This article is from the Australian Property Journal archive
THE Australian Securities and Investments Commission has won a landmark victory in the Federal Court against eight directors and former executives of Centro Properties Group.
Justice John Middleton set a new precedence in corporate governance in Australia when he found the former eight directors of breaching their duties as directors, when they misclassified $1.1 billion of short term debt. This caused a ripple effect which revealed that Centro had not disclosed a $US1.75 billion of debt and when the group’s share price plunged in 2007, Centro did not revealed that it had understated short term debt liabilities by about $3 billion, until 2008.
These directors were chairman Brian Healey; CEO Andrew Scott; non-executive director Samuel Kavourakis; non-executive director James William Hall; non-executive director Paul Cooper; non-executive director; non-executive director Peter Goldie; non-executive director Louis Wilkinson and CFO Romano Nenna.
In his 186 pages decision, Justice Middleton found the directors were “intelligent, experienced and conscientious” and that they relied on extensive advice and processes before approving erroneous financial statements in 2007.
Although he added that “there is no suggestion that the directors were dishonest”.
But the judge found the directors had breached their duties and said it was not about a mere technical oversight.
“The significant matters not disclosed [the short-term debt and post-balance date guarantees entered into by Centro] were well known to the directors, or if not well known to them, were matters that should have been well known to them,” he said.
Centro had argued that ASIC’s corporate governance case was an unrealistic expectation on directors’ duties and would put too much burden on them, but the judge disagreed.
“If they had understood and applied their minds to the financial statements and recognised the importance of their task, each director would have questioned each of the matters not disclosed. Each director, in reviewing financial statements, needed to enquire further into the matters revealed by those statements.
“I do not consider this requirement overburdens a director, or as argued before me, was cause the boardrooms of Australia to empty overnight.
“Directors are generally well remunerated and hold positions of prestige, and the office of director will continue to attract competent, diligence [sic] and intelligent people,” Justice Middleton said.
“A director is an essential component of corporate governance. Each director is placed at the apex of the structure of direction and management of the company. The higher the office that is held by a person, the greater the responsibility that falls upon him or her. The role of a director is significant as their actions may have a profound effect on the community, and not just shareholders, employees and creditors,” the judge said.
ASIC will now make a submission for penalty.
ASIC chairman Greg Medcraft the judgement on the legal duties of directors and management sent a clear message to boardrooms across the country about corporate accountability.
“The central question in the proceeding was whether the directors were required to apply their own minds to, and carry out a careful review of, the proposed financial statements and the proposed directors report, to determine that the information they contained was consistent with the director’s knowledge of the company’s affairs, and that they did not omit material matters known to them or material matters that should have been known to them,” he added.
Medcraft said the case also highlighted the danger of boards uncritically relying on management, or the auditors, as Centro did when it blamed PricewaterhouseCoopers.
“Each member of the board must bring and apply their own skills and knowledge when declaring financial statements are true and fair. This is not a responsibility company boards can delegate or merely rubber stamp. It’s not good enough for directors to just be present,” he continued.
Medcraft said there was a minimum standard of boardroom participation that directors must meet. This means the key elements of a company’s financial position are something directors should understand and be able to communicate accurately to the market.
“Directors are an important gatekeeper for our markets. The community expects them to take their responsibilities seriously, and discharge their duties carefully. This case makes clear directors’ responsibilities to apply their skills and knowledge to the financial statements of the company.
“It is not unrealistic to expect that these standards should be met,” Medcraft said.
The decision was also welcomed by the shareholders class action group.
Maurice Blackburn lawyers senior associate Martin Hyde, who is running the class action on behalf of Centro investors, said Justice Middleton’s decision reinforces the class action case.
In 2008, Maurice Blackburn issued Federal Court proceedings on behalf of disgruntled shareholders, alleging that Centro Properties Group and its listed affiliate Centro Retail Group engaged in misleading and deceptive conduct and breached their continuous disclosure obligations in the reporting of their June 2007 accounts.
When the two companies eventually revealed the true extent of their maturing debts in December 2007, their share prices plummeted.
The group members in the Maurice Blackburn Centro class actions, who comprise a broad range of investors, from individuals to the largest financial institutions in Australia, are seeking damages worth several hundred million dollars from Centro and from Centro’s auditors PricewaterhouseCoopers.
Australian Property Journal
