Australia: Tesco - Food for thought for directors of Australian companies

HG Corporate Advisory Alert: 30 September 2014

Tesco PLC is one of the most high profile and best known UK public companies. As the owner of a large chain of supermarkets, it has a deserved reputation for reliability.

However, Tesco has been on the front page of UK papers recently for all of the wrong reasons. The UK supermarket giant has found itself in the headlines following an alleged £250 million overstatement of its half-year profit, an amount equal to almost a quarter of its expected profit for the period. Tesco has described the error as being caused by an "accelerated recognition" of commercial income and delayed recognition of costs.

The over-statement of income came to light as a result of a whistleblower, and consequently Tesco appointed Deloitte to conduct an independent investigation. Tesco has also notified the UK's Financial Conduct Authority. Pending the outcome of the investigation by Deloitte, four Tesco executives have been suspended, including the company's UK Managing Director.

With the reporting season in Australia now winding up, and concerns about the reported profits of companies in the post-mining boom economy, Tesco's predicament serves as a timely reminder to directors of Australian companies (in particular, ASX listed entities) of their duties as they apply to the review, adoption and approval of a company's financial statements.

In this Alert, Special Counsel Peter Burge and Solicitor Shilpa Dougall consider the potential consequences for directors of a company registered in Australia, were it to discover an overstatement of such magnitude in its financial statements.

Potential implications under the Corporations Act

In the event of a "Tesco-style" overstatement in the financial statements of a company registered in Australia, sections 180 and 344 of the Corporations Act 2001 (Cth) (Corporations Act) would likely be the sections of most concern to directors.

Section 180 of the Corporations Act provides the statutory iteration of the duty of care and diligence applicable to directors and officers of companies in Australia. Section 344 provides that it is an offence for a director to fail to take all reasonable steps to comply with or secure compliance with Chapter 2M of the Corporations Act (financial reports and audit).

Section 180 has been the subject of judicial consideration in recent years, most notably in Centro (ASIC v Healey & Ors [2011] FCA 717), James Hardie (ASIC v Hellicar [2012] HCA 17) and Fortescue Metals (ASIC v Fortescue Metals Group Ltd [2011] FCAFC 19).

Centro would be of particular relevance to a "Tesco-style" overstatement in Australia. In addition to section 180, in that case the Court also considered section 344.

The facts in Centro are well known but they are worth reiterating for present purposes. ASIC brought an action against the directors and chief financial officer of Centro, an ASX-listed company, for approving financial statements and a directors' report which:

  • failed to disclose crucial matters, including significant amounts of short-term debt and guarantees for short-term debt; and
  • misclassified $1.5 billion of current liabilities as non-current liabilities.

In light of the Centro decision, if faced with a "Tesco-style" overstatement a court might in Australia, consider the following:

  • How "plain" was the error – was the early recognition of the profits in the half-year guidance clearly reported? In Centro, the court was of the view that the misstatement of the current liability was plain on the face of the documents provided to the board. In Tesco's case, the overstatement of profits amounted to approximately a quarter of Tesco's expected profit for the period. A court would likely ask the question whether the error was obvious such that the directors, armed with their own knowledge, should have been alive to it and whether the failure to do so was negligent.
  • Reasonable Reliance – could the directors argue that they had relied on the company's audit committee and auditor? Section 189 of the Corporations Act enables directors to argue that they placed 'reasonable reliance' on the competence of professional or expert advice. One point of difference between the UK regime and that of Australia is that while Tesco's half-year profit guidance did not apparently have to be audited, in Australia an ASX-listed company's would have been (section 302 of the Corporations Act). However, notwithstanding that this half year guidance was not audited, Tesco's auditor did highlight "the recognition of commercial income" as an "area of focus" in the company's 2014 annual report. In the Australian context, had the auditors previously flagged such an issue, it would then arguably be incumbent on the directors to make appropriate enquiries.
  • Quantity and complexity of financial information – could the directors argue that the quantity and complexity of the material they had to work through affected their ability to detect the error? This was one argument adopted by the directors in Centro. It is likely that the financial information of a FTSE-100 company with a former market valuation of in excess of £18 billion and over 500,000 employees would be voluminous and complex. However, Justice Middleton in Centro stated that the complexity and volume of information to be considered by directors cannot be an excuse for failing to properly read and understand financial statements.

Consequence of breach of Corporations Act

If the directors of an Australian company were faced with a "Tesco-style" overstatement and were found to have breached section 180 and section 344 of the Corporations Act, they could each be liable for a disqualification order, a pecuniary penalty or a compensation order.

This is in addition to the more prosaic impact of such an occurrence: Tesco's share price plummeted in the days after the story broke resulting in approximately £2 billion being wiped off Tesco's market capitalisation.

Lessons for directors of companies in Australia

Although Tesco is a UK registered company and so is subject to UK regulation, the company's current circumstances serve as a timely reminder to directors of Australian companies, in particular ASX-listed companies, of their duties and obligations in relation to their company's financial statements. In particular, directors should be reminded that:

  • Directors (at least of ASX-listed companies) are required to have a certain degree of financial literacy – that is they should have the ability to read and understand financial statements and should have an understanding of accounting practice and standards. This does not require directors to be familiar with every accounting standard, but the directors should be sufficiently aware and informed to understand what is being approved or adopted. In particular, directors should be sufficiently engaged such that they make enquiries when they are not sure about something in the accounts.
  • Directors should not assume that it is a defence to an action for breach of duty to argue that they have been given too much information to contend with.
  • There are limits to the protection from liability provided by the delegation and reasonable reliance provisions in the Corporations Act. In particular, directors cannot delegate their "core, irreducible" responsibilities, including the declaration of compliance for financial statements.

© HopgoodGanim Lawyers

Award-winning law firm HopgoodGanim offers commercially-focused advice, coupled with reliable and responsive service, to clients throughout Australia and across international borders.

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.

Shilpa Dougall
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.