High Court provides guidance on who is an ‘officer’ of a Company
By Benjamin Caddaye, Law Clerk and Alicia Hill, Principal
Earlier this year the High Court of Australia handed down its decision in Australian Securities and Investment Commission v King  HCA 4. This was an appeal from the Queensland Court of Appeal concerning the definition of who was an ‘officer’ of a company under section 9 of the Corporations Act 2001 (Cth) (Act). This decision provides useful guidance on who will be considered an officer of a company where there is a complex corporate structure, confirming there is no requirement to hold an identifiable office (i.e to be a director or secretary) within the company to be considered as an ‘officer’.
Mr King was the CEO and executive director of MFS Ltd, the parent company of the MFS Group which provided tourism and travel-related services under the Stella Group banner and funds management and financial services, including managed investment schemes.
MFSIM was the responsible entity for the Premium Income Fund (PIF), the largest registered managed investment scheme in the MFS Group with over $700 million in assets under management.
In June 2007 MFSIM entered into a $200 million loan facility with the Royal Bank of Scotland for use by the PIF.
MFS Castle Pty Ltd, an entity within the MFS group had a $250 million dollar short term loan facility from another finance provider Fortress Capital which was due to expire in August 2007. However, the plans the MFS Group had to put place to raise enough funds to repay that facility did not materialise.
As a consequence, Fortress and Mr King reached an agreement for the payment by 30 November of $100 million together with an extension fee of $3 million, with the balance of $150 million to be repaid by 1 March 2008. This agreement meant that MFS Ltd had to find $103 million in order to pay Fortress by 30 November 2007.
In November 2007 MFSIM and senior personnel in the MFS Group (including Mr King) arranged to draw down $150 million under MFSIM’s RBS facility and use that money to pay the debts of the MFS Group, specifically $103 million to satisfy the Fortress Capital loan facility of MFS Castle.
MFSIM received no consideration for the payment. As a consequence, the PIF was exposed to the risk that its money would not be repaid as there was no promise of repayment or security for the advance of funds from MFS Ltd.
At first instance Douglas J held that MFSIM contravened section 601FC(5) of the Act because it breached its duties under s 601FC(1) of the Act as the responsible entity of PIF and that MFSIM had also provided a financial benefit to a related party in contravention of section 208(1) of the Act. Furthermore, Mr King was found at trial to have been knowingly concerned in MFSIM’s contraventions of the Act as an ‘officer’ under section 9 and, in consequence of section 79(c) of the Act, he was held to have contravened subsections 601FC(5) and 209(2) of the Act.
The responsible entity for a managed investment scheme is subject to increased regulation under the Corporations Act as a result of their role as trustee of funds on behalf of retail investors. Section 601FC(1) sets out the duties of the responsible entity in exercising its powers and carrying out its duties, section 601FD sets out the duties of the officers of the responsible entity and section 601FE sets out the duties of employees of the responsible entity. Furthermore, ASIC is powered under section 601FF to carry out surveillance checks on the responsible entity at any time to ensure it is complying with its duties under the Act. Under section 601FC(5) a responsible entity which contravenes subsection 601FC(1), and any person who is involved in a responsible entity’s contravention of that subsection, contravenes this subsection.
Mr King was alleged to have been involved in the MFSIM’s contravention under s 601FC(5), and it was also alleged that he was an officer of the responsible entity and as such had breached his duties under section 601FD.
This was the point in issue on appeal, as Mr King had argued that he was not an ‘officer’ within the meaning of section 9 of the Corporations Act, which provides “officer” of a corporation means:
(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)…
Queensland Court of Appeal
The Queensland Court of Appeal found in Mr King’s favour, holding that the definition of ‘officer’ in (b)(ii) required that Mr King’s capacity to affect significantly the corporation’s financial standing must arise from his occupation of some ‘office’ in the sense of a recognised position with duties and rights attached to it.
The Court stated that ASIC would therefore be required to demonstrate that Mr King held an office of MFSIM to fall within the limbs of the section 9(b) definition of officer.
Here, while Mr King was CEO of the parent company, he held no office in MSFIM and therefore argued he could not be an officer within the meaning of s 9(b)(ii).
High Court of Australia
The High Court upheld ASIC’s appeal, finding that the Queensland Supreme Court had erred in finding section 9(b) required there to be an ‘office’ from which the power to affect the financial standing of the company derived.
First, this finding was inconsistent with the literal reading of the text of the section, as the differences between section 9(a) and 9(b) made clear the intention to extend the definition of officer beyond its ordinarily definition of an office holder.
Second, in considering the context, history and purpose of the Act, the same conclusion was reached.
For example, a shadow director is considered a director under its definition, and therefore an officer under section 9(a) despite the fact a shadow director holds no office.
Similarly, section 206A(1)(b) renders it an offence for a person disqualified from managing a corporation to manage a corporation.
If the requirement to hold an office was read into section 9(b), it would render the prohibition otiose as it would allow individual who had been disqualified to manage corporations so long as they did not hold an identifiable office.
The High Court decision in King illustrates that individuals who make or participate in making decisions which affect a substantial part of the business of the corporation, or who have the capacity to affect significantly a corporation’s financial standing can be considered officers of that corporation.
This broad definition look to actual ability or influence on a case by case basis and can apply (like it did in King) where a group CEO exerts influence over a subsidiary, despite that CEO not holding any office within the subsidiarity.
It means that those who meet the definition of ‘officer’ are then able to be held accountable to the company for their actions in particular where it results in an outcome that is not for the benefit of the company.
If you require further advice about whether you fall within the definition of being an officer of a company or want to know if someone else may please contact Alicia Hill on (03) 8540 0292 or Alicia.firstname.lastname@example.org