LAW504 Business And Corporations Law

Table of Contents

Question:

Research conducted on an Australian case (Nassar V Innovative Precasters Group Pty Ltd 2009) regarding breach of director’s/officers responsibilities.

This report should outline the following:

Introduction of the case.

Critically analyse and discuss the court/tribunal decision, and the reasons for it, in light of the Corporations Act.

Answer:

Introduction

This report provides an overview of the ASIC v Healey Case (2011).

The report also examines the evaluation of judgments by court/tribunal and the reasons for judgments under the Corporations Act.

Introduction to the Case

The ASIC case v Healey is also known by the name Centro.

In October 2009, the Australian Securities and Investment Commission (ASIC), brought proceedings against six directors and two executives of the Centro organization.

The directors violated sections 180(1) to 344(1) and 601FD(3) of the Corporations Act 2001 (Lowry 2012).

Directors approved financial statements that were consolidated for Centro’s financial year ended 30 June 2007.

Financial statement classification was incorrectly consolidated. $1.5 billion was listed as debt in non-current liabilities, when in fact it was current liabilities.

The directors were also unsuccessful in disclosing US$1.75 billion in guaranteed, which was deemed a material event that occurred after the balance date.

The directors did not approve the financial statement and report merely because of technical oversight.

This information was not disclosed in reports and had serious implications for shareholders and the share market.

Despite the lack of information, risks were not evaluated.

The Corporations Act 2001’s main objective states that financial statements and the director’s report must be properly prepared and published.

This was the situation when Centro’s external auditor PWC (Price Waterhouse Coopers), and Centro management reviewed the report, financial statements, and failed to identify any errors (Pugliese Nicholson, Bezemer 2015).

The former CFO of Centro, Mr. Nenna admitted that directors had violated sections 180(1), 344(1), and 601FD (3) of the Corporations Act 2001.

ASIC’s case against Centro entities’ directors focused only on each director.

Directors of Centro entities have violated sections 180(1) to 601FD(3) and 344(1). Their duties and responsibilities were breached as follows:

Section 180(1): This section states that directors should establish the standard objectives, exercise their authority and perform their duties with diligence and care.

Section 601FD (3). This section states that officers must perform their duties. Directors of a company should take every step necessary to ensure compliance with the Corporations Act 2001 (Giordano 2011, 2011).

Section 344(1): This section states that directors must consider contraventions to financial reporting obligations and financial records keeping.

There are many reasons for the breach of duties

The Board was not provided with financial information by the management or external auditors.

Directors were also not focused on the financial statements properly.

Moreover, the directors did not have proper evaluations and approved financial statements.

Judge Middleton said that directors could not excuse management from failing to provide the correct information.

The Board cannot control what information they receive and how much information is being received (Sharp 2012).

Directors and the Board should establish a policy regarding the disclosure of financial statements information.

Directors did not review and draft the financial statements and notes.

The directors simply read the financial statements and made decisions based on the assurance of the auditors and the CFO.

Directors have not questioned management and advisers to ensure that the financial statements are properly analyzed.

Directors did not pay attention to the approval process of financial statements.

They didn’t use their accounting knowledge and other material accounting standards.

In financial statements, current liabilities were shown as non-current liabilities (du Plessis & Meaney 2012).

Directors should seek advice from external advisors before they approve financial statements. However, directors of Centro entities didn’t prefer to do this.

Prior to financial statements approval, the directors of Centro entities did not attend the audit meetings.

Audit meetings could have been useful in obtaining the necessary information about financial accounts.

Critically analyze and discuss the Court/Tribunal Judgment and The Reason For It In Terms Of The Corporations Act

The decision

Middleton ruled that Centro’s directors had violated sections 180(1), 344(1), and 601FD (3) of the Corporations Act 2001.

They failed to take the necessary steps to ensure compliance with the Corporations Act 2001.

Directors were also unable to properly utilize their authority as they failed to analyze the Centro entities’ financial statements with accuracy (Banerjee & Humphery-Jenner 2016).

The directors failed to exercise the diligence and care required when evaluating the financial statements for the Centro entities.

