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“A directors’ job is to work within the spirit of the law as well as complying with the law.  The spirit encapsulates transparency, integrity, accountability and independence (of thought)”

Many shareholders of Nuplex Industries Limited and the fallen Lombard Finance and Investment Limited may have yelled ‘Hallelujah’ late last month even though their bank balances had either suffered or could suffer from the action of a few of the companies directors. 

While we feel the concern some shareholders will have, the steps taken by the Securities Commission in recent weeks is welcomed. We need directors and trustees to not only work within the regulations governing their organisations but to also work in the spirit of good governance and that means to question proposed action and to consider any ramifications of the decisions made, not to just interpret the law as they see fit or to misled the shareholders.  The calibre of the directors that are now facing civil proceedings suggests they understand only too well the principles of which governance is founded: accountability, integrity, transparency and independence as well as their fiduciary responsibility to the shareholders.

In the case of Nuplex Industries Limited (Nuplex) which is still trading on the NZX the Securities Commission alleges that from 22 December 2008 until 19 February 2009 Nuplex breached its continuous disclosure obligations under the NZX Listing Rules as well as the Securities Markets Act 1988 by failing to disclose to the market a breach of a banking covenant, and that both Nuplex and its directors are responsible for such a failure.  It has been reported that the Securities Commission is seeking declarations of contravention, pecuniary penalties (maximum penalty of up to $1 million per defendant) and compensatory orders.

As this is the first continuous disclosure case brought by the Commission lets hope it will send a strong signal to directors of other listed companies reminding them that their fiduciary duties are extensive and board members, both directors and trustees, must take reasonable care to ensure all regulatory requirements are met in a timely manner and more importantly interested parties are properly informed – in other words the principle of transparency is applied.

Also last month we heard that the receivers of Lombard Finance & Investment Limited (a company that went into receivership on 10 April 2008 owing approximately $127 million to some 4,400 investors) believe secured debenture holders are very unlikely to receive more than 30% of their investment back. This is a little better that the unsecured creditors who are no likely to receive a return at all. In the civil proceeding the Securities Commission is alleging Lombard Finance & Investment Limited’s offer made by way of documents and advertisements misled investors because the offer misrepresented the investment risks, especially in relation to liquidity, the quality of the loan book, adherence to credit policies and the company's overall financial position. The key communications tools being referenced are the registered prospectus dated 7 September 2007, as amended by a memorandum of amendments dated 24 December 2007, the investment statements dated 28 December 2007 and DVD advertisement distributed during 2007 and 2008. 

 It has been reported that in these documents it states that the company's financial position had not materially and adversely changed since the company's last balance date. Whereas the directors believe this claim made in the prospectus was not misleading because the change was due to adverse circumstances. However, the Securities Commission is taking a difference view alleging such information was false and the directors' statements misled investors. Thus the Securities Commission has applied for declarations of civil liability and civil pecuniary penalties of up to $500,000 against each of the current four directors.  Under the Securities Act these applications must be made together. 

It’s pleasing to see the Securities Commission taking such steps. The financial health of many companies has been adversely affected by the recession over recent years and shareholders need to be advised of the full impact now just from the recession but also from transactions, competitive and other such sources.  

Some of us could argue that a director’s role includes regularly looking into a ‘crystal ball’ and being alert to possible negative effects before they impact. While the directors concern are only being challenged as to the way they have presented the facts a clear message let hope the message is taking up by directors and trustees and they accept they can be held accountable, individually or collectively, for the outcomes of decisions they make.

Nevertheless the action the Securities Commission is taking is a step towards seeking greater transparency, compliance and may later in the case of Lombard seeking some compensation for investors. While investors can take their own civil compensation proceedings many will be pleased the Commission now has the power to act.

For us working in the governance arena we too can now say ‘Hallelujah’, well done Securities Commission.