the pleaded case
230 The directors contended that ASIC was bound by its pleaded case. It was contended that ASIC has sought to depart from its pleaded case in a number of respects. ASIC contended that it had not departed from its pleaded case.
231 A proceeding can only be decided upon a different basis to that set out in the pleadings where the parties agree to depart from what is alleged, or the court permits such a departure. As Mason CJ and Gaudron J noted in Banque Commerciale SA (en liq) v Akhil Holdings Ltd (1990) 92 ALR 53, by stating with sufficient clarity the case that the opposing party must meet, pleadings ensure what their Honours described as "the basic requirement of procedural fairness". In the same case, Brennan J (as he then was) put the point in these terms (at 59):
In Thorp v Holdsworth (l876) 3 Ch D 637 at 639, Jessel MR stated the object of pleadings: "The whole object of pleadings is to bring the parties to an issue, and the meaning of the rules of Order XIX was to prevent the issue being enlarged, which would prevent either party from knowing when the cause came on for trial, what the real point to be discussed and decided was. In fact, the whole meaning of the system is to narrow the parties to definite issues, and thereby to diminish expense and delay, especially as regards the amount of testimony required on either side at the hearing."
When the pleadings bring the parties to the issue, the court's function is to determine that issue and to grant relief founded on the pleadings unless the parties are allowed to alter the issues at the trial without amendment of the pleadings (as to which, see the observations in London Passenger Transport Board v Moscrop [1942] AC 332 at 340, 347, 351, 356). The rule is clearly laid down in the judgment of this court in Dare v Pulham (1982) 148 CLR 658 at 664; 44 ALR 117 at 121:
Apart from cases where the parties choose to disregard the pleadings and to fight the case on issues chosen at the trial, the relief which may be granted to a party must be founded on the pleadings (Gould and Birbeck and Bacon [v Mount Oxide Mines Ltd (in liq) (1916) 22 CLR 490 at 517, 518]; Sri Mahant Govind Rao v Sita Ram Kesho [(1898) LR 25 Ind A 195 at 207]).
232 The recent decision of the Full Court of the Federal Court in Castel Electronics Pty Ltd v Toshiba Singapore Pte Ltd (2011) 277 ALR 116 again confirmed the importance of confining a party to its pleading and held at [304] to [308] that:
This Court has recently reiterated that "[m]aterial facts must be pleaded with the degree of specificity necessary to define the issues and inform the parties in advance of the case they have to meet": Kernel Holdings Pty Ltd v Rothmans of Pall Mall (Australia) Pty Ltd (1991) 217 ALR 171 at 173; Betfair Pty Ltd v Racing New South Wales (2010) 189 FCR 356; 273 ALR 664; [2010] FCAFC 133 at [49].
In Banque Commerciale SA en Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 at 296-297, the High Court confirmed that a party is entitled, at trial, to have the opposing party confined to its pleading because the first party is entitled to come to trial to meet only the issues raised on the pleadings. If, however, the first party allows the other party to raise other material facts and issues for the determination of the court, then the court may proceed to determine the proceeding on those further material facts and issues. See also Gould v Mount Oxide Mines Ltd (in liq) (1916) 22 CLR 490 at 517.
233 This proceeding is not one where the parties have chosen to disregard the pleadings and fight the case on issues chosen at trial.
234 ASIC has made no application to amend its pleading. ASIC is, therefore, bound by its pleading and the relief substantially as claimed in the amended application. Accordingly, the directors submitted that to the extent that there are properly identified areas of departure from the pleaded case, ASIC ought to be confined to its pleaded case and the departures rejected.
235 Based on ASIC's pleaded case, and the defence of the directors, a key issue in this proceeding is whether ASIC has proved that the directors failed to take all reasonable steps to secure compliance by various entities with s 296 (accounting standards), s 297 (true and fair view) and s 298 (directors' report) for the purposes of s 344(1) of the Act.
236 In the circumstances of this proceeding, if ASIC fails to prove a contravention of s 344(1), it is difficult to see how there would be a breach of the standard of care and diligence. Further, I interpolate that I approach s 601FD(1)(f), referring to "all steps that a reasonable person would take" in a similar manner to the approach I take in relation to s 344(1). No party suggested I should do otherwise.
