Directors’ obligation to question (ASIC v Centro)

In the recent Centro case, Justice Middleton found the directors to be “intelligent, experienced and conscientious” but that their uncritical reliance on management and auditors was a breach of their directors’ duties.

If there are facts that directors should know, it is immaterial if they actually know them, specifically:

“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.”

Justice Middleton’s judgment was concerned with the Directors of public companies which have a recognised higher expectation of reasonable skill and competence (compared to smaller private companies), but nevertheless, as a Non-Executor Director of a proprietary company, if you sign something you do not understand or rely on advice which you should have known was wrong, then you may be liable, even if you acted honestly.

What can you do?

As a Director, you are responsible for what information your company does or does not provide you. Relying on advisers, to digest financial reports will provide no safe harbour if they contain information which you should have known was incorrect.

  1. Take steps to raise your level of financial literacy;
  2. Be proactive in seeking information from the company (the days of passive Non-Executive Directors is long gone); and
  3. If you receive ANY report/advice that whitewashes the truth or simply makes you feel uncomfortable, contact us IMMEDIATELY!

To find out more please contact Ian Tindale or Gavin Barnes on +617 3223 6100 or on email at iant@redchip.com.au

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