New Zealand: The Lombard case – more lessons for directors

Last Updated: 21 July 2012

By Sarah Kerr

What was the case about?

The case related to alleged breaches of the Securities Act 1978 (the "Securities Act") by the directors of Lombard Finance & Investments Limited ("LFIL"). LFIL was a finance company which periodically raised money from the public to on-lend to borrowers who were predominantly property developers. As part of its periodic fundraising, and to comply with the requirements of the Securities Act, LFIL issued prospectuses and distributed investment statements. These offer documents contained information for investors who were encouraged to invest in debenture stock and unsecured notes of LFIL.

In April 2008, receivers were appointed to LFIL by Perpetual Trust, the trustee for the debenture stockholders of LFIL. According to the High Court judgment, the likely projected return for secured investors is less than 24 cents in the dollar whilst unsecured investors in LFIL may lose the entirety of their investments.

The Lombard case has garnered significant media attention, not only because of the imposition of criminal liability on directors but also because of the high profile directors involved. The directors found guilty of criminal charges under the Securities Act included the Right Honourable Sir Doug Graham (a former Minister of Justice, Attorney General and Minister in charge of the Serious Fraud Office) and the Honourable Bill Jeffries (a former Cabinet Minister whose portfolios included Justice and Transport). The two other directors involved were Michael Reeves (also CEO of LFIL) and Lawrence Bryant.

What were the charges against the directors?

The charges against the directors were brought under section 58 of the Securities Act (criminal liability for mis-statement in advertisement or registered prospectus). The five charges under that section related to allegedly untrue statements in an amended prospectus issued by LFIL in December 2007, allegedly untrue statements in three investment statements issued in December 2007 and an allegedly untrue statement in a DVD that was apparently distributed between March and April 2008. (The DVD constituted an "advertisement" for the purposes of the Securities Act).

The Crown's arguments that untrue statements were made in the prospectus were centred around five key matters, as follows:

  • LFIL's liquidity;
  • The impairment of major loans made by LFIL to borrowers;
  • The existence of, and adherence to, lending and credit policies as a means of limiting risks;
  • The absence of adverse change in LFIL's financial position since 31 March 2007; and
  • An assurance that there were no other matters material to the offer of securities, beyond those referred to in the amended prospectus.

What did the Crown have to prove?

Because the offences under section 58 of the Securities Act are strict liability offences, the issue of whether or not the directors intended to distribute offer documents that were false or misleading is irrelevant. The Crown merely had to prove that:

  1. the offer documents contained untrue statements (which could either be an affirmative statement or a material omission of information);
  2. the offer documents were distributed (as regards the prospectus); and
  3. the accused directors signed the prospectus, or it was signed on their behalf.

In relation to the DVD, the Crown needed to show that the directors were directors at the time of its distribution.

What defences were available to the directors?

The directors could escape liability under section 58 by arguing that, on the balance of probabilities, the untrue statements were immaterial, or that they had reasonable grounds to believe, and did, up to the time of distribution of the prospectus/investment statements/DVD, believe that the statements were true.

An additional defence available in relation to the distribution of the DVD was the defence of total absence of fault, which, as a settled legal principle, is open as a defence to parties accused of certain strict liability offences.

What did the Court find?

The Court found that the directors made untrue statements in the prospectus and investment statements in relation to two out of five matters alleged by the Crown to have been untrue.

The key respect in which the Court found untrue statements had been made was as regards the liquidity of LFIL (i.e. the ability of LFIL to meet its payment obligations). Specifically, the court found that "... there was a material discrepancy between the liquidity squeeze confronting LFIL in December 2007, and the more confident comments on liquidity conveyed in the offer documents."

The court noted that on 15 November 2007, Sir Doug Graham had commented in an email to Mr Reeves (the CEO) that LFIL was "sailing very close to the wind now and the next two or three months will be critical". The court also placed emphasis on the fact that predictions given to the Board by management since September 2007 in relation to projected repayment of loans had been consistently out by more or less than half the predicted repayments in each month and that this had not been accurately reflected in the prospectus and investment statements.

Although the judge was satisfied that the directors "genuinely believed in the accuracy and adequacy of the content of the offer documents when they were issued" he held that they could not establish, on the balance of probabilities, that it was reasonable for them to omit further details in relation to liquidity issues facing LFIL that were known to them but not acknowledged in the prospectus and investment statements.

The second key matter in which the court found (by extension) that the directors were guilty of making an untrue statement was in connection with the statement in the prospectus that "There are no other material matters relating to the offer of securities offered under this Prospectus other than those set out in this Prospectus".

