Who is a company officer? High Court analysis in ASIC v King and its implications

  • The statutory definition of officer is easy to recite but not always easy to apply.
  • High Court in King averts moral hazard by adopting an expansive view of who is a company officer.
  • King bridges the accountability gap in decision-making below board level.
  • King has great potential to shape and influence governance standards.

In addressing a fundamental question for good corporate governance, who is a company officer, the starting point is to consider and apply the statutory definition in s 9 of the Corporations Act 2001, with the relevant parts reproduced below. An ‘officer of a corporation’ is defined by statute to, inter alia, mean:

  • A director or secretary of the corporation or
  • A person
        • Who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
        • Who has the capacity to affect significantly the corporation’s financial standing; or …

When the full statutory definition of an ‘officer’ in s 9 of the Act is considered, the definition identifies two classes of persons, namely, (a) those who occupy or hold a named office and (b) those who engage in certain conduct or have a certain kind of capacity or influence on the directors of the company.1

The statutory definition of officer is easy to recite. However, it may not always be easy to apply — as highlighted by the litigation history in the King decision and, earlier almost a decade ago, in the James Hardie litigation history.2 Essentially, this is because the question of how significant a role a person played is one of fact and degree.3 Such an assessment cannot be made in a vacuum. The real difficulties that can arise in assessing as to who is a company officer are captured in the observations made by the High Court in King:4

The quality of a person’s capacity or actions, and the effects of that capacity or those actions on the management of a corporation, are not necessarily uniform across corporations, or corporate groups, or even uniform within a single corporation or group. The size of a corporation, the corporate structure, the management structure, and the identity and nature of the persons involved are likely to affect who is an officer of a corporation at any point in time. Circumstances may change over time, sometimes dramatically.

Against the backdrop of such considerations, the Australian Law Reform Commission is currently considering the need for law reform to strengthen individual liability for corporate misconduct.5 As part of that inquiry, it is also examining whether clarity is required on the threshold question of who is a company officer? The recent High Court decision in ASIC v King is welcomed for the clarity and guidance it provides to this crucial question.

King affirms the term ‘officer of a corporation’ captures anyone in the company who can affect significantly the company's financial standing.

The main issue in the High Court appeal in King concerned the meaning of the word ‘officer’, as defined above. King affirms the term ‘officer of a corporation’ captures anyone in the company who can affect significantly the company's financial standing. The High Court rejected the narrow interpretation given by the Court of Appeal of the Supreme Court of Queensland6 which muddied the waters by limiting the reach of the statutory definition to those who hold or occupy a named office, or a recognised position with rights and duties attached to it.

Before discussing the High Court analysis in King, and the litigation history which spanned a decade, it pays to provide a brief overview of the facts and decisional history in this case.

Facts and decisional history

Mr King was the chief executive officer (CEO) and an executive director of MFS Ltd, a formerly listed public company that was the parent company of the MFS Group of companies (the MFS Group). The Premium Income Fund (PIF) was the largest registered managed investment scheme in the MFS Group. It was the flagship fund of the group, and as of October 2007, with total funds under management from retail investors of some $787 million. MFS Investment Management Pty Ltd (MFSIM) was the responsible entity of PIF.

MFSIM entered into a $200 million facility with the Royal Bank of Scotland (the RBS loan agreement) and it was to be used by MFSIM for the purposes of PIF only, and not the other companies in the MFS Group.

In November 2007, MFSIM and senior personnel in the MFS Group, including Mr King, arranged to draw down the bulk of the loan under the RBS loan agreement and, contrary to the agreement, the money was used to pay the debts of the other MFS Group companies for which PIF was not liable.

The Appeal to the High Court concerned the $130 million disbursement that was paid by MFSIM to MFS Administration Pty Ltd, which acted as the treasury company for the MFS Group. Upon receipt of this money, on the same day, MFS Administration Pty Ltd paid $103 million to Fortress Credit Corporation (Australia) II Pty Ltd (Fortress). The payment of this debt was unrelated to PIF, nor MFSIM, and PIF did not derive any benefit from this transaction. The use of the funds belonging to PIF, in such an unauthorised way, was approved by Mr King in his capacity as the overall boss of the MFS Group.

