What lawyers say about criminalising directors

The economy will suffer if company directors who breach their duties become criminals, the New Zealand Law Society says.

It warns the tougher measure proposed in the Companies and Limited Partnerships Amendment Bill will deter competent candidates from governance roles, for fear their reputation will be damaged.

The society, which regulates all lawyers – a large portion of the potential director pool – presented its submission to the commerce select committee last week.

The omnibus piece of legislation proposes to criminalise certain breaches of directors’ duties and will make changes to company registration provisions and treatment of amalgamations and schemes of arrangement by companies which are subject to the Takeovers Code.

Society commercial and business law committee member Ross Johnston told the committee the bill would discourage legitimate risk-taking and entrepreneurship.

“The strong correlation between good governance and productivity would make any government wary not to, inadvertently, deter competent and honest candidates from governance roles,” he said.

The society was concerned the bill did not do enough to limit the offences to those involving dishonesty only.

And he suggested if criminal sanctions were the only ones available for directors who breached their duties, the courts could be reluctant to convict.

Uncertain outcomes would then deter the regulator from bringing cases to prosecution, Mr Johnston said.

The society’s concerns are echoed by the Institute of Directors.

Chief executive Ralph Chivers told NBR ONLINE the bill was too vague as to which breaches would constitute criminal behaviour.

“This adds to the risk of decision making in a way that we think could suppress legitimate business decision making,” he said.

Recent upgrades to the Financial Markets Conduct Bills and Crimes Act had been more than sufficient to capture criminal conduct around in the boardroom.

“And we’re talking about a small minority of people here, let’s not forget. We don’t think criminalising some of these breaches is going to capture more.

“It will make more people nervous and that will translate to more conservative decision-making. We don’t need that in this climate.”

Asked if people were already too nervous to take up directorships, Mr Chivers said:

“We certainly wouldn’t want to see it get any worse. There is some concern already.

“We don’t want to make the good directors more nervous. We need to focus on the erring ones.”

The Serious Fraud Office prosecuted record number of directors in the last year and secured charges or convictions relating to eight finance companies and two other individuals involved in "super frauds" in the year to June 30.

Mr Chivers said the result of those prosecutions over the last year had encouraged greater focus on compliance among directors.