Holmes Institute HI6027: ASIC v Healey Case Analysis, T2 2017

This report provides a detailed analysis of the ASIC v Healey case, focusing on the breaches of director duties under the Corporations Act 2001. The case involves seven directors and the CFO of the Centro Retail Group and Centro Properties Group, who were found to have breached their duties re...Read More

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Introduction
The directors in the companies of Australia, along with the officers of such companies have been
imposed different responsibilities under Part 2D.1 of the Corporations Act, 2001, which is an act
of commonwealth and governs all the companies in the nation (Cassidy, 2006). The purpose for
imposing the duties on the directors stems from the fact that the business of the company is run
on behalf of the shareholders by them. Under this very part of the governing act, the civil and
criminal obligations are imposed on the directors in case the duties imposed on them are not met
(Latimer, 2012).
Australian Securities and Investments Commission v Healey [2011] FCA 717 was a case, where
seven directors of the company, along with its Chief Financial Officer were held to have
breached the duties imposed through the governing act (Walmsley and Puri, 2011). In the
following parts, a discussion has been carried on this very case, where the background of the
case is discussed, along with the duties and responsibilities which have been breached by the
directors of this case, and before concluding, the decision of the case has been highlighted.
The Case
In the case of ASIC v Healey, civil proceedings were launched by ASIC back in Oct 2009 against
the present and ex non-executive director, the former CFO, and the former CEO of different
entities, in the Federal Court of Australia, within the Centro Retail Group and the Centro
Properties Group, collectively referred herewith as Centro (Australian Institute of Company
Directors, 2011). A declaration was sought out by the ASIC regarding the relevant officers and

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directors breaching the duties which they had under this act, towards the entities within Centro,
for the approval of Financial Reports. Centro Properties Group was a staple entity, which
consisted of Centro Properties Limited and Centro Property Trust. Centro Retail Group was also
a stapled entity, which consisted of Centro Retail Limited and Centro Retail Trust. Though, none
of the entities of Centro were made a party to these proceedings (Bryans, 2011).
The case which was brought by the ASIC revolved around the central proposition regarding the
director duties to read and understand the financial statements in a proper manner; following by
the application of knowledge for having or for the need of having attained for performing the
particular task. In a crux, the claims made in the submission of ASIC were regarding the breach
of duty of care and diligence by the directors, along with their failure in taking the required steps
for making certain the compliances with the financial reporting obligations contained for Centro,
based on the act, were undertaken, for the reasons given here (Bryans, 2011).
ASIC claimed that the financial reports created of the Centro group for the year which ended on
June 30th, 2007 were not complying with the standards of accounting, and also did not provide
the requisite true and fair view of the performance of the entities and of the financial position of
them, due to the failure in classification of a major value of the interest bearing liabilities as
being the current liabilities. The crucial matters were not disclosed in the reports, including the
non-disclosure of the major amount of short-term debt, along with the guarantees for the short-
term debt. Also, in this case, the short-term debt was not only hidden but was also misclassified
as being a serious of non-current liabilities. Due to these reasons, a false view was given of the
short-term debt burden of the company (Halsey Legal Services, 2017).

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Duties/ Responsibilities Breached
The directors have been given a duty/ responsibility through section 180 of the Corporations Act,
2001, to use their powers and discharge their obligations in a manner which depicts care and
diligence (Australasian Legal Information Institute, 2017). For the purpose of undertaking care
and diligence in the work of the officer and director, this section sets out a standard of a prudent
person. So, the duties have to be used in a manner which a reasonable person would use, had
they held the same office with the same responsibilities and were faced with similar situation
(WIPO, 2015).
Through section 180(1), a civil obligation is set out, for the breach of which, civil penalties are
imposed through section 1317E. Under section 1317E the court has the power of making a
declaration of contravention against the officer or director who breaches their duties covered
under section 180(1) (ICNL, 2017). Further, once this declaration is made, ASIC can apply for
pecuniary penalty order pursuant to section 1317G and can also apply for a disqualification order
pursuant to section 206C (Federal Register of Legislation, 2017).
The claim of ASIC in this case was regarding the failure of the director in taking the required
steps for securing the compliances of the Centro group with regards to the declaration by director
pursuant to section 295A, the compliance with the accounting standards pursuant to section 296,
presenting a true and fair view pursuant to section 297 and regarding the annual report of the
directors pursuant to section 298, which effectively led to the contravention of section 344(1) of
the Corporations Act, 2001. This section imposes a duty on the directors to take all the necessary
steps for complying with the financial record keeping and the need for reporting the obligations
contained in the act (Bryans, 2011).

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The key point here, which was to be determined by the court, was regarding the situation in
which the duty pursuant to section 344 for taking the required steps for securing the compliance
with the obligations of financial reporting, put a duty on the director to scrutinize each line
personally, in the accounts to look for apparent inaccuracies or accounting errors. Even when this
was not a requirement, to understand if there was negligence on part of the directors to have
failed in detecting such errors when the external auditor, Price Waterhouse Coopers and the
management had missed those errors in the past (Bryans, 2011).
This is the point which was taken into consideration to decide upon the possible breach of
section 180 by the defendants of this conduct. Similar to this section is section 601FD(1)(b),
where a specific emphasis is made to the officers of the organization under a registered scheme.
The ability of the directors of delegating the tasks to the auditors and the management and their
reliance on the processes and systems of the company were also relevant in this case, pursuant to
sections 189, 190 and 198D (Bryans, 2011).
Analysis of Court/Tribunal Decision
In this case, Justice Middleton held that every director of the company had breached the duties
imposed on them through sections 180(1), pursuant to section 601FD(3), and lastly, based on
section 344(1) of the Corporations Act, 2001 (Jacobson, 2011). In his view, there was a failure
on part of the directors to take the steps which were required for making certain that the
provisions of this act were complied with. Also, he noted the failure in taking all the steps which
a prudent individual would have taken in case they held the position of the directors, for making
certain that the provisions of this act, by the relevant entities, was undertaken. And lastly, he
stated that there was an utmost failure in the exercising of the required degree of diligence and

