Much has been written about the implications of the decision in the “Centro case” – that is, the recent Federal Court decision of ASIC v Healey.

ASIC instituted proceedings against various (former) directors and officeholders.

The Court found that the 2007 financial statements contained errors, which meant that they did not comply with accounting standards and did not present a true and fair view of each company’s financial position and performance.

In the Centro Properties Group accounts, the error amounted to $1.5 billion, and in the Centro Retail Group, the error was in the order of $500 million.

The directors were obliged, under the Corporations Act 2001, to review the financial statements, and to determine whether they complied with the appropriate accounting standards and whether they represented a “true and fair view” of the position of the companies.

For example, both financial statements classified interest-bearing liabilities as “non-current” liabilities when applicable accounting standards mandated that they be classified as “current liabilities”.  The directors were or should have been aware of this.

The Court also held that the directors did not take all reasonable steps to consider the content of the statements and did not make enquiries of management and external advisers, which they should have done.

The Court explained, in relation to directors’ duties, that:

• directors must take an intelligent and proactive interest in the information provided to them, and ensure that they understand all of the information
• it is necessary for directors to have a degree of financial literacy
• it is reasonable for directors to rely on external consultants and advisers but if directors are aware of circumstances where a “prudent person” would question the information provided, it is no longer reasonable to rely on the advice
• directors may not use the excuse that they are overloaded with information and cannot be expected to fully comprehend every part of it.

The Court did not clearly distinguish between the duties of a full time executive director and those of a non-executive director.

The Court has not yet handed down its decision in relation to penalties for the directors. 

Author: Naomi Fink

Directors’ duties and financial statements by Holley Nethercote Commercial Lawyers is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 2.5 Australia Licence.

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