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2014 will be a watershed year for New Zealand directors

24 October 2013

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This article first appeared in November's issue of boardroom, the IoD's member magazine.

Four statutes, all of which will be passed before the end of next year, will make 2014 a watershed year for New Zealand directors.

The Financial Markets Conduct Bill was enacted in August.  Still in the pipeline are the bill to establish the new health and safety in employment (HSE) regime, the Commerce (Cartels and Other Matters) Bill and the Companies and Limited Partnerships Amendment Bill.

The HSE Bill, part of the Pike River legacy, allows for the possibility of jail time without intentional wrongdoing.  This distinguishes it from the other Bills, all of which - although one of them only belatedly - insist that there must be an element of deliberate fault to attract criminal sanction. 

But all four pieces of legislation will increase directors’ exposure to legal risk.
The HSE Bill will create a positive ‘due diligence’ duty on directors to ensure that those with management responsibility for workplace safety are discharging their duties appropriately.  In judging what is appropriate, the Courts will have regard to the Good Governance Guidelines prepared by MBIE and the Institute of Directors.  These state that:
“Directors need to be aware of the organisation’s hazards and risks.  They should have an understanding of hazard control methods and systems so that they can identify whether their organisation’s systems are of the required standard.  They should understand how to measure health and safety performance so they can understand whether systems are being implemented effectively”.
This is a much stronger standard than currently applies.  Now, directors can be held liable for an HSE breach only where they have “directed, authorised, assented to, acquiesced in, or participated in the failure”.  
The Bill is still being drafted but will introduce a three-tier penalties structure in which the most serious breaches will be punishable by individual fines of up to $600,000 and/or five years in prison.  The Government is still considering whether to introduce a crime of corporate manslaughter into the Crimes Act, with a maximum penalty of ten years where a director’s acts or omissions contributed materially to a workplace fatality.

The Commerce (Cartels and Other Matters) Amendment Bill makes “hard core” cartel behaviour – defined as price fixing, restricting output and market allocating – liable for a prison sentence of up to seven years.  But it:

  • exempts “collaborative activity” involving a cartel element, provided the agreement on price or output is reasonably necessary in order to give effect to the arrangement, and the arrangement has not been entered into for the dominant purpose of reducing competition, and
  • requires culpability for criminal liability, including by providing it is a defence that a defendant “honestly believed” that the collaborative activity exemption applied.
The principal risk for directors in relation to this provision is that the scope of the collaborative activity safe harbour is uncertain and will need to be established through the courts.
The Companies and Limited Partnerships Amendment Bill will make it a crime punishable by up to five years in jail or by a fine of up to $200,000 for a director:
  • to exercise a power or perform a duty in bad faith towards the company, believing that the conduct is not in the company’s best interests, and knowing or being reckless as to whether the conduct will cause serious loss to the company or benefit a person who is not the company, or
  • knowingly to cause or allow the business of the company to be carried on in a manner that causes serious loss to one or more of the company’s creditors.
These provisions were rewritten – after sustained advocacy from governance experts, including the Institute of Directors, INFINZ, Business New Zealand, Chapman Tripp and other major law firms – to make it clear that the offending had to be deliberate.  But, although the new version is an improvement on the original, important concerns remain.
The issue with the “best interests” offence is that broad fiduciary duties form a poor basis for criminal sanction because their boundaries are open to differing interpretations, and the targeted misconduct will almost always be caught by existing fraud offences in the Companies and Crimes Acts.
The ‘reckless trading’ offence will be problematic if its effect in practice is to create another barrier to solvent work-outs.  Work-outs are undertaken to capture the often substantial difference between going concern value and liquidation value, and often have the side effect of preserving jobs.  Creating further obstacles in their path would be a serious own goal in a New Zealand legal framework already weighted toward the “put up the shutters” option.   
The Financial Markets Conduct Act covers offences relating to misleading or defective disclosures.  The Act relies mostly on civil remedies, which can run as high as $1 million for an individual.
It makes civil actions more accessible by providing that, where investors have lost money and a breach has occurred, the loss will be attributed to the defective disclosure unless it can be proved that it had an independent cause.  This will make class claims much easier – currently, individualised causation makes them near impossible.
The standard of proof is also easier as civil liability can be incurred without knowing contravention.  Criminal sanctions are reserved for the most serious offending, where there is a specific fault element, and require proof beyond reasonable doubt – rather than the ’no-fault’ criminal liability under current law (subject to due diligence defences).

Comment

Serious breakdowns cast long shadows.  So it is that the Pike River tragedy and the finance company collapses have led our legislators to strengthen the incentives on directors to be diligent in performing their duties.  There is also an element of catch-up, particularly with Australia in relation to the HSE and cartels bills.    
But, while these motives are understandable, there are significant risks in the drift toward criminalisation, including that it:
  • favours the large because, as the risk of liability increases, so does the cost of avoiding it (and New Zealand is an economy of small enterprises)
  • transfers money – for little efficiency gain – from shareholders to external consultants (lawyers, accountants, health and safety experts, etc.), and
  • discourages younger people, and specialists who are not from legal/audit backgrounds, from taking positions on boards – tilting boards further toward process and compliance and away from enterprise and wealth creation.

Contacts