Question

1. Explain why the directors were liable for breach of duty in ASIC v Healey [2011] FCA 717 and also explain why their defences failed?

Answer 1

The case concerns scope of a director’s duty to exercise reasonable care and skill in understanding the financial reports of a company. The Defendants were 2 Executive and 6 Non-Executive directors of the various Centro companies. During September 2007 board meetings, the directors approved the companies’ accounts. The accounts had several serious errors.

A director cannot simply ‘go through the paces’ when signing off on financial statements. While a director can rely upon others to prepare the financial statements, the requirements for directors under the Corporations Act does not allow directors to simply discharge the responsibility of accurate financial statements to another competent and reliable person. A director is required to read, understand and apply his or her own knowledge to financial statements before approving them. Consequently, they failed to exercise the care and diligence required by directors under the law and thereby breached the relevant Corporations Law directors’ duties provisions.

An argument was raised that the sheer volume of information provided in the financial reports is beyond what a reasonable director can digest and analyse. Justice rejected this and stated that if a director is provided with too much information in regards to a company, so that they cannot understand all its workings, then the director must decrease the volume of information provided to them or increase the amount of time prescribed to absorb the information.