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Judicial Anxiety: Customary International Protection of Human Rights in the Domestic Arena.

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Presentation on theme: "Judicial Anxiety: Customary International Protection of Human Rights in the Domestic Arena."— Presentation transcript:

1 Judicial Anxiety: Customary International Protection of Human Rights in the Domestic Arena

2 Wake up New Zealand: Directors’ Duties Reform Responses to the GFC

3 Julie Cassidy School of Law Auckland University of Technology

4 Introduction Major corporate collapses in recent decades Consider whether the directors meet the standards expected in the modern commercial world New Zealand has lagged behind other nations ie Australia reform in late 1980’s and early 1990’s Significant legislative amendment to Australian directors’ duties in 1992, 1999 and 2001 Failure to strengthen its directors’ duties not because New Zealand was immune from the GFC ie Hanover Finance, Five Star Consumer Finance, Capital + Merchant Finance Ltd, Bridgecorp group, Nathans Finance Ltd and Lombard Finance & Investments Ltd A number of spectacular corporate collapses with many investors losing much or all of their savings Broader public mistrust and lack of confidence in capital markets and the finance sector generally

5 Introduction: Response to the GFC in has been confined to reform of banking sector and more recently securities laws Directors’ conduct continues governed by a regime that is weak re standards of conduct and review Regulatory body, now the Financial Markets Authority ('FMA'), has no power to pursue directors for even egregious breaches Had to resort to alternative sources of punishment, in particular offences relating to misstatements in financial products Outside the realm of such breaches the FMA is powerless to take actions against directors There are no offences that apply to core directors' duties post the allotment of securities Regulatory regime in New Zealand is inadequate

6 Introduction: Current proposal to criminalize serious breaches: s 131: duty of act in good faith and in the best interests of the company s 135: reckless trading Companies and Limited Partnership Amendment Bill will amend Companies Act 1993: new ss 138A and 380(4) s 131: director acts in “bad faith”, “believing” the conduct is not in the company’s best interests and "knowing or being reckless” that the conduct will cause “serious loss to company“ or “benefit or advantage a person”: s 138A(1) s 135: director "knows” the company’s business is conducted in a manner that will result in “a serious loss to the company‘s creditors” and 1 or more non-consenting creditors suffer serious loss: s 380(4) Imprisonment 5 yrs or fine $200,000: s 373(4) Automatic 5 year bans from management: s 382

7 Introduction: First, current regime as to directors' duties in New Zealand Second, arguments for/against the changes Third, evaluation in light of regulatory regime in Australia Changes are to be applauded, but do not do far enough Criminal breaches should not be confined to these two directors' duties In Australia criminal liability also extends to the duty to exercise powers for their proper purpose and the duties not to improperly use the directors' position and corporate information Should reconsider complementing reforms with a civil penalty regime as in Australia

8 Current regime in New Zealand: Directors' duties are governed by ss and 145 Companies Act 1993: duty to act in good faith and in the best interests of the company: s 131 duty to exercise powers for a proper purpose: s 133 duty to comply with the constitution: s 134 duty to avoid reckless trading: s 135 duty not to agree to the company incurring an obligation that it will be unable to perform: s 136 duty of care, diligence and skill: s 137 duty not to disclose, use or act on company information: s 145 Note, interrelationship between statutory duties and the fiduciary duties/common law duties remains unclear in New Zealand

9 Current regime in New Zealand: New Zealand's directors' duties regime is based on a private enforcement Echoing the position under equity and the common law, these core directors’ duties are owed to the company: s 169(3)(d)-(i) Company (a legal fiction) is the proper plaintiff The decision to litigate is a management decision Management powers are conferred on the board: s 128(1) and (2) Companies Act 1993 Decision rests in the hands of the directors who may be the offending director or closely affiliated to that person Litigation against directors often only occurs once the company is insolvent and management powers have shifted to a liquidator

10 Current regime in New Zealand: Shareholders can only bring personal actions against directors for duties owed to them personally: ss 169(1) and (3)(a)-(c) Duty to supervise the share register (s 90), duty to disclose interests (s 140) and duty to disclose share dealings (s 148) Personal litigation cannot be brought for breaches of directors' duties owed to the company Shareholders may bring a derivate action for a breach of directors' duties under s 165 Need leave of the court Discretionary factors stated in s 165(2) s 165(3) requires (i) company does not intend to bring the proceedings and (ii) company’s interests not be left to directors Litigation is costly Any compensation is paid to the company, not the shareholder Typically shareholders only learn of the conduct post the breach

