An Office Fit for a King – Shadow and de Facto Directors in Australia

Harley Schumann and Franklin Koo

The High Court of Australia has unanimously overruled a decision of the Queensland Court of Appeal that imposed a restricted definition of ‘officer’ in section 9(b)(ii) of the Corporations Act 2001 (Cth) (“Act”). The effect of the decision below was that a person could only satisfy the definition of “officer” if they had been formally appointed to a position in the company. The High Court’s decision ensures that an individual with significant influence over the affairs of a company, such that they are a ‘de facto’ or ‘shadow’ director, cannot avoid liability as an “officer” on the arbitrary basis that they were not formally appointed to a position in the company.

Background

The Defendant (“King”) was the Chief Executive Officer and an executive director of MFS Ltd, the parent company of the MFS Group (“the MFS Group“). The Australian Securities and Investments Commission (“ASIC”) commenced enforcement proceedings against a number of individuals, including King, alleging breaches of duties as an “officer” under the Act.

The alleged breaches concerned a subsidiary of the MFS Group. King had been at one time registered as a director of that subsidiary, but had ceased to be registered as a director before the alleged breaches had taken place. However, the evidence in the Courts below established that after his formal removal as a director, King continued to be the “overall boss of the MFS Group”, assumed “overall responsibility” for the subsidiary, that he had “substantial” influence over the subsidiary’s directors and that he “saw fit to intervene in the business” and “issue directives”.

ASIC argued that despite the removal of King from the register as a director, King was nonetheless an “officer of a corporation”, as defined in s 9(b)(ii) of the Act because he was a person “who has the capacity to affect significantly the corporation’s financial standing.”

The Queensland Court of Appeal found that despite King’s influence over the subsidiary, he did not satisfy the definition of “officer” in s 9(b)(ii), because any capacity he had to affect the corporation’s financial standing did not derive from his occupation of an “office”, in the sense of “a recognised position with rights and duties attached to it”.

Decision of the High Court

The High Court unanimously (Kiefel CJ, Gageler and Keane JJ, with Nettle and Gordon JJ writing a concurring judgment) concluded that an “Officer” under section 9(b)(ii) is not limited to those who hold or occupy a named office, or a recognised position with rights and duties attached to it.

The High Court was of the view that the Court of Appeal’s interpretation would be contrary to the literal meaning of the legislative text, as well as the legislative context, history and purpose.

The High Court confirmed that the determination of whether a person is an officer is one of fact and degree (at [39] and [90]), having regard to the actual role that the person played in the corporation, not some formal designation of a role or title (at [35] and [91]).

The concurring judgment of Nettle and Gordon JJ further explained that determining whether an individual is an officer of a corporation requires consideration of their role against the backdrop of the practical operation of the business, having regard to the size of the corporation and the structure of its management (at [91]-[93]).

Comment

Given the finding that King was the “overall boss”, the outcome of this decision is unsurprising. If the Court of Appeal decision were to stand, an individual could essentially run a company but avoid any liability as an officer by refusing to take a formal title. If this loop-hole existed, it would be regularly exploited.

More interesting and difficult questions will arise in cases where the position of the purported officer is not so similar to a director as King was. For example, there will no doubt be cases in which an external third party, such as a lender or financial advisor, has significant capacity to influence the decisions of the Board, and to affect the corporation’s financial standing.

The High Court was very clear that such parties in appropriate cases may come within the definition of “officer” (at [38]-[43] and [96]). The limiting factor that prevents truly external parties becoming “officers of the corporation” is that they must be “of” the corporation. The High Court held that this meant that a person could only be an officer under the Act if they are “in fact, involved in the management of the corporation and is thereby able to ensure that the advice will be implemented” (at [41]).

This is a relatively high bar that will exclude most external advisors and counterparties. However, it will no doubt be met in many cases, for example where the financial survival of a company is dependent on a lender, such that the company has little choice but to follow the lender’s directions. In such circumstances, the third party will need to be careful not to step into the management of the corporation or else it may attract the duties and potential liabilities of being an “officer”.

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