New Zealand: 2012: Are you in the cross hairs for creditor claims?

Brief Counsel

Recent decisions from the courts have raised the legal risk for directors and underlined the exposure to third party liability of auditors, trustees and promoters.

As a result, we can probably expect this year to have more claims made by receivers, liquidators and out-of-pocket investors against those involved in:

  • company governance and management
  • prospectus preparation, and
  • the provision of professional services.

So who is potentially in the gun, and why?

Directors

The risk profile attached to being a director was re-shaped in 2011 and made a lot more challenging, particularly for the directors of finance companies. Three factors were at work. They were (with links to the relevant Chapman Tripp commentary):

  • a number of cases in both Australia and New Zealand which explored the boundary between management and governance and established that, although directors may rely on expert advice, they cannot delegate their core decision-making functions
  • law change, pending and actual, which raised the civil penalties to which directors are exposed and introduced criminal penalties for serious breaches of directors' duties, and
  • the High Court ruling that directors may not access their insurance policies to fund the defence of criminal or civil proceedings if the costs would deplete the funds available to pay any successful civil claimant.
    Civil claims against directors are likely to continue in 2012 as receivers and liquidators attempt to maximise recoveries for creditors.

Also vulnerable are professional service providers, especially those whose role was to protect the company and/or its investors in some way. We are already starting to see those cases begin to work their way through the courts. Judgments delivered towards the end of 2011 may assist, and indeed encourage, some of those claims.

Auditors

The High Court was required to undertake a high level assessment of the merits of the claim by Nathan Finance's receivers against the company's auditors. Although the issue arose in the context of a procedural question only, rather than a substantive trial, the judgment is instructive and highlights a potential exposure for auditors generally.

The judge considered that the claim raised a number of issues which required an answer, not least of which was the discrepancy between the $154 million of loans recorded in the audited accounts and the $6.5 million which the receivers had been able to recover.

But of more general relevance was the High Court's view that, although the losses suffered by Nathans were due mainly to lending decisions made by the directors, this did not absolve the auditors of all responsibility. Instead the judge concluded that, if the receivers could establish that the auditors had been negligent, then that negligence could have caused the loss of money deposited by investors after the date at which the first financial statements were audited.

Trustees

The second judgment concerned an attempt by the trustee of National Finance's debt securities to strike out a claim that the trustee owed statutory duties and common law duties (in negligence) to National Finance, in addition to those owed directly to investors.

Although the judgment was again in the context of a procedural application, and not following a full trial, the High Court considered that it was in a position to make a binding and final determination as to whether the trustee, as a matter of law, owed the duties claimed.

Associate Judge Bell ultimately determined that the trustee did not owe statutory duties to National Finance (as opposed to investors), but did owe common law duties in negligence, in addition to, or concurrent with, contractual duties imposed by the trust deed.

The determination that the trustee owed common law duties to the company is important in two respects:

  • it avoids a potential statutory complication that other defendants may have faced in claiming contribution from the trustee, and
  • it may effectively defer the commencement of any limitation period, so as to enable claims to be brought later which might otherwise have been time barred.

The National Finance judgment is also significant for expressing the view that an indemnity granted by National Finance in favour of the trustee, contained in the trust deed, may be ineffective where a trustee fails to exercise due care and diligence.

Promoters

Parties who promote offers to the public are also more exposed following the Court of Appeal's judgment in what has been referred to as the Feltex "class action".

To succeed in a claim against an auditor, individual investors must be able to show very specifically that they relied for their investment decision on particular language in the audit report and underlying accounts.

However, in relation to promoters, the Court of Appeal left open the possibility that investors might need to satisfy a much lighter test, possibly as low as simply relying on third party advice (for example, from a broker or even from a news report) that was based on incorrect information contained in the prospectus.

The Court also left open the prospect of even more indirect reliance under a "fraud on the market" theory which postulates that investors are entitled to rely upon the protections offered by the regulatory regime itself. In other words, had those preparing the prospectus complied with their obligation to ensure that all statements in the prospectus were true, the prospectus would never have been registered and investors would have suffered no loss.

Chapman Tripp comments

Some of the judgments may be appealed, and the effect of others may be nullified once the proceedings go to trial. But the uncertainty creates opportunities for claimants and exposure to risk for potential defendants. We therefore expect to see a continuation of such claims throughout 2012, especially as claimants attempt to access the proceeds of insurance policies.

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 Mondaq.com.

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

Authors
 
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”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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