August 25, 2011

Directors update

The recent Federal Court decision of Australian Securities and Investments Commission v Healey [2011] FCA 717 (“Centro”) shows the significant obligations that directors need to take into account when approving financial statements of their company. In this instance, the directors approved financial reports for Centro Property Group and Centro Retail Group which failed to disclose that the cumulative liabilities of both companies were $3.75 billion.

Justice Middleton held that certain directors and former officers of Centro had:

  1. Breached their duties to act with due care and diligence under sections 180(1) and 601FD(3) of the Corporations Act 2001 (Cth)(“the Act”); and
  2. Failed to take all reasonable steps to comply with, or secure compliance with the financial reporting obligations contained in Part 2M.3 of the Act, pursuant to section 344(2) of the Act.

In making this decision, his Honour clarified that directors have a responsibility to read, understand and focus on the contents of the financial reports they are required to approve or adopt. It is not sufficient for a director to be briefed by a party with knowledge of the contents of the financial report.

Further, the responsibility of the director extends to require that the director ensures that the financial statements are consistent with the director’s knowledge of the company’s financial position, which requires the director to examine in detail the report and be continually apprised of the company’s financial circumstances.