The directors in the companies of Australia, along with the officers of such companies have been imposed different responsibilities under Part 2D.1 of the Corporations Act, 2001, which is an act of commonwealth and governs all the companies in the nation (Cassidy, 2006). The purpose for imposing the duties on the directors stems from the fact that the business of the company is run on behalf of the shareholders by them. Under this very part of the governing act, the civil and criminal obligations are imposed on the directors in case the duties imposed on them are not met (Latimer, 2012).
Australian Securities and Investments Commission v Healey  FCA 717 was a case, where seven directors of the company, along with its Chief Financial Officer were held to have breached the duties imposed through the governing act (Walmsley and Puri, 2011). In the following parts, a discussion has been carried on this very case, where the background of the case is discussed, along with the duties and responsibilities which have been breached by the directors of this case, and before concluding, the decision of the case has been highlighted.
In the case of ASIC v Healey, civil proceedings were launched by ASIC back in Oct 2009 against the present and ex non-executive director, the former CFO, and the former CEO of different entities, in the Federal Court of Australia, within the Centro Retail Group and the Centro Properties Group, collectively referred herewith as Centro (Australian Institute of Company Directors, 2011). A declaration was sought out by the ASIC regarding the relevant officers and directors breaching the duties which they had under this act, towards the entities within Centro, for the approval of Financial Reports. Centro Properties Group was a staple entity, which consisted of Centro Properties Limited and Centro Property Trust. Centro Retail Group was also a stapled entity, which consisted of Centro Retail Limited and Centro Retail Trust. Though, none of the entities of Centro were made a party to these proceedings (Bryans, 2011).
The case which was brought by the ASIC revolved around the central proposition regarding the director duties to read and understand the financial statements in a proper manner; following by the application of knowledge for having or for the need of having attained for performing the particular task. In a crux, the claims made in the submission of ASIC were regarding the breach of duty of care and diligence by the directors, along with their failure in taking the required steps for making certain the compliances with the financial reporting obligations contained for Centro, based on the act, were undertaken, for the reasons given here (Bryans, 2011).
ASIC claimed that the financial reports created of the Centro group for the year which ended on June 30th, 2007 were not complying with the standards of accounting, and also did not provide the requisite true and fair view of the performance of the entities and of the financial position of them, due to the failure in classification of a major value of the interest bearing liabilities as being the current liabilities. The crucial matters were not disclosed in the reports, including the non-disclosure of the major amount of short-term debt, along with the guarantees for the short-term debt. Also, in this case, the short-term debt was not only hidden but was also misclassified as being a serious of non-current liabilities. Due to these reasons, a false view was given of the short-term debt burden of the company (Halsey Legal Services, 2017).
The directors have been given a duty/ responsibility through section 180 of the Corporations Act, 2001, to use their powers and discharge their obligations in a manner which depicts care and diligence (Australasian Legal Information Institute, 2017). For the purpose of undertaking care and diligence in the work of the officer and director, this section sets out a standard of a prudent person. So, the duties have to be used in a manner which a reasonable person would use, had they held the same office with the same responsibilities and were faced with similar situation (WIPO, 2015).
Through section 180(1), a civil obligation is set out, for the breach of which, civil penalties are imposed through section 1317E. Under section 1317E the court has the power of making a declaration of contravention against the officer or director who breaches their duties covered under section 180(1) (ICNL, 2017). Further, once this declaration is made, ASIC can apply for pecuniary penalty order pursuant to section 1317G and can also apply for a disqualification order pursuant to section 206C (Federal Register of Legislation, 2017).
The claim of ASIC in this case was regarding the failure of the director in taking the required steps for securing the compliances of the Centro group with regards to the declaration by director pursuant to section 295A, the compliance with the accounting standards pursuant to section 296, presenting a true and fair view pursuant to section 297 and regarding the annual report of the directors pursuant to section 298, which effectively led to the contravention of section 344(1) of the Corporations Act, 2001. This section imposes a duty on the directors to take all the necessary steps for complying with the financial record keeping and the need for reporting the obligations contained in the act (Bryans, 2011).
The key point here, which was to be determined by the court, was regarding the situation in which the duty pursuant to section 344 for taking the required steps for securing the compliance with the obligations of financial reporting, put a duty on the director to scrutinize each line personally, in the accounts to look for apparent inaccuracies or accounting errors. Even when this was not a requirement, to understand if there was negligence on part of the directors to have failed in detecting such errors when the external auditor, Price Waterhouse Coopers and the management had missed those errors in the past (Bryans, 2011).
This is the point which was taken into consideration to decide upon the possible breach of section 180 by the defendants of this conduct. Similar to this section is section 601FD(1)(b), where a specific emphasis is made to the officers of the organization under a registered scheme. The ability of the directors of delegating the tasks to the auditors and the management and their reliance on the processes and systems of the company were also relevant in this case, pursuant to sections 189, 190 and 198D (Bryans, 2011).
In this case, Justice Middleton held that every director of the company had breached the duties imposed on them through sections 180(1), pursuant to section 601FD(3), and lastly, based on section 344(1) of the Corporations Act, 2001 (Jacobson, 2011). In his view, there was a failure on part of the directors to take the steps which were required for making certain that the provisions of this act were complied with. Also, he noted the failure in taking all the steps which a prudent individual would have taken in case they held the position of the directors, for making certain that the provisions of this act, by the relevant entities, was undertaken. And lastly, he stated that there was an utmost failure in the exercising of the required degree of diligence and care on part of the directors when they were reviewing the financial statements (Federal Court of Australia, 2011).
