In the recent case of Australian Securities and Investments Commission v King, the High Court has unanimously confirmed that a person need not hold or occupy a named office (such as director or secretary) within a corporation to be considered an ‘officer’ for the purposes of the Corporations Act 2001 (Cth) (Corporations Act).
Background to the case
Mr King was the CEO of MFS Ltd, which was the parent company of the MFS Group of companies (MFS Group). The primary business of the MFS Group was funds management and financial services.
MFS Investment Management Pty Ltd (MFSIM) was the responsible entity of the Premium Income Fund (PIF), the largest registered managed investment scheme in the MFS Group. At the relevant time, Mr King was not a director of MFSIM. In its capacity as the responsible entity of PIF, MFSIM entered into a $200 million facility with the Royal Bank of Scotland which was to be used by MFSIM for the purposes of PIF and was not available for the use of other companies within the MFS Group.
In November 2007, MFSIM and senior personnel in the MFS Group arranged to draw down $150 million under the loan agreement with the Royal Bank of Scotland. The funds were not used by PIF and were instead used to pay the debts of other companies within the MFS Group. No agreement or security was put in place within the MFS Group in relation to this use of funds and accordingly, there were no assurances or guarantees put in place that the money which should have belonged to PIF would be restored to it.
The MFS Group since collapsed resulting in substantial losses to the investors of PIF.
Relevant provisions and arguments
Section 9 of the Corporations Act defines an officer of a corporation to be:
“(a) a director or secretary of the corporation; or
(b) a person:
(i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(ii) who has the capacity to affect significantly the corporation’s financial standing; or
(iii) 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).”
The Australian Securities and Investments Commission (ASIC) argued that Mr King, as CEO of the MFS Group, was an officer of MFSIM and, in allowing the misappropriation of funds, was in breach of the duties owed by officers of responsible entities for managed investment schemes set out in section 601FD of the Corporations Act. ASIC contended that Mr King was a person who had capacity to affect the financial standing of MFSIM because he was the CEO and had overall responsibility for MFSIM as a member of the MFS Group, and because the deputy CEO of MFS Ltd and an executive director of MFSIM had reported directly and frequently to Mr King and customarily acted in accordance with Mr King’s instructions and wishes in that role.
At trial, Mr King was found to be an officer of MFSIM and in breach of section 601FD of the Corporations Act. However, on appeal, and despite agreeing that Mr King was knowingly concerned in MFSIM’s breaches of the Corporations Act, the Queensland Court of Appeal agreed with Mr King’s argument that he did not have the capacity to affect MFSIM’s financial standing within the meaning of the definition of ‘officer’ because any capacity he had to affect MFSIM’s financial standing was derived from his position as CEO of the MFS Group and was exercised by him in that role, rather than from acting in an office or position within MFSIM. Mr King argued, and the Court of Appeal accepted, that if Mr King was held to be an officer for the purposes of section 9 of the Corporations Act, then section 9 would also capture persons who are, on any realistic view, unrelated to the management of the company, such as external advisors or consultants.
The High Court
The High Court unanimously rejected Mr King’s arguments and the findings of the Queensland Court of Appeal. The High Court held that a literal interpretation of section 9 would not capture external advisors or consultants as the capacity to affect the financial standing of a corporation resides in the person to whom the advice of external advisors is given, and not the advisors themselves. Further, the Court noted that it is was the purpose of the Corporations Act to protect shareholders and creditors, and that “if the CEO of the parent company of a group of companies is allowed to act in relation to other companies in the group untrammelled by the duties that attach to officers of each of the other companies in the group, shareholders and creditors would be left exposed to an obvious risk. It would be an extraordinary state of affairs if those who actually determine the course of a company’s financial affairs could avoid responsibility for their conduct by the simple expedient of deliberately eschewing any formal designation of their responsibilities.” Accordingly, the High Court held that Mr King was an officer of MFSIM and was liable under section 601FD.
It is now apparent that individuals who have the power to control the direction or management of a corporation will be considered to be an officer for the purposes of the Corporations Act, even if they are not formally appointed as a director or secretary of the corporation. If you are not a formal director or secretary of a corporation but are concerned that you may be deemed to be an officer and be liable under the Corporations Act, please do not hesitate to contact us.