ASIC v Healey - Case Study Example

Running Head: COMPANIES AND SECURITY LAW Companies and Security Law Name Institution The Centro matter: ASIC v Healey [2011] FCA 717 Centro was an Australian firm that was publicly listed and central to its business was ownership, development and management of retail shopping centres. Some of its business included operating publicly listed investment trusts. Inclusive in Centro was Centro Properties group (this was made up of Centro Properties Limited (CPL) and Centro Properties Trust (CPT)) and Centro Retail Group (made up of Central Retail Limited (CRL) and Central Retail Trust (CRT) (ASIC v Healey, 2011). For the financial year that ended on 30th June 2007, Central Properties Group (CNP) and Central Retails Group’s (CER) financial accounts contained errors and ommissions. These were: CNP’s accounts did not indicate an approximate of $1.5 billion of short-term liabilities which were classified as non-current liabilities. In addition, the accounts did not disclose about US $ 1.75 billion which was the post-balance date of short-term liabilities of an associated company. CER’s accounts did not indicate about $ 500 million of short-term liabilities which were classified as non-current liabilities. (O’Brien, 2011:par. 2) Civil penalties and proceedings of disqualification were brought against Centro’s directors and CFO by ASIC under ss 1317E, 1317G and 206C of the Corporations Act. In these proceedings, it was alleged that the directors contravened the following provisions: (a) s 180(1), being the statutory duty of a director or officer of a corporation to act with reasonable care and diligence; (b) s 601 FD(3), being the statutory duty of an officer of a responsible entity to act with reasonable care and diligence; and (c) s 344, being the statutory duty of a director to take all reasonable steps to secure compliance by the corporation with the financial reporting requirements of the Act. (O’Brien, 2011: par. 3) Those involved in this lawsuit included the CEO, CFO, the non-executive chairman and five non-executive directors (Directors in the Spotlight, 2011). In the judge’s view, at a board meeting attended by the six directors on the 6th Septrmber 2007, the directors failed to take the required steps to comply with section 295A of the act (Jacobson, 2011). The directors included Healey, the CEO and five other non-executive directors.By approving the financial statements, they breached sections 180(1) and s 344(1). Since then, the value of Centro’s securities has reduced notably (Jacobson, 2011). The CFO admitted to the contravention but the executive director Mr. Scott (CEO) and the non-executive directors (chairman Healey) and four others denied contravention. Their assertion was that the errors and ommissions from the 2007 financial year accounts were complex interpretations of new Accounting Standards about which leading accountants had different opinions; this means that they fully depended on Centro’s auditors (PWC) and management. None of these identified the errors or even any issue of non-disclosure relating to the FY07 accounts. In this view, ASIC’s case raised eyebrows on how non-executive directors could notice and correct accouting errors that professional internal accountants and external professional auditors could not identify! (O’Brien, 2011: par. 4). Middleton J did not agree with the directors’ submissions but rather was in favor of ASIC. He held that: a) The non-disclosed information being CNP’s and CER’s current liabilities, and CNP’s guarantee of post-balance date were significant issues and every director knew or should have known the position of the firm regarding these matters. Because of this, the directors should not have certified the FY07 accounts to be true and fair, or published them without properly disclosing the information. b) Directors of publicly listed companies are required to put it in mind and carefully review the proposed financial statements and proposed director’s report to find out if the information these documents contain are tallying with what the director knows about the firm’s affairs, and that nothing in the director’s knowledge is ommitted. c) Had the Centro directors understood the importance of their duty inregard to these financial records, they would have questioned every missing detail (Baxt et al., 1984). The judge stressed that he was neither imposing an unbearable burden to directors, nor was he infringing their right to delegate to others managerial duties or those of preparing draft accounts.he held that the proceeding involved being accountable for documents signed by, adopted or pproved by the directors. The requirement is that before such papers are adopted, they should be read carefully and understood, being put in mind in the light of what the director knows or should know about, since one is in the position of a director (O’Brien, 2011, par. 6). The judge said, “I do not consider this requirement overburdens