High Court guidance on extended meaning of "officer" of a corporation

What you need to know

Under paragraph (a) of the definition of "officer" in the Corporations Act (s 9), a person who is a director or secretary of a corporation is an "officer of the corporation".  Under paragraph (b), a person "who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation" (para (b)(i)), or "who has the capacity to affect significantly the corporation's financial standing" (para (b)(ii)), is an officer of the corporation.  All such persons may be subject to the same duties and obligations as a director of the company, including the duties and obligations in Part 2D.1 and/or s 601FD of the Corporations Act.

In ASIC v King [2020] HCA 4, the High Court held that, while para (a) of the definition captures individuals who hold a named office in a corporation for which the Corporations Act prescribes certain duties and functions, para (b) captures those who do not hold such an office. Paragraph (b) defines "officer" by reference to the facts of the relationship between an individual and a corporation in relation to the affairs of the corporation.  In the case of a person who is said to fall within para (b), questions of fact and degree arise: it is what the putative officer does or has the ability to do, in relation to the corporation, that is material; the question of how significant a role a person played is one of fact and degree.  It is not the case (as the Court of Appeal had held) that the person must also act in an office or position within the corporation, in the sense of a recognised position with rights and duties attached to it.

Mr King was CEO and an executive director of MFS Limited, the parent of the MFS group of companies.  However, he was not a named director or secretary of the MFS subsidiary that entered into the impugned transaction giving rise to the proceedings – he had in fact ceased to be a named director of the relevant corporation (MFSIM, which was the responsible entity of a managed investment scheme (PIF)) before the transaction was entered into.  However, it was found that Mr King had a capacity to affect significantly the financial standing of MFSIM by reason of his involvement in the financial affairs of MFSIM and his ability to affect its decision-making processes in regard to its affairs, and that Mr King (among other things):

• acted as the overall boss of the MFS Group and assumed overall responsibility for MFSIM;
• spoke daily with Mr White (the deputy CEO of MFS Ltd and executive director of MFSIM), who took instructions from Mr King with respect to "proprietary matters" of MFSIM's business;
• saw fit to intervene in the business of MFSIM and to issue directives as to how things should be done, and that Mr King had substantial influence over Mr White and others within MFSIM;
• was in frequent contact with others within the MFS Group, including Mr White, about the progress of Mr White's efforts to procure the finance for the impugned transaction; and
• approved and authorised the use of the funds for the transaction and that Mr White would not have caused PIF's money to be used in in the transaction without the imprimatur of Mr King.

It was argued by Mr King that para (b)(ii), if applied literally, would capture persons who are, on any realistic view, unrelated to the management of the company, with external consultants or advisors, bankers, and the Commissioner of Taxation given as examples.  The Court rejected this argument and expressed the view that: 

"It may happen … that a person who has legal rights against a corporation as a counterparty to a particular transaction or particular transactions is able to inveigle himself or herself into the decision-making processes of the corporation by means of the mere threat of the exercise of those rights. In such a case, that person may fall within either or both of para (b)(i) or (ii) of the definition.  But that depends on the facts of the case as to the nature and extent of the counterparty's control of, or capacity to control, the corporation's decision-making qua management; it does not depend on the counterparty's legal rights."

This may mean that a lender managing the way in which a company attempts to work its way out of financial distress may fall within the reach of the definition of "officer" under paragraph (b).

The Court also noted that, although advisers 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 adviser 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 adviser or consultant is, in fact, involved in the management of the corporation and is thereby able to ensure that the advice will be implemented.

Management responsibility and the meaning of "officer" 

Individual responsibility for corporate misconduct has attracted particular attention following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. One form of legal responsibility under review is extended management responsibility, including the liability of "officers" of a corporation. 

Last week the Australian Law Reform Commission pointed to the need for extended management responsibility to apply to both individuals below the C-suite who are responsible for a division or business unit on the one hand and executives of a parent company on the other hand.

The Queensland Court of Appeal had held that Mr King, who was the chief executive officer of the listed parent company of a group of companies (MFS Ltd), was not an "officer" of one of the subsidiaries because he did not have a recognised position with rights and duties attached to it in the subsidiary.

This raised the important question for the High Court - does a person have to occupy an "office" in the relevant company to be an "officer" of that company?

