New Zealand: "Literally insane"? Maybe not. Ill-advised? Definitely

Brief Counsel
Last Updated: 9 September 2012
Article by Ross Pennington

The intention to criminalise breaches of directors' duties in the Companies and Limited Partnerships Amendment Bill is "literally insane", according to Professor Stephen Bainbridge, a US governance expert.

Google 'Professor Bainbridge, criminalising agency costs' and read it for yourself. The Professor has a full-blooded, talkback radio blogging style. But he is also the William D. Warren Distinguished Professor of Law at UCLA, has a long list of academic articles and books to his credit and in 2008 made Directorship Magazine's top 100 most influential people in the field of corporate governance.

So when he suggests the proposed new section 138A should be thrown back, we should at least give him a hearing – especially as his concerns are widely shared in New Zealand.

Section 138A, which the Bill would insert into the Companies Act, provides that it is a criminal offence punishable by up to five years' jail or a fine of up to $200,000 to knowingly act or omit to act in a way that is seriously detrimental to the interests of the company, or will result in serious loss to the company's creditors.

So what's wrong with that? As the collapse of the finance companies has reminded us, the damage created by corporate failure can be devastating and far-reaching. Surely, then, the penalties for poor or reckless governance should be severe. True, but a number of other factors must also be considered.

Professor Bainbridge identifies one of them: "The problem is that business decisions rarely involve black-and-white issues; instead, they typically involve prudential judgements among a number of plausible alternatives. Given the vagaries of business, moreover, even carefully made choices among alternatives may turn out badly".

A lot has already been written in the New Zealand context about how making directors criminally liable for decisions taken in good faith will deter good people from taking up directorships. For us, the key question is not so much about getting directors in the door, but what they do when they're there.

This needs some focus, because the environment for corporate decision-making is a critical part of the wider issue of stimulating enterprise, innovation and ultimately growth – all of which are currently in short supply.

So will these new crimes succeed in deterring the errant while being a matter of pure indifference to the diligent? There are several reasons to doubt it.

Consider the reckless trading provision, which has been described by Professor Peter Watt, perhaps New Zealand's leading authority on governance issues, as "problematic" even in its purely civil form. Directors can be deemed to have traded recklessly if they take on debt that the company was unlikely to be able to perform but this determination can only be made once it has become apparent that the debts cannot be honoured.

Even under existing laws, the safest thing for directors to do in terms of their own position when a company is in financial difficulty is to "hand over the keys to the bank" and have the company go into receivership. It may be the safest, but is it the best? The answer depends on the circumstances, but the INSOL international workout principles are firmly against such risk aversion, which can unnecessarily destroy economic value and harm stakeholders – including the most vulnerable, the company's employees.

Looking at this provision with a wider lens, if we're going to jail directors for incurring debts they can't perform, why stop there? Why not criminalise anyone who over-extends themselves causing serious loss to their creditors? The short answer is that we used to, but we abandoned the Dickensian debtors' prison as part of the same civilising impulse that saw an end to witch trials, bear-baiting and the stocks.

Neither is the offence required because creditors, or liquidators on their behalf, can already recover from directors personally where they have been shown to have breached the reckless or insolvent trading provisions of the Companies Act. Adding a crime into this framework tilts the dial strongly against managed workouts and reduces the incentives on creditors to monitor and manage their own position.

Similarly with the failure to act in the company's "best interests". Let's begin with what it's not. It's not deceit, false accounting, misstatement when offering securities, theft in a special relationship or fraudulent trading – all of which (and much more besides) are crimes for which directors are already personally liable, represent legitimate matters of public interest, and are not so abstract as to be literally "in the eye of the beholder".

The elements of the "best interests" offence are much more slippery and imprecise, encompassing everything from various levels of negligence, to disloyalty and other forms of "mismotivation" (what the economists simply call "agency costs"). From a prosecutor's perspective, then, it is something of a one-size-fits-all, which can be wheeled out whenever there is a damaging corporate failure.

The ready retort to these concerns is that these crimes all require "knowledge". In the context of corporate decision-making, however, a knowledge element by itself is an inadequate marker of the sort of "egregiousness" that is supposed to make us comfortable with attaching criminal sanctions to otherwise legitimate business activities.

Little that a company does is accidental and it is all under the ultimate management of the directors. If a company fails, the situation is very often serious, or even "egregious", for those impacted by it. The real issue then becomes the assessment of prosecutors and the courts about the business judgements of the directors, influenced heavily by their eventual outcomes.

Which brings us back to Professor Bainbridge's point. Risk and return are positively correlated. Shareholders, and the economy, benefit from directors taking legitimate risks. Where there is no theft, deceit or misstatement, how are prosecutors and judges to distinguish between competent risk-taking and criminal mismanagement? The efficiency costs of risk aversion and standing still are no less real for being invisible.

For every Enron there is an Apple. Companies come to grief, causing harm, but they are also a vital part of the engine for economic growth, innovation and human aspiration. The company form was originally born out of the risky venture of sending goods around the world in sailing ships. That's the function companies are going to have to continue to fulfil if we're going to get anywhere.

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.

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
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