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care on part of the directors when they were reviewing the financial statements (Federal Court of
Australia, 2011).
Justice Middleton also held that the reliance on the advice of management could not be
substituted by the management for their examination or own attention towards significant issues
which fall particularly under the responsibilities of the Board, along with the obligations
regarding the reporting. Each of the directors and the Board has been placed with the particular
task of financial statements approval through this act. As a result of this, the members of the
board were given the responsibility of focusing on and attending to such accounts; further, under
the present situations, they could not simply abdicate or delegate this particular reasonability to
another (Australasian Legal Information Institute, 2011).
Justice Middleton also highlighted the reasons behind the decision given by him. It was
explicitly pointed out by Justice Middleton that the directors of this case were conscientious,
intelligent and experienced individuals, and that there were no suggestions that the directors had
not acted in an honest manner while discharging their duties (Paolini, 2014). The emphasis was
laid by Justice Middleton on the proceedings regarding issue not being about a simple technical
oversight. Instead, he believed that the key issue resolved around whether the directors of an
entity which was majorly publicly listed, was required to apply its own mind for carrying out a
careful review regarding the financial statements proposed in front of him, in addition to the
directors’ report, and the determination of the information contained in it to be consistent with
the knowledge of the directors of the affairs of the company, and lastly, regarding not omitting
the material information which they knew or which, by the virtue of their position, they ought to
have known (Australasian Legal Information Institute, 2011).

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Due to these reasons, Justice Middleton was satisfied with the contentions laid down by the
ASIC regarding the breach of sections 180(1), 601FD(3), and 344(1) by the directors of this case,
particularly due to the failure in undertaking the required care and diligence in their work.
Though, he did highlight that there was an absence of any proof regarding the directors being
dishonest. It was just a case of the directors’ failure in taking the required steps which they
should have, by being the director of the company, and by not performing the activities on the
basis of the duties given to them, and lastly, due to their failure in undertaking the required
degree of diligence and care which was required on their part through the law. The emphasis of
Justice Middleton was on the knowledge which the directors should have had, due to their
position (Australasian Legal Information Institute, 2011).
Relevance of Decision
Justice Middleton confirmed that at the core, the irreducible requirement of the director was to be
involved in the company’s management and for taking the required steps on the basis of their
position for guiding and monitoring the company. Hence, it was the responsibility of the
directors to read, gain an understanding and to focus upon the contents of the reports given to
them particularly for the ones for which a responsibility has been imposed on each of the
directors to adopt or approve. This very view of Justice Middleton was crucial as he highlighted
the ability of the directors to rely on the auditors and the management for the financial accounts.
He held that no decision of this case should be taken to mean that the directors need to have the
infinite ability or knowledge. And so, the delegation of work by the directors is normal and has
to be continued. The only thing which is required on part of the directors is to be diligent and
make intelligent decisions by taking an interest in the information provided to them, by reading

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and understanding it and by making enquiries in case they do not understand something.
Enquires are to be made only when the financial statement calls for such enquiries (Bryans,
2011).
Conclusion
On the basis of the discussion carried above, it becomes very clear that the case of ASIC v
Healey was a significant case, majorly because in this case, the duty was breached by not one,
but by seven of the directors of the company, along with the company’s CFO, which is a key
officer of the company. The court held that the directors had failed to discharge the duties
contained in section 180(1) on the directors and officers of the company, as they failed to be
diligent and careful in the matter of different reports which were presented in the board meeting.
Also, there was a huge failure in compliance with key sections of this act, especially when the
officers and the directors were required to fulfill the obligations of carefully reading and
understanding those reports. Owing to these and several other breaches highlighted above, the
directors and the officers of the company were held to have breached their duties.

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References
Australasian Legal Information Institute. (2011) Australian Securities and Investments
Commission v Healey [2011] FCA 717 (27 June 2011). [Online] Australasian Legal Information
Institute. Available from: http://www.austlii.edu.au/au/cases/cth/FCA/2011/717.html [Accessed
on: 20/08/17]
Australasian Legal Information Institute. (2017) Corporations Act 2001. [Online] Australasian
Legal Information Institute. Available from:
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/ [Accessed on: 20/08/17]
Australian Institute of Company Directors. (2011) Centro Case Summary. [Online] Australian
Institute of Company Directors. Available from:
http://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: 20/08/17]
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: 20/08/17]
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:

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http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2011/2011fca1003
[Accessed on: 20/08/17]
Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Australian Government.
Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 20/08/17]
Halsey Legal Services. (2017) Directors' duties: Control and understand the flow of
management information. [Online] Halsey Legal Services. Available from:
http://www.halseys.com.au/detail.php?id=19 [Accessed on: 20/08/17]
ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from:
http://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on:
20/08/17]
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: 20/08/17]
Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, NSW: CCH Australia
Limited.
Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, MA, USA: Edward
Elgar.
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: 20/08/17]

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WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from:
http://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 20/08/17]