Duties and Responsibilities for Directors †MyAssignmenthelp.com

Question: Discuss about the Duties and Responsibilities for Directors. Answer: Introduction In Australia, Corporations Act, 2001 (Cth), herein referred to as CA, is the main legislation which sets out the duties and responsibilities for the directors and officers of the nation, and these are particularly covered under Part 2D.1 of CA (Cassidy, 2006). The reason for putting such duties on the directors is that the business of any company is operated for the shareholders of such company. As a result of these provisions of CA, a breach of the imposed duties and responsibilities result in both civil and criminal liabilities for the director or officer (Latimer, 2012). The case of ASIC v Healey [2011] FCA 717 relates to the breach of the aforementioned duties for seven directors and the Chief Financial Officer of the company (Walmsley and Puri, 2011). This case continues to be a leading decision for the directors in aspect of what not to do while participating in the daily affairs of the company. The following parts would cover a discussion of what exactly happened in this case, the duties which were breached, the arguments made by the parties and the decision given by the court. The ASIC initiated civil proceedings in this case in October 2009 against the present and previous non-executive directors, CFO and CEO of different companies, covered under the Centro Retail Group (Retail) and Centro Properties Group (Properties) in the Federal Court of Australia (Australian Institute of Company Directors, 2011). And this group, for the purpose of this discussion, has been referred to as CG. ASIC sought for a declaration against the pertinent directors and the officer for violating their duties based on the CA, which were owed for the reasons of being a part of CG, related to the sanction of the financial reports. Properties was a staple organization which was formed by Centro Property Trust and Centro Properties Limited. Retail was also a stapled organization, which was formed of Centro Retail Trust and Centro Retail Limited. None of these entities of Centro however were made as a party to the proceedings brought forward by ASIC (Bryans, 2011). The main issue of this case can be stemmed from the contentions raised by the ASIC regarding the possible breach of duties covered under Part 2D.1 of the CA by the defendants of this case. Under the CA, particularly its section 180(1), the company directors are required to make use of their powers and fulfil their duties in such a manner which shows care being taken, along with being diligent in performing their tasks (Austlii, 2017). For being careful and diligent, the directors and the other officers of the company are required to adopt the standards of a rational individual. Hence, there is a need to fulfil the obligations in such a manner as a reasonable individual would do, in case they held the same responsibilities and the same office as that of the officer or director (WIPO, 2015). A breach of provisions covered under section 180(1) result in the attraction of civil obligations set out under section 1317E of CA. This section gives the courts with the power of making a declaration of contravention against the director or officer in question, who has been accused of breaching the provisions of CA (ICNL, 2017). Upon the grant of this declaration, the ASIC can move on to apply for the pecuniary penalties stated under section 1317G or to go forward with the application pursuant to section 206C of CA for the disqualification order (Federal Register of Legislation, 2017). The ASICs contentions in this case were related to the directors failure in performing their duties properly and in taking the requisite steps in order to secure the adherence by CG for the declarations of directors as per section 295A of the CA, the accounting standard compliance based on section 296 of CA, putting forward true and fair position of the company based on section 297 of CA, and lastly, in the matter off annual report of director based on section 298 of CA, and these breaches result in section 344(1) of the CA being contravened. Under this section, the directors are imposed with the duty of undertaking the required steps in order to comply with the financial record keeping of the company, in addition to the reporting requirements for the adherence to the provisions of CA (Bryans, 2011). Analysis (including legal arguments) ASIC initiated this on the main theme of the duties of directors of reading and gaining an understanding to the financial statements properly, accompanied with the application of requisite knowledge for performing the specific task or for the need of attaining such knowledge in order to do such task. To put it more clearly, the ASIC based their claims on the duty of directors regarding being careful and diligent in their work against the defendants of this case, apart from their shortfall in undertaking the steps which were needed for fulfilling the requirements of the financial reporting for CG on the basis of CA (Bryans, 2011). As per the claims made by the ASIC, the financial reports which had been created for CG for the year ended on 30th June 2007 failed to adhere to the accounting standards, coupled with their failure in providing the true and fair picture of the performance of the group and their financial position. This was due to the shortfall in proper classification of a chunk of interest value which bore the liabilities as being current liabilities, which was inherently wrong. The reports failed to carry out a discussion on the key issues, which included the huge amount of short-term debts not being disclosed, and the same was not done for the short-term debt guarantees. This was in addition to the misclassification of short-term debt as a major non-current liability, along with the short-term debt being hidden. As a result of this, a false view of the group was presented in the matter of the short-term debt burden (Halsey Legal Services, 2017). The main issue which was required to be determined by the court in this case was related to such circumstances which could lead to the duties covered under section 344, as a result of the steps which had to be undertaken for being compliant with the financial reporting obligations, where a duty is placed on the directors for scrutinizing every aspect of it and to look into the accounts for any accounting errors or the apparent inaccuracies. Where this was not an obligation, the court had to evaluate the statements and whether there was negligence on part of the directors as they did not see these errors when Price Waterhouse Coopers, who were the external auditor of the company also had missed these in the past, along with the management of the company. This was the key point related to the possible contravention of 180(1) by the different defendants of this case. Aligned with this section was the provisions of section 601FD (1) (b) of CA, which puts a specific emphasis over the offi cers of the company based on a registered scheme. Apart from this case, sections 189, 190 and 198D of the CA were also relevant to the case based on