CENTRO CASE – LESSONS FOR DIRECTORS
Written by Victor Hamit

The Centro Case [ASIC v Healey & Ors [2011] FCA 717] has generated considerable interest and commentary. The legal commentary has ranged on the extent of the implications for directors. The Centro decision determined that all of the Directors (including the Chief Executive Officer) and the Chief Financial Officer had breached the Corporations Act requirement that they exercise their duties with reasonable care and diligence. This article seeks to identify some lessons that may apply to clubs.

Briefly, the relevant facts for this article were that the Directors had miscategorised a short term liability of about $1.5b as non-current. Further, the Directors failed to disclose guarantees of about $1.7b post balance date. The Court found these were material errors. The Court also found that whilst these were honest mistakes, it was information which was known, or should have been known, to the Directors. The financial statements had been prepared by management and independently audited and then approved by the Directors. The claim by the Directors was that they had relied on experts was acknowledged by the Court, but did not exonerate them.

The Court found the Directors did not need to have an intimate understanding of accounting principles and were entitled to delegate tasks. But Directors must focus their attention and apply themselves to the tasks before them. The Court considered that the errors were “so obvious” that the Directors had abdicated their responsibility to review and consider the accounts and had relied on others without question.

Whilst there were specific provisions in the Corporations Act which applied in the Centro Case and care must always be taken that each case turns on its own particular facts. This article considers the possible ramifications for committee members of incorporated associations.

The majority of clubs in Victoria are incorporated under the Associations Incorporation Act and therefore are not governed by the Corporations Act. For the purposes of this article we use the term ‘director’ to include a member of a club’s committee of management. In the Centro case the provision dealing with reasonable care and diligence is merely a codification of the general law. It is generally considered that the general law duties of directors apply to committee members of clubs. Therefore, a director of a club must use reasonable care and diligence in carrying out their responsibilities.

It is clear that what is reasonable will depend upon the facts of each case. However, a director must apply himself to the matters before the Board that require consideration. To put it colloquially, a director must use his “smarts” and should recognise that there is no such thing as a “dumb” or “silly” question. This does not mean that a director needs to, or should, be involved in the day to day management of the club, or in the minutia of the club’s operations nor be a technical expert (such as an accountant or engineer).

The lessons for directors of Clubs are that when considering matters before them they must:

Focus
Apply themselves,
Understand, and
Use common sense.
Directors really must actively consider issues within the Club’s governance and risk protocols. A director can rely on expert advice but not to the extend of ignoring obvious errors that a person exercising reasonable care and diligence would query.

Clubs operate in a heavily regulated environment affecting a range of conduct which includes gaming, liquor, occupational health and safety and industrial relations. If as a director, you cannot reasonably focus on these issues, but would simply prefer to participate in bowls or golf at the Club – the role and responsibilities of a director are not for you.

Article Published: Club Connect – August 2011

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Victor Hamit
Wentworth Lawyers
Level 40,
140 William Street
MELBOURNE VIC 3000

Email: vhamit@wentworthlawyers.com.au
Website: www.wentworthlawyers.com.au

Tel: +61 3 9607 8380
Mobile: +61 408 590 706

Disclaimer:

These materials are provided as a general guide on the subject only, not as specific advice on any particular matter or to any particular person. Please seek specific advice on your own particular circumstances as situations and facts vary.
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