Australian Securities and Investments Commission v King

• Jurisdiction: Australia Federal only
• Judge: Kiefel CJ,Gageler,Keane JJ.,Nettle,Gordon JJ.
• Judgment Date: 11 March 2020
• Neutral Citation: [2020] HCA 4
• Court: High Court
• Docket Number: B29/2019
• Date: 11 March 2020

[2020] HCA 4

HIGH COURT OF AUSTRALIA

Kiefel CJ, Gageler, Keane, Nettle and Gordon JJ

B29/2019

Australian Securities and Investments Commission

Appellant

and

Michael Christodoulou King & Anor

Respondents

Representation

S P Donaghue QC, Solicitor-General of the Commonwealth, with M T Brady QC and O M Ciolek for the appellant (instructed by Corrs Chambers Westgarth)

D F Jackson QC with B J Kabel for the first respondent (instructed by Tucker & Cowen Solicitors)

Submitting appearance for the second respondent

Corporations Act 2001 (Cth), ss 9, 179, 180, 601FD.

CATCHWORDS

Corporations — Officers — Meaning of “officer” of corporation — Where para (b)(ii) of definition in s 9 of Corporations Act 2001 (Cth) defined “officer” of corporation as person who had capacity to affect significantly corporation's financial standing — Where MFS Investment Management Pty Ltd (“MFSIM”) responsible entity of registered managed investment scheme, Premium Income Fund (“PIF”) — Where MFSIM entered into loan facility to be used solely for purposes of PIF — Where MFSIM drew down on loan facility to pay debts of other related companies in MFS Group — Where MFSIM secured no promise of repayment of funds to PIF — Where first respondent was Chief Executive Officer of parent company of MFS Group — Where first respondent acted as “overall boss” of MFS Group and assumed “overall responsibility” for MFSIM — Where first respondent approved and authorised disbursement of funds from loan facility knowing no benefit or consideration would pass to PIF — Where first respondent not director of MFSIM at relevant time — Where Australian Securities and Investments Commission alleged first respondent breached duties as officer of MFSIM in contravention of Corporations Act — Whether para (b)(ii) of definition of “officer” in Corporations Act requires person to have acted in recognised position within corporation with rights and duties attached to it — Whether first respondent “officer” of MFSIM.

Words and phrases — “capacity to affect significantly the corporation's financial standing”, “chief executive officer”, “corporate group”, “de facto director”, “financial standing”, “managed investment scheme”, “management of corporation”, “misuse of funds”, “named office”, “office”, “officer”, “officer of a corporation”, “recognised position”.

ORDER

• 1. Appeal allowed.

• 2. Set aside paragraphs 1, 2 and 7 of the order made by the Court of Appeal of the Supreme Court of Queensland on 18 December 2018 in Appeal No 6320 of 2017 and, in their place, order that the appeal to the Court of Appeal be dismissed.

• 3. Set aside the order made by the Court of Appeal dated 18 June 2019 in Appeal No 6320 of 2017 and, in its place, order that Mr King pay the Australian Securities and Investments Commission's costs of the appeal to the Court of Appeal.

• 4. Mr King pay the Australian Securities and Investments Commission's costs of the appeal to this Court.

1 Kiefel CJ, Gageler and Keane JJ. The principal issue in this appeal concerns the construction of the word “officer”, as defined in s 9 of the Corporations Act 2001 (Cth) (“the Act”). The Court of Appeal of the Supreme Court of Queensland concluded that for the appellant (“ASIC”) to establish that the first respondent (“Mr King”) was an “officer” of the second respondent (“MFSIM”) within para (b)(ii) of the definition of that term as it applies to a corporation, it was necessary for ASIC to prove that Mr King had acted in an “office” of MFSIM, in the sense of “a recognised position with rights and duties attached to it” 1. For the reasons that follow, the Court of Appeal erred in so concluding; and so ASIC's appeal must be allowed.

Background

2 Mr King was the Chief Executive Officer (“CEO”) and an executive director of MFS Ltd, a formerly listed public company that was the parent company of the MFS Group of companies (“the MFS Group”) 2. The MFS Group commenced business before the turn of the century as the mortgage lending arm of a firm of Gold Coast solicitors. By 2007, its business had grown and it fell into two broad categories: tourism and travel-related services (“the Stella Group”); and funds management and financial services, including managed investment schemes 3. Of the latter, the Premium Income Fund (“PIF”) was the largest registered managed investment scheme in the MFS Group.

