A long running court battle between ASIC and Michael King, former CEO and executive director of Queensland based listed company MFS Ltd, has ended with implications for the governance of Australian corporations.
MFS Ltd operated a diverse range of tourism and financial services businesses including a retail Managed Investment Scheme (MIS). Each business was operated by a separate MFS subsidiary. At its peak, the MIS had more than $700 million under management.
The MIS subsidiary borrowed $200 million for purposes connected with the MIS however, a significant proportion of the borrowed funds was instead used to pay-down MFS group debt unconnected with the MIS or the stated purposes for which the funds were borrowed. King was formerly a director of the MIS subsidiary but had no ‘official’ role in the subsidiary at the relevant time.
ASIC argued King breached his duty as an ‘officer’ of the subsidiary even though not a ‘director’. The Supreme Court of Queensland found King breached his duties as an officer of the subsidiary, even though not a director, by not acting honestly, failing to act with care and diligence, and misusing his position.
The decision of the trial judge was overturned by the Queensland Court of Appeal which held ASIC failed to prove King acted in an ‘office’ within the subsidiary company that is “a recognised position with rights and duties attached to it” notwithstanding that King “saw fit to intervene in the business of [the subsidiary] and to issue directives as to how things should be done”. ASIC appealed to the High Court.
On 11 March 2020, the High Court found in favour of ASIC. It held that, although King was not a director of the subsidiary, the definition of ‘officer’ under Section 9 of the Corporations Act includes “a person who has the capacity to significantly affect the corporation’s financial standing”.
In summary, the High Court decision means that, in addition to people who hold an ‘office’ within a corporation (e.g. directors and secretaries), the expression ‘officer’ includes people:
- who participate significantly in making decisions that affect the corporation;
- who have the capacity to affect the corporation’s financial standing; or
- in accordance with whose instructions or wishes the directors of the corporation are accustomed to act.
This judgement reinforces the governance obligations that can be imposed on people connected with corporations even where they do not hold an ‘office’. Those who are significantly involved in the governance or management of a corporation may be deemed ‘officers’ under Section 9 of the Corporations Act, which will trigger the same duties as ‘office holders’ – naturally this will depend on the extent of the involvement of the person in governing or managing the corporation. There is a general exemption for professional advisors but advisors need to be careful they do not overstep the mark to the point where the law would deem them an ‘officer’.