Case Overview: “I’m not a director therefore I’m not liable.” Are you sure about that?

 

The unanimous High Court decision of Australian Securities & Investments Commission v King and Anor [2020] HCA 4 (‘the decision’) suggests a possible widening of the category of those who are likely to be deemed company officers, and removes an element of doubt which previously existed as to the meaning of the term.

 

Background

 

The decision concerned the collapse of the MFS Group.

 

Michael King was the CEO and an executive director of the publicly listed entity, MFS Ltd, which was the parent company of the MFS Group of companies (‘Parent Company’). There were several other companies in the MFS Group, including MFS Investment Management Pty Ltd (‘MFSIM’), which was the responsible entity of a managed investment scheme, The Premium Income Fund (‘Fund’). The Fund was the largest management investment scheme in the MFS Group.

 

MFSIM entered into a $200 million facility with the Royal Bank of Scotland, which was to be used for the purposes of the Fund.

 

At about the same time, another company in the MFS Group, MFS Administration, was experiencing liquidity problems. In response to these problems, MFSIM drew down the greater part of its facility with the Royal Bank of Scotland, and apparently to assist MFS Administration with its creditors, paid out from the sum drawn down, $130 million for the benefit of those creditors. MFSIM had no contractual arrangement with MFS Administration to cover such payment, nor did MFSIM or the Fund have any contractual obligation towards, or legal liability to, those creditors. No security or consideration for the $130 million payment was provided to MFSIM, and the Fund derived no benefit from the payment.

 

The MFS Group collapsed in 2008, leaving investors in the Fund with substantial losses.

 

ASIC commenced proceedings against Mr King and other executives in the Group in connection with that payment alleging breaches of the Corporations Act (‘the Act’) contending that the payment of the $130 million amounted to a misappropriation of funds. Even though Mr King was a director of the Parent Company, he was not a director of MFSIM and ASIC alleged that Mr King was an ‘officer’ of MFSIM pursuant to section 9(b)(ii) of the Act. ASIC alleged that Mr King had breached section 601FD(1)(e) and (f) of the Act in that, as an ‘officer’ of a responsible entity (MFSIM) of a registered scheme (the Fund), he had not acted honestly, or with a degree of care and diligence, or in the best interests of the members of the Fund.

 

The question at issue was whether Mr King was in fact an officer of MFSIM when it released the $130 million to creditors of other companies in the MFS Group.

 

The Law

 

Section 9(b) of the Act defines ‘officer’ as including a person:

 

  1. Who makes or participates in making decisions that affect the whole … of the business of the corporation; or
  2. Who has the capacity to affect significantly the corporation’s financial standing; or
  3. In accordance with whose instructions or wishes, the directors of the corporation are accustomed to act.

 

Section 601FD (1) of the Act requires an officer of a responsible entity to a registered scheme to act honestly, with care and diligence, and in the best interests of members of the scheme. In the circumstances of the MFS Group, the Fund was a registered scheme, and MFSIM was its responsible entity.

 

The Evidence

 

ASIC provided evidence to the Queensland Supreme Court that Mr King, as CEO and executive director of the Parent Company, regularly gave directions to and initiated steps by MFSIM. Mr White, an executive director of MFSIM, reported directly and frequently to Mr King in the performance of Mr White’s role in MFSIM, and customarily acted in accordance with Mr King’s instructions and wishes.

 

Mr King appeared to have an active day-to-day role in the running of MFSIM, and therefore of the Fund.

 

Trial history

 

The Queensland Supreme Court found that because of the way he influenced and appeared to control the affairs of MFSIM, he was an officer of that company, even though he was not a director of the company. The court further found that he had acted in such a way as to breach sections 601FD(1)(e) and (f) of the Act.

 

Mr King and other senior personnel of the company appealed the court’s decision to the Queensland Full Court and were successful. The Full Court found that the definition of ‘officer’ in subsection (b) of the definition in section 9 of the Act required that for a person to be an ‘officer’ he/she must actually hold some office in the company. As Mr King did not hold any office in MFSIM, he was not an officer of the company.

 

ASIC appealed the Full Court’s decision to the High Court. The Judges of the High Court, Kiefel CJ, Gageler and Keane JJ allowed the appeal and ultimately found for ASIC. Their Honours decided that section 9(b)(i) and 9(b)(ii) of the Act captured those persons who did not hold an office within the company but who were engaged in the corporation’s decision-making and management. Their Honours also noted that it was inconsistent with the legislative purpose of the section of the Act for the CEO of a parent company to act in relation to other companies in the group without being subject to the duties or consequences attaching to officers of each of the companies in the group, as shareholders and creditors would be left exposed to obvious risk.

 

Their Honours identified the following factors as being relevant to this determination on a case by case basis:

 

  • The identification of the role of a person in relation to the corporation;
  • What they did or did not do to fulfil that role; and
  • The relationship between their actions or inaction and the financial standing of the corporation.

 

Noting this may vary significantly depending on a company’s size, structure and circumstance.

 

The High Court found that the question of whether a person was an officer is an objective one, both of fact and of degree, and depends upon the level of influence which the person has over the affairs and running of the subject company. The Court was careful to state that merely having an influence over company decisions will not necessarily make a person an ‘officer’, rather that the person must be able to ensure that the advice will be implemented.

 

Ramifications

 

Confirmation of this decision expanding the definition of an ‘officer’ will undoubtedly give ASIC and other regulators added confidence for actions against ‘officers’ for breaches of directors’ duties under sections 180 or 601FD of the Act.

 

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