In this important case, the High Court of Australia unanimously clarified the definition of officer of an entity.
The question of who is an officer of an entity is an important matter to understand. The law imposes duties and responsibilities on directors and officers who may, for example, be exposed to criminal liability, liability for breach of duty, or claims for insolvent trading. The High Court’s unanimous decision in ASIC v King (11 March 2020) provides greater clarity on the definition of officer. With an apparently broader construction of the term, company representatives and those able to affect the financial standing of a company are now even more accountable for their decisions and actions, even though that person does not hold an official office in the entity or have an officer title.
Background to the King decision
King was the executive director and chief executive officer (CEO) of a parent company which managed a group of companies. One of those companies (the subsidiary company) was the responsible entity of a managed investment scheme (MIS) within the same group of companies.
At the material time, King did not hold an official office in the subsidiary company.
The subsidiary company borrowed $200 million under a loan facility which was to be used solely for the purpose of MIS and not for purposes of other companies within the group. Senior personnel in the group, including King, arranged for $150 million to be drawn down from the loan facility. Of these funds, $103 million were used to pay an outstanding debt of another subsidiary in the group. No agreement was reached under which the subsidiary received any consideration for this payment, nor was there any promise of repayment or security for the transaction.
Like a house of cards, the group of companies later collapsed, leaving investors significantly out of pocket.
ASIC took legal action against the various parties involved in the management of the group. This included King. ASIC argued that King was an officer of the subsidiary company, even though he did not formally hold an ‘officer’ position. In particular, ASIC argued that King fell within the definition of officer in section 9 of the Corporations Act 2001 (Cth) (Corporations Act) in that he had the capacity to affect significantly the subsidiary’s financial standing and in arranging the draw-down and subsequent use of funds he had breached his duty under the Corporations Act to act honestly, with care and diligence as an officer of a registered scheme.
The facts might seem complex, but the main point of this case is it clarified who is an officer under the Corporations Act. This is relevant to a range of people: for example, persons in management, persons with involvement in a group subsidiary, and liquidators considering breach of duty claims.
Definition of Officer of an entity
ASIC relied upon the definition of officer in the Corporations Act in characterising King as an officer. Section 9 lists various definitions for an officer of an entity, including:
- A director or secretary of the corporation
- A person who makes decisions which affect the whole of, or most of, the corporation
- A person who gives instructions to the directors (but excluding professional advisers such as accountants and lawyers)
The part of the law that ASIC relied upon, however, said that an officer of an entity included a person:
who has the capacity to affect significantly the corporation’s financial standing?
As the case progressed through the Court system, the question was whether King had made decisions for the subsidiary company that significantly affected its financial standing. If he had, he would fall within this definition and could be held responsible for his decisions that led to the financial collapse of the subsidiary.
High Court’s decision
The High Court looked at the officer definitions in the Corporations Act and found that a broad interpretation should be applied to the definition which dealt with people exerting financial influence.
Under this definition, there was no requirement for a person to hold a formal title that would identify them as a company officer (for example, a director or CEO), or that such person acted in office. The definition did not have a threshold requirement of a recognised position with rights and duties attached to it.
The Court found that King was involved in the management of the subsidiary company and so he was a company officer. It noted that King had acted as the overall boss of the group, and thus exercised responsibility for the subsidiary company. King influenced the financial standing of the subsidiary and the group of companies.
Observations about accountability
The Court observed that the Corporations Act set out officer duties. One of the aims of these duties was to protect members of managed investment schemes from questionable decisions. How? By imposing decision-making accountability on company officers.
It said that if the CEO of a parent company were allowed to make decisions for subsidiary companies, shareholders and creditors would be severely exposed unless there was accountability for the decisions.
The upshot is that if you are a decision-maker, you must carefully consider your choices. Consider your role and the extent to which your decisions affect the financial standing of the company.
As the saying goes,
With great power comes great responsibility.
The Court did not identify a test to determine these issues, because much will come down to the company’s size, structure and particular circumstances. In other words, it all depends. Annoyingly unspecific, but a legal reality.
Our thoughts
If you are a company decision-maker or you otherwise have significant influence in the decisions of a company, consider whether you have the ability to affect the financial standing of the company. If you are involved in a group of companies, consider whether you can exert influence over the entire group, not just the parent or one of the subsidiaries. If you are exerting financial influence but are uncertain whether you are an officer of a particular company, you will need to take legal advice to work out on which side of the line you fall.
If there is a chance that you may be an officer of a company to which you are not formally appointed, you ought to ensure that the company has directors’ and officers’ insurance which would respond to that characterisation of your role.
If you are a liquidator of a company and are considering breach of duty claims, remember to look out for persons who exert influence over the financial standing of the company.
This decision will likely allow ASIC further scope to target shadow directors and de facto directors. The message is this: if you are running a company, no matter what your role or title, you are accountable and responsible.
Further Information
For more information on company officers and company law, please contact Trevor Withane: