The Australian Securities and Investments Commission (ASIC) has succeeded in its proceedings against Michael King, former group CEO and executive director of MFS Ltd, the parent company of the MFS funds management and financial services group until its $2.5 billion collapse in 2008.
In ASIC v King  HCA 4, the High Court unanimously found that Mr King had breached his duties as an officer of a responsible entity under section 601FD of the Corporations Act 2001 (Cth), despite the fact that he was not a director of the relevant subsidiary. In making this finding, the High Court held that an ‘officer of a corporation’ in section 9(b)(ii) of the Corporations Act is not limited to those who hold or occupy a named office in a company or a recognised position with rights and duties attached to it. Rather, a person may be an ‘officer’ where as a matter of fact and circumstance they have the capacity to significantly affect the company’s financial standing, even where they do not hold an official position within the company.
Mr King had a $300,000 penalty imposed (in addition to the majority of ASIC's legal costs). In ASIC’s media release, Commissioner John Price said this decision “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.”
ASIC alleged that Mr King had breached his duties as an officer of MFS Investment Management Pty Ltd (MFSIM) (the second respondent) which was at the time the responsible entity of Premium Income Fund (PIF), the largest managed investment scheme in the MFS Group. The facts centred around a $200 million loan facility which MFSIM entered into with the Royal Bank of Scotland which was to be used solely for the purposes of PIF. ASIC alleged that Mr King, MFSIM and senior personnel in the MFS Group caused $150 million to be drawn down from the facility which was used for the purposes of other companies in the MFS Group.
The key consideration for the High Court was whether the Supreme Court of Queensland (Court of Appeal) had erred in finding that Mr King did not fall within the definition of an ‘officer of a corporation’ because he did not derive his capacity to affect the financial standing of MFSIM from his occupation of an ‘office’ within MFSIM in the sense of a “recognised position with rights and duties attached to it”.
Although Mr King had ceased to be a director of MFSIM on 27 February 2007, ASIC argued that Mr King remained an officer of MFSIM until 21 January 2008 under paragraph (b)(ii) of the definition of ‘officer of a corporation’ in section 9 of the Corporations Act which includes “a person… who has the capacity to affect significantly the corporation’s financial standing”. ASIC relied on the fact that Mr King continued to hold the position of group CEO and executive director of MFS Ltd with overall responsibility for the group, including MFSIM. Further Mr White, the deputy CEO of MFS Ltd and an executive director of MFSIM continued to frequently report to Mr King directly regarding the performance of his role at MFSIM. Mr White also customarily acted in accordance with Mr King’s instructions and wishes in that role.
The High Court held that the fact that Mr King acted as the “overall boss of the MFS Group” and assumed “overall responsibility for MFSIM” was sufficient for the purposes of establishing he was an ‘officer’ of MFSIM by virtue of his capacity to affect significantly the financial standing of MFSIM.
The High Court judgment in ASIC’s favour has important implications for companies, directors and senior management going forward.
- The judgment highlights that the Court will apply a broad interpretation of the definition of ‘officer’ under paragraph (b)(ii) of section 9 of the Corporations Act, therefore capturing individuals who do not occupy an official position within the company but has the capacity to affect significantly the financial standing of the company. Any person who would fall within a broader interpretation of ‘officer’ is reminded that directors and officers of Australian companies owe various common law, fiduciary and statutory duties (most relevantly as set out in the Corporations Act). Any failure to comply with those duties may expose the relevant person to a claim for breach of duty. It is not clear whether ASIC will be looking to increase prosecutions against ‘officers’, who in ASIC’s view should be responsible and held accountable for their actions – and possibly going beyond just claims against person involved as potential shadow directors.
- In particular, directors, chief executives or officers of a holding company may fall within the definition of ‘officer’ of an operating subsidiary where that person has the capacity to significantly affect the financial standing of the subsidiary. This is particularly the case in circumstances where that individual has demonstrated that capacity by exercising it to the detriment of the subsidiary and its creditors and shareholders. For this reason, such persons captured by the broader interpretation of an ’officer’ should ensure they are familiar with the operations, financing and structure of the corporate groups where the Court will look at the relevant person’s “overall” influence. Obtaining briefings and external advice is critical.
- External consultants, advisors or bankers will not be caught by the definition of officer as even though they may give advice which could significantly affect the financial standing of the company, the power to influence the decision making of the company resides in the person to whom the advice is given. One exception may be where the advisor or consultant is in fact involved in the management of the corporation and could ensure that the advice would be implemented.