ASIC V. Healey Case: Duties And Responsibilities Of Directors In Financial Management

Background of ASIC v. Healey Case

Discuss about the Securities and Investments Commission Versus Healey.

In business, it is well-recognized that directors should take part actively in the affairs of the corporation, rather than merely grace board meetings. Aside from that, they should demonstrate utmost skills, care and diligence in their functions and power since they are the companies’ representatives. In the case of the Australian Securities and Investments Commission (ASIC) versus Healey, the judgment of the Federal Court of Australia powerfully reminds directors that they should get actively involved in their firm’s financial management. Due to this, they may impact the future duty of trustees to practice cognitive skills and care in approving their company’s financial reports (Gamertsfelder, 2013, p.519). This report provides the background of ASIC versus Healey case, outlines the duties and responsibilities that directors breach with the reasons for it, and finally discusses and analyzes the court’s decision for the case and why they made that choice.

The matter of ASIC v. Healey [2011] FCA 717 was a trial of the Centro group directors in the Australian Court before Judge Middleton. The issue was a primary concern of the duties of directors of companies to exercise reasonable care and skills following the financial reports of their firms. In October 2009, the proceedings against the Centro directors commenced. Among these directors were two executives – former CFO Romano Nenna  and former managing director and CEO of the company Andrew Scott, and six non-executive directors Brian Healey, Paul Cooper, Peter Wilkinson, Sam Kavourakis, Peter Goldie and Jim Hall (Centro Case Summary, 2011). On Wednesday 31 August 2011, Judge Middleton handed its penalty decision against the former CFO of the Centro Properties Group (CNP) and Centro Retail Group (CER) and the seven directors (Jacobson, 2011). ASIC on 27 June 2011, declared that each of the defendant directors had violated the statutory duty of care and diligence by signing off the financial reports that did not have any significant matters (Asic.gov.au., 2011). At the beginning of the hearing, Romano Nenna confessed that he had breached the Corporations Act as purported by the Australian Securities and Investments Commission.

The annual reports of CNP and CER in 2007 did not unveil significant matters (Jacobson, 2011). In the case of the Centro Properties Group, the report did not have short-term liabilities amounting to 1.5 billion dollars; instead, they got involved under the non-current liabilities. Besides that, the report did not unveil sureties of short-term liabilities of a concomitant business of approximately 1.75 billion US dollars that got given afterwards.  On the other hand, the 2007 annual reports of CER failed to show some amount of short-term liabilities of 500 million dollars categorized as non-current liabilities. According to the Australian Centre for Philanthropy and Non-profit Studies (2011, p.1), the reports gave a false view of the organization’s short-term burden of debt.  Due to this, the value of the Centro entities and securities extensively reduced. Additionally, Judge Middleton’s view was that the seven defendant directors did not take the analytical procedures to comply with section 259A of the Corporations Act (Jacobson, 2011).

Breached Duties/Responsibilities

In the Australian case ASIC v. Healey, the primary concern before the Federal Court was whether the defendants of the Centro Group should use their minds and perform a vigilant review of the recommended financial records of the company and the proposed directors’ report (Sharp, 2012, p.335). It is a question to find out whether the information that the reports contain lias with the awareness of the directors of the company’s affairs. Besides that, the issue is to determine whether the reports do not leave out the factual problems known to them or those that they should know. With regards to these issues, the Court finds out that the entire board of directors of the Centro Group was found to have failed in its responsibilities by not realizing the exclusion of the billions of dollars of the short-term debts in the financial reports as mentioned in the background of the case (Giordano, 2011, p.393). Middleton finds out that the directors failed to implement their obligations according to the duty of care and diligence as required under sections 180 (1), 344(1) and 601FD(3) of the Corporations Act 2001 (Cth) (Walmsley & Puri, 2011; Lowry, 2012, p.251).

344(1): ASIC purported that the directors breached this section of the Corporations Act by failing to take the required sensible procedures to comply with the specific financial reporting duties contained in ss.295A, 296, 297 and 298.

Ss.295A states that the declaration of directors according to the financial statements under s.295 must make inquiries after the CEO, or the CFO have declared the directors in the form specified in the Act (Centro Case Summary, 2011, p.1).

S.296 requires that financial reports must act in agreement with the accounting standards.

S.297, on the other hand, requires that the financial data should provide an accurate and fair view of the financial performance, as well as the financial position of the company.

S.298 calls for inclusion of some specific data in the annual report of directors.

