LIABILITY AS A COMPANY OFFICER ALTHOUGH NOT IN OFFICE

March 2020

The High Court has recently confirmed(1) that a person may be treated as “an officer” of a company, and have the duties and liabilities of an officer(2), although they have no formal role, title or employment with the company.

The Corporations Act defines “officer”(3) in terms that extend beyond those who occupy or hold recognised offices so as to include a person.

(i) who 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 standings; 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).

Notwithstanding the apparently clear meaning of the definition the Court of Appeal below accepted the argument that the definition at (ii) above could not extend to someone whose capacity to affect the company’s financial standing did not derive from their occupation of an office within the company in the sense of “a recognised position with rights and duties attached to it”.

The High Court unanimously rejected the Court of Appeal’s view and:

1. confirmed previous decisions recognising that the definition of “officer” was intended to “expand the coverage of the duties of officers…to include individuals who would not be officers…within the ordinary meaning of that term”; and

2. said that anyone who satisfies any or all of the descriptions at (i) – (iii) above is ipso facto “withihn” the corporation for the purposes of the Corporations Act and the duties and obligations imposed by the Act.

For some the decision is possibly most remarkable for the fact that it reached the High Court given:

(a) the ordinary meaning of the words used;

(b) the fact that the relevant Explanatory Memorandum stated that the definition of officer “generally covers persons who have a degree of influence or potential influence over the general conduct of the entity, through the office they hold or otherwise”; and

(c) the fact that the extended definition “officer” is consistent with the extended definition of “director” insofar as it also includes de facto and shadow directors.

In short, the decision confirms that the legislation was intended to capture people who might otherwise hide behind the formalities, or lack of formalities, attaching to the appointment or engagement of officers so as to the extend the prescribed duties to those directly or indirectly exerting power or influence over the company.

Notwithstanding the exclusion at (iii) above the decision provides a timely reminder to advisors and financiers to take care as to the extent of their participation in the decision-making, particularly with regard to financial issues, of their clients or borrowers.

Liability as a Company Officer

Prepared by:

Stefan Jury Principal

T: +61 8 8414 3363 E: sjury@jht.com.au

Andrew Fisher Principal

T: +61 8 8414 3322 E: afisher@jht.com.au

Robert Mills Principal

T: +61 8 8414 3302 E: rmills@jht.com.au

[1] ASIC v King [2020] HCA 4
[2] For example sections 181 – 184 of the Corporations Act [3] Corporations Act section 9

Disclaimer: This information is current as of March 2020. This article does not constitute legal advice and is intended to provide a general guide to the subject matter. Specialised advice should be sought about your specific circumstances.