FACULTY OF LAW AND BUSINESS

Thomas More Law School Brisbane; Melbourne; North Sydney

LEGL 201 COMPANY LAW SEMESTER 2, 2019 ASSESSMENT TASK NO 2: INDIVIDUAL ASSIGNMENT

 ASSESSMENT TASK NO 2: INDIVIDUAL ASSIGNMENT.

“The directors are intelligent, experienced and conscientious people. In the light of significance of the matters that they knew, they could not have, nor should have, certified the truth and fairness of the financial statements, and published the annual reports in the absence of the disclosure of those significant matters.” Middleton J, ASIC v Healey (2011) 196 FCR 291.

Discuss the above quotation in the context of the Federal Court’s decision in ASIC v Healey (Centro decision), as well as other relevant cases that you have studied in class.

1. The Centro decision (ASIC v Healey (2011) 196 FCR 291) has been summarised in the textbook on pages 529-530.

2. A SUMMARY OF THE JUDGE’S DECISION (MIDDLETON J) IS ATTACHED WITH THIS ASSIGNMENT.

3. TOTAL WORD COUNT INCLUDING FOOTNOTES AND BIBLIOGRAPHY 1000-1200 WORDS.

4. PLEASE READ THE JUDGE’S SUMMARY OF THE FACTS OF THE CASE (ATTACHED WITH THIS ASSIGNMENT).
5. PLEASE NOTE:- THE BETTER ANSWERS WILL GO BEYOND THE POWERPOINTS AND LECTURE MATERIAL AND TEXTBOOK. (REFER TO THE MARKING RUBRIC WHICH CAN BE FOUND IN THE APPENDIX OF THE UNIT OUTLINE FOR FURTHER GUIDANCE).
6. TOTAL MARKS FOR THE ASSIGNMENT IS 30%.

REASONS FOR JUDGMENT

INTRODUCTION

• The Australian Securities and Investments Commission (‘ASIC’) has made application under ss 1317E, 1317G and 206C of the Corporations Act 2001 (Cth) (‘the Act’) for declarations of contravention against the defendants in relation to ss 180(1), 601FD(3) and 344(1) of the Act and for orders that each of the defendants pay pecuniary penalties and be disqualified from managing corporations.
• The conduct relied on by ASIC in support of the relief sought is contained in an amended statement of claim filed in the proceeding dated 26 November 2010 (‘the amended statement of claim’). The allegations in the amended statement of claim concern the approval of the consolidated financial statements of Centro Properties Limited (‘CPL’), Centro Property Trust (‘CPT’) and Centro Retail Trust (‘CRT’) for the financial year ending on 30 June 2007 at a board meeting attended by the defendant directors on 6 September 2007.
• Other than Mr Nenna (the eighth defendant and Chief Financial Officer (‘CFO’)), the defendants were directors of each Centro company described below. Mr Healey (the first defendant) was the non-executive Chairman. Mr Scott (the second defendant) was the Chief Executive Officer (‘CEO’), and the other directors were non-executive directors.
• Each of the directors contested the application. Mr Nenna made certain admissions in his Second Further Amended Defence dated 4 April 2011, although did not admit that the general information required by s 299A of the Act was required to be included in the directors’ report. Otherwise, Mr Nenna has admitted contraventions of s 180(1) and s 601FD(3) of the Act. Subject to a hearing as to whether Mr Nenna should be relieved from liability and as to penalty (if any), Senior Counsel for Mr Nenna sought and was excused from attending the further hearing of the proceeding on liability. Nevertheless, Mr Nenna was to be bound by the evidence put before me in the proceeding, and any findings and determination made that he contravened the Act.
• ASIC has proved that the directors and each of them in the course of participating in the resolutions approving the accounts of CPL, CPT and CRT have contravened ss 180(1), 344(1) and 601FD(3) of the Act to  the  extent  claimed  in  its  amended  application  dated 26 November 2010.
• ASIC has proved that Mr Nenna has contravened s 180(1) and 601FD(3) of the Act based upon his admissions and following upon the findings and determination of the Court in this proceeding.
• I am yet to determine whether any defendant should be relieved from liability for such contraventions and the imposition of penalties (if any).
• By way of briefest summary, I make the following comments regarding the directors. The directors are intelligent, experienced and conscientious people. There has been no suggestion that each director did not honestly carry out his responsibilities as a director. However, I have found, in the specific circumstances the subject of this proceeding, that the directors failed to take all reasonable steps required of them, and acted in the performance of their duties as directors without exercising the degree of care and diligence the law requires of them.
• The 2007 annual reports of Centro Properties Group (‘CNP’) and Centro Retail Group (‘CER’) failed to disclose significant matters. In the case of CNP, the report failed to disclose some $1.5 billion of short-term liabilities by classifying them as non-current liabilities, and failed to disclose guarantees of short-term liabilities of an associated company of about US$1.75 billion that had been given after the balance date. In the case of CER, the 2007 annual reports failed to disclose some $500 million of short-term liabilities that had been classified as non-current.
• This proceeding is not about a mere technical oversight. The information not disclosed was a matter of significance to the assessment of the risks facing CNP and CER. Giving that information to shareholders and, for a listed company, the market, is one of the fundamental purposes of the requirements of the Act that financial statements and reports must be prepared and published. The importance of the financial statements is one of the fundamental reasons why the directors are required to approve them and resolve that they give a true and fair view.

