Court hands down penalties in the Centro Case

On 31 August 2011, the Federal Court of Australia decided the penalties for the non-executive directors, CEO and CFO of Centro, having found that they breached their duties in Australian Securities and Investments Commission v Healey [1].

The penalties

Though not officially exonerated by the Court, the non-executive directors did not incur any fines nor were any of them disqualified from acting as a director.

The CEO was not disqualified from acting as a director, but was ordered to pay a pecuniary penalty of $30,000, which the Court considered to be at the lower end of the range.

The CFO, who admitted each of his alleged breaches, was disqualified from acting as a director for two years and received no fine.

Although only one penalty was awarded, each defendant was ordered to pay a portion of ASIC’s legal costs.

Reasons for penalties

Justice Middleton stated that at forefront of the Court’s consideration when determining these penalties was the issue of general deterrence.  Middleton J was of the view that the penalties handed down went far enough to indicate the Court’s disapproval of the actions of each of the directors, and to satisfy the requirements of the principle of general deterrence. 

Middleton J noted the Court’s willingness to take into account the circumstances in which the contraventions occurred, the overall conduct of the directors, and the impact of the penalties imposed on the directors.  He noted that imposing greater penalties would not bring about a greater benefit for society or the corporate world, and would otherwise be unfair and inappropriate.

The Judge considered the following factors when determining the penalties for the non-executive directors:

• they each had unblemished records as directors of listed companies
• there was no pattern of previous reckless or illegal conduct on their part
• it was unlikely that they would repeat conduct of that nature again
• none of them sought to conceal the errors that were made
• once they became aware that the accounts were misstated, they took immediate and responsible steps to investigate the error and inform the market, and
• the reputational damage that they each suffered.

What does this mean for directors?

As the court held in the Centro Case (our firm’s article on this can be found here), directors have a positive duty to understand and monitor the financial position of the company and apply an enquiring mind to financial reports.  Where dealing with significant and complex organisations, and large amounts of information, directors need to ensure that board papers and reporting systems are structured so as to help them monitor the key metrics of company performance.

Having imposed a rather heavy burden on directors in the main decision, the Court’s approach in the penalty case is of some comfort to non-executive directors that courts will distinguish between executive and non-executive directors, and will take into account their overall honesty and good faith, when it comes to deciding on sanctions.