237 The directors submitted that in approaching this key issue, the Court must proceed on the footing (in the absence of any allegations to the contrary) that the directors were reasonably entitled to place reliance on the processes which Centro had put in place for the purposes of ensuring that the financial statements were accurate and in accordance with the accounting standards, keeping in mind that accounting and auditing are specialised fields. For example, it was contended that the Court must assume that the directors were entitled to place full trust and confidence in the following matters:
(a) Centro had a competent and qualified CFO, Mr Nenna;
(b) Centro had taken appropriate and adequate steps to manage the transition from AGAAP to AIFRS, which steps resulted in the preparation of a Centro accounting policy manual with input from both PwC and Moore Stephens;
(c) Centro had retained competent and qualified external auditors, PwC, to audit the financial reports of CNP and CER, and:
(i) PwC's undertaking as auditor specifically included verifying compliance with accounting standards;
(ii) PwC had complete access to staff and information to conduct its audit;
(iii) PwC's audit report for the relevant period which was received prior to 5 September 2007 did not raise any issues concerning the accounts or the competence or cooperation of management; and
(iv) PwC gave audit clearance of the Appendix 4E financial statements at the August 2007 BARMC and the final accounts at the September 2007 BARMC meeting;
(d) the CFO and Mr Belcher (who during the relevant period was the Group Financial Accounting Manager at Centro) had provided the non-executive directors with "Accounting Issues" papers for the Appendix 4E financial statements at the August 2007 BARMC and the final accounts at the September 2007 BARMC meeting which purported to indentify the accounting issues which they felt needed to be drawn to their attention, but made no reference to any issue with regards to classification of liabilities or disclosure of post balance date events;
(e) the CEO, CFO and Mr Belcher had signed a management representation letter for the Appendix 4E financial statements at the August 2007 BARMC and the final accounts at the September 2007 BARMC meeting which the non-executive directors understood to convey assurance from them that the accounts were correct and in accordance with the accounting standards;
(f) the CFO and Mr Belcher had recommended to the Board that the accounts be approved, and Mr Cougle said at the September 2007 BARMC meeting that he could give comfort to the non-executive directors that the auditors had signed-off on the accounts; and
(g) no-one told the non-executive directors that the Appendix 4E financial statements contained an error when both management (Mr Belcher) and PwC (Mr Cougle) accepted that they should have been told of this.
238 For the purposes of this proceeding, I accept these submissions, and proceed on the assumptions contained within them. ASIC, as I understand its position, does not contend otherwise.
239 In their written submissions the non-executive directors then submitted as follows:
The critical question the Court needs to determine is whether in the circumstances the obligation under s 344 to take all reasonable steps to secure compliance required the non-executive directors to personally scrutinise each line in the accounts looking for accounting errors or apparent inaccuracies and, even if so, whether it was negligent for them to have failed to detect the relevant errors where both management and PwC had previously missed them.
Even if the first limb of s 344 is engaged (if the Act imposes an obligation on a director rather than on the company), directors may still rely on others to assist them in fulfilling a requirement imposed upon them by the Act. In that case, the question for the court remains one of process - was the process such that a director took reasonable steps to secure compliance with the outcome prescribed by statute by relying on others. For example, the Act imposes an obligation on directors in s 306, which requires the directors of a disclosing entity to prepare a directors' report for the half year. The first limb of s 344 is thereby engaged, but the consequence is not that directors must personally undertake each and every necessary step. On the contrary, directors may still ensure that an obligation imposed on them is discharged by delegating to others various tasks. Taking the example of preparation of the directors' report under s 306, the directors may delegate the drafting to members of the management team. In that case, the directors may still have taken "reasonable steps to comply with" s 306 for the purposes of the first limb of s 344. To deny directors the capacity reasonably to delegate tasks to management would be to strip out from s 344 the words "take all reasonable steps to comply with" so that it would read "fail to comply with … Part 2M.2 or Part 2M.3". Such a reading is contrary to the express terms of s 344 and, if adopted, would render those provisions of Parts 2M.2 and 2M.3 (which require steps to be taken by directors) in effect strict liability offences.