1. The significant matters not disclosed were well known to the directors, or if not well known to them, were matters that should have been well known to them.
2. In the light of the significance of the matters that they knew, they could not have, nor should they have, certified the truth and fairness of the financial statements, and published the annual reports in the absence of the disclosure of those significant matters. If they had understood and applied their minds to the financial statements and recognised the importance of their task, each director would have questioned each of the matters not disclosed. Each director, in reviewing financial statements, needed to enquire further into the matters revealed by those statements.
3. The central question in the proceeding has been 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 and the proposed directors’ report, 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.
4. A director is an essential component of corporate governance. Each director is placed at the apex of the structure of direction and management of a company. The higher the office that is held by a person, the greater the responsibility that falls upon him or her. The role of a director is significant as their actions may have a profound effect on the community, and not just shareholders, employees and creditors.
5. This proceeding involves taking responsibility for documents effectively signed-off by, approved, or adopted by the directors. What is required is that such documents, before they are adopted by the directors, be read, understood and focussed upon by each director with the knowledge each director has or should have by virtue of his or her position as a director. I do not consider this requirement overburdens a director, or as argued before me, would cause the boardrooms of Australia to empty overnight. Directors are generally well remunerated and hold positions of prestige, and the office of director will continue to attract competent, diligence and intelligent people.
6. The case law indicates that there is a core, irreducible requirement of directors to be involved in the management of the company and to take all reasonable steps to be in a position to guide and monitor. There is a responsibility to read, understand and focus upon the contents of those reports which the law imposes a responsibility upon each director to approve or adopt.
7. All directors must carefully read and understand financial statements before they form the opinions which are to be expressed in the declaration required by s 295(4). Such a reading and understanding would require the director to consider whether the financial statements were consistent with his or her own knowledge of the company’s financial position. This accumulated knowledge arises from a number of responsibilities a director has in carrying out the role and function of a director. These include the following: a director should acquire at least a rudimentary understanding of the business of the corporation and become familiar with the fundamentals of the business in which the corporation is engaged; a director should keep informed about the activities of the corporation; whilst not required to have a detailed awareness of day-to-day activities, a director should monitor the corporate affairs and policies; a director should maintain familiarity with the financial status of the corporation by a regular review and understanding of financial statements; a director, whilst not an auditor, should still have a questioning mind.
8. A board should be established which enjoys the varied wisdom, experience and expertise of persons drawn from different commercial backgrounds. Even so, a director, whatever his or her background, has a duty greater than that of simply representing a particular field of experience or expertise. A director is not relieved of the duty to pay attention to the company’s affairs which might reasonably be expected to attract inquiry, even outside the area of the director’s expertise.
9. The words of Pollock J in the case of Francis v United Jersey Bank (1981) 432 A 2d 814, quoted with approval by Clarke and Sheller JJA in Daniels v Anderson (1995) 37 NSWLR 438, make it clear that more than a mere ‘going through the paces’ is required for directors. As Pollock J noted, a director is not an ornament, but an essential component of corporate governance.
10. Nothing I decide in this case should indicate that directors are required to have infinite knowledge or ability. 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.
