Pothers about liability risks for company directors and officers are nothing new in corporate law. The global financial crisis (‘GFC’), however, created a unique and unfamiliar commercial matrix in which such concerns were played out. Although Australia fared much better than many jurisdictions during the GFC, that is not to say it was unaffected. The crisis had an array of significant commercial and legal effects in Australia, including in the area of directors’ liability. Against the backdrop of Australia’s stringent insolvent trading regime, the crisis increased the risk of business failure and complicated the task of assessing a company’s solvency. These factors also affected potential liability of directors for breach of the duty of care and diligence.
One decision highlighting the potential dangers for directors in this regard is ASIC v Healey (‘Centro Liability Decision’), which was delivered in June 2011. In that case, Middleton J in the Federal Court of Australia held that the defendants, including executive and non-executive directors, had breached their duty of care and diligence in relation to financial reporting obligations during the GFC. Many commentators viewed the Centro Liability Decision as unduly harsh. In the United States (‘US’), it has been described as a ‘wake-up call from down under’.
Only a few months after delivering his wake-up call, however, Middleton J came to consider the appropriate penalties to apply in relation to the relevant breaches in ASIC v Healey [No 2]9 (‘Centro Penalty Decision’). In contrast to the Centro Liability Decision, which had been criticised for its stringency, the Centro Penalty Decision was widely greeted in the press as being too lenient.
An intriguing aspect of the Centro litigation is the apparent incongruity between the liability decision and the later penalty judgment. This article argues that the Centro Liability Decision and Centro Penalty Decision form vital complementary parts of the overall doctrinal message of the Centro litigation. The article suggests that, rather than signifying inconsistency, the two decisions reflect an underlying tension in the area of directors’ duties between legal rules and aspirational standards.
This tension also underpins the law in this area in the US. The article examines the Centro litigation through a comparative law lens, contrasting it with some leading US case law on the duty of care and the duty of oversight, where the friction between legal rules and aspirational standards is apparent. US case law discussed in this article, which serves to elucidate the tension between legal rules and aspirational standards, includes the famous decision in Smith v Van Gorkom, and the Disney litigation. The article argues that although, viewed in isolation, the Centro Liability Decision strongly resembles Smith v Van Gorkom, when the complementary Centro Penalty Decision is taken into account, the overall message of the Centro litigation becomes more closely aligned with more recent US case law on the duty of care, such as the Disney litigation.