the capability of the directors in delegating their work to management and auditors, apart from the reliance on the systems/ processes of company (Bryans, 2011). The decision was presided over by Justice Middleton of the Federal Court of Australia and they came to the conclusion that there was a breach of the duties by the defendants of this case covered under section 180(1) of CA, in addition to sections 601FD(3) and 344(1) of CA (Jacobson, 2011). Justice Middleton was of the view that the directors had failed in undertaking the steps which were required by them in order to comply with the different provisions of the CA. There was a clear shortfall in undertaking the steps which a reasonable person in similar position and with similar circumstances would have undertaken in order to comply with the different provisions of the CA for the CG and for the other entities of this group. Apart from this, Middleton J opined that the defendants had failed in a big manner when it came to the exercising of the requisite degree of care and diligence when they were reviewing the financial statements which led to the contravention of provisions of this act (Federal Court of Australia, 2011). Middleton J further stated that relying on the managements advice by the defendants could not be a valid or proper substitute in the matter of their own examination and attention in the matter of key issues, particularly when they were the responsibility of the Board, in addition to the duties in the matter of reporting. Every director of the company, along with the board of the company, was under the obligation of properly going through the financial statements before giving it their approval based on governing provisions of CA. This meant that the board had the duty of putting the focus on, and attending the accounts. And based on the given situation, the responsibility could not be simply delegated to another person to hold the same as having being fulfilled (Austlii, 2011). Middleton J did put the necessary light on the reasoning of this judgement. He pointed that the directors of this case were experienced, intelligent and conscientious people and that there was nothing to show that they had acted in a dishonest manner while they were discharging the duties imposed on them. He emphasised on the proceedings for the issue not being a mere technical oversight and that the major issue was related to the directors of the organization, which was mostly a public listed company, and which put a requirement on the defendants to apply their mind in order to carefully review the financial statements which were put before them. This was to be done for the directors report also and there was held a need of determining the information contained in these documents to be consistent with the knowledge of the affairs of the company with the defendants. Also, they should not have simply omitted the key information which they knew about, or which they should have known ab out, as a result of the position held by them in the company (Austlii, 2011). Conclusion As a result of all these reasons, in the view of Middleton J, the arguments put forward by ASIC were indeed correct in the matter of contravention of the different provisions by the defendants of this case, specifically the matter related to the failure of the directors in being careful and diligent towards their work. The absence of evidence regarding the dishonesty of the defendants was also taken into consideration in this case. The court held that the directors had failed, in this case, in adopting the requisite measures, which the virtue of their position required them to do, and due to these reasons, they failed in fulfilling the duties covered under Part 2D.1 of the CA, in addition to the other duties put on them through the various provisions of CA. Middleton J placed his focus for this case on the knowledge of the directors as a result of their position in the CG, as being a reason for this contravention (Austlii, 2011). This decision of the case highlights the significant role played by the Federal Court of Australia in holding the directors of the companies liable in cases of breach of their duties. Middleton J in this case confirmed that the root of the directors duty was in the irreducible requirement of being involved in the management of the company and for taking all such steps which are required to guide and monitor the affairs of the company. Thus, where there is a failure in carefully and diligently checking the contents of the reports given to the directors, they would be held liable, especially when they are the signatories of such reports. This decision is guidance for the directors to question the reports and to gain clarity on the contents of such reports, where something is not clear or known to them (Bryans, 2011). References Austlii. (2011) Australian Securities and Investments Commission v Healey [2011] FCA 717 (27 June 2011). [Online] Austlii. Available from: https://www.austlii.edu.au/au/cases/cth/FCA/2011/717.html [Accessed on: 29/11/17] Austlii. (2017) Corporations Act 2001. [Online] Austlii. Available from: www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/ [Accessed on: 29/11/17] Australian Institute of Company Directors. (2011) Centro Case Summary. [Online] Australian Institute of Company Directors. Available from: https://www.companydirectors.com.au/~/media/Resources/Director%20Resource%20Centre/Governance%20and%20director%20issues/case%20summary/ASIC%20v%20Healey%20Centro%20Directors%20Federal%20Court%20Judgment%20%2027%20June%202011.ashx [Accessed on: 29/11/17] Bryans, P. (2011) ASIC v Healey. [Online] Lexology. Available from: https://www.lexology.com/library/detail.aspx?g=1db0b085-6f89-445e-8548-f1172a1f24b0 [Accessed on: 29/11/17] Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press. Federal Court of Australia. (2011) Australian Securities and Investments Commission v Healey (No 2). [Online] Federal Court of Australia. Available from: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2011/2011fca1003 [Accessed on: 29/11/17] Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Australian Government. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 29/11/17] Halsey Legal Services. (2017) Directors' duties: Control and understand the flow of management information. [Online] Halsey Legal Services. Available from: https://www.halseys.com.au/detail.php?id=19 [Accessed on: 29/11/17] ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 29/11/17] Jacobson, D. (2011) Centro (ASIC v Healey) Case Note: Directors Duties for Financial Statements. [Online] Bright Law. Available from: https://www.brightlaw.com.au/centro-asic-v-healey-case-note-directors-duties-for-financial-statements/ [Accessed on: 29/11/17] Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, NSW: CCH Australia Limited. Walmsley, S., and Puri, R. (2011) The Centro decision - ASIC v Healey Ors [2011] FCA 717. [Online] Johnson Winter Slattery. Available from: https://www.jws.com.au/en/legal-updates-archive/item/198-the-centro-decision-asic-v-healey-ors-2011-fca-717 [Accessed on: 29/11/17] WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 29/11/17]