Australia: Indemnity Arrangements For Directors And Officers: Implications Of ASIC v King

In Short

The Situation: The High Court of Australia has allowed an appeal brought by the Australian corporate regulator, confirming that the definition of 'officer' under Australia's corporations legislation includes any person "who has the capacity to affect significantly the corporation's financial standing", even in circumstances where the person does not occupy a named office in the corporation with recognised duties and rights attached to it.

The Judgment: In Australian Securities and Investments Commission v King [2020] HCA 4, the Court unanimously held that the Court of Appeal of the Supreme Court of Queensland erred in concluding that, despite Mr King acting as the "overall boss" of the MFS Group of companies, he was not an 'officer' of the relevant subsidiary as he did not occupy a formal office within that entity. The Court ruled that the capacity of a person to affect significantly the financial standing of the corporation is to be determined by reference to the facts and circumstances of the relationship between the individual and the corporation. While a person's occupation of a recognised office of power within the corporation is one factor to be considered in that assessment, it is not an essential factor.

Looking Ahead: Corporations and individuals need to be aware that individuals who exercise a degree of control over a corporation such that they have the capacity to affect significantly the corporation's financial standing are officers, even where they do not hold a formal position within the corporation. Immediate implications include concerns about the sufficiency of Directors & Officers Insurance and employment indemnities for senior officers of group holding companies. These arrangements require swift review. This case effectively creates 'shadow officers' and continues the erosion of the 'corporate veil' within corporate groups.

Facts of the Case

The first respondent, Mr King, was the Chief Executive Officer ("CEO") and an executive director of MFS Ltd, the parent company to the MFS Group of companies, some of which were engaged in the funds management and financial services industry.

The second respondent, MFS Investment Management Pty Ltd ("MFSIM"), was a subsidiary of MFS Ltd and the responsible entity for the MFS Group's largest managed investment fund, named the Premium Income Fund ("PIF"). In that capacity, MFSIM entered into a $200 million facility with the Royal Bank of Scotland ("RBS Facility"). The RBS Facility was to be used by MFSIM for the purposes of PIF and was not available for use by other companies in the MFS Group.

In late 2007, funds were drawn down from the RBS Facility by MFSIM at Mr King's direction, $103M of which was used to pay the debts of another entity in the MFS Group. The payment was made in the absence of any agreement, consideration, security or promise to repay in place, with the result that PIF (and indirectly the retail investors of that fund) were thereby exposed to the risk that PIF's money would not be restored to it. At the time of the payment, Mr King did not hold any formal office within MFSIM.

The appeal to the High Court related to ASIC's contention that, in contravention of section 601FD of the Corporations Act, Mr King had breached various duties in his capacity as an officer of the responsible entity. Consistent with the factual findings of the trial judge (which were not disturbed on appeal) that Mr King acted as the "overall boss of the MFS Group" and assumed "overall responsibility for MFSIM", ASIC argued that Mr King came within the definition of 'officer' because he was a person with the capacity to affect significantly MFSIM's financial standing, notwithstanding that he held no formal position within MFSIM at the time of the relevant payment.

The Decision

An 'officer of a corporation' is defined in section 9 of the Corporations Act to mean (among other things):

...

The Court (Kiefel CJ, Gageler, Keane, Nettle and Gordon JJ) unanimously held that paragraph (b)(ii) of the definition is not limited to those individuals who hold or occupy a named office or a recognised position in a corporation with rights and duties attached to it.

In the joint judgment handed down by Kiefel CJ, Gageler and Keane JJ, their Honours held that, while paragraph (a) of the definition captures individuals who hold a named office in a corporation, paragraph (b) defines 'officer' by reference to the facts of the relationship between an individual and a corporation in relation to the affairs of the corporation. Their Honours opined that it would be extraordinary if individuals who had the capacity to, and actually did, determine the course of a company's financial affairs could evade responsibility for their conduct by the "simple expedient of deliberately eschewing any formal designation of their responsibilities". This was considered significant in the context of the legislative purpose of section 601FD, which was enacted to provide protection to members of managed investment schemes by imposing duties on officers of responsible entities.

Justices Nettle and Gordon agreed with the orders proposed in the joint judgment and further expressed the view that the definition of 'officer' must be read in light of its legislative context and history, "with an understanding that the text is the latest form of legislative response to what has been continuing evolutionary change in corporate structure and governance". Their Honours also adverted to the risk (although not applicable on the facts of the case before the Court) that bankers and other third parties may fall within the reach of one or more of paragraphs (b)(i)-(iii) of the definition of 'officer', for example, lenders managing a company's attempts to work its way out of financial distress.