Centro Case: A warning for all company directors and their advisors
Peter Gibbons - Joanne D'Andrea
01 July 2011
On 27 June 2011 Federal Court Justice Middleton in Melbourne handed down his decision in a high profile case
brought by ASIC as a consequence of the collapse of the Centro Retail and Property Trust Group (Centro Group)
in 2007-2008.
The decision has important implications for directors of all companies (whether or not publicly listed) and their
advisors. The decision addresses the duties imposed on every director of a company and, in particular, the need for
diligence in approving a company’s financial statements.
1.
Background
The case was brought by ASIC against the chief executive officer, the chief financial officer, the nonexecutive chairman and the other non-executive directors of the failed Centro Group. ASIC alleged that
the former directors of Centro Group:
1.1. breached their duties as directors under the Corporations Act 2001 (Cth) (Act) to read and understand
the financial statements of the group and to apply their background knowledge and experience to the
review of financial statements; and
1.2. were negligent in failing to take all reasonable steps to secure compliance by the company of its
financial accounting obligations.
2.
There was no suggestion that any of the directors had not acted honestly in carrying out their
responsibilities.
3.
The high profile collapse of this significant group of companies had/has widespread implications for
creditors, shareholders, employees and others associated with the Group and the company.
4.
Whilst the decision has not made new law, it serves as a reminder to directors of companies of their
responsibilities under the Corporations Act regarding the approval of financial statements.
Financial reporting requirements
5.
To comply with section 292 of the Act Centro Group was required to prepare financial reports for each
financial year.
6.
Section 295 (4) of the Act required the financial reports to include a declaration by the directors as to:
“(a) whether, in the director’s opinion, there are reasonable grounds to believe that the company, …will
be able to pay its debts as in when they become due and payable; and
(b) whether, in the director’s opinion, the financial statement and notes are in accordance with the Act
…”
Director’s resolutions
7.
At a board meeting held on 6 September 2007 the directors unanimously resolved:
7.1. to approve the consolidated financial statements; and
7.2. that declarations be made in writing by the directors to the effect that:
7.2.1. the financial statements are in accordance with the Act;
7.2.2. the financial statements gave a true and fair view of the financial position of the Centro Group; and
7.2.3. there were reasonable grounds to believe that the Centro Group would be able to pay its debts as
and when they became due and payable.
7.3. The directors signed the declaration.
Errors in the accounts
8.
It later transpired that there were errors in the accounts, particularly, interest bearing liabilities totalling some
$2.6 billion which ought to have been classified and shown in the accounts as current interest bearing
liabilities but which were classified and shown as non-current interest bearing liabilities.
Courts findings
9.
Justice Middleton’s judgment included the following comments, findings and conclusions:
9.1. The directors were all intelligent, experienced and conscientious people who did not act dishonestly
in the discharge of their responsibilities.
9.2. The directors were aware of the current interest bearing liabilities and were aware, or should have
been aware, of the relevant accounting principles which would have alerted the directors to the apparent
error in the financial statements.
9.3. Each director could and should then have made relevant enquiries of management, the board, audit
committee or other directors.
9.4. The directors failed to take all reasonable steps required of them, and acted in the performance of
their duties as directors without exercising the degree of care and diligence which the law requires of
them.
9.5. The proceeding was not about a mere technical oversight; the information not disclosed in the
financial statements regarding the status of the liabilities was a matter of significance to the assessment of
the risks facing the Centro Group.
9.6. The importance of the financial statements is one of the fundamental reasons why the directors are
required to approve them and resolve that the accounts give a true and fair view of the financial situation
of a company.
9.7. The significant matters not disclosed were well known to the directors, or if not well known to them,
they should have been.
9.8. If the directors had properly read, understood and applied their minds to the financial statements,
recognising the importance of their duties as directors, then they would have questioned the matters not
disclosed in the financial statements.
9.9. All directors must carefully read and understand financial statements before they form the opinions
which are to be expressed in the declaration required by Section 295 (4) of the Act. The directors are
required to consider whether the financial statements are consistent with his or her own knowledge of the
company’s financial position.
9.10. Directors are entitled to delegate to others (management and outside parties such as accountants and
auditors) the preparation of the books of accounts and the management of the day to day affairs of the
company. However, a director should take a diligent and intelligent interest in the information available to
him or her, and if necessary make further enquiries if matters revealed in the financial statements call for
such enquiries.
Outcome of case
10. The proceeding has been adjourned to 1 August 2011 when the court will decide what if any penalties are
to be imposed upon the former directors of Centro Group.
Conclusions
11. This case demonstrates and reinforces the importance of directors of all companies, including family trust
companies (not just large or publicly listed corporations) recognising that their duties and obligations as
directors require them to actively scrutinise the financial accounts of the companies of which they are
directors before passing a resolution approving them.
12. Courts have the power to impose severe penalties upon directors who fail to discharge their statutory
duties in cases such as this.
While some of the issues raised in this case are of particular relevance to publicly listed companies, the
underlying principles concerning management of companies identified by Justice Middleton apply
equally to non-publicly listed companies, including companies conducting small and medium size
businesses. These obligations are frequently overlooked and can provide a basis for future dispute with
shareholders and creditors. That dispute can also include unitholders and beneficiaries where a small
private company acts as trustee of a trust.