240 In relation to this submission I make the following observations:
(a) ASIC does not allege that the non-executive directors need to personally scrutinise each line of the financial statements as suggested. What is pleaded and contended for by ASIC is that having a sufficient knowledge of conventional accounting practice to enable a director to carry out his or her responsibility, each director had to read and understand the financial statements, and then giving consideration to those financial statements with each director's accumulated knowledge, draw the error or apparent error to the attention of executive management or the other directors. It is then said, that in failing to draw the attention of the error or apparent error to the executive management or the other directors, the directors, and each of them failed to take all reasonable steps to secure compliance by Centro .
(b) I accept that directors may rely on others to assist them in fulfilling a requirement even where it is one directly imposed upon them by the Act. To a degree, the directors can rely upon the processes they have put in place. However, this is not exclusively the situation in the case of financial accounts, as I have endeavoured to explain. Of course, the drafting of a financial statement will be the domain of management. Nevertheless, the whole purpose of the directors' involvement in the adoption and approval of the accounts is to have the directors involved in the process at a level and responsibility commensurate with their role. In other words a reasonable step would be to delegate various tasks to others, but this does not discharge the entire obligation upon the directors. A further step is required, so it can be said that all reasonable steps have been taken by the directors. To complete the process, this step, as I have said repeatedly in answer to the contentions of the directors, involves the directors and each of them taking upon themselves the responsibility of reading and understanding the financial statements in the way I have described.
241 I now look further to the pleaded case and the case presented by ASIC. I consider that ASIC has maintained its pleaded position to the extent it still persists in the allegations and has not deviated from its pleadings as contended for by the directors. However, I make one preliminary observation.
242 After ASIC closed its case, upon my request for a document setting out the material facts sought to be established, ASIC handed up a document titled "Material Facts Which ASIC Seeks to Establish". By this document, it was contended by the directors that ASIC again sought to depart from its pleaded case and the case it opened. ASIC does not rely upon this document. The directors have and do rely upon the pleading and the opening. Therefore, I need not concern myself with this document as it has no relevance to defining the issues before the Court. There has been no suggestion that the directors acted, in the course of the trial, on the basis of the information in the document handed to the Court.
243 The case against each director and Mr Nenna is pleaded separately, but in each case in a similar manner. The pleading seeks to define the degree of care and diligence which is required of the director, in the relevant context of the approval of the Centro accounts, in two stages.
244 The first stage relates to the financial literacy and knowledge of the company's financial position which the law requires company directors to have in particular circumstances.
245 ASIC submitted that the required financial literacy of a public company director extends to a general awareness of the financial reporting obligations of the Act, bearing in mind that directors have a statutory obligation under s 344 to take all reasonable steps to comply or secure compliance with them. This would include the knowledge that directors must approve the accounts and directors' reports, that accounts must show a true and fair view and comply with accounting standards, and that the law requires the directors' report to refer to particular things such as events after the balance date.
246 ASIC did not seek to establish that any of the defendants did not possess the necessary degree of financial literacy. In fact the intelligence, experience and knowledge of each director was relied upon to show that the omissions could only have occurred through lack of focus in approving or adopting the financial statements. Nevertheless, ASIC submitted that if the absence of the necessary financial literacy was an explanation for failure of any or all of the directors to notice the deficiencies in the accounts and reports, the failure to acquire such knowledge was itself a breach of the duty of care and diligence.
247 ASIC's case was that there was an irreducible requirement upon the directors of involvement in the management of the company which includes maintaining familiarity with the company's financial affairs. In the case of Centro, that required familiarity extended to being aware of the extent of the borrowings and the maturity profile of those borrowings, and aware of the guarantees which had been given in August 2007. It was ASIC's case that every one of the directors in fact knew of these matters by virtue of various information and reports they were given. However, ASIC contended that if ignorance of these matters was an explanation for failure of any or all of the directors to notice the deficiencies in the accounts and reports, that ignorance itself bespoke a breach of the duty of care and diligence.
248 The second stage in defining the required degree of care and diligence is in the process of review of the accounts by the directors. ASIC submitted that it was the duty of every director to read the financial statements carefully and consider whether what they disclose is consistent with the directors' own knowledge of the company's affairs. ASIC's case against each director was not that he did not look at the accounts. ASIC in its opening contended that each director did not do so with "the necessary degree of care, and application of the mind, to the task".