Justice Middleton also held that the reliance on the advice of management could not be substituted by the management for their examination or own attention towards significant issues which fall particularly under the responsibilities of the Board, along with the obligations regarding the reporting. Each of the directors and the Board has been placed with the particular task of financial statements approval through this act. As a result of this, the members of the board were given the responsibility of focusing on and attending to such accounts; further, under the present situations, they could not simply abdicate or delegate this particular reasonability to another (Australasian Legal Information Institute, 2011).
Justice Middleton also highlighted the reasons behind the decision given by him. It was explicitly pointed out by Justice Middleton that the directors of this case were conscientious, intelligent and experienced individuals, and that there were no suggestions that the directors had not acted in an honest manner while discharging their duties (Paolini, 2014). The emphasis was laid by Justice Middleton on the proceedings regarding issue not being about a simple technical oversight. Instead, he believed that the key issue resolved around whether the directors of an entity which was majorly publicly listed, was required to apply its own mind for carrying out a careful review regarding the financial statements proposed in front of him, in addition to the directors’ report, and the determination of the information contained in it to be consistent with the knowledge of the directors of the affairs of the company, and lastly, regarding not omitting the material information which they knew or which, by the virtue of their position, they ought to have known (Australasian Legal Information Institute, 2011).
Due to these reasons, Justice Middleton was satisfied with the contentions laid down by the ASIC regarding the breach of sections 180(1), 601FD(3), and 344(1) by the directors of this case, particularly due to the failure in undertaking the required care and diligence in their work. Though, he did highlight that there was an absence of any proof regarding the directors being dishonest. It was just a case of the directors’ failure in taking the required steps which they should have, by being the director of the company, and by not performing the activities on the basis of the duties given to them, and lastly, due to their failure in undertaking the required degree of diligence and care which was required on their part through the law. The emphasis of Justice Middleton was on the knowledge which the directors should have had, due to their position (Australasian Legal Information Institute, 2011).
Justice Middleton confirmed that at the core, the irreducible requirement of the director was to be involved in the company’s management and for taking the required steps on the basis of their position for guiding and monitoring the company. Hence, it was the responsibility of the directors to read, gain an understanding and to focus upon the contents of the reports given to them particularly for the ones for which a responsibility has been imposed on each of the directors to adopt or approve. This very view of Justice Middleton was crucial as he highlighted the ability of the directors to rely on the auditors and the management for the financial accounts. He held that no decision of this case should be taken to mean that the directors need to have the infinite ability or knowledge. And so, the delegation of work by the directors is normal and has to be continued. The only thing which is required on part of the directors is to be diligent and make intelligent decisions by taking an interest in the information provided to them, by reading and understanding it and by making enquiries in case they do not understand something. Enquires are to be made only when the financial statement calls for such enquiries (Bryans, 2011).
On the basis of the discussion carried above, it becomes very clear that the case of ASIC v Healey was a significant case, majorly because in this case, the duty was breached by not one, but by seven of the directors of the company, along with the company’s CFO, which is a key officer of the company. The court held that the directors had failed to discharge the duties contained in section 180(1) on the directors and officers of the company, as they failed to be diligent and careful in the matter of different reports which were presented in the board meeting. Also, there was a huge failure in compliance with key sections of this act, especially when the officers and the directors were required to fulfill the obligations of carefully reading and understanding those reports. Owing to these and several other breaches highlighted above, the directors and the officers of the company were held to have breached their duties.
Australasian Legal Information Institute. (2011) Australian Securities and Investments Commission v Healey  FCA 717 (27 June 2011). [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/au/cases/cth/FCA/2011/717.html [Accessed on: 20/08/17]
Australasian Legal Information Institute. (2017) Corporations Act 2001. [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/ [Accessed on: 20/08/17]
Australian Institute of Company Directors. (2011) Centro Case Summary. [Online] Australian Institute of Company Directors. Available from: https://www.companydirectors.com.au/~/media/Resources/Director%20Resource%20Centre/Governance%20and%20director%20issues/case%20summary/ASIC%20v%20Healey%20Centro%20Directors%20Federal%20Court%20Judgment%20%2027%20June%202011.ashx [Accessed on: 20/08/17]
Bryans, P. (2011) ASIC v Healey. [Online] Lexology. Available from: https://www.lexology.com/library/detail.aspx?g=1db0b085-6f89-445e-8548-f1172a1f24b0 [Accessed on: 20/08/17]
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
Federal Court of Australia. (2011) Australian Securities and Investments Commission v Healey (No 2). [Online] Federal Court of Australia. Available from: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2011/2011fca1003 [Accessed on: 20/08/17]
Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Australian Government. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 20/08/17]
Halsey Legal Services. (2017) Directors' duties: Control and understand the flow of management information. [Online] Halsey Legal Services. Available from: https://www.halseys.com.au/detail.php?id=19 [Accessed on: 20/08/17]
ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 20/08/17]
Jacobson, D. (2011) Centro (ASIC v Healey) Case Note: Directors’ Duties For Financial Statements. [Online] Bright Law. Available from: https://www.brightlaw.com.au/centro-asic-v-healey-case-note-directors-duties-for-financial-statements/ [Accessed on: 20/08/17]
Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, NSW: CCH Australia Limited.
Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, MA, USA: Edward Elgar.
Walmsley, S., and Puri, R. (2011) The Centro decision - ASIC v Healey & Ors  FCA 717. [Online] Johnson Winter & Slattery. Available from: https://www.jws.com.au/en/legal-updates-archive/item/198-the-centro-decision-asic-v-healey-ors-2011-fca-717 [Accessed on: 20/08/17]
WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 20/08/17]
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