September 28 2016
The Court of Appeal recently revisited the critical subject of how far directors must go to ‘take all reasonable and proper steps’ when making decisions on behalf of their company. In this case, 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 were under scrutiny from the Financial Markets Authority for not filing financial returns for the 2011, 2012 and 2013 financial years. Apple Fields claimed they were relying on professional accounting advice, that according to Generally Accepted Accounting Principles, their financial returns would need to be consolidated with those of Noble Investments Limited, a partner company in a joint venture. However, the sole director of Noble 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 this accounting advice, they had taken every action available to them to procure the financial information from Noble. Consequently, they believed they had met their duties under the Financial Reporting Act 1993 and the Companies Act 1993, even though they could not meet obligations to file financial returns.
Consider this example. The question is whether the directors had honestly believed that there was nothing more they could achieve on the basis of this accounting advice, or whether they had taken the advice and accepted it at face value.
What else could the directors have done?
Most importantly, they should have sought advice from a commercial or corporate lawyer sooner rather than later.
The court stated it wasn’t questioning the directors’ decisions but providing guidance and clarification regarding what steps should be taken by directors in this situation.
Company directors need to be fully aware of their obligations and responsibilities to their company and its shareholders. Therefore, a director must shed light on a situation where there’s doubt. Directors need to do everything possible to ensure their organisation complies with appropriate legislation. Failure to meet obligations can be harmful to the company’s profitability, reputation, and that of the directors themselves.
In the Apple Fields situation, the court said the directors could not have taken all reasonable and proper steps if they had not ensured compliance with legislative requirements. It noted there were many options available to the directors of Apple Fields, in particular seeking legal advice to explore if 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.
What’s the cost?
If you’re a company director, 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.
What you should do as company director
As a company director, you may have to make decisions on a daily basis about whether advice, professional or not, is sufficient and accurate.
As a result of this case, the court has highlighted that as a director, you must keep asking yourself whether you need to seek further assurances, in particular a second legal or accounting opinion, especially in areas where you have less expertise. The core of a director’s duty is that you must carry out decisions for the benefit of the company, even in situations where you may not hold expert knowledge.
When in any doubt, talk to a commercial lawyer. From a practical viewpoint, you need to consider whether additional professional advice is required in order to meet legislative compliance or whether there are any other legal avenues which can be taken to ensure compliance.
 Prain v Financial Markets Authority  NZCA 298