Business Law ASIC v Healey & Ors 2011 FCA 717 †Free Samples

Question: Discuss about the ASIC v Healey Ors [2011] FCA 717 (Centro Case). Answer: Introduction The Australian Securities and Investment Commission (ASIC) initiated legal proceedings against six non-executive directors and two executives of the Centro entities. The six non-executive chairpersons were former non-executive chairperson and the two executives were former chief executive officer. The ASIC initiated the legal proceedings on the ground that all the defendants had contravened their legal duty of care and diligence towards the Centro entities, by approving the consolidated financial accounts for the Centro entities for the financial year that ended on 30 June 2007 (Stuart 2015). The consolidated financial statements erroneously classified $1.5 billion in debt as non-current liabilities where in fact, they were current liabilities. They further failed to reveal US$1.75 billion in guarantees which was later found to be an essential event that had been entered into post the balance date. The failure to disclose such significant and crucial matters and the misclassification of the short-term debt burden as a series of non-current liabilities falsely presented the short-term debt burden of the company. The directors were found to be guilty in contravening the directorial duties stipulated under the Corporations Act 2001 (Cth) (the Act) with respect to the care and diligence that they are obligated to exhibit in the position of Directors thus, violating section 180(1), 601FD(1) and 344(1) of the Corporations Act 2001 (Cth) (the Act). This case did not held that the directors were dishonest but that they failed to take reasonable steps that that law obligates the directors to take while they act in the position of the directors of the company. Duties breached by the Directors The directors have been held liable for contravening section 344(1), 180(1) and section 601FD (1), section 296, 297, 298 of the Corporations Act 2001 (Cth) that required them to discharge their directorial duties with due care and diligence. According to section 180 (1) of the Act, a director or any other officer of a corporation are obligated to exercise their powers and discharge their duties with due care and carefulness that would be exercised by any other reasonable person if such person was in the position of the Directors of the company. The reasonable person shall have the same responsibilities as that of the directors (Banerjee and Humphery-Jenner 2016). The Directors have been found liable for contravening their directorial duties stipulated under section 180(1) of the Act on the following grounds: The directors failed to pay proper attention while reading and understanding the content of the CPL reports with respect to the sorting of liabilities as current or non-current; the revelation of the relevant guarantees; The directors failed to properly assess the content of the CPL reports regarding the classification of liabilities and disclosure of relevant guarantees; The director failed to make sufficient enquiry with the management, the Board Audit and Risk Management Committee and other Board members regarding the failure of the CPL Financial reports to sort the liabilities; disclosure of the CPL reports. They failed to pay adequate attention to the management representation letter provided to the directors; failure to meet the requirements specified under section 295A of the Act. The directors were not provided with a declaration with respect to section 295A of the Act. The ASIC has further alleged that the first defendant, Brian Healey, has violated section 601FD (1) and (3) of the Act. According to section 601FD (1), the first defendant has failed to exercise due care and diligence that would be exercised by any reasonable person if such person was in the position of the directors (Keay 2014). A director is required to act for the welfare of the members of the company and in case there arises conflict of interests between the entity and the members; the directors must give more priority to the interest of the members. As per section 601FD (3) of the Act, any person who contravenes subsection 1 of the Act shall be said to have contravened this subsection as well and a director must not intentionally violate subsection 1 of the Act. The first defendant contravened the mentioned section with respect to the Centro Property Trust by his conduct on 6 September 2007. Being an officer of the CPT Manager Limited, he voted in favor of the resolution that approved the annual financial report or the CPT Financial Report and annual directors report (CPT Directors report) for the year that ended on 30 June 2007. The reports were approved even when CPT financial report was not in compliance with the standards of accounting stipulated under section 296 of the Act. Further, the financial statements and the notes in the CPT Financial Report contravened section 297 of the Act as the financial report provided a false and unfair analysis of the financial position of the entity as there was misclassification of the liabilities and non-disclosure of the short-term debt burden of the company (Velasco 2014). The directors were further alleged to have contravened section 298 of the Act as the CPT Directors Report did not provide any details of the Relevant Guarantees that was legally required to be given under section 299 (1) (d) and 299A of the Act. As per section 344 of the Corporations Act 2001 (Cth), a director of a company shall be subject to civil penalty if he fails to take rational steps to act in accordance with the directorial duties that would have been exercised by any reasonable person in the position of the director and under the same circumstances. Critical analysis of the decision of the Australian Federal Court The Federal court opined that the directors of the company are conscientious, experienced and intelligent people and there is nothing to suggest that the director did not discharge their directorial duties honestly and diligently (Strine 2014). However, under certain specific circumstances, it can be observed that the directors have failed to take reasonable steps that they were legally obligated to take and have also failed to perform their duties exercising the level of care and diligence that was required of them by law. In regards to the importance of the matters that they were aware of, the directors should not have certified the truth of the financial