The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors: Australian Securities and Investments Commission v Healey

Date01 March 2012
DOIhttp://doi.org/10.1111/j.1468-2230.2012.00898.x
AuthorJohn Lowry
Published date01 March 2012
CASES
The Irreducible Core of the Duty of Care, Skill and
Diligence of Company Directors: Australian Securities and
Investments Commission vHealey
John Lowry*
The decision in ASIC vHealey raises hitherto unexplored questions about the standard of care of
non-executive directors in monitoring the production of financial statements.More par ticularly,
it considers the power of directors to delegate areas of responsibilityrequir ing specialist knowledge
and the degree of permissible reliance on professional advisers. The reasoning of the judge will
doubtless prove helpful to the English courts not only in relation to duty of care issues under
section 174 of the Companies Act 2006, but also when considering the duty to exercise
independent judgment which is now restated in section 173.
INTRODUCTION
The decision handed down by the Federal Court of Australia on 27 June 2011
in Australian Securities and Investments Commission vHealey1(ASIC vHealey),is the
latest development in the trend seen both in Australia and the UK towards
imposing greater accountability on directors in discharging their duties of care,
skill and diligence.2It also highlights the fundamental importance of financial
disclosure both as a regulatory tool and as a key component for ensuring that
the markets can effectively monitor the performance of corporate management.
The case is of interest not only because of the parallels in the two jurisdictions
in the development of the relevant jurispr udence and legislative codification
of the duty of care of directors, but also because of the similarity of the statu-
tory requirements (and the adoption of the International Financial Reporting
*UCL,Faculty of Laws. I owe a debt of gratitude both to Professor JamesPenner and to the anonymous
referee for their insightful comments on an earlier draft of this note.The usual caveat applies.
1 [2011] FCA 717. The case has generated considerable interest in Australia, see, for example, The
Morning Star 29 June 2011. The lawfir ms have also been busy producing briefing notes for clients,
see DLA Piper, ‘So you think you are a good director?’ at www.dlapiper.com/files/Publication/
facc855c-cb7b-42b7-9a37-664632422f67/Presentation/PublicationAttachment/40aaa4bc-4a02-
499d-889b-7d53ad66fd73/DLA246_D%26O_update_29June2011.pdf and Arnold Bloch Leibler
at http://www.abl.com.au/ablattach/ablcasenote210711.pdf (both last visited 11 November 2011).
2 As will be seen, the modern case law,now codified in the companies’ legislation of both jurisdic-
tions, has adopted an objective approach towards the determination of whether directors have
discharged their duties of care,skill and diligence. For Australia,see for example, AWA Ltd vDaniels
t/as Deloitte Haskins & Sells (1995) 37 NSWLR 438, Clarke and Sheller JJA, considered below;and
for the UK, see for example,Re D’Jan Ltd [1993] BCC 646, Hoffmann J (as he then was).
© 2012The Authors.The Modern Law Review © 2012 The Modern Law Review Limited. (2012) 75(2) MLR 249–274
Published by BlackwellPublishing, 9600 Garsington Road, Oxford OX42DQ, UK and 350 Main Street, Malden,MA 02148, USA
Standards and other global accounting standards) which govern corporate finan-
cial disclosure and the directors’ report.3
The proceedings were brought by the Australian Securities and Investments
Commission (the ASIC4) against the CEO, the CFO, the non-executive chair-
man and five other non-executive directors of the Centro group of companies.
ASIC sought declarations that each of the defendants had breached their statu-
tory duty of care and diligence owed to the Centro companies and thereby
contravened relevant provisions of the (Australian) Corporations Act 2001 (Cth)
in approving consolidated financial accounts for the Centro group for the
financial year ending 30 June 2007.The consolidated financial statements had
incorrectly classified A$1.5 billion in debt as non-current liabilities (when they
were in fact current liabilities) and failed to disclose US$1.75 billion in guarantees
(which was found to be a material event which had been entered into after the
balance date). This was in circumstances where both Centro management and
Centro’s auditor, PricewaterhouseCoopers (PwC), had previously reviewed the
financial statements and the directors’ report and had f ailed to identify any such
errors. It was held by Middleton J that each of the directors had breached their
duty of care and diligence in relation to the relevant Centro companies and had
failed to take all reasonable steps to ensure compliance with the financial report-
ing obligations in the 2001 Act. Since these issues arose in the context of the
obligations borne by directors to approve cor porate accounts prior to placing
them in the public domain, it is instr uctive to consider briefly the disclosure
regime that formed the backdrop to the determination of the standard of care
before turning to the reasoning of Middleton J.
THE BACKGROUND
Corporate financial disclosure and the development of the standard of
care of directors
Since the late 1980s there has been a global alignment of the requirements
governing corporate financial disclosure.The broad consensus of opinion is that
trust and confidence in the financial markets can only be maintained if they
are seen to be operating on the basis of accurate and comprehensive financial
information made available to them by companies.5As a corporate governance
tool, disclosure perfor ms a regulatory function in that it compels directors to
manage the company efficiently and responsibly. The received wisdom is that
3 See, for example,the International Accounting Standards developed and issued by the International
Accounting Standards Board.
4 The ASIC is an independent Government body which was established by theAustralian Secur ities
and Investments CommissionAct 2001. It is the primary body responsible for the administration of
company law inAustralia. Its role,amongst other things, is to administer the Corporations Act 2001
and investigate and prosecute breachesof it. In carrying out its regulatory function it has the power
to bring proceedings for civil penalties.See fur ther,http://www.asic.gov.au/asic/asic.nsf (last visited
11 November 2011).
5 See, for example,W.F. Ebke,‘The Impact of theTransparency Regulation on Company Law’in K.
J. Hopt and E. Wymeersch (eds), Capital Markets and Company Law (Oxford: OUP, 2003).
Directors’ Duties of Care
© 2012 TheAuthors. The Modern Law Review © 2012The Modern Law Review Limited.
250 (2012) 75(2) MLR 249–274

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