A Clear Warning for all Directors

On 27 June 2001, the Federal Court handed down a decision that will reverberate around all boardrooms in Australia. ASIC alleged that their approval of the consolidated financial statement of Centro Properties Ltd, Centro Property Trust and Centro Retail Trust was in contravention of several sections of the Corporations Act. The 2007 annual reports were approved as final financial statements, despite the fact that they failed to disclose billions of dollars of short-term debt.  The case before Justice Middleton of the Federal Court considered "whether directors of substantial publicly listed entities are 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 contain is consistent with the directors' knowledge of the company's affairs, and that they do not omit material matters known to them or material matters that should be known to them."  Justice Middleton found that 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 the law requires of them." His Honour was at pains to limit his decision to the specific circumstances of this case and to point out that "there has been no suggestion that each director did not honestly carry out his responsibilities as a director."  The consequences of this decision for Australian directors should not be ignored. This decision obviously will be interpreted as a warning to all directors. It could be said that the Federal Court has put all Australian directors on notice. They have a duty to ask tough questions in the boardroom and must use their own knowledge when examining things like financial statements. His Honour stated: "the significant matters not disclosed were well known to the directors, or if not well known to them, were matters that should have been well known to them."  His Honour held that "a director, whatever his or her background, has a duty greater than that of simply representing a particular field of experience or expertise. A director is not relieved of the duty to pay attention to the company's affairs, which might reasonably be expected to attract inquiry, even outside the area of the director's expertise."