Centro Directors guilty of breach of the Corporations Act
Corporate governance has been the focus of the corporate regulators for some time. In turn, courts are being asked to consider whether or not directors have complied with the duties imposed upon them under the Corporations Act 2001, particularly those obligations of care and diligence under section 180(1) of the Act.
On 27 June 2011, Justice Middleton of the Federal Court handed down his judgment in the Centro case. You are probably aware that ASIC accused the directors of the company of failing to act in accordance with their duties of care and diligence and failed to take steps to ensure compliance with the financial reporting obligations under the Corporations Act.
Although the case relates to a publicly listed company, the principles equally apply to private organisations and not-for-profit public companies and the engagement of non-executive directors on Boards of those organisations.
In Centro, the central question before the court was whether the directors had sufficiently carried out a review of the proposed financial statements; whether, if they had done that, the information was consistent with the directors’ knowledge of the company’s affairs; and whether the accounts contained all material information that should have been reported on and known to the directors.
Justice Middleton held that:
“Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the day to day affairs of the company. What each director is expected to do is to take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an enquiring mind to the responsibilities placed upon him or her. Such a responsibility arises in this proceeding in adopting and approving the financial statements.”In this instance, the financial statements prepared by experienced accountants and managers (Centro’s 2007 Annual Financial Reports) had incorrectly categorised US$2 billion worth of liabilities as being non-current, and had entirely omitted a US$1.75 billion short-term liability guarantee. Remember, it is the principle, not the size of the errors that impact liability.
In those circumstances, Justice Middleton stated:
“I do consider that all that was required of the directors in this proceeding was the financial literacy to understand basic accounting conventions and proper diligence in reading the financial statements. The directors had the required accumulated knowledge of the affairs of Centro, based upon the documents placed before them and discussions at Board meetings. Each director then needed to formulate his own opinion, and apply that opinion to the task of approving the financial statements.”As you can see, the dollar amounts were not central to the issue of having the requisite knowledge and taking the appropriate care. Each of the two executive and six non-executive directors have been found guilty of breaching section 180 of the Act.
This is a timely reminder that anyone who holds a position on a Board must enquire of and be diligent in respect to information that is presented to them, even if that information is presented by highly qualified professionals.Jonathan Casson
Partner
T: +61 2 9390 8316
E: jonathan.casson@holmanwebb.com.au