Australian Securities and Investments Commission v Healey
[2011] FCA 717
•27 June 2011
FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Healey [2011] FCA 717
Citation: Australian Securities and Investments Commission v Healey [2011] FCA 717 Parties: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v BRIAN HEALEY, ANDREW THOMAS SCOTT, SAMUEL KAVOURAKIS, JAMES WILLIAM HALL, PAUL ASHLEY COOPER, PETER GRAHAM GOLDIE, LOUIS PETER WILKINSON and ROMANO GEORGE NENNA File number: VID 750 of 2009 Judge: MIDDLETON J Date of judgment: 27 June 2011 Catchwords: CORPORATIONS – Directors and officers – Duties – Functions – Division of functions between Board and management – Non-executive directors – Duties of non-executive directors – Degree of skill required of non-executive directors – Extent to which directors entitled to rely on judgment and advice of management and experts – Duties of chief executive officer – Statutory duty of care and diligence – Standard of care – Duty to read and understand financial statements – Duty to apply background knowledge to review of financial statements
NEGLIGENCE – Directors – Failing to take reasonable steps to secure compliance by a company of its obligations in relation to accounting records – Nature of what is required – Relevance of belief that others discharging the obligation – Reliance on others – Whether reliance on internal and external processes discharges duties of directors – Negligence not mistake
STATUTES - Corporations Act 2001 (Cth) – ss 180, 344, 601FD, 294, 295A, 296, 297, 298, 299, 200A – Interplay between s 180 and s 344 of the Corporations Act 2001 (Cth)
PRACTICE AND PROCEDURE – Pleadings – Principles regarding unpleaded case – Whether parties can depart from pleaded case – No case to answer submission – Election – Procedure in Federal Court of Australia – Federal Court Rules – Order 35 Rule 1 – s 31A of the Federal Court of Australia Act 1976 (Cth)
EVIDENCE – Onus and standard of proof in civil penalty proceedings
Legislation: Companies Act 1896 (Vic)
Companies Act 1929 (UK)
Companies Act 1938 (Vic)
Companies Act 1948 (UK)
Companies Act 1958 (Vic)
Companies Act 1961 (Vic)
Companies Act 1981 (Cth)Companies Act 2006 (UK)
Company Law Review Act 1998 (Cth)
Corporations Act 1989 (Cth)
Corporations Act 2001 (Cth)
Evidence Act 1995 (Cth)
Federal Court of Australia Act 1976 (Cth)
Financial Reporting Act 1993 (NZ)Cases cited: Australian Competition and Consumer Commission v Leahy Petroleum Pty [2009] FCA 1678
Browne v Dunn (1893) 6 R 67
Commercial Union Assurance Co of Australasia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 (CA)
Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1Dyers v The Queen (2002) 210 CLR 285
Freeman v Health Insurance Commission (1997) 78 FCR 91
Hunter Resources Ltd v Melville (1988) 164 CLR 234
Jones v Peters [1948] VLR 331
Kennedy v Wallace (2004) 142 FCR 185; (2004) FCAFC 337
Prentice v Cummins (No 6) (2003) 203 ALR 449; [2003] FCA 1002
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355
Protean (Holdings) Ltd v American Home Assurance Co [1985] VR 187
Rasomen Pty Ltd v Shell Co of Australia (1997) 75 FCR 216
Ryan v Fisher (1976) 51 ALJR 125
Sampson v Richards [1949] VLR 6
Scalise v Bezzina [2003] NSWCA 362
Spencer v The Commonwealth (2010) 241 CLR 118
Swain v Hillman [2001] 1 All ER 91
Trade Practices Commission v George Weston Foods Ltd (No 2) (1980) 43 FLR 55
Trade Practices Commission v Nicholas Enterprises Pty Ltd [1978] ATPR 40-097
Tru Floor Service Pty Ltd v Jenkins (No 2) (2006) 232 ALR 532
Union Bank of Australia v Puddy [1949] VLR 242
White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169
William H Muller & Co v Ebbw Vale Steel, Iron & Coal Ltd [1936] 2 All ER 1363Date of hearing: 4-7, 12-15, 18-20 April 2011, 2-5, 9-11, 16-18 May 2011 Place: Melbourne Division: General Division Category: Catchwords Number of paragraphs: 589 Counsel for the Plaintiff: Mr DMB Derham QC with Mr R Strong and Mr R Pintos-Lopez Solicitor for the Plaintiff: Australian Securities and Investments Commission Counsel for the First, Third, Fourth, Fifth, Sixth and Seventh Defendants: Mr AC Archibald QC with Mr PD Crutchfield SC, Mr NP De Young, Ms CG Button and Mr BA McLachlan Solicitor for the First, Third, Fourth, Fifth, Sixth and Seventh Defendants: Gadens Lawyers Counsel for the Second Defendant: Mr L Glick SC with Mr MS Osborne and Ms FJ Bentley Solicitor for the Second Defendant: Strongman & Crouch Counsel for the Eighth Defendant: Mr T Woodward SC Solicitor for the Eighth Defendant: Schetzer Brott and Appel
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 750 of 2009
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
PlaintiffAND: BRIAN HEALEY
First DefendantANDREW THOMAS SCOTT
Second DefendantSAMUEL KAVOURAKIS
Third DefendantJAMES WILLIAM HALL
Fourth DefendantPAUL ASHLEY COOPER
Fifth DefendantPETER GRAHAM GOLDIE
Sixth DefendantLOUIS PETER WILKINSON
Seventh DefendantROMANO GEORGE NENNA
Eighth Defendant
JUDGE:
MIDDLETON J
DATE:
27 JUNE 2011
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
INTRODUCTION
The Australian Securities and Investments Commission (‘ASIC’) has made application under ss 1317E, 1317G and 206C of the Corporations Act 2001 (Cth) (‘the Act’) for declarations of contravention against the defendants in relation to ss 180(1), 601FD(3) and 344(1) of the Act and for orders that each of the defendants pay pecuniary penalties and be disqualified from managing corporations.
The conduct relied on by ASIC in support of the relief sought is contained in an amended statement of claim filed in the proceeding dated 26 November 2010 (‘the amended statement of claim’). The allegations in the amended statement of claim concern the approval of the consolidated financial statements of Centro Properties Limited (‘CPL’), Centro Property Trust (‘CPT’) and Centro Retail Trust (‘CRT’) for the financial year ending on 30 June 2007 at a board meeting attended by the defendant directors on 6 September 2007.
Other than Mr Nenna (the eighth defendant and Chief Financial Officer (‘CFO’)), the defendants were directors of each Centro company described below. Mr Healey (the first defendant) was the non-executive Chairman. Mr Scott (the second defendant) was the Chief Executive Officer (‘CEO’), and the other directors were non-executive directors.
Each of the directors contested the application. Mr Nenna made certain admissions in his Second Further Amended Defence dated 4 April 2011, although did not admit that the general information required by s 299A of the Act was required to be included in the directors’ report. Otherwise, Mr Nenna has admitted contraventions of s 180(1) and s 601FD(3) of the Act. Subject to a hearing as to whether Mr Nenna should be relieved from liability and as to penalty (if any), Senior Counsel for Mr Nenna sought and was excused from attending the further hearing of the proceeding on liability. Nevertheless, Mr Nenna was to be bound by the evidence put before me in the proceeding, and any findings and determination made that he contravened the Act.
ASIC has proved that the directors and each of them in the course of participating in the resolutions approving the accounts of CPL, CPT and CRT have contravened ss 180(1), 344(1) and 601FD(3) of the Act to the extent claimed in its amended application dated 26 November 2010.
ASIC has proved that Mr Nenna has contravened s 180(1) and 601FD(3) of the Act based upon his admissions and following upon the findings and determination of the Court in this proceeding.
I am yet to determine whether any defendant should be relieved from liability for such contraventions and the imposition of penalties (if any).
By way of briefest summary, I make the following comments regarding the directors. The directors are intelligent, experienced and conscientious people. There has been no suggestion that each director did not honestly carry out his responsibilities as a director. However, I have found, in the specific circumstances the subject of this proceeding, that the directors failed to take all reasonable steps required of them, and acted in the performance of their duties as directors without exercising the degree of care and diligence the law requires of them.
The 2007 annual reports of Centro Properties Group (‘CNP’) and Centro Retail Group (‘CER’) failed to disclose significant matters. In the case of CNP, the report failed to disclose some $1.5 billion of short-term liabilities by classifying them as non-current liabilities, and failed to disclose guarantees of short-term liabilities of an associated company of about US$1.75 billion that had been given after the balance date. In the case of CER, the 2007 annual reports failed to disclose some $500 million of short-term liabilities that had been classified as non-current.
This proceeding is not about a mere technical oversight. The information not disclosed was a matter of significance to the assessment of the risks facing CNP and CER. Giving that information to shareholders and, for a listed company, the market, is one of the fundamental purposes of the requirements of the Act that financial statements and reports must be prepared and published. The importance of the financial statements is one of the fundamental reasons why the directors are required to approve them and resolve that they give a true and fair view.
The significant matters not disclosed were well known to the directors, or if not well known to them, were matters that should have been well known to them.
In the light of the significance of the matters that they knew, they could not have, nor should they have, certified the truth and fairness of the financial statements, and published the annual reports in the absence of the disclosure of those significant matters. If they had understood and applied their minds to the financial statements and recognised the importance of their task, each director would have questioned each of the matters not disclosed. Each director, in reviewing financial statements, needed to enquire further into the matters revealed by those statements.
The central question in the proceeding has been whether directors of substantial publicly listed entities are required to apply their own minds to, and carry out a careful review of, the proposed financial statements and the proposed directors’ report, to determine that the information they contain is consistent with the director’s knowledge of the company’s affairs, and that they do not omit material matters known to them or material matters that should be known to them.
A director is an essential component of corporate governance. Each director is placed at the apex of the structure of direction and management of a company. The higher the office that is held by a person, the greater the responsibility that falls upon him or her. The role of a director is significant as their actions may have a profound effect on the community, and not just shareholders, employees and creditors.
This proceeding involves taking responsibility for documents effectively signed-off by, approved, or adopted by the directors. What is required is that such documents, before they are adopted by the directors, be read, understood and focussed upon by each director with the knowledge each director has or should have by virtue of his or her position as a director. I do not consider this requirement overburdens a director, or as argued before me, would cause the boardrooms of Australia to empty overnight. Directors are generally well remunerated and hold positions of prestige, and the office of director will continue to attract competent, diligence and intelligent people.
The case law indicates that there is a core, irreducible requirement of directors to be involved in the management of the company and to take all reasonable steps to be in a position to guide and monitor. There is a responsibility to read, understand and focus upon the contents of those reports which the law imposes a responsibility upon each director to approve or adopt.
All directors must carefully read and understand financial statements before they form the opinions which are to be expressed in the declaration required by s 295(4). Such a reading and understanding would require the director to consider whether the financial statements were consistent with his or her own knowledge of the company’s financial position. This accumulated knowledge arises from a number of responsibilities a director has in carrying out the role and function of a director. These include the following: a director should acquire at least a rudimentary understanding of the business of the corporation and become familiar with the fundamentals of the business in which the corporation is engaged; a director should keep informed about the activities of the corporation; whilst not required to have a detailed awareness of day-to-day activities, a director should monitor the corporate affairs and policies; a director should maintain familiarity with the financial status of the corporation by a regular review and understanding of financial statements; a director, whilst not an auditor, should still have a questioning mind.
