In March 2020, the High Court delivered its judgment in ASIC v King  HCA 4, in which it clarified the definition of “officer” under s 9(b)(ii) of the Corporations Act 2001 (Cth) (Act)1. The High Court confirmed it extends beyond formal office holders to persons involved in management decisions that have a substantial impact on the corporation, including after resignation from official capacities.
In the financial lines insurance space, this High Court decision and subsequent decisions confirming its application over the past year are relevant to how wide ‘officers’ cover may be, potentially encapsulating a broader range of insureds than previously thought.
In 2019, ASIC brought proceedings against Michael Christodoulou King, the former CEO and executive director of MFS Ltd, a large investment scheme. In short, ASIC alleged Mr King had directed MFS Ltd to use a multi-million dollar drawdown from one of its subsidiary managed investment schemes to pay off $147.5m worth of debt in November 2007.
Mr King officially ceased being an officer of MFS Ltd on 27 February 2007. However, ASIC alleged that Mr King was acting in the capacity of an “officer” until 21 January 2008, and breached his duties under the Act. ASIC argued that the deputy CEO of MFS Ltd and executive director of the subsidiary had reported directly and frequently to Mr King, and customarily acted in accordance with Mr King’s instructions in that role.
At first instance, the Supreme Court of Queensland agreed that Mr King had breached his duty as an “officer”, as he had capacity to affect the subsidiary’s financial standing.2 However, the Queensland Court of Appeal upheld Mr King’s submission that he did not have that capacity within the meaning of paragraph (b)(ii) of the definition of “officer” under the Act because any such capacity did not derive from his occupation of an “office” within the subsidiary with recognised rights and duties.3
High Court decision
ASIC appealed to the High Court, which unanimously found the Queensland Court of Appeal made an error in law. The Court held that paragraph (b)(ii) of the definition of “officer” requires a literal application of the paragraph, not an ordinary meaning by reference to the term itself, otherwise paragraph (b)(ii) is “read out” of the Act.4 Ultimately, the Court confirmed that s 9 should be read broadly, and is intended to protect shareholders and creditors from the actions of those who avoid formal titles or offices.5
Critically, the High Court disagreed with the Court of Appeal adding a requirement that the “officer” referred to in paragraph (b)(ii) be acting in an “office” within the meaning of the company. The Court clarified that paragraphs (a) and (b) of s 9 differed, with the latter extending the scope of the term “officer” beyond its ordinary meaning of “office holder”.6 While paragraph (a) captured those in a named office, paragraph (b) captured those who do not hold such an office. The High Court found paragraph (b) defines “officers” “by reference to the facts of the relationship between an individual and a corporation in relation to the affairs of a corporation”.7 These officers under (b)(i) and (ii) do not need to be in the same position as directors and officers under (a), while those falling under (b)(iii) can be described as “shadow officers”.8
The High Court said this approach is consistent with the broader context of the Act, and officers’ duties under s 180.9 The Court reinforced that definition (b) indicates that s 180 is not confined to persons who hold an office formally (as contemplated by definition (a)), but imposes duties on persons who are officers by reason of the paragraph (b) definition, as s 180 applies to whatever function the person concerned actually performs in relation to the corporation.10
The High Court emphasised that paragraph (b) of the definition of “officer” is functional in character in the sense that it is concerned with the “person’s actions or capacity and their effects”11, “identifying persons who are involved in management of the corporation”, being persons “involved in policy making and decisions that affect the whole or a substantial part of the business of the corporation”12, and the person’s effects will not necessarily be uniform across the group and may change as the size and structure of the group changes over time.13
The High Court’s interpretation of who really is an “officer” of a corporation may be broader than the general understanding in the financial lines insurance market. It is therefore critical for underwriters and claims managers alike to be aware of how the courts look at “officers” when identifying potential insureds that do not hold formal titles or offices.
It’s clear that a person may continue to operate as an “officer” even after they resign. In addition, while Gageler J excluded external consultants, since the person must be ‘of’ a corporation14, Nettle and Gordon JJ thought that bankers and financial advisors could be construed as “officers’.15
The High Court’s decision has since been applied in subsequent judgments16, suggesting that this broad interpretation of “officer” under the Act is here to stay.
This article was written by Jason Symons, Partner, Matthew Harding, Partner, Claudia George, Solicitor and Brooke Volbrecht, Law Graduate.
1 Relevantly, s 9 defines “officer of a corporation” as:
(a) a director or secretary of the corporation; or
(b) a person:
(i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(ii) who has the capacity to affect significantly the corporation’s financial standing; or
(iii) 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 …”
2 Australian Securities and Investments Commission v King  HCA 4 at ; Australian Securities and Investments Commission v Managed Investments Ltd [No 9] (2016) 308 FLR 216 at .
3 at , .
4 at .
5 at -.
6 at , .
7 at .
8 at .
9 at .
10 at ; Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465 at 476 .
11 at ; Grimaldi v Chameleon Mining NL [No 2] (2012) 200 FCR 296 at 318 .
12 at ; Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd [No 4] (2007) 160 FCR 35 at , .
13 at -, .
14 at .
15 at .
16 Mudgee Dolomite & Lime Pty Ltd v Robert Francis Murdoch  NSWCA 1510 at ; Oliana Foods Pty Ltd v Culinary Co Pty Ltd (in liq)  VSC 693 at ; Cassimatis v Australian Securities and Investments Commission  FCAFC 52 at , .