249 Consistent with its pleaded case, ASIC, in opening, propounded that every director, whether executive or not, whatever his background, skills and role, had certain "irreducible" duties. ASIC's senior counsel said:
… there is an irreducible requirement upon directors of involvement in [the] management of [the] company which includes maintaining familiarity with the company's financial affairs. In the case of the Centro companies that required familiarity extends to being aware of the extent of the borrowings and the maturity profile of those borrowings and aware of the guarantees which have been given in August. It is ASIC's case that every one of the directors in fact knew of these matters by virtue of the information and reports they were given as detailed earlier. But if ignorance of these matters is an explanation for failure of any or all of the directors to notice the deficiencies in the accounts and reports, that ignorance itself bespeaks a breach of the duty of care and diligence.
250 ASIC's case was plainly focused on duties of care and diligence owed by any director irrespective of their personal qualifications, or background. ASIC also structured its case as to process on the care and diligence standard. Again in opening, ASIC said:
The second stage, your Honour, of the way in which ASIC defines the required degree of care and diligence is in the process of review of the accounts by directors. It has already been explained that ASIC's submission will be that it is the duty of every director to read the financial statements carefully and consider whether what they disclose is consistent with the directors' own knowledge of the company's affairs. Of course for each of these directors the knowledge of what precisely he did or did not do in this regard is solely his own. Some or all of them may choose later to give evidence about that, and the court may be in a position to make specific findings. ASIC's case against each director is not that he did not look at the accounts; it is a case that each did not do so with the necessary degree of care and application of the mind to the task.
251 In what in this proceeding became to be known as the "Blind Freddy" proposition, ASIC's submission in opening was that the errors in the financial statements were so obvious that breach of the standard of due care and diligence is the inescapable conclusion that this Court must draw. The position is probably best summarised by what ASIC said in opening:
We will submit that the court can draw the conclusion [as to breach of the standards of care and diligence] from the obviousness of the error to any reader of the accounts who had the requisite financial literacy and the knowledge that these directors had of the affairs of the companies, specifically their debts.
252 Of course, this was said before evidence was led by each of the directors. It was submitted by the directors that ASIC's case was that it matters not what mountain of detail obscured the facts that may have revealed the extent of short-term liabilities or that management failed to bring salient facts to the attention of the board or audit committee. It was further submitted that it also apparently matters not that PwC had undertaken in its audit plan to monitor compliance with accounting standards, that major accounting firms seemed to have struggled with this aspect of the transition to AIFRS, or that the Centro accounting policy manual prepared by Centro's accounting team under the supervision of the CFO and with input from PwC and Moore Stephens misstated the test. The necessary result, it was submitted, if ASIC were to succeed in this proceeding, was that non-executive directors are required to spot accounting errors that numerous expert accountants within management and the independent auditors had missed. It will apparent from what I have already said, that this is not ASIC's case.
253 It was also submitted by the defendants that ASIC proceeded in a fundamentally unfair and unsatisfactory way in mounting its case on s 344(1). It was contended that ASIC's primary case was initially one based on due care and diligence. It was submitted that the particulars of the alleged breach of directors' duties included in the amended statement of claim relate exclusively to the standard of care and diligence. For example, it was submitted that when ASIC pleaded that, in participating in the resolutions regarding the financial statements of CPL and CPT, Mr Cooper failed to exercise due care and diligence (implicitly s 180) and failed to take all reasonable steps (implicitly s 344), the only particulars ASIC gives of the alleged failures relate to s 180. It was contended that no particulars were given of the "reasonable steps" ASIC says that Mr Cooper (or any of the other directors) should have taken to comply with, or secure compliance with, Part 2M.3 of the Act.
254 The High Court observed in Kirk v Industrial Relations Commission of NSW (2010) 239 CLR 531 at [26], the "common law requires that a defendant is entitled to be told not only of the legal nature of the offence with which he or she is charged, but also of the particular act, matter or thing alleged as the foundation of the charge". The Court continued (at [26] and [28]) to explain that the essential factual ingredients of the offence must be set out, and that, where the essence of the offence is a failure to do something, that which ought to have been done must be set out explicitly and with particularity:
[26] The common law requirement is that an information, or an application containing a statement of offences, "must at the least condescend to identifying the essential factual ingredients of the actual offence". These facts need not be as extensive as those which a defendant might obtain on an application for particulars. In Johnson, Dixon J considered that an information must specify "the time, place and manner of the defendant's acts or omissions". McTiernan J referred to the requirements of "fair information and reasonable particularity as to the nature of the offence charged.
