Question

Conduct research about the ‘Centro case’ and the legal actions against DickSmith, described in the Australian Financial Review article by Adele Ferguson: “Dick Smith directors hit with legal action from receiver”.

Using the AREA framework, find parallels of the situation of DickSmith with the Centro case. Discuss with your group in class, the role of the board of directors as well as their relationship with the executive management of a company and consider whether directors should be held personally liable in these cases.

Link to the “Centro Case”: https://www.brightlaw.com.au/centro-asic-v-healey-case-note-directors-duties-for-financial-statements/

Link to DickSmith Case: https://www.afr.com/business/retail/afr19adele-column-20170319-gv1fju

Compare and Find the Parallels of the situation of DickSmith with the Centro case,

Dertermine what is the role of the board of director & Director's Liabilities in these case

Answer 1

Compare and Find the Parallels of the situation of DickSmith with the Centro case:

Mr. D Smith and Centro case are both similar in regard to their implications against directors. Both cases are implying the standard of knowledge and care given by a director should be high enough that any mistakes approved by them are now their personal liability. While in the case of Centro, it was the negligently misidentification of $3 Billion of liabilities as non-current that led to the charges; in the D Smith case it was the intentional use of buying up rebate stock with little sale ability to reduce costs and increase profits that led to D smith’s downfall. The role of the directors in the Centro case was to approve financial reports and ensure they were accurate representations that followed the accounting standards.

While the judge said the directors didn’t act dishonestly, it was clear they should have known that a liability to be repaid within 12 months is classified as current.

Dertermine what is the role of the board of director & Director's Liabilities in these case:

The role of the directors in the D smith case was to appropriately manage inventory and debt to keep the company solvent and profitable. Instead they bought up bad stock at rebates to inflate profits. By misinterpreting their current liabilities as long term, the directors in the Centro case breached their duty to exercise care and diligence; as you do not require expertise on accounting standards to know what a current liability is.By promoting a rebate driven buying strategy for stock, the directors of the D smith were potentially breaching their duty to act in good faith, as they were buying up stock that would look like a smaller expense on the balance sheet, but at the ultimate detriment of sales.

While the directors in the Centro case should clearly be held liable for such a clear mistake and breach of duty; the directors of D smith aren’t as clearly liable. There were many checks and balances, including professional auditors who gave them the go ahead for their financial reporting and dividend payment.