On 11 March 2020, the High Court of Australia provided its final judgment for the matter of Australian Securities and Investments Commission v King & Anor (2020) HCA 4 “ASIC v King”.

ASIC v King explicitly dealt with the question of whether a director of a parent company could be considered as an ‘officer’ for one of its subsidiaries under section 9 of the Corporations Act 2001 (Cth).

Mr King

MFS Ltd was the parent company of the MFS Group of companies (the MFS Group). Mr King was CEO and executive director of MFS Ltd. Additionally, Mr King had previously held the office of director for one of MFS Ltd’s subsidiaries, the MFS Investment Management Pty Ltd (MFSIM).

Although his role as director for MFSIM ceased on 27 February 2007, it was alleged that he was personally responsible for the misuse of MFSIM funds that occurred on the 27 November 2007.

The transaction

On 27 November 2020, MFSIM and senior personnel of the MFS Group, including Mr King, arranged for $150million to be drawn down from a Royal Bank of Scotland (RBS) loan facility.

Of that amount, there was a redraw in the amount of $130million from a loan facility between MFSIM (in its capacity as the responsible entity for its subsidiary, Premium Income Fund (PIF) and the Royal Bank of Scotland (Transaction). This Transaction was the subject of the Court’s decision.

The Transaction funds were paid to MFS Administration (the treasury company of the MFS Group) without consideration or agreement for its repayment. From this amount, MFS Administration used $103million to pay an outstanding debt in the MFS Castle Pty Ltd (MFS Castle) (a wholly-owned subsidiary of MFS Ltd) to a third party, Fortress Credit Corporation (Australia) II Pty Ltd.

PIF’s money was used to pay the debts of MFS companies for which PIF was neither actually nor contingently liable.

No agreement had been reached by which MFSIM received any consideration for this payment, nor was there any promise of repayment or security for the Transaction. As such, MFSIM had breached its duties as PIF’s responsible entity and thereby contravened s 601FC(1) of the Corporations Act 2001 (Cth) (“the Act”).

Graph anni report

Extension of section 9

Section 9 of the Corporations Act 2001 (Cth) provides that officer” of a corporation means:

  1. a director or secretary of the corporation; or
  2. a person:
    1. who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
    2. who has the capacity to affect significantly the corporation’s financial standing; or
    3. in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation); or
  3.  a receiver, or receiver and manager, of the property of the corporation; or
  4. an administrator of the corporation; or
  5. an administrator of a deed of company arrangement executed by the corporation; or
  6. a liquidator of the corporation; or
  7. a trustee or other person administering a compromise or arrangement made between the corporation and someone else.

Crucially, ASIC v King has resulted in an extension of previous interpretations of section 9 regarding the definition of an ‘officer’ within a corporation.

New interpretations of section 9 are no longer confined to individuals who hold a position within a company but can also include persons who “play some part in the management of the corporation”.

This extension will allow persons to be considered as ‘officers’ without requiring them to hold a formal office within the corporation.

Going forward, the key test for a person will be defined as an ‘officer’ will be whether it can be shown that they had the “capacity to affect significantly the financial standing of the company”.

The rationale behind ASIC v King  

In making its decision, the High Court relied on judgments from Grimaldi and Shafron,[1] where it was found that a person who satisfied subsection 9(b) of the definition of officer ‘is likely to be acting in an office (or position) for the purposes of section 9, irrespective of whether they were formally appointed to that role.

Instead, the relevant factors should consider:

  • the persons’ capacity and participation in investment and financial decisions; and
  • the nature of the persons’ participation in the control and direction of the affairs of the corporation.

Additionally, the High Court referenced the legislative history and conceptualisation of management which relates to “activities which involve policy and decision-making, related to the business affairs of a corporation, affecting the corporation as a whole or a substantial part of that corporation”.

Subsection 9(b) also contains a language change in contrast with earlier subsections of section 9. This was argued to show an intention by the Commonwealth Parliament to extend the interpretation of ‘officer’ to include “reference to the facts of the relationship between an individual and a corporation in relation to the affairs of the corporation.”

Facts that held Mr King as an ‘officer’

Several factors persuaded the court to define Mr King’s relationship with MFSIM as qualifying for the definition of ‘officer’.

The two most persuasive of these were evidence that:

  1. he acted as the ‘overall boss of the MFS Group’ and appeared to assume ‘overall responsibility for MFSIM’; and
  2. he was also shown to have both participated in the business of MFSIM and had an integral role in the redraw of funds from the loan facility that were used to inappropriately pay the debt of another MFS subsidiary.

Evidence was provided to the High Court, which showed Mr King’s influence over the deal and the acting authority he had over the decision.

While he did not have a formal office within the company, it was found that his capacity to affect the financial standing of MFSIM significantly was enough to classify him as an ‘officer’ for the purpose of section 9.

  1. Grimaldi v Chameleon Mining NL (No 2) (2012) FCAFC 6; Shafron v ASIC (2012) 88 ACSR 126.

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this article, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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Sandy Donaldson

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