Case Note: Australian Securities and Investments Commission v King [2020] HCA 4 The decision provides some clarity around the meaning of 'officer' as defined in s9 of the Corporations Act.

Key takeouts

1. Who falls within the definition of 'officer of a corporation'?

The case is primarily concerned with the construction of the definition of 'officer' in s9 of the Corporations Act 2001 (Cth) and more particularly, with the question of whether a group CEO, who was involved in the management of a subsidiary but who did not hold a named 'officer' role within the subsidiary, fell within the definition of ‘officer’ for that subsidiary.

The Corporations Act sometimes imposes liability only on directors, for example, insolvent trading liability. But other important responsibilities are imposed more widely on 'officers'. That expression extends to anyone who participates in decision making that affects at least a substantial part of the company's business, or who has capacity to significantly affect its financial standing.

How should para (b)(ii) of the definition of 'officer of a corporation' s 9 be interpreted? Was the Queensland Supreme Court of Appeal correct in holding that in order to fall within the definition, it is necessary to prove that the individual held or occupied a named office or a 'recognised position with rights and duties attached to it'?

2. Broader interpretation

All five judges of the High Court of Australia who heard the case ruled in favour of ASIC and overturned the Queensland Supreme Court of Appeal's narrower interpretation of 'officer' in s9. Justices Kiefel, Gagler and Keane wrote the leading judgment. Justices Nettle and Gordon wrote a separate judgment which emphasised three points. The High Court held that:

  • contrary to the QCA's decision, s9 para (b)(ii) 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, and accepted by the Court of Appeal, including that the group CEO in question, acted as the 'overall boss' of the group and assumed 'overall responsibility' for the subsidiary, were sufficient to establish that he 'has the capacity to affect significantly the corporation's financial standing' (in line with the definition).

3. 'Clear guidance'

In a statement welcoming the decision, ASIC Commissioner John Price said the decision provides 'clear guidance on who is an "officer" of a corporation'. Mr Price added that the decision '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'.

Introduction

On 11 March, the High Court handed down its decision in Australian Securities and Investments Commission v King [2020] HCA 4.The key issue in the case was the construction of para (b)(ii) of the definition of 'officer of a corporation' s 9 of the Corporations Act 2001 (Cth) (the Act).

More particularly the case considered the question of whether a group CEO, who did not hold a formal 'officer' role in a subsidiary company, but who was nevertheless 'overall responsible' for the subsidiary, fell within the definition of ‘officer’ for that subsidiary (and could therefore be liable under s601FD of the Act) and if so, what is needed to establish this.

Was the Queensland Supreme Court of Appeal correct in holding that it is necessary to hold or occupy a named office in a corporation or a 'recognised position with rights and duties attached to it' in order to meet the definition?

Background

Mr King was the CEO and an executive director of MFS Ltd (also known as Octaviar Ltd), the parent company of the MFS Group of companies (MFS Group).Premium Income Fund (PIF) was the largest registered managed investment scheme in the MFS Group and MFS Investment Management Pty Ltd (MFSIM) was its responsible entity.

Mr King acted as the 'overall boss of the MFS Group' and took 'overall responsibility for MFSIM'.

On 29 June 2007, MFSIM entered into a $200m loan facility with the Royal Bank of Scotland (RBS).The RBS loan facility was to be used solely for the purpose of 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, $103m of which was then used to pay a debt owed by another company in the MFS group.The debt in question was unrelated to either PIF or MFSIM and PIF received no benefit or consideration for it.This use of the PIF funds was 'authorised and approved' by Mr King.

The High Court appeal relates to ASIC's contention that Mr King was liable under s 601FD of the Act (which imposes duties on 'officers' of responsible entities) as an 'officer' of MFSIM.The key question under consideration by the Court was therefore, whether Mr King met the definition of 'officer' under para (b)(ii) of the definition of 'officer of a corporation' s 9 of the Act.

ASIC's case

The Queensland Supreme Court of Appeal found that Mr King did not fall within the definition.In order for Mr King to meet the definition within para (b)(ii), the Court held that ASIC needed 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'. ASIC argued that this construction was incorrect.

Among other things, ASIC argued that if not an 'officer' of MFSIM in name, Mr King was one in effect. That is, despite not being officially an MFSIM director at the time he authorised the use of PIF funds, he was nevertheless and 'officer' of MFSIM within the definition of officer in s9, as he was 'a person…who has the capacity to affect significantly the corporation's financial standing'.

As a question of fact, he both had 'overall responsibility for MFSIM' and had 'approved and authorised' the misuse of PIF's funds in this case ASIC argued, despite the fact that he was not acting in the role of an officer of MFSIM at the time.

