what centro directors missed

Robert Gottliebsen

What Centro directors missed
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ASICs record in high profile court cases is not good and clearly the regulator would improve Australian corporate governance if it lifted its game in the courts. But all Australian company directors will be hoping that it maintains its poor record in the case against Centro non-executive directors.

If ASIC were to win that case it would change the way Australian boards operate and dramatically increase the cost of running a company as well as substantially lowering the ability of directors to perform their job.

At this point I must emphasise that the courts will decide what are the relevant facts of the Centro case and will decide whether Centro directors are guilty or innocent. Nothing I write will, or should, change that.

But on the surface it would seem that successful prosecution of the case against Centro non-executive directors would create precedents of enormous significance.

When the June 30 2007 Centro Properties and Centro Retail accounts came before the boards, the directors did not believe the companies were under solvency threat. The group had been developed into a series of layers to enable superannuation funds to invest directly in various forms of shopping centre security. The 2007 Centro Properties and Centro Retail accounts were therefore one of the more complex set of documents to come before two boards of directors.

As the board looked at them, they had management assurance that they were correct plus a backing from auditors PricewaterhouseCoopers. On the basis of those assurances directors signed the accounts. It is now alleged that $1.5 billion of borrowings in Centro Properties accounts, and $598 million in Centro Retail, were treated as non-current liabilities but should have been current liabilities (Civility, cynicism and Centro, October 21).

It does not appear that the Centro directors knew of the misclassification when they approved the accounts, which means that the core question for the court is whether they should have known.

Again, I emphasise that the facts are a matter for the court, but if non-executive directors are to be successfully prosecuted for signing in good faith complex accounts audited by a firm of the standing of PWC, then the Australian board experience will be totally changed. Directors will require their own set of auditors to check on the company auditors.

It's important to remember that the Centro board went on to hold the company together in an amazing way to preserve value for shareholders.

Nevertheless, as Stephen Bartholomeusz explained, ASIC did not finish 2009 well (see ASIC needs a win, December 23). It lost its actions against Fortescue Metals Andrew Forrest and former One.Tel co-chief executive Jodee Rich and his finance director Mark Silbermann. There were also scathing comments by a Victorian Supreme Court judge as he threw out ASICs attempt to bring a second case against former AWB chief executive Andrew Lindberg.

ASIC is considering appealing the One.Tel judgement and has lodged an intention to appeal the AWB decision.

In Centro, ASIC is targeting former chairman Brian Healey and former chief executive Andrew Thomas Scott in their directorial capacities, as well as former chief financial officer Romano George Nenna. Non-executive directors being targeted are Paul Ashley Cooper, Peter Graham Goldie, James William Hall, Samuel Kavourakis, and Louis Peter Wilkinson.
ASIC is seeking orders to disqualify the directors and officer from managing corporations and will ask the court to impose pecuniary penalties on them. While these are civil, not criminal, actions by ASIC, they will, if successful, have a profound effect on the way directors conduct their affairs.

Last month Professor Ramsay, director of the Centre for Corporate Law at Melbourne University, said that the criticism heaped upon ASIC by judges highlighted a weakness in its ability to identify cases it could litigate effectively.

''It's probably opportune to consider whether there should be some review about how we conduct such complex litigation,'' Professor Ramsay said (ASIC in need of reform over litigation, December 26).

Maybe Professor Ramsays suggested review should start with the Centro case.