The former CFO of the CBL Group has been found personally liable as an accessory in relation to breaches by CBL Corporation Limited (CBL) of continuous disclosure and fair dealing provisions of the Financial Markets Conduct Act 2013 (FMCA).[1]
While it is the first time that the High Court has considered accessory liability in relation to the continuous disclosure and fair dealing provisions, its findings are consistent with the development of the law on accessory liability in other contexts and provide helpful confirmation for directors and senior managers as to the circumstances in which personal liability could arise.
Background
The Financial Markets Authority (FMA) brought proceedings against CBL, its directors, and CFO in relation to alleged failures to disclose material information in relation to the financial position of CBL. Specifically, that these failures contravened the continuous disclosure rules under the FMCA, and that misrepresentations had been made in market announcements in breach of the fair dealing provisions.
Before trial, CBL had made admissions in relation to certain of the (primary) contraventions alleged, and CBL's directors had reached settlements with the FMA. Accordingly, the CFO was the only remaining defendant at trial. The issue to be determined was whether the CFO was liable as an accessory to (primary) contraventions by CBL.
Key findings
Actual knowledge is required
For an individual to be found liable as an accessory for a breach of the FMCA, there must be a primary contravention by the company, and the individual must have been "involved in the contravention".[2]
The Court confirmed that to be "involved in the contravention", an individual must have actual knowledge of the essential factual elements of the contravention. Constructive knowledge will not be sufficient, ie that the person ought to have known certain information.
The "essential facts" of a contravention will be case specific. The Court confirmed in relation to continuous disclosure contraventions that the individual concerned must know that the information was not generally available to the market and that, if it were generally available, it would have a material effect on the price of the company’s shares (ie the individual must know that the information is material). Accordingly, directors and senior managers will not be liable as an accessory if they genuinely did not know that information was material or made an incorrect assessment of materiality. Whether or not an alleged accessory knew that information was material may be expected to be a contentious evidential issue.
In considering questions of materiality, the Court referred to the NZX Guidance Note on Continuous Disclosure. Directors and senior managers should continue therefore to be familiar with this guidance in understanding their obligations and informing their assessments.
Beyond materiality, the Court also found that the "essential facts" of the contravention included the fact that the information in question was not information that was exempted from disclosure by the "safe harbour" exceptions in the Listing Rules. The Court confirmed that the onus fell on the FMA to establish that the CFO knew that the information was not information that was exempted from disclosure by the safe harbour exceptions.
Senior managers can be "accessories"
The Court's