Fed­er­al Court finds Cen­tro direc­tors guilty of breach­es of the Cor­po­ra­tions Act

In brief – Breach of finan­cial report­ing oblig­a­tions and duties of care and diligence

The Fed­er­al Court has found that eight direc­tors of Cen­tro Prop­er­ties Group and Cen­tro Retail Group breached their finan­cial report­ing oblig­a­tions and their duties of care and dili­gence under the Cor­po­ra­tions Act 2001 in approv­ing incor­rect finan­cial reports dur­ing 2007.

ASIC legal action against Cen­tro directors

In Octo­ber 2009, the Aus­tralian Secu­ri­ties and Invest­ment Com­mis­sion (ASIC) com­menced pro­ceed­ings against eight direc­tors, two exec­u­tive and six non-exec­u­tive, of Cen­tro Prop­er­ties Group and Cen­tro Retail Group.

ASIC sought dec­la­ra­tions of con­tra­ven­tion against each direc­tor in rela­tion to com­pli­ance with finan­cial report­ing oblig­a­tions under sec­tion 344(1) and statu­to­ry imposed duties of care and dili­gence under sec­tions 180(1) and 601FD(3) of the Cor­po­ra­tions Act 2001.

The alle­ga­tions con­cerned the 2007 approval of Cen­tro’s annu­al finan­cial reports, in which some US$2 bil­lion worth of lia­bil­i­ties were incor­rect­ly cat­e­gorised as being non-cur­rent and some US$1.75 bil­lion worth of short-term lia­bil­i­ty guar­an­tees were left undisclosed.

For more infor­ma­tion about the com­mence­ment of ASIC’s pro­ceed­ings against the Cen­tro direc­tors, please see our ear­li­er arti­cle Direc­tors in the hot seat.

Fed­er­al Court deci­sion in Cen­tro case

On Mon­day 27 June 2011, Jus­tice Mid­dle­ton of the Fed­er­al Court of Aus­tralia hand­ed down his judge­ment. It was found that each defen­dant direc­tor had breached the statu­to­ry imposed duties of care and dili­gence and had failed to take rea­son­able steps to ensure com­pli­ance with finan­cial report­ing oblig­a­tions under the Act.

The full text of the Fed­er­al Court judg­ment in the Cen­tro case can be accessed here.

The defen­dant direc­tors have 21 days from the date of judge­ment to appeal the decision.

Finan­cial state­ments must accu­rate­ly reflect the company’s position

The cen­tral ques­tion before the court was whether direc­tors of sub­stan­tial pub­licly list­ed enti­ties are required to apply their own minds to, and car­ry out a care­ful review of, the pro­posed finan­cial state­ments, to deter­mine that the infor­ma­tion they con­tain is con­sis­tent with the director’s knowl­edge of the company’s affairs, and that they do not omit mate­r­i­al mat­ters known to them or mate­r­i­al mat­ters that should be known to them. 

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. Because of their nature and impor­tance, the direc­tors must under­stand and focus upon the con­tent of finan­cial state­ments, and if nec­es­sary, make fur­ther enquiries if mat­ters revealed in these finan­cial state­ments call for such enquiries.”

Sum­ming up, 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 dis­cus­sion at board meet­ings. Each direc­tor then need­ed to for­mu­late his own opin­ion, and apply that opin­ion to the task of approv­ing the finan­cial statements.”

Direc­tors need to be finan­cial­ly literate

The judg­ment has a clear mes­sage for cor­po­rate Aus­tralia. Direc­tors should have the capac­i­ty to scru­ti­nise the con­tent of their com­pa­ny’s accounts to ensure accuracy.

It is essen­tial for direc­tors to be able to read, inter­pret and under­stand the con­tent of finan­cial state­ments. It is no excuse for a direc­tor to say that he or she relied sole­ly on the skill of the accoun­tant or audi­tor and made the assump­tion that a finan­cial state­ment was cor­rect before sign­ing off on it.

This means that finan­cial lit­er­a­cy is a cru­cial pre­req­ui­site for any per­son to be appoint­ed to the board of a sub­stan­tial pub­licly list­ed com­pa­ny. With­out this skill, a direc­tor will not be able to judge whether there is a need to make fur­ther enquiries about the con­tent and effect of finan­cial state­ments pri­or to approv­ing them.

Next stage of the Cen­tro case

The ques­tion of relief from lia­bil­i­ty and penal­ty will be deter­mined by Fed­er­al Court hear­ing on 1 August 2011.

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