The recent Federal Court decision of ASIC v Healyreaffirmed the importance of a director's role in preparing and approving a company's financial reports. Although directors may enlist accountants and company management to prepare financial reports, the directors have the ultimate responsibility to review and carefully consider those reports before they are approved and submitted to ASIC.Jeff Holowaychuk
The decision in the ASIC v Healy (Centro Case) relates to a number of errors that were found in the annual financial reports of the Centro Group.
The Centro Group is a retail investment organisation specialising in the ownership, management and development of retail shopping centres.
In 2007, the board meetings of the Centro Group approved financial reports that significantly understated the group's short-term liabilities, being liabilities which are due to be repaid or refinanced within 12 months.
When, some months later, the Centro Group discovered these errors and announced them to the market, ASIC commenced legal proceedings against the Centro Group directors for breaching their duties under the Corporations Act 2001 (Corporations Act).
The Court in the Centro Case was concerned with the obligations imposed on directors under sections 180 and 344 of the Corporations Act. Those duties are as follows:
In particular, the Court examined how these duties applied to the requirement for directors to include a declaration in company financial reports.
The Act, in Part 2M.3, requires certain companies to prepare financial reports and directors' reports for each financial year. Companies that must prepare and lodge financial reports with ASIC include:
A financial report must consist of:
In relation to the director's declaration — which was key to the Court's decision in the Centro case — the directors must declare:
The Court found that:
The Court considered that persons in the position of the Centro Group directors knew, or ought to have known, about the company's short-term liabilities. In addition, company directors should have a basic understanding of accounting principles and standards in order to perform their duties. Therefore, had the directors exercised their powers with a sufficient degree of care and diligence — ie by reading the financial reports with a critical eye — then their knowledge of the company's affairs would have exposed the error and caused them to raise the issue with management and advisors.
Although the Centro case relies heavily on its own circumstances, the decision sets some general points about the duties of directors:
For more information about financial reporting obligations and directors duties more generally, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Maddocks Corporate and Commercial Team.
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Paul is a Special Counsel in the Maddocks Commercial team with particular expertise in commercial agreements for the supply of goods and/or services, the Personal Property Securities Act 2009, the National Consumer Credit Protection Act 2009 and the National Credit Code and the Australian Consumer Law.
Paul's key areas of practice include:
Before joining Maddocks, Paul was employed for 13 years with the Victorian Department of Justice, principally as a Deputy Registrar in the Victorian Magistrate's Court, but also as a legislation, policy and project officer for the Department.
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