Further, ASIC argued that the QCA's reasoning relied on a misinterpretation of Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296, which ASIC maintained 'did not hold that a person must hold a "position" internal to the company of which the person is an "officer"'.

The High Court's decision: Mr King was an 'officer' of MFSIM

The Court unanimously held that Mr King was an 'officer' of MFSIM within the definition of 'officer' in para (b)(ii), overturning the QCA's narrower interpretation. The facts were sufficient to establish that Mr King was an 'officer'

The facts in this case, including that Mr King acted as the 'overall boss of the MFS Group' and had 'overall responsibility for MFSIM' was sufficient, their Honours found, to establish that 'he had the capacity to affect significantly the financial standing of MFSIM' as required to meet the definition.

In their leading judgement Keifel CJ, Gageler J and Keane J said:

'If the CEO of the parent company of a group of companies is allowed to act in relation to other companies in the group untrammelled by the duties that attach to officers of each of the other companies in the group, shareholders and creditors would be left exposed to an obvious risk. It would be an extraordinary state of affairs if those who actually determine the course of a company's financial affairs could avoid responsibility for their conduct by the simple expedient of deliberately eschewing any formal designation of their responsibilities. This is especially so in the present case, when regard is had to Ch 5C of the Act, and specifically s 601FD, which was enacted to provide protection to members of managed investment schemes by imposing duties and responsibilities on the officers of responsible entities'.

'It is impossible to discern from the Act the intention that an officer of a holding company should fall outside para (b)(ii) of the definition in relation to a subsidiary if, as a matter of fact, that individual has the capacity to affect significantly the financial standing of the subsidiary, particularly where that individual has demonstrated that capacity by exercising it to the detriment of the subsidiary and its creditors and shareholders'.

No requirement to prove that Mr King acted in an 'office' or position within MFSIM

In their judgement, Keifel CJ, Gageler J and Keane J held that the Court of Appeal erred in giving 'officer' its ordinary meaning (ie the holder of an office) 'contrary to the orthodox view'.

'Textual differences between paras (a) and (b) of the definition make it clear that para (b) of the definition extends the scope of the term "officer" beyond its ordinary meaning of "office holder". While para (a) of the definition captures individuals who hold a named office in a corporation for which the 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. The contrasting language is a powerful textual indication that Parliament did not intend to confine the class of persons described in para (b), including sub-para (ii), by an unexpressed requirement that the relationship between an individual and a corporation be identified by reference to a recognised position with rights and duties attaching to it'.

Their Honours went on to conclude that 'considerations of legislative context, history and purpose point in the same direction as considerations of text'.

Grimaldi?

In their judgement, Keifel CJ, Gageler J and Keane J also found that the QCA's construction was flawed, because it relied on a misinterpretation of Grimaldi v Chameleon Mining NL [No 2] (2012) 200 FCR 296 at 324 (Grimaldi).

Their Honours state:

'The reasons in Grimaldi, when read as a whole, recognise that para (b) of the definition of "officer" expands the coverage of the duties of officers of a corporation to include individuals who would not be officers of a corporation within the ordinary meaning of the term. Grimaldi is distinctly not supportive of the view that, as a matter of law, a person who satisfies either of the requirements of para (b)(i) or (ii) of the definition does so only if that person is acting in a recognised office within the corporation. Accordingly, while the Court of Appeal was correct to say that there is no relevant tension between Grimaldi and Shafron, the suggestion that there was some tension arose only because the argument put by Mr King misunderstood what the Full Court said in Grimaldi'.

ASIC's response: The decision provides welcome clarity

In a statement, ASIC Commissioner John Price welcomed the decision as providing 'clear guidance on who is an "officer" of a corporation and establishing 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'.

Mr Price said that the decision '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'.

Noting that the litigation commenced in 2009, Mr Price added that the decision demonstrates ASIC's commitment to pursuing difficult, long running actions in the public interest'.

Implications for the ALRC's reform agenda?

On 10 March, the Australian Law Reform Commission (ALRC) released an update, following the release of its November discussion paper, flagging that the ALRC considers that the High Court's decision is relevant in the context of considering the need (or not), at a future date, for the existing definition of 'officer' in the Act to be expanded/clarified as a means of addressing the 'accountability gap' below board level.

'Depending on how the High Court interprets the existing provision, there may be a need for statutory reform to ensure that individuals below the C-suite who are responsible for a division or business unit, and executives of parent companies, are adequately captured by the definition of "officer" in the Corporations Act' the ALRC writes.

Having said this, the ALRC makes clear that it does not consider it appropriate to recommend any specific law reform 'at the present moment' given the legislative reform on foot and the (at the time) pending High Court decision. However, the ALRC says that will recommend 'a wide-ranging review of the effectiveness of individual accountability mechanisms for corporate misconduct be commissioned by December 2025'.