On 11 March 2020, the High Court handed down its decision in ASIC v King [2020] HCA 4, a decision that considers the scope of definition of company ‘officer’ in the Corporations Act 2001 (Cth).

The High Court confirmed that the definition includes persons who do not have any official role or position within the company, but who have capacity to significantly affect the company’s financial standing.

In making its decision the High Court usefully made some comments about how this could apply in the context of corporate groups, financiers, advisers and consultants.

Facts

Mr King was the CEO and an executive director of MFS Ltd, the parent company of a group of subsidiaries involved in, among other things, funds management and financial services (Parent Company).

Two of the Parent Company’s subsidiaries were:

  • MFS Investment Management Pty Ltd, which was responsible for the management of a managed investment scheme (Subsidiary A)
  • MFS Administration Pty Ltd, which was the treasury company for the corporate group (Subsidiary B).

Although Mr King did not hold any official role with Subsidiary A or Subsidiary B, he nevertheless arranged for Subsidiary A to:

  • draw down $150 million under a facility it had entered with the Royal Bank of Scotland
  • pay $130 million of those funds to Subsidiary B, which used the money to pay other debts of the corporate group.

Subsidiary A did not have an agreement with Subsidiary B for the repayment of the $130 million, and therefore did not receive any consideration for the payment.

Previous decisions

Following the collapse of the Parent Company and its subsidiaries in 2008, ASIC commenced proceedings against Mr King and other individuals involved with the corporate group.

At first instance, the Supreme Court of Queensland found that Mr King was an ‘officer’ of Subsidiary A even though he did not hold any official position with the company.

The Court relied on the definition in sub-section 9(b)(ii), which provides that an ‘officer’ of a corporation includes a person ‘who has the capacity to affect significantly the corporation’s financial standing’.

The Court also found that Mr King had breached his statutory obligation in section 601FD of the Corporations Act ‘by not acting honestly, or alternatively failing to exercise the required degree of care and diligence and not acting in the best interests of the members’ of the fund managed by Subsidiary A.

After the Court of Appeal overturned that finding, ASIC appealed to the High Court.

High Court decision

The High Court confirmed that, as a matter of construction, the definition of ‘officer’ in section 9 of the Corporations Act extended to persons who were not ‘office holders’ within the corporation.

The High Court found that the Act defined ‘officer’ by reference to the relationship between the individual and the company, rather than by reference to their official role or capacity.

The High Court rejected the arguments made by Mr King that to be a company ‘officer’, a person needed to have a role or position within the management of the company. The High Court noted that ‘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’.

Comments

The High Court’s decision brings important clarity to the meaning of ‘officer’ in the Corporations Act by making it clear that a person may be an ‘officer’ without holding any official role or position within the company.

This finding could have broader implications for corporate groups, financiers, advisers and consultants.

For corporate groups, the decision gives a clear demonstration of how a parent entity’s management personnel may unknowingly become an ‘officer’ of subsidiaries where they have significant involvement in the affairs of the subsidiaries.

For financiers, the High Court expressly noted the possibility that third parties could become ‘officers’ of a company in circumstances where they involve themselves in the decision-making processes of the company by threatening to exercise their rights.

The High Court took a narrower approach in relation to advisers and consultants, noting that it is usually the person who receives advice that has the capacity to significantly affect the financial standing of a company. However, the Court left open the possibility that an adviser or consultant could become a company ‘officer’ where they do in fact involve themselves in the management of the company to ensure their advice is implemented.

The High Court’s confirmation that non-office holders can still be company ‘officers’ will be an important consideration in future private and public litigation. Given ASIC’s more litigious approach to regulatory enforcement, corporate groups, financiers, advisers and consultants will need to carefully consider the limits of their roles and the extent to which they can and should influence the decision making processes of a company.