Who is an ’officer’ of a company? A recent decision by the High Court in ASIC v King  HCA 4 will have significant implications for people of influence within corporate groups, management below the board, contractual counterparties, banks, and other external advisers and consultants.
On 11 March 2020, the High Court of Australia delivered judgment in the long-running litigation relating to the collapse of MFS Ltd / Octaviar.
The central issue before the High Court was whether the Chief Executive Officer of MFS Ltd, Michael King, was an ’officer’ of a subsidiary company within the group in circumstances where he was not a named director or secretary of that company. The High Court concluded that he was.
The High Court’s decision is of great significance to corporate Australia because it identifies that the following persons could also be caught by the officer definition in the Corporations Act 2001 (Cth):
- people of influence within corporate groups;
- management below board-level;
- contractual counterparties;
- lenders; and
- external advisers and consultants.
The consequence of being an officer of a corporation is that the officer owes certain duties to the corporation under the Corporations Act 2001 (Cth).
MFS Ltd was a publicly listed company and was the parent company of the MFS Group. MFS Ltd collapsed in 2008 with substantial debts.
Following the collapse, ASIC commenced civil penalty proceedings against a number of directors and officers of the group (including Mr King) in connection with large scale misuse of funds.
The relevant entity at the heart of ASIC’s case was MFS Investment Management Pty Ltd (MFSIM). MFSIM was the Responsible Entity of the Premium Income Fund (PIF), the largest registered managed investment scheme in the MFS Group. PIF was the ‘flagship fund’ with approximately A$787 million of total funds under management from retail investors.
A financier, Fortress Credit Corporation Australia II Pty Ltd, had provided a short-term loan facility of A$250 million to MFS Castle, a wholly owned subsidiary of MFS Ltd. That loan was guaranteed by MFS Ltd and another wholly owned subsidiary, MFS Financial Services Pty Ltd.
The Fortress loan was due to be repaid on 30 November 2007.
In late November 2007, when it became apparent that it was unlikely that the Fortress loan could be repaid on 30 November, Mr King as CEO of MFS Ltd negotiated a deferral of the repayment of the loan. The deferral agreement involved MFS Ltd having to find A$103 million to pay Fortress by 30 November 2007 with the balance to be repaid at a later date.
This set off a chain of events within the MFS Group which involved MFSIM and senior MFS personnel drawing down funds from a loan facility agreement that MFSIM, as Responsible Entity of PIF, had with the Royal Bank of Scotland (RBS).
The money was not used for the purposes of PIF; rather it was used to pay the debts of other MFS group companies for which PIF was not actually or contingently liable.
Mr King was found to have encouraged the use of MFSIM’s funds to repay Fortress. He was also found to have approved and authorised the use of the funds, and also that the funds would not have been paid without his imprimatur.
When MFSIM’s funds were used to repay Fortress on 30 November 2007, no agreement had been reached involving consideration being paid to MFSIM. PIF (and indirectly the retail investors of that fund) was thereby exposed to the risk that MFSIM’s money would not be restored to it. There was no evident promise of repayment, let alone one that was properly secured.
After the monies had been paid to Fortress, senior personnel within the MFS group prepared documents which suggested that legitimate transactions had been entered into between MFS Ltd and MFSIM in relation to the use of monies from MFSIM’s loan facility with the RBS. The purpose of these documents was to disguise the misuse of MFSIM’s funds.
Supreme Court decision
The Supreme Court found that MFSIM, Mr King and other senior officers within the MFS group had contravened numerous provisions of the Corporations Act in connection with the misuse of MFSIM’s funds.
The trial judge imposed significant compensation orders and pecuniary penalties and also imposed lengthy periods of disqualification from company directorships on the various defendants, including Mr King.
ASIC pursued its case against Mr King on the basis that he was an officer of MFSIM and therefore owed duties to MFSIM as an officer of that company under the Corporations Act. Mr King had resigned as a director on 27 February 2007 – that is prior to the contraventions the subject of the litigation. ASIC nevertheless argued that he was an officer of MFSIM on the basis that he had the “capacity to affect significantly the financial standing of MFSIM” and was therefore an officer within the meaning of the officer definition in section 9(b)(ii) of the Corporations Act.
ASIC’s case that Mr King was an officer of MFSIM included that Mr King had overall responsibility for the operations of MFSIM and that he was able to control the affairs of the company through his influence over Mr White (another defendant) who ran the business of MFSIM.
