In ASIC v King  HCA 4, the High Court considered whether a director of a holding company was an “officer” of a subsidiary company for the purposes of the Corporations Act (the Act). If so, the “officer” may have been liable for breaches of duties as an “officer”.
Mr King was the CEO and an executive director of MFS Limited (also known as Octaviar Ltd), the parent company of the MFS Group. The group included MFSIM, the responsible entity of a managed investment scheme called the PIF.
In late 2007, Mr King and other MFSIM and MSF personnel arranged for $150 million to be drawn down under a facility that was to be used only for the PIF. $147.5 million of those funds were paid to the benefit of another company in the MFS Group. This was in breach of the facility terms and the PIF constitution.
Mr King was not then a director of MFSIM, but the CEO and staff of MFSIM took instructions from him, including regarding investments to be made by the PIF.
The MFS Group collapsed. Subsequently, ASIC commenced proceedings against various executives, including Mr King.
The Supreme Court of Queensland held the respondent was an “officer” of MFSIM under section 9 of the Act, which defined an “officer” to include “a person who has the capacity to affect significantly the corporation’s financial standing”.
On appeal, the Queensland Court of Appeal disagreed, holding that, although the respondent had that capacity, it was also necessary for ASIC to prove that the respondent acted “in some office of the corporation, not in the sense of an office named in the Act, but in the sense of a recognised position with rights and duties attached to it.” The Court of Appeal thought that, without this gloss, the legislation would capture many people who were not reasonably involved in the management of a corporation.
The High Court unanimously rejected the Court of Appeal’s approach and allowed the appeal.
Keifel CJ, Gageler and Keane JJ confirmed that paragraph (b)(ii) of the definition concerns only the capacity of a person to significantly affect the corporation’s financial standing. They contrasted:
Their Honours held that the Court of Appeal’s concerns about unintended consequences were misplaced, because even where the definition in paragraph (b)(ii) is satisfied, “it remains necessary to ask whether the ‘officer’ is relevantly ‘of the corporation’ …in the sense of being engaged, in fact, in the management of its affairs or property”. This excludes persons who are counterparties to a transaction or provide the corporation with advice.
Their Honours observed that a director of a holding company who participates in decision-making as to how the group’s funds are to be invested is an officer of a subsidiary impacted by those decisions under paragraph (b)(ii) of the definition, even though the director holds no recognised position in the subsidiary.
Nettle and Gordon JJ agreed with the other Judges’ decision and further noted that whether a person is an officer under the paragraph (b)(ii) definition is determined by consideration of the role the person played in the management of the corporation. Determining whether a person has the capacity to affect significantly a corporation’s financial standing depends on:
On that basis, their Honours held that the respondent was clearly an officer of MFSIM, and was liable for breach of duty.
The definition of “officer of a corporation” is considerably wider than merely those who act in an office to which rights and duties attach. The question is whether the person in fact had the capacity to affect significantly the corporation’s financial standing while the person was engaged, in fact, in the management of its affairs or property.
Accordingly, a director of a holding company who participates in decision-making as to how the group’s funds are to be invested is an officer of a subsidiary impacted by those decisions under the paragraph (b)(ii) definition, even though the director holds no recognised position in the subsidiary. Regulators such as ASIC may now widen their gaze to parties who ‘run’ companies in practical reality, not just in name.
Scott Couper, Partner
Craig Melrose, Solicitor