In July this year, the Federal Court (Jackman, J) delivered its judgment in relation to ASIC’s allegations that the former Managing Director and CEO of Noumi Limited (formerly called Freedom Foods Limited) breached various provisions of the Corporations Act in relation to statements in the Noumi accounts for the 2019 financial year and the first half of the 2020 financial year.
ASIC’s claims against the company and its CFO relating to statements in those accounts had previously been resolved on the basis of admissions and agreed penalties. The CEO decided to defend the allegations against him. The court considered the matter on the basis of the evidence and disregarded the admissions made by the other defendants.
The alleged breaches related to statements of inventory levels in the Noumi accounts for the FY2019 full year and the FY2020 first half, and statements about revenue and profit in the FY2020 first half accounts.
Summary of the court’s findings
The court made the following findings on the evidence:
- the FY19 accounts included information about inventories that meant that the FY19 accounts did not give a true and fair view of the financial position of the company [at para 210], but that the CEO did not become aware of information that ASIC alleged he knew, until months later.
- the FY20 first half accounts failed to give a true and fair view of the financial position of the company [at para 219], and that the CEO was aware of the relevant inventory information particularised by ASIC in relation to the FY20 first half accounts. [at para 223]
- the FY20 first half accounts also contained information about revenue and profit that did not comply with applicable accounting standards, [at para 227] and that the CEO was aware of the relevant revenue information particularised by ASIC in relation to the FY20 first half accounts. [at para 233].
- That information was material price-sensitive information that should have been disclosed by the company to ASX under its continuous disclosure obligations but ASIC failed to establish that the CEO was aware that the information was material price-sensitive information.
ASIC’s allegations
ASIC alleged the following breaches of the Corporations Act by the CEO:
- Breaches of s1309(2) by giving information that was false or misleading in a material particular to the Noumi directors in connection with the FY19 accounts and the FY20 first half accounts, without taking reasonable steps to ensure that the information was not false or misleading.
- Breaches of s344 by failing to take all reasonable steps to comply or secure compliance by the company with the requirements for financial reports under the corporations Act and the listing rules in relation to the FY19 accounts and the FY20 first half .
- Breaches of s180(1), the duty of care and diligence, by permitting the publication of non-compliant accounts, failing to correct or withdraw the accounts, failing to ensure that adequate accounting policies and procedures were in place, and failing to disclose information about the accounts to the board and ASX.
- Breaches of s674(2A) for being knowingly involved in the company’s continuous disclosure breaches.
Findings with respect to ASIC’s allegations against the CEO
The allegations in relation to breaches of s1309(2) failed because ASIC pleaded that the CEO had made unqualified representations concerning the accounts, whereas he had qualified the relevant statements “to the best of my knowledge”. [at para 243 and para 246]
The allegations of breaches of s344 relied on particulars given by ASIC. In relation to the FY19 accounts, ASIC particularised five ways in which the CEO failed to take reasonable steps. The court found that ASIC had failed to establish any of those five alleged failures on the evidence. [at para 260]
In relation to the FY20 half-year accounts, ASIC also alleged five ways in which the CEO had failed to take reasonable steps. The court found, based on the evidence as to the CEO’s actual knowledge of the relevant accounting matters at the time of the publication of the FY20 half year accounts, three of those five grounds had been established, and therefore the CEO had breached s344 in relation to the FY20 half year accounts. [at para 267]
In relation to the alleged breaches the duty of care and diligence by the CEO, the cases establish that “liability under s 180(1) may be triggered where a director’s failure to exercise reasonable care and diligence has caused or allowed the company to contravene the Act, at least where it was reasonably foreseeable that such contravention might harm the company’s interests” [para 276]
ASIC alleged that the CEO had breached the duty of care and diligence on multiple grounds with respect to each of the FY19 accounts and the FY20 half-year accounts. Interestingly, ASIC alleged that obligations continued after the publication of the relevant accounts, including obligations to inform the board, correct the accounts and disclose the accounting breaches once they became known to the CEO.
