Are you liable for breaches as an 'officer' of a corporation?

The Australian Securities and Investments Commission has successfully appealed a decision of the Queensland Court of Appeal, on construction of the term 'officer' as defined in section 9(b)(iii) of the Act, being a person who has the capacity to significantly affect the financial standing of a company.

What's happened?

Michael King was the CEO and an executive director of MFS Ltd, the parent company of the MFS Group. MFS Investment Management Pty Ltd (MFS Investment) was a subsidiary of the MFS Group and acted as a responsible entity for various managed investment schemes, including the Premium Income Fund (PIF). Mr King had been the director of MFS Investment until 27 February 2007 and the MFS Group CEO until 21 January 2008. In June 2007, MFS Investment as the responsible entity for PIF entered into a $200 million facility with the Royal Bank of Scotland. The purpose of this facility, as described in PIF’s PDS, was to help manage the liquidity of the fund.

On 27 November 2007, MFS Investment and senior management of MFS Group, including Mr King, arranged for $150 million to be drawn down from the facility and deployed the funds to repay debts of other MFS Group companies, of which PIF was not actually or contingently liable.

Civil penalty proceedings

ASIC commenced civil penalty proceedings against MFS Investment and Mr King, Craig White (MFS Group Deputy CEO and later MFS Group CEO from 21 January 2008), David Anderson (MFS Group Chief Financial Officer), Craig Hutchings and Marilyn Watts (MFS Investment Fund Manager) for the misappropriation of funds held by PIF on behalf of unit holders (although the case against MFS Investment was settled). In May 2016, the Supreme Court of Queensland found that Mr King, Mr White, Mr Anderson, Mr Hutchings and Ms Watts had collectively committed 217 contraventions of the Act and had breached their duties as officers of MFS Investment to act honestly and in the best interests of members of PIF. In this respect, ASIC had successfully contended that Mr King breached his duties as an "officer" of MFS Investment under s 601FD of the Act, despite the fact that he had ceased to be a director of MFS Investment on 27 February 2007.

Court of Appeal

Contrary to the decision of the trial judge, the Court of Appeal held that Mr King did not have the capacity to affect MFS Investment’s financial standing within the meaning of paragraph 9(b)(ii) of the definition of 'officer of a corporation'. The Court of Appeal found that any capacity he had to affect MFS Investment’s 'financial standing' did not derive from his occupation as an 'officer', in the sense of “a recognised position with rights and duties attached to it.”

The High Court

On appeal, the High Court unanimously held that the meaning of 'officer of a corporation' in paragraph 9(b)(ii) is not limited to those who hold or occupy a named office in a corporation or a recognised position with rights and duties attached to it. In their joint judgment, Kiefel CK, Gageler and Keane JJ noted:

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.

Additionally, the High Court held that:

• more generally, paragraph (b) of the definition of 'officer' extends the scope of the term in the Act to capture those who do not hold a named office in a corporation, by reference to the relationship between a person and a corporation in relation to the affairs of the corporation
• the risk of the definition in para (b)(ii) over-reaching to capture persons unrelated to the management of the company is mitigated by the words 'of a corporation'. These words ensure that “officer” is confined to persons engaged, in fact, in the management of its affairs or property
• although advisors and consultants may give advice which can significantly affect the financial standing of a corporation, it does not follow that the advisor or consultant has the capacity to affect significantly the financial standing of the corporation. That capacity lies with the person to whom the advice is given, who ultimately decides if the advice should be acted upon.

What this means for corporations

ASIC Commissioner John Price declared that the High Court judgment ‘sends a clear signal to anyone running a company – in name or in effect – that they should be responsible and held accountable for their actions.’

What this means is that, even if you do not hold a named office in an organisation, you may still have all the duties attached to 'officers' of the organisation and attract liability for breaches of the Act.