Centro Properties Group directors wrongly approved financial statements that didn’t disclose all the company’s debt, a federal judge ruled, a decision that the stock market regulator said clarifies a board’s duties to shareholders.
Centro’s 2007 annual report failed to disclose A$1.5 billion ($1.6 billion) of short-term liabilities by classifying them as non-current, and the company didn’t declare $1.75 billion of short-term debt guarantees of an associated company, Judge John Middleton wrote in a 189-page ruling today in Melbourne. The mall manager also didn’t disclose A$500 million of short-term debt at one of its units, the judge said.
“This proceeding is not about a mere technical oversight,” Middleton wrote. “The information not disclosed was a matter of significance to the assessment of risks facing” Centro and its unit Centro Retail Group, he said.
The ruling makes clear directors have a responsibility to ensure the accuracy of a company’s financial statements, Greg Medcraft, chairman of the Australian Securities & Investment Commission, said at a news conference in Sydney. The ruling also shows the danger boards face when they rely uncritically on management or auditors, Medcraft said.
“Directors are an important gatekeeper in our system,” Medcraft said. “It’s not the responsibility of company boards to just delegate or rubber stamp. They actually have to take responsibility.”
Centro dropped 5 percent to 3.8 Australian cents at the 4:10 p.m. close in Sydney trading, the lowest since at least August 1997. The shares have fallen 76 percent this year.
Centro first announced a restructuring plan in 2009 after a debt-fueled U.S. buying spree backfired when the global financial crisis caused property values to plummet and borrowing costs to soar, leaving the company unable to refinance its liabilities. Melbourne-based Centro, which managed about A$16.5 billion of shopping malls in Australia, New Zealand and the U.S., had about A$16 billion of debt across its businesses as of Dec. 31, according to the company’s first-half results released Feb. 24.
Blackstone Real Estate Partners VI LP, a unit of the world’s biggest private-equity firm, agreed to buy Centro’s 588 U.S. malls in March for $9.4 billion. Centro said on March 1 it also agreed to swap part of its debt for 108 Australian properties and will be left with about A$100 million.
“There has been no suggestion that each director did not honestly carry out his responsibilities,” Middleton wrote. In this specific instance, “the directors failed to take all reasonable steps required of them,” the judge said.
Centro is reviewing the ruling and will comment further this week, it said in a statement to the Australian Stock Exchange.
“The critical task of restructuring Centro in the best interests of all investors remains the priority,” the company said. “Today’s decision will not impact the progress being made on that front.”
Judge Middleton said he hasn’t yet decided on penalties in the case.
“The penalties are quite important,” the commission’s Medcraft said. “But the judge identified a very important principle.”
The case is: Australian Securities and Investments Commission v. Healey. VID750/2009. Federal Court of Australia (Melbourne).