Justice Middleton handed down his penalties judgment in the Centro matter yesterday. Directors and officers were not excused from liability but, at the same time, non-executive directors have not been barred or given civil penalties.
The decision follows on from Justice Middleton’s judgment on 27 June 2011 (see our earlier alert), which considered liability for breaches of directors and officers duties in connection with deficiencies in the annual financial reports for certain Centro entities.
The key outcomes of the penalties judgment are:
- Declarations were made that the directors and officers had breached certain provisions of the Corporations Act and their applications for relief from liability were dismissed;
- Despite submissions from ASIC, no disqualification or pecuniary penalty orders were made against the non-executive directors;
- The directors and officers have been ordered to pay ASIC’s costs;
- Mr Scott (the former managing director and CEO) has further been ordered to pay a pecuniary penalty of $30,000; and
- Mr Nenna (the former CFO) has further been disqualified from managing corporations for 2 years.
Justice Middleton’s orders are summarised below:
Click here to see table
Overview of decision
The breaches in this case
The breaches related to disclosure in the 2007 annual financial reports of Centro Properties Group (CNP) and Centro Retail Group (CER). Both reports classified liabilities as “non-current”, when these should have been classified as current liabilities. The amounts involved were $1.5 billion in the case of CNP and $500 million in the case of CER. The reports of CNP also did not disclose material guarantees given by CNP entities after the relevant reporting date as post balance date disclosures.
No relief from liability
The directors sought relief from liability on the basis of ss1317S and 1318 of the Corporations Act. To provide relief from liability, it must appear to the Court that the directors acted “honestly”. Justice Middleton held that the conduct of the directors that was found to be in breach of statutory duties was undertaken honestly.
Nevertheless, Justice Middleton declined to grant relief from liability. In declining to grant relief, he was conscious of the need to promote the policy rationale of general deterrence given the “seriousness of the contraventions” involved. He did not, however, consider this policy rationale warranted granting the more severe orders sought by ASIC.
In making declarations of contravention, Justice Middleton identified a number of key facts which supported his findings. In summary, he considered that the directors:
- knew or ought to have known that the current liabilities were larger than disclosed, and that the guarantees had been granted;
- ought to have known that the accounts did not comply with the Corporations Act;
- failed to properly read, understand and give sufficient attention to the content of the financial reports as they related to current liabilities and the guarantees;
- failed to consider or properly consider the content of the financial reports as they related to current liabilities and the guarantees;
- failed to make enquiry or adequate enquiry of management, the Audit Committee and other members of the Board concerning the apparent deficiencies in the reports;
- failed to have the apparent deficiencies in the reports corrected;
- failed to take steps to ensure they had sufficient knowledge about the requirement for CFO / CEO sign-off on the accounts in compliance with the Corporations Act and failed to take steps to ensure that the sign-off was received; and
- failed to read, understand and give sufficient attention to the management representation letter provided to the directors.
In respect of Mr Nenna, Justice Middleton relied on the fact that Mr Nenna recommended approval of the accounts and the directors’ report in circumstances where he:
- knew that the current liabilities were larger than disclosed and that the guarantees were granted;
- knew that a major liability had been wrongly classified in the consolidated balance sheet of CNP lodged with the ASX;
- ought to have known that the accounts did not comply with the Corporations Act or the accounting standards; and
- failed to take all reasonable steps to rectify that non-compliance.
No disqualification from managing corporations for directors
While Justice Middleton dismissed the directors’ applications for relief from liability, his Honour determined that disqualification orders in relation to the directors would be excessive, unnecessary and inappropriate in the circumstances given the directors’ “past and future contribution to the corporate world”. His Honour also took account of the widespread commentary and analysis since he handed down his decision in the liability proceeding and the corresponding reputational implications for each director. While his Honour commented that the directors could have gone further in expressing remorse, he referred to the fact that they each faced further litigation. The class actions against the Centro entities will be heard early in 2012.
Pecuniary penalty order against Mr Scott
Justice Middleton considered Mr Scott’s role as the former managing director and CEO and found that he had a higher responsibility than that of other directors, in particular, in relation to the management representation letter. A pecuniary penalty was therefore imposed on Mr Scott.
Disqualification orders made against Mr Nenna
Mr Nenna submitted that the appropriate penalty against him would be disqualification for a period of no more than two years and that a pecuniary penalty order should not be made - this was ultimately accepted by Justice Middleton. His Honour considered that the imposition of a disqualification order, taken together with the declaration of contravention, was sufficient to achieve the objective of general deterrence and therefore did not impose a pecuniary penalty.
The parties agreed upon the appropriate costs order to make in this case. The directors and officers will share liability for ASIC’s costs, with Mr Nenna bearing a lesser share as he did not contest liability. In this context, Justice Middleton noted that “In light of the insurance position of the defendants, it seems that the incidence of costs is not an important consideration in the imposition of a penalty. Therefore, I have treated costs as a neutral factor in my determination of the appropriate penalty to impose in this proceeding.” The implication is that the directors’ D&O insurer will bear the costs.