Meaning of 'officer' broadened 8 min read
The recent decision of the High Court of Australia in ASIC v King considers the meaning and scope of the term 'officer', as defined in s9 of the Corporations Act 2001 (Cth), and contains important if non-binding observations on how the term may catch bankers and other third parties.
The High Court of Australia recently considered the extended meaning of 'officer' under the Corporations Act 2001 (Cth) (Corporations Act) in its decision of Australian Securities and Investments Commission v King  HCA 4 (ASIC v King).
In this case, the court considered whether the CEO of a parent company acted as an 'officer' of a subsidiary under section 9(b)(ii) of the Corporations Act, despite not holding any official title in relation to that company. In arriving at their conclusion that the CEO was acting as an 'officer' of the subsidiary during the course of the alleged conduct, the court held that whether an individual is acting as an 'officer' would depend on the degree of influence exerted over a company, and their capacity to affect that company's financial standing.
This decision significantly broadens the scope of who may be considered an 'officer' of a company, as it may capture any individual if they are found to exercise the requisite degree of influence and control, despite not holding any official position in connection with that company.
Bankers have long been concerned with potential 'shadow director' liability when drawn into the conduct of the affairs of companies in difficulty as part of workout or reconstruction negotiations. Observations in this decision suggest such concerns are well founded.
Companies and individuals alike should be aware that the absence of an 'official' appointment will not protect them when engaging in conduct that has the potential to significantly influence a company's financial decisions or affairs. This is particularly pertinent in respect of advice given in workouts and distressed refinancing contexts, where third parties or officers, or even middle management of parent companies, may exert significant influence over a company in relation to a proposed course of action. Once found to be an 'officer', directors' duties are owed to the company by the outsider, along with (absent its suspension during the COVID-19 pandemic) potential insolvent trading liability.
The Corporations Act defines an 'officer' of a corporation to include its directors and company secretary, and also persons:
- that make, or participate in making, decisions that affect the whole, or a substantial part, of the business of a corporation;
- that have the capacity to significantly affect a corporation’s financial standing [this is s9(b)(ii), the focus of the decision]; or
- in accordance with whose instructions or wishes, the directors of a corporation are accustomed to act.
MFS Ltd (also known as Octaviar Ltd), formerly a listed public company, was the parent company of MFS Investment Management Pty Ltd (MFSIM), which acted as responsible entity for several registered managed investment schemes, the largest of which was the Premium Income Fund (PIF).
Civil penalty proceedings were commenced by ASIC against officers and a fund manager of MFSIM in connection with the misappropriation of $147.5 million held by PIF on behalf of unit holders. These funds were used to pay debts owed by other entities in the MFS Group, for which PIF was not liable. Specifically, this appeal considered whether the CEO and executive director of MFS Ltd acted as an 'officer' of MFSIM in relation to the misappropriation.
The findings of the primary judge that the CEO of MFS Ltd had significant influence over the MFSIM entity were not disputed. Despite the practical influence that the CEO possessed and exerted over MFSIM, the Court of Appeal of the Supreme Court of Queensland held that the CEO of MFS Ltd was not an 'officer' of MFSIM within s9(b)(ii) of the Corporations Act, as the influence on MFSIM's financial operations did not derive from a 'recognised position with rights and duties attached to it'.
The High Court of Australia unanimously allowed the appeal, concluding in two separate joint judgments that the Court of Appeal erred in its conclusion. The court held that the construction of the term 'officer' should not be so tightly construed, and provided guidance as to what would be considered an 'officer' under s9(b)(ii) of the Corporations Act.
The whole Court held that the term 'officer' in s9(b)(ii) is not limited to those who hold or occupy a named office, or a recognised position with rights and duties attached to it. Rather, an officer of a corporation includes a person who has engaged in certain conduct, who has a certain kind of capacity, or who has (or had) a certain influence on the directors of the corporation. Specifically, the High Court held that there is no requirement that a person be a named officer of a corporation to fall within the ambit of s9(b)(ii), as the relevant test will be a matter of fact to determine whether a person has the requisite capacity to significantly affect the financial standing of the company.
Proceeding on this basis, their Honours concluded that the factual findings of the primary judge, that the CEO of MFS Ltd acted as the 'overall boss of the MFS Group' and assumed 'overall responsibility for MFSIM', were sufficient to establish the capacity to 'significantly affect the financial standing of MFSIM' (at ), and therefore be considered an 'officer' under the definition of s9(b)(ii) of the Corporations Act.
In the joint judgment of the plurality (Kiefel CJ, Gageler and Keane JJ), their Honours stated:
If the CEO of the parent company of a group of companies is allowed to act in relation to other companies in the group untrammeled 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. 
In a separate judgment, Gordon and Nettle JJ also noted that the person's contribution to the making of a decision must be assessed, and that decision must be (in accordance with the words of s9(b)(i)) one which affects the whole, or a substantial part, of the business of the corporation, in order to be considered an 'officer' of the company.
This decision confirms a broad scope to those who may be considered an 'officer' of a company. In the current economic recession flowing from COVID-19, the decision should serve as a caution to both third parties and individuals in non-official positions who engage in conduct influencing the management of a corporation in financial difficulty, eg in workouts and distressed refinancing contexts.
Further, the argument that the literal construction of 'officer' under s9(b) could capture financiers, external consultants and advisers was accepted by Gordon and Nettle JJ:
…[we] do not accept that bankers and other third parties could never fall within the definition of 'officer'…to give just one example, lenders managing the way in which a company attempts to work its way out of financial distress may present real issues about the application of these provisions. 
On the other hand, the plurality saw the argument as misplaced. The question is whether the third party 'answers the description of being 'of' the corporation in the sense of being engaged, in fact, in the management of its affairs or property' .
Further, Kiefel CJ, Gageler and Keane JJ observed that 'the definition of 'officer' in s9 is intended to capture those managing the corporation or its property, as distinct from those who are able to affect the corporation by exercise of rights as a counterparty to a transaction involving the corporation' . Their Honours continued:
It may happen, of course, that a person who has legal rights against a corporation as a counterparty to a particular transaction or particular transactions is able to inveigle himself or herself into the decision-making processes of the corporation by means of the mere threat of the exercise of those rights. In such a case, that person may fall within either or both of para (b)(i) or (ii) of the definition. But that depends on the facts of the case as to the nature and extent of the counterparty's control of, or capacity to control, the corporation's decision-making qua management; it does not depend on the counterparty's legal rights. 
Similarly their Honours were not concerned with financial advisers and consultants who merely advise and do not decide,'unless the advisor or consultant is, in fact, involved in the management of the corporation and is thereby able to ensure that the advice will be implemented' .
These observations are non-binding and, with respect, a little question begging. But they are indicative of the High Court's current thinking and do flag that there is no 'safe harbour', but rather there are only difficult questions of fact and degree.
In an earlier Insight, we looked at implications of the case for individual stakeholders who may (unknowingly) be officers of company group subsidiaries with consequent onerous duties and/or potential liabilities under applicable work health and safety legislation.
Please contact us if you would like further advice about anything raised in this article.