and creditors exposed to an obvious risk if the CEO of the parent company of a group of companies were allowed to act in relation to the other companies in the group without bearing the same duties that attach to officers of each of the other companies in the group. The Court considered that this would be contrary to the purpose of the Corporations Act, which is to protect shareholders and creditors.
The Court considered the factors that should be taken into account in determining whether a person “has the capacity to affect significantly [a] corporation’s financial standing”, such that they are an “officer” under the Corporations Act. The Court held that determining whether a person has such a capacity depends on:
- identifying the person’s role in relation to the corporation;
- what the person did or did not do (whether on a particular occasion or over time) in their role in the corporation; and
- the relationship between the person’s action or inaction and the financial standing of the corporation.
Implications and the COVID-19 environment
The High Court’s decision means that regulators and other parties may have recourse against, not only persons with a specific position or title in a corporation, but those who are able to affect the corporation’s financial standing without holding a named office or position.
This means that those in corporations who may not hold a specified position need to be aware that they may still be subject to the obligations imposed on officers under the Corporations Act. The coronavirus (COVID-19) pandemic presents companies with particular risks and challenges, including that significant decisions may need to be taken which are likely to affect the financial standing of companies. To achieve compliance with the duties imposed on directors and “officers” by the Corporations Act, regard must be had to the prevailing circumstances. For example, the general obligation on directors and “officers” to exercise care and diligence under section 180 of the Corporations Act is framed by reference to “the corporation’s circumstances”.
As the High Court’s decision in King makes clear, those who are in positions of influence to affect a corporation’s financial standing should ensure that they are aware of and fully understand their obligations. Now, more than ever, it is important not to assume that the obligations imposed on officers of corporations only apply to official office holders. In this context, given the potential ramifications for those who may be held found to be officers, individuals would be wise to carefully consider any steps they take where they are in a position to influence the financial standing of a corporation.
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.
BY: Susan Goodman, Partner at Holding Redlich, and Melissa de Jongh, Associate