A board should be established which enjoys the varied wisdom, experience and expertise of persons drawn from different commercial backgrounds. Even so, a director, whatever his or her background, has a duty greater than that of simply representing a particular field of experience or expertise. A director is not relieved of the duty to pay attention to the company’s affairs which might reasonably be expected to attract inquiry, even outside the area of the director’s expertise.
The words of Pollock J in the case of Francis v United Jersey Bank (1981) 432 A 2d 814, quoted with approval by Clarke and Sheller JJA in Daniels v Anderson (1995) 37 NSWLR 438, make it clear that more than a mere ‘going through the paces’ is required for directors. As Pollock J noted, a director is not an ornament, but an essential component of corporate governance.
Nothing I decide in this case should indicate that directors are required to have infinite knowledge or ability. Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the day-to-day affairs of the company. What each director is expected to do is to take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an enquiring mind to the responsibilities placed upon him or her. Such a responsibility arises in this proceeding in adopting and approving the financial statements. Because of their nature and importance, the directors must understand and focus upon the content of financial statements, and if necessary, make further enquiries if matters revealed in these financial statements call for such enquiries.
No less is required by the objective duty of skill, competence and diligence in the understanding of the financial statements that are to be disclosed to the public as adopted and approved by the directors.
No one suggests that a director should not personally read and consider the financial statements before that director approves or adopts such financial statements. A reading of the financial statements by the directors is not merely undertaken for the purposes of correcting typographical or grammatical errors or even immaterial errors of arithmetic. The reading of financial statements by a director is for a higher and more important purpose: to ensure, as far as possible and reasonable, that the information included therein is accurate. The scrutiny by the directors of the financial statements involves understanding their content. The director should then bring the information known or available to him or her in the normal discharge of the director’s responsibilities to the task of focussing upon the financial statements. These are the minimal steps a person in the position of any director would and should take before participating in the approval or adoption of the financial statements and their own directors’ reports.
The omissions in the financial statements the subject of this proceeding were matters that could have been seen as apparent without difficulty upon a focussing by each director, and upon a careful and diligent consideration of the financial statements. As I have said, the directors were intelligent and experienced men in the corporate world. Despite the efforts of the legal representatives for the directors in contending otherwise, the basic concepts and financial literacy required by the directors to be in a position to properly question the apparent errors in the financial statements were not complicated.
The main issues in this proceeding can be summarised as follows:
(a)Whether CNP had current interest bearing liabilities of $2.611 billion and CER had current interest bearing liabilities of $598 million which were required to be classified as current liabilities.
(b)Whether the entering into of certain guarantees were material events occurring after the balance date, matters or circumstances which significantly affected the state of affairs of CPT and its controlled entities in subsequent years within the meaning of s 299(1)(d) of the Act, and information that members of the CPL would reasonably require to make an informed assessment of the financial position of CPL or its business strategies and prospects for future years for the purposes of s 299A of the Act.
(c)Whether the directors knew or ought to have known at the time of approving the 2007 accounts that:
(i)CNP and CER had very substantial liabilities in the order of $2.611 billion and $598 million respectively, which were due to be repaid or refinanced within 12 months from the balance date and in relation to which there was no unconditional right to defer payment for at least 12 months after the balance date; and
(ii)since the balance date, guarantees had been given relating to loans totalling in excess of US$2.8 billion which might significantly affect the current state of affairs of CPL and its controlled entities in subsequent financial years.
(d)Whether a reasonable director in the like position of the directors was required to have:
(i)“sufficient” knowledge of “conventional” accounting principles and practices, including that current liabilities generally mean financial obligations which must be “paid” or “satisfied” within 12 months of the balance date and that significant events which occur after that date must be disclosed in the financial report; and
(ii)applied their minds and carried out a careful review of the 2007 accounts to determine whether they accurately reflected the financial position and performance of consolidated entities known to them.
(f)Whether the directors received a declaration in accordance with s 295A(2) prior to approving the accounts, and the consequences of any failure to comply with s 295A.
(g)Whether the directors failed to exercise their powers and discharge their duties with the requisite degree of care and diligence or failed to take all reasonable steps to secure compliance with the Act
Having made these brief remarks in summary, I first turn to outline the nature of the Centro entities so to understand the application in this proceeding, and to briefly set out the statutory requirements and the relevant financial statements.
THE CENTRO ENTITIES
Identification
At all times during the period from 1 October 2006 until 30 September 2007 each of the following bodies was a public company registered under the provisions of the Act:
(a)CPL;
(b)CPT Manager Limited (‘CPTM’);
(c)Centro Retail Limited (‘CRL’); and
(d)Centro MCS Manager Limited (‘CMCSM’).
At all times during the relevant period:
(a)CPT was a managed investment scheme registered under s 601EB of the Act;
(b)CPTM was:
(i)the responsible entity for CPT for the purposes of Part 5C.2 of the Act; and
(ii)a wholly owned subsidiary of CPL;
(c)CPL and all the entities controlled by it and CPT and all the entities controlled by it were collectively known as CNP;
(d)each ordinary share in CPL was stapled to an ordinary unit in CPT (‘CNP stapled securities’);
(e)CNP stapled securities were listed for quotation on the Australian Securities Exchange (‘ASX’); and
(f)for statutory reporting purposes, specifically the requirements of Urgent Issues Group Interpretation 1013 “Consolidated Financial Reports in relation to Pre-Date-of-Transition Stapling Arrangements” (‘UIG 1013’) and Australian Accounting Standard 3 (‘AASB 3’), CPL was deemed to be the parent entity of CNP.
At all times during the relevant period:
(a)CRT was a managed investment scheme registered under s 601EB of the Act;
(b)CMCSM was:
(i)the responsible entity for CRT for the purposes of Part 5C.2 of the Act; and
(ii)a wholly owned subsidiary of CPL;
(c)CRL and all the entities controlled by it and CRT and all the entities controlled by it were collectively known as the CER;
(d)each ordinary share in CRL was stapled to an ordinary unit in CRT (‘CER stapled securities’);
(e)CER stapled securities were listed for quotation on the ASX; and
(f)for statutory reporting purposes, specifically the requirements of Australian Accounting Standards Board Interpretation 1002 “Post-Date-of-Transition Stapling Arrangements” (AASB Interpretation 1002) and AASB 3, CRT was deemed to be the parent entity of CER.
Before 1 October 2004:
(a)CPL was called Prime Property Management Limited; and
(b)another company subsequently called Centro (CPL) Limited (‘Old CPL’) was called Centro Properties Limited.
Corporate Governance in the Centro Group
During the relevant period, there was in force for CNP a written Board Charter (‘Board Charter’).
The Board Charter provided that the responsibilities and functions of the Board of CPL (referred to therein as ‘the Company’) included the following:
(a)reviewing and approving corporate strategies, budgets, annual business plans and Group policies;
(b)monitoring the Company’s financial position and business results (including the audit process) to understand at all times the health of the Company;
(c)ensuring regulatory compliance and maintaining adequate risk management processes; and
(d)ensuring a high level of transparency reporting to security holders and compliance with the highest ethical standards.
It was the policy and practice of the directors that the corporate governance policies and procedures of CNP applied to CER.
During the relevant period:
(a)there was a committee of the directors of CPTM called the Board Audit and Risk Management Committee (‘BARMC’);
(b)the members of the BARMC were Mr Kavourakis, Mr Hall and Mr Cooper;
(c)there was in force a written charter for the BARMC (‘BARMC Charter’); and
(d)the functions of the BARMC as defined in the BARMC Charter applied to CPL, CPT, CMCSM and all other entities in CNP.
The BARMC Charter provided that:
(a)the objectives of the BARMC included assisting the board in discharging its responsibilities with respect to the financial statements, financial report and annual report;
(b)the key responsibilities and functions of the BARMC included the following:
(i)to oversee the preparation of financial statements and reports; and
(ii)oversight of financial controls and systems;
(c)one of the specific functions of the BARMC was to review and report to the board that financial information provided to investors and the board was accurate and reliable; and
(d)the normal procedures for the committee’s audit responsibility included:
(i)determining the reliability and integrity of accounting policies and financial reporting and disclosure practices; and
(ii)monitoring compliance with applicable accounting standards and other requirements relating to the preparation and presentation of financial results.
At all times during the relevant period the auditor of each Centro company and CPT and CRT was PricewaterhouseCoopers (‘PwC’).
OVERVIEW OF FINANCIAL REPORTING REQUIREMENTS OF THE ACT
By s 292 of the Act, each Centro company, CPT and CRT were required to prepare a financial report and a directors report for the financial year ending on 30 June 2007.
By s 295 of the Act, the financial report of each Centro company, CPT and CRT was required to include a declaration by the directors under s 295(4) of the Act:
(a)whether, in the directors’ opinion, there are reasonable grounds to believe that the company, registered scheme or disclosing entity will be able to pay its debts as and when they become due and payable; and
(b)whether, in the directors’ opinion, the financial statement and notes are in accordance with this Act, including:
(i)section 296 (compliance with accounting standards); and
(ii)section 297 (true and fair view); and
(c)save for CPTM and CMCSM, that the directors have been given the declarations required by s 295A,
and that declaration was required to be made in accordance with a resolution of the directors, state the date on which the declaration is made and be signed by a director.
By s 295A of the Act, the directors’ declaration included in the financial reports of CPL, CPT, CRL and CRT under s 295(4) of the Act was required to be made only after each person who performed:
(a)a chief executive function; and
(b)a chief financial officer function
in relation to CPL, CPT, CRL and CRT (as the case may be) had given to the directors a declaration under s 295A(2) of the Act.
Mr Scott and Mr Nenna were the persons who performed the CEO and the CFO function respectively during the relevant period in relation to CPL, CPT, CRL and CRT.
By s 296(1) of the Act, the financial report of each of the Centro companies, CPT and CRT for the financial year ending on 30 June 2007 was required to comply with the accounting standards made by the Australian Accounting Standards Board (‘AASB’) pursuant to s 334 of the Act.
AASB 101 “Presentation of Financial Statements”, as amended (‘AASB 101’) was an accounting standard made by the AASB pursuant to s 334 of the Act and in force during the whole of the relevant period.
At all times during the relevant period, AASB 101 provided that an entity was required to classify a liability as current in its financial reports when:
(a)it expected to settle the liability in its normal operating cycle;
(b)it held the liability primarily for the purposes of trading;
(c)the liability was due to be settled within twelve months after the end of the reporting period; or
(d)the entity did not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period,
and provided that all other liabilities were required to be classified as non-current.
AASB 110 “Events after the Reporting Period” (‘AASB 110’) was an accounting standard made by the AASB pursuant to s 334 of the Act and in force during the whole of the relevant period.
At all times during the relevant period, AASB 110 provided in paragraph 21 that:
If non-adjusting events after the reporting date are material, non-disclosure could influence the economic decisions that users make on the basis of the financial statements. Accordingly, an entity shall disclose the following for each material category of non-adjusting event after the reporting period:
(a) the nature of the event; and
(b)an estimate of its financial effect, or a statement that such an estimate cannot be made.
By s 297 of the Act, the financial statements and notes forming part of the financial report of each Centro company, CPT and CRT for the financial year ending on 30 June 2007, were required to give a true and fair view of the financial position and performance of the respective company and scheme and, in the case of CNP and CER, of each consolidated entity to which they related.
