Defin­ing An ​‘Offi­cer’ Under the Cor­po­ra­tions Act: Case Note — Aus­tralian Secu­ri­ties and Invest­ments Com­mis­sion v King [2020] HCA 4

Defin­ing An ​‘Offi­cer’ Under the Cor­po­ra­tions Act: Case Note — Aus­tralian Secu­ri­ties and Invest­ments Com­mis­sion v King [2020] HCA 4

Intro­duc­tion

On 11 March 2020 the High Court of Aus­tralia hand­ed down judg­ment in the case of Aus­tralian Secu­ri­ties and Invest­ments Com­mis­sion v King [2020] HCA 4, with the judg­ment pro­vid­ing a long-await­ed clear def­i­n­i­tion of what an ​‘offi­cer’ means under sec­tion 9 of the Cor­po­ra­tions Act 2001 (Cth) (the Act).

The High Court’s unan­i­mous judg­ment, which was favourable to ASIC, deter­mined that Mr King was an ​‘offi­cer’ as defined in sec­tion 9(b)(ii) of the Act, as the pro­vi­sion is not only con­fined to those who hold or occu­py a named office in a cor­po­ra­tion or a recog­nised posi­tion with rights and duties attached to it.

Back­ground

Mr Michael King was the Chief Exec­u­tive Offi­cer (CEO of) and an exec­u­tive direc­tor MFS Ltd, which was the par­ent com­pa­ny of the MFS group of com­pa­nies (MFS Group). MFS Invest­ment Man­age­ment Pty Ltd (MFSIM) was a sub­sidiary in the MFS Group and act­ed as a respon­si­ble enti­ty for a hand­ful of reg­is­tered man­aged invest­ment schemes, the largest being the Pre­mi­um Income Fund (PIF).

On 29 June 2007, MFSIM entered into a $200 mil­lion facil­i­ty with the Roy­al Bank of Scot­land (RBS), with this facil­i­ty to be used by MFSIM for the PIF’s pur­pos­es. MFSIM then arranged for $103 mil­lion of this facil­i­ty to be used to pay the debt of anoth­er com­pa­ny with­in the MFS Group (MFS Admin­is­tra­tion Pty Ltd). In the process of the funds being drawn down from the facil­i­ty, there was no con­sid­er­a­tion, agree­ment or secu­ri­ty in place, mean­ing that there was no guar­an­tee that mon­eys belong­ing to PIF would be restored.

The MFS Group con­se­quent­ly col­lapsed, leav­ing the investors of PIF with sig­nif­i­cant finan­cial losses. 

In 2009, ASIC com­menced enforce­ment pro­ceed­ings against senior exec­u­tives of the MFS Group, includ­ing Mr King. In these pro­ceed­ings, ASIC alleged that there had been breach­es of the Act on the basis that Mr King was an ​‘offi­cer’ of MFSIM, as he fell with­in the def­i­n­i­tion of ​‘offi­cer of a cor­po­ra­tion’ under sec­tion 9(b)(ii) of the Act.

Rel­e­vant Legislation

Sec­tion 9 of the Act defines the term ​‘offi­cer of a cor­po­ra­tion’ in part as follows:

‘offi­cer’ of a cor­po­ra­tion means:

1. a direc­tor or sec­re­tary of the cor­po­ra­tion; or
2. a per­son:
   1. who makes, or par­tic­i­pates in mak­ing, deci­sions that affect the whole, or a sub­stan­tial part, of the busi­ness of the cor­po­ra­tion; or
   2. who has the capac­i­ty to affect sig­nif­i­cant­ly the cor­po­ra­tion’s finan­cial stand­ing; or
   3. 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

Supreme Court of Queensland

The case first came before Dou­glas J in the Supreme Court of Queens­land, where his Hon­our found in favour of ASIC, as his Hon­our was sat­is­fied that ASIC had shown that Mr King was an ​‘offi­cer’ of MFSIM as he had capac­i­ty to sig­nif­i­cant­ly affect MFSIM’s finan­cial stand­ing. This deci­sion was sub­se­quent­ly appealed to the Queens­land Court of Appeal.

The Court of Appeal

In the Queens­land Court of Appeal, the deci­sion sub­stan­tial­ly favoured ASIC, how­ev­er, the Court of Appeal found that in rela­tion to the def­i­n­i­tion of an offi­cer, Mr King was not an offi­cer of MFSIM at the time of the breach as he was mere­ly act­ing in his capac­i­ty as CEO of the MFS Group, rather than act­ing in a posi­tion or office with­in MFSIM. 

ASIC then appealed this point to the High Court of Australia.

The High Court of Australia

ASIC were ulti­mate­ly suc­cess­ful in their appeal to the High Court, with all five judges who heard the case rul­ing in favour of ASIC and over­turn­ing the Queens­land Court of Appeal’s nar­row­er inter­pre­ta­tion of what con­sti­tutes an ​‘offi­cer’ under sec­tion 9 of the Act. 

The Court (Kiefel CJ, Gagel­er, Keane, Net­tle and Gor­don JJ) held unan­i­mous­ly that para­graph (b)(ii) of the sec­tion 9 def­i­n­i­tion of an ​‘offi­cer of a cor­po­ra­tion’ was not lim­it­ed to indi­vid­u­als who hold or occu­py a named office or a recog­nised posi­tion in a cor­po­ra­tion with rights and duties attached to it. 

This approach by the High Court clar­i­fied that the pur­pose of sec­tion 9(b)(ii) of the Act was to extend the mean­ing of ​‘offi­cer’ beyond a per­son who mere­ly held an office for­mal­ly recog­nised with­in the corporation. 

The High Court made it clear that the rel­e­vant test will be a mat­ter of fact and cir­cum­stance con­sid­ered in order to deter­mine whether a per­son has the required capac­i­ty to sig­nif­i­cant­ly affect the finan­cial stand­ing of a com­pa­ny. In this case, the fact that Mr King had been act­ing as the over­all boss of the MFS Group and that he had assumed over­all respon­si­bil­i­ty for MFSIM was suf­fi­cient for the High Court to deter­mine that Mr King was an ​‘offi­cer’ of MFSIM, due to his capac­i­ty to sig­nif­i­cant­ly affect the finan­cial stand­ing of MFSIM.

Sig­nif­i­cance

The sig­nif­i­cance of this deci­sion was apt­ly sum­marised by ASIC Com­mis­sion­er John Price on the day the judg­ment was hand­ed down when he not­ed that: 

‘ASIC notes today’s High Court deci­sion, which sends a clear sig­nal to any­one run­ning a com­pa­ny – in name or in effect – that they should be respon­si­ble and held account­able for their actions.’ 

‘It pro­vides clear guid­ance on who is an ​“offi­cer” of a cor­po­ra­tion and estab­lish­es that the duties and respon­si­bil­i­ties to a com­pa­ny, its cred­i­tors and share­hold­ers under the Act will apply to indi­vid­u­als who have the capac­i­ty to sig­nif­i­cant­ly affect the finan­cial stand­ing of a company’.