The High Court allowed ASIC's appeal, holding that the definition of "officer" in s 9 of the Corporations Act 2001 (Cth) (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 within a company.

Group CEO used facility for unauthorised purposes

ASIC v King concerned the conduct of Mr King, the former CEO of MFS Ltd. MFS Ltd was the listed parent company of the MFS Group of companies. The business of the MFS Group included funds management and financial services, including managed investment schemes.

The flagship fund of MFS Group was the Premium Income Fund (PIF), which was managed by MFSIM as responsible entity. MFSIM entered into a $200 million facility with a bank to be used for PIF's  purposes.  The facility was not available for the use of other companies in the MFS Group. MFSIM and senior personnel in the MFS Group drew down $150 million under the facility to pay the debts of other companies in the MFS Group. No consideration was given to MFSIM for the payment, and there was no evident promise to provide security or repay the money.

Mr King was not a director of MFSIM at the time of the payment. 

Among other things, ASIC alleged that Mr King was liable under section 601FD of the Corporations Act by reason of the payment. This raised the question of whether Mr King was an "officer" of MFSIM within the meaning of paragraph (b)(ii) of the definition in s 9 of the Corporations Act, which relevantly provides that an "officer" of a corporation means "a person who has the capacity to affect significantly the corporation's financial standing". 

The judge at first instance held that Mr King was liable as an officer of MFSIM.  The decision was reversed by the Queensland Court of Appeal on the basis that Mr King did not have the capacity to affect MFSIM's financial standing within the meaning of para (b)(ii) of the definition of "officer of a corporation" because any capacity he had to affect MFSIM's financial standing did not derive from his occupation of an "office" within MFSIM, in the sense of "a recognised position with rights and duties attached to it". The five member High Court unanimously held that the Court of Appeal erred in so concluding, and allowed ASIC's appeal.  Two judgments were delivered (Kiefel CJ, Gageler and Keane JJ, and Nettle and Gordon JJ).

Who is an officer under paragraph (b)(ii)?

The High Court examined both textual considerations and the legislative context, history and purpose of the definition of "officer".

Textually, the Court considered that a literal application of paragraph (b)(ii) does not require that a person be acting in an "office" within the company. The Court of Appeal had rejected a literal interpretation as this would have the unintended consequence of people unrelated to the management of a corporation being considered as "officers". According to this reading of the definition, "External consultants or advisors, bankers, and the Commissioner of Taxation" would be captured by the definition. Therefore the Court of Appeal had regard to the ordinary meaning of the term "officer" as the holder of an office.

In adopting a literal reading of paragraph (b)(ii), the High Court relied on two important textual considerations.

First, looking at the language in the definition, it remains necessary to ask whether the "officer" is relevantly "of" the corporation. It will be a question of fact and degree whether the person is "of" the corporation in the sense of being engaged, in fact, in the management of its affairs or property.

Secondly, s 179(2) expressly provides that "Section 9 defines both director and officer. Officer includes, as well as directors and secretaries, some other people who manage the corporation or its property (such as receivers and liquidators)." According to the majority judgment, this confirms that the definition is intended to capture those managing the corporation or its property, as distinct from those who are able to affect the corporation by the exercise of rights as a counterparty to a transaction.

Corporate groups and the responsibility of executives

The majority also considered that the legislative purpose of the Corporations Act "to protect shareholders and creditors" would be defeated if the CEO of a parent company of a corporate group who actually determines the course of a subsidiary's financial affairs could avoid responsibility by avoiding any formal designation of their responsibilities.

According to Nettle and Gordon JJ, whether a person has the capacity to significantly affect a corporation's financial standing depends on identifying their role in relation to the corporation, what they did or did not do (on a particular occasion or over time) and the relationship between their actions or inactions and the financial standing of the corporation.

Their Honours considered that it is necessary to consider the size of the corporation, the corporate structure, the management structure, and the identity and nature of the persons involved.

Nettle and Gordon JJ noted that in large public companies there is substantial room for people outside the boardroom to have a significant effect on a corporation and that modern corporate groups are often run by key group executives or executive committees of the holding company whose decisions are implemented on a group rather than an entity basis and implemented across the various companies in the group.