Directors of a company operate in an apex position, and they have various responsibilities which they have to comply with. The ASIC v Godfrey [2017] FCA 1569 is a recent case in which the court highlighted the importance of financial literacy of directors. While discharging their duties as directors of a corporation, they have to ensure that they are financially literature. Financial literacy means that directors should not solely rely on the claims made by the management or external auditors of the company. Directors have to evaluate themselves that the corporation is complying with the appropriate financial reporting requirements. The issue, in this case, arises because the managing director of the company, Patrick Godfrey, failed to take reasonable steps in order to ensure that the corporation meets its financial reporting requirements (ASIC, 2017a). Due to lack of compliance with the reporting requirements, the court provided that the director has violated the provision given under section 344 (1) of the Corporations Act 2001 (Ctb) (Act). This report will evaluate the facts of the case and the duties which are violated by the directors. This report will also analyse the decision given by the court and the relevancy of this case for other corporations which are operating in Australia.
The case was filed by ASIC against Patrick Godfrey. He was acting as the managing directors of Banksia Securities Ltd (Banksia). The company was involved in the business of issuing public debentures to its clients. The capital collected by the corporation through this procedure is used for giving loans to third parties. These loans were given for the purposes of property development. Between the period of 2011 and 2012, Mr Godfrey was operating as the signatory on various financial reports formed by the enterprise. In these financial statements, a misstatement was made by the company regarding the level of bad or doubtful debts which the company was entitled to (BDO Australia, 2018). Moreover, the financial reports were not made according to the compliance with relevant accounting standards. Due to these misstatements, the amount of shareholder capital which was available in the corporation was overstated substantially. When the ASIC decided to investigate in the company, Mr Godfrey agreed to give his full support to the regulatory body. After its investigation, ASIC alleged that the company has failed to comply with the relevant accounting standards and they did not give a true and fair view regarding the amount disclosed in the financial reports of the enterprise. It was also alleged by the regulatory authority that Mr Godfrey has failed to obtain a proper understanding of the requirements which are given under the accounting standard AASB 139 (ASIC, 2017b). This standard is relating to financial instruments and their recognition and measurement. Moreover, ASIC provided that the director has violated the provisions given under section 344 (1) of the act.
The directors of a company have immense powers to take business decisions which come with huge responsibilities as well. The directors have to ensure that they maintain a high degree of care and diligence while performing their actions in the company as given under section 180 of the act. The directors are responsible for ensuring that the company complies with relevant legislation during its operations. The directors will be held liable regardless of the fact whether they were involved in the formation of the financial reports or not in case misrepresent is made in them. They have to ensure that they did not act recklessly or carelessly and it is their duty to ensure that care is maintained by them to ensure that the corporation complies with all the relevant provisions (Austlii, 2018). They have to maintain a standard which a reasonable person would maintain while acting in such position. Subsection 1 of this section provides that the powers must be exercised while ensuring a degree of care. This case is maintained throughout different circumstances of the corporation which means that even if the director is not responsible for the actions directly, a suit can be brought for failing to maintain a standard of care.
The penalty can be imposed on the director for violating the provisions of this act under section 1317E. This section imposes a civil penalty on the director. Moreover, section 344 imposes a duty on the directors which provides that they will be held liable for contravening this section due to failure to take reasonable steps to comply with provisions given under Part 2M.2 or 2M.3 (Legislation, 2018). Both of these sections provide provisions regarding compliance with relevant accounting standards and other policies while preparing the financial reports of the enterprise. In the case of Mr Godfrey, both of these provisions were violated. Firstly, he failed to maintain a degree of care to ensure that the financial reports are prepared while complying with relevant accounting standards. It was the duty of Mr Godfrey, and due to his carelessness, the financial statements of Banksia showed wrong information which adversely affected the interest of the company and its members (Hoffman and Bester, 2018). It was the duty of Mr Godfrey to become more engaged in the process of formation of the financial reports to ensure that it did not violate the principles given under the Corporations Act. Since the provisions given under Part 2M.2 and 2M.3 were violated by the company, Mr Godfrey was held liable for violating section 344 (1).
