Justice Middleton in his Federal Court judgment found that eight directors of the Centro group had breached their duties as directors by failing to notice multi-billion dollar accounting errors.
The 2006/2007 financial statements approved by the directors contained significant errors, including the incorrect classification of $1.5 billion short-term liabilities as long-term liabilities and the non-disclosure of short-term liabilities involving an associated company of approximately US$1.75 billion. The financial statements had been prepared by Centro’s management and approved by the directors.
Whilst Justice Middleton said in his judgment that there was no suggestion of dishonesty of the directors, the matters that were failed to be disclosed “were well known to the directors… or were matters that should have been well known to them.
It was found that the directors had relied solely on their management, advisors and auditors and if the directors had “applied their minds” and “recognised the importance of their task” they would have questioned the non-disclosure and classification of the relevant debts. Accordingly, the directors “failed to take all reasonable steps to focus and consider… the financial statements.
This is a significant decision for corporate law and governance a highlights the importance of all directors being properly engaged in understanding and reviewing financial records in order to comply with their responsibilities and duties and not simply relying upon the advice of management and advisors.