statements and published the annual reports when there was no disclosure of the significant matters (Laing, Douglas and Watt 2015). The court further stated that had the directors applied their mind with respect to the financial statements and identified the significance of the task, each director would have enquired about the matters that were not revealed to them. It was imperative for the directors to review the financial statements and made proper enquiry about the matters disclosed by those financial statements. The issue surrounding the legal proceeding has been whether the directors of the publicly listed entities were required to apply their knowledge and minds while reviewing the proposed report of the directors in order to determine that the content of the report is consistent with the knowledge possessed by the director with respect to the affairs of the company. The directors should have ensured that the content does not leave out material matters that was known to the directors. The court stated that a director is central to the management and direction of the any organization and the role played by the director may have a deep impact not only on the shareholders, creditors, employees but also on the community. The directors are usually accountable for ensuring that documents are properly reviewed, adopted, and approved after effectively perusing the documents. The directors must review the content of the documents with the knowledge that they possess by virtue of the position that the directors hold (ODonnell et al. 2015). The contention that effective perusal of every documents before their approval overburdens the directors shall not be taken into consideration as the directors receive good remuneration and gold a prestigious position which requires to them to discharge their directorial duties and exhibit due care, diligence and intelligence while discharging their responsibilities. While explaining the significance of the position held by the directors, the court stated that the law confers upon the directors a irreducible and a vital responsibility to be involved in the management of the company and take necessary steps to act in the best interest of the organization and its members. The law also obligates the directors to carefully peruse and understand every document before approving or adopting it and must ensure the accuracy and fairness of the content of the document prior to the formation of any opinion that is expressed in the declaration under section 295(4) of the Corporation Act 2001 (Cth). For this purpose, the directors must ensure that the financial statements are consistent with the knowledge possessed by the Directors. A director must concentrate more on the affairs of the company that require him to act diligently and apply his intelligence while discharging the directorial duties. Under the circumstances of this case, the directors failed to exercise their duty to peruse and comprehend the documents and make necessary enquiries relating to the fairness of the financial statements. Since the directors are not required to participate in the day-to-day activities of the company and neither are they required to possess infinite knowledge or ability, it is expected from them to discharge their primary duties exercising due care and diligence. The directors claimed relief from liability on the ground that they relied on management and the auditors; hence they are not liable for contravening their directorial duties under the Corporations Act 2001 (Cth) and are entitled to be exempted from the penalties stipulated under the statute. However, the court rejected this contention on the ground that the directors have made declaration of contravention under section 1371DA of the Act. The contention that the defendants relied on the management and the auditors cannot be taken into consideration as the law requires and expects that the directors should have adequate financial knowledge to be able to determine any errors in the financial statements published by the company (Wheelen and Hunger 2017). The careful perusal of the financial statements is an important role that is played by the directors and as mentioned before directors are experienced and intelligent men in the corporate sector, hence, it is quite obvious to expect fro m the directors to ensure that the information in the financial statements is accurate and fair. Impact of the decision The important issues that were dealt with in this case were delegation of duty and dependence of the directors on others and the extent to which directors are required to possess financial literacy. The implication of the decision in the Healys case had enhanced the significance of the duty of a director to exercise care and due diligence while discharging the directorial duties. The directors are required to apply their intelligence while reviewing the financial statements and must possess sufficient knowledge about the financial status of the company in order to make necessary enquiries to ensure that the content of the financial statements are consistent with the knowledge possessed by the directors with respect to the company. Further, with respect to the issue regarding depending on the advice given by others the court found that it is an essential duty of the directors to take rational steps to monitor the functioning of the company and exercise supervisory powers in the operational matters of the company (Coffee et al. 2015). Directors cannot depend on the advice of the management as an alternative for assessing matters that falls within the responsibilities of the members of the Board. Furthermore, the judge laid more emphasis on the requirement of the directors to possess minimum knowledge about the financial activities of the company so that they are capable of detecting any financial error in the organization. The directors of an organization are required to comply with the financial reporting requirements stipulated under the Corporations Act 2001 (Cth) and possess knowledge about the affairs of the company ensuring that they exercise reasonable care and diligence while discharging their directorial duties in the best interest of the company. References ASIC v Healey Ors [2011] FCA 717 (Centro Case). Banerjee, S. and Humphery-Jenner, M., 2016. Directors duties of care and the value of auditing.Finance Research Letters,19, pp.1-14. Laing, G., Douglas, S. and Watt, G., 2015. 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