By the operation of s 298 and s 299 of the Act:
(a)each Centro company, CPT and CRT was required to prepare a directors’ report for the financial year ending on 30 June 2007 which included the information required by, amongst other provisions, s 299(1)(d);
(b)the information required by s 299(1)(d) was:
… details of any matter or circumstance that has arisen since the end of the year that has significantly affected, or may significantly affect:
(i) the entity’s operations in future financial years; or
(ii) the results of those operations in future financial years; or
(iii) the entity’s state of affairs in future financial years…
By the operation of s 298 and s 299A of the Act:
(a)the directors’ report of CPL for the financial year ending 30 June 2007 was required to include the information required by subs 299A(1);
(b)the information required by subs 299A(1) was:
… information that members of the listed entity would reasonably require to make an informed assessment of:
(a) the operations of the entity reported on; and
(b) the financial position of the entity reported on; and(c)the business strategies, and prospects for future financial years, of the entity reported on.
By s 314 of the Act:
(a)each of CPL and CPT was required to report to its members for the financial year ending on 30 June 2007 by providing either the financial report for the year together with the other reports mentioned in s 314(1)(a) or a concise report for the year that complied with subsection 314(2);
(b)a concise report for the financial year would comply with subs 314(2) if it consisted of a concise financial report drawn up in accordance with accounting standards made for the purposes of subs 314(2)(a) together with the other reports and documents described in subs 314(2)(b) to 314(2)(c).
AASB 1039 “Concise Financial Reports” (‘AASB 1039’) was an accounting standard made by the AASB pursuant to s 334 of the Act and in force during the whole of the relevant period.
At all times during the relevant period, AASB 1039 provided that a concise financial report must disclose the information required by paragraph 21 of AASB 110 in respect of each event occurring after the reporting date that does not relate to conditions existing at the reporting date.
2007 ANNUAL ACCOUNTS OF CPL AND CPT
At a joint meeting of the boards of directors of CPL and CPTM held on 6 September 2007 attended by the directors and each of them, the directors unanimously:
(a)resolved to approve the consolidated financial statements of CPL and its controlled entities for the year ending on 30 June 2007 (‘CPL 2007 Accounts’) and the consolidated financial statements of CPT and its controlled entities for the year ended 30 June 2007 (‘CPT 2007 Accounts’);
(b)with respect to the CPL 2007 Accounts and the CPT 2007 Accounts, resolved that declarations be made in writing by the directors that:
(i)the financial statements complied with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements;
(ii)the financial statements gave a true and fair view of the financial position of CPL and CPT (as the case may be) as at 30 June 2007;
(c)resolved that in the opinion of the directors:
(i)with respect to the CPL 2007 Accounts and the CPT 2007 Accounts, the financial statements and notes were in accordance with the Act and the company’s Constitution; and
(ii)there were reasonable grounds to believe that CPL and CPT would be able to pay their debts as and when they became due and payable; and
(d)with respect to the CPL 2007 Accounts and the CPT 2007 Accounts, resolved that the Directors’ Reports and Directors’ Statements and the Responsible Entity’s Reports and Declarations be approved, that the reports, statements and declarations be signed by any two directors and that the reports so signed be annexed to the financial statements.
On or about 6 September 2007, Mr Healey and Mr Scott, acting as directors of CPL signed the directors’ declaration for the purposes of s 295(1)(c) of the Act to be included in the CPL 2007 Accounts, which was in the following terms:
In the directors’ opinion:
(a)the financial statements and notes set out at pages 53 to 112 and remuneration disclosures on pages 37 to 50 are in accordance with the Corporations Act 2001, including:
(i)complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and
(ii)giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2007 and of its performance as represented by the results of their operations, changes in equity and their cash flows, for the financial year ended on that date; and
(b)there are reasonable grounds to believe that the Group will be able to pay its debts as an [sic] when they become due and payable; and
(c)the audited remuneration disclosures set out on pages 37 to 50 of the directors’ report comply with Accounting Standards AASB 124 Related Party Disclosures and the Corporations Regulations 2001.
The directors have been given the declaration by the chief executive officer and the chief financial officer required by section 295A of the Corporations Act 2001.
In the opinion of the Directors of Centro Properties Limited the financial statements and notes are in accordance with the Constitution dated 31 July 1989.
This declaration is made in accordance with a resolution of the directors.
It is in dispute whether Mr Scott and Mr Nenna did at any time give to the directors a declaration under s 295A of the Act in relation to the financial records and the financial statements of CPL.
The CPL 2007 Accounts:
(a)stated in note 1 that:
The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
(b)stated in note 1(b) that the financial report had been prepared in accordance with Australian Accounting Standards and the Act;
(c)further stated in note 1(w) that its principal accounting policies included the following:
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.
(d)at least in the accounts lodged with ASIC, stated in note 18 and in the balance sheet that:
(i)the total of interest bearing liabilities for CPL and its controlled entities which were classified as current interest bearing liabilities as at 30 June 2007 was $1,096,936,000; and
(ii)the total of interest bearing liabilities for CPL and its controlled entities which were classified as non-current interest bearing liabilities as at 30 June 2007 was $2,506,815,000.
It seems accepted, but in any event apparent on the evidence that, as at 30 June 2007, CPL and its controlled entities had interest bearing liabilities totalling $2,611,033,581 which:
(a)were required by AASB 101; and
(b)ought under the accounting policy stated in note 1(w),
to have been classified and shown in the balance sheet as current interest bearing liabilities but were classified and shown as non-current interest bearing liabilities.
The CPL 2007 Accounts:
(a)stated the following in note 28:
CONTINGENT LIABILITIES
Bank guarantees of $5 million each (2006: $5 million) have been arranged by the Group in the name of CPT Manager Limited, Centro MCS Manager Limited and Centro Funds Management Limited to guarantee obligations under Australian Financial Services Licence and responsible entity requirements (2006: CPT Manager Limited and Centro MCS Manager Limited). CPT Manager Limited has other contingent liabilities of $2.6 million in the form of bank guarantees to the Road Traffic Authority (“RTA”);
(b)stated the following in note 35:
EVENTS OCCURRING AFTER REPORTING DATE
Proposed Merger of Centro Shopping America Trust and Centro Retail Trust
On 27 August 2007, Centro Retail Trust (“CER”) announced its proposal to merge with Centro Shopping America Trust (“CSF”). Under the proposed merger, Centro agreed to contribute approximately $2.2 billion of Australasian and US property assets in return for an investment in the merged entity. This merger proposal is subject to investor approval in October 2007, at which time the assets would be transferred from Centro. The transfer is expected to have a minimal impact on Centro’s earnings and balance sheet position.
Between 30 June 2007 and 6 September 2007, CPL and CPTM as responsible entity of CPT gave the following guarantees:
(a)Amended and Restated Guaranty Agreement (Non-Recourse Carveouts) executed as of 1 August 2007 in favour of JPMorgan Chase Bank NA;
(b)Guaranty Agreement (Payment) executed as of 1 August 2007 in favour of JPMorgan Chase Bank NA;
(c)Guaranty Agreement (JPMCB) executed as of 5 August 2007 in favour of JPMorgan Chase Bank NA;
(d)Amended and Restated Guaranty Agreement executed as of 31 July 2007 in favour of Bank of America, NA.
On 6 September 2007, Mr Healey and Mr Scott signed the directors’ report for CPL for the year ended 30 June 2007 (‘CPL 2007 Directors’ Report’).
The CPL 2007 Directors’ Report stated at page 49 that:
There has not arisen in the interval between 30 June 2007 and the date hereof any matter or circumstance that has significantly affected or may significantly affect:
(i) the Group’s operations in future financial years; or
(ii) the results of those operations in future financial years; or
(iii) the Group’s state of affairs in future financial years;
except as otherwise referred to in the financial statements or in this Directors’ report.
On 6 September 2007, Mr Healey and Mr Scott, acting as directors of CPTM signed the declaration for the purposes of s 295(1)(c) of the Act to be included in the CPT 2007 Accounts, which was in the following terms:
In the directors’ opinion:
(a)the financial statements and notes set out at pages 53 to 104 and remuneration disclosures on pages 36 to 50 are in accordance with the Corporations Act 2001, including:
(i)complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and
(ii)giving a true and fair view of the Trust’s and consolidated entity’s financial position as at 30 June 2007 and of its performance as represented by the results of their operations, changes in equity and their cash flows, for the financial year ended on that date; and
(b)there are reasonable grounds to believe that the Trust will be able to pay its debts as an when they become due and payable; and
(c)the audited remuneration disclosures set out on pages 36 to 50 of the directors’ report comply with Accounting Standards AASB 124 Related Party Disclosures and Class Order 06/50 issued by the Australian Securities and Investments Commission.
The directors have been given the declaration by the chief executive officer and the chief financial officer required by section 295A of the Corporations Act 2001.
In the opinion of the Directors of CPT Manager Limited the financial statements and notes are in accordance with the Constitution dated 31 July 1989
This declaration is made in accordance with a resolution of the directors.
It is again in dispute whether Mr Scott and Mr Nenna did at any time give to the directors a declaration under s 295A of the Act.
The CPT 2007 Accounts:
(a)stated in note 1 that:
The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
(b)stated in note 1(b) that the financial report had been prepared in accordance with Australian Accounting Standards and the Act;
(c)further stated in note 1(t) that one of the principal accounting policies adopted in the preparation of the financial report was that:
Borrowings are classified as current liabilities unless the Trust has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.
(d)At least in the accounts lodged with ASIC, stated in note 16 and in the balance sheet that:
(i)the total of interest bearing liabilities for CPT and its controlled entities which were classified as current interest bearing liabilities as at 30 June 2007 was $1,096,936,000;
(ii)the total of interest bearing liabilities for CPT and its controlled entities which were classified as non-current interest bearing liabilities as at 30 June 2007 was $2,506,750,000.
It seems accepted, but in any event apparent on the evidence that, as at 30 June 2007, CPT and its controlled entities had interest bearing liabilities totalling $2,611,033,581 which:
(a)were required by AASB 101; and
(b)ought under the accounting policy stated in note 1(t),
to have been classified and shown in the balance sheet as current interest bearing liabilities but were classified and shown as non-current interest bearing liabilities.
The CPT 2007 Accounts:
(a)stated the following in note 24:
CONTINGENT LIABILITIES
The Trust has no contingent liabilities; and
(b)stated the following in note 31:
EVENTS OCCURRING AFTER REPORTING DATE
Proposed Merger of Centro Shopping America Trust and Centro Retail Trust
On 27 August 2007, Centro Retail Trust (“CER”) announced its proposal to merge with Centro Shopping America Trust (“CSF”). Under the proposed merger, Centro agreed to sell approximately $2.2 billion of Australasian and US property assets in return for units in the newly merged entity. This merger proposal is subject to investor approval in October 2007, at which time the assets would be transferred from Centro. The transfer is expected to have a minimal impact on Centro’s earnings and balance sheet position.
Between 30 June 2007 and 6 September 2007, CPTM as responsible entity of CPT gave the following guarantees:
(a)Amended and Restated Guaranty Agreement (Non-Recourse Carveouts) executed as of 1 August 2007 in favour of JPMorgan Chase Bank NA;
(b)Guaranty Agreement (Payment) executed as of 1 August 2007 in favour of JPMorgan Chase Bank NA;
(c)Guaranty Agreement (JPMCB) executed as of 5 August 2007 in favour of JPMorgan Chase Bank NA;
(d)Amended and Restated Guaranty Agreement executed as of 31 July 2007 in favour of Bank of America, NA.
On 6 September 2007, Mr Healey and Mr Scott signed the directors’ report for CPT for the year ended 30 June 2007 (‘CPT 2007 Directors’ Report’).
