Liability of an Incompetent Board
Jonathan Casson, Partner
A recent New Zealand case has shown that board members who are inept can expect to be dealt with harshly by the court system.
In August 2007, Nathans finance company was placed into receivership owing more than 7,000 investors $174 million. The court sent a clear message to directors that they regarded untrue statements in offer documents to be a serious breach of the law. Directors were found guilty of five charges and, although Justice Heath said the offending directors did not display any element of dishonesty, the performance of the directors was inept and far below any standard the investors would expect.
The seriousness with which the court viewed the situation is shown by the fact that the least culpable of the four directors was sentenced to nine months home detention plus 300 hours of community work and ordered to pay $310,000 in reparation. The company chairman was sent to jail for two years and two months and ordered to pay $425,000 in reparations.
The case is one of a number that were reported during the course of last week. In Australia ASIC has announced:
1. orders permanently banning another director who forged signatures on finance application documents
2. another has been sentenced to three years and one month’s jail in the Perth court for breaching his duty as a director. That person was also ordered to repay $1.7 million
3. a further director in Queensland was found guilty on seven counts of defrauding investors and misappropriation and was sentenced to seven years imprisonment
4. in Tasmania a director was found guilty in the Hobart Magistrates Court of carrying on an unlicensed financial services business and was sentenced to six months imprisonment and placed on a five year good behaviour bond.
And, of course, we have the Centro decision (previously reported in our newsletters) where the failure of directors to properly account for liabilities resulted in disqualifications and personal fines.
It must be remembered that all these decisions have been reported in the last 10 days alone.
What each of these decisions confirms is that the Australian Securities & Investment Commission and the courts will seriously look at and require directors to comply with the duties that are imposed upon them, and that any deviation (through fraud or ineptness) is likely to result in serious personal fines, disqualifications and jail terms.
If you have any doubt about your duties or whether particular conduct is consistent with those duties, you should seek immediate legal advice.
Jonathan Casson
Partner
T: +61 2 9390 8316
E: jonathan.casson@holmanwebb.com.au