This Brief Counsel looks at the proposal and discusses its
The introduction of criminal offences for serious breaches of
directors' duties has a long and nomadic history.
It was first raised in the June 2010 discussion document to
launch the Securities Law Review and featured briefly in the
exposure draft Financial Markets Conduct Bill before being
transferred to the Companies and Limited Partnerships Amendment
This Bill is primarily concerned with tightening the rules
around company registration, Chapman Tripp's commentary on
which is available
The directors' duties provisions amend the Companies Act
1993 by inserting a new section which provides for criminal
sanctions. Those criminal sanctions will apply only to a
breach of two of the existing duties in the Companies Act:
the duty to act in good faith and in what the director believes
to be the best interests of the company, and
the duty not to agree, cause or allow a company to carry on
business in a manner likely to create a substantial risk of serious
loss to the company's creditors.
A director will be criminally liable if he or she knows that
conduct in breach of those duties is either seriously detrimental
to the interests of the company or will result in serious loss to
the company's creditors.
Penalties are up to five years' imprisonment or a fine of up
Chapman Tripp comments
The policy papers leading up to the introduction of the Bill
recognise the tension between deterrence of intentional dishonest
behaviour and the need to avoid deterring people from taking
directorships and boards from taking legitimate commercial
Clearly there will come a point at which the march toward
criminalisation in the boardroom will deter people from becoming
directors and will deter boards from making rational business
decisions or will mean that they become so focussed on looking
behind their backs and seeking expert independent input that they
miss out on opportunities.
To address that concern, the government is proposing to
criminalise only "knowing" and egregious conduct.
This will mean that any prosecution will have to prove, beyond a
reasonable doubt, that a director had actual knowledge (or wilful
blindness) that his or her conduct was definitely causing or would
definitely cause a particular effect. This is a high
threshold for any prosecutor to meet. Liability will
therefore be difficult to establish.
By requiring knowledge (tantamount to proving intention), we
believe that the Bill strikes the right balance between deterring
inappropriate conduct while at the same time avoiding
discouragement for the right people from taking up
This balance is further enhanced by the fact that the government
has not proposed "civil penalties", such as those which
apply in the securities context, for less serious breaches.
Such penalties would lead to a sliding scale of culpability,
which the Minister considered would then "put the
regulator in the position of second-guessing the soundness of
directors' business decisions".
Finally, the Bill excludes introducing any new criminal sanction
for breach of a director's duty not to agree to the company
incurring an obligation unless the director believes, on reasonable
grounds, that the company will be able to perform that obligation
when it is required to do so.
Criminalisation of the duty was proposed in the Minister's
February 2011 Cabinet Paper, but was omitted from the draft Bill
because the Companies Act already contains criminal provisions for
carrying on business fraudulently.
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.
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