The High Court of Australia ruled that Michael Christodoulou King, former CEO and executive director of MFS Ltd was an “officer” of MFS Investment Management Pty Ltd (MFSIM) and that he was responsible for the acts of the subsidiaries, including the financial collapse that resulted to billions of investor losses.
Mr King and a partner started MFS as a small mortgage company in 2000. By 2007, the company has expanded into tourism and travel-related services (“the Stella Group”) and funds management and financial services.
Premium Income Fund (“PIF”) was the largest registered managed investment scheme in the MFS Group and its “flagship fund.” As of the third quarter of 2007, PIF had total funds under management from retail investors of approximately $787 million. MFSIM was the responsible entity of PIF.
In June 2007, MFSIM entered a $200 million facility with the Royal Bank of Scotland Plc for PIF. In November of that year, MFSIM and senior personnel in the MFS Group arranged to draw down $150 million under the RBS loan agreement.
Of the $150 million, $103 million was paid to Fortress Credit Corporation (Australia) II Pty Ltd., which extended a $250 million loan to MFS Castle Pty Ltd, a wholly-owned subsidiary of MFS Ltd. The Fortress loan was supposed to be paid by the proceeds of the sale of the Stella Group or a corporate banking facility but none of these two options materialized.
According to court documents, there was no agreement by which MFSIM received any consideration for the payment of $130 million. The Australian Securities and Investment Commission (ASIC) said that PIF 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.
Mr King stepped down as MFSIM’s director in February 2007, but his companies continued trading. In January of 2008, MFS Group split into two and prices of shares crashed to about $1, resulting in billions of investor losses.
Relevant to the current ruling, ASIC alleged that:
The High Court agreed with the ASIC and substantially held that the term “officer”
Given the facts and circumstances of this case, the High Court concluded that Mr King was a person who could significantly affect the financial standing of MFSIM.
The Court held that Mr King acted as “overall boss” of MFS Group and assumed “overall responsibility” for MFSIM.
In sum, the High Court has this to say:
If the CEO of the parent company of a group of companies is allowed to act in relation to other companies in the group untrammelled by the duties that attach to officers of each of the other companies in the group, shareholders and creditors would be left exposed to an obvious risk.
It would be an extraordinary state of affairs if those who actually determine the course of a company’s financial affairs could avoid responsibility for their conduct by the simple expedient of deliberately eschewing any formal designation of their responsibilities.
This is especially so in the present case when regard is had to Ch 5C of the Act, and specifically s 601FD, which was enacted to provide protection to members of managed investment schemes by imposing duties and responsibilities on the officers of responsible entities.
ASIC Commissioner John Price said, “ASIC notes today’s High Court decision, which sends a clear signal to anyone running a company – in name or in effect – that they should be responsible and held accountable for their actions.”
“It provides clear guidance on who is an “officer” of a corporation and establishes that the duties and responsibilities to a company, its creditors and shareholders under the Act will apply to individuals who can significantly affect the financial standing of a company,” Commissioner Price said.
“The finding that Mr King was an officer of the subsidiary MFSIM, marks the conclusion of long-running litigation which commenced in 2009 and demonstrates ASIC’s commitment to pursuing difficult, long-running actions in the public interest.”
Read the full-text of the High Court of Australia’s ruling here
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