Centro directors needed to act as 'gatekeepers': ASIC

Jonathan ChancellorDecember 8, 2020

Greg Medcraft, the chairman of the Australian Securities and Investments Commission, has welcomed the Federal Court’s decision in its case against eight directors and former executives of Centro Properties Group, citing it as a landmark decision in Australian corporate governance.

Justice John Middleton’s judgment on the legal duties of directors and management sends a clear message to boardrooms across the country about corporate accountability, according to Medcraft.

“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 directors’ 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,” Medcraft said.

Middleton ruled: “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.”

Medcraft says the case also highlights the danger of boards uncritically relying on management, or the auditors.

“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.

“Directors are an important gatekeeper for our markets,” Medcraft says.

ASIC alleged that the seven directors of Centro Properties Group and Centro Retail Group failed to discharge their duties with due care and diligence in approving the financial reports for Centro Properties Ltd, Centro Property Trust, and Centro Retail Trust for the year ended June 30, 2007.

ASIC also contended that the directors and the former chief financial officer knew that the entities had very significant short-term interest bearing liabilities and should have known that these liabilities were incorrectly classified in the 2007 financial reports.

The defendants to ASIC’s civil penalty action were:

·        Brian Healey, former chairman and non-executive director

·        Andrew Thomas Scott, former chief executive officer and managing director

·        Samuel Kavourakis, a former non-executive director

·        James William Hall, a non-executive director

·        Paul Ashley Cooper, a non-executive director

·        Peter Graham Goldie, a former non-executive director

·       Louis Peter Wilkinson, a former non-executive director; and

·       Romano George Nenna, former CFO.

ASIC sought orders to disqualify the directors and officers from managing corporations and asked the court to impose pecuniary penalties on them.

At the commencement of the trial Nenna filed an amended defence, admitting most of ASIC’s allegations against him.

A penalty hearing is to be scheduled.

The Australian Institute of Company Directors says company directors continue to be concerned about the ongoing confusion between the roles of non-executive directors and management.

The AICD points to Middleton's comment that “there has been no suggestion that each director did not honestly carry out his responsibility as a director”.

"We also note that the Federal Court has not determined whether any defendant should be relieved from liability and also whether any penalties should be imposed," the AICD says.

The AICD says it is important for all company directors to have an understanding of the business which they oversee, as well as a basic understanding of the financial position of the company.

“However, in an environment where the complexity of financial reporting standards and their application continues to increase, the role of company directors continues to become even more onerous.

“The judgment reminds directors that they are entitled to rely on specialist knowledge and advice provided by management and external advisors but cautions directors that there are limits to that reliance,” the AICD says.

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.

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