Middleton, the judge, ruled:

Directors of Centro cannot substitute the advice of management for their focus and evaluation on other important matters. This falls especially in the Board’s responsibilities due to reporting obligations.

Each director and Board of the Centro entities are responsible for sanctioning financial statements under the Corporations Act 2001 (Gamertsfelder 2013,).

Each member of the Centro entity board was responsible for focusing on and attending to the company’s accounts.

Directors of Centro entities were also prohibited from transferring or abdicating their responsibility to employees.

Judge also said that directors are intelligent, conscientious, and experienced.

Judge Middleton’s Reasons for His Decision

Middleton, the judge, stressed that the proceedings were not limited to technical oversight.

It is now up to the directors of the Centro entities to determine if they are able to use their own brains to review and analyze the financial statements of the company in order to present the director’s report. Morgan and McLennan (2011).

Directors of the company must also ensure that they have the correct data according to their knowledge.

Directors of Centro entities must not ignore material matters or matter that they should acknowledge.

Justice Middleton, relying on the law relevant to the case, confirmed that directors are essential to the management of Centro entities.

Directors should be able to comprehend and focus on the contents of the financial statements.

Directors of the company must also trust the auditors and management for financial accounts in order to obtain all information necessary to approve the financial statements.

Laing, Douglas, and Watt (2015). It is impossible to know everything and everyone can only do so much.

Directors can delegate responsibility for the preparation of accounts, books and daily operations.

Director of the company should expect that they will take an interest in the information and be able to understand it.

They will be able to use their curiosity in the approval of financial statements for Centro entities.

Directors should pay attention to the financial statements. If there are any issues, directors should inquire about them (Prescott & Silcock 2011, 2011).

It was also found that directors were not informed of important information in this instance.

Conclusion

The above discussion shows that directors of Centro entities failed to fulfill their responsibilities.

Directors did not verify the accuracy of reports.

The directors did not question the management and external advisors to confirm that the financial statements had been prepared correctly.

It is essential to confirm that the financial statements are true and fair.

Based on the assurance of the CFO of the company, the directors approved the financial statements.

Directors failed to exercise the duty of diligence or care.

The directors also failed to set clear objectives for how they would exercise their duties.

Refer to

Banerjee S. and Humphery Jenny M. (2016). ‘Directors’ duties of care, and the value auditing’. Finance Research Letters 19, pp. 1-14.

du Plessis J.J., and Meaney I.

(2012). “Directors’ liability when they approve financial statements that contain blatantly incorrect items: Lessons from Australia for all directors in every jurisdiction,” Company lawyer, 33(9). pp.

Fisher, J., and French, E. (2014) “The big issue: Annual reporting and directors’ duties: Ensuring compliance financial reporting requirements and participant’, Irrigation Australia: Official Journal of Irrigation Australia. 30(3). p. 34.

Gamertsfelder L. (2013) ‘Corporate Information and the Law’, Keeping Good Companies 65(9), p. 516.

Giordano F. (2011). ‘Company secretary: Financial reporting duties of directors-Ten corporate governance lessons from Centro for non-executive directors of Listed Public Companies’. Keeping good companies, 63(7). p. 390.

G. Laing, S. Douglas, and G. Watt (2015), ‘Aspects Corporate Delegation and Reliance and Financial reporting: Lessons from Australian Securities and Investments Commission (v. Healey), Canberra L.

(2012). “The Irreducible core of the Duty to Care, Skill and Due Diligence of Company Directors”: Australian Securities and Investments Commission (v Healey), The Modern Law Review 75(2), pp.

Morgan, J., and McLennan M. (2011). ‘Demanding duty: approving financial reports after Centro’. Law Society Journal: The official journal of Law Society of New South Wales. 49(9) p. 56.

Prescott, L., and Silcock K. (2011). ‘Corporate Law: Opes prime fallout from Australia’s largest stockbroking collapse’. Keeping Good Companies. 63(9). p. 546.

Pugliese A., Nicholson G., and Bezemer P.J.

(2015) “An observational analysis of how board dynamics and directors’ participation affect perceived board effectiveness”, British Journal of Management 26(1), pp.

(2012), “Centro Revisiting Old Warnings for NFPs”, Keeping Good Companies 64(6), p. 334.

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