The Australian Securities and Investments Commission (ASIC) today succeeded in a major High Court decision on who is a company “officer” potentially liable for penalties under the Corporations Act.
The High Court unanimously held that the definition of “officer” 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, noting 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”.
ASIC brought a civil penalty case against MFS Investment Management Ltd (MFSIM) and various directors, officers and employees of the MFS Group of companies, including Mr King as Group CEO.
The case arose from the unravelling of the Group, which comprised a multitude of businesses including a managed investment scheme, the Premium Income Fund, of which MFSIM was the responsible entity. The entity misused $147.5 million belonging to the fund to pay the debts of other companies in the Group.
ASIC claimed that Mr King had breached his obligations as an officer of the responsible entity. Critically, Mr King was not a director of MFSIM although, as Group CEO, had influence over its affairs. There was no doubt that, if Mr King were found to be an officer, he would be in breach of his duties to act honestly and in the best interests of fund members.
The Corporations Act defines “officer” to include “a person who has the capacity to affect significantly the corporation’s financial standing”. The essential question was whether this definition is limited to someone with a specific office or responsibility in the corporation.
ASIC argued that, as a person can be a shadow director of a company without occupying an office, there is no reason to imply the need for an office in this clause.
Mr King argued ASIC’s interpretation would have wide and unintended consequences and that it was difficult to imagine any circumstances in which a reasonable person, who has no role within a company or ability to affect internally its management or operations, would take positive steps to ensure compliance by the company with statutory obligations. To find otherwise might expand liability to external persons or entities with no involvement internally in the company including, for example, bankers, the Commissioner of Taxation, or legal advisers.
The High Court was untroubled by the objections of Mr King as to unintended consequences. The potential liability of external parties was a matter of fact and degree as to their actual control of decision-making and management. The question in each case is whether the person answers the description of being “of” the corporation in the sense of being engaged, in fact, in the management of its affairs or property.
The court noted the trial judge’s factual findings, that Mr King acted as the “overall boss of the MFS Group” and assumed “overall responsibility for MFSIM”, were sufficient to establish that Mr King had the capacity to affect significantly the financial standing of MFSIM.
The result is a sensible and principled outcome that is consistent with Parliament’s intention to ensure that offenders cannot hide behind formal designations. For directors, it is a reminder to remain steadfastly independent in asserting their role in directing corporate affairs against others who do not have formal responsibility, such as major shareholders. For those others with influence, it is a caution of responsibility and of acting in the best interests of the company.
 Australian Securities and Investments Commission v King  HCA 4
Lionel Hogg, Partner