On 31 August 2011, Justice Middleton of the Federal Court handed down his penalties judgment in the Centro matter. None of the directors were excused from liability.
The decision follows the court’s earlier judgment on 27 June 2011. In this earlier case, ASIC sued the CEO and directors of companies within the Centro group for breach of their duties. The directors approved financial accounts released to the ASX which wrongly classified current liabilities of $1.5bn as “non-current” and failed to disclose guarantees of current liabilities. The Federal Court found each of the Centro directors had breached their duties of care and diligence under section 180 of the Corporations Act and section 601FD of the Corporations Act, as officers of a managed investment schemes. In addition, the directors were found to have breached s344 of the Act for failing to take all reasonable steps to comply with their financial reporting obligations. The court found that if each director had exercised proper diligence in reading the draft financial statements, knowing the accounting standards in relation to when a liability must be classified as current and when events must be disclosed post balance sheet-date and knowing that short-term facilities were maturing and guarantees had been given, this would have caused each director to make enquiries of management, the audit committee and other members of the board and to have the financial statements corrected prior to approving them.
The court held that directors are required to read and understand financial statements to discharge their statutory obligations and while they can delegate tasks, they cannot delegate to management and external advisers their express responsibility to ensure the financial statements comply with the Act. The mistakes in this case were regarded by the court as so obvious that the directors could not simply accept the advice of management and the auditors. In light of this, directors should carefully review the details of the financial statements and reports when approving them. It is clear that complexity and information overload is no excuse for failing to read and understand financial statements because directors can control the information received. This means that directors must understand basic accounting concepts and practices but how much knowledge in terms of more complex concepts was not in issue before the court.
In the penalties case, the court held that:
- The directors were not relieved from liability under sections 1317S or 1318 and were ordered to pay ASIC’s costs;
- The non-executive directors were not disqualified or penalised;
- The former CEO was ordered to pay a penalty of $30,000 taking account of the CEO’s higher responsibility in relation to the management representation letter; and
- The former CFO was disqualified from managing corporations for 2 years but not penalised.
The directors sought relief from liability on the basis of sections 1317S and 1318 of the Corporations Act. To provide relief from liability, it must appear to the Court that the directors acted “honestly”. While the court found the directors acted honestly, it declined to grant relief from liability given the “seriousness of the contraventions”. The directors failed to properly read and understand the content of the financial reports and failed to make adequate enquiry of management to ensure compliance with the Act.
The directors will again be in the spotlight in the upcoming class action against the Centro entities next year.