a director, or as argued before me, would cause the boardrooms of Australia to empty overnight” (O’Brien, 2011, par. 6). This case therefore, shows that there is a vital, uncompromising requirement that directors should be involved in a company’s management, and that necessary measures should be taken for a director to be able to give guidance and to monitor. Therefore, given the responsibility imposed to the director by law to adopt or approve, the director must read, understand and concentrate on the contents of these documents (Bryans, 2011). It is debatable as to whether the judge’s decision created a new law, or set a new standard for the accountability and responsibility of directors for the admissibility of published financial reports. This case has been a success for ASIC and may be considered the Regulator’s effort to raise the standards of corporate governance In Australia. The judge presents this case as one that involves conventional legal procedures to adress obvious failure shown on the directors’ side (O’Brien, 2011, par. 7). Middleton J’s reasoning The decision by Middleton J contains a vital view of legal principles regarding civil penalties and disqualification proceedings against company directors for financial reports and declarations that are wrongly stated or ones containing errors and omissions. Middleton confirmed a line of authority establishing that disqualification proceedings and civil penalties against directors and officers by ASIC must be proved by ASIC on Briginshaw Standard. This means, while the case needs to be proved only to the civil standard on the balance of probabilities, the cause of action, the weight of the allegations for the defendants of being proved liable, all are issues that the tribunal of fact must be mindful of, before being persuaded. Nonetheless, Middleton J did not have difficulty, even while applying the Briginshaw Standard, finding that ASIC had proved their case in this matter against the defendants (O’Brien, 2011, par. 16-18). Middleton J accepted ASIC’s submission in relation to statutory reporting obligations in the following manner: The main elements of statutory reporting regime were summarised by ASIC as: i) Published financial statements certified by the directors are deemed to be correct, true and correct or true and fair has been part of company law. ii) It is a statutory requirement by legislated schedule or accounting standards to differentiate between current and non-current liabilities. iii) It is a requirement for the directors’ reports to deal with post balance date events (especially guarantees) (Lee v Lee’s Air Farming Ltd, 1961). With this requirement, it was proper that Middleton J found the defendants at fault since they did not fully fulfill their duty by certifying the financial statements whereas they understood the financial position of the company. It would be disastrous to assume the duties of the director without this information in mind. Bearing in mind that they had this knowledge, they failed to act according to what they knew or were supposed to know. Middleton J based on the statutory obligations imposed to the directors to report and make a declaration that the company can pay its debts and also that its accounts are true and fair. This needs greater attention. The director needs to be informed about the company’s financial matters in order to be able to create the opinion that is required to make the director’s statement. Currently, the duties of the director are considered objective and not subjective as in the past (O’Brien, 2011, par. 21). The judge’s view that it was absolutely necessary for the directors to have the ability of reading and understanding financial statements and not merely depend on the advice of accountants and auditors, and having the knowledge that assets and liabilities are classified in financial statements as current or non-current was correctly put (The Centro Matter, 2011). They should also have the knowledge to disclose certain activities post balance sheet date. This is in accordance with s 295(4) (d). This act requires that the declarations be made by the directors solely and it is a duty that cannot be delegated (Baxt, et al., 1984)). Ramifications for Directors and Companies If a company’s acounts are unreliable, the effects could be far reaching and disastrous for many stakeholders. The importance therefore has been placed on the directors to make sure that preparation of accurate financial accounts is effected. A keen interest is to be taken while presenting these records in order to take informed decisions about the company’s welfare immediately and in the future. Directors should have an understanding of the obligations imposed on them under the corporations Act. Daily decisions are to be made by the directors depending on the financial position of the company. This also includes incurring debts on the company’s behalf. Without recording accurate financial information, the