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r v jeffries Professor Nicholas Ryder (University of the West of England) discusses the difficulties faced by prosecutors in
securing convictions against company directors who deliberately misstate the company’s financial wellbeing.

Speed read

One factor which contributed to the financial crisis in 2007 was the deliberate misstatement by companies regarding their financial wellbeing. However, prosecutors continue to face serious difficulties when seeking to establish the liability of the directors of failing or failed corporations. As Professor Ryder explains, the newly passed Financial Markets Conduct Act 2013 in New Zealand will most likely exacerbate the problem.


The global financial crisis in 2007 resulted in numerous international corporations suffering record financial losses and in some instances, insolvency. One factor that contributed to some of these losses was the deliberate misstatements by companies regarding their financial circumstances. This has been an area of concern in the United States of America and its Securities and Exchange Commission has imposed several financial sanctions on firms who engaged in these practices.

In R v Jeffries & others [2013] NZCA 188, the Court of Appeal of New Zealand concentrated on the misstatements made by the directors of Lombard Finance Limited. The directors challenged their convictions under the Securities Act 1979 (s. 58(3)). Section 58(3) states that “where a registered prospectus that includes an untrue statement is distributed, every person who signed the prospectus, or on whose behalf the registered prospectus was signed [...] commits an offence”. However, it is a defence under section 58(4) to prove either, that the statement in question was immaterial, or that the person “had reasonable grounds to believe, and did, up to the time of the distribution of the prospectus, believe that the statement was true”.

The convictions arose from the collapse of Lombard Finance Limited in 2008, which acted as a finance company by raising money from the public and then acting as a lender, predominantly to property developers. By 2007, the company was experiencing liquidity issues. Nonetheless, the appellants decided that the company could continue to raise finances from the public. In December 2007, Lombard decided to issue an amended prospectus under the Securities Act 1979 and it was from this amended prospectus that the charges arose. Thereafter Lombard’s position deteriorated further and the company was placed into receivership in April 2008, with Lombard’s investors suffering significant losses.

Count one of the indictment alleged that the new prospectus contained untrue statements in five particular respects. The first particular respect was “the omission of material information relating to adverse liquidity issues, including the deterioration in the company’s cash position”.  At first instance, the appellants were convicted on all counts, although in relation to count one Dobson J held that they had only made untrue statements in two of the five alleged respects. The Court of Appeal upheld Dobson J’s decision as to the first count. In particular, the Court considered that the reference in the prospectus to the Board being “confident” that Lombard would have sufficient cash to fund all payments to investors was incorrect as it did not sufficiently or accurately convey the vulnerable state that Lombard was in.

The New Zealand Financial Markets Conduct Act 2013, which received royal assent on 13 September 2013, has made important legislative amendments to the liability of finance company directors. The amendments include the removal of strict liability for defective disclosure of a company’s financial position. By virtue of section 264 of the 2013 Act, a person will only be criminally liable for making a false or misleading statement if he knew that the statement was false in a material aspect or was materially misleading. This amendment places the burden of proof on the prosecution. Accordingly, if the case against the Lombard directors were to be brought today, the directors’ knowledge of falsity would need to be established, whereas hitherto it could have been assumed. It is interesting to note that this problem is not limited to the United Kingdom.

Another significant aspect of the case was the lenient sentences imposed by Dobson J. These were subsequently challenged on appeal by the Solicitor General on the basis that Dobson J had incorrectly characterised the respondents’ conduct as an error of judgement. The Court of Appeal rejected the contention by the Solicitor General that the correct starting point for the sentence was between two and two and a half years’ imprisonment.  The Court of Appeal distinguished the case from more serious instances of corporate criminality which had occurred in recent years.[1] 

r v jeffries 2[1] ^ See Robb, D. and Seeto, N. ‘Implications of Australian Securities and Investments Commission v Bridgecorp Finance Limited on debenture trustee liability’ (2007) Butterworths Journal of International Banking and Financial Law, 22(2), 110-112 and Brown, B. and Harker, C. ‘New Zealand: recent GST cases address priority in insolvency and criteria for deregistration’ (2012) Tax Planning International Indirect Taxes, 10(7), 16-20.
Image credit: Flickr
The views expressed in this article represent those of the author and not Bright Line Law.

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