The CPT 2007 Directors’ Report stated at page 76 that:
There has not arisen in the interval between 30 June 2007 and the date hereof any matter or circumstance that has significantly affected or may significantly affect:
(i) the Trust’s operations in future financial years; or
(ii) the results of those operations in future financial years; or
(iii) the Trust’s state of affairs in future financial years;
except as otherwise referred to in the financial statements or in this Directors’ report.
2007 ANNUAL ACCOUNTS OF CRT
At a meeting of the board of directors of CMCSM held on 6 September 2007 attended by the directors and each of them, the directors unanimously:
(a)resolved to approve the consolidated financial statements of CRT and its controlled entities for the year ended 30 June 2007 (‘CRT 2007 Accounts’);
(b)with respect to the CRT 2007 Accounts, resolved that declarations be made in writing by the directors that:
(i)the financial statements complied with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements;
(ii)the financial statements gave a true and fair view of the financial position of CRT as at 30 June 2007;
(c)resolved that in the opinion of the directors:
(i)with respect to the CRT 2007 Accounts, the financial statements and notes were in accordance with the Act and the Constitution;
(ii)there were reasonable grounds to believe that CRT would be able to pay its debts as and when they became due and payable;
(d)with respect to the CRT 2007 Accounts, that the Directors’ Reports and Directors’ Statements and the Responsible Entity’s Reports and Declarations be approved, that the reports statements and declarations be signed by any two Directors and that the reports so signed be annexed to the financial statements.
On 6 September 2007, Mr Healey and Mr Scott, acting as directors of CMCSM signed the declaration for the purposes of s 295(1)(c) of the Act to be included in the CRT 2007 Accounts, which was in the following terms:
In the Directors’ opinion:
(a)the financial statements and notes set out at pages 36 to 74 and remuneration disclosures on page [sic] are in accordance with the Corporations Act 2001, including:
(i)complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and
(ii)giving a true and fair view of the company’s and the consolidated entity’s financial position as at 30 June 2007 and of its performance, as represented by the results of their operations, changes in equity and their cash flows, for the financial period ended on that date; and
(b)there are reasonable grounds to believe that the Group will be able to pay its debts as an when they become due and payable; and
The directors have been given the declaration by the chief executive officer and the chief financial officer required by section 295A of the Corporations Act 2001.
In the opinion of the Directors of Centro MCS Manager Limited the financial statements and notes are in accordance with the Constitution dated 31 July 1989
This declaration is made in accordance with a resolution of the directors.
It is again in dispute whether Mr Scott and Mr Nenna did at any time give to the directors a declaration under s 295A of the Act.
The CRT 2007 Accounts:
(a)stated in note 1 that:
The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
(b)stated in note 1(b) that the financial report had been prepared in accordance with Australian Accounting Standards and the Corporations Act;
(c)further stated in note 1(s) that one of the principal accounting policies adopted in the preparation of the financial report was that:
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.
(d)at least in the Accounts lodged with ASIC, stated in note 15 and in the balance sheet that:
(i)the total of interest bearing liabilities for CRT and its controlled entities which were classified as current interest bearing liabilities as at 30 June 2007 was $nil;
(ii)the total of interest bearing liabilities for CRT and its controlled entities which were classified as non-current interest bearing liabilities as at 30 June 2007 was $1,443,797,000.
It seems to be accepted, but in any event apparent on the evidence that, as at 30 June 2007, CRT and its controlled entities had interest bearing liabilities totalling $598,292,097 which:
(a)were required by AASB 101; and
(b)ought under the accounting policy stated in note 1(s),
to have been classified and shown in the balance sheet as current interest bearing liabilities but were classified and shown as non-current interest bearing liabilities.
THE RELEVANT SECTIONS OF THE ACCOUNT ON CLASSIFICATION
It is worth observing that the relevant sections of the financial statements (as reported) relating to the classification of liabilities for the year ending on 30 June 2007 are relatively succinct. I accept that these sections appear in a larger context, but they contain important information which could and should be carefully understood by each director.
Relevant sections of the statement of financial position of the relevant entities (as reported) are:
30 Jun 07
$000CPL and its controlled entities Current liabilities Payables 263,341 Interest bearing liabilities 1,096,936 Derivative financial instruments 215,746 Provisions 177,476 Total current liabilities 1,753,499 Non-current liabilities Payables 54,228 Interest bearing liabilities 2,506,815 Non-interest bearing liabilities 283,724 Provisions 1,667 Total non-current liabilities 2,846,434 CPT and its controlled entities Current liabilities Payables 48,849 Interest bearing liabilities 1,096,936 Derivative financial instruments 215,746 Provisions 173,249 Total current liabilities 1,534,780 Non-current liabilities Payables 54,228 Interest bearing liabilities 2,506,750 Non-interest bearing liabilities 149 Total non-current liabilities 2,561,127 CRT and its controlled entities Current liabilities Trade and other payables 14,097 Provisions 72,564 Total current liabilities 86,661 Non-current liabilities Interest bearing liabilities 1,443,797 Deferred tax liabilities 17,799 Total non-current liabilities 1,461,596
SUBSEQUENT EVENTS
I make mention of the following events which occurred after September 2007.
CNP released its 2007 Annual Report containing the concise version of the CPL 2007 Accounts to the ASX on or about 18 September 2007.
CER released its 2007 Annual Report containing the concise version of the CRT 2007 Accounts to the ASX on or about 18 September 2007.
The CPL 2007 Accounts, CPT 2007 Accounts and the CRT 2007 Accounts were lodged with ASIC, pursuant to subs 319(1) of the Act, on 28 September 2007.
At the close of trading on the ASX on 12 December 2007:
(a)the closing price of a CNP stapled security was $5.70;
(b)the closing price of a CER stapled security was $1.42.
On 13 December 2007:
(a)each of CNP and CER requested the ASX to halt trading in their respective stapled securities for two business days until 17 December 2007;
(b)the ASX halted trading in the stapled securities of both CNP and CER until the commencement of trading on 17 December 2007.
On 17 December 2007:
(a)CNP announced to the ASX that:
(i)it was revising its projected earnings downwards by approximately 13%;
(ii)it was continuing to negotiate refinancing of $1.3 billion worth of debt;
(iii)it had obtained an extension until 15 February 2008 of all facilities maturing prior to that date;
(iv)it would not pay a distribution for the half year ended 31 December 2007.
(b)after the announcement referred to in paragraph (a), trading in CNP stapled securities resumed and on that day:
(i)trading began at a price of $2.30 per stapled security;
(ii)the closing price of CNP stapled securities was $1.36.
On 17 December 2007:
(a)CER announced to the ASX that:
(i)it was revising its projected earnings downwards by approximately 5%;
(ii)it was continuing to negotiate refinancing of $1.2 billion worth of debt;
(iii)it had obtained an extension until 15 February 2008 of all facilities maturing prior to that date;
(iv)it would not pay a distribution for the half year ended 31 December 2007, at least until long term refinancing was finalised.
(b)after the announcement referred to in paragraph (a) trading in CER stapled securities resumed and on that day:
(i)trading began at a price of $1.00 per stapled security;
(ii)the closing price of the CER stapled securities was $0.85.
By letter dated 19 December 2007 to Ms Hourigan Company Secretary, ASX requested CNP, amongst other things, to explain the apparent differences in the classification of, and amounts disclosed as, current and non-current debt obligations in the Group’s Appendix 4E, Annual Report and the recent announcement.
By letter dated 20 December 2007 to ASX, Ms Hourigan stated on behalf of CNP, in response to the request, that:
(a)in the appendix 4E the full value of interest bearing liabilities were classified as non-current;
(b)as a result of the identification by management and the auditors of $1,097 million of interest bearing liabilities that should be classified as current, such liabilities were so classified in the financial statements;
(c)at all times since 6 September 2007 the correct classification of current liabilities was available to the market.
On 15 January 2008, CNP announced to the ASX that:
(a)it had initiated a review of the classification of its current and non-current debt in the CPL 2007 Accounts;
(b)it considered that there was a prospect that the proportion of current interest bearing liabilities might have been higher than previously reported.
On 15 January 2008, CER announced to the ASX that:
(a)it had initiated a review of the classification of its current and non-current debt in the CRT 2007 Accounts;
(b)as at January 2008 the debt maturing in 12 months or less had increased from $0.7 billion to $1.3 billion compared with the position disclosed in December 2008.
On 15 February 2008, CNP announced to the ASX that it expected A$1,514,097,090 of interest bearing liabilities which were classified as non-current in the CPL 2007 Accounts to be re-classified as current in addition to the A$1,096,936,000 classified as current in those accounts.
On 15 February 2008, CER announced to the ASX that it expected $598,292,097 of the interest bearing liabilities which were classified as non-current in the CRT 2007 Accounts to be re-classified from non-current to current.
On 29 February 2008 CNP informed ASX that:
(a)it had restated its prior period comparatives to take into account a change in the presentation of $1,514,097,090 of interest bearing liabilities which were previously presented as non-current in the balance sheet as at 30 June 2007 under AASB 101 Presentation of Financial Statements;
(b)the reason for the reclassification was that the original classification did not accord with the requirements of AASB 101;
(c)as a result of the restatement, the amount (rounded to thousands) of interest bearing liabilities as at 30 June 2007 classified as current liabilities had increased from $1,096,936,000 to $2,611,033,000;
(d)CNP had contingent liabilities as at 31 December 2007 in respect of:
(i)a guarantee of US$1,753 million in respect of Centro Super LLC debt;
(ii)a guarantee of US$350 million in respect of Centro Super LLC revolving debt.
On 28 February 2008 CER informed ASX that:
(a)it had restated its prior period comparatives to take into account a change in the presentation of $598.3 million of interest bearing liabilities which were previously presented as non-current in the balance sheet as at 30 June 2007 under AASB 101 Presentation of Financial Statements;
(b)the reason for the reclassification was that the original classification did not accord with the requirements of AASB 101;
(c)as a result of the restatement, the amount (rounded to thousands) of interest bearing liabilities as at 30 June 2007 classified as current liabilities had increased from zero to $598,292,000.
Various proceedings in the Federal Court of Australia have been commenced against various Centro entities arising out of the omissions and errors alleged in this proceeding.
THE DIRECTORS
I should say something further about some of the directors.
The Chairman of the BARMC was Mr Kavourakis. Mr Kavourakis had been appointed as a Director of Centro in November 2003. He had been for a period of eight years the Managing Director of National Mutual Funds Management and during the relevant period was or had been a director of several other listed companies. In a letter dated 24 October 2003 in which he offered Mr Kavourakis an appointment as non-executive director, Mr Healey said “your principal role and responsibilities as a non-executive director of the group is to act in the best interest of the security holders of both Centro and Prime. The role includes approval of the Groups strategy and assisting and overseeing management to execute this strategy. In particular your position on the Board is seen to include your background in the areas of investment and funds management both in general and with specific application to property”.
Mr Hall was appointed to the Boards of Centro in September 2005. Mr Hall holds tertiary qualifications in commerce and during the relevant period was a Fellow of CPA Australia and a member of the Institute of Company Directors. He had been Vice President of Group Accounting and Controller at BHP Billiton and a director and CFO of Orica Ltd.
In a letter dated 5 August 2005 in which he was invited to join the Boards of Centro, his principal role and responsibilities were identified in similar terms to those of Mr Kavourakis, but it was said, that “in particular, your position on the Board is seen to include your strong accounting and financial management background and experience across the full range of financial activities in which a substantial public company is involved”.
