Too much influence – and you might find yourself an officer of the company

In ASIC v King [2020] HCA 4, the critical question for the High Court was whether Michael King was an officer of MFS Investment Management Pty Ltd (MFSIM) for the purpose of the definition of officer of a corporation under s 9 of the Corporations Act 2001 (Cth) (Act).

Material Facts

Prior to its $2.5 billion collapse in 2008, Michael King was Chief Executive Officer and an executive director of MFS Ltd, the parent company of the MFS Group. The Premium Income Fund (PIF) was the largest managed investment scheme in the MFS Group with total funds under management from retail investors of approximately $787 million. MFSIM, a subsidiary company of MFS Ltd, and the responsible entity of PIF, entered into a $200 million loan facility with the Royal Bank of Scotland Plc. The loan was to be used for the purposes of PIF. MFSIM and senior personnel in the MFS Group arranged to draw down $150 million under the loan facility to pay the debts of other MFS Group companies and not for the purposes of PIF.

On 27 February 2007, Mr King ceased to be a director of MFSIM. However, ASIC argued that he remained an officer of MFSIM until 21 January 2008 because he was a person … who has the capacity to affect significantly the corporation’s financial standing pursuant to paragraph (b)(ii) of the definition of officer of a corporation in s 9 of the Act. ASIC argued that Mr King as CEO and an executive director of MFS Ltd had overall responsibility for MFSIM as a member of the MFS Group. In addition, Mr White, the deputy CEO of MFS Ltd and an executive director of MFSIM frequently reported to Mr King regarding his performance as executive director of MFSIM, and customarily acted in accordance with Mr King’s instructions and wishes in that position.

Supreme Court of Queensland

In the Supreme Court of Queensland, the primary judge found that Mr King breached his duties as an officer of MFSIM 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 PIF contrary to s 601FD(1)(a) and (c) of the Act. The primary judge also held that Mr King, contrary to s 601FD(1)(e) and (f)(iii) of the Act, made improper use of his position as an officer of MFSIM by failing to take steps that a reasonable person would take in his position to ensure MFSIM as responsible entity for PIF complied with its constitution.

Supreme Court of Queensland Court of Appeal

Mr King lodged an appeal with the Supreme Court of Queensland Court of Appeal. The court upheld Mr King’s submission that any capacity he had to affect significantly MFSIM’s financial position did not derive from his position as an officer for the purposes of s 9 of the Act because he did not occupy an office within MSFIM in the sense of it being a recognised position with rights and duties attached to it.

Decision of the High Court

ASIC was granted an application to appeal to the High Court. The High Court unanimously found that Michael King breached his duties as an officer of MFSIM under s 601FD of the Act.

The High Court noted the differences between paras (a) and (b) of the definition of officer. For the purposes of para (a), an officer means a director or secretary of the corporation, capturing individuals who hold a named office in the corporation for which the Act prescribes certain duties and functions. Para (b) extends the scope of the term officer beyond its ordinary meaning of office holder to capture those individuals who do not hold such an office. In para (b) one must consider the relationship between the individual and corporation in relation to the affairs of the corporation.

The High Court noted it was clear that Parliament’s intention with para (b) was not to make it a requirement that the individual’s relationship with the corporation must be determined by a position with rights and duties attached to it.

The High Court stated:

As to the mischief at which the definition of “officer” in s 9 of the Act is directed, the construction of para (b)(ii) for which Mr King contends is not apt to achieve the purpose of the Act to protect shareholders and creditors. 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.

The key takeaway from this High Court decision is that even if a person doesn’t have an official position within the company, if they have the capacity to affect significantly the financial standing of the company, any failure to comply with those duties will expose them to a claim for breach of duty. This is particularly true where chief executive officers, directors and officers of a parent company are making decisions that significantly affect the financial standing of the subsidiary.

And a warning to advisors and consultants. If you are advising on matters significantly affecting the financial standing of a company and you follow through to ensure your advice is acted upon, you may find yourself an officer of the company subject to common law, fiduciary and statutory duties.

DISCLAIMER. This is general information only. It is not legal advice. You must seek independent legal advice for your particular circumstances.