Who is an “officer” in business dealings?

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The term “officer” (Officer) is used in various statutory contexts including (but not limited to) the Corporations Act 2001 (Cth) (Act) and also in the Franchising Code of Conduct (Code) located in Schedule 1 of the Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Cth) (Regulation).   It is also often referred to in the context of liability of “Officers” of corporations.   Given the statutory use of this term the questions is just who is an Officer as defined in the Corporations Act?

The relevant law

Section 9 of the Act defines the term Officer as it relates to corporations and non-corporations as follows:

“officer of a corporation means:

1. a director or secretary of the corporation; or
2. a person:
   • who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
   • who has the capacity to affect significantly the corporation’s financial standing; or
3. 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
4. a receiver, or receiver and manager, of the property of the corporation; or
5. an administrator of the corporation; or
6. an administrator of a deed of company arrangement executed by the corporation; or
7. a liquidator of the corporation; or
8. a trustee or other person administering a compromise or arrangement made between the corporation and someone else…

officer of an entity that is neither an individual nor a corporation means:

1. a partner in the partnership if the entity is a partnership; or
2. an office holder of the unincorporated association if the entity is an unincorporated association; or
3. a person:
   • who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the entity; or
   • who has the capacity to affect significantly the entity’s financial standing.”

This article discusses the elements to be established for a person to be an Officer pursuant to  section 9(b), that has the effect of making them liable to the same extent as directors.

Section 9(b)(i) – Decisions affecting whole of the business of the corporation/entity

In determining whether a decision affects the whole, or a substantial part, of the business of the corporation, it is important to consider the role of the person making that decision.

In Shafron v Australian Securities and Investments Commission [2012] HCA 18 (Shafron) per French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ at [23], when considering whether a decision affected the whole, or a substantial part, of the business of a corporation, the question that should be asked is “what role the person in question plays in the corporation.”

For these purposes, the role of the officer does not have to relate to the particular breach in question.

Furthermore, the person need not be in the same position as a director but must be involved in the management of the corporation/entity, for example, involved in policy making decisions.^[1]  It is important to identify a link between the person’s decisions and/or actions and the decision/s of those carrying an official title to adopt such decisions and/or actions.^[2]

Finally, actions that affect the whole, or a substantial part of the business are not uniform across all corporations.  Therefore, Nettle and Gordon JJ at [92] in the case of Australian Securities and Investments Commission v King [2020] HCA 4 (King) provides a subjective test that looks at:

• corporation’s/entity’s size;
• corporate structure;
• management structure; and
• identity and nature of the persons involved.

Each of these factors affect who is an Officer in a particular company at any given time.

Section 9(b)(ii) – Capacity to affect the corporation’s financial standing

Like section 9(b)(i), section 9(b)(ii) looks to those who are in management positions, the role they played in that position and the subjective test from King.  However, unlike the former, the latter is concerned with persons who have a “certain kind of capacity”.^[3]

To determine capacity in this respect, Nettle and Gordon JJ at [91] in King said that it is relevant to consider:

“what they did or did not do (whether on a particular occasion or over time) and the relationship between their actions or inaction and the financial standing of the corporation.”

Section 9(b)(iii) – Directors accustomed to act

The people referred to under section 9(b)(iii) are those who, according to Shafron at [25], “have, or have had, a certain kind of influence on the directors of the corporation”.

Furthermore, the Federal Court case of Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd [No 4] (2007) 160 FCA 963 provides at [481] that those who fall into the section 9(b)(iii) category can best be described as “Shadow Officers”.

Liability of Officers

Officers can be liable pursuant to various sections of the Act including:

• s 184 – Good faith, use of position and use of information – criminal offences;
• s 198G – Exercise of powers while company under external administration;
• s 256D – Consequences of failing to comply with section 256B (Company may make reduction not otherwise authorised); and
• s 259A – Directly acquiring own shares.

Takeaways

It is important for Officers to ensure that they understand the scope of their role and the expected duties and the standard by which those duties should be discharged.

Links and further references

Legislation

Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020

Corporations Act 2001 (Cth)

Cases

Australian Securities and Investments Commission v King [2020] HCA 4

Grimaldi v Chameleon Mining NL [No 2] (2012) 200 FCAC 6

Shafron v Australian Securities and Investments Commission [2012] HCA 18

Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd [No 4] (2007) 160 FCA 963

Further information about directors duties

If you need assistance with any legal issue regarding the duties of directors and Officers, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] ASIC v King [2020] HCA 4 at [87]-[88].

[2] ASIC v King [2020] HCA 4 at [90].

[3] Shafron v ASIC [2012] HCA 18 at [25].

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