Directors fear jail for taking risks

HAMISH RUTHERFORD
Last updated 05:00 12/06/2012

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The Institute of Directors is warning proposed legislation may leave professional directors facing jail for making "legitimate business errors" because of uncertainty about what constitutes criminal behaviour.

The warning is contained in its second submission on the Financial Markets Conduct Bill, promoted by former Commerce Minister Simon Power as a "once in a generation" review of securities law.

The institute said the current draft would mean criminal charges could be brought for "reckless" behaviour, which was poorly defined and might cover acceptable risk-taking.

The organisation, which has more than 5000 members, said recklessness needed to be either clearly defined or extra conditions should be added requiring criminal intent to be proven.

Chief executive Ralph Chivers said that the organisation was happy to disown unprofessional directors, but the current drafting left material uncertainty about what would, and what would not, be considered criminal.

"What we don't want is for `reckless' to have such a weak interpretation that any sort of error is caught up in that," Chivers said. Engineers, lawyers and doctors, all of whom could cause "grievous harm" if they erred, "are able to operate with some confidence that they won't go to jail for some sort of normal professional error".

The institute said the legislation created uncertainty about whether professional indemnity insurance could be taken for errors that would otherwise be considered legitimate business practice, when professional trustees could take indemnity insurance for breaches of duties.

The risks associated with a lack of a "safety net" could put off legitimate risk-taking or cause directors to rethink their positions.

"We need our top talent at the top table, and they need to be able to operate as other professionals do, knowing that if they're doing all that can reasonably be expected, they're not going to face harsh sanctions."

The Institute of Finance Professionals New Zealand (Infinz) submitted that government officials had repeatedly said criminal liability should only apply for "egregious" conduct under the bill, but this had been translated into "knowing" or "reckless" conduct in the legislation, which potentially had a far wider meaning.

Introduced to Parliament last October, the legislation could allow fines of up to $5million for companies that make misleading statements in product-disclosure statements and advertisements.

Both the FMA and the Registrar of Companies would be able to ban individuals from managing a company for 10 years – double the current prohibition – and the High Court would have the power to impose indefinite bans, which the institute thought was draconian.

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The commerce select committee is due to report the legislation back to Parliament by September, with the bill expected to be progressed before the end of the year.

- BusinessDay.co.nz

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