Question: 3 please refer to attachment b asic wins case...
3) Please refer to “Attachment B” – “ASIC wins case against Centro directors” and answer the following questions:
In this case, which was the hearing at first instance, the court determined that the directors had committed a major breach of duty in relation to the omission of certain contingent liabilities from the company accounts.
b) With reference to at least one statutory provision, identify two (2) parties who the directors had argued in their defence that they were entitled to rely upon and what was their justification for doing so.
ASIC wins case against Centro directors -
Date June 27, 2011
Update A Federal Court judge has strongly warned the corporate regulator to ‘‘consider carefully’’ what it does with a decision handed down this morning that found directors of the Centro property group breached their duties when they failed to notice multi-billion dollar errors in the property group's accounts.
Justice John Middleton said that in the reasons for his decision, which runs to 186 pages, he found the directors were ‘‘intelligent, experienced and conscientious’’ and that they relied on extensive advice and processes before approving erroneous financial statements in 2007.
He also said that ‘‘there is no suggestion that the directors were dishonest’’.
The Australian Securities and Investments Commission will make submissions about penalties on August 1. The corporate regulator could ask the court to ban the directors from managing or serving as directors, financial penalties, or ask for simple declarations.
Outside the court, a spokesman for the six non-executive directors said they were ‘‘disappointed’’ with the decision and would review the detail of the reasons.
Former chief executive, Andrew Scott, declined to comment. Centro’s former chief financial officer, Romano Nenna, was not in court. He has already made certain admissions about ASIC’s allegations.
Justice Middleton this morning found the directors breached their duties when they approved financial statements for 2006-07 which did not disclose that Centro was required to repay billions of dollars of debt within a matter of months.
The judge read 23 paragraphs of his decision in court today. He said the case was ‘‘not about a mere technical oversight’’ but that it went to the heart of whether directors of substantial publicly listed companies must ‘‘apply their minds’’ to their review of financial statements and the directors’ report in order to determine in the information is consistent with what they know and that it does not omit material matters.
‘‘The significant matters not disclosed [the short-term debt and post-balance date guarantees entered into by Centro] were well known to the directors, or if not well known to them, were matters that should have been well known to them,’’ the judge said.
He said considering the significance of the matters that they knew ‘‘they could not have, nor should they have, certified the truth and fairness of the financial statements ...’’
‘‘If they had understood and applied their minds to the financial statements and recognised the importance of their task, each director would have questioned each of the matters not disclosed,’’ Justice Middleton said in his decisions.
‘‘Each director, in reviewing financial statements, needed to enquire further into the matters revealed by those statements.’’
He said what was required of directors was they read, understand and focus on the documents they approve ‘‘with the knowledge each director has or should have by virtue of his or her position as a director’’.
‘‘I do not consider this requirement overburdens a director, or as argued before me, was cause the boardrooms of Australia to empty overnight.’’
‘‘Directors are generally well remunerated and hold positions of prestige, and the office of director will continue to attract competent, diligence [sic] and intelligent people.’’
ASIC will hold a press conference in Sydney responding to the decision.
Centro Property Group shares, meanwhile, lost 0.3 of a cent, or 7.5 per cent, to 3.7 cents in recent trading, valuing the company at just $36 million. Centro Property shares peaked at just over $10 each in May 2007.
Eight of Centro's current and former directors face possible bans and financial penalties following Justice Middleton's findings. ASIC had claimed that the Centro directors fell short of the minimum standard of care expected from boardroom participants.
Centro directors, however, argued that while a mistake was made on their watch, they were entitled to rely on the specialist knowledge and advice provided by Centro's accounting managers and by its auditors, PricewaterhouseCoopers.
They had claimed the regulator is trying to impose an impossibly high standard of perfection, one that would require every director to acquire a finely tuned knowledge of accounting standards and to understand how changes to those standards might affect figures in company accounts.
Centro directors in late 2007 approved financial statements that indicated the company had no short-term debt, when in fact it needed to repay billions of dollars of debt within 12 months, including a $1.1 billion J.P. Morgan facility by December.
$1.1 billion misinterpretation
The $1.1 billion error apparently arose because an accounting standard for short-term debt had been wrongly interpreted. The error was detected after the publication of unaudited preliminary accounts in August, but the court heard it was not brought to the attention of directors before they approved the final version of the accounts in September.
ASIC was suing Centro's former chief executive, Andrew Scott; its former chairman, Brian Healey; current chairman, Paul Cooper; the former head of the audit committee, Sam Kavourakis; current non-executive director, Jim Hall; and former non-executive directors, Peter Wilkinson and Graham Goldie.
Centro's former finance director, Romano Nenna, has already admitted some of ASIC's allegations. During a trial in April and May, the directors claimed they did all that could reasonably be expected.
The court heard some of the directors did not read the final version of the financial statements or that they did not examine them in detail.
It also heard that Centro's final statements went through numerous changes.
In final submissions during May, counsel for ASIC, Mark Derham, QC, told the court the regulator expected a level of ''financial literacy'' of directors, but not a working knowledge of accounting standards.
The 2006-07 accounts also did not disclose that Centro, after June 30, had guaranteed about $1.75 billion of US dollar liabilities for an associated US company.
When the share market in late 2007 learnt Centro was having difficulties refinancing its bank debt, the company's share price plunged. It was not until early 2008 that Centro revealed it had understated its short-term liabilities by about $3 billion.
Justice Middleton will later preside over a directions hearing for two class actions in which investors are suing Centro for losses incurred as a result of the failure to properly disclose the debts. The class actions are not due for trial until March 2012.