…
[28] The statements of the offences as particularised do not identify what measures the Kirk company could have taken but did not take. They do not identify an act or omission which constitutes a contravention of ss 15(1) and 16(1). The first particular of the s 15(1) offence suggests that the Kirk company had some systems relating to the operation of the ATV in place, but that they were not sufficient. It does not identify the deficiency in the system or the measures which should have been taken to address it. The second particular does not identify what information, instruction or training was necessary to be given to Mr Palmer or the other employee of the Kirk company. The particulars of the s 16(1) offence say nothing about what should have been done to avoid exposing the contractors to risk to their health and safety from the use of the ATV. Needless to say, the appellants could not have known what measures they were required to prove were not reasonably practicable.
255 In my view, the pleading is clear. The pleading gives sufficient notice to the defendants in accordance with the requirements set out in Kirk, assuming those requirements are applicable to this proceeding. For relevant purposes in considering whether the defendants have sufficient notice of what 'reasonable steps' should be undertaken, the essential elements of the pleading, taking Mr Cooper for example, are as follows. In paragraph 159 of the amended statement of claim the duty is set out. All 'necessary steps' to have sufficient knowledge of certain matters are described, including ensuring the director has sufficient knowledge to enable him to take 'all reasonable steps' to secure compliance with the relevant provisions of the Act. I would have thought that the directors, like other members of the community, are required to know the law. However, ASIC pleads in paragraph 159(c) a limited responsibility to take necessary steps to ensure sufficient knowledge of the requirements of Parts 2M.2 and 2M.3 to enable them to take all reasonable steps to secure compliance with the Act. Reading the relevant provisions applicable to one's responsibilities would seem an appropriate starting point, one not undertaken by the directors in this proceeding. In paragraph 159(f), the duty to read and understand the financial statements and reports, and the duty to draw errors, apparent errors and omissions to the executive management or other directors, is set out. I should indicate that bringing something to management's attention can be done in a number of ways, including asking questions or making appropriate enquiries and comments. It is then alleged in paragraph 160 that Mr Cooper failed to exercise the duties described previously in paragraph 159.
256 There is no mis-match between what is pleaded in paragraph 159 and paragraph 160. In paragraph 160(a) it is alleged that Mr Cooper failed to exercise his various responsibilities as pleaded in paragraph 159 (a reference to s 180(1)), and in paragraph 160(b) it is alleged there was a failure to take all steps that a reasonable person would take to secure compliance with the Act (a reference to s 601FD(1)(f)). This is made clear in paragraph 161. Paragraph 162 then picks up the allegations made in paragraph 159 and paragraph 160 making them applicable to CPL and CPTM and the specific alleged contravention of s 344(1) of the Act.
257 The particulars to s 160(c) are premised on the basis that "if" Mr Cooper had exercised the care and diligence described in paragraph 159, certain matters would have resulted. The particulars do not attempt to describe the 'reasonable steps', this already being achieved by the earlier references in paragraph 159 and 160.
258 The pleading in relation to Mr Scott is equally clear. The allegations against Mr Scott were particularised in a separate letter dated 23 December 2009. However, the scheme of the pleading is the same as that in relation to Mr Cooper. The basic knowledge requirement is set out, which Mr Scott should acquire. The requirement to take reasonable steps is referred to, after taking 'all steps necessary' to ensure a knowledge and understanding of Mr Scott's obligations under s 344, Part 2M.2, 2M.3, s 295A, s 296 and s 297. Then it is set out what reasonable steps should be undertaken, there already being a reference that Mr Scott is alleged to have failed to exercise the degree of care and diligence described in "all, or one or more" of the sub-paragraphs of paragraph 123 (which corresponds to the allegation against Mr Cooper in paragraph 159).
259 The specific steps particularised are to have "carefully and diligently reviewed the accounts", the "core requirements" being referred to by reference to sub-paragraph 123(f)(i) and (ii), and then it being alleged if this had occurred, the error would have been identified and steps taken to correct it. It is also alleged that if Mr Scott had exercised the care and diligence required of him, he would not have voted in favour of the relevant resolutions. In the body of the pleading, just as in the case against Mr Cooper, it is alleged that he should have drawn the error or 'apparent' error to the attention of executive management or the other directors. In the context of the use of the word "apparent", it is meant to mean, and would be readily understood to mean, seeming to be in error. It has not been alleged that the directors were required to be 'experts' in accounting standards and positively pick the error.
