ASIC v King provides important clarity on the definition of ‘officer’

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This article was written by Georgia Sullivan, Kate Cincotta, Emily Lobban and Rob Tooth.

Today, the High Court of Australia has provided important clarity on the definition of 'officer' in section 9 of the Corporations Act 2001 (Cth) (Act) in the much-anticipated decision of Australian Securities and Investments Commission v King [2020] HCA 4.

In a judgment that will be well-received by ASIC, the High Court unanimously determined that there is no requirement that a person be a named officer of a corporation to fall within the ambit of section 9(b)(ii) of the Act. The relevant test will be a matter of fact and circumstance to determine whether a person has the requisite capacity to significantly affect the financial standing of the company.

More importantly, for corporate groups, emphasis will be placed on the overall position of influence the person had within that group's affairs, rather than a strict reading of the "office" held by the person.

Relevant statutory provision

The term "officer of a corporation" is defined by s9 of the Act as follows:

 "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); or


The facts

Michael King was the Chief Executive Officer (CEO) and an executive director of MFS Ltd, which was the parent company of the MFS Group of companies (MFS Group). MFS Group's business included managing the Premium Income Fund (PIF), which was MFS Groups' largest registered managed investment scheme. MFSIM was the responsible entity of PIF. In that capacity, MFSIM entered into a $200 million facility with the Royal Bank of Scotland (RBS), which was to be used by MFSIM for the purposes of PIF.

The High Court's interest was in a $130 million disbursement paid by MFSIM to MFS Administration Pty Ltd, which acted as the treasury company of the MFS Group. $103 million of this was paid from MFS Administration Pty Ltd to Fortress Credit Corporation (Australia) II Pty Ltd as funds drawn down from the RBS loan agreement. There was no agreement, consideration, or security in place, which meant that there was no guarantee that money which should have belong to PIF would be restored to it.

The MFS Group subsequently collapsed leaving investors of PIF out of pocket a substantial amount.

ASIC first commenced enforcement proceedings against senior executives of MFS, including Mr King, in 2009 alleging breaches of the Act.  In relation to Mr King, ASIC alleged that he was an "officer" of MFSIM as he fell within definition of section 9(b)(ii) even though he did not hold did not occupy an office within MFSIM.

The case was heard in the first instance before Douglas J in the Supreme Court of Queensland.  His Honour found in favour of ASIC.

The Court of Appeal's decision

The decision at first instance was subsequently appealed to the Queensland Court of Appeal. ASIC substantially won the appeal on 18 December 2018, however, in relation to the definition of an officer it was found that Mr King had not contravened the Act as an 'officer' as MFSIM at the time of the breach. with orders made against ASIC. Relevantly, the Court of Appeal found that Mr King did not have the capacity to affect MFSIM's financial standing within the meaning of paragraph (b)(ii) as they adopted a much stricter approach.

ASIC appealed to the High Court of Australia.

The decision

All judges found the Court of Appeal erred in its finding that it was necessary for ASIC to prove that Mr King had 'acted in an office' of MFSIM, in the sense of 'a recognised position with rights and duties attached to it'.

Kiefel CJ, Gageler and Keane JJ found the Court of Appeal's reasoning departed from the literal application of the text of section 9.[1] When properly construed, their Honours instead found that sections 9 (b)(i) and (b)(ii) captured those persons who do not hold an office within the company but who were engaged in the corporation's decision-making qua management.[2]

The judges found that the Court of Appeal's approach departed from the literal application of the text by adding a requirement that the officer referred to in paragraph (b)(ii) be acting in an 'office' within the company.[3] While paragraph (a) captures individuals who hold a named office in a corporation, paragraph (b) captured those who do not hold such an office.

Notably, their Honours considered it was not consistent with the legislative purpose of the section for the CEO of a parent company to act in relation to other companies in the group without being subject to the duties or consequence attaching to officers of each of the companies in the group, as shareholders and creditors would be left exposed to obvious risk.[4]

Mr King was held to be an officer of MFSIM despite not holding a formal executive role at the time of the transaction, as he was involved in the management of MFSIM and not only had the capacity to affect significantly the financial standing of MFSIM, but actively intervened in the business of MFSIM.

Nettle and Gordon JJ also agreed with the joint judgment in that the Court of Appeal took a too narrow view of the definition of an "officer" in section 9 and considered that the section applied to persons who are involved in the management of a corporation and who, by their actions (including inaction) have the capacity to affect the whole or substantial part of the business of the corporation.[5] 

Their Honours identified certain factors as being relevant to this determination on a case by case basis, including:

  • the identification of the role of a person in relation to the corporation;
  • what they did or not do to fulfil that role; and
  • the relationship between their actions or inaction and the financial standing of the corporation,[6]

noting that this may vary significantly depending on a company's size, structure and circumstance.

In applying this test, their Honours found that the facts and circumstances "compelled the conclusion" that Mr King was an officer of MFSIM.

While not directly relevant to the appeal, Nettle and Gordon JJ also questioned whether, for example, bankers and other third parties could fall within the reach of the definition of "officer" under section 9, particularly lenders who manage how a company attempts to work its way out of financial distress.[7]  As clarified by Kiefel CJ, Gageler and Keane JJ, this will only become an issue where the advisor or consultant/lender is involved in the management of the corporation and is thereby able to ensure that the advice will be implemented.[8] 

Practical implications

Regulators will be buoyed by this recent decision. Confirmation of the scope of the definition of "officer" will give added confidence to ASIC and other regulators for actions against "officers" for breaches of directors' duties under s 180 or s601FD of the Act.

Regulators such as ASIC will now focus on those individuals who are able to influence a company's affairs, as well as reference to a specific position or title within the corporation.   Will this be the new attack front in lieu of shadow directors?

[1] [24].

[2] [43]

[3] [24].

[4] [46]. 

[5] [88].

[6] [91].

[7] [96].

[8] [42].