BBAL401 Company Law: ASIC v Healey - Directors' Duties & Breaches

This case study provides an in-depth analysis of the ASIC v Healey case, focusing on the duties and responsibilities of company directors under Australian Corporations Law. It examines the factual background, the issues raised by ASIC regarding potential breaches of Part 2D.1 of the Corporations Act, and the court's reasoning in finding that the directors failed in their duty of care and diligence. The analysis covers the legal arguments presented by both sides, including the directors' reliance on management advice, and concludes with Justice Middleton's judgment emphasizing the irreducible requirement for directors to be involved in the management and monitoring of the company's affairs. The case highlights the importance of directors' careful review of financial statements and their responsibility to ensure compliance with financial reporting obligations. This document is available on Desklib, a platform offering a wealth of study resources, including past papers and solved assignments, designed to aid students in their academic pursuits.

Corporations Law
ASIC v Healey

IRAC 2
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.
Factual Background
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

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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).
Issue
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.
Rule
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

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the application pursuant to section 206C of CA for the disqualification order (Federal Register of
Legislation, 2017).
The ASIC’s contentions in this case were related to the director’s 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

IRAC 5
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 officers 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).

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Conclusion (judgment and role of court)
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 management’s 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

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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 director’s 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 about, as a result of the position held by them in
the company (Austlii, 2011).
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

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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).

IRAC 9
References
Austlii. (2011) Australian Securities and Investments Commission v Healey [2011] FCA 717 (27
June 2011). [Online] Austlii. Available from:
http://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:
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: 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:
http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2011/2011fca1003
[Accessed on: 29/11/17]

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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:
http://www.halseys.com.au/detail.php?id=19 [Accessed on: 29/11/17]
ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from:
http://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:
http://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 29/11/17]