260 It is alleged that if the directors had acted appropriately then the omissions would seem to be an error, which the directors should have picked up, and at least brought to the attention of the relevant person, or otherwise not participated in the resolutions without further enquiry.
261 The pleading and the particulars must be considered as a whole. Just because any one particular act or omission may not amount to, say, a failure to take reasonable care, does not mean that taking the allegations as a whole may not lead to that conclusion - see Doonan v Beacham (1953) 87 CLR 346, 351-2 (per Williams ACJ).
262 Further, as Kitto J observed in Doonan at p 352:
The function of such particulars is not to divide a single issue of negligence into several distinct issues each requiring a separate finding, and to preclude a verdict from being given for the plaintiff unless he obtains a finding in his favour upon one or more of those issues. It is simply to confine the issue of negligence to the question whether the plaintiff's injury was caused by negligent conduct of the defendant falling within the limited category of acts and omissions which is defined by the particulars considered as a whole.
263 The defendants then made a number of submissions regarding the "shifting sands" of the ASIC case, none of which I regard as being made out or of any significance in the resolution of this proceeding.
264 First, I do not regard ASIC as bringing a new case based on s 295(4) of the Act, as contended by the directors. Section 295(4) is a provision which is of significance in a consideration of the scope of a director's responsibilities. It has been pleaded, and whether or not ASIC in opening made "only passing mention" of that provision, (as suggested by the non-executive directors) hardly puts reliance on s 295 as a new case.
265 Further, the non-executive directors submitted that ASIC has not pleaded any case based on a failure to take reasonable steps under s 344 in relation to the directors' report which it alleges (in paragraph 31H of the amended statement of claim) breaches ss 299 and 299A. This is not so as ASIC pleads a contravention of s 298, (which in turn refers to ss 299 and 299A), and then later pleads that each director failed to take all reasonable steps to secure compliance with s 298 of the Act, and thereby contravened s 344(1).
266 Then lengthy submissions were made by the directors as to the pleading and the directors' knowledge of note 1(w) and note 18 to the accounts. Note 18 is not relevantly relied upon by ASIC, and I therefore focus upon note 1(w).
267 The case as pleaded is that the directors should have had sufficient knowledge of conventional accounting practices to enable them to recognise that the accounts were in error or apparent error. It was submitted that the case that ASIC pleaded and opened does not depend upon the non-executive directors having knowledge of note 1(w). It was submitted that notwithstanding its pleaded case, ASIC now seeks to rely on the presence of note 1(w) by suggesting that the directors ought to have read it and been informed that the accounts had not been prepared in a way that conformed with it and were therefore wrong.
268 ASIC submitted that it had pleaded note 1(w) and referred to the following paragraphs of its amended statement of claim (by reference to Mr Scott):
(a) paragraph 29 - this paragraph sets out the content of note 1(w) in the CPL accounts;
(b) paragraph 35 - this paragraph set out the content of note 1(t) in the accounts of CPT (which was in substance the same as note 1(w));
(c) paragraph 42 - this paragraph set out the content of note 1(s) in the accounts of CRT (which was in substance the same as note 1(w));
(d) paragraphs 71-73 - these paragraphs plead the contents of the draft Appendix 4Es sent to the non-executive directors, and does not specifically refer to note 1(w) (and its equivalents). According to ASIC, the failure to pick up note 1(w) (and its equivalents) was just an error in the cross-referencing;
(e) paragraphs 82 and 84 - these paragraphs plead the contents of the Appendix 4E as signed by Mr Healey, and again do not refer to note 1(w) (and its equivalents), ASIC again said this omission was merely an error in cross-referencing;
(f) paragraph 123 - this paragraph refers to the standard ASIC pleads was required to be exercised by Mr Scott as a "reasonable director of a corporation in the circumstances of CPL and CPTM as described in paragraphs 45 to 104".
269 If not for the error in cross-referencing, note 1(w) (and its equivalents) would form part of the pleaded knowledge which ASIC says the non-executive directors should have had.