• 180(1): ASIC also said that the defendants had violated section 180(1) of the Corporations Act. It calls for company directors to practice their authorities and liberate their responsibilities with an amount of care and diligence that any sensible individual would do if they were an officer in the circumstances of a firm (Lowry, 2012, p.253; Healey, 2012).
• 601FD(3): Replying to the same conduct as that of s.344(1), ASIC also purported that the defendant directors also breached Section 601FD(1)(b). This part has the same duties for the officers of the accountability unit of a registered scheme (Centro Case Summary, 2011, p.2).

The violation of responsibilities was a failure to make sure that the data in the financial reports were in line with the accounting standards. However, it gets expected that the directors, especially the non-executive directors may have a small degree of professional financial and accounting acquaintance (Walmsley & Puri, 2011). Nonetheless, the Court still finds out that the omitted liabilities “were well-known to the directors, or if not well-known to them, were matters that should have been well-known to them” (Walmsley & Puri, 2011, par.11). According to the Court, if the defendants carefully deliberated the financial statements in their knowledge of the affairs of the entity with its financial position, each of the defendant directors would have realized the missing significant amount of short-term liabilities and question the error. Since the duty of care is to be demonstrably well thought-out, the Federal Court deliberated that the duty of competence calls for directors to read and comprehend the financial statements, together with what the concepts of the ‘current’ and ‘non-current’ liabilities imply (Walmley & Puri, 2011, par.12).

Reasons for their Breach

Given that, according to Walmsley & Puri (2011), the directors subjectively believed and knew that the duty of competence required of them was irrelevant. Consequently, they argue that their reason for the breach of the Corporations Act was that it was abnormal for the NEDs to personally question the financial records prepared by knowledgeable accounting members and acclaimed by skilled auditors who are masterminded by the experienced audit committee.

Judge Middleton, on 27 June 2011, handed down his verdict that each of the defendant directors knew about the current interest bearing liabilities and guarantees. Besides that, they knew, or say; they should have been conscious of the relevant accounting principles which would have forewarned them of the ostensible error in the proposed financial statements. Due to this, the judge decided that the defendants:

• Did not take all the required sensible procedures to concentrate and ponder the contents of the financial records by themselves, predominantly as to short-term liabilities, as well as whether the guarantees should have been made open.
• Did not make inquiries of the other directors, the board audit committee, or the management as to the proposed data in the Group’s financial records concerning the short-term liabilities and guarantees. In addition to that, they failed to correct the apparent errors.
• Lastly, they did not appeal that the directors be given affirmations according to s.295A of the Corporations Act.

From these findings, Judge Middleton decided that each of the defendants did not abide by the duty of care and diligence meant for the company. As a corollary, they breached ss.180(1) and 601FD(3), and at the same time they did not follow the required steps to make them comply with the financial recording duties in the Act contravening s.344. Aside from that, the judge also held that ss.180(1) and 601FD(3) duties of the Act also got violated by the former CFO. Thus, the Court fined the former CEO, Mr. Andrew Scott $30,000, disqualified the former CFO, Mr.Nenna from working with companies for two years, rejected the applications of directors to be exonerated from their contraventions and the defendant directors got ordered to pay costs of action for ASIC.

Middleton sums up that when any director gets faced with a financial statement, he or she has a responsibility to take a keen and intelligent interest in the available information, understand it and put on an inquisitive mind to the obligations to be found upon him or her (Downie, 2011). Such a duty comes when the director proceeds to adopt and approve the financial statements. As a result of the reports’ nature and relevance, the directors get obliged to comprehend and focus on the reports’ contents and if necessary, further enquire if the problems revealed in the records need such inquiries.

Following the directors’ reason for breach and Middleton’s decision, the court agreed that the NEDs had followed the habitual doings to approve their financial reports. In practice, it is not common for a NED or an audit committee to do something wrong for it to adhere to the accounting standards (Dunn, 2011, p.482). However, the Court decided that the role of the audit committee of monitoring the financial reporting does not exclude the role of directors from taking action to the financial statements. In this regard, the Court did not assert that the directors had to know all the accounting standards, but it was reasonable that they should be sufficiently aware and knowledgeable about what should be adopted or approved (Bonner, Hunt & Watson-Dunne, 2014, p.557).

Court’s Decision and Implications

It was “not about a mere technical oversight” to accept the financial reports in question (Centro Case Summary, 2011, p.2; ASIC v. Healey, 2011, p.1). The omissions in the reports have an important impact on the shareholders and the share market. It would also be difficult to assess the risks without the omitted data. For that reason, according to Walmsley & Puri (2011), the directors should not have argued blindly relying on the declaration from the external auditors that the financial records were pertinent. Moreover, a ‘reasonable director’ would have confirmed the exactitude of each data in the reports (Walmsley & Puri, 2011, par. 17). They would also go through the statements correctly together with the available information, which would have shown them the momentous misclassification of the short-term liability of the entity (Venus, 2016, p.28; Smith, 2016, p.541).