11. No less is required by the objective duty of skill, competence and diligence in the understanding of the financial statements that are to be disclosed to the public as adopted and approved by the directors.
12. No one suggests that a director should not personally read and consider the financial statements before that director approves or adopts such financial statements. A reading of the financial statements by the directors is not merely undertaken for the purposes of correcting typographical or grammatical errors or even immaterial errors of arithmetic. The reading of financial statements by a director is for a higher and more important purpose: to ensure, as far as possible and reasonable, that the information included therein is accurate. The scrutiny by the directors of the financial statements involves understanding their content. The director should then bring the information known or available to him or her in the normal discharge of the director’s responsibilities to the task of focussing upon the financial statements. These are the minimal steps a person in the position of any director would and should take before participating in the approval or adoption of the financial statements and their own directors’ reports.
13. The omissions in the financial statements the subject of this proceeding were matters that could have been seen as apparent without difficulty upon a focussing by each director, and upon a careful and diligent consideration of the financial statements. As I have said, the directors were intelligent and experienced men in the corporate world. Despite the efforts of the legal representatives for the directors in contending otherwise, the basic concepts and financial literacy required by the directors to be in a position to properly question the apparent errors in the financial statements were not complicated.
14. The main issues in this proceeding can be summarised as follows:
15. Whether CNP had current interest bearing liabilities of $2.611 billion and CER had current interest bearing liabilities of $598 million which were required to be classified as current liabilities.
16. Whether the entering into of certain guarantees were material events occurring after the balance date, matters or circumstances which significantly affected the state of affairs of CPT and its controlled entities in subsequent years within the meaning of s 299(1)(d) of the Act, and information that members of the CPL would reasonably require to make an informed assessment of the financial position of CPL or its business strategies and prospects for future years for the purposes of s 299A of the Act.
17. Whether the directors knew or ought to have known at the time of approving the 2007 accounts that:
    1. CNP and CER had very substantial liabilities in the order of $2.611 billion and $598 million respectively, which were due to be repaid or refinanced within  12 months from the balance date and in relation to which there was no unconditional right to defer payment for at least 12 months after the balance date; and
18. since the balance date, guarantees had been given relating to loans totalling in excess of US$2.8 billion which might significantly affect the current state of affairs of CPL and its controlled entities in subsequent financial years.
19. Whether a reasonable director in the like position of the directors was required to have:
    1. “sufficient” knowledge of “conventional” accounting principles and practices, including that current liabilities generally mean financial obligations which must be “paid” or “satisfied” within 12 months of the balance date and that significant events which occur after that date must be disclosed in the financial report; and
    2. applied their minds and carried out a careful review of the 2007 accounts to determine whether they accurately reflected the financial position and performance of consolidated entities known to them.
20. Whether the directors received a declaration in accordance with s 295A(2) prior to approving the accounts, and the consequences of any failure to comply with s 295A.
21. Whether the directors failed to exercise their powers and discharge their duties with the requisite degree of care and diligence or failed to take all reasonable steps to secure compliance with the Act
22. Having made these brief remarks in summary, I first turn to outline the nature of the Centro entities so to understand the application in this proceeding, and to briefly set out the statutory requirements and the relevant financial statements.