The court provided in its judgement that Mr Godfrey had failed to maintain a standard of care. Although he was not indulged in any unfair trade practices, and he also assisted ASIC during the investigation, however, he was acting as the managing director of the company due to which he owed a duty of care. Such duty was violated since he failed to ensure that the financial statements of the enterprise are prepared by complying with relevant accounting standards. The court holds Mr Godfrey liable for the failure of Banksia to comply with financial reporting obligations. The court disqualified Mr Godfrey from acting as the director of the company and prohibited him from managing the corporation for a period of five years. Moreover, a pecuniary penalty was imposed by the court on Mr Godfrey of $25,000 (Austlii, 2017).
The decision, in this case, is relevant for other Australian corporations, and their directors. It is a cautionary tale regarding the financial literacy abilities which a director must have while managing the operations of the company. Mr Godfrey was not aware of the relevant accounting principles which the corporation has to comply with while preparing its financial reports. He failed to ensure whether the management of the company or external auditors have evaluated that the relevant accounting standards are complied during the preparation of the financial statements (Lacey, 2018). This case shows that the directors cannot delegate their responsibilities to other parties. It shows that they can be held liable if other parties failed to do their job. They are operating at an apex position; therefore, they are liable for ensuring that they discharge their duties while maintaining a level of care and diligence. Other Australian corporations also have to ensure that they did not violate disclosure requirements while preparing their financial reports. Effective compliance with all the relevant accounting standards is necessary for parties to ensure that their financial statements show a true and fair view which did not mislead the members. The role of the directors of the company in the preparation of the financial statements is highlighted in this case as well.
Conclusion
In conclusion, the key issue raised in this case is related to non-compliance with relevant accounting principles while preparation of financial reports of the company. ASIC initiated an investigation against Banksia for providing misleading information in its financial statements. ASIC alleged Mr Godfrey for failing to ensure that relevant accounting standards are met during the preparation for the reports. The court provided that he is liable for this mistake and disqualified him from acting as the director of the company for a period of five years. A penalty of $25, 000 was also imposed on Mr Godfrey. The court provided that while acting as the director, it is necessary that parties maintain a standard of care. Based on this degree of care, the director should not solely rely on the management or external auditors to ensure that all the relevant accounting standards are fulfilled while preparing the financial report. This case is relevant since it highlights the importance of financial literacy of directors and the negative consequences which they could face in case they failed to maintain a standard of care.
References
ASIC. (2017a) Australian Securities and Investments Commission v Godfrey Law [2017] FCA 1569. [PDF] Available from https://download.asic.gov.au/media/4584779/17-462mr-attachment-asicvgodfrey2017fca-1569-22-12-2017.pdf [Accessed 27th September 2018].
ASIC. (2017b) ASIC commences proceedings against former managing director of Banksia Securities Limited Law. [Online] Available from https://asic.gov.au/about-asic/media-centre/find-a-media-release/2017-releases/17-205mr-asic-commences-proceedings-against-former-managing-director-of-banksia-securities-limited/ [Accessed 27th September 2018].
Austlii. (2018) Australian Securities and Investments Commission v Godfrey [2017] FCA 1569 (22 December 2017). [Online] Available from https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2017/1569.html?context=1;query=GOdfrey;mask_path=au/cases/cth/FCA [Accessed 27th September 2018].
Austlii. (2018) Corporations Act 2001. [Online] Available from https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/ [Accessed 27th September 2018].
BDO Australia. (2018) ASIC v Godfrey – Risks for directors and senior executives of companies who fail to comply with the Corporations Act 2001 and Accounting Standards. [Online] Available from https://www.bdo.com.au/en-au/accounting-news/accounting-news-february-2018/asic-v-godfrey [Accessed 27th September 2018].
Hoffman, G. and Bester, C. (2018) ASIC v Godfrey: another cautionary tale about the financial literacy required of directors. [Online] Available from https://www.claytonutz.com/knowledge/2018/april/asic-v-godfrey-another-cautionary-tale-about-the-financial-literacy-required-of-directors [Accessed 27th September 2018].
Lacey, A. (2018) Banking on the financial literacy of directors: is it a breach of duty when the numbers don’t add up?. [Online] Available from https://mccabecurwood.com.au/banking-financial-literacy-directors-breach-duty-numbers-dont-add/ [Accessed 27th September 2018].
Legislation. (2018) Corporations Act 2001. [Online] Available from https://www.legislation.gov.au/Details/C2017C00328 [Accessed 27th September 2018].
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