ASIC v Godfrey: Importance of Financial Literacy of Directors

The ASIC v Godfrey case highlights the importance of financial literacy of directors. The report evaluates the facts of the case and the duties which are violated by the directors. The decision given by the court and the relevancy of this case for other corporations which are operating in Australia.

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Corporate Law
ASIC v Godfrey [2017] FCA 1569

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TABLE OF CONTENTS
Introduction................................................................................................................................2
Case Background.......................................................................................................................2
Infringement of director duties...................................................................................................3
Decision of the court..................................................................................................................4
Relevance of the case.................................................................................................................4
Conclusion..................................................................................................................................6
References..................................................................................................................................7

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INTRODUCTION
Directors of a company operate in an apex position, and they have various responsibilities
which they have to comply with. The ASIC v Godfrey [2017] FCA 1569 is a recent case in
which the court highlighted the importance of financial literacy of directors. While
discharging their duties as directors of a corporation, they have to ensure that they are
financially literature. Financial literacy means that directors should not solely rely on the
claims made by the management or external auditors of the company. Directors have to
evaluate themselves that the corporation is complying with the appropriate financial reporting
requirements. The issue, in this case, arises because the managing director of the company,
Patrick Godfrey, failed to take reasonable steps in order to ensure that the corporation meets
its financial reporting requirements (ASIC, 2017a). Due to lack of compliance with the
reporting requirements, the court provided that the director has violated the provision given
under section 344 (1) of the Corporations Act 2001 (Ctb) (Act). This report will evaluate the
facts of the case and the duties which are violated by the directors. This report will also
analyse the decision given by the court and the relevancy of this case for other corporations
which are operating in Australia.
CASE BACKGROUND
The case was filed by ASIC against Patrick Godfrey. He was acting as the managing directors
of Banksia Securities Ltd (Banksia). The company was involved in the business of issuing
public debentures to its clients. The capital collected by the corporation through this
procedure is used for giving loans to third parties. These loans were given for the purposes of
property development. Between the period of 2011 and 2012, Mr Godfrey was operating as
the signatory on various financial reports formed by the enterprise. In these financial
statements, a misstatement was made by the company regarding the level of bad or doubtful
debts which the company was entitled to (BDO Australia, 2018). Moreover, the financial
reports were not made according to the compliance with relevant accounting standards. Due
to these misstatements, the amount of shareholder capital which was available in the
corporation was overstated substantially. When the ASIC decided to investigate in the
company, Mr Godfrey agreed to give his full support to the regulatory body. After its
investigation, ASIC alleged that the company has failed to comply with the relevant

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accounting standards and they did not give a true and fair view regarding the amount
disclosed in the financial reports of the enterprise. It was also alleged by the regulatory
authority that Mr Godfrey has failed to obtain a proper understanding of the requirements
which are given under the accounting standard AASB 139 (ASIC, 2017b). This standard is
relating to financial instruments and their recognition and measurement. Moreover, ASIC
provided that the director has violated the provisions given under section 344 (1) of the act.
INFRINGEMENT OF DIRECTOR DUTIES
The directors of a company have immense powers to take business decisions which come
with huge responsibilities as well. The directors have to ensure that they maintain a high
degree of care and diligence while performing their actions in the company as given under
section 180 of the act. The directors are responsible for ensuring that the company complies
with relevant legislation during its operations. The directors will be held liable regardless of
the fact whether they were involved in the formation of the financial reports or not in case
misrepresent is made in them. They have to ensure that they did not act recklessly or
carelessly and it is their duty to ensure that care is maintained by them to ensure that the
corporation complies with all the relevant provisions (Austlii, 2018). They have to maintain a
standard which a reasonable person would maintain while acting in such position. Subsection
1 of this section provides that the powers must be exercised while ensuring a degree of care.
This case is maintained throughout different circumstances of the corporation which means
that even if the director is not responsible for the actions directly, a suit can be brought for
failing to maintain a standard of care.
The penalty can be imposed on the director for violating the provisions of this act under
section 1317E. This section imposes a civil penalty on the director. Moreover, section 344
imposes a duty on the directors which provides that they will be held liable for contravening
this section due to failure to take reasonable steps to comply with provisions given under Part
2M.2 or 2M.3 (Legislation, 2018). Both of these sections provide provisions regarding
compliance with relevant accounting standards and other policies while preparing the
financial reports of the enterprise. In the case of Mr Godfrey, both of these provisions were
violated. Firstly, he failed to maintain a degree of care to ensure that the financial reports are
prepared while complying with relevant accounting standards. It was the duty of Mr Godfrey,
and due to his carelessness, the financial statements of Banksia showed wrong information

