Following on from the decision of Justice Middleton on 27 June
2011, the ASIC and the legal representatives for the eight Centro
board members found to have failed to have performed their duties
with the level of care and diligence required pursuant to the
Corporations Act, 2001 recently made submissions to the court in
relation to the appropriate penalty to be imposed.
On 31 August 2011, Justice Middleton handed down non-pecuniary
penalties in the form of court declarations against the six
non-executive directors, fined Andrew Scott (then Chief Executive
Officer) $30,000 and barred Romano Nenna (then Chief Financial
Officer) from serving as a manager or director of any company for a
two year period.
In respect of the non-executive directors, Justice Middleton
stated that whilst they "could have gone further in the
way they expressed their remorse...to levy anything more would be
By way of background, the case proven against the eight
defendant directors (two executive and six non-executive) centred
on the approval of consolidated financial statements of three
Centro entities for the financial year ending June 2007. All
directors, save for one, defended the allegations.
The claim related specifically to the annual reports of the
Centro entities and a failure by the members of the board to detect
the non-disclose of significant matters; namely millions of dollars
worth of short term liabilities and the guarantees of the
short-term liabilities of an associated company.
The penalty hearing
At the penalty hearing on 1 August 2011, the ASIC sought to
distinguish between the culpability of the executive and
non-executive directors. ASIC contended that the penalty for
the CEO (Andrew Scott) should be "substantially
greater" than that imposed on the other directors and
that the CFO's role (Romano Nenna) was "significantly
different from and more serious" than the non-executive
Specifically, the ASIC submitted that:
The two executive directors be barred from acting as directors
for up to three years and be fined $100,000 each for failing to
detect the error in the Centro entities' annual reports.
The six non-executive directors be barred from acting as
directors for between six and eighteen months and be fined at least
$30,000 and up to $60,000.
The actions of the directors had caused serious damage to other
companies in the property sector and "it had a major
effect on the market".
The handing down of penalties would act as a form of
general deterrence and impress on directors the consequences to
themselves and to the companies they oversee if they fail to apply
due care and diligence to their duties.
In addition to distinguishing between the executive and
non-executive directors, ASIC also submitted that the court could
differentiate between the non-executive directors "on the
basis of their differing responsibilities within the
The defendants' submissions
Supported by character evidence from a wide range of prominent
business figures, Counsel for the non-executive directors submitted
that the ASIC's proposed penalties were "extreme" and
On behalf of the defendants, it was variously submitted that
Justice Middleton should rely on the provision in the legislation
that enables him to waive any penalty on the basis that the
defendants were acting honestly. It was also submitted
The defendants had been sufficiently
"humiliated" and had already endured the
"trauma" of the case and the pending shareholder class
The publicity generated by the case was sufficient punishment,
including the impact it had on their employment prospects
(especially that of Nenna and Scott).
The conduct of the defendants amounted to a form of
"reasonable negligence" and to penalise them with a
declaration would be akin to "punishing a child when they
don't know they have done something wrong".
The handing down of penalties would dissuade others from
accepting director roles and would be "utterly out of
step" with the community's expectations.
Whilst it is clear that Justice Middleton's penalties are
well below the bar submitted by the ASIC the case has certainly
generated much interest in the corporate community and highlighted
the repercussions that may ensue if directors do not properly
scrutinise company reports and financial records.
Whether the level of public embarrassment that the eight
defendant directors suffered will be sufficient deterrence to
others is yet to be proven. However, what is certain is that
corporate boards in Australia are closely monitoring board room
procedures and processes to ensure that their members do not suffer
the same fate
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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