If it looks like a duck, swims like a duck and quacks like a duck… High Court gives broad interpretation to definition of “officer” If it looks like a duck, swims like a duck and quacks like a duck… High Court gives broad interpretation to definition of “officer”

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If it looks like a duck, swims like a duck and quacks like a duck… High Court gives broad interpretation to definition of “officer”

16 April 2020 | Professional Indemnity & Financial Lines

In a unanimous judgment, the High Court has overturned the decision of the Queensland Court of Appeal in respect of its narrow interpretation of the term “officer” under s 9 of the Corporations Act 2001 (Cth), finding it is not necessary for a person to be a named officer in order for s 9 to apply.

In Issue

  • Whether the construction of the word “officer” under s 9 applies only to  persons who have acted in an “office” for that corporation, meaning “a recognised position with rights and duties attached to it”.

The background

Mr King was the CEO and an executive director of MFS Ltd, the parent company of the MFS Group. PIF was the flagship fund and largest registered managed investment scheme within the MFS Group. MFSIM was its responsible entity. Mr King had ceased to be a director of MFSIM on 27 February 2007. In June 2007, MFSIM entered into a $200million facility with a foreign bank, the funds of which were to be used for PIF’s purposes only, and were not to be made available to other entities in the MFS Group. MFSIM, upon gaining access to the $200million, drew down $130million on 30 November 2007 which was immediately applied to satisfy the debts of another entity in the MFS Group. ASIC contended that Mr King was liable under s 601FD of the Act as an "officer" of MSFIM at the relevant time, “because (in accordance with paragraph (b)(ii) of the definition of "officer of a corporation" in s 9 of the Act) he was "a person ... who has the capacity to affect significantly the corporation's financial standing".

The decision at trial

It was held, both at trial and on appeal, that MFSIM (as PIF’s responsible entity) had breached its duties under s 601FC of the Corporations Act 2001(Cth) (the Act) (contravening s 601FC(5)); and that MFSIM had contravened s 208(1) of the Act by providing financial benefit to the other MFS Group entity (in satisfaction of its debts). Mr King was found to have been knowingly concerned in MFSIM’s contraventions and so to have contravened s 601FC(5) and s 209(2) of the Act.

The primary judge had also found Mr King liable as an “officer” of MFSIM under s 601FD of the Act, for failing to act honestly, “or alternatively failing to exercise the required degree of care and diligence and not acting in the best interests of the members of PIF", and also for failing to make proper use of his position. However, the Court of Appeal disagreed, holding that Mr King could not be considered an “officer” of MSFIM for the purposes of the Act, because: (a) he did not hold a “recognised position with rights and duties attached to it" in MSFIM (i.e., an “office”) at the relevant time; and (b) on the Appeal Court’s review of the evidence, any capacity which Mr King had to affect the  financial standing of MFSIM  was derived from his standing as CEO of MFS Ltd, rather than as an officer of MSFIM.

The issues on appeal

The principal issue on appeal to the High Court concerned the construction of the word "officer", as outlined above.

The Decision on appeal

The High Court held that in relying on a technical interpretation of the construction of the word “officer”, the Court of Appeal took too narrow a view about Mr King’s actual capacity to “affect significantly the financial standing of MFSIM”. Where acts or omissions relate to companies in a group, the overall position of influence of a person in the group’s affairs must be taken into account, rather than considering the person’s acts or omissions in respect of one particular company only. The High Court observed that the approach taken by the Court of Appeal to paragraph (b)(ii) of the definition of "officer" departs from a literal application of the text by adding a requirement that the "officer" referred to in paragraph (b)(ii) be acting in an "office" within the company. Textual differences between paragraphs (a) and (b) of the definition make it clear that paragraph (b) of the definition extends the scope of the term "officer" beyond its ordinary meaning of "office holder".

The High Court specifically stated that: “Paragraph (b)(ii) of the definition of "officer" in s 9 … is not limited to those who hold or occupy a named office, or a recognised position with rights and duties attached to it. A conclusion that a person has to hold or occupy a named office, or a recognised position with rights and duties attached to it, would be contrary to the text of the definition, which does not refer to any need to hold a named office. Such a construction would also be contrary to the extension of the definition of "officer" over time to those who are concerned in, or who take part in, the "management" of the corporation…”

In further support of its view, the High Court noted that considerations of legislative context, history and purpose pointed in the same direction as considerations of text.

The High Court rejected Mr King’s argument that paragraph (b)(ii), if applied literally, might capture persons who are unrelated to the management of the company. External consultants or advisors, bankers and the Commissioner of Taxation were given as examples of this concern. The High Court held that the language of the legislation avoids the unintended consequences raised. For example, the definition in s 9 is that of an "officer of a corporation". The words "of a corporation" mean that, even where paragraph (b) of the definition of "officer" is satisfied, it remains necessary to ask whether the "officer" is relevantly "of" the corporation. In addition, the High Court noted that although advisors and consultants may give advice which, if implemented, can significantly affect the financial standing of the corporation, it does not follow that it is the advisor or consultant who, in that circumstance, has the capacity to affect significantly the financial standing of the corporation. That capacity resides in the person to whom the advice is given, because it is that individual who determines whether or not the advice should be acted upon.

Implications for you

This decision provides useful guidance on who will be regarded by the courts as an officer of a corporation. This decision makes clear that the name or title is not determinative alone and that regard will be had to the actual roles and responsibilities of relevant personnel. Officers prosecuted for offences in respect of one corporation in a group may also find themselves liable in respect of contraventions of their “officer” duties or responsibilities against other corporations.

Whilst the term ‘officer’ is typically defined broadly in D&O insurance policies, the decision is also a timely reminder for insurers, insureds and their brokers to check and ensure that their D&O insurance policies appropriately extend (or where relevant, confine) cover to those individuals within corporate groups that reflects the parties’ intentions.

Australian Securities and Investments Commission v King [2020] HCA 4

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Jaimee-Lee Holstein

Jaimee-Lee Holstein

Solicitor