ASIC v Godfrey: Importance of Financial Literacy of Directors

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