Buck stops with the board, says judge in landmark Centro case Former Centro CEO Andrew Scott leaves the Federal Court in Melbourne after a finding was handed down the directors had breached the Corporations Act. Picture: Stuart Mcevoy Source: The Australian THERE were warnings yesterday of an exodus of directors from public company boards after the corporate regulator won a landmark case against the board of beleaguered property group Centro. Federal Court judge John Middleton yesterday ruled that eight former and current Centro directors failed to exercise due care and diligence in the lead-up to the company's near-collapse in 2007 by signing off on accounts that wrongly classified billions of dollars in debt. The directors argued that they had relied on management and company auditors PricewaterhouseCoopers to ensure the accounts were correct, but Justice Middleton ruled they could not delegate essential duties when it came to reading financial statements. "This proceeding is not about a mere technical oversight," he said. The significant matters not disclosed were well known to the directors, or if not well known to them, were matters that should have been well known to them. The case has been closely watched by business groups and legal experts amid concerns it could further increase the responsibilities and liability of company directors. It is also a significant win for the Australian Securities & Investments Commission, which led the charge against the directors and is still recovering from a string of high-profile court losses. ASIC chairman Greg Medcraft welcomed the decision as clarification of board responsibilities. "Our community has a right to expect high standards of company directors," he said. What the court has said is that they can't just simply delegate to management or rubberstamp management. If what we want is to have confident and informed investors, then they've got every right to expect a high standard from the gatekeepers who are directors. ASIC sued former Centro chief executive Andrew Scott, former chairman Brian Healey, current chairman Paul Cooper, former chief financial officer Romano Nenna, former non-executive directors Peter Wilkinson, Sam Kavourakis and Peter Goldie, and Jim Hall, who remains on the board. The group was responsible for the 2007 annual report, which wrongly classified more than $2 billion in debt as non-current and failed to disclose a $2.8bn debt guarantee used to buy a US shopping centre portfolio. ASIC will now argue for financial penalties to be imposed upon the directors, as well as their future disqualification from managing corporations. Justice Middleton yesterday advised ASIC to consider "very carefully" how far it wanted to go in pursuing punishment. "There has been no suggestion made that the directors were dishonest," he said. They relied upon extensive advice and processes that were not called into question. Justice Middleton said he did not consider the requirement to read and understand financial statements with an inquiring mind "would cause the boardrooms of Australia to empty overnight." But Australian Institute of Company Directors chief executive John Colvin yesterday said directors were concerned as there was confusion about the roles of non-executive directors and management. "The judgment reminds directors that they are entitled to rely on specialist knowledge and advice provided by management and external advisers, but cautions directors that there are limits to that reliance," he said yesterday. Deakin University law professor Jean du Plessis said the decision would "not make competent and even diligent people enthusiastic to take up positions as non-executive directors in companies. Every single non-executive director in this country will insist that there must be additional auditors coming in and additional checks built into the system to make 100 per cent sure the financial statements contain nothing that's incorrect. A survey by the AICD last year found laws imposing personal liability on directors affected their decision-making. Almost a third of those surveyed said they had declined an offer of a directorship primarily because of personal liability risk. Queensland University of Technology law lecturer Peter Little said companies would feel increased pressure to have more stringent corporate governance systems in place to attract company directors. In a statement yesterday, Centro Property Group said an internal committee would consider the decision and issue another statement later this week. A spokesperson for the independent directors involved in the case, including current directors Paul Cooper and Jim Hall, said: "We are disappointed and are reviewing the judgment." Mr Hall sits on other ASX-listed company boards, including Paperlinx and toll-road company ConnectEast. Mr Cooper was on the board of Axa Asia Pacific at the time of its merger with AMP. ConnectEast Group general manager, corporate affairs, James Tonkin said: "ConnectEast notes the decision today of the Federal Court in the ASIC case against directors and executives at Centro. ConnectEast will not make further comment until the conclusion of the penalty hearing in early August. The ruling will also affect class actions from Centro shareholders seeking millions of dollars in damages from Centro and PwC. The court will hear submissions about penalties for the directors in August.