The CEO and other senior executives of a parent company to a corporate group often do not sit on a group subsidiary board, and have no formal executive role in the subsidiary's activities. The High Court has confirmed that if the group senior executive has the requisite capacity to affect significantly the subsidiary's financial standing, then that senior executive is an "officer" of the subsidiary company within the meaning of section 9 of the Corporations Act 2001 (Cth). This means that the person will be subject to the same statutory duties in relation to the activities of the subsidiary as directors and executives of the subsidiary itself (Australian Securities and Investments Commission v King  HCA 4).
ASIC has greeted the decision, with Commissioner John Price saying, "ASIC notes today's High Court decision, which 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." But how will this play out in practice? Are consultants or lenders at risk of being caught?
The subsidiary's debt, and the CEO of the parent's decision
Mr Michael King, was CEO of the MFS Ltd, which at the time was the ASX-listed parent company of the MFS Group (later called Octaviar), a large diversified investment and funds management group with a market capitalisation of $3 billion. The Premium Income Fund was a large registered management investment and MFS Investment Management Limited (MFSIM), a member of the MFS group, was the responsible entity of the fund. In 2007, MFSIM arranged a $200 million loan facility with the Royal Bank of Scotland in its capacity as the responsible entity of the Premium Income Fund.
When it became apparent that a debt owed by MFS Administration could not be repaid, payment was made by drawing down on the loan facility used to pay the debts of other MFS Group companies, including a disbursement of $130 million paid by MFSIM to MFS Administration on 30 November 2007.
Mr King had ceased to be a director of MFSIM in February 2007, more than 6 months prior to the transaction.
ASIC commenced enforcement proceedings against Mr King alleging that he was nonetheless an "officer" of MFSIM (as responsible entity of the Premium Income Fund) and had breached his duties under section 601FD(1) of the Corporations Act. He had (ASIC alleged) breached those duties by not acting honestly, failing to exercise the required degree of care and diligence, not acting in the best interests of the members of the fund, making improper use of his position as an officer of MFSIM, and failing to take steps that a reasonable person would take in his position to ensure MFSIM as responsible entity for the fund complied with the fund's constitution.
The "officer" definition
For many years, the Corporations Act has imposed statutory duties (and associated personal liability) not only on directors of companies, but also on "officers" of companies and of responsible entities of managed investment schemes.
"Officer" is broadly defined in section 9 of the Corporations Act, and includes the following wording:
"officer of a corporation means:
(a) a director or secretary of the corporation; or
(b) a person:
(i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(ii) who has the capacity to affect significantly the corporation's financial standing; or
(iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation)
Can an "officer" be someone who does not hold a particular office within the corporation itself?
ASIC argued that Mr King was liable under section 601FD of the Corporations Act as an "officer" of MFSIM in that he was a person who had the capacity to affect significantly MFSIM's financial standing (as required by section 9 paragraph (b)(ii) of the definition) because he was the CEO and an executive director of MFS Ltd with overall responsibility for MFSIM as a member of the MFS Group; and because Mr White, the deputy CEO of MFS Ltd and an executive director of MFSIM, had 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 in that role.
Mr King's argument (with which the Queensland Court of Appeal had agreed) was that notwithstanding the fact that Mr King had the capacity to affect significantly MFSIM's financial standing (as required by paragraph (b)(ii) of the definition), to be "an officer of" a corporation" Mr King also needed to be appointed in some formal office within MFSIM, whether as a director or senior executive. He also argued that if the definition of "officer" was interpreted otherwise, it would capture persons who are unrelated to the management of the company such as advisors, external consultants, bankers and the Commissioner of Taxation.
The High Court unanimously disagreed with Mr King and the Queensland Court of Appeal. It concluded that "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".
It held that officers of a corporation are not defined through whether or not they hold an "office" within the corporation. Instead, section 9 is functional in character as it is concerned with the stipulated quality of a person's actions or capacity and their effects. Section 9 of the Act thereby requires consideration of the role the person played in the corporation, not their official title.
The High Court emphasised the importance of the principle that if individuals have the capacity to significantly affect the financial standing of a company then they can be an "officer" of a corporation.
Can an adviser or consultant be an "officer"?
The High Court also determined that advisers and consultants may give advice, but ultimately the capacity to affect significantly the corporation's financial standing resides in the person to whom the advice is given. This is because it is that individual who determines whether or not the advice is acted upon. Accordingly, the High Court did not accept that persons in acting in those capacities would be "officers" unless they had some means of ensuring that their advice was acted upon and it was not necessary to gloss the language of paragraph (b)(ii) to avoid the unintended consequences imagined by Mr King's argument.
Can a lender or other contractual counterparty be an "officer"?
The High Court did acknowledge that certain contractual counterparties (which may include lenders) are often able to affect the corporation by the exercise of rights as a counterparty to a transaction involving the corporation. However, it confirmed that the definition of "officer" in section 9 is intended to capture those managing the corporation or its property, as distinct from those who are able to affect the corporation by the exercise of such rights.
That said, it did note that there may be a possibility that a person who has legal rights against a corporation (such as a lender) may "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 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 in the character of management; it does not depend on the counterparty's legal rights.