MEDIA RELEASE – For immediate use, 18 October 2012

Criminalisation of breaches of directors’ duties could impact economy

Proposed legislation that would criminalise breaches of directors’ duties could have a negative impact on the economy, the New Zealand Law Society says.

The introduction of criminal liability for breaches of directors’ duties – as a “backstop” to civil liability – is intended to penalise and deter dishonest directors, but the Law Society is concerned the Companies and Limited Partnerships Amendment Bill does not make dishonesty an element of the offence.

Law Society commercial and business law committee member Ross Johnston presented the Law Society’s submission on the bill to the Commerce Select Committee today.

“By not clearly limiting the offences to those involving dishonesty, New Zealand risks discouraging legitimate risk-taking and, thereby, discouraging the types of innovation and entrepreneurship that are pivotal to business development,” he told the committee.

“This same risk saw Australian policymakers seek to strike a balance between discouraging undesirable behaviour, and facilitating responsible risk-taking and innovation and ensuring honest and competent people are not deterred from becoming company directors for fear of damage to their reputations.

“The strong correlation between good governance and productivity would make any government wary not to (inadvertently) deter competent and honest candidates from governance roles.

“The SME sector in particular needs good governance inputs from people with experience (and mana). By creating uncertainty, there seems to be the very real prospect of discouraging the sort of strong hands on the tiller that are needed.

“Where only criminal sanctions are available to address behaviour, arguably lacking a criminal level of blameworthiness, a reluctance by the courts to convict might deter the regulator from bringing cases to prosecution, as the outcomes are uncertain and the costs for the tax payer potentially substantial.”

The Law Society noted that directors who breach their duties are already subject to substantial and effective sanctions, including damage to their reputations and civil liability to compensate where losses are caused by the breach of a relevant duty.

“The wave of successful prosecutions against certain directors of a number of failed finance companies illustrates the adequacy of the existing criminal law provisions,” Mr Johnston said.

The Law Society was concerned that the Bill raised the prospect of compounding the existing difficulties with the reckless trading prohibition in the Companies Act, by adding a criminal backstop to that sanction.

The problems with the wording of the current prohibition were well known in that it appeared to penalise directors for taking risks, even if those risks were legitimate, Mr Johnston said.

“The language provides little or no guidance to directors as to the point at which a decision should be made to stop trading,” he said.

Rather than risk compounding these difficulties, the Law Society suggested that the underlying legislation was in need of serious revision.

“Without it, Parliament runs the risk of having the courts undertaking a ‘reverse engineering’ exercise to try to cure the problems of the underlying language, making the situation worse in respect of both penalisation and deterrence,” Mr Johnston said.

ENDS

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