Skim Read at Your Peril: Directors’ obligations in relation to board materials

 In our article of 20 March entitled ‘Directors’ duties | a timely reminder’, we spoke about a family Company Director who breached his director’s duties by making payments from company funds.  However, not all breaches of directors’ duties are so obvious and intentional.

It is important that directors are aware of their obligations under the Corporations Act 2001 (Cth) (Act) in relation to board materials, as whilst they may be acting honestly, they can still breach their duties if they do not comply with the relevant provisions.  This article will consider the extent of directors’ obligations when considering board materials, including board papers and board minutes.

Obligations in relation to keeping board minutes

Under section 251A(1)(b) of the Act, companies must record minutes of ‘all proceedings and resolutions’ of board meetings, within one month.  It is important that these minutes are accurate.

Minutes do not need to be a full transcript of board meetings – they are not a report, and speeches and arguments do not normally appear in minutes.¹ However, it is important that any significant events or decisions in the meeting are recorded in the minutes.

The importance of the accuracy of board minutes is emphasized by:

• section 251A(6), which creates a presumption that a minute that is recorded and signed is evidence of the proceeding, resolution or declaration to which it relates, unless the contrary is proved.  Proving that board minutes are inaccurate is difficult, so it is important that directors are satisfied that minutes are accurate before they are signed by the chair; and
• directors must ensure that minutes are not false or misleading under section 1308 of the Act.

Obligations in relation to keeping board papers

Under section 286 of the Act, a company must keep written financial records that:

• correctly record and explain its transactions and financial position and performance; and
• would enable true and fair financial statements to be prepared and audited.

Companies are also required to retain the financial records for 7 years after the transactions covered by the records are completed.

Section 296 of the Act also requires the financial report for a financial year to comply with the accounting standards.

ASIC v Healey

The case of ASIC v Healey [2011] FCA 717 (Centro Case) is an important illustration of how the Court will apply the obligations in relation to board materials to directors and their duties under the Act.

In the Centro Case, ASIC brought an action against the directors and financial officers of the Centro Group, alleging that they had breached their duties under:

• section 180 of the Act, relating to the duty to exercise director’s powers with due care and diligence; and
• section 344 of the Act, relating to failing to take reasonable steps to comply with their obligations relating to financial records or financial reporting under the Act.

ASIC’s argument was that Centro’s directors had breached their duties because they approved the consolidated financial statements and a directors’ report for the financial year ending on 30 June 2007 at a board meeting, when they should not have done so.  ASIC’s argument was that these accounts did not comply with the Act for the following reasons:

• the accounts mischaracterised a number of borrowings (totalling approximately $2 billion) as non-current liabilities when they were actually current liabilities;
• just after the end of the 2007 financial year, Centro gave some guarantees of about $1.75 billion in relation to the liabilities of an associated entity. ASIC argued that this was a material post balance date event and should have been disclosed in the annual report; and
• the board had not ensured that the CEO and CFO had provided the declaration of compliance required by section 295A of the Act.

The directors argued that:

• they could not be expected to know that the liabilities were current liabilities within the meaning of the relevant accounting standards;
• there had been a change in the accounting standard, and its interpretation had some ambiguity;
• the documentation relating to the borrowings was complex; and
• they could not be expected to carefully check Board pack which varied between 450 and 1000 pages each month.

The Court dismissed the director’s arguments.  They held that:

• the meaning of non-current liability was not ambiguous at all – it was straightforward and was clearly summarised in a note to the accounts;
• the complexity of the documents was irrelevant – a basic understanding of the meaning of current liability should have led them to question why the borrowings were classified as non-current;
• whilst the board packs were large, each director would have or should have accumulated sufficient knowledge of what was contained within the papers and annexures, with reference being made to that material and information during discussion; and
• the directors could control the information they received and directors who do not read, understand and focus on all the information provided to them are at risk of breaching their duties.

Ultimately, whilst the Court was satisfied that the defendants had not been dishonest in carrying out their responsibilities, the Court still found that they had failed to take all reasonable steps required of them and that they acted in the performance of their duties as directors without exercising the degree of care and diligence the law requires.

In this case, the CEO was ordered to pay a penalty of $30,000.00 plus a share of ASIC’s legal costs, and the CFO was disqualified from managing corporations for two years.  No penalty was imposed on the non-executive directors other than court declarations and orders for payment of costs.

Lavan comment

It is important that directors understand, and are regularly reminded, of their obligations in relation to board papers.  Whilst directors usually have many competing obligations and commitments, and board papers can often be lengthy, it is important they make time to fully understand minutes and financial statements and ensure they are satisfied of their accuracy, and make enquiries if they are not satisfied of their contents.  If they do not do this, they are at risk of prosecution under the Act, which can include financial penalties and disqualification from acting as a director.

Lavan’s Corporate Disputes team can assist you in understanding your obligations as a director, or defending any allegations of breach of duties.