3 PIF was the “flagship fund” of the MFS Group. As at 31 October 2007, it had total funds under management from retail investors of approximately $787 million 4. MFSIM was the responsible entity of PIF. In that capacity, on 29 June 2007, MFSIM entered into a $200 million facility with the Royal Bank of

Scotland Plc (“the RBS loan agreement”) 5. The facility was to be used by MFSIM for the purposes of PIF; it was not available for the use of other companies in the MFS Group 6

4 On 27 November 2007, MFSIM and senior personnel in the MFS Group arranged to draw down $150 million under the RBS loan agreement. The money was not used for the purposes of PIF; rather, it was used to pay the debts of other MFS Group companies for which PIF was not actually or contingently liable 7. In broad terms, $147.5 million was disbursed by MFSIM to pay the debts of other companies in the MFS Group: one disbursement of $130 million was made on 30 November 2007 and another of $17.5 million was made on 27 December 2007 8.

5 This appeal is concerned only with the $130 million disbursement that was paid by MFSIM to MFS Administration Pty Ltd, which acted as the treasury company for the MFS Group. On the same day that it received the $130 million, MFS Administration Pty Ltd paid $103 million to Fortress Credit Corporation (Australia) II Pty Ltd (“Fortress”) 9.

6 Fortress had previously provided a short-term loan facility of $250 million to MFS Castle Pty Ltd, a wholly owned subsidiary of MFS Ltd. That loan was guaranteed by MFS Ltd and another wholly owned subsidiary, MFS Financial Services Pty Ltd. It was to be repaid on 31 August 2007. In order to enable the loan to be repaid by the due date, MFS Ltd had hoped to sell the Stella Group or obtain a $450 million corporate banking facility. Neither of these hopes

materialised and the short-term facility with Fortress was extended by agreement to 30 November 2007 10

7 In late November 2007, when it became apparent that it was unlikely that the $250 million Fortress debt could be repaid on 30 November, Mr King, as CEO of MFS Ltd, negotiated a further deferral of the repayment of the loan with Fortress. An agreement was reached for the payment by 30 November of $100 million, together with an extension fee of $3 million, with the balance of $150 million to be repaid by 1 March 2008 11. This agreement meant that MFS Ltd had to find $103 million in order to pay Fortress by 30 November 2007 12. When the payment to Fortress on 30 November was made from the funds drawn down from the RBS loan agreement, no agreement had been reached by which MFSIM received any consideration for its payment of $130 million to MFS Administration Pty Ltd and thence Fortress. PIF (and indirectly the retail investors of that fund) was thereby exposed to the risk that PIF's money would not be restored to it — there was no evident promise of repayment, let alone one that was properly secured 13.

8 At trial, ASIC put its case against Mr King in two ways. First, ASIC claimed that Mr King contravened the Act because he was knowingly concerned in MFSIM's contraventions of the Act. The primary judge (Douglas J) held 14 that MFSIM contravened s 601FC(5) of the Act because it breached its duties under s 601FC(1) of the Act as the responsible entity of PIF; and that MFSIM had also provided a financial benefit to a related party (MFS Administration Pty Ltd) in contravention of s 208(1) of the Act. Mr King was found, at trial and on appeal, to

have been knowingly concerned in MFSIM's contraventions of the Act and, in consequence of s 79(c) of the Act, he was held to have contravened ss 601FC(5) and 209(2) of the Act 15

9 This appeal relates to the second way in which ASIC conducted its case at trial. ASIC contended that Mr King was liable under s 601FD of the Act as an “officer” of MFSIM. In that regard, the primary judge held that Mr King breached his duties as an officer of MFSIM “by not acting honestly, or alternatively failing to exercise the required degree of care and diligence and not acting in the best interests of the members of PIF” 16 contrary to s 601FD(1)(a) and (c) of the Act. The primary judge also held that Mr King, contrary to s 601FD(1)(e) and (f)(iii) of the Act, “made improper use of his position as an officer of MFSIM by failing to take steps that a reasonable person would take in his position to ensure MFSIM as responsible entity for PIF complied with its constitution” 17.

10 Mr King had ceased to be a director of MFSIM on 27 February 2007 18. ASIC's case against him was that he nonetheless remained an “officer” of MFSIM until 21 January 2008 because he fell within para (b)(ii) of the definition of “officer of a corporation” in s 9 of the Act, being “a person … who has the capacity to affect significantly the corporation's financial standing”. ASIC argued 19 that Mr King was a person who had that capacity because he was the CEO and an executive director of MFS Ltd with overall responsibility for MFSIM as a member of the MFS Group; and because Mr White, the deputy CEO of MFS Ltd and an executive director of MFSIM, had reported directly and frequently to Mr King in the

performance of Mr White's role in MFSIM, and customarily acted in accordance with Mr King's instructions and wishes in that role

Relevant statutory provisions

11 The term “officer of a corporation” is defined by s 9 of the Act as follows: “officer of a corporation means:

• (a) a director or secretary of the corporation; or

• (b) a...