11 Current regime in New Zealand: FMA cannot enforce even the statutory directors' duties No power to litigate seeking compensation for the company No power to seek a civil penalty No power to commence criminal proceedings even for the most serious breaches Powers to initiate civil actions are limited to contraventions of the Securities legislation No power to bring civil actions for breaches of the Companies Act 1993 Power to commence criminal proceedings for offences under the Securities Act 1978 Power to commence criminal proceedings for offences under s 373 Companies Act 1993 But s 373 does not include directors’ duties Companies Act 1993 includes powers to disqualify directors But only limited availability for breaches of directors’ duties Directors' duty regime is a private enforcement regime

12 Reform Proposals: A number of reviews in light of the GFC and the failure of many New Zealand finance companies Ministry of Economic Development, Review of Securities Law Discussion Paper (June 2010) Office of the Minister of Commerce, Cabinet Paper to the Chair of the Cabinet Economic Growth and Infrastructure Committee: Securities Law Reform (February 2011) Commerce Minister’s announcement of a comprehensive review of securities laws (17 March 2011) Office of the Minister of Commerce, Cabinet Paper to the Chair of the Cabinet Economic Growth and Infrastructure Committee: Securities Law Reform – Additional Policy Decisions and Costings (May 2011) Companies and Limited Partnership Amendment Bill 2011, s 138A Referred to Commerce Committee, Report (11 December 2012) House of Representatives, Supplementary Order Paper (5 June 2013) House of Representatives, Supplementary Order Paper (19 November 2013)

13 Reform proposals “[P]otential for substantial harm to individual and public interests from directors breaching their duties …” Need for regulatory regime that encourages directors "to act in socially appropriate way" Need to ensure there are remedies for those "who are adversely affected by contraventions of the duties" Under-enforcement of directors' duties under the current New Zealand regime Introduce an "escalating hierarchy of liability" Need for public enforcement of directors' duties FMA and Registar of Companies to have the ability to enforce egregious breaches of specified directors duties Egregious breaches: "deliberate or reckless” Criminal offences attracting possibly substantial fines or considerable terms of imprisonment to both punish and deter

14 Reform proposals Recommendation to criminalize confined to the duty to act in good faith and in the best interests of the company (ss 131 and 138A(1)) and reckless trading (ss 145 and (138A(2)) now 380(4) In Australia also the proper purposes doctrine (s 181(1)(b) and 184(1)(d)) and improper use of position or corporate information (ss 182, 183 and 184(2) and (3)) Discussion paper identified “undesirable conduct by directors” beyond just these two duties

15 Reform proposals Watson: s 133, the proper purposes doctrine, is "misunderstood and rarely enforced” Wealth of English and Australian case law but does not appear to be a criminal prosecution of ss 181(1)(b) and 184 No New Zealand statutory equivalent to the Australian prohibition of an improper use of position (s 182) There is a New Zealand equivalent to the prohibition of an improper use of corporate information, s 145 No explanation why excluded Strange given proposals based on Australian regime The leading case on the application of s 184, ASIC v Adler, included criminal breaches of ss 182, 183 and 184

16 Reform proposals Decision to introduce criminal sanctions for certain directors' duties was coupled with a rejection of a concurrent a civil penalty regime Civil penalties "would result in too great a risk of people being deterred from taking on directorships" Civil penalties would be inappropriate as it would involve the regulator "second-guessing the soundness of directors' business decisions” Both points addressed later in context of arguments for/against reform

17 Arguments against reform: Difficult to distinguish “decisions that turn out badly from bad decisions” Directors might be unfairly held liable when things go wrong First, a high threshold has not be met before criminal prosecution is even a possibility Sections 138A(1) and 380(4) requires knowledge of the serious consequences of the breach Second, the onus of proof lies with FMA Standard of proof will be beyond reasonable doubt Third, the threat of criminal proceedings is equally applicable to cases involving ‘non-director’ decision makers Why should directors be treated differently?

