Answer
ASIC v Healey & Ors [2011] FCA 717
Facts
The Australian Securities and Investments Commission (ASIC) initiated a legal proceeding against the seven directors and the CEO of the various companies functioning within the Centro Properties Group. The directors were alleged to have committed breach of the director’s duties under section 180(1), 344(1) and 601 FD (3) of the Corporations Act in relation to the approval of the financial statements of the Group in 2007. The directors failed to notice the omission of billions of dollars of short-term debt in the financial reports of the Centro Group (Hiller 2013). ASIC claimed that the directors had contravened their directorial duties by granting the financial statements of the company who had devalued their short-term liabilities by grading them as non-current liabilities and the company had further, failed to make disclosure about important post-balance guarantees.
Furthermore, the ASIC has claimed that the directors failed to act with due diligence, care, and skill that is required to be exercised by the directors or officers of a company while reading the financial statement of the company. The court held that the directors of a company must act in compliance with the Corporations Act 2001 and the directors must ensure that the financial statements of the company are correct and that it is not understating any liabilities (Idowu, Capaldi and Zu 2013).
Breach of the Director’s duties
The directors or the officers of the Centro Group have been alleged to have committed a breach of section 180(1), 344(1) and 601 FD (3) of the Corporations Act. Section 180(1) of the Corporations Act places the directors under statutory obligation to exercise their powers and discharge their obligations with such due care and diligence that any prudent person would exercise if they were the directors or officers of such corporation and had the same responsibilities in the corporation (Tricker and Tricker 2015).
Section 344 (1) of the Act is a civil penalty provision and is applicable if the directors makes a dishonest contravention by failing to take necessary steps to comply with sections 324 DAA, 324 DAB or 324 DAC of the Corporation Act, 2001. According to section 324 DAA the directors of a listed or of a listed registered scheme may pass a resolution for approving an individual to play a major role in the company audit for two financial years consecutively. Section 324 DAB states that if the listed company has an audit committee, the directors cannot grant approval under section 324 DAA unless such approval is recommended by the audit committee. Section 324 DAC lays down that if the directors grant approval under 324 DAA the directors must provide the ASIC a copy of such resolution within fourteen days from the date of granting such approval.
Section 295 A of the Act states that the directors must make declaration that the financial statements of the company have been maintained properly. According to section 601 FD of the Act states that any officer of a corporation is responsible to act with honesty and due diligence and care (Dhaliwal et al. 2014). The officer is obligated to act in the best interest of the company and its members.
In the case, the directors have not certified the fairness and the truth of the company’s financial statements and published the annual reports without making any disclosure about the indispensible matters. Being the directors of a listed registered company, they failed to notice omission of billion dollars of short-term liabilities in thy financial statement for the cento group under section 295 A of the Act. Further it failed to acknowledge the ASIC under section 324 DAAC of the Act. The directors’ and the officers have failed to discharge their responsibilities effectively and have not acted with due diligence and care as they are statutorily obligated to act.
Critical analysis of the Court’s decision
The court held that the directors being experienced, conscientious and intelligent people did carry out their statutory obligations as a director of a company honestly. However, under definite circumstances, the directors have failed to act with due diligence and care which the law requires them to exercise. If they recognized and comprehended the significance of their act and applied their mind, each director would have questioned the non-disclosure of the significant matters. Further, after reviewing the financial statements, they would have inquired into the matters (Laing, Douglas and Watt 2015). Therefore, the CEO was held to pay a penalty amount to the Commonwealth and the officer was disqualified from managing operations and the relief for liability application by the non-executive directors was denied.
The decision held by the court did not establish any new law. There is no need of any finance specialist or account expertise and neither the directors are required to be involved in the operational management of a corporation. They are legally obligated to provide a declaration relating to the financial statement of the company reflecting the solvency and fair and true view of the financial status of the corporation. This responsibility must be carried out by the directors only and they cannot delegate the responsibility to the management of the corporation (Langford, Ramsay and Welsh 2015).
The directors must apply their knowledge and mind to comprehend the financial statements and such statements must be declared as stipulated under section 295 (4). This would require the directors to take into considerations whether the financial statements are in consistent with the knowledge of the director regarding the financial position of the company. While comprehending the financial statements and state off affairs of the company, the directors must act with due care and diligence and skill as required by the statutes (Huggins, Simnett and Hargovan 2015). The implementation of these legal principles determined by the Judge in this case may be considered as hard as many may opine that Centro Group was a complex business and had several important matters to be dealt with by the Board. The short-term financial debt was considered as one of such issues.
However, it seems that the application of the laws was reasonable on the basis of the fact that the directors have failed to read the financial statements and was dependent on the management. The case of ASIC v Healey signifies that the directors must use their knowledge, experience and skill in order to ensure that the management is operating effectively and they must act in the best interest of the organization and its members.
Reference list
ASIC v Healey & Ors [2011] FCA 717
Dhaliwal, D., Li, O.Z., Tsang, A. and Yang, Y.G., 2014. Corporate social responsibility disclosure and the cost of equity capital: The roles of stakeholder orientation and financial transparency. Journal of Accounting and Public Policy, 33(4), pp.328-355.
Hiller, J.S., 2013. The benefit corporation and corporate social responsibility. Journal of Business Ethics, 118(2), pp.287-301.
Huggins, A., Simnett, R. and Hargovan, A., 2015. Integrated reporting and directors’ concerns about personal liability exposure: Law reform options. Company and Securities Law Journal, 33, pp.176-195.
Idowu, S.O., Capaldi, N. and Zu, L., 2013. Encyclopedia of corporate social responsibility. Springer Berlin Heidelberg.
Laing, G., Douglas, S. and Watt, G., 2015. Aspects of Corporate Delegation, Reliance and Financial Reporting: Lessons from Australian Securities and Investments Commission v. Healey. Canberra L. Rev., 13, p.16.
Langford, R.T., Ramsay, I. and Welsh, M.A., 2015. The origins of company directors' statutory duty of care.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.