16 April 2020
Company officers – High Court clarifies and suggests possible expanded definition
Most people understand that company directors have certain duties and obligations. However, many are not aware that company officers also have legal obligations. This bulletin looks at a recent High Court decision which clarified who is considered a company officer and what their legal obligations are. In this time of unprecedented change, when businesses need to make critical decisions quickly and sometimes with limited information, now more than ever it is critical to understand the implications of being deemed a company officer.
The unanimous High Court decision of Australian Securities & Investments Commission v King and Anor (the decision) suggests a possible widening of the category of those who are likely to be deemed company officers, and removes an element of doubt which previously existed as to the meaning of the term.
The decision suggests that a range of third parties dealing with a company could be caught within the net of the term “officer”. Such third parties could be lenders, contracting counterparties, external advisers and consultants, the test being whether the actions of those parties have had a history of directly or indirectly influencing or effecting steps taken by the company. The decision held out the possibility that the categories of those caught within the definition of “officer” may be expanded by the courts in the future.
Going forward, people who are not directors of a company but are in a position to influence and/or direct the operations of that company may be deemed officers of that company, and should tread with some caution.
The decision concerned the collapse of the MFS Group.
Michael King was the CEO and an executive director of the public listed entity, MFS Ltd (Parent Company). There were several other companies in the MFS Group, including MFS Investment Management Pty Ltd (MFSIM), which was the responsible entity of a managed investment scheme, The Premium Income Fund (Fund). The Fund was the largest management investment scheme in the MFS Group.
MFSIM entered into a $200 million facility with the Royal Bank of Scotland, which was to be used for the purposes of the Fund.
At about the same time, another company in the MFS Group, MFS Administration, was experiencing liquidity problems. In response to these problems, MFSIM drew down the greater part of its facility with the Royal Bank of Scotland, and apparently to assist MFS Administration with its creditors, paid out from the sum drawn down, $130 million for the benefit of those creditors. MFSIM had no contractual arrangement with MFS Administration to cover such payment, nor did MFSIM or the Fund have any contractual obligation towards, or legal liability to, those creditors. No security or consideration for the $130 million payment was provided to MFSIM, and the Fund derived no benefit from the payment.
The MFS Group collapsed in 2008, leaving investors in the Fund with substantial losses.
ASIC contended that the payment of the $130 million amounted to a misappropriation of funds and commenced proceedings against Mr King and other executives in the Group in connection with that payment. At all relevant times, Mr King, although a director of the Parent Company, was not a director of MFSIM.
It was alleged that Mr King had breached s.601FD(1)(e) and (f) of the Corporations Act in that, as an “officer” of a responsible entity (MFSIM) of a registered scheme (the Fund), he had not acted honestly, or with a degree of care and diligence, or in the best interests of the members of the Fund.
The question at issue was whether Mr King was in fact an officer of MFSIM when it released the $130 million to creditors of other companies in the MFS Group.
Part (b) of the definition of “officer” in S. 9 of the Corporations Act defines “officer” as including a person:
(i) Who makes or participates in making decisions that affect the whole … 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.
S.601FD (1) of the Corporations Act requires an officer of a responsible entity to a registered scheme to act honestly, with care and diligence, and in the best interests of members of the scheme. In the circumstances of the MFS Group, the Fund was a registered scheme, and MFSIM was its responsible entity.
The evidence tendered in the trial in the Queensland Supreme Court was that Mr King, in his capacity as CEO and executive director of the Parent Company, regularly gave directions to and initiated steps by MFSIM. A Mr White, an executive director of MFSIM, reported directly and frequently to Mr King in the performance of Mr White’s role in MFSIM, and customarily acted in accordance with Mr King’s instructions and wishes.
Clearly, Mr King had an active day-to-day role in the running of MFSIM, and therefore of the Fund.
The Queensland Supreme Court found that because of the way he influenced and appeared to control the affairs of MFSIM, he was an officer of that company, even though he was not a director of the company. It further found that he had acted in such a way as to breach s.601FD(1)(e) and (f) of the Corporations Act.
Mr King and other senior personnel of the company appealed the court’s decision to the Queensland Full Court and were successful. The Full Court found that the definition of “officer” in subsection (b) of the definition in section 9 of the Act required that for a person to be an “officer” he/she must actually hold some office in the company. As Mr King did not hold any office in MFSIM, he was not an officer of the company.
ASIC appealed the Full Court’s decision to the High Court, which allowed the appeal and ultimately found for ASIC. It held that there was no implied term to be inserted in the section 9 definition of “officer” that at the relevant time the person had to actually fill an office in the company. In so finding, it denied that the judgment of the Full Federal Court in Grimaldi v Chamelon Mining and of the High Court in Shafron v ASIC constituted authority for the interpretation taken by the Full Court.
The High Court found that the question of whether a person was an officer is an objective one, both of fact and of degree, and depends upon the level of influence which the person has over the affairs and running of the subject company. The Court was careful to state that merely having an influence over company decisions will not necessarily make a person an “officer”.
In the particular matter, Mr King clearly had a decisive influence over the steps taken by MFSIM, and though not a director of the company, was an “officer” in accordance with the definition of that term in S.9 of the Corporations Act.
Author: Chris McCaffery