The Court of Appeal has allowed an appeal for the directors of Apple Fields Limited (AFL), quashing orders made against them for breaches of the Financial Reporting Act 1993 (Act).
In summary, AFL had failed to register audited financial statements and an auditor’s report as required under the Act. The directors of AFL explained in the High Court that their failure to meet the requirements under the Act was primarily based on advice that had been given to them by their accountant, to the effect that generally accepted accounting practice required that AFL consolidate its accounts with those of Noble Investments Limited and file those consolidated accounts.
The directors of AFL relied on the statutory defence under section 40(a) of the Act on the basis that the board had taken external accounting advice and that they had taken “all reasonable and proper steps to ensure that the applicable requirement of [the] Act [had] been complied with”.
The District Court and High Court found against the directors, stating that they should have sought further “comprehensive legal and/or accounting advice as to the range of options available to them”.
The Court of Appeal however overturned the earlier decisions and found that the directors of AFL had taken all reasonable steps to ensure compliance with the Act. They had received external accounting advice which they reasonably believed was accurate. There was also no evidence that further accounting and/or legal advice would have produced a different outcome.
The significance of this decision is as an authority for the proposition that it is reasonable for company directors to rely on professional advice, so long as they reasonably believe that the professional advice is accurate. If directors reasonably believe that the professional advice is or may be incorrect, then further steps should be taken to seek a second opinion in relation to the options and obligations available.