The court found that the CEO had breached s180 in relation to the FY19 accounts by failing to inform the board and correct the accounts (summarising) once the CEO became aware of the accounting issues in the FY19 accounts. [at paras 290 and 291] However, ASIC failed to establish that the CEO had breached s180(1) prior to or at the time of the publication of the FY19 accounts, or that he had breached s180(1) by failing to disclose the accounting breaches to ASX, or by exposing the company to the risk of legal proceedings.
(ASIC alleged that the CEO had knowledge of particular accounting information concerning inventories at the time that the FY19 accounts were finalised and published, but that information was not in fact available to the CEO until months later. Accordingly, ASIC’s claim that the CEO was aware of matters that meant that the FY19 accounts did not give a true and fair view failed, because of the way in which the particulars were drafted. [at para 215])
The court also found that the CEO had breached s180 in relation to the FY20 half-year accounts on several grounds, each based on the finding that the CEO was aware at all material times of the information that meant the accounts did not present a true and fair view and did not comply with the accounting standards. Those grounds included:
- Permitting the company to disclose the FY20 half-year financial report, and failure to qualify, withdraw or correct the report;
- Failure to ensure that the company had adequate policies and procedures in place in relation to accounting for inventory, revenue and the preparation of financial statements;
- Failure to disclose information about the half-year accounts to the board and the ASX
- Failure to take all reasonable steps to ensure that the half-year accounts gave a true and fair view
The allegations of breaches of s674(2A) failed because ASIC failed to establish that the CEO was aware that the relevant information was material price-sensitive information, although the court concluded by a narrow margin that the information that caused the accounts not to comply with the accounting standards, and not to give a true and fair view, was material price-sensitive information.
Lessons for directors, particularly executive directors
The outcome of this case echoes, in some respects, the findings against the CEO in ASIC’s case against directors and officers of The Star: in both cases, the CEO was found to have breached his obligation of care and diligence by failing to inform the board of matters that related to regulatory compliance.
Further, in the Noumi case, the CEO was found to have breached his duty of care and diligence by failing to have adequate policies and procedures in place to ensure that the accounts were prepared in accordance with statutory requirements. This obligation applies to all directors, not just the CEO.
It is particularly notable that (in his joint capacity as MD) the CEO breached his obligation under s344(1) by failing to take reasonable steps to ensure that the accounts complied with the Corporations Act and the accounting standards. Section 344(1) is also the section under which the directors of the Centro companies were found to have breached their obligations in the landmark 2011 Federal Court decision on the responsibility of directors for company accounts. Although ASIC’s action in this Noumi case was against the CEO alone, the judgment restates principles from the Centro case that boards of reporting entities must take reasonable steps to ensure that the financial statements comply with the accounting standards and give a true and fair view. The obligation of directors under s344 cannot be delegated: directors cannot delegate to or rely on the CFO or the auditors to ensure compliance. Directors must carefully read and understand financial statements before approving them, and bring to that task the information which is known, or ought to be known, by them, and if necessary, make further inquiries if matters revealed in those financial statements call for such inquiries.
Section 344 is a civil penalty provision, and a breach of s344 is also an offence if the contravention is dishonest.
Section 344 now also applies to mandatory sustainability reports: boards of reporting entities must take reasonable steps to ensure compliance with the Act and AASB S2 or face personal liability.
Unlike its litigation against the directors and officers of The Star and Centro, ASIC’s litigation focused on Noumi, its former CEO, and its former CFO and company secretary, with no claims brought against Noumi’s non-executive directors. In a separate decision in 2024, the Court found the former CFO and company secretary had been knowingly concerned in Noumi’s continuous disclosure breaches, breached his duties as an officer of Noumi, and gave false or misleading information to Noumi’s directors and auditors.
This also a case, like ASIC’s case against directors and officers of The Star and its case against Nuix and its directors, where ASIC failed to prove many of the matters it had alleged. In all of these cases, many of ASIC’s allegations and the supporting particulars appear to have been affected by hindsight bias or by implying facts or knowledge that could not be proved. There is no question that the regulator should have prosecuted these cases, but it does not inspire confidence, within ASIC or within the community, when cases fail for these reasons.
