Insurance & Reinsurance
In the recent case of Australian Securities and Investments Commission v King  HCA 4, the High Court of Australia considered the question of who is an "officer" of a corporation under section 9(b)(ii) of the Corporations Act 2001.
The question is potentially significant for a wide range of persons involved in managing a corporation's affairs and property, inasmuch as the Corporations Act imposes extensive duties on persons who qualify as an "officer".
Section 9 contains a broad definition of "officer" that extends beyond directors and secretaries and other persons who hold or occupy a named office, to include persons who do not.
The latter category of person is addressed in section 9(b) and concerns any person:
In this case, ASIC alleged against King that he was liable under section 601FD of the Corporations Act as an "officer" of MFS Investment Management Pty Ltd (MFSIM). MFSIM was the responsible entity of a registered managed investment scheme, Premium Income Fund (PIF). MFSIM had entered into a loan facility of AUD200 million with the Royal Bank of Scotland which was to be used solely for PIF's purposes. MFSIM drew down on the loan facility to pay debts of other MFS group companies in what the High Court described as a "blatant misuse of PIF's scheme property".
ASIC alleged that King was an officer of MFSIM within the meaning of section 9(b)(ii). They alleged he had approved and authorised the disbursement of PIF's funds and in doing so had breached his duties under section 601FD as an officer of MFSIM.
King contended he was not an officer of MFSIM because he did not hold any office named within section 9 of the Corporations Act and did not fall within section 9(b)(ii) as he was not acting in a recognised position within MFSIM with rights and duties attached to it.
The primary judge found in favour of ASIC. King appealed. The Court of Appeal did not disturb the primary judge's findings in relation to the nature and extent of King's involvement with the operations of MFSIM. Among other things, it concluded that:
However, the Court of Appeal accepted Mr King's submission that he was not an 'officer' of MFSIM within the meaning of section 9(b)(ii).
In allowing ASIC's appeal, the High Court held that the Court of Appeal had taken too narrow a view of section 9(b)(ii) as well as the significance of the specific examples given by ASIC of Mr King's capacity to affect MFSIM's financial standing.
The High Court emphasised that the question of who is an "officer" of a corporation within the meaning of section 9(b) is ultimately a question of fact. The size of a corporation, the corporate structure, the management structure and the identity and nature of the persons involved in the management are all circumstances likely to affect who is an officer of a corporation at any time.
Moreover, under section 9(b), there is substantial room for people outside the boardroom, and even people outside the company, to have a significant involvement in the company's business affairs, or capacity to affect significantly the company's financial standing, or influence over the board of directors, so as to qualify as an officer. That is especially true of larger companies, which are often managed under the broad direction of the board of directors rather by than the board itself. It is also true of group executives, executive committees of holding companies making group wide decisions, and third parties, such as bankers and financiers.
Even though Mr King was not an officer of MFSIM and was not acting in a recognised position in MFSIM, the High Court found that he qualified as an officer of MFSIM. As the Court of Appeal had found, he was the "overall boss" of the MFS Group. That determination was made having regard to the evidence of his conduct presented by ASIC, which included giving group wide and MFSIM specific directions (rather than advice) on matters such as banking arrangements, the provision of information about PIF to investors, the funding of business across the MFS Group, the negotiation of a joint venture and the operation of the group's transactional business.
The High Court's decision is relevant to anyone who may be engaged in the management of a company, including outsiders, even if they do not hold or occupy a named office or other recognised position within the company. They may assume duties as an officer of the company, depending on their conduct, their capacity to affect the company's financial standing and their ability to influence the directors. The question of how significant a role they play is one of fact and degree. Professional advisors who are acting in a purely advisory capacity still get the benefit of the carve out in section 9(b)(iii).
The expansive definition of "officer" in section 9 (which the High Court recognised was broader than the ordinary meaning of the term "officer" as the holder of an office) has insurance implications.
The Corporations Act imposes duties on persons participating in the management of companies, including directors, officers, senior managers and employees. In recognition of that, many D&O policies contain an expansive definition of "Insured Person" (or similar) that includes all those roles and responsibilities, in many cases closely reflecting the wording of the Corporations Act. However, this is not always the case, and the wording and extent of cover for directors, officers and employees may differ across policies and be subject to limitations.
Further, in determining questions of policy response for a particular claim, it may be necessary to consider not just whether the individual is (or was) an Insured Person within the meaning of the policy, but whether the claim made against that person is in respect of an alleged or actual breach of duty done by them in that capacity.
Those questions did not arise for consideration in this case. However, the High Court's decision indicates that questions of liability at least are not to be determined by reference to a narrow meaning of "officer", and this may be relevant to questions of policy response, subject always to considering the policy wording.