New Zealand: The Feltex Decision and its Import for Other Directors

Last Updated: 6 September 2010
Article by Roger Wallis, Victoria Heine, Geof Shirtcliffe, Pheroze Jagose and John Holland

Judge Jan Doogue's vigorous defence of a director's right to rely on specialist advice in MED v Feeney and Ors has drawn sharply different responses with some seeing it as a source of comfort for directors and others as a source of concern.

This Brief Counsel summarises the key points of the decision, samples some of the reactions it has provoked and gives Chapman Tripp's assessment of the decision's broader significance.

He said, they said, we said

Professor Martin Devlin, programme adviser for Massey University's Master of Business Administration, considers that the decision will deter people from taking up directorships: "Many directors will be concerned that they can, individually, find themselves in court on such charges as faced by the Feltex directors, even after relying upon experts for advice and guidance".

The New Zealand Shareholders' Association Chairman John Hawkins seemed to take the opposite position, saying: "If directors can rely entirely on outside advisers then that begs the question of why directors have to be paid so well for exercising their judgement".

Our view: We consider that, on balance, the judgment should be a source of considerable reassurance for New Zealand directors. While directors must always give appropriate consideration to material placed before them, they are entitled to trust those advising them, so long as such trust is warranted and there are no reasons to suspect that it may be misplaced.

In situations, such as under sections 36 and 36A of the Financial Reporting Act 1993 (FRA), where only directors, and not the company, are exposed to liability, the law appropriately acknowledges that those directors are justified in relying on expert advice.

The charges

All five directors faced two charges under s 36A relating to the accuracy of Feltex's interim financial statements for the half year to 31 December 2005. The statements were one of the first in New Zealand to be prepared for compliance with new financial reporting standards, the New Zealand International Financial Reporting Standards ("NZIFRS").

Both breaches arose as a consequence of the statements being prepared in a way that would have complied with the old standards (GAAP), but did not comply with NZIFRS. This led to a loan facility that Feltex had with ANZ being classified as a "non-current liability" when, under the new standards, it was in fact a "current liability".

It was not disputed by the defendants that the statements breached s 36A. Instead, they relied on section 40 of the FRA, which provides a complete defence for directors who have taken "all reasonable and proper steps" to ensure their company complied with the FRA.

The Judge was also guided by what she regarded as a codification of common law principles relating to appropriate delegation, contained in s 138 of the Companies Act (CA). This section provides that directors are entitled to rely on information and advice received from their employees or professional advisers. Section 138 only applies, however, if a director "acts in good faith, makes proper inquiry where the need for inquiry is indicated by the circumstances, and has no knowledge that such reliance is unwarranted".

The result

Judge Doogue's decision is an emphatic dismissal of all charges, holding that the directors' behaviour was entirely appropriate in the circumstances. She found that the directors had taken a number of prudent steps in relation to the change-over of accounting standards, including:

  • commissioning Ernst & Young to prepare an IFRS assessment identifying the key areas that had to be addressed in the change-over
  • establishing a steering committee comprising Feltex's own financial management, supervised by Ernst & Young to review the IFRS standards applicable to Feltex, and
  • engaging Ernst & Young to review the interim financial statements in question to ensure they complied with the IFRS.

"A reasonable director having read Ernst & Young's review report and attended the (board) meeting on 16 February 2006 would have been left in no doubt that the interim financial statements complied fully with the IFRS," the Court said.

On that basis, the Judge held that the further steps submitted as necessary by the Ministry for Economic Development – that the directors ought to have considered themselves how the new reporting standards applied to Feltex, and whether the financial statements complied with IFRS – were not necessary. In light of the highly complex and technical nature of the new accounting standards, it was entirely reasonable for the directors to rely on the specialist advice of Ernst & Young.

The intersection between the FRA and the CA

Sections 36 and 36A of the FRA endeavour to ensure a reporting entity's financial statements are accurate by imposing liability on directors (and directors alone), where those statements are inaccurate. Such a legislative approach must necessarily allow directors a measure of protection where they have established appropriate mechanisms to ensure reporting compliance. The "reasonable and proper steps" test in s 40 does so.

In this case, it is clear that such steps had been taken. It is important to recall, however, that what is "reasonable" turns largely on the particular circumstances at hand. Directors must remain vigilant in ensuring that their company's finances are managed prudently and professionally. As long as this is done, however, it is clear that the law will respect the fact that this requires the delegation of responsibility in certain specialised areas.

It is also interesting to note that Judge Doogue is quite explicit that "as a matter of law the directors are entitled to the benefit of s 138 of CA 93", holding that s 138 applies directly to directors' responsibilities under the FRA, not just the CA. In so holding, Judge Doogue rejected the argument that as part of Part 8 of the CA, s 138 applies only as a defence to the civil charges possible for a breach of 'directors' duties' contained in that Part.

Instead, the Judge considered that as the two Acts passed through Parliament together, they are properly considered "companions". In her view, s 128 of the CA, which grants directors "all the powers necessary for managing, and for directing and supervising the management of, the business and affairs of the company", extends to the powers exercised in ensuring compliance with the FRA. On that basis, directors are entitled to the benefit of s 138.

In the final analysis, it is questionable whether an explicit reading-in of s 138 was required in this case. In considering what amounts to "all reasonable and proper steps" under s 40 of the FRA, a court will necessarily refer to the broader principles of company law, including the CA and the common law relating to reliance on specialist advice. As such, it may be that s 138 is better considered a guide to interpreting s 40 than an explicit defence in and of itself, as the judgment seems to imply.

Our thanks to Michael Dobson, Law Clerk, for writing this Brief Counsel. For more information please contact the authors on the right.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Roger Wallis
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions