How law has a substantial impact on the manner? Explain.
In the contemporary Australian corporate setting, the case of Australian Securities and Investments Commission (ASIC) v Healey & Ors  FCA 717 is arguably fundamental so far as the responsibilities and duties of directors of a company are concerned (Mohd-Sulaiman, 2013; Bonner, Hunt, and Watson-Dunne, 2014). Bonner et al. (2014) explicate that the decision in this case law has a substantial impact on the manner in which the statutorily defined duties and responsibilities of company directors are understood in the Australian context. According to Clarke and Dean (2014) the backdrop of this monumental corporate case law can be traced as back as October 2009 when the ASIC ("the Commission") initiated court proceeding against the entire board of Centro, both the executive and non-executive, for violating its duty in failing to notice a considerable error in the company's financial statements. Furthermore, the error in question also went uncorrected by both the internal and external auditors of the company. Specifically, the Commission instituted legal proceeding against the whole Centro board of directors over the financial errors that were evident in the Group's 2007 financial statements (Solaiman, 2013). Solaiman (2013) elucidates that the financial error in question involved Centro improperly categorizing about Au$2 billion as short-term debt as opposed to long-term debt and further, failed to disclose particular guarantees appropriately as post-balance date events. In a nutshell, this multi-billion error was mainly as a result of a misinterpretation of a significant accounting standard provided for the presentation of short-term debt. Consequently, Centro's repayment obligations were considerably understated.
Subsequently, the board of directors argued in their defense that they could not be faulted on the aforementioned financial error because they had relied on the information and advice presented to them by the organization's management as well as the auditors (Morgan and McLennan 2011; Nariman Mohd-Sulaiman 2013; Bonner et al. 2014). Thus, it was the position of the board of directors that since they had formulated and implemented all the reasonable measures that mitigate the possibility of accounting errors arising in the company, they had fulfilled their statutory obligation towards the company so far as the preparation and presentation of the financial statements were concerned. Nariman Mohd-Sulaiman (2013) adds that the directors also argued in their defense that the placing of the expectation that directors need to establish errors in the company's financial statements would impose on them an impossibly high burden. In his decision, Middleton J established that the entire board of directors had acted negligently, thereby failing to take the degree of diligence and care that the Corporations Act 2001 (Cth) ("the Act") requires of them (O'Leary, Boolaky and Copp 2013). Thus, the Court made a determination to the effect that the directors were negligent in the exercise of their powers and duties.
Statutory Breaches in the Case
In this case, the fundamental question that Commission brought to the attention of the Court for determination was whether the directors of large publicly listed companies are required to individually review the proposed financial statements and ensure that they are reasonably accurate before making the appropriate decisions, including their approval as proposed (Morgan and McLennan 2011). It is important to note that in this case, Commission's contention was that Centro's directors had breached various provisions of the Act when they unilaterally approved the consolidated 2007 financial statements of the Centro Group of Companies: Centro Retail Trust (CRT), Centro Property Trust (CPT), and Centro Properties Limited (CPL) (Lowry 2012 Hill 2012). According to the Commission, this conduct by Centro's board of directors amounted to a breach of several provisions of the Act. The Commission alleged that as a result of the directors' failure to take all the reasonable measures to ensure that Centro entities complied with certain reporting obligations provided under ss. 295A, 296, 297 and 298 of the Act, they had manifestly violated s. 344(1) of the Act and consequently, liable for the appropriate penalties provided in the Act (Jacobson 2011). Furthermore, by the same conduct by the directors, Commission also claimed that the directors had breached ss. 180(1) as well as 601FD (3) of the Act.
In brief, the Commission's position was that the conduct of the directors was explicitly in contravention of the aforementioned provisions of the Act. Essentially, the Commission argued that s.295A of the Act expressly provides that the declarations made by a company's directors concerning their organization's financial statements as stipulated under s.295 of the Act must always be informed by the declarations made by the Chief Financial Officer (CFO) or Chief Executive Officer in the form prescribed in the statute. However, Centro's directors did not adhere to this requirement of the law when they approved the 2007 Centro Group's consolidated financial statements. Moreover, s.296 requires that it is mandatory that all the financial reports must comply with the fundamental accounting standards that are in place, which incidentally includes the proper grouping of short-term and long-term debts. Nevertheless, in Centro's 2007 financial reporting, the company's financial statements manifestly flouted the fundamental accounting standard of categorizing the company's short-term and long-term debts. Thus, the Company breached s.296 of the Act and hence, making the directors liable for the contravention.
Furthermore, the Commission invited the Court to take judicial notice that s.297 of the Act stipulates that the financial statements, as well as the accompanying notes generated by companies, need to provide a true and fair view concerning the entity's financial position and performance. In contrast, the error arising from the Centro's 2007 consolidated financial statement failed to meet this statutory threshold by offering a false and unfair view of the Group's financial position and performance. In fact, the consolidated financial statements provided a significantly understated repayment obligation on the part of the Centro Group of Companies. Further, the Commission urged the Court to take cognizance of s.298 of the Act which stipulates that it was mandatory for the directors to include certain information in their annual reports. However, Centro's directors failed to provide some of the specified information on their 2007 consolidated financial reports, thereby liable for penalties as provided in the Act. Notwithstanding the preceding claims, the Commission also relied on Section 180(1) as well as Section 601FD (1)(b) of the Act to argue its case against the directors. The said Sections require a company's director and officer to exercise their powers and execute their duties with due consideration to some degree of diligence and care that a reasonable person would take if they were an officer or director of the company is such circumstances.
The Analysis of the Court's Decision
As mentioned earlier, the Court established that the directors had acted in a negligent manner when approving the 2007 consolidated financial statements and as a result, among other provisions, breached Sections 344 (1), 180(1), and 601FD(3) of the Act. The implication of the ratio decidendi manifested in this corporate case law is that despite the directors of a company acting in good faith and putting in place the appropriate accounting measures, it is incumbent upon them to always ensure that the company's financial statements are reasonably accurate. Therefore, on the premise of the rationale provided in this case law, it means that directors in Australia, including other jurisdictions, are liable for any error of omission or commission that arises from their reliance on expert advice even when there is sufficient evidence that demonstrates the reliance was done in good faith (Morgan and McLennan 2011; Nariman Mohd-Sulaiman 2013). Mohd-Sulaiman (2013) and Smith (2014) opine that the decision, in this case, acts as an important reminder to directors of companies that regardless as to whether they are executive or otherwise, they have to play an active role in the management of the affairs of the company, especially those that are fundamentally important to the enterprise, such as the financial statements.
Incidentally, although many may argue that this case law establishes a new law regarding the duties and responsibilities of directors other than those contemplated under the Act, Walmsley and Puri (2011) contends otherwise. Walmsley and Puri (2011) assert that ratio decidendi of the Court's decision does not support the proposition the directors of a company are barred from relying on the opinion provided to them by experts. Instead, the rationale stands for the proposition that directors have an obligation to question such views in the context that it is questionable. In other words, this case promotes the legal concept that the directors of a company cannot be permitted to abrogate their statutory responsibility of being aware of particular activities of the company when executing their fundamental functions, for example, the making of declarations concerning the preparation of financial statements as provided under Section 295(4)(d) of the Act. In conclusion, this case law places upon the directors of companies the obligation to exercise reasonable care and diligence when seeking and taking into consideration the opinion that they receive from experts concerning the various crucial aspects of the company. Accordingly, before making a significant decision or declarations, directors are strongly advised to first subject expert opinion to adequate scrutiny before sanctioning the proposals contained in the particular opinion.
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