The High Court of Australia has handed down a unanimous judgment in the recent case of Australian Securities and Investments Commission v King1 clarifying the scope of the term 'officer' as defined in s 9 of the Corporations Act 2001 (Cth) (Act). The judgment overturned the narrower construction by the Queensland Court of Appeal and Supreme Court of Queensland, who heard the case on appeal and at first instance.
The Commissioner of ASIC, John Price, published a statement welcoming the High Court’s decision for sending 'a clear signal to anyone running a company – in name or in effect – that they should be responsible and held accountable for their actions’.
Facts
The High Court considered whether the first respondent, Mr King, as Chief Executive Officer and an executive director of MFS Limited, the parent company of the MFS Group of companies, was an officer pursuant to s 9 of the Act.
The MFS Group was involved in financial services, including fund management. MFS Investment Management Pty Ltd (MFSIM), a subsidiary of the MFS Group, acted as a responsible entity for various managed investment schemes, the largest of which was the Premium Income Fund (PIF). On 29 June 2007, MFSIM entered into a $200 million loan facility with the Royal Bank of Scotland (RBS) for the sole purpose of PIF.
On 27 November 2007, senior executives of the MFS Group, including Mr King, arranged for $150 million to be drawn down from the RBS loan facility. This money was used to pay off debts of companies within the MFS Group. With no guarantee in place to secure this ‘loan’ from PIF, the fund’s investors suffered economic loss when the MFS Group subsequently collapsed without repaying the outstanding money.
ASIC commenced civil penalty proceedings against the senior executives of the MFS Group and a fund manager of MFSIM for alleged misappropriation of funds in relation to this disbursement. As against Mr King, ASIC alleged he was an 'officer' of MFSIM within the meaning of s 9(b)(ii) of the Act, despite having ceased to be a director of MFSIM on 27 February 2007. On this basis, ASIC alleged Mr King breached his duty as an officer of the company under s 601FD of Act.
The Queensland Court of Appeal’s decision
The Court of Appeal did not disturb the primary judge’s factual findings that Mr King was the ‘overall boss of the MFS Group’ and assumed ‘overall responsibility for MFSIM’; nor did it dispute that these findings were a sufficient basis to establish that Mr King was in a position to affect the financial position of MFSIM significantly.
However, despite these findings, the Court of Appeal ultimately held that Mr King’s ability to affect MFSIM’s financial capacity was not derived from a ‘recognised position with rights and duties attached to it’ as intended by the meaning of ‘officer’ in s 9(b)(ii).
ASIC subsequently sought special leave to appeal the Court of Appeal’s decision to the High Court of Australia.
The High Court’s decision
The High Court unanimously held that the factual findings of the primary judge, which remain undisturbed, 'compelled the conclusion' that Mr King fell within the meaning of 'officer' as defined in s 9(b)(ii) of the Act, overturning the decisions of the lower courts. This conclusion was reached on the facts of the case, despite Mr King not holding a formal executive role within MFSIM at the time ASIC alleged the funds were misappropriated.
In a joint judgment, Kiefel CJ, Gageler and Keane JJ held that, when considering the legislative intent of the provision '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'.
In a separate judgment, Nettle and Gordon JJ agreed, holding s 9 of the Act applies to those with the capacity to affect the whole or substantial part of the business of the corporation through their involvement in the management of that corporation.
Conclusion
This case emphasises both the persistence of ASIC in pursuing individuals through the courts and the willingness of the Court to ensure the scope of liability under the Act captures those responsible for financial decisions.
It is important company directors and executives, their brokers and insurers take note of the decision in assessing their potential exposure to claims, and in the defence and management of any claims that may arise.