The trial judge found that Mr King was an officer because he had the capacity to affect significantly the financial standing of MFSIM and made civil penalty orders against Mr King on that basis.
Court of Appeal
The Court of Appeal overturned the ruling of the trial judge on the question of whether Mr King was an officer of MFSIM.
The Court of Appeal concluded that it was necessary, but that ASIC had failed to prove, that Mr King acted in an office of MFSIM – that is, "a recognised position with rights and duties attached to it".
It was this finding that ASIC appealed to the High Court.
High Court decision
ASIC’s appeal to the High Court was successful.
The High Court accepted ASIC’s submission that, having regard to the text, legislative history and statutory purpose, the definition of officer in section 9(b)(ii) of the Corporations Act, is not limited to those who hold or occupy a named office, or a recognised position with rights and duties attached to it.
In assessing whether someone is an officer of a corporation within the meaning of section 9(b)(ii) of the definition of officer, a decisive factor will be the extent to which the relevant person was involved in the management of the affairs of the company or its property.
Justices Nettle and Gordon expanded on this concept by observing that:
- The officer definition in section (b)(ii) is functional in character, focussing upon the person’s capacity and the effects of that capacity.
- Whether a person falls within the definition will be a question of fact and degree, having regard to the relevant person’s contribution to the making of a particular decision and an analysis of whether the decision is one which affects the whole or a substantial part of the business of the corporation.
- The inquiry is not limited to any particular issue or act which the person was involved in and which is said to constitute a breach of duty. Determining whether the person has the requisite capacity depends on identifying their role in relation to 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.
The High Court made a number of remarks which suggest that persons of influence within a corporate group, and persons at management level, could potentially be captured by the definition of officer in section 9(b)(ii) of the Corporations Act. In this regard, the Court noted that:
- Whether a person is an officer of a corporation cannot be assessed in a vacuum. Where the relevant acts or omissions relate to one or more companies in a group, it is necessary to consider the person’s overall level of influence within the group as a whole.
- The nature of a person’s capacity and the effects of that capacity on the management of the corporation will not be uniform across all companies. Factors such as the size of a corporation, the corporate structure, the management structure and the identity and nature of the persons involved will all be relevant.
- While it may be possible for all members to participate in the management of smaller companies, this is not true of larger companies where the board is generally guided by management consisting of executive and general employees of the company. It is possible that those people within management could be classified as officers within the meaning of section 9(b)(ii) recognising that there is substantial room for people outside the boardroom to have a significant effect on a corporation.
The Court also identified that contractual counterparties, lenders and external advisers and consultants could be officers in appropriate cases. Justices Nettle and Gordon gave the example of lenders managing the way in which a company attempts to work its way out of financial distress, indicating that this may be a potential scenario where the officer definition could conceivably be engaged.
Further, Kiefel CJ, Gageler and Keane JJ reasoned that:
- Simply because a person is able to affect a corporation by the exercise of rights as a counterparty to a transaction will not necessarily lead to the view that a person is an officer within section 9(b)(ii) of the Corporations Act. However, where a person who has legal rights against a corporation as a counterparty to a particular transaction or transactions inveigles himself or herself into the decision-making processes of the corporation by means of the mere threat of the exercise of those rights, the person may fall within the definition of an officer. The relevant enquiry is not the nature of the counterparty’s legal rights, but rather the nature and extent of the counterparty’s control of, or capacity to control, the corporation’s decision making in terms of management.
- Although advisors and consultants may give advice which, if implemented, can significantly affect the financial standing of the corporation, it does not follow that it is the advisor or consultant who, in that circumstance, has the capacity to affect significantly the financial standing of the corporation. That capacity in fact resides in the person to whom the advice is given because it is that individual who determines whether or not the advice should be acted upon. The giving of that advice is of no consequence, unless the advisor or consultant is involved in the management of the corporation and is able to ensure that the advice will be implemented.
The High Court’s decision in ASIC v King is significant given the discussion about persons of influence within corporate groups, persons involved in management, lenders and external advisers and consultants potentially being captured by the officer definition in section 9(b)(ii) of the Corporations Act.
In an intra-company context, the decision represents an opportune time for companies to revisit corporate structures and internal governance arrangements to ensure that lines of responsibility are clearly identified and understood.
For third parties liaising with companies, even greater care will be required to ensure that dealings with a company do not constitute involvement in the management of the company with which they are dealing.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.