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which adversely affected the interest of the company and its members (Hoffman and Bester,
2018). It was the duty of Mr Godfrey to become more engaged in the process of formation of
the financial reports to ensure that it did not violate the principles given under the
Corporations Act. Since the provisions given under Part 2M.2 and 2M.3 were violated by the
company, Mr Godfrey was held liable for violating section 344 (1).
DECISION OF THE COURT
The court provided in its judgement that Mr Godfrey had failed to maintain a standard of
care. Although he was not indulged in any unfair trade practices, and he also assisted ASIC
during the investigation, however, he was acting as the managing director of the company
due to which he owed a duty of care. Such duty was violated since he failed to ensure that the
financial statements of the enterprise are prepared by complying with relevant accounting
standards. The court holds Mr Godfrey liable for the failure of Banksia to comply with
financial reporting obligations. The court disqualified Mr Godfrey from acting as the director
of the company and prohibited him from managing the corporation for a period of five years.
Moreover, a pecuniary penalty was imposed by the court on Mr Godfrey of $25,000 (Austlii,
2017).
RELEVANCE OF THE CASE
The decision, in this case, is relevant for other Australian corporations, and their directors. It
is a cautionary tale regarding the financial literacy abilities which a director must have while
managing the operations of the company. Mr Godfrey was not aware of the relevant
accounting principles which the corporation has to comply with while preparing its financial
reports. He failed to ensure whether the management of the company or external auditors
have evaluated that the relevant accounting standards are complied during the preparation of
the financial statements (Lacey, 2018). This case shows that the directors cannot delegate
their responsibilities to other parties. It shows that they can be held liable if other parties
failed to do their job. They are operating at an apex position; therefore, they are liable for
ensuring that they discharge their duties while maintaining a level of care and diligence.
Other Australian corporations also have to ensure that they did not violate disclosure
requirements while preparing their financial reports. Effective compliance with all the
relevant accounting standards is necessary for parties to ensure that their financial statements

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show a true and fair view which did not mislead the members. The role of the directors of the
company in the preparation of the financial statements is highlighted in this case as well.

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CONCLUSION
In conclusion, the key issue raised in this case is related to non-compliance with relevant
accounting principles while preparation of financial reports of the company. ASIC initiated
an investigation against Banksia for providing misleading information in its financial
statements. ASIC alleged Mr Godfrey for failing to ensure that relevant accounting standards
are met during the preparation for the reports. The court provided that he is liable for this
mistake and disqualified him from acting as the director of the company for a period of five
years. A penalty of $25, 000 was also imposed on Mr Godfrey. The court provided that while
acting as the director, it is necessary that parties maintain a standard of care. Based on this
degree of care, the director should not solely rely on the management or external auditors to
ensure that all the relevant accounting standards are fulfilled while preparing the financial
report. This case is relevant since it highlights the importance of financial literacy of directors
and the negative consequences which they could face in case they failed to maintain a
standard of care.

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REFERENCES
ASIC. (2017a) Australian Securities and Investments Commission v Godfrey [2017] FCA
1569. [PDF] Available from http://download.asic.gov.au/media/4584779/17-462mr-
attachment-asicvgodfrey2017fca-1569-22-12-2017.pdf [Accessed 27th September 2018].
ASIC. (2017b) ASIC commences proceedings against former managing director of Banksia
Securities Limited. [Online] Available from https://asic.gov.au/about-asic/media-centre/find-
a-media-release/2017-releases/17-205mr-asic-commences-proceedings-against-former-
managing-director-of-banksia-securities-limited/ [Accessed 27th September 2018].
Austlii. (2018) Australian Securities and Investments Commission v Godfrey [2017] FCA
1569 (22 December 2017). [Online] Available from
http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2017/1569.html?
context=1;query=GOdfrey;mask_path=au/cases/cth/FCA [Accessed 27th September 2018].
Austlii. (2018) Corporations Act 2001. [Online] Available from
http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/ [Accessed 27th September
2018].
BDO Australia. (2018) ASIC v Godfrey - Risks for directors and senior executives of
companies who fail to comply with the Corporations Act 2001 and Accounting Standards.
[Online] Available from https://www.bdo.com.au/en-au/accounting-news/accounting-news-
february-2018/asic-v-godfrey [Accessed 27th September 2018].
Hoffman, G. and Bester, C. (2018) ASIC v Godfrey: another cautionary tale about the
financial literacy required of directors. [Online] Available from
https://www.claytonutz.com/knowledge/2018/april/asic-v-godfrey-another-cautionary-tale-
about-the-financial-literacy-required-of-directors [Accessed 27th September 2018].
Lacey, A. (2018) Banking on the financial literacy of directors: is it a breach of duty when
the numbers don’t add up?. [Online] Available from https://mccabecurwood.com.au/banking-
financial-literacy-directors-breach-duty-numbers-dont-add/ [Accessed 27th September 2018].
Legislation. (2018) Corporations Act 2001. [Online] Available from
https://www.legislation.gov.au/Details/C2017C00328 [Accessed 27th September 2018].

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