Mr Cooper was appointed to the Boards of Centro in October 2006. He had been a practising solicitor and a partner in a major law firm in Melbourne. From 1995 up to and including the relevant time he had been a Director of AXA Asia Pacific Holdings Ltd and a member of the Audit and Compliance Committee of that Board. In a letter dated 31 August 2006, in which he was invited to join the Boards of Centro, his role was described in similar terms to that of Mr Kavourakis and Mr Hall and it was said that “in particular, your position on the Board is seen to include your significant experience in investment banking and corporate advisory work at senior levels and your strong understanding of current and emerging corporate governance requirements and trends”.
The Chairman and non-executive directors were well remunerated. The remuneration of the Chairman Mr Healey was a fee of $376,050 pa. Other non-executive directors were entitled to a fee of $115,000 pa. Mr Kavourakis as Chairman of the BARMC was entitled to an additional fee of $16,000 pa and Mr Cooper and Mr Hall as members of that committee were entitled to an additional fee of $8,000 pa.
Mr Andrew Scott joined Centro in March 1997, after 15 years with Coles Myer Ltd in various senior property finance and strategy positions. His employment was governed by an Executive Service Agreement which renewed on or about 1 March 2005. Mr Scott was bound to carry out his duties faithfully and diligently with the degree of competence and efficiency appropriate for a person serving the group in the position of Managing Director and CEO. In the year ended 30 June 2007 his total remuneration and benefits were over $3.5 million.
PRINCIPLES OF LAW
Before attempting to summarise the evidence, and to focus attention upon the important aspects of this proceeding, I set out some principles of law I consider are appropriate to apply.
Application of the Briginshaw standard
The evidence and issues in this case must be considered by application of what is known as the Briginshaw standard. The allegations are serious and, if substantiated, may be taken to have very serious consequences for the personal and professional reputations of the defendants.
In Australian Securities and Investments Commission v Macdonald(No 11) (2009) 71 ACSR 368, (2009) 230 FLR 1, Gzell J recognised that the seriousness of the allegations and the potential consequences of civil penalty proceedings demanded the application of the Briginshaw standard. His Honour explained (at [182]-[186]) that:
Section 140 of the Evidence Act 1995 prescribes the standard of proof in civil proceedings as the balance of probabilities and provides that the court may take into account in deciding whether it is so satisfied, the nature of the cause of action or defence, the nature of the subject matter of the proceedings and the gravity of the matters alleged.
This provision reflects Dixon J’s discussion of the quality of persuasion required for this purpose in Briginshaw v Briginshaw (1938) 60 CLR 336 at 361–2; [1938] ALR 334 at 342 (Briginshaw). In that case, the High Court held that, on a petition for divorce on the ground of adultery, the standard of proof was not that of proof beyond reasonable doubt.
Dixon J said that when the law requires the proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found. In civil matters, the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal:
The truth is that, when the law requires the proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found. It cannot be found as a result of a mere mechanical comparison of probabilities independently of any belief in its reality. No doubt an opinion that a state of facts exists may be held according to indefinite gradations of certainty; and this has led to attempts to define exactly the certainty required by the law for various purposes. Fortunately, however, at common law no third standard of persuasion was definitely developed. Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters “reasonable satisfaction” should not be produced by inexact proofs, indefinite testimony, or indirect inferences. Everyone must feel that, when, for instance, the issue is on which of two dates an admitted occurrence took place, a satisfactory conclusion may be reached on materials of a kind that would not satisfy any sound and prudent judgment if the question was whether some act had been done involving grave moral delinquency.
To similar effect is the statement of the majority of the High Court in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 at 449–50.
These are civil penalty proceedings where a pecuniary penalty of up to $200,000 and an order disqualifying the individual defendants from managing corporations for such period as the court considers appropriate, are sought. The seriousness of the nature of the cause of action and the gravity of the matters alleged must be taken into account in deciding whether facts have been proved on the balance of probabilities: Adler v ASIC (2003) 179 FLR 1; 46 ACSR 504; [2003] NSWCA 131 at [146]–[148] (Adler NSWCA). This means that, ordinarily, the more serious the consequences of what is contested in litigation, the more a court will have regard to the strength and weakness of evidence before it in coming to a conclusion: CEPU v ASIC (2007) 162 FCR 466; 242 ALR 643; [2007] FCAFC 132 at [30] (CEPU). That means that if inferences are to be drawn, ASIC has to establish that the circumstances appearing in the evidence give rise to a reasonable and definite inference and not merely to conflicting inferences of equal degrees of probability: CEPU at [38].
Similarly, in the Court of Appeal decision of Morley v Australian Securities and Investments Commission (2010) 274 ALR 205; [2010] NSWCA 331; (Spigelman CJ, Beazley and Giles JJA) proceeded upon the basis that the Briginshaw standard applied. Their Honours confirmed that that standard finds its modern expression in the terms of s 140 of the Evidence Act 1995 (Cth) (‘the Evidence Act’) and that the Briginshaw standard is routinely applied in civil penalty proceedings.
In this proceeding, it is also important to remember that where an applicant’s case rests on inferences from primary facts, it is not enough for the circumstances to give rise to conflicting inferences of equal degrees of probability. The principle was stated by the High Court in Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1 and has been adopted repeatedly since (at 5):
Of course as far as logical consistency goes many hypotheses may be put which the evidence does not exclude positively. But this is a civil and not a criminal case. We are concerned with probabilities, not with possibilities. The difference between the criminal standard of proof in its application to circumstantial evidence and the civil is that in the former the facts must be such as to exclude reasonable hypotheses consistent with innocence while the latter you need only circumstances raising a more probable inference in favour of what is alleged. In questions of this sort where direct proof is not available it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference: they must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture… But if circumstances are proved in which it is reasonable to find a balance of probabilities in favour of the conclusion sought then though the conclusion may fall short of certainty, it is not to be regarded as a mere conjecture or surmise.
See Luxton v Vines (1952) 85 CLR 352, at 358, per Dixon, Fullagar and Kitto JJ; Nominal Defendant v Owens (1978) 22 ALR 128 (FC), at 132-133, per Muirhead J (with whom St John J agreed); Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125 (CA), at 141, per Tadgell JA, and cases cited there; and Australian Competition and Consumer Commission v Amcor Printing Papers Group Ltd (2000) 169 ALR 344; [2000] FCA 17.
Financial Reporting
This proceeding is about financial reporting and the role and responsibilities of directors in relation to that task.
It is useful to briefly describe the special treatment given to financial statements over a period of time. A statutory obligation to produce and have audited a financial statement was imposed on the directors of a company in Victoria by s 23 of the Companies Act 1896 (Vic). That section required a balance sheet complying with some basic requirements to be prepared, audited, sent to the shareholders and kept posted up “in a conspicuous place in the registered office of the company and every branch office where the business of the company is carried on.” The balance sheet sent to shareholders had to be accompanied by a certificate signed by one or more directors on behalf of the board stating that in his or her or their opinion the balance sheet is “drawn up so as to exhibit a correct view of the state of the company’s affairs”.
Significant amendments to those requirements were contained in the Companies Act 1938 (Vic), s 123, derived from the Companies Act 1929 (UK). They were expanded to include a separate profit and loss account and a report by the directors as to the state of the company’s affairs. The certificate was to be signed by two directors on behalf of the Board and was required to state their opinion that the balance sheet and profit and loss accounts were “drawn up so as to exhibit a true and correct view of the state of the company’s affairs and the results of the business, respectively”.
In the Companies Act 1958 (Vic) the language “true and correct” was altered to “true and fair” and in addition to being certified as such in a statement of the opinion of the directors, the balance sheet and profit and loss account were required in fact to show a true and fair view. A schedule of the requirements for the content of the statements, which had grown considerably since 1896, was included in the legislation.
This statutory scheme continued through the company law statutes of Victoria until 1980, although with many additions and modifications accruing over the years. Some, which are relevant in this proceeding, are:
(a)the requirements for the content of the balance sheet were modified in 1961 to include a requirement that current and non-current liabilities (using a payable within 12 month test for the distinction) be shown separately:
(b)a requirement was added in 1964 that the directors’ report state “with appropriate details” whether or not any contingent liability had been undertaken by the company since the date of the previous report;
(c)from 1971, the directors statement had to be made in accordance with a resolution of the directors. The requirements for the content of the directors’ report were also expanded and rewritten at this time. They then required the directors to state:
●whether there exists at the date of the report any contingent liability that had arisen since the end of the financial year and if so the general nature thereof;
●whether there had arisen since the end of the financial year and before the date of the report any item, transaction or event of a material and unusual nature.
In the Companies Act 1981 (Cth), the statutory scheme was retained, but there was a considerable expansion in its coverage. In particular, the directors’ statement was also then required to state that in the opinion of the directors the company was able to pay its debts as and when they fell due. By amending legislation in 1983, the obligation to prepare accounts in accordance with approved accounting standards was introduced.
In addition, in forming an opinion as to whether the profit and loss account and balance sheet showed a true and fair view, directors were required to have regard to:
(i) circumstances that have arisen; and (ii) information that has become available, since the end of the financial year to which the accounts relate, being circumstances or information that would, if those accounts had been made out when the statement is made, have affected the determination of an amount or particular in those accounts.
There were no substantial alterations to the statutory scheme in the Corporations Act 1989 (Cth) until the passing of the Company Law Review Act 1998 (Cth), when, the provisions now forming Part 2M.3 (relevantly for present purposes) were enacted.
Key elements of the above developments were correctly summarised by ASIC as follows:
(a)the publication of financial statements certified by the directors to be correct, or true and correct, or true and fair, has been part of company law for at least 115 years;
(b)there has been a statutory obligation, by means of a legislated schedule or accounting standards, to distinguish between current and non-current liabilities for the past 50 years; and
(c)post balance date events (especially contingent liabilities such as guarantees) have been required to be dealt with in directors’ reports since the mid-1960s.
As ASIC noted, all of the developments above long preceded the business careers of the defendants.
There has also been development in the common law.
In Metal Manufacturers Ltd v Lewis (1986) 11 ACLR 122 Hodgson J observed that a director seeking to perform the duties in what was then s 269 and s 270 of the Companies Act 1981 (Cth) (in particular the making of the directors’ statement) would have made observations and drawn conclusions from the balance sheet. In the NSW Court of Appeal, where the decision was upheld, Kirby P spoke of a “statutory scheme” encompassing s 229 (duty to act with care and diligence) and the reporting provisions in ss 269 and 270 which require the directors to address their minds to the affairs of the company, and requires a higher level of attention than was the case in the past.
In Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405, another case about insolvent trading, Ormiston J pointed to the then ss 269 and 270 and said (at 406) that the presence of those provisions meant that “a director is obliged to inform himself or herself as to the financial affairs of the company to the extent necessary to form each year the opinion required for the director’s statement.” Later, his Honour said (at 431):
In the light of the various duties now imposed upon the directors, it would not appear unreasonable that they should apply their minds to the overall position of the company.
… Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the day-to-day affairs of the company. What each director is expected to do is to take a diligent and intelligent interest in the information either available to him or which he might with fairness demand from the executives or other employees and agents of the company. (own emphasis)
In Commonwealth Bank of Australia v Friedrich and Ors (1991) 5 ACSR 115. Justice Tadgell expressed his agreement with what had been said in Statewide Tobacco Services Ltd v Morley and added this (at 126):
As the complexity of commerce has gradually intensified (for better or for worse) the community has of necessity come to expect more than formerly from directors whose task it is to govern the affairs of companies to which large sums of money are committed by way of equity capital or loan. In response, the parliaments and the courts have found it necessary in legislation and litigation to refer to the demands made on directors in more exacting terms than formerly; and the standard of capability required of them has correspondingly increased. In particular, the stage has been reached when a director is expected to be capable of understanding his company’s affairs to the extent of actually reaching a reasonably informed opinion of its financial capacity. Moreover, he is under a statutory obligation to express such an opinion annually. I think it follows that he is required by law to be capable of keeping abreast of the company’s affairs… (own emphasis)
Later in dealing with the facts of the case, Tadgell J performed some analysis of the information contained in the 1987 accounts of the relevant company (the National Safety Council of Victoria) and stated a number of propositions about what could be derived from an examination of them. The propositions included observations about the ratio of current assets to current liabilities, increases in debtors and work in progress, and the relationship of those items with a reported increase in turnover. These, he said, would have been found without difficulty upon a consideration of those accounts by a “director seeking to do his duty”. He went on to say (at 185):
These figures, and the calculations I have indicated, are not complicated. They could, I think, be fairly easily appreciated by any adult person of normal intelligence who had a general knowledge of the company’s activities and an inclination to consider the accounts and the auditor’s report for half an hour. A non-executive director of a company whose figures they were should, in my judgment, have been able to derive from the documents at least the simple propositions I have set out. The company was not an elementary organisation operating in a back yard, but one with a stated annual turnover of $60m, having stated liabilities of at least $131m and the use of very substantial resources and some hundreds of employees: its affairs demanded an appreciable degree of diligent application by its directors if they were to attempt to do their duty. The deserved degree of application should have enabled an appreciation by a director of its 1987 accounts and the audit report thereon at least to the extent I have indicated. (own emphasis)
In AWA Ltd v Daniels (1992) 7 ACSR 759, at 864, Rogers CJ Comm Div said:
A director is obliged to obtain at least a general understanding of the business of the company and the effect that a changing economy may have on that business. Directors should bring an informed and independent judgment to bear on the various matters that come to the Board for decision. (own emphasis)
The New South Wales Court of Appeal in Daniels v Anderson considered the matter further. In the course of the relevant part of the judgment of Clarke and Sheller JJA, their Honours said that “the modern cases to which we have referred, set in the context of a legislative pattern of imposing greater responsibility upon directors, demonstrate that the director’s duty of care is not merely subjective, limited by the director’s knowledge and experience or ignorance and inaction.” They went on to endorse observations made in the New Jersey decision of Francis v United Jersey Bank (1981) 432 A 2d 814 which included the following:
Because directors are bound to exercise ordinary care, they cannot set up as a defence lack of the knowledge needed to exercise the requisite degree of care.
…
While directors are not required to audit corporate books, they should maintain familiarity with the financial status of the corporation by a regular review of the financial statements.… The review of financial statements, however, may give rise to a duty to inquire further into matters revealed by those statements. (own emphasis)
In Deputy Commissioner of Taxation v Clark [2003] NSWCA 91 Spigelman CJ (with whom the other members of the New South Wales Court of Appeal agreed) reviewed the authorities, including those mentioned above, and said (at [108]–[109]) that:
What constitutes breach of the standards of care and of diligence, in a particular case, will depend on a wide variety of circumstances including the precise nature of the business conducted by the company and the composition of its board. However, the case law indicates that there is a core, irreducible requirement of involvement in the management of the company.
Although the standard of skill may vary in accordance with the particular skills of the director, the core, irreducible requirement of skill involves an objective test, such as “ordinary competence” (3M Australia Pty Ltd v Kemish (at 373) per Foster J) or “reasonable ability” (Rema Industries & Services Pty Ltd v Coad (1992) 7 ACSR 251 at 259, per Lockhart J). An equivalent objective test applies to the core, irreducible requirement of diligence, such as “reasonable steps to place themselves in a position to guide and monitor the management of the company”, per Rogers J in AWA Ltd v Daniels (at 864), adopted by Clarke JA and Sheller JA on appeal in Daniels v Anderson (at 501). (own emphasis)
Justice Austin later stated in ASIC v Vines (2003) 48 ACSR 291 at [30] that Daniels v Anderson “established an objective duty, broadly in the region of competence, arising out of the director’s duty of diligence. It is therefore a duty capable of being encompassed by the statutory standard of care and diligence.” His Honour later went on to note that the authorities established that the statutory duty was enhanced where the directorial appointment is based on a special skill, and that there was a standard of skill for executive officers who were appointed to positions requiring skill, and that standard was encompassed in the statutory formulation of care and diligence.
The evidence of Mr Belcher who prepared the letter was that the aim was to comply with the relevant provisions of the Act. As indicated from the above evidence, Mr Scott who signed the letter believed that the letter complied with the requirements of s 295A. He also believed that the group’s solicitors had vetted the letter. There was no suggestion that Mr Scott did not hold the necessary opinion required by s 295A at the time of signing the letter. Mr Belcher said that he would not have signed the letter if he did not think that the accounts complied with the Act or accounting standards.
The Centro management representation letters were prepared by Mr Belcher using a PwC precedent with involvement from PwC. Draft management representation letters were included in the BARMC packs for the August and September BARMC meetings which were provided to PwC. Mr Cougle, Mr Cronin and Mr Fekete of PwC attended those BARMC meetings at which the draft management representation letters for the Appendix 4Es and the final accounts were tabled and signed. At no time did PwC or Moore Stephens raise any issue with regards to the Centro management representation letters.
During the trial, both Mr Hall and Mr Cooper (of the BARMC) gave evidence to the effect that they believed the management representation letters complied with the Act. Mr Cooper’s evidence was that he expected management, including Centro’s general counsel John Hutchinson to “get it right”. Mr Hutchinson had previously been a partner of Freehills. He had also attended the August 2007 BARMC meeting at which the Appendix 4E management representation letter was tabled and signed. Indeed, at that meeting, he presented the internal audit report to the BARMC. The equivalent letter for the final accounts was in the same form. Ms Hourigan, the legally qualified Centro company secretary, was present at both meetings.
I accept that the non-executive directors were entitled to place trust in PwC, Moore Stephens, the CFO, Mr Hutchinson, Mr Belcher and Ms Hourigan to ensure that the management representation letter provided to them complied with s 295A of the Act. Each of those people had expertise in the field and by their receipt of draft letters and attendance at BARMC meetings had ample opportunity to detect and inform the directors that the letters did not expressly provide for the opinion required by the section. The question of any possible non-compliance with s 295A was plainly not an issue.
It was submitted by the directors that in order to detect the shortcoming which ASIC allege in this proceeding, the non-executive director would have had to look up s 295A themselves, scrutinise its terms, and construe and compare the contents of the draft management representation letters provided to them. It was submitted that the notion of a non-executive director of a large and complex publicly listed corporation undertaking such a process has a complete air of unreality; That this sort of work is the exclusive domain of the financial accountants and general counsel who are employed to ensure that the material which they present to the Board is correct.
The requirements of s 295A are succinct and clear. A simple reading of the provision would have indicated what was required. Even a general understanding of s 295A would indicate to a director that a declaration of opinion is required, and not merely an acknowledgement. The management representation letter is not simply a declaration of opinion, and has a different character.
The directors had a responsibility to receive the declarations, and declare themselves that they have been given the declarations required by s 295A. No director gave evidence that he himself read or familiarised himself with s 295A of the Act. Mr Scott assumed a state of affairs, and relied upon others. The other directors did the same. In receiving the management representation letter, each director failed to read it properly or at all to ensure compliance with s 295A, before approving the financial statements.
I do not accept, as I have endeavoured to explain in relation to other matters, that ensuring compliance with s 295A is the ‘exclusive domain’ of the financial accountants and general counsel. The approach I take may come close to placing a burden on each director akin to each director having not only to take reasonable steps to secure compliance with the Act, but actually complying with the Act. If this is the practical result, it arises out of the nature of the requirements in s 295A and 295(4), and the operation of s 344(1). I do not regard this obligation as onerous.
In my view, the directors did not take all reasonable steps to secure compliance with s 295A of the Act, and by approving the financial statements breached s 180(1) and s 344(1).
CONSEQUENCES OF OMISSIONS
I should make mention of the foreseeable consequences arising from the omissions in the financial statements.
It was reasonably foreseeable in August and September 2007 that -
(a)the subsequent discovery and correction of a significant error in the classification of current liabilities in the accounts of CPL and CPT could lead to harm to the interests of CPL, CPTM and/or CPT;
(b)a failure to make the required disclosure in the CPL and CPT accounts of significant guarantees undertaken subsequent to the balance date could lead to harm to the interests of CPL, CPTM and/or CPT.
The reputation of CNP and CER as well managed and well governed entities was crucial to the maintenance of confidence in them in the financial market. The reputation of the entities was inevitably a matter of concern to the directors. The occurrence of breaches of the Act had the potential to damage the reputation of the entities in the financial market.
Further, the revelation that CNP and CER had erred by not disclosing substantial on balance sheet debt liabilities, and that CNP had erred in not disclosing that it had guaranteed substantial off balance sheet liabilities of the US joint venture vehicle, was itself likely to lead to a loss of confidence, regardless of the fact that these also involved contraventions of the Act.
A loss of confidence in the management of CNP and CER on the part of investors and other participants in the financial market is itself calculated to affect the market price of the securities of the entities, and therefore the interests of security holders and lenders.
The concern of the management that ‘credit issues’, meaning the availability of financial credit, might affect the reputation of the entities, and therefore their standing in the financial market, is shown by an email exchange between Mr Nenna and Mr Scott on 11 July 2007, in which Mr Nenna updates Mr Scott on meetings with relationship banks and particularly concerning the take-out of the JP Morgan bridge facility. Scott responds:
We need to keep on top of it and ‘listen to the noises’ but not overreact to them. If you want my assistance please do not hesitate to ask as the equity analysts are not being at all kind to us and are trying to beat up stories at the drop of a hat (real or imagined!). I think that any ‘noise’ on credit issues will be reacted to very badly. We will have to keep Phillipa informed as she will have to respond promptly, positively and aggressively to any bad rumours, especially till our gearing is lowered.
Mr Lonergan in his third report referred to the importance of the omitted information to users of the accounts, particularly with respect to the assessment of the value of the securities which were quoted and traded on the ASX. Litigation by shareholders, including class actions, had by 2007 become increasingly common in circumstances where the share price of an entity had declined and there was information which had not been previously disclosed, which might have influenced the price had it been earlier disclosed.
It was apparent in 2007 that an error in the accounts of a large publicly listed entity such as CNP or CER, or a failure by either of them to disclose a significant matter, could result in litigation against them. In addition, because they were publicly listed, such an error or failure could also well attract the attention of ASIC and be investigated.
OTHER MATTERS
No Case Submission
In the course of the proceeding, the directors made an no case submission.
I make mention of a ruling I made on the no case submissions of the directors in relation to putting the defendants to their election. I deferred the ruling until the completion and consideration of the no case submission heard during the trial.
The no-case submission was rejected. I do, however, make mention that I approached the task upon the basis of the broad principles usefully enumerated by Kaye J in Oakley and Anor v Insurance Manufacturers of Australia Pty Ltd [2008] VSC 68 at [3]:
[3] In my view the authorities, to which I shall shortly refer, establish the following broad principles which should apply to the application which is before me:
1. Where a no case submission is made in a trial by jury, the role of the judge is to determine whether, on the view of the evidence most favourable to the party against whom such a submission has been made (“the respondent party”), the jury could (not would) find in favour of the respondent party.
2. The test which is applicable, where a judge is sitting without a jury, is less stringent. In such a case the judge may uphold a no case submission, notwithstanding that the evidence, on the view most favourable to the respondent party, could support a judgment in favour of the respondent party.
