In the current economic environment, we recommend that lenders are mindful of some comments made by the High Court of Australia recently in the case of ASIC v King [2020] HCA 4. The case dealt with intra-group arrangements and held that, if an executive of a parent company can affect significantly the financial standing of a subsidiary, the executive may be deemed to be an officer of the subsidiary even if he or she does not hold, occupy or act in a recognised office in the subsidiary. For a full analysis, see If it walks like a duck and it quacks like a duck then it's probably a duck.
However, some obiter comments made specific reference to whether a lender may be held to be an officer of borrower under paragraph (b) of the definition of "officer" in section 9 of the Corporations Act 2001 (Cth). This could more readily arise where the lender is assisting the borrower in managing its financial distress. A key consequence of a lender being held to be an officer is that the lender would bound by the duties of an officer of the borrower, including to act in the corporation's best interests and to exercise reasonable care and diligence.
Paragraph (a) of the definition of "officer" states that it includes a director or secretary. Paragraph (b) deals with persons who are not officeholders and provides that it means 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
- 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).
Most notably, Nettle and Gordon JJ stated, "… we do not accept that bankers and other third parties could never fall within the reach of one or more of para (b)(i)-(iii) of the definition of "officer" in s9 of the Corporations Act 2001 (Cth). Those questions did not arise directly in this litigation but, to give just one example, lenders managing the way in which a company attempts to work its way out of financial distress may present real issues about the application of these provisions" (emphasis added).
It is the capacity to control or affect significantly the borrower's financial standing that is key, not the lender's legal rights under the finance documentation per se. Kiefel CJ, Gageler and Keane JJ stated, "It may happen, of course, that a person who has legal rights against a corporation as a counterparty to a particular transaction or particular transactions is able to inveigle himself or herself into the decision-making processes of the corporation by means of the mere threat of the exercise of those rights. In such a case, that person may fall within either or both of para (b)(i) or (ii) of the definition. But that depends on the facts of the case as to nature and extent of the counterparty's control of, or capacity to control, the corporation's decision-making qua management; it does not depend on the counterparty's legal rights."
Further comments were made by Kiefel CJ, Gageler and Keane JJ in relation to the roles of advisors and consultants, and these are also relevant to lenders. They stated, "In addition, although advisors and consultants may give advice which, if implemented, can significantly affect the financial standing of the corporation, it does not follow that it is the advisor or consultant who, in that circumstance, has the capacity to affect significantly the financial standing of the corporation. That capacity in fact resides in the person to whom the advice is given, because it is that individual who determines whether or not the advice should be acted upon. The giving of that advice is of no consequence, unless the advisor or consultant is, in fact, involved in the management of the corporation and is thereby able to ensure that the advice will be implemented."
These comments clarify that a lender is unlikely to be considered to be an officer of the borrower unless it is in fact involved in its management and is able to ensure that its advice will be implemented. Lenders have long been alive to the dangers of shadow directorship and the case does not alter the law in this regard. However, it is a timely reminder of the potential risks to lenders in the tendency of Australian courts to interpret the definition of "officer" expansively and should be borne in mind when dealing with borrowers in financial distress.
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