ASIC win in High Court means broad definition of company “officer”

In a recent decision, the High Court of Australia has provided important clarification about the meaning of the term ‘officer’ within s.9 of the Corporations Act.

In Australian Securities and Investment Commission v King & Anor [2020] HCA 4, the High Court unanimously allowed an appeal from the Queensland Court of Appeal (QCA), which had determined that the respondent, Mr King, was not an ‘officer’ under the Corporations Act (the Act) as he had not held an office, in the sense that he did not have "a recognised position with rights and duties attached to it" within the particular company ASIC was investigating.

The decision will have consequences particularly for the oversight and corporate governance of large corporate groups as well as to provide some clarification for the interpretation of Directors' and Officers' Liability Insurance.

Background

Mr King was the Chief Executive Officer and an executive director of MFS Ltd, the parent company of the MFS Group of companies (MFS Group). The MFS Group provided funds management and financial services, including managed investment schemes. Premium Income Fund (PIF) was the largest registered managed investment scheme in the MFS Group, and MFS Investment Management Pty Ltd (MFSIM) was its responsible entity. In that capacity, MFSIM entered into a $200 million loan facility with the Royal Bank of Scotland on 29 June 2007 (RBS loan facility). The RBS loan facility was to be used solely for the purposes of PIF, and not for the use of other companies in the MFS Group.

On 27 November 2007, MFSIM and senior personnel in the MFS Group, including Mr King, approved a drawdown of $150 million under the RBS loan facility. Of these funds, $130 million was paid to MFS Administration Pty Ltd (MFS Administration), the treasury company for the MFS Group. MFS Administration used $103 million of those funds to pay an outstanding debt of MFS Castle Pty Ltd, a wholly-owned subsidiary of MFS Ltd, which was due to be repaid by 30 November 2017. PIF received nothing in exchange for the payment from the RBS loan facility. There was no evidence of any promise of repayment, let alone one that was properly secured. As a result, PIF and its investors were at risk that the funds withdrawn would not be restored to PIF.

At trial, ASIC established that MFSIM breached its duties as responsible entity under s601FC(1) of the Act by reason of its misuse of PIF's money.  ASIC also alleged that Mr. King:

• had been knowingly concerned or involved in MFSIM’s breaches in contravention of ss601FC(5) and 209(2) of the Act; or, in the alternative,
• was liable under s601FD of the Act because he was an "officer" of MFSIM who failed to act honestly and in the best interests of the members of PIF.

The Act relevantly defines "officer of a corporation" as:

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)

At the centre of the arguments before the Court was the fact that Mr King had ceased to be a director of MSFIM on 27 February 2007, several months before the entry into the RBS loan facility and the drawdown of funds.

ASIC argued that notwithstanding this, Mr King remained an "officer" of MFSIM within the meaning of s9(b)(ii) of the Act because he was "a person ... who has the capacity to affect significantly the corporation's financial standing", on the basis that:

• He was the CEO and an executive director of MFS Ltd, the parent company with overall responsibility for the management of the MFS Group; and
• Mr White, the deputy CEO of MFS Ltd (and an executive director of MSFIM) had reported directly to, and acted in accordance with, Mr King’s instructions and wishes.

The trial judge found that Mr King was an "officer" of MFSIM for the purpose of the Act because he had the capacity to affect significantly MFSIM's financial standing. The Court imposed a pecuniary penalty on Mr King of $300,000.  Mr King appealed the decision to the QCA.

Decision Below

The QCA determined that although Mr King was "the overall boss of the MFS Group" and assumed "overall responsibility for MFSIM", he was not “an officer” of MFSIM within the meaning of s9(b)(ii) of the Act because his capacity to affect MFSIM’s financial standing "did not derive from his occupation of an “office” within MFSIM, in the sense of “a recognised position with rights and duties attached to it". The QCA found, accordingly, that ASIC had not proved that Mr King had acted as the holder of an "office" of MFSIM. The QCA reduced the pecuniary penalty imposed on Mr King to $270,000 and made more favourable costs orders for the trial at first instance and on appeal.

High Court’s Determination

The High Court unanimously rejected the QCA’s interpretation of s9(b)(ii) as too narrow an interpretation which ignored the clear textual considerations of how “officer” was defined by the Act. 

The Court reasoned that while the definition of “officer” in s9(a) of the Act was concerned with officeholders, s9(b) captured those who did not hold such an office by seeking to define those individuals by reference to their relationship to the corporation so as to include any person who had the capacity to affect significantly a corporation's financial standing, whether or not that person held a formal office. In their joint judgment, Kiefel CJ, Gageler and Keane JJ found that the contrast between s9(a) and s9(b) of the Act was a powerful textual indication of Parliament’s intention not to confine the definition of "officer" to merely those who had recognised position with rights and duties attaching to it.

Their Honours also noted that an individual who is a shadow director, within the meaning of para (b)(ii) of the definition of "director" in s9 of the Act, would also fall within para (a) of the definition of "officer of a corporation" because that person is a "director". Accordingly, their Honours concluded that if there was no requirement for a shadow director to hold an "office" under para (a), there was no good reason to impose such a requirement under para (b).

Mr King argued that a literal interpretation of the definition in s9(b)(ii) would capture external consultants or advisors, bankers, or even the Commissioner of Taxation, who are unrelated to the management of the company but can affect its financial standing. The Court dismissed these concerns as misplaced as this reasoning failed to take into account that under s9(b)(ii) the person must relevantly be “of” the corporation in the sense of being involved in the management of the corporation's affairs or property. While consultants or advisors may give advice that can affect the financial standing, they cannot affect the financial standing as it is the directors and officers who determine whether that advice should be acted upon. The Court indicated that an advisor or consultant may still be considered an "officer" if he or she was involved in the management of the corporation and was able to ensure that their advice would be implemented.

In their concurring judgment, Nettle and Gordon JJ highlighted that in determining whether a person falls within the definition of “officer”in s9(b)(ii) requires consideration of the role that person played in the management of the corporation. Determining whether a person has the capacity to affect the financial standing requires identifying:

• the role that person played in the corporation;
• 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.

As a consequence, the Court set aside the orders made by the QCA.  The full pecuniary penalty of $300,000 was reinstated and Mr King was ordered to pay ASIC's costs of the appeal to the QCA and to the High Court.

Analysis

The High Court’s decision provides an expansive definition of “officer” which takes into account modern corporate structures and the reality that there are people outside of the boardroom who have significant capability to affect the management of a corporation's affairs. 

It will be a decision welcomed by ASIC and regulators who are looking to extend the reach of the provisions in the Act concerning directors' duties. In effect, regulators will be able to cast the net much wider than might otherwise have been thought to be the case prior to this decision, to potentially capture individuals who influence a company's affairs. 

Interestingly, Nettle and Gordon JJ warned that based on the approach adopted by the Court, bankers and other third parties could fall within the reach of paragraph (b) of the definition of "officer" in s9. Their Honours noted that in particular, lenders managing the way in which a company works its way out of financial distress, could fall within the definition of "officer" and that could present real issues in future cases.  

This decision will not directly impact the question as to which individuals are covered as "Insured Persons" in Directors and Officers (D&O) insurance policies. The construction of such policies is a matter of contractual interpretation and every policy has a different wording. That said, it is interesting to note that D&O policies usually identify the individuals it covers by listing their job title or role as a starting point and often extends to cover shadow directors or de facto directors and those with a more remote connection.  While not directly on point, this case could be used as persuasive authority by someone who is not a director or officer of an insured entity but who seeks to bring themselves within the broader ambit of cover.