If it walks like a duck and it quacks like a duck then it's probably a duck

A recent decision of the High Court of Australia[1] held that if an executive can affect significantly the financial standing of a subsidiary within a corporate group, the executive may be considered an officer of that subsidiary without holding, occupying or acting in a recognised office in the subsidiary.  It affirmed prior decisions to the effect that the definition of “officer” in Australia’s corporations law will be given a broad reading by courts with the consequent extended application of statutory duties, for example, to act in the best interests of the corporation and to exercise reasonable care and diligence.

In this brief update, we consider what the decision means for those running corporate groups in Australia, particularly in this time of heightened regulatory scrutiny of executive conduct. 

Background Facts

Mr King was the CEO and executive director of MFS Ltd, the parent company of the MFS Group. MFSIM was a member of  the MFS Group, and on whose behalf Mr King had undertaken negotiations concerning a draw down from a loan facility that had been granted to MFSIM for its own purposes. These negotiations were undertaken by Mr King notwithstanding the fact that he had no formal position within MFSIM at the material time, and despite the fact that the draw down sum was to be utilised to repay debts of other companies in the MFS Group.

ASIC, the Australian companies regulator, had commenced proceedings against Mr King in the Supreme Court of Queensland for contraventions of the Corporations Act 2001 (Cth) (the Act), specifically in relation to being knowingly concerned in MFSIM’s contraventions of the Act and under sections 601FD(1)(a) and (c) for breach of duties as an officer of MSFIM.[2]

At trial, it was held that Mr King was knowingly concerned in MFSIM’s contraventions of the Act, and had personally contravened sections 601FC(5) and 209(2) of the Act. The primary judge found that Mr King was an “officer” of MFSIM as he had the capacity to affect significantly the financial standing of the company. On appeal however, the Court of Appeal held that ASIC had failed to prove that Mr King had the capacity to affect significantly the financial standing of MFSIM, and any capacity that Mr King did have to affect the matter was one derived from his position as CEO of MFS Group rather than from acting in an office or position within MFSIM.

Question before the High Court

The High Court was tasked with the construction of the word “officer” as contained in section 9 of the Act, in light of the Court of Appeal’s approach that suggested that in order for ASIC to establish that Mr King was an “officer” of MFSIM, Mr King had to have acted in an “office” of MFSIM, i.e. within a recognised position with rights and duties attached to it.

Decision of the High Court

The High Court overturned the decision of the Court of Appeal, and in doing so, held that Mr King, a CEO of a holding company, was  an “officer” under paragraph (b)(ii) of the definition as he had the “capacity to affect significantly the corporation’s financial standing”, notwithstanding the fact that the “corporation” in question here was a subsidiary in which Mr King held no formal position.

The Court of Appeal was held to have erred in concluding that ASIC had to establish that Mr King held “a recognised position with rights and duties attached to it” in order to assert that Mr King was an “officer” of the subsidiary under paragraph (b)(ii) of the definition.

The High Court went on to state that if a CEO of a parent of a group of companies was allowed to act in relation to other companies within the group, without being held accountable to duties that are ordinarily attached to officers of such other (subsidiary) companies, shareholders and creditors of those companies would be left exposed to an obvious risk. The High Court accordingly held that the Act does not envisage that an officer of a holding company should fall outside the ambit of paragraph (b)(ii) of the definition of “officer” if such an individual has the capacity to significantly affect the financial standing of the subsidiary company.

This decision affirms the approach taken by the Full Court of the Federal Court in Grimaldi v Chameleon Mining NL [No 2] where it was held that the definition of “officer” under paragraph (b) of the definition expands the coverage of the duties of officers of a corporation to include individuals who would not be officers of a corporation within the ordinary meaning of the term.[3]

What it means for those running Australian businesses

In light of the High Court’s decision, directors and executives of Australian businesses should be aware of the expansive interpretation afforded to an “officer” under section 9 of the Act.

It will be difficult, absent facts that demonstrate a lack of control of financial levers, to defend an action by ASIC on the basis that a decision maker at a group level is not an officer of a subsidiary within the group where that executive has been making decisions that affect significantly the financial standing of the subsidiary company. This is especially so in corporate structures involving parent and holding or subsidiary companies, where parent company personnel such as the CEO or CFO are often significantly involved in the affairs of other companies within their group. Accordingly, executives (and directors) should be aware they could be deemed as an “officer” of a subsidiary company, and accordingly be subject to the duties and liabilities ordinarily attaching to an officer.

This decision highlights important considerations for those running corporate groups: to whom do you owe duties and what is in their respective best interests. While the interests of the members of a corporate group are often aligned, that is not always the case. Among other duties, an “officer” of a corporation must exercise powers and discharge duties in the best interests of the corporation.[4] This may become difficult or impossible for an officer of more than one company in a corporate group, if corporate interests materially diverge. To an extent, this can be addressed by ensuring that the constitution of a subsidiary expressly authorises directors to act in the best interests of the holding company.[5]

Further, to the extent there is an intention that certain officers of holding entities of a group are not to be treated as officers of one or more subsidiaries within the group, it will be important to put in place, comply with, and maintain clear records documenting compliance with corporate authority frameworks which show this separation of management control within the group.

Finally, it will also be important for directors and executives to ensure that relevant insurance policies cover all companies within the group and provide for situations where they may be deemed (by conduct) to be an officer of a subsidiary.