Directors’ Liability

The recent decision in ASIC v Healey & Ors [2011] FCA 717 highlights the role and duties of directors.
Justice Middleton held relevantly that (with emphasis added):
“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.” [20]

“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.” [573]

In His Honour’s view directors are required to have the ability to read and understand the financial statements, including the understanding that financial statements classify assets and liabilities as current and non-current, and what those concepts mean, and should have an understanding of the need to disclose certain events post balance sheet date. This does not require directors to be familiar with every accounting standard, but sufficiently aware and knowledgeable to understand what is being approved or adopted. Justice Middleton found that if the defendant directors had understood and applied their minds to the financial statements and recognised the importance of their task, then each director would have questioned each of the matters not disclosed.

The message is that as a director, even a non-executive director, you cannot merely rely on experts (accountants, auditors, financial advisers) in approving financial statements or otherwise directing the course of the company. Each director must engage with the information available to him in the manner highlighted above.