270 The directors accept that the pleading relies on note 1(w) (in paragraph 30) to substantiate ASIC's case as to the proper classification of the liabilities, but say note 1(w) had only this specific role in the pleaded case.
271 As to the non-executive directors' knowledge, the critical paragraph is paragraph 103 of the amended statement of claim. That paragraph pleads that, by reason of the facts set out in paragraphs 45 to 102 (which paragraphs do not incorporate any reference to note 1(w) only because of the error in cross-referencing), the directors knew or ought to have known of the level of CPL's and CRT's short-term debt and the existence and significance of the guarantees. It was submitted that if ASIC's case was that note 1(w) formed one of the "dots" which the directors should have joined in order to conclude that the accounts were in error or apparent error, it should have referred to it in paragraphs 103 and 104.
272 In my view, the pleading adequately brings to the directors' attention the existence and significance of note 1(w). The error in cross-referencing would have been apparent to the reader of the pleading. I do not consider any director has been taken by surprise by reference to note 1(w) and the calling in aid by ASIC of the directors' knowledge or constructive knowledge of it. The note 1(w) was referred to in the pleading, and was part of documents clearly before the directors to which they were said to have knowledge of at the relevant time. In any event, reliance can be placed by ASIC on note 1(w) in response to any suggestion by the directors in their evidence that they were not aware, or were not sufficiently aware, of the conventional accounting practice, and in particular the classification of current liabilities .
273 Another suggested deviation from the pleading related to reclassification following the Appendix 4E.
274 ASIC's amended statement of claim does not refer to the reclassification of the interest bearing current liabilities of CNP following the release of the Appendix 4E (from nil to $1.1 billion) as a source of knowledge of the directors. It is not pleaded that any or all of the non-executive directors were informed that an error had been identified in the Appendix 4E, that management and PwC had agreed that the JP Morgan domestic bridge facility should have been classified as current and that the JP Morgan domestic bridge facility had in fact been reclassified in the full financial statements of CNP.
275 ASIC led evidence from Mr Cougle and Mr Cronin suggesting that those attending the BARMC meeting on 5 September 2007 were told of the change between the Appendix 4E and the final accounts.
276 ASIC acknowledged that there is no reference in Centro's company secretary, Ms Hourigan's notes to the matter having been raised which "would seem surprising [if it had been raised]" and that Mr Belcher did not recall drawing the attention of the BARMC meeting to that change.
277 In relation to this matter, the directors submitted as follows. No allegation was pleaded that the non-executive directors were informed by Mr Belcher (or anyone else) of the reclassification of the Appendix 4E - such a critical factual matter must be pleaded, and ASIC's failure to plead the matter should be the end of it. In any event, Mr Belcher's oral evidence was that the matter was not raised - his evidence was unequivocal, he had no uncertainly about his recollection, and his evidence was against his personal interest. If there is any question about what the non-executive directors were told, Mr Belcher's evidence should be accepted. Mr Belcher's evidence was supported by Ms Hourigan's own evidence (she said "nobody said that [there had been an error in the 4E]") and her careful notes - there is no reference in those notes to the matter having been raised. In view of the depth of detail in her notes, it is inconceivable that the matter was raised and not noted by her. It also beggars belief to suggest that the matter was raised and not one person at the audit committee meeting on 5 September 2007 said anything about it. Finally, on cross-examination, Mr Cougle turned out not to have any specific recollection of the matter having been raised at all, based his evidence on a recollection that changes between versions of accounts usually were raised with the Board.
278 In final submissions, ASIC did not press that I find as a fact that the matter referred to above was raised. I proceed in this proceeding on the basis that the matter was not raised. Therefore, I need not analyse any further whether there was a departure from the pleaded case on this matter.
279 In its amended statement of claim, ASIC allege only that the directors received extracts of the draft financial statements of CPL, CPT and CRT (within the September 2007 BARMC papers) prior to approving the accounts. In its opening, ASIC's case was that the non-executive directors had not received either the full or the concise financial statement of CNP or CER by the time of the critical BARMC meeting on 5 September 20007. The opening included the following statement:
Both the full financial statements and the concise financial reports of CNP and CER were completed and ready to be signed (and were in fact signed) on 6 September 2007). It appears that the full financial statements were completed by management on about 4 September 2007, but were still be [sic] considered by the Auditor and were subject to changes…
Save that he says that the completed full and concise financial statements were placed in a room at Centro's head office by 6 September, Mr Belcher is unable to say anything further about the distribution of copies of those documents to the directors or even that they were in the hands of the members of the Audit Committee at their meeting the following day: a meeting which did not take place at Centro's head office, but early in the morning at its office in Collins Street in the city.
