Australian Securities and Investments Commission v King & Anor [2020] HCA 4

Earlier this week, the High Court unanimously allowed an appeal from a judgment of the Court of Appeal of the Supreme Court of Queensland concerning the construction of the word “officer” as defined in s 9 of the Corporations Act 2001 (Cth) (‘Act’).

The law

The term “officer of a corporation” is defined by s 9 of the Act 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
    1. who has the capacity to affect significantly the corporation’s financial standing; or
    1. 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)…”

The facts

The first respondent, Mr King, was the Chief Executive Officer and an executive director of MFS Ltd, the parent company of the MFS Group of companies (“the MFS Group“).

The MFS Group was involved in managing the Premium Income Fund (“PIF“), which was the largest registered managed investment scheme in the MFS Group, and MFS Investment Management Pty Ltd (“MFSIM“), the second respondent, was its responsible entity.

MFSIM entered into a $200 million loan facility with the Royal Bank of Scotland on 29 June 2007 (“the RBS loan facility“). The RBS loan facility was to be used solely for the purpose of the PIF, and not for the purposes of other companies in the MFS Group. On 27 November 2007, MFSIM and senior personnel in the MFS Group, including Mr King, arranged for $150 million to be drawn down from the RBS loan facility. Of these funds, $130 million was paid to MFS Administration Pty Ltd (“MFS Administration“), the treasury company of the MFS Group. MFS Administration used $103 million of those funds to pay an outstanding debt in the name of MFS Castle Pty Ltd, a wholly owned subsidiary of MFS Ltd.

$103,000,000 of the $150 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.

No agreement had been reached by which MFSIM received any consideration for this payment, nor was there any promise of repayment or security for the transaction. The MFS Group subsequently collapsed leaving investors of PIF significantly out of pocket.

The decision

ASIC contended that Mr King breached his duties as an “officer” of MFSIM under s 601FD of the Corporations Act, despite the fact that he had ceased to be a director of MFSIM on 27 February 2007. ASIC submitted that Mr King was an “officer” of MFSIM under the Corporations Act because he fell within para (b)(ii) of the definition of “officer of a corporation” in s 9 of the Act, being “a person … who has the capacity to affect significantly the corporation’s financial standing”.

The Queensland Court of Appeal held that Mr King did not fall within that definition because his capacity to affect the financial standing of MFSIM did not derive from holding an “office” within MFSIM in the sense of a “recognised position with rights and duties attached to it“.

ASIC appealed to the High Court. The Court unanimously held that para (b)(ii) of the definition of “officer of a corporation” in s 9 of the Act is not limited to those who hold or occupy a named office in a corporation or a recognised position with rights and duties attached to it. The factual findings made by the primary judge, which were not disturbed by the Court of Appeal, including that Mr King acted as the “overall boss of the MFS Group” and assumed “overall responsibility for MFSIM”, were sufficient to establish that Mr King had the capacity to affect significantly the financial standing of MFSIM.

Notably, their Honours considered it was not consistent with the legislative purpose of s 9 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.

The Court 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,

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

In applying this test, the Court found that the facts and circumstances “compelled the conclusion” that Mr King was an officer of MFSIM despite not holding any formal role in MFSIM, as he:

  • was involved in the management of MFSIM;
  • had the capacity to significantly affect the financial standing of MFSIM;
  • interfered with the business and financial decisions of MFSIM; and
  • not only had the capacity to significantly affect the financial standing of MFSIM, but actively did so.

The Court held that the s 9 definition of an ‘officer’ also applied to persons who are involved in the management of a corporation who by their acts or omissions have the capacity to affect the whole or substantial part of the business of the corporation.

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 s 9, particularly lenders who manage how a company attempts to work its way out of financial distress.  As clarified by Kiefel CJ, Gageler and Keane JJ, this will only become an issue when the third party is involved in the management of the corporation and is thereby able to ensure that the advice will be implemented.