Australian Securities and Investments Commission v Healey

Facts

ASIC brought civil penalty proceedings against seven directors and the chief financial officer of Centro Properties Group and Centro Retail Group following the approval and signing of financial statements for the year ended 30 June 2007. The financial statements failed to disclose billions of dollars of short-term liabilities and post-balance-date events relating to the refinancing of debt. Each defendant signed off on the financial statements without appreciating those material errors.

Issues

1. Whether the directors breached their duty of care and diligence under s 180(1) of the Corporations Act 2001 (Cth) by approving financial statements that contained material misstatements. 2. Whether directors are personally required to read, understand and apply their minds to the financial statements they sign, or whether they may rely entirely on management and expert advisers.

Holding

Middleton J held that each of the directors breached s 180(1) of the Corporations Act 2001 (Cth) by approving financial statements without personally reading and understanding them, and that reasonable reliance on management and advisers does not excuse a director from that irreducible personal obligation.

Ratio decidendi

A director has a non-delegable personal obligation to read, understand and focus attention on the financial statements placed before them for approval; the standard of care and diligence in s 180(1) of the Corporations Act 2001 (Cth) requires that a director bring an informed and questioning mind to the task and cannot be satisfied by blind reliance on management or expert advisers, regardless of a director's particular skills or the complexity of the company's affairs.

Obiter dicta

Middleton J observed that the obligations of directors are not fixed but are influenced by the size and nature of the company and the particular responsibilities assumed by each director, and that the business judgment rule in s 180(2) did not apply because approving financial statements is not a 'business judgment' within the meaning of that provision.

Significance

ASIC v Healey is the leading Australian authority on the irreducible personal obligations of directors regarding financial reporting, confirming that no director may discharge their duty of care and diligence under s 180(1) of the Corporations Act 2001 (Cth) solely by delegating scrutiny of financial statements to management or auditors.

Key authorities

• ASIC v Rich ASIC v Rich (2003) 44 ACSR 341applied
• Re City Equitable Fire Insurance Co Ltd Re City Equitable Fire Insurance Co Ltd [1925] Ch 407considered
• Daniels v Anderson Daniels v Anderson (1995) 37 NSWLR 438applied
• AWA Ltd v Daniels AWA Ltd v Daniels (1992) 7 ACSR 759considered
• Permanent Building Society (in liq) v Wheeler Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109considered
• Vrisakis v Australian Securities Commission Vrisakis v Australian Securities Commission (1993) 9 WAR 395considered