3. In such a case the judge may perform an assessment of the quality of the evidence which has been called on behalf of the respondent party. In some cases, such an assessment may involve the judge evaluating the credit of witnesses from whom such evidence has been called.
4. In determining a no case submission, the judge is entitled to draw inferences from the evidence.
5. On a no case submission, the judge cannot draw an inference against the party making the submission (“the moving party”) based upon the absence of evidence from that party.
6. Although the judge, sitting alone, may assess the quality of the evidence in determining a no case submission, nonetheless the test which is to be applied by the judge, at that stage, is different to the test which the judge would apply in determining the ultimate outcome of the case, at the conclusion of a trial. Notwithstanding that the judge, in determining the no case submission, may assess the quality of the evidence, nonetheless the test remains whether, on the evidence so assessed, the judge “could” (not would) find for the respondent party on the evidence so far led. In such a case, the judge would only find against the respondent party if the evidence, so far adduced, is so unsatisfactory or inherently unreliable or equivocal that he were to conclude that he could not be reasonably satisfied of the case made by the respondent party on the evidence thus far adduced.
I consider these propositions consistent with authority and the decision of the Full Court of the Federal Court in Rasomen Pty Ltd v Shell Co of Australia (1997) 75 FCR 216.
Whilst deferring the ruling until the completion and consideration of the no case submission, I ruled that the defendants should not be put to their election.
The Court has a broad discretion not to put the moving party to its election (or, alternatively, to refuse to hear the no case submission at all) – see Protean (Holdings) Ltd v American Home Assurance Co [1985] VR 187 at 237; Rasomen at 223; Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1 at 7; Tru Floor Service Pty Ltd v Jenkins (No 2) (2006) 232 ALR 532 at 537-8; and ACCC v Amcor at [62].
Considerations relevant to the exercise of the discretion include the following:
(a)A departure from the general rule can seldom be justified unless adherence to the rule would not serve the ends of justice or convenience – see: Protean at 238 (citing Sampson v Richards [1949] VLR 6); Jones v Peters [1948] VLR 331; and ACCC v Amcor at [62]);
(b)The Court will have regard to all the circumstances of the case, including the nature of the case, the stage it has reached, the issues involved and the evidence given – see: Protean at 238; William H Muller & Co v Ebbw Vale Steel, Iron & Coal Ltd [1936] 2 All ER 1363 at 1365-6 (quoted with approval in Rasomen at 223); and ACCC v Amcor at [62]).
(c)Regard should be had to whether, in all the circumstances of the case, putting the party to its election will result in the most efficient resolution of the proceeding – the Court will consider whether putting a party to its election will lead to the party unnecessarily leading the remainder of its evidence or, conversely, whether not putting the party to its election may result in a real risk that the Court will be required to consider the same evidence twice – see: William H Muller (quoted with approval in Rasomen at 223); Compaq Computer at 9; Tru Floor at 540 (paras [27] and [28]); Australian Competition and Consumer Commission v Leahy Petroleum Pty [2009] FCA 1678 at [92]; and ACCC v Amcor at [71] and [72].
(d)Departure from the general rule may be justified where the case alleges fraud or dishonesty – in those circumstances it would normally be wrong to permit a defendant to be cross-examined where there really is no evidence against him/her of fraud – see Union Bank of Australia v Puddy [1949] VLR 242 at 245-6 (quoted in Tru Floor at 538); Protean at 215 and 236; Compaq Computer at 7 and 9; Tru Floor at 540 (paras [28] and [29]).
(e)Similarly, in ACCC v Amcor, Sackville J considered that defendants accused of serious breaches of the Trade Practice Act 1974 (Cth) which would render them liable to substantial civil penalties (and also cause potential loss of business reputation), and that the allegations were analogous to a fraud case, were reasons why the defendants should not be put to their election: see ACCC v Amcor at [67]-[68].
(f)Justice Davies in Trade Practices Commission v George Weston Foods Ltd (No 2) (1980) 43 FLR 55, rejected the fact that the proceeding was a civil penalty proceeding as a ground for not putting the defendants to their election. He nevertheless took into account as a matter to be considered that the allegation is one that calls for a standard of proof consistent with the seriousness of the allegations made.
In the end, I considered the case to be such that the interests of justice required the directors to be permitted to make a no case submission without being put to their election.
I was particularly mindful of the considerations that led Sackville J in ACCC v Amcor to a similar view.
As was the position taken by Sackville J, I took the view that this was a case in which serious allegations of contraventions of the Act had been made against each of the defendants. If the allegations were to be established, the directors would be exposed to pecuniary penalties. Adverse findings might well have serious consequences in terms of loss of business reputation.
The authorities recognise that a departure from the general rule is often justified where fraud is alleged against the moving party. In The Union Bank of Australia Ltd v Puddy, Fullagar J said (at 246) that where fraud is alleged:
… it may often be wrong to suggest that a party should submit himself to cross-examination before it is seen that there is really some evidence against him.
See also Protean, at 215, per Young CJ; at 236, per Fullagar J; and Compaq, at 7.
Whilst fraud is not alleged in this proceeding, in my opinion it is analogous to a fraud case by reason of the very serious allegations that have been made against each of the directors: see George Weston, at 61; Trade Practices Commission v Nicholas Enterprises Pty Ltd [1978] ATPR 40-097 (Fisher J), at 17,958.
It was also apparent from the contentions advanced by the directors that the no case submission could be addressed by me without having to assess the credit of any of the witnesses.
Finally, all directors sought to put a no case submission. This was not a case where only some of the defendants wished to make the submission. If that had been the position, there would have been difficulties in entertaining the submission without requiring those directors wishing to advance it not to call evidence.
Another issue arose because application was also made by the directors under s 31A of the Federal Court of Australia Act 1976 (Cth). I proceeded on the basis that whether application was made in reliance on the summary judgment power in s 31A or pursuant to the power in O 35 r 1 of the Federal Court Rules, the party making the application should as a general rule, be put to its election not to call evidence. This is because:
(a)putting the moving party to its election is the general rule of practice;
(b)the practice is for the benefit of the court in relation to the just and convenient disposition of the proceeding, and is to be departed from by reference to that consideration;
(c)section 31A is a discretionary power and expressly does not limit any of the other powers of the Court (s 31A(4));
(d)there is no reason why the practice should not apply to an application under s 31A where that application is one which is, in substance, a no case application.
I should also say that s 31A is an appropriate source of power for summary judgment, even though a trial has commenced. Nothing said in Spencer v The Commonwealth (2010) 241 CLR 118 precludes s 31A being such a source of power in the appropriate circumstances. It may not be appropriate to exercise the power during a trial, and it may be rare for the occasion for its exercise to arise, but this does not deny the power existing.
A Court may, for example, dismiss a claim after hearing some evidence, without undertaking the further steps and delays of a full hearing. This would still be summary judgment.
Undoubtedly, s 31A was designed to deal with cases that were not fit for trial at all (see Lord Woolf in Swain v Hillman [2001] 1 All ER 91, at 95). However, there may well be situations where the ‘unmeritorious’ nature of a case becomes apparent just after a trial commences. I see no reason to preclude s 31A from being available in such circumstances. Its terms are not limited to interlocutory applications or to pre-trial situations.
Mr Rich
The subject of an email sent to Mr Purdon (a senior investigator at ASIC), on behalf of Mr Stephen Rich (an analyst at UBS), was raised during the course of the trial.
The email was a response to questions posed to Mr Rich by Mr Purdon during the course of ASIC’s investigations into the Centro group (prior to the commencement by ASIC of this proceeding), relating to what impact the omissions alleged in this proceeding, would have on the market.
The relevant questions and answers contained in the response email from Mr Rich were as follows:
1. When CNP announced the New Plan acquisition on 28 February 2007, did he understand that the deal was being partly financed by short-term debt?
I believe the market was made aware that there was a bridging finance component.
2. On 7 May 2007, CNP made a presentation titled “Transactions Implement Business Model”. Page 22 of the presentation indicated that the US$3.7bn purchase price will be funded by a US$1.2bn loan from banks and US$2.06 in committed financing. Did he understand that all of this funding was short-term bridging finance? If not, would this have made a difference to this assessment of the price or value of CNP?
I’m not sure whether I was aware at the time that all of this funding was short term bridging finance. However, my thoughts on the deal were fairly negative, so further knowledge would simply have made me more bearish, but I’m not sure it would have affected my valuation of the stock (I was at Deutsche Bank at the time).
3. When Centro released its Appendix 4E of 9 August 2007, the on-balance sheet interest bearing liabilities was shown wholly as non-current. However, when Centro released its Annual Report on 18 September 2007, the on-balance sheet interest bearing liabilities were now classified $A1,096,936,000 as current and the rest as non-current. Did he note this at the time? If yes, did this impact on his assessment of the price or value of the CNP shares?
I do not recall noticing the shift in treatment immediately, but I believe it was subsequently brought to my attention, I cannot recall the exact date. I believe this information would have been worthy of consideration in terms of calculating a fair value of securities. However, it is unlikely we would have immediately changed our valuation or Price Target. More likely to factor into our next re-assessment of value.
4. If, on 9 August 2009, CNP had announced at its presentation of its annual financial results, that it had in excess of A$4.8bn worth of interest bearing liabilities that were maturing in less than 6 months but CNP was very confident that this debt could be repaid or re-financed before maturity, would that have affected his assessment of the price or value of CNP at the time? If so, why?
Having recently moved from Deutsche Bank, I was in the process of working with Simon Garing to transition coverage and merge our views on the name. As credit markets had begun to tighten we were interested in the level of short term expiries. At the time, we were much more accepting of company confidence that we would be today. As such, we probably would have accepted the company’s confidence and not altered our valuation but would have been increasingly wary of other expiring facilities that may have provided lead indicators of any further financial difficulty.
During the course of the trial, I thought it appropriate that Mr Lonergan should consider the views expressed by Mr Rich for the purpose of determining whether those views affect the opinions Mr Lonergan had given in his expert reports (in particular, his third report).
Mr Lonergan in a further affidavit dated 12 April 2011 concluded as follows:
No impact on my opinion
58Mr Rich’s comments in the Email have no impact on my opinion. My reasons why that is so include:
(a)they responded to questions different from questions that I was asked
(b)they appear to only reflect his generalised and uncertain recollections or qualified view
(c)they contained no supporting evidence, analysis or reasoning
(d)Mr Rich was not provided with information consistent with ASIC’s Amended Statement of Claim
(e)some of the questions put to Mr Rich are either materially incomplete (in terms of the current issues being heard) and/or inconsistent
(f)Mr Rich was not asked to, and did not opine on, the matters that are the subject of the Reports.
59Put simply, in my view, Mr Rich was apparently not given all the relevant information, and his responses to the questions asked apparently provided only ‘general recollections’ in his responses.
I do not think it necessary to comment further upon the email from Mr Rich. It was discovered by ASIC, so there is no question of it being concealed from the defendants. It was not suggested that fairness required ASIC to call Mr Rich as a witness. I agree with Mr Lonergan’s assessment of the email. Even without Mr Lonergan’s evidence, I would have made the same assessment of the contents of the email. I put no weight at all on the views of Mr Rich as expressed in the form found in the email.
Cross-examination of the directors
A number of times during submissions, Senior Counsel for Mr Scott particularly, contended that a number of matters were not put to the directors, and that such matters not put could not be relied upon by ASIC.
