Managers and executives put on notice by the High Court

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By Sam Bassingthwaighte, Senior Associate

On 11 March 2020, a long-running feud between former MFS CEO Michael King and ASIC came to an end with a resounding win for the corporate watchdog.

This decision should serve as a reminder to all company managers and executives that, while they may not hold a ‘recognised position’ (e.g. director) by title, they may be considered an ‘officer’ of the company and be bound by the duties and responsibilities imposed by the Corporations Act 2001 (Cth) (Act) In turn, this may lead to penalties for contravention of those duties.

We go into further detail in respect of the circumstances leading to and informing the Court’s decision below.

Background

Mr King was the CEO and executive director of MFS Ltd, the parent company of the MFS Group of companies which, among other things, provided funds management and financial services.

On 27 November 2007, Mr King, along with other senior personnel of the MFS Group, arranged for $150 million to be drawn down from a Royal Bank of Scotland loan facility held by an MFS Group subsidiary, MFS Investment Management Pty Ltd (MFSIM), and for $130 million of those funds to be paid to another MFS Group subsidiary, MFS Administration Pty Ltd (MFSA).

No formal agreement had been reached by which MFSIM received any consideration for this payment, nor was there any promise of repayment or security for the transaction.

Mr King was not a director of either MFSIM or MFSA at the time these arrangements were entered into.

Following the collapse of MFS Group in 2008, ASIC commenced proceedings against Mr King.  ASIC contended that, despite the fact that he had ceased to be a director of MFSIM on 27 February 2007, Mr King had the capacity to affect significantly the corporations financial standing and, in carrying out the transactions noted above, had breached his duties as an ‘officer’ of MFSIM under s601FD of the Act.

The Queensland Court of Appeal held that Mr King did not fall within the definition of an ‘officer of a corporation’ on that basis that any capacity he had to affect the financial standing of MFSIM did not derive from his occupation of an ‘office’ in the sense of a ‘recognised position with rights and duties attached to it’, ASIC sought and was granted special leave to appeal to the High Court.

In a unanimous decision, the High Court allowed ASIC’s appeal and overturned the Queensland Court of Appeal’s restrictive interpretation of ‘officer’ in s 9 of the Act by stating that a person of whom para (b)(ii) speaks need not occupy a ‘recognised position’ within the corporation. An officer can be anyone who has the capacity to affect significantly the corporation’s financial standing.

Further, the Court found that the Act defined ‘officer’ by reference to the relationship between the individual and the company, rather than by reference to their official role or capacity, and that Mr King had acted as the ‘overall boss of the MFS Group’ and assumed ‘overall responsibility for MFSIM’.

The Court found that the evidence established that Mr King had that capacity and was knowingly concerned in the wrongful application of a loan facility funds in breach of his duties as an ‘officer’ under the Act.

The Implications

ASIC Commissioner John Price said, ‘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.’

Given that officers have many of the same duties and face many of the same liabilities as directors, the statutory definition of “officer” provides little in the way of detailed practical assistance.

Helpfully, this judgement reduces the ‘grey area’ surrounding a determination of whether an individual would be considered an ‘officer’ of a corporation, particularly by clarifying that a person need not hold any official role or position within a company to be designated as such.

Persons who hold such positions should closely examine the scope of the coverage of their D&O policies (if any) to consider whether adequate coverage is provided and seek legal advice if they are unsure whether or not they would be considered an ‘officer’.

For further information, please do not hesitate to contact us.

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