BLL Bulletin

Stay ahead with us

At the end of each month the BLL Bulletin presents a round-up of BLL news in the areas of bribery & corruption, fraud, money laundering and proceeds of crime. To opt-in for the BLL Bulletin, enter your details and email to the side.

Bright Line Law News

Latest news & updates from Bright Line Law.

NEW ZEALAND: CRIMINAL OFFENCE TO BREACH DIRECTORS DUTY

NEW-ZEALAND-.CRIMINAL-OFFENCE-TO-BREACH-DIRECTORS-DUTYJonathan Fisher QC discusses the recent criminalisation of serious corporate misconduct by directors in New Zealand. Is there a case for similar reform in the UK, or should the UK take a different route?

SPEED READ

The Government of New Zealand has recently passed legislation creating new offences for serious misconduct by directors. The provisions are significantly watered down from the offences that were originally proposed, which aimed to criminalise all serious breaches of directors’ duties. In establishing these criminal offences, New Zealand has taken a different road to the UK, preferring a broad-brush rather than targeted approach. This is a mistake, because the new offences add little to the existing company law regime. The suggested change in the UK, involving an expansion of corporate criminal liability, is a more attractive approach.  

COMMENTARY

New Zealand has recently passed legislation criminalising serious misconduct by directors. In doing so, it is following a global trend of tightening corporate regulation in the wake of recent scandals associated with the global financial crisis. The Companies Amendment Act 2014 amends the Companies Act 1993, so that it now includes two new offences. The new offences are diluted versions of those originally proposed, which sought to create criminal liability for breach of the directors’ duties contained in sections 131 and 135 of the Companies Act 1993. The New Zealand rules differ from those in the UK in that the UK favours a more targeted approach, concentrating on specific instances of criminality.

The first offence is the new section 138A of the Companies Act 1993 offence for serious breach of a directors’ duty to act in good faith and in the best interests of the company. A director will commit an offence if he exercises powers or performs duties in bad faith, believing that the conduct is not in the best interests of the company, and knowing that the conduct will cause serious loss to the company. The second new offence is one of dishonestly allowing an insolvent company to incur debts. This offence extends the ambit of section 380 of the Companies Act 1993. A person convicted of either of these offences is liable to imprisonment for a term not exceeding 5 years, or to a fine not exceeding $200,000 under section 373 of the Companies Act 1993.

The new offences are significantly watered down versions of the amendments which were originally proposed. As initially put forward, the offences would have created criminal liability directly correlating to a breach of section 131 of the Companies Act 1993, involving the duty to act in the best interests of the company, or section 135 of the Companies Act 1993 involving reckless trading. The Bill was amended because it received a hostile reception from academics and practitioners alike. The main concerns which were highlighted by the Select Committee considering the Bill, were that that the new offences were too broadly drafted, provided no guidance to directors, and may have resulted in a “...chilling effect on legitimate business risk-taking.” In response to these concerns, the provisions were heavily diluted, if not completely emasculated. In their revised form, the new provisions replace the section 135 offence with an amendment of section 380 of the Companies Act 1993 and change the duty to act in the best interests of the company offence to a duty, in all but name, not to act, or omit to act, in bad faith towards the company. Most notable is the stark difference between the obligation to act in good faith under section 131 and the new offence of acting in conscious bad faith. As reformulated, the new offences add little to the present law, which already specifies the offences of fraudulently carrying on a business, under section 380 of the Companies Act 1993, obtaining property by deception or causing loss by deception under section 240 of the Crimes Act 1961, and theft by a person in a special relationship under section 220 of the Crimes Act 1961.

In light of the reforms in New Zealand, questions arise as to the efficacy of the UK’s own company law regime, and the effectiveness of its response to recent financial scandals. The UK’s response to bad behaviour in the banking and commercial sectors has been typically British. Instead of broad-brush reform, the UK Government has taken a much more targeted and nuanced approach, creating specific criminal offences which are tightly focused. The only difficulty with the UK approach is that the new offences may be too tightly focused. The new criminal offence in section 36 of the Financial Services (Banking Reform) Act 2013 is a perfect example. Section 36 creates an offence, applicable to senior managers and directors in the banking sector, of reckless decision-making or failure to prevent reckless decision-making which causes a financial institution to fail. The obvious criticism here is why the new offence should be limited to circumstances which cause a financial institution to fail. What about reckless decision-making which has a devastating impact on a bank’s profitability but stops short of precipitating the bank’ collapse? Other examples of tightly focused new offences introduced in the UK include sections 90 and 91 of the Financial Services Act 2012, which provide that, in the context of market activity, it is an offence to give misleading impressions or statements — section 91 deals in particular with LIBOR rigging.

While specificity garners certainty, which was a key concern in relation to the proposed New Zealand reforms, it inevitably means that less people fall under the scope of the regime. It may be, however, that the key to reducing corporate misbehaviour lies not in placing criminal liability on directors, but rather on the companies themselves, with a view to creating a better and more responsible culture of self-regulation. A recent shift towards the wider imposition of corporate criminal liability for the wrong-doing of its employees can be seen in section 7 of the Bribery Act 2010, which creates the offence of failure of commercial organisations to prevent bribery. The Government’s stated intention is to extend the “failure to prevent” offence to other areas. Speaking at the Cambridge International Symposium on Economic Crime on 2nd September 2014, Jeremy Wright QC MP said, “...Government officials are considering proposals for the creation of an offence of a corporate failure to prevent economic crime, modelled on the offence in the Bribery Act section 7.”

This approach would sidestep the problems faced by law reformers in New Zealand, whilst at the same time avoiding the artificial restrictions which can flow from the drafting of a narrowly targeted criminal offence. A new broader corporate criminal offence along the lines articulated by Mr Wright would ensure that the law is clear, focused and able to strike the appropriate balance between discouraging malpractice and encouraging responsible risk-taking in the commercial sector. It would also avoid the pitfalls associated with a long and expensive law reform process, which in New Zealand appears to have resulted in a symbolic rather than a seismic shift in the law.

 

Image Credit

Integration and infiltration: Keeping Hong Kong co...
GOVERNMENT ROLLS BACK ON PROFESSIONAL ENABLERS
The views expressed in this article represent those of the author and not Bright Line Law.

SUBSCRIBE

  1. Please let us know your name.
  2. Invalid Input
  3. Please let us know your email address.
  4. Invalid Input