Directors' Duties and ASIC v. Healey

This assignment examines the significant legal case of ASIC v. Healey, which established stringent requirements for directors regarding their financial acumen and diligence in managing company affairs. The analysis focuses on the case's influence on directors' duties, particularly concerning the comprehension of financial statements and the delegation of responsibilities. Students are expected to delve into the case's details, explore its legal implications, and discuss its lasting impact on corporate governance practices.

CORPORATIONS LAW

TABLE OF CONTENTS
1. INTRODUCTION 1.
2. DUTIES AND RESPONSIBILITIES
BREACHED
1.
3. ANALYSIS OF THE JUDGMENT 4.
4. REFERENCES 6.

INTRODUCTION
It is an established fact that the directors of corporates are obligated to not only makes
their presence in the board meetings and other operations of the company, but are also under a
strict obligation to make an active participation in the relevant affairs of the company. The
Federal Court has delivered a judgement in the year 2011 in order to make a powerful reminder
to the agents of the corporates which includes the directors as well as the officers which are
occupying a similar position in the firms. The said precedent has been set in the name of ASIC v.
Healey (2011). The directors were characterized as agents of the entities and were required to
deliver utmost skills, diligence as well as care in exercising their duties and responsibilities. An
active participation from the end of every director is a necessity now after the pronouncement of
the judgement. The manner in which the judgement has been pronounced is likely to influence
the manner in which the scope of duties shall be interpreted in the future. A particular impact can
be seen in context of financial reporting by the directors and the extent to which they are liable to
exercise skill and care. The judgement of the case is a clear indication of the fact that the courts
view the directors of company as representatives of shareholders, particularly in the case of
public listed corporate (Giordano, 2011). It has been specifically opined by the court that these
officers ought to utilize their expertise as well as experience to evaluate and if required challenge
the manner I which the management is functioning. It is their duty to ensure if the management is
able to fulfil their obligations and responsibilities in an effective manner. The courts through this
judgement have highlighted the importance of analyzing financial statements in order to ensure
the effectiveness of the operations of management.
DUTIES AND RESPONSIBILITIES BREACHED
The facts of the case involved publicly listed firms and the case was pertaining to the
duties as well as responsibilities of directors of these companies. It was alleged that in the case
that the directors of the company failed to exercise due diligence and disclose significant
information which they ought to have known in respect to the company. The said information
was in relation to the short-term responsibilities of the corporate, which in fact were categorized
by the directors as the non-current liabilities. Moreover, the directors were also alleged to be
unknown of the guarantees forwarded pursuant to preparation of the balance sheet in respect to
the liabilities. This unawareness on the part of directors hampered the assessment in relation to
solvency as well as liquidity of the concerned companies. This in turn was considered as
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contravention of section 180(1), 344(1) and 601FD(3) of the Corporations Act 2001 and
therefore, ASIC sought a declaration from the directors. In response to the same the directors
argued that in respect to the financial reporting they completely relied on assurances as well as
expert advice of the management and the auditors. In addition it was stated by them that they
trusted the accuracy of the financial reports as the same was prepared by the experts of the field.
Basing their further argument on the stated justification the directors stated that there was no
breach of any of the provisions of law on their part.
ASIC has now adopted an approach which can be described as a ‘stepping stone’
specifically in respect to director’s statutory duty of care. In this regard the directors and the
related officers are likely to face severe liabilities for corporate fault. This principle is not just
limited to breach of the provisions of the corporation act, but can also be applied in the instances
wherein the environmental laws are violated. Section 180 of the Corporations Act imposes a civil
obligation of exercising care and diligence (Tomasic, Bottomley and McQueen, 2002.). 180(1) of
the Act says that every director and officer of a company shall exercise their responsibilities as
well as discharge their duties in a manner which a reasonable person would have exercised if
he/she was occupying the respective position in the company. In other words, the section
requires every director of the company as well as the officers to act in a reasonable manner at all
time while handling the affairs of the company. It requires them to invest utmost capabilities and
skills while dealing in matters related to the corporate. Section 180(2) of the Act provides for a
presumption in respect to the business judgments which are undertaken by the directors and the
officers. It is presumed under the section that clause (1) has been adhered to by the officers at the
time of making the business judgment. However, this shall stand valid only in the event the
judgment has been made in good faith for a rightful purpose, the officer did not hold any
personal interest in the decision and reasonably believe it to be suitable, are well informed in
relation to the subject matter of the case and consider the decision to be rationally in interest of
the company (Corporations Act 2001 - Sect 180, 2016).
The directors in the case failed to undertake reasonable measures in the capacity of a
director and failed to perform the requisite duties which they ought to have performed. The
failure was in respect to not disclosing the short term debt, which allegedly was well known to
them. It was also observed by the court that these matters should be known to the directors and in
the event the directors were not aware of the same then this amount to be a failure to abide by
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section 180 of the act. In other words, unawareness of this information implies that the directors
did not act in a reasonably fair and diligent manner. The impugned financial reports in question
were approved by the directors, and hence it cannot be characterized as a matter of mere
technical oversight. Non-disclosure of details of short term debt in the financial report led to
implications which were serious in nature for both the shareholders and the share market. The
rationale behind importance to this disclosure is that the market or shareholders shall not be able
to assess the risk in an accurate manner. This in turn vitiates the primary purpose of preparing
