High Court clarifies meaning of “officer” – implications for not-for-profits

Background

Many charities and other not-for-profit entities are structured these days as companies limited by guarantee (CLGs).

A key feature of any company are the statutory and common law duties owed by directors of the corporation. Those duties extend to a duty of care and diligence, the need for directors and officers to act in good faith and for a proper purpose and for directors not to mis-use their position for personal advantage.

These duties in the Corporations Act 2001 (Cth) (Corporations Act) apply not only to directors, but have been extended to “other officers” of the corporation.

For registered charities structured as CLGs though, many provisions in the Corporations Act that deal with duties of directors and officers have been turned off so that, the common law duties continue to apply as well as the ACNC governance standards.

The ACNC governance standards do not impose the general director duties personally on directors (referred to in the ACNC Act and governance standards as responsible entities of a charity). Rather, the obligation is on the charity to take reasonable steps to ensure that its directors/responsible entities are subject to and comply with the various duties in governance standard 5 dealing with the duties of responsible entities.

But for not-for-profit entities that are not registered charities, many of the provisions of the Corporations Act continue to apply.

The issue

The Corporations Act duties apply to “directors” and “officers” of a corporation.

The term “officer of a corporation” is defined by s9 of the Act as follows:

 “officer of a corporation means:

(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

…”

The meaning of these words “a person who has the capacity to affect significantly the corporation’s financial standing” was considered by the High Court recently in a decision concerning the MFS Group which got into financial difficulty during the GFC^[1].

The Court unanimously held that para (b)(ii) of the definition of “officer of a corporation” in s 9 of the Corporations Act is not limited to those who hold or occupy a named office in a corporation or a recognised position with rights and duties attached to it.

Facts

Mr King, the CEO of MFS Ltd (a former listed public company) had been a director of one of the subsidiary companies, MFSIM. MFSIM was the responsible entity for a listed property trust called the Premium Income Fund.  It was in fact the largest registered managed investment scheme in the MFS Group.

Mr King had been a director of MFSIM but had resigned that position prior to his involvement in loan facility rearrangements that ultimately led to the failure of the Premium Income Fund.

The question was whether Mr King, though not a director, met the definition of “officer” for the purposes of the directors’ duty provisions because he had the capacity to affect significantly the corporation’s financial standing.

Decision

The High Court held that Mr King did meet the definition of “officer” and, in so doing, overturned the decision of the Queensland Court of Appeal.

Mr King had argued that if he was to be classified as an “officer”, then he would need to hold some position as an officer within the company itself. The Court said that the issue was what he had the ability to do in relation to a company that is material for the relevant definition.  Merely because he did not hold a position actually “within” the specific company did not matter.

Here, Mr King had the ability to affect the standing of MFSIM and through it the Premium Income Fund because he had significant influence over the board and, in particular, the deputy CEO of the MFS Group who was an executive director of MFSIM and who acted on Mr King’s advice.

Lessons to be learned

The wider interpretation of “officer” indicated in the High Court judgment has implications for all involved with companies limited by guarantee (registered charity or not, such as a sporting or service club). However, it will have greater implications for non-ACNC CLGs as they do not have parts of the Corporations Act turned off for their officers and directors.

An ‘officer’ will be subject to the statutory duties of directors and others set out in the Corporations Act, unless the entity is a registered charity with the ACNC. If they are a registered charity, as explained above, the obligation is on the charity to take reasonable steps to ensure that its directors/responsible entities are subject to and comply with the various duties in governance standard 5 dealing with the duties of responsible entities.

However, there other duties in the Corporations Act which are not turned off by the ACNC legislation, such as section 1309 which deals with the provision, both knowingly and unknowingly, of false or misleading information by officers and employees of a corporation to directors, auditors or members. This is an example of a provision that applies to all CLGs regardless of whether they are registered with the ACNC or not.

The decision is significant for non-ACNC entities such as sporting organisations, clubs and a range of other not for profits,. It means that anybody who can significantly affect a company’s financial standing even if not holding a position within the company, e.g. by way of influence over financial transactions, will be considered an “officer” and therefore subject to the very specific provisions of the Corporations Act dealing with director and officer duties.

Take for example a wealthy individual who has extensively funded the CLG. The person is not a formal board member or officer merely being referred to as an advisor. They expect, and are, consulted before every board meeting about important decisions and the board takes this direction. Such a person in the right circumstances maybe regarded as an officer.

[1] ASIC -v- King [2020] HCA No 4