Directors’ duties – how far is far enough?

The Court of Appeal recently revisited the all-important question of how far must directors go to ‘take all reasonable and proper steps’ when making decisions on behalf of a company. In this case[1], the court looked at the decisions and inactions of the directors of Apple Fields Limited when relying on professional accounting advice in meeting their obligation to file financial returns.

Apple Fields had come under scrutiny from the Financial Markets Authority for not filing financial returns for the 2011, 2012 and 2013 financial years. Apple Fields claimed that they had relied on professional accounting advice in that the Generally Accepted Accounting Principles required that any of its financial returns would need to be consolidated with those of Noble Investments Limited, a company which it partnered with as part of a joint venture. The sole director of Noble, however, had refused to allow access to its financial information, which prevented Apple Fields from filing its financial returns.

Apple Fields’ directors claimed that in relying on accounting advice provided to them, they had taken all steps available and they had no other options to procure financial information from Noble. The directors believed that although they could not meet obligations to file financial returns, because they had relied on professional advice they had met their duties under the Financial Reporting Act 1993 and, similarly, under the Companies Act 1993.

The principles for all company directors to take on board are, using the Apple Fields example, whether the directors had honestly believed that there was nothing more they could achieve on the basis of accounting advice they had received, or whether they had taken the advice and merely accepted it.


What else could the directors have done?

The court made the point clear that it was not for it to question directors’ decisions but rather to provide guidance and clarification as to what steps should be taken by directors in this situation.

Company directors should be fully aware of their obligations and responsibilities to their company and its shareholders, and a director must therefore shed light on a situation where there’s doubt. In doing so, directors need to take all practicable steps to ensure their organisation complies with appropriate legislation. If not, the outcome can be harmful not only in terms of the company’s profitability, but also in its reputation and that of the directors themselves.

In the Apple Fields situation, the court said that the directors could not have taken all reasonable and proper steps if the steps already taken had not ensured compliance with legislative requirements. It noted that there were a range of options available to the directors of Apple Fields, in particular taking further practical steps such as seeking legal advice to explore whether there were options available to require Noble to provide its financial records, or to obtain a second accounting opinion to ascertain whether the outcome would be different.

Directors need to be aware that the Financial Markets Authority has the power to fine up to $100,000 for non-compliance; Apple Fields’ directors were fined $30,000. The decision is being appealed.


Where to from here?

Undoubtedly situations arise daily for directors where they have to make a decision on whether advice, professional or not, is sufficient and accurate.

Nevertheless, in this particular decision, the court has highlighted that as a director you must keep asking yourself whether you need to seek further assurances, in particular a second opinion of legal or accounting advice in areas of expertise which you are not familiar with. This comes to the core of a director’s duty in that you must carry out decisions for the benefit of the company, even in situations where you may not hold expert knowledge.

From a practical viewpoint, when it comes to legislative compliance, directors need to consider whether additional professional advice is required in order to meet these requirements or whether there are any other legal avenues which can be taken to ensure compliance. 

[1]   Prain v Financial Markets Authority [2016] NZCA 298

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Copyright, NZ LAW Limited, 2016. Editor - Adrienne Olsen. em. ph. 029 286 3650 or 04 496 5513.