and publishing the financial report. In the instant the court opined that the concerned officers
were under an obligation to not only read the statements for accuracy, but also to further enquire
about the details to verify the authenticity of the same (Centro (Asic V Healey) Case Note:
Directors’ Duties For Financial Statements, 2011.). Lastly, they were also made liable for
certifying the reports as true and completely fair reflection of the financial position of the
concerned corporate.
The directors in the instant case were also made liable for contravention of Section 181
of the act, which essentially requires the officers to act in good faith and in contravention of the
same imposes civil obligations. The section imposes the obligation to act in good faith in respect
to best of the interests of members as well as the corporation. Further, it also states that the duties
shall be discharged in a manner which is appropriate for the company and can be termed as a
proper purpose. This section also imposes a civil penalty and has been breached by the directors
involved in the present case (Smith, 2012). Followed by the same, section 344 (1) of the Act has
also been attracted in the present case. The provision makes the officers liable for contravening
the provisions of section 324DAA, DAB and DAC, or Part 2M.2/ 2M.3. These provisions are
particularly in connection to the eligibility terms in respect to directors of listed company. In the
present case, the directors failed to undertake reasonable measures in order to comply with the
relevant provisions and hence, were made liable under this section 344. In addition, the directors
were also made liable for violation of section 601FD of the Act. The section expressly imposes a
statutory duty on the directors as well as the officers, in relation to operation of their respective
entities. This statutory duty is inclusive of acting honestly, in a careful and diligent manner,
prioritizing the best interest of the members and ensuring their welfare. In addition, it has also
been specifically provided that the directors shall not take undue advantage of the secured
information or the position to the detriment of the company, or for personal benefit
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(Corporations Act 2001 - Sect 601FD, 2016). In the instant case the directors breached clause (1)
of section 601FD as they failed to exercise reasonable care and diligence at the time of approving
the financial reports. Moreover, they also did not act in the best interest of the shareholders or the
members of the company, which in turn is also a violation of section 601FD (1). This section
imposes a civil liability on the directors of concerned companies, which amounted to a penalty of
$30,000 in respect to the CEO, along with the other penalties which were imposed.
ANALYSIS OF THE JUDGMENT
The judgment has imposed an irreducible obligation on the director and the related
officers to stay an active part of the management of their respective corporate, and undertake all
possible reasonable measures to monitor and guide the operations of the company. This
obligation has been reiterated as a statutory obligation and has been imposed on the officers of
corporate at the core level. Particularly in respect to financial reports the court has mandated the
concerned officers to go through the entire report in a diligent manner and understand each and
every aspect. This whole process would then require the director to stay informed of all the
affairs of the company and possess knowledge in respect to the financial position. This implies
that the directors in pursuance to this judgement and the related sections shall be required to stay
involved in the affairs of the company, gain a rudimentary understanding in relation to the
business of the corporate, stay aware of fundamentals of the business and stay updated about all
the matters pertaining to the company. In addition to above, the officers shall monitor the manner
in which the corporate affairs are being carried out and in turn, apprise oneself of the financial
status of business or the corporate (ASIC v. Healey (2011), 2011). It can be implied from the
above mentioned obligations that the directors have been appraised with duties which cannot be
delegated. For instance, verification of the financial reports shall be personally undertaken by the
director, and in order to abide by the same all of them shall be financially literate.
The three most important issues which have been ascertained by the court in this
judgment are that of non-delegation of one’s duty, non-reliance on knowledge of others,
financial literacy of the officers and lastly the role of management. One of the most fundamental
contributions of the present case is that it imposed a strict requirement for the directors and the
related officers to possess reasonable skills in respect to understanding of financial statements. It
further requires the directors to act in a reasonably diligent manner to delegate their duties to
others. In addition, the delegation shall not be stayed aloof of criticism and hence, the directors
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shall exercise utmost care and skills in order to make any sort of judgement with respect to the
affairs of the company. Lastly, it requires the directors to undergo special trainings if they find
themselves deficient in any of the mentioned subjects, and upgrade themselves to the best of
their positions. Therefore, it can be concluded that the primary focus of the judgment is on the
diligence and skills of the director in respect to delivery of their duties and responsibilities. In
addition, to always cater to the interests of the corporate and related members.
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REFERENCES
Books and Journals
Giordano, F., 2011. Company Secretary: Financial Reporting Duties of Directors-Ten Corporate
Governance Lessons from Centro for Non-Executive Directors of Listed Public
Companies. Keeping good companies. 63(7). p.390.
Smith, D. K., 2012. Governing the Corporation: the Role of Soft Regulation. UNSWLJ. 35.
p.378.
Tomasic, R., Bottomley, S. and McQueen, R., 2002. Corporations law in Australia. Federation
Press.
Online
ASIC v. Healey (2011), 2011. [PDF]. Available through: <file:///C:/Users/SW/Downloads/ASIC
%20v%20Healey.pdf>. [Accessed on 15th January 2017].
Centro (Asic V Healey) Case Note: Directors’ Duties For Financial Statements, 2011. [Online].
Available through: <https://www.brightlaw.com.au/centro-asic-v-healey-case-note-
directors-duties-for-financial-statements/>. [Accessed on 15th January 2017].
Corporations Act 2001 - Sect 180, 2016. [Online]. Available through:
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html. [Accessed on 15th
January 2017].
Corporations Act 2001 - Sect 601FD, 2016. [Online]. Available through:
<http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s601fd.html>. [Accessed on
15th January 2017].
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