directors may be likely to breach 180(1), 601FD and 344(1) and Part 5.7B of the corporation law, including insolvent trading. In doing this, they may be held liable to compensate the company for the incurred debts (Tesco Supermarkets Ltd v Nattrass, 1972). Middleton J insisted that the directors should not only rely on expert advice but must themselves also put into scrutiny and review the information and be in agreement with the reported information (H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd, 1957). Directors must approve the information presented in the financial accounts. They must understand and concur that it is a true reflection of the company’s financial position at that time basing on their knowledge of the company’s financial status. Only by doing this would they be fulfilling their obligations under the Corporations Act (ASIC v Healey (Centro Case), 2011). The directors have a duty to prevent insolvent trading basing on ASIC’s Regulatory guide and therefore the following principles have to be followed: They need to remain informed concerning the company’s financial position and affairs. They need to probe financial difficulty immediately and assess the solvency of the company regularly. In case of financial difficulties, they need to seek the required professional advice immediately. They need to act fast on any emergent issues (Co. Macaura v Northern Assurance Co Ltd, 1925). The director therefore is not required to delegate the provision of vital information about the solvence of the company to another person. Comparison of Re City Equitable with ASIC v Healey In considering the proceedings of Re City Equitable, Romer J held that the directors were not being charged for misconduct or negligence but rather a failure to perform their full duty to the company. But according to Art 150, they were excused from liability. In this case, Romer J submitted that in order to ascertain the duties of a director, it was necessary to understand the nature of business that the company is involved in, and the manner of distribution of duties between the directors and other company officials. In performing duty, the director must act with honesty, skill and diligence. The degree of this skill or diligence is not clearly defined. Thus, if a director acts honestly, he or she cannot be held accountable for damaged caused unless proof of gross negligence is given. This is not the same as the ASIC v Healey case where the director was to be liable for the damages caused by negligence and failing to act diligently. The amount of care owed to duty depended on the kind of duties perfomed and therefore this would vary from the position of one director to another. The director needs only to act to the best of his knowledge just as any other person with the same knowledge would in another instance. The director therefore is not liable for mere errors of judgment. According to this case, the director may delegate duties in regard to exigencies of business and articles of association, to any other official so long as the director should trust that official with that duty if there are no grounds for suspicion (Re City Equitable Fire Insurance Ltd, 1925). The directors in this case have been shielded from their liability which is not in the ASIC v Healey case. There are vital duties that must be performed by the director alone in the Healey case. These duties cannot be delegated to another official as seen in this case. Analysis of Two other Cases mentioned in the ASIC vs Healey In the case of ASIC vs Vines, three executives of GIO insurance Ltd Mr. Vines, Mr. Robertson and Mr. Fox were alleged to have contravened statutory duties during the takeover bid by AMP for GIO. This involved the preparation of a target’s statement in response to the bid (ASIC v Vines, 2006). Austin J found that the executives had breached their duties of care and diligence by not ensuring that the GIO auditors and the due diligence committee were well informed and that the target statement was correct. The court decided that the three executives be disqualified under section 1317EA. In considering reason behind the decision, a pattern of disclosure will be taken into account, more so if the disclosure is at a difficult time for the company. There was a greater need for deterrence especially where dishonesty was found as in the case of Fox (ASIC v Vines, 2006). The executives in the ASIC vs Vines case were asked to pay pecuniary fines. At the end of the case, Vines was allowed to appeal against the disqualification from managing a corporation (ASIC v Vine Penalty Reduced, 2007). The ruling in this case was fair as indeed the financial information that was vital for the takeover of the company was not provided at the required time (Appeals and Related Actions in the Federal Court, 2011). In the Deputy Commissioner of Taxation vs Clark, the court suggested that the director’s duty of care and diligence is a vital item in management of a company. This