One of the major regulatory trends to have emerged from the global financial crisis has been a worldwide focus on corporate liability for the actions of rogue employees. It is now critical that companies understand the circumstances in which they will, or will not, be held liable for what an employee might do.
Earlier this year, the Supreme Court of Queensland in ASIC v King, found five former executives of MFS Investment Management Limited (MFS) liable for breaching their directors' and officers' duties. Importantly in this case, the actions of those executives were also attributed to MFS.
In 2008, the MFS group of companies collapsed, owing A$2.5 billion. In 2009, the Australian Securities and Investment Commission (ASIC) brought a civil claim against the senior executives for A$147.5 million, which the ASIC alleged the senior executives to have misappropriated from a Premium Income Fund (PIF) to satisfy other debts of the MFS Group.
The defendant executives were Michael King (CEO of the entire MFS Group until 21 January 2008), Craig White (CEO of the MFS Group after Mr King's resignation), David Anderson (CFO of the MFS Group), Guy Hutchings (CEO of MFS), and Marilyn Watts (Fund Manager of PIF).
Among other things, the senior executives were found to have known that the misappropriated money belonged to investors in the PIF scheme and that it should have been used for the purposes of the investors rather than the repayment of debts within the MFS Group. The Judge found that there was a perception amongst the senior executives that the PIF scheme was a "'slush fund' run in the group's interests rather than the interests of its investors". The senior executives also falsified a number of documents that were "prepared in haste in a transparent attempt to hide the previous misappropriations" from the auditors and the Royal Bank of Scotland.
More significantly, however, the Judge attributed the actions of Messrs White, King, Anderson and Hutchings and Ms Watts to MFS. He did so by applying the well-known test set down by Lord Hoffmann in Meridian Global Funds Management Asia Ltd v Securities Commission - that is, by asking "whose act (or knowledge, or statement of mind) was for this purpose to count as the act etc. of the company?"
The court had no difficulty holding the executives' actions should count as acts of the company. The Judge agreed with ASIC's submission that the executives' actions were not "totally in fraud" of MFS because MFS benefitted financially from the actions. In particular, the misappropriation of the PIF funds was used to satisfy other debts of the MFS Group.
See the Court's decision here.