For various reasons, the court found that all directors could invoke the defence of total absence of fault in relation to the distribution of the DVD.

Important "lessons" for directors arising from the Lombard decision

  1. The buck stops with you, as director: Directors cannot delegate their directors' duties. Even where advisers such as lawyers and auditors sign off on offer documents or where offer documents appear to be "market standard" this does not instantly absolve you from liability as a director of a public issuer in relation to the content of those offer documents. You need to closely review and consider the content of offer documents yourself and ensure those offer documents do not contain any untrue statements. As the Court said: "The directors' obligations in relation to the accuracy of content of offer documents are non-delegable".
  2. Beware of over-reliance on management: You can rely on the advice of management but only up to a point. If you have any concerns about the information provided by management or, more generally, about the ability of management to perform their duties, you must enquire further and resolve these concerns. In particular, if you are relying on management projections or reports which have ultimately turned out to be materially inaccurate more than once, serious questions need to be asked before continuing to rely on such information. As the Court said: "Neither sections [2B (Meaning of "due enquiry") of the Securities Act or 138 (Use of information and advice) of the Companies Act] can be read in a way that would relieve a director of the obligation to check on the competence of a delegate, in any circumstances where a signal occurs that would put a reasonable director on notice of the need to do so... By the time of the February 2008 Board meeting, the pattern of errors in the projections of performance by borrowers over the preceding six months should have caused the Board to question the adequacy of management of the major loans."
  3. Err on the side of disclosure: If, as a director, you are making an important judgement call which may be crucial to the ongoing financial health of the company of which you are a director (e.g. where management forecasts are being relied upon and such forecasts have previously been proven unreliable) disclose that judgement call in the offer documents.
  4. Don't let a fear of being unduly pessimistic hinder disclosure: The law requires directors to disclose in offer documents all material matters, including those which might adversely affect the value of securities previously issued by the company. A fear of "upsetting" the market or negatively impacting the value of existing securities is no excuse for holding back on disclosure of material information in offer documents.

What is the relevance of the Financial Markets Conduct Bill ("FMC Bill") to charges of a similar nature?

The FMC Bill is currently before Parliament. It was introduced to Parliament on 12 October 2011 and had its first reading on 7 March 2012. It has been referred to the Commerce Select Committee who are due to report back on 7 September 2012.

The broad purpose of the FMC Bill is "to provide an enduring financial market conduct regulatory regime that promotes confident and informed participation in New Zealand's financial markets". Amongst other things, the FMC Bill repeals in its entirety the Securities Act. The equivalent of section 58 of the Securities Act (which is the relevant section in the Lombard case) in the FMC Bill is clause 259 (criminal liability for false or misleading statement or information). The maximum penalty for an offence under that section is, for an individual, imprisonment for a term of not exceeding five years and a fine not exceeding $500,000 or both and, in any other case, a fine not exceeding $2.5 million.

The explanatory note to the FMC Bill explains that serious criminal offences which provide for the possibility of imprisonment are targeted at "egregious violations of the law, such as where the conduct in question involved knowledge or recklessness".

Under the new regime, it is unlikely that the Lombard directors would have been the subject of criminal charges or at risk of being subject to criminal penalties. They would, however, likely still have been the subject of civil charges. In a similar vein, the proposed criminalisation of certain directors' duties in the Companies Act (the duty to act in good faith and the best interests of the company and the duty to avoid carrying on the business of the company in a manner likely to create a substantial risk of serious loss to the company's creditors) will require knowledge on the part of the accused. The Companies and Limited Partnerships Amendment Bill which is the vehicle for these changes prescribes a maximum penalty of five years imprisonment or a fine of $200,000 for breach of these directors' duties.

Sentencing of the Lombard directors

Sentencing of the Lombard four is set down for 29 March and, although the charges are criminal and criminal penalties apply, it is likely that the sentences imposed on the directors will take the form of fines and community-based sentencing because the Court did not find the directors were dishonest or negligent (and acknowledged that it was not part of the Crown's case that the directors' conduct was anything but honest). This may well cause a media uproar, with those who do not have a full understanding of the case perhaps taking the view that the directors have been let off lightly and inadequately punished. The long term consequences of the decision could mean that it is much harder for companies (particularly those who are issuing prospectuses and investment statements) to attract good quality directors onto boards. Directors' fees will likely also increase to reflect the heightened risks associated with assuming a directorship.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

Similar Articles
Relevancy Powered by MondaqAI
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
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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
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 (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

To Use 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.


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.


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