Notwithstanding that Mr King had ceased to be a director of MFSIM in February 2007, ASIC alleged that he nonetheless remained an ‘officer' of MFSIM until January 2008 due to his capacity to affect significantly the company's financial standing due to his role as CEO and executive director of MFS Group. The undisputed facts showed Mr King acted as the ‘overall boss of the MFS Group’7 and assumed ‘overall responsibility for MFSIM.’8

The primary judge was satisfied that Mr King was an ‘officer’ as his conduct fell within the meaning of s 9(b)(ii) of the Act.9 Notwithstanding these facts, the Court of Appeal disagreed with the primary judge on the basis that any capacity which Mr King had to affect MFSIM’s financial standing did not derive from his occupation of an ‘office’ within MFSIM. The Court of Appeal held that ASIC needed to prove that Mr King had acted in an ‘office’ of MFSIM to satisfy the statutory definition of a company officer. The Court of Appeal said that the statutory definition in s 9(b)(ii):10

… cannot be applied literally, for otherwise a person who is, on any realistic view, unrelated to the management of a corporation could be subjected to the burdens of the provisions of the [Corporations] Act with respect to officers.

Furthermore, the Court of Appeal was of the view that any capacity which Mr King did have to affect significantly the company’s financial standing derived from his position as CEO of the MFS Group, rather than him acting in an office or position within MFSIM.11

High Court analysis in King

The High Court in King unanimously rejected the narrow construction adopted by the Court of Appeal and favoured a literal interpretation of s 9(b)(ii). This approach was supported with reference to the text, context and purpose to which the statutory definition of ‘officer’ is directed.12

The significance of the contrasting language used in the statutory text of paragraphs (a) and (b) of section 9 of the Act was not lost on the High Court. The textual differences, it was held, makes it clear that para (b) of the definition extends the scope of the term ‘officer’ beyond its ordinary meaning of ‘office-holder.’13

In reaching its decision, the High Court was concerned that the narrow view adopted by the Court of Appeal would fail to address the mischief to which the statutory definition of ‘officer’ of the Act is directed. The High Court drew attention to the potential adverse consequences resulting from that approach by noting that:14

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.

Furthermore, the High Court warned of the moral hazard arising from adopting the narrow view of the statutory definition of ‘officer’:15

It would be an extraordinary state of affairs if those who determine the course of a company's financial affairs could avoid responsibility for their conduct by the simple expedient of deliberating eschewing any formal designation of their responsibilities.

Turning to the facts of the case, it was held that the circumstances relating to the misuse of funds in November 2007 compelled the conclusion that Mr King was an officer of MFSIM within the meaning of s 9(b)(ii), despite him ceasing to a director of MFSIM, for the following reasons:16

[Mr King’s] involvement in and impact on MFSIM and its business remained extensive and significant. Without holding an office, Mr King has a degree of influence over the general conduct of MFSIM, which had the capacity to affect significantly MFSIM's financial standing.

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Implications

It would be absurd to say, as demonstrated by the High Court decision in King, that the official title or office held by the person involved in the company’s affairs will always trump the statutory definition of ‘officer’. Such a restrictive interpretation would undermine a key pillar of corporate governance, that of accountability for decision-making. The High Court in Shafron, and now in King, reaffirms that the notion of participating in decision-making presents a question of fact and degree in which the significance to be given to the role played by the person in question must be assessed.

The key judicial message, in both cases, is a powerful reminder to people involved in corporate decision-making that it is the nature of a person’s role or position within the corporation that is the ultimate determinant of that person’s duty and liability.17

These judicial authorities affirm that the statutory definition is sufficiently broad with an elastic-like quality to it. Consequently, the net of potential liability for those involved in the company’s affairs can be cast further than those making decisions in the boardroom.

The decision in King, together with ASIC’s use of the stepping stone approach to establish officer liability, brings such potential civil and criminal liabilities closer to home for decision-makers acting below the level of the board and C-suite executives.

