In our article of 20 March entitled ‘Directors’ duties | a timely reminder’, we spoke about a family Company Director who breached his director’s duties by making payments from company funds. However, not all breaches of directors’ duties are so obvious and intentional.
It is important that directors are aware of their obligations under the Corporations Act 2001 (Cth) (Act) in relation to board materials, as whilst they may be acting honestly, they can still breach their duties if they do not comply with the relevant provisions. This article will consider the extent of directors’ obligations when considering board materials, including board papers and board minutes.
Under section 251A(1)(b) of the Act, companies must record minutes of ‘all proceedings and resolutions’ of board meetings, within one month. It is important that these minutes are accurate.
Minutes do not need to be a full transcript of board meetings – they are not a report, and speeches and arguments do not normally appear in minutes.1 However, it is important that any significant events or decisions in the meeting are recorded in the minutes.
The importance of the accuracy of board minutes is emphasized by:
Under section 286 of the Act, a company must keep written financial records that:
Companies are also required to retain the financial records for 7 years after the transactions covered by the records are completed.
Section 296 of the Act also requires the financial report for a financial year to comply with the accounting standards.
The case of ASIC v Healey  FCA 717 (Centro Case) is an important illustration of how the Court will apply the obligations in relation to board materials to directors and their duties under the Act.
In the Centro Case, ASIC brought an action against the directors and financial officers of the Centro Group, alleging that they had breached their duties under:
ASIC’s argument was that Centro’s directors had breached their duties because they approved the consolidated financial statements and a directors’ report for the financial year ending on 30 June 2007 at a board meeting, when they should not have done so. ASIC’s argument was that these accounts did not comply with the Act for the following reasons:
The directors argued that:
The Court dismissed the director’s arguments. They held that:
Ultimately, whilst the Court was satisfied that the defendants had not been dishonest in carrying out their responsibilities, the Court still found that they had failed to take all reasonable steps required of them and that they acted in the performance of their duties as directors without exercising the degree of care and diligence the law requires.
In this case, the CEO was ordered to pay a penalty of $30,000.00 plus a share of ASIC’s legal costs, and the CFO was disqualified from managing corporations for two years. No penalty was imposed on the non-executive directors other than court declarations and orders for payment of costs.
It is important that directors understand, and are regularly reminded, of their obligations in relation to board papers. Whilst directors usually have many competing obligations and commitments, and board papers can often be lengthy, it is important they make time to fully understand minutes and financial statements and ensure they are satisfied of their accuracy, and make enquiries if they are not satisfied of their contents. If they do not do this, they are at risk of prosecution under the Act, which can include financial penalties and disqualification from acting as a director.
Lavan’s Corporate Disputes team can assist you in understanding your obligations as a director, or defending any allegations of breach of duties.