I do not accept this submission. First, before each director gave evidence prior notice was clearly provided, by way of the pleadings, the opening, the evidence and in the course of the no-case submission, of ASIC’s case: see eg Kennedy v Wallace (2004) 142 FCR 185; (2004) FCAFC 337 at 56.
Secondly, in relation to the rule in Browne v Dunn (1893) 6 R 67, as Mason P explained in Scalise v Bezzina [2003] NSWCA 362 at [98] (Santow JA with Brownie AJA agreeing):
The rule does not undermine the adversary nature of proceedings or make one party the other’s keeper. Thus, a party who proves facts sufficient to establish a cause of action or a defence upon which that party bears the onus does not have to confront the other side’s witnesses with the issue if they do not address it in their own evidence. To require this would invert that aspect of the rule grounded in what I have described as judicial economy. There is no unfairness in letting the sleeping dog lie and also invoking Jones v Dunkel (1959) 101 CLR 298 so long as the moving party has by pleadings or otherwise signalled the matter sought to be proved and led necessary evidence on the topic. There is no need to confront an opponent’s witnesses by cross-examination if they fail to contradict evidence earlier called by the moving party in support of an issue raised in the pleadings or otherwise….
In my view, even recalling this is a civil penalty proceeding, the fact that the directors were not examined in chief on some topic, does not impose an obligation on ASIC to confront them to the extent submitted by the directors. In fact, the directors would be expected to provide evidence, which was peculiarly within their knowledge, of the extent to which they read and understood the accounts, the accounting standards and the Act: see eg Commercial Union Assurance Co of Australasia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 (CA) at 418-419 per Handley JA; Freeman v Health Insurance Commission (1997) 78 FCR 91 at 98-99; White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169 at 226-229 per Goldberg J; and Prentice v Cummins (No 6) (2003) 203 ALR 449; [2003] FCA 1002 at [77]-[80] per Sackville J (where a witness ‘elected to give no evidence’ in respect of a particular issue).
I observe that in criminal cases, in such circumstances, even if described as unusual, the failure to present evidence (whether it be by calling a witness or by failing to examine a witness in chief on some topic) may call for an inference that further examination in chief on the topic may have exposed unfavourable facts: see eg Dyers v The Queen (2002) 210 CLR 285 at [9]-[10] and [15] per Gaudron and Hayne JJ.
Of course, at all times, ASIC has the onus of proving its case on all elements. No failure to call evidence, or to examine in chief more comprehensively on some topics, can fill in the gaps of any failure to prove those elements.
In this proceeding, as it eventuated, the evidence was relatively uncontroversial. No issue of credit arose. I did not draw inferences against the directors because of any failure to examine in chief on some topic. However, I did not draw inferences in favour of the directors where their legal representatives specifically refrained from presenting evidence peculiarly within each director’s knowledge as to what they knew, read or understood.
REALITY CHECK
The directors have contended on a number of occasions that ASIC’s contentions in this proceeding lack any sense of reality, and embrace a counsel of perfection. The directors say that all the processes that could have been undertaken and all the advices that could have been obtained were in fact undertaken or obtained. They accepted that directors cannot abdicate their responsibility, but it was argued by the directors that they fulfil such responsibility by adopting processes and relying on proper advice. It was argued that ASIC in this proceeding seeks to extend the responsibility of directors well beyond reasonable financial literacy and a proper degree of engagement in the affairs of a company. The directors point to the fact that at the time, the errors were not detected by anyone in Centro’s accounting team, PwC, or by any of the directors. The directors submitted that the more the issues are scrutinised, the more difficult they seem to be.
I do not accept these matters are determinative in the proper consideration of the issues before me.
Part of ASIC’s case is that the apparent errors were so obvious that it can more readily be inferred that it was negligent for the directors to have failed to detect them. After all, each director was intelligent and sufficiently financially literate, having many years of experience analysing financial statements. Further, the year 2007 was not the first time each director had to read and understand accounts, even with the change in accounting standards.
Whilst there are many matters a director must focus upon, the financial statements must be regarded as one of the most important. As I have said repeatedly, a director must at least understand the terminology used in the financial statements, and in this proceeding this related to the classification of liabilities and disclosure of events occurring after the balance date.
It may be that in the course of this trial the directors have been able to show others had difficulties with the issues confronting the directors in 2007.
The first point to observe is that the directors themselves were not distracted by the various so called complicated issues raised now in this proceeding. Each director relied completely on the processes in place and their advisors. All the directors failed to see the ‘obvious errors’ because they all took the same approach in relying exclusively upon those processes and advisors. No director stood back, armed with his own knowledge, and looked at and considered for himself the financial statements.
The second point to make is that as far as the other persons who fell into error are concerned, the Court in this proceeding cannot adequately determine the reason for this occurring. Every person referred to by the directors as having fallen into error, had different roles to play, and had various levels of information available to them.
Some may well have had limited knowledge of the facts, or themselves failed to take sufficient care. Mr Nenna has acknowledged that he failed to take sufficient care. The mere fact that others (perhaps many others) fell into error does not assist in determining the key issue in this proceeding relating to the conduct of the directors.
The final point to observe, is that ASIC does not allege, as I have previously indicated, that the directors needed to get it right or that they needed to realise that the information available to them was ‘necessarily’ indicative of error (as the directors would frame the issue). All that is being alleged is that they should have detected the apparent error, and acted accordingly, by for instance, asking the appropriate question of management.
Therefore, I do consider that all that was required of the directors in this proceeding was the financial literacy to understand basic accounting conventions and proper diligence in reading the financial statements. The directors had the required accumulated knowledge of the affairs of Centro, based upon the documents placed before them and discussion at board meetings. Each director then needed to formulate his own opinion, and apply that opinion to the task of approving the financial statements.
CONCLUSION
In light of the above findings, there has been a failure to comply with the relevant AASB’s, and a failure to give a true and fair view, contrary to the provisions of s 296 and 297, and a failure to disclose information in the terms of s 299 and 299A so as to not comply with s 298.
ASIC in its submissions made an individual analysis of contraventions in relation to each director. However, ASIC’s case was based upon a central proposition concerning the duty of directors to properly read and understand the financial statements and to apply the knowledge they had or should have acquired to perform that task.
Based upon the evidence, which in the main was uncontroversial, each director did not take all reasonable steps to focus and consider for himself the content of the financial statements, particularly as to short-term debt and whether the guarantees should have been disclosed.
Each director failed to make enquiries of management, the BARMC or other directors as to proposed statements in the financial statements relating to the short-term debt and guarantees, and failed to have apparent errors corrected.
Each director failed to request that the directors be given declarations pursuant to s 295A of the Act which accorded with its requirements, after failing to consider the requirements of s 295A and read the management representation letter.
I have already found that each director knew of the current interest bearing liabilities and of the guarantees. Each director was aware of or should have been aware of the relevant accounting principles which would have alerted each director to the apparent error in the proposed financial statements. Each director could then and should have made the relevant enquiries, if they had taken all the reasonable steps required of them. The directors did not focus upon or properly consider the issues the subject of ASIC’s allegations. Each director may have had different reasons for not focusing. For instance, Mr Scott did not focus, as he was concentrating on the key risk areas and investors, and did not consider the existence of current debt liabilities as a problem. Mr Scott considered that the concern of investors at the time was with total liabilities. Mr Scott assumed that management and the advisors would bring to his attention any information necessary, and did not turn his mind specifically to the guarantees or to short-term debt.
The other directors relied solely on management and their advisors to be properly informed of information relevantly to be put into the financial statements.
The differences between the individual analysis of each director provided by ASIC, in my view, do not detract from the above position pertaining to each director and the findings I make. Whether, for instance, a director went through the financial statements ‘line by line’, he is not thereby taking all reasonable steps, if the director in doing so is not focussed for himself upon the task and considering for himself the statutory requirements and applying the knowledge he has of the affairs of the company.
The failure to notice certain omissions may well be explicable – but here the directors, in some cases on their own admission, clearly looked solely to management and external advisors. If they had acted, as Senior Counsel for ASIC suggested, as the final filter, taking care to read and understand the financial accounts, the errors may have been discovered earlier than they were.
In relation to each director in his capacity as a director (or officer) of each relevant entity as pleaded in the amended statement of claim and to the extent relief is sought in the amended application, I find that each director failed to take the following reasonable steps and failed to take the following steps that a reasonable person would have taken if they were in the director’s position:
(a)to properly read, understand and give sufficient attention to the content of the financial statements prior to participating in the resolutions occurring on 6 September 2007 in so far as they related to:
(i)the classification of liabilities as either current or non-current;
(ii)the disclosure of guarantees relating to Super LLC and Centro NP LLC.
(b)to consider or properly consider the content of the financial statements prior to participating in the resolutions occurring on 6 September 2007 in so far as they related to:
(i)the classification of liabilities as either current or non-current;
(ii)the disclosure of guarantees relating to Super LLC and Centro NP LLC.
(c)to raise or make enquiry or adequate enquiry with management, the BARMC and other members of the Board prior to participating in the resolutions occurring on 6 September 2007:
(i)the apparent failure of the financial statements to properly classify current and non-current liabilities;
(ii)the apparent failure of the financial statements to properly disclose the guarantees relating to Super LLC and Centro NP LLC.
(d)to have the apparent failures with respect to the financial statements corrected prior to participating in the resolutions occurring on 6 September 2007;
(e)prior to participating in the resolutions on 6 September 2007;
(i)to take the necessary steps to ensure they had a sufficient knowledge of the requirements of s 295A;
(ii)to read, understand and give sufficient attention to the management representation letter provided to the directors;
(iii)to request that the directors be given a declaration pursuant to s 295A of the Act which accords with its requirements.
(f)not participating in the resolutions occurring on 6 September 2007 prior to being given a declaration pursuant to s 295A of the Act.
In these circumstances, each director in relation to the allegations pleaded in the amended statement of claim and to the extent relief is sought in the amended application contravened ss 180(1), 601FD(3) and 344(1) of the Act in that:
(a)each director failed to take all reasonable steps to secure compliance with each of the provisions of the Act alleged against them;
(b)each director failed to take all steps that a reasonable person would take if they were in each director’s position to ensure compliance by the relevant entity with each of the provisions of the Act alleged against them;
(c)each director failed to exercise the degree of care and diligence required by failing to take each of the steps I have found that each director failed to take in the course of his review of the financial statements.
Once the Court is satisfied that a person has contravened the above provisions, it must make a declaration of contravention (see s 1317E).
Section 1317E(2) provides that the declaration must specify the following:
(a)the Court that made the declaration;
(b)the civil penalty provision that was contravened;
(c)the person who contravened the provision;
(d)the conduct that constituted the contravention;
(e)if the contravention is of a corporation/scheme civil penalty provision - the corporation or registered scheme to which the conduct related.
In relation to Mr Nenna, declarations will need to be made based on his admissions and my conclusion that the information required by s 299A of the Act needed to be included in the financial statements.
I will ask the parties to confer and consider appropriate declarations to accord with my findings in light of the relief sought in the amended application. The declarations will need to be made by reference to each defendant, the relevant entity, the provision contended and the conduct involved as I have described it in these reasons.
I propose to adjourn this proceeding to allow the parties to submit minutes so that the declarations can be made and to formulate minutes for the purposes of the hearing of relief from liability and penalty (if any) to be heard on 1 August 2011.
I certify that the preceding five hundred and eighty-nine (589) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton. Associate:
Dated: 27 June 2011
Australian Securities and Investments Commission v Healey [2011] FCA 717
Briggs & Briggs (No 2) [2024] FedCFamC2F 258
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