is a factor in prevention of insolvent trading in the company (Little, nd). This was in connection with Southern Cross Interiors Pty Ltd which was in liquidation, paying $208,737.44 to the tax Office by group tax. SCI’s liquidator succeeded in bringing action against the Deputy Commisioner of Taxation (DCT) to repay the money after it was proved that this was an unfair preference. The DCT sought declarations that the two directors, Mr and Mrs Clark were liable to indemnify the DCT to repay the money. However, in this case, Mr Clark had asked Mrs Clark to become director as required by law that the company has two directors. Mrs Clark had no experience in managing a company since she had never been a director before. Most of her time was spent at home and therefore she had no business experience. Mrs Clark said, most of what she did as her duty, she thought was her obligation as a wife and that many things were not explained to her by Mr Clark when signing the company’s documents (Salomon v Salomon & Co, 1987). It was declared that Mr Clark was liable to repay the DCT for the repayment of the money this declaration was not made for Mrs Clark because her inaction came within available defence for a director in s588FGB(5) of the Corporations Act. This act says that it is a defence if in the case of illness or any other good reason the person did not take part in the management of the company at the payment time (Little, n.d.). It was therefore held that because of her lack of understanding and failure for her husband to explain the nature of her responsibilities to the company to her, she believed that she was not to take part in the management of the company. The court considered the duties of a director particularly in reference to insolvent trading and that it is a requirement of corporations’ legislation that a director participates in the management of the company (Supreme Court, 2001). The explanation for failure to participate is focused on a particular point in time and in consideration of the duties imposed upon the director at the time the monies were paid. In addition, the case law, statutory reform and textual context, the word ‘good reasons’ should be read so as not to conflict with the obligation of the directors to participate in the management of the company. In this manner, reasons that cause a director not to participate in the management of a corporation do not good make a ‘good reason’ (Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation, 2001). References Appeals and Related Actions in the Federal Court (2011). Federal Court of Australia. Retrieved from http://www.fedcourt.gov.au/ctlists/ctlists_appeals.html on 30th September 2011 ASIC v Healey [2011] FCA 717 ASIC v Healey (Centro Case) Federal Court Decision 27th June 2011. Retrieved from http://resolutelawyers.blogspot.com/2011/07/asic-v-healey-centro-federal-court.html on 30th September 2011 ASIC v Vines: hefty penalties for breach of duty by company executives (2006). http://www.mallesons.com/publications/marketAlerts/2006/Documents/8663533w.ht m on 30th September 2011 ASIC v Vines penalty reduced on appeal (2007), Australian Regulatory Complianve Review.retrieved from http://www.djacobson.com/australian_regulatory_rev/2007/06/asic-v-vines-pe.html on 30th September 2011 Baxt, R. et al. (1984). Cases and materials on taxation (2nd ed.). Sydney : Butterworths. Bryans, P. (2011). ASIC vs Healey. Retrieved from http://www.freehills.com/7288.aspx on 30th September 2011 Co. Macaura v Northern Assurance Co Ltd [1925] AC 619 H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd [1957] 1 QB 159 Jacobson, D. (2011). Centro (ASIC v Healey) case note: directors’ duties for financial statements. retrieved from: http://www.langes.com.au/australian_regulatory_compliance/2011/06/29/centro-asic- v-healey-case-note-directors-duties-for-financial- statements/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A +AustralianRegulatoryReview+%28Australian+Regulatory+Compliance+Review%2 9 on 30th September 2011 Lee v Lee’s Air Farming Ltd [1961] AC 12 Little, J. (n.d.).What is a 'Good Reason' Not to Participate in the Management of a Company? http://www.findlaw.com.au/articles/1665/what-is-a-good-reason-not-to- participate-in-the-ma.aspx 30th September 2011 Re City Equitable Fire Insurance Ltd [1925] Ch 407 Re City Equitable Fire Insurance Company Ltd, Chancery Division Court of appeal (1925) Ch 407 Salomon v Salomon & Co [1897} AC 22 The Centro matter: ASIC v Healey [2011] FCA 717 and breach of director's duties Retrieved from: http://www.the-civil-lawyer.net/2011/06/centro-matter-asic-v-healey- 2011-fca.html on 30th September 2011 The Supreme Court of New South Wales on Insolvency and Sexually Transmitted Debt; Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621. Retrieved from http://www.hyndco.com.au/publications/supreme_court_of_new_south_wales.htm on 30th September 2011 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 Read More