If the members of the Audit Committee and the other directors did have available to them on 5 September 2007 a copy of the full financial statements of each of the CER and CNP, or event [sic] the concise reports, then it remains unexplained how they got them.
280 ASIC only presses the facts now made clearer upon the directors giving evidence. I do not consider there is really much dispute about the sequence of events. The evidence adduced during the trial has established unequivocally that versions of both the full and concise financial statements of CNP and CER were made available to the directors prior to the relevant meetings. The full financial statements were available for review by the directors at the meeting room in Centro's head office in Glen Waverley (called 'the Glen') from at least 2 September 2007. This was the usual Centro practice. The evidence of Mr Belcher was that:
A version of the full financial statements of the Centro Properties Group, being Centro Properties Limited, and its controlled entities, including Centro Properties Trust, called CNP, was placed in a room at The Glen. The version in that room would have been updated progressively. There would have been a version of the CNP full financial statements in that room at The Glen on Sunday 2 September and Monday 3 September. Mr Belcher cannot say what version was or versions were in that room on those days.
281 The evidence of each of the members of the BARMC (Kavourakis, Hall and Cooper) was that they attended the Glen to inspect them between 2 September 2007 and 4 September 2007.
282 Further, each of the non-executive directors had been provided with the concise financial statements of CNP and CER by emails sent by Ms Hourigan on 4 September 2007. With the exception of Mr Hall, the evidence of each of the non-executives was that they read or believed they would have read the concise financial statements prior to the relevant meetings. Mr Hall's evidence was that he did not review the concise accounts because he had read the full financial statement at the Glen in any event. Similarly, Mr Kavourakis' evidence was that he would not have read the balance sheets in the concise accounts for the same reason.
283 ASIC sought to say that the non-executive directors had not been given sufficient time to review the final accounts prior to the meetings. This was submitted by the defendants to be a shift in its case. In this respect, I do not consider that ASIC was altering its position, but was referring to the circumstances leading up to the approval of the accounts.
284 It was then suggested by the directors that ASIC's pleaded case requires that directors "get it right". The directors submitted that ASIC now contends that a director needs only to ask the appropriate questions.
285 The directors submitted that they were required, on ASIC's case, to have sufficient knowledge of accounting standards to recognise that there were errors or apparent errors in the accounts. This (they submitted) required that the non-executive directors succeed where others (principally management and the auditors) had failed. Having recognised these errors and omissions, ASIC's case is that the directors were then required to draw the error or omission to the attention of management, the BARMC and/or the other directors. It was submitted that ASIC's pleaded case is not that the non-executive directors should have simply asked a question of management or the auditors. I have already considered the pleadings and expressed my view concerning ASIC's case. As I have already indicated, to allege that a director is required to draw an error, apparent error or omission to the attention of management can be done in a number of ways. One way, is to ask a question.
286 Finally, it was submitted by the non-executive directors that ASIC has sought to avoid any suggestion that its case sets an unfeasibly high bar for non-executive directors by requiring that they obtain a working knowledge of the entire range of accounting standards by ASIC now suggesting that this proceeding (as it relates to classification) only requires a "routine and basic application of the test for classification of liabilities". Putting to one side for the present the argument regarding whether the classification standard is as simple as ASIC would have it, this case, it was submitted departed from the pleaded case.
287 The directors have contested ASIC's attempt to characterise the application of AASB 101 and AASB 110 as simple and routine. They submit that the application of accounting standards is a specialised field of expertise exercised by accountants and auditors and is complex. It was submitted that the case ASIC brought requires in effect that a director have a good working knowledge of all of the accounting standards, which it was submitted that ASIC seeks to walk away from.
288 As I have indicated, this is not the case ASIC brings in this proceeding. The ASIC case as pleaded is that there is only required a routine knowledge of and basic application of the test for classification of liabilities. It is not suggested, in the pleading or the opening, that the directors have a working knowledge of all of the accounting standards, or even a working knowledge of AASB 101 or AASB 110.