Judge Middleton states that his reason for his decision was a consideration of the issue of general deterrence (asic.gov.au, 2011). The Court has tried to identify the seriousness of the contraventions and consider the circumstances in which they took place, the general behavior of the directors, and the influence of the drawbacks executed on the defendants. The judge made the decision to provide a significant direction and trend of the corporate accountability of directors and the company’s management. Besides, it wanted to have a significant effect on the liability judgment.

Conclusion

Therefore, to conclude with, ASIC v. Healey case validates that most courts take directors of public entities as the shareholders’ representatives of their companies. Accordingly, they should apply their skills and experience to evaluate, oversee, and may be, a challenge to ensure the management fulfills their duty of care in an efficient manner. Therefore, directors should read, understand and analyze the company’s financial records by applying the knowledge they have in their positions as leaders. Ultimately, irrespective of jurisdiction, all leaders should take this case as an aide memoire to them that their role is a receptive one and not passive.

Reference List

Asic.gov.au. (2011). 11-188MR Centro civil penalty proceedings | ASIC – Australian Securities and Investments Commission. [online] Available at: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2011-releases/11-188mr-centro-civil-penalty-proceedings/ [Accessed 3 Jan. 2017].

Australian Securities and Investments Commission v Healey and Others [2011] FCA 717. (2011). The Australian Centre for Philanthropy and Nonprofit Studies, pp.1-2.

Bonner, G, Hunt, S, & Watson-Dunne, N 2014, ‘Interim Report into the Financial System — Implications for boards’, Governance Directions, 66, 9, pp. 555-558.

Centro Case Summary ASIC v Healey & Ors [2011] FCA 717. (2011). 1st ed. [ebook] Australian Institute of Company Directors, pp.1-4. Available at: https://www.thewaltongroup.com.au/wp-content/pushups/2011/09/ASIC_v_Healey_Centro_Directors_Federal_Court_Judgment__27_June_20111.pdf#page=1&zoom=auto,-107,848 [Accessed 3 Jan. 2017].

Downie, A. (2011). The Centro matter: ASIC v Healey [2011] FCA 717 and breach of director’s duties.. [online] The-civil-lawyer.net. Available at: https://www.the-civil-lawyer.net/2011/06/centro-matter-asic-v-healey-2011-fca.html [Accessed 4 Jan. 2017].

Dunn, K 2011, ‘Directors cannot rely on others to discharge their duties’, Keeping Good Companies (14447614), 63, 8, pp. 480-483.

Gamertsfelder, L 2013, ‘Corporate information and the law’, Keeping Good Companies (14447614), 65, 9, pp. 516-520.

Giordano, F 2011, ‘Financial reporting duties of directors — ten corporate governance lessons from Centro for non-executive directors of listed public companies’, Keeping Good Companies (14447614), 63, 7, pp. 390-396.

Healey, J 2012, International Aid, Thirroul, NSW, Australia: Spinney Press, eBook Collection (EBSCOhost).

Hill, JG 2012, ‘Centro And The Monitoring Board – Legal Duties Versus Aspirational Ideals In Corporate Governance’, University Of New South Wales Law Journal, 35, 1, pp. 341-359.

Jacobson, D. (2011). Centro (ASIC v Healey) case note: directors’ duties for financial statements – Bright Law. [online] Bright Law. Available at: https://www.brightlaw.com.au/centro-asic-v-healey-case-note-directors-duties-for-financial-statements/ [Accessed 3 Jan. 2017].

Lowry, J 2012, ‘The Irreducible Core of the Duty of Care, Skill, and Diligence of Company Directors: Australian Securities and Investments Commission v Healey,’ Modern Law Review, 75, 2, pp. 249-260.

Sharp, CA 2012, ‘Centro — revisiting old warnings for NFPs’, Keeping Good Companies (14447614), 64, 6, pp. 334-337.

Smith, C 2016, ‘Company directors who cannot read or understand English warned by Australian court’, Governance Directions, 68, 9, pp. 540-543.

Venus, P 2016, ‘How to avoid disqualification as a director by ASIC’, Governance Directions, 68, 1, pp. 28-31.

Walmsley, S., and Puri, R. (2011). The Centro decision – ASIC v Healey & Ors [2011] FCA 717. [online] Jws.com.au. Available at: https://www.jws.com.au/en/legal-updates-archive/item/198-the-centro-decision-asic-v-healey-ors-2011-fca-717 [Accessed 4 Jan. 2017].