18 Arguments against reform: Will discourage reasonable risk taking Based on the need to encourage entrepreneurial spirit and notion shareholders expect risks to be taken Accords the notion of risk taking a positive quality which may not be shared by all investors Fails to acknowledge the role of shares in long and medium term investment Decades of ‘entrepreneurial spirit’ have cost many New Zealand shareholders, investors, creditors and employees their life savings and / or livelihoods An inappropriate reversal of the burden of corporate responsibility requiring shareholders to monitor board’s risk taking activities Assumes that the courts are unable to distinguish between reasonable business risks and unreasonable business risks

19 Arguments against reform: Will discourage people taking up appointments as directors Can be tested against the expectations in other professions Would qualified directors be any more fearful of being held criminally liable for egregious breaches than qualified persons in any other field of profession ie doctors? Doctors also face criminal liability for extreme breaches of duty under the Crimes Act; this has not discouraged such professionals Should be able to expect directors will not be dishonest and reckless; fears of criminal suits unfounded Criminal liability for breaches of directors’ duties under s 184 did not see the board rooms across the ditch empty out Ultimately, it would be wrong to relieve directors from liability for such extreme breaches because without this ‘safety net’ persons will be unwilling to take up directorships

20 Arguments against reform: Criminal prosecutions attract a higher degree of publicity than civil proceedings Criminalization of breaches of directors’ duties provide greater personal and general deterrence 2011 Cabinet paper: Criminal offences attracting possibly substantial fines or considerable terms of imprisonment were considered appropriate to both punish and deter Such deterrence will hopefully prevent a recurrence of the recent corporate collapses Need to restore public confidence in the capital market Arguably, by making directors more accountable, the public may be more willing to consider this form of investment

21 Australian comparison: The core directors duties are civil penalty provisions: s 1317E(1) They are corporations/scheme civil penalty provisions: s 1317DA ASIC may seek a declaration under s 1317E(1) that a civil penalty provision has been breached If the court is satisfied there is a breach, it must make a declaration Under s 1317G the ASIC can seek a civil penalty of up to $200,000 against individuals and $1m against a body corporate for each offence Applies where breach materially prejudices corporation’s, members’ or creditors’ interests Is intended to impose a personal punishment on the director, while also providing a general deterrent Note, under 1317S relief may be provided where the director has acted honestly and, having regard to all the circumstances, ought fairly to be excused

22 Australian comparison: Another consequence of breaching civil penalty provisions is disqualification from the management of corporations Under s 206C (1)and (2), where a declaration of contravention has been made under s 1317E, on the application of the ASIC, the court may disqualify a person from management Determined in light of, inter alia, the person's conduct in relation to the management, business or property of the corporation Period of disqualification is a matter for the court's discretion Disqualification prevents offending directors simply moving to a new corporate vehicle Objects includes both personal and general deterrence Recent cases have also stressed the importance of the role of section 206C in punishing the director

23 Australian comparison: Sections 1317H and 1317J allow the company to seek compensation for the damage suffered Company may initiate an action or intervene in civil penalty proceedings brought by ASIC Allows the corporation to ‘piggy-backing' on ASIC litigation Corporation might not itself have the resources to commence litigation Costs of litigation way heavy on a company considering bringing an action against a non-compliant director

24 Australian comparison: A breach of directors’ duties may also give rise to criminal consequences Under s 184 a breach of: s 181(1)(a) (duty to act in good faith in the best interests of the corporation) s 181(1)(b) (duty to exercise powers for proper purposes) s 182 (prohibiting an improper use of position) or s 183 (prohibiting an improper use of corporate information) constitutes an offence when the director contravened the relevant provision recklessly or with intentional dishonesty An individual: $220,000 fine and/or up to 5 years imprisonment; or body corporate: a $1.1m fine s 588G (insolvent trading) constitutes an offence when the failure to prevent the company from incurring the debt was dishonest: s 588G(3) A fine of up to $220,000 and/or up to 5 years imprisonment may be ordered

25 Australian comparison: While the company continues to be able to enforce the common law/equity directors' duties ASIC has powers of enforcement in regard to the statutory directors’ duties Part 3 ASIC Act 2001 confers extensive investigatory and information gathering powers where ASIC has reason to suspect a breach of the Corporations Act 2001 Under s 50 ASIC Act 2001 ASIC may bring civil proceedings on behalf of third parties where as a result of investigation "it appears to the ASIC to be in the public interest" May also intervene in litigation: s 1330 Corporations Act 2001 Under s 49 ASIC Act 2001 ASIC may bring criminal proceedings where investigations indicate that a person has committed an offence Concurrent power with the DPP

26 Conclusion: New Zealand proposal for public enforcement of directors’ duties by FMA is to be applauded New Zealand proposal for criminalization of directors’ duties is to be applauded But why only two duties? Does not go far enough Should be complemented by civil penalties for cases that do not meet the bar of egregious breaches Would provide an "escalating hierarchy of liability" Benefit of punishment and deterrence Would allow corporations to ‘piggy back’ on FMA civil penalty proceedings seeking compensation


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