King, together with Shafron, has enormous implications for corporate accountability and liability, going beyond the board and C-suite executives. The statutory definition of ‘officer’ is sufficiently broad and, depending on the facts of a case, has great potential to capture those employees operating below board level who are entrusted with significant decision-making power and those whose influence the company’s financial standing. In this context, titles such as employee or junior executive will be unable to mask the corporate reality that such a person may be a company officer which attracts all the duties and liabilities that attach to that status,18 including the civil penalty and criminal liability provisions of the Corporations Act which has recently been substantially strengthened.

For any breach of directors and officers statutory duties arising after March 2019,19 such as the failure to exercise care and diligence [s 180(1)] or the failure to exercise powers in good faith in the best interests of the company, and for a proper purpose [ s 181], the maximum pecuniary penalty for individuals is $1.05 million per offence and the maximum criminal penalty (if the breach is accompanied by dishonesty or recklessness) is 15 years imprisonment.

The decision in King, together with ASIC’s use of the stepping stone approach to establish officer liability, brings such potential civil and criminal liabilities closer to home for decision-makers acting below the level of the board and C-suite executives. The stepping stone approach, which involves establishing corporate fault in the first instance, followed by a personal action against individual company officers for liability, is now a regular feature of ASIC’s law enforcement strategy20 - as recently shown in the Vocation case where a former government minister was banned from management and had a pecuniary penalty imposed arising from the company’s contravention of law.21

King may also have a prominent role to play in fixing individual liability in the much-anticipated prosecutions expected from the fallout of the Report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission)22 and also in light of ASIC’s recent adoption of a ‘why not litigate’ strategy to law enforcement.

The potentially broad reach of the statutory definition of ‘officer’ has been long recognised, for example by the former government advisory body,23 by judicial authorities,24 leading academics25 and now by the High Court in King, observing that the statutory text in s 9 of the Act is a legislative response ‘to what has been continuing evolutionary change in corporate structure and governance.’26

In unpacking the meaning of the High Court’s observation of the statutory text in s 9, it can be taken to signal that the law on corporate governance in the Corporations Act is sufficiently broad enough to capture people working beneath board level in large public companies and in corporate groups and that such persons are not necessarily exempt from falling within the wide definition of ‘officer’. The observations made in the CAMAC Report27 on the modern commercial landscape, and the realities of devolution of managerial power outside the boardroom is noted and endorsed in King:28

… there is substantial room for people outside the boardroom to have a significant effect on a corporation and that modern structured corporate groups are often ‘run day-to-day by key group executives or executive committees of the holding company whose decisions, made on a group rather than an entity basis, are implemented across the various companies within the group.’

The implications of the statutory interpretation of ‘officer’ in King, however, goes much further. The tentacles of the statutory definition of officer can stretch much further and capture bankers and other third parties, as recognised by the High Court.29 This is true more so now than ever before due to the crippling economic effects of the coronavirus pandemic on the economy. To say that trading conditions for companies are extremely tough right now in a generation defining pandemic would be a gross understatement.  The number of companies in financial distress can be expected to scale up, massively, and King may have serious implications for external advisers involved in a corporate workout.

From a corporate restructuring perspective, lenders who participate in such an effort need to be aware of their actions and level of influence on the board of the debtor company or the running of the debtor company. Failure to consider such relevant issues runs the risk that the lender may be considered to be a shadow officer (or shadow director) of the debtor company and liable under the legal regime in the Corporations Act impacting company officers, other than the insolvent trading laws under s 588G which applies to directors only. Such a potential risk for legal liability arose in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd,30 but where, on the facts, it was held that neither Apple (major supplier and secured creditor) nor its financial director were shadow directors when they sought to impose conditions for their continued support of the financially distressed debtor company on a commercial arm’s length basis.

Conclusion

The judicial analysis of who is a company officer by the High Court in King, and earlier in Shafron,31 firmly puts to rest the notion that a person has to hold or occupy a named office, or a recognised position with rights and duties attached to it.

