The Federal Court has today found that markets watchdog Australian Securities and Investments Commission has proved its case against Centro directors who failed to notice multi-billion dollar errors in the property group's 2006-07 accounts.
In strong comments, while delivering his decision in Mebourne Justice John Middleton said the directors were "intelligent and experienced men in the corporate world" but he said the case was "not about a mere technical oversight."
Today's finding is likely to add clarity to the hotly debated notion of director's responsibilities, and be examined closely by companies, shareholders and other interested parties. The result is also a significant for ASIC in the high-stakes case.
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"A director is an essential compondent of corporate governance," Justice Middleton said. "Each director is placed at the apex of the structure of direction and management of a company. The higher the office, that is held by a person, the greater the responsibility that falls upon him or her."
"The role of a director is significant as their actions may have a profound effect on the community, and not just shareholders, employees and creditors," Justice Middleton.
The hearing is continuing.
Possible bans
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.
