Australia: What does the Centro case mean for directors?

Directors must scrutinise company accounts.

That is the clear message emerging from Monday's Centro decision, and the message headlined in all the media reports of the decision.

What is equally significant for directors is what doesn't appear in the newspaper headlines – issues such as:

  • do directors have to be accounting standard gurus?
  • how do directors spot the ticking bomb buried deep in a massive board pack?


ASIC argued that Centro's directors had breached their duties under sections 180 and 344 of the Corporations Act, because its 2007 annual accounts had not complied with the Corporations Act and the accounting standards:

  • the accounts had misclassified a number of borrowings as non-current liabilities when they were actually current;
  • just after the end of the 2007 financial year, Centro had given some guarantees as part of a transaction. ASIC argued that this was a material post balance date event and so 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.

Misclassification of current liabilities as non-current

Centro's 2007 annual accounts had misclassified a number of borrowings as non-current liabilities when they were actually current.

The directors argued that they could not be expected to know that the liabilities in question were current liabilities within the meaning of the relevant accounting standards. Among other things, they pointed out that:

  • there had just been a change in the relevant accounting standard and some greyness in its interpretation; and
  • the documentation relating to the borrowings was complex.

The Court dismissed the directors' argument for a number of reasons:

  • the accounting standard's meaning of non-current liability was "straightforward"; in this regard, the Court noted that it was clearly summarised in a note to the accounts - "Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date";
  • even if there had been greyness, the directors had not shown how that greyness resulted in their failure to notice the misclassification; and
  • the complexity of the documentation was irrelevant - the directors knew that the borrowings were maturing in the short term, and a basic understanding of the meaning of current liability should have led them to ask why the borrowings had not been classified as current liabilities.

Post balance date events

Just after the end of the 2007 financial year, Centro had given some guarantees as part of a transaction. ASIC argued that this was a material post balance date event and so should have been disclosed in the annual report.

The directors argued that, even if the guarantees were material, they had not breached their duties by failing to ensure that the guarantees were disclosed in the annual report.

On this point, the directors' argument was that they could not be held to have breached their duty through failure to notice an omission that had escaped the attention of both management and the auditors. They also argued that reasonable directors would have formed the view that the guarantees did not need to be disclosed because the borrowings which had been guaranteed were already included in the financial statements of companies which had been equity accounted for in the accounts.

The Court dismissed these arguments.

It said that:

  • the directors were aware of the need to disclose post balance date events; and
  • the directors were aware of the guarantees and of their magnitude.

It followed that the directors should therefore have turned their minds to the issue of whether disclosure of the guarantees was required. There was no evidence that they had done so. Relying on general assurances from management and the auditors about the accounts' compliance with the statutory requirements did not excuse failure to raise that specific issue.

The argument that a reasonable director could have formed the view that equity accounting for the guarantees meant that they did not have to be disclosed was also dismissed. There was no evidence that the directors had formed that view.

The section 295A certificate

Section 295A says that the directors of a listed company cannot make their section 295(4) declaration unless the CEO and CFO have declared that, in their opinion, the annual accounts comply with the accounting standards (among other things).

ASIC successfully argued that the document provided to the Centro board did not comply with this requirement.

The Court then held that the directors had breached their duties by not taking all reasonable steps to ensure compliance with section 295A.

The bigger picture

Accounting expertise of directors

The Court appeared to say that it was not laying down a general financial literacy standard for directors. The Court found that what was involved was a very large liability which, on a basic understanding of the meaning of "current liability", should have been disclosed in the accounts.

Nevertheless, it is clear that the Court did believe that a certain level of financial literacy is an essential qualification for directors:

"All that is being alleged is that where the accounts on their face refer, as here, to classification of debt and post balance date events, the director adopting and approving the accounts should have a knowledge of and apply the basic elements of the one or two standards relevant to this proceeding.


I do consider that all that was required of the directors in this proceeding was the financial literacy to understand basic accounting conventions and proper diligence in reading the financial statements."

In the long term, this is likely to be a significant issue for directors. Where does one draw the line between "basic accounting conventions" (which directors are expected to understand) and the more arcane aspects of the accounting standards?


The Court said that the importance of the annual accounts and the fact that the Corporations Act places specific responsibilities upon directors in relation to the accounts means that directors cannot delegate those responsibilities:

"Directors cannot substitute reliance upon the advice of management for their own attention and examination of an important matter that falls specifically within the Board's responsibilities as with the reporting obligations. The Act places upon the Board and each director the specific task of approving the financial statements. Consequently, each member of the board was charged with the responsibility of attending to and focusing on these accounts and, under these circumstances, could not delegate or 'abdicate' that responsibility to others."

Again, this is a relatively simple concept when large current liabilities are incorrectly classified. The Court was not dealing with allegations of mistakes or omissions buried in line items or in notes to the accounts.

Information overload

One aspect of the case has importance beyond the issue of the directors' scrutiny of the financial reports.

The Centro directors argued that the information about the borrowings was lost in a very large board pack.

One of the Court's comments on this argument may make unwelcome reading for most listed company directors:

"A board can control the information it receives. If there was an information overload, it could have been prevented. If there was a huge amount of information, then more time may need to be taken to read and understand it. The complexity and volume of information cannot be an excuse for failing to properly read and understand the financial statements. It may be for less significant documents, but not for financial statements. [T]he directors were in possession of the information. The information was provided to the directors by management for a reason."

If this is the new information oversight standard for board meetings, it could create problems for companies.

Most obviously, it may create tension between management and the board. It is not quite true to say, as the Court did, that management provides information to the directors "for a reason". Management provides the information for two reasons:

  • to ensure that board decisions are made on a fully-informed basis; and
  • to ensure that members of management do not incur personal liability for failure to properly advise the board.

Given this, it is not necessarily easy for a board to control the information it receives in order to prevent an information overload. Any push-back by the board on this front may encounter resistance from management. However, this decision highlights the need for boards to carefully manage this process and focus on the manner in which information is provided to the board. Boards need to ensure that they receive meaningful information and not merely data.

Of course, it may be that the judge intended to restrict his comments to information about the financial statements: he does draw a distinction between financial statements and "less significant documents". However, that begs the question of what constitutes "less significant documents". In the context of the Centro decision, the looming current liabilities and the material post-balance date events may have made the accounts the most significant documents before the board. At other times and in other contexts, a board may be confronting other issues and different priorities.

Even if the Court's finding that a board paper overload is no excuse for failing to read and understand those papers is restricted to matters and documents on which the directors have specific statutory duties, it seems the finding would clearly apply to matters such as takeovers (where the directors' recommendation is at the heart of the target's statement) and dividends (for which the directors have a specific statutory responsibility).

Where to now?

It is too soon to say that Centro marks a new line in the sand for directors: there may be an appeal from yesterday's decision.

Even if there isn't an appeal, the decision may be sui generis (lawyerspeak for a one-off). The facts may be so unusual that the decision is not really applicable to other boards not facing similar circumstances.

Those are the optimistic responses.

Realistically speaking, it's unlikely that the trend of the last quarter century – in which the minimum standards expected of directors have continued to evolve – is suddenly going to stop. In the meantime, the Centro Court's comments about the responsibility of directors to look critically at financial statements and to understand basic accounting standards must be taken on board.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.