From a corporate governance perspective, the High Court decision in King bodes well for accountability in decision-making by bridging the accountability gap, particularly when significant and influential decisions are made by others below board level. The decision in King has great potential to shape and influence governance standards, especially when companies fail to clearly delineate lines of corporate responsibility within internal management.

Notes
  1. Australian Securities and Investments Commission v King [2020] HCA 4 at [85]-[88]; Shafron v Australian Securities and Investments Commission [2012] HCA 18 at [25].
  2. Shafron v Australian Securities and Investments Commission [2012] HCA 18. For commentary, see Hargovan, A ‘Dual Role of General Counsel and Company Secretary: Walking the Legal Tightrope in Shafron v ASIC (2012) 27 Australian Journal of Corporate Law 112.
  3. Australian Securities and Investments Commission v King [2020] HCA 4 at [90]; Shafron v Australian Securities and Investments Commission [2012] HCA 18 at [26].
  4. Australian Securities and Investments Commission v King [2020] HCA 4 at [92].
  5. Australian Law Reform Commission, Corporate Criminal Responsibility — Individual Liability for Corporate Misconduct (An Update — March 2020).
  6. King v Australian Securities and Investments Commission [2018] QCA 352.
  7. [2020] HCA 4 at [14].
  8. Ibid.
  9. Australian Securities and Investments Commission v Managed Investments Ltd [No 9] [2016] QSC 109.
  10. King v Australian Securities and Investments Commission [2018] QCA 352 at [247].
  11. Ibid at [288].
  12. [2020] HCA 4 at [23]-[47] per Kiefel CJ, Gageler and Keane JJ.
  13. Ibid at [24].
  14. Ibid at [46].
  15. Ibid.
  16. Ibid at [125].
  17. Ibid at [84].
  18. For example, see Hodgson v Amcor [2012] VSC 94.
  19. Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019.
  20. See further, Herzberg A and Anderson H, ‘Stepping Stones — From Corporate Fault to Directors’ Personal Civil Liability’ (2012) 40 Federal Law Review 181; Zhou, A ‘A Step Too Far? Rethinking the Stepping Stone Approach to Officers’ Liability (201) 47 Federal Law Review 151.
  21. See further Hargovan A, 2019, 'Stepping stone liability for non-executive chair in Vocation Ltd', Governance Directions, Vol 71, No 1, p 5.
  22. Commonwealth of Australia, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report: Volume 1, 2019. For commentary, see Hargovan A, 2019, 'Banking royal commission final report: Cultural issues and implications', Governance Directions, Vol 71, No 3 p 1; Hargovan A, 2018, 'Hayne Royal Commission Interim Report: Unclogging the Central Artery', Governance Directions, Vol 70, No 11, p 691.
  23. See Corporations and Markets Advisory Committee (CAMAC), Corporate Duties Below Board Level (Report, April 2006).
  24. For example, see AWA Ltd v Daniels trading as Deloitte Haskins & Sells (1992( 7 ACSR 759 at 832-833; Australian Securities and Investments Commission v Alder (2002) 168 FLR 253 at 279-280; Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 at [45].
  25. Austin and Ford, Ford, Austin and Ramsay’s Principles of Corporations Law (17th ed; 2018) at 466.
  26. Australian Securities and Investments Commission v King [2020] HCA 4 at [71].
  27. See n23 above.
  28. Ibid at [94].
  29. Ibid at [96].
  30. 2010] NSWSC 233; upheld on appeal [2011] NSWCA 109. See further, Anil Hargovan, ‘Throwing Light on Shadow Directors’ – Court of Appeal in Buzzle v Apple’ (2011) 10 Insolvency Law Bulletin 173.
  31. See Hargovan, A ‘Identifying Company Officers: Judicial Signposts by the High Court in the James Hardie Decisions’ [2012] Butterworths Corporate Law Bulletin [472]; Hargovan, A ‘Company Officers in the Judicial Spotlight’ (2012) Keeping Good Companies Vol 64 p 365.

Anil Hargovan can be contacted on (02) 9385 3577 or by email a.hargovan@unsw.edu.au.

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