Who’s running the company? ‘Officers’ under Australian corporations law

Nicholas Mavrakis
Clayton Utz, Sydney
nmavrakis@claytonutz.com

Jonathan Slater
Clayton Utz, Sydney
jslater@claytonutz.com

Kate Madgwick
Clayton Utz, Sydney
kmadgwick@claytonutz.com

Simon Agnello
Clayton Utz, Sydney
sagnello@claytonutz.com

With the evolving complexity of company structures, it has become even more important for corporate groups operating in Australia to monitor which of their employees may fall within the definition of ‘director’ or ‘officer’ for Australian corporate entities and, therefore, be subject to statutory duties under Australian corporations law.

Under Australian law, company directors and officers owe various common law, fiduciary and statutory duties to their company. These duties include that directors and officers must act, with reasonable care and diligence, in good faith in the best interests of the company and for a proper purpose. Directors and officers must not improperly use their position or company information. Significant penalties, such as damages, statutory civil penalties, and even disqualification from managing corporations can be imposed where breaches of these duties are established. In egregious cases, there are criminal sanctions.

In the recent decision of Australian Securities and Investments Commission v King ('King'),[1] the Australian High Court held that a person can be an ‘officer’, where they have the capacity to affect the company's financial standing significantly. This may be so even where they do not hold any official position within the company. The High Court confirmed that the definition of ‘officer’ does not rely on the occupation of an ‘office’ within a company.

The ASIC v King case

Mr King was the CEO and director of the group’s parent company and the ‘overall boss’ of the related corporate group. He was found to have been involved in arranging for AUD130m to be borrowed by one subsidiary (on behalf of an investment fund) and then used for the purposes of assisting other companies within the group, without any benefit to the investment fund which incurred the debt. The transaction was entered into without any agreement to repay the borrowed funds (or security given), exposing beneficiaries of the investment fund to the risk that the AUD130m would not be repaid.

It was established that King breached his duties as an ‘officer’ of the subsidiary, even though he held no formal role or office in that subsidiary at the time of the impugned transaction. One of the executive directors of the subsidiary reported frequently to King and customarily acted in accordance with King’s instructions and wishes.

The High Court held that the fact that King acted as the ‘overall boss’ of the group and assumed ‘overall responsibility’ for the subsidiary was sufficient to establish that he was an officer of the subsidiary by virtue of his capacity to affect significantly its financial standing. Critically, King did not derive his capacity to affect the financial standing of the subsidiary from his occupation of an ‘office’ of the subsidiary, in the sense of a ‘recognised position with rights and duties attached to it’.[2]

The High Court said it would be ‘extraordinary’ if officers who made decisions that determined a company’s financial affairs could avoid responsibility for their conduct by ‘deliberately eschewing any formal designation of their responsibilities’,[3] and that shareholders and creditors would be exposed to an ‘obvious risk’ if the CEO of a group parent company were permitted to act in relation to other companies in the group ‘untrammelled by the duties that attach to officers of each of the other companies’.[4]

The High Court sought to distinguish the position of officers from that of external advisors and consultants to a company. While acknowledging that external advisors may give advice which can significantly affect the financial standing of a corporation, in most cases, they do not possess the requisite ‘decision making’ capacity to do so. That capacity, the Court held, resides in the persons who decide whether or not the advice should be acted on.

The Australian corporate regulator has welcomed the decision in King, though it is not yet clear whether this will lead to an increase in enforcement activity or litigation. It should be noted that in addition to this ‘officer’ liability, individuals and even companies may be found to be de facto or shadow directors of a company under Australian law if they act in the position of a director, without being validly appointed to that role, or where the directors of the company are accustomed to acting in accordance with that person or company’s instructions or wishes.

The decision in King should be of particular interest to corporate groups where senior executives in the parent company have the capacity to affect the financial standing of a subsidiary significantly, despite not holding any formal position at the subsidiary level. Those individuals, and others, may be unwittingly subject to statutory duties in respect of a subsidiary, which may expose them to a costly and time-consuming regulatory investigation or litigation if a breach of those duties is suspected.

If this risk has not previously been considered, corporate groups should clarify which employees and managers are or may need to be making decisions that could significantly affect the financial standing of companies operating in Australia and ensure that appropriate governance structures are in place. This is an especially relevant consideration in the current economic climate, where many businesses may be experiencing disrupted operations and financial distress. Executives and managers within a company or corporate group may be forced to take on greater responsibility in a time of crisis, for example, which may cause them to fall under the definition of ‘officer’ for one or more entities.

Uncertainty around which employees or related parties are subject to statutory duties may expose corporations and their personnel to additional risk if their directors & officers (D&O) insurance policy is not periodically updated to ensure an appropriate level of coverage. The decision in King will not necessarily widen the class of persons who may fall under the definition of ‘officer’ for the purposes of a particular D&O policy and so companies should review the coverage under their existing policies. Anecdotally, there are reports of D&O policy premiums rising as a result of the increased appetite for shareholder class actions. Coupled with a potential broadening of the D&O coverage required, this may have serious financial implications for some smaller companies or subsidiaries.

The High Court’s decision in King is a timely reminder that many of the responsibilities and obligations imposed on directors apply equally to ‘officers’ of a corporation under Australian law. Whether a non-director will fall under the definition of ‘officer’ is a matter of fact and degree and the High Court's broad reading of the definition means that directors, chief executives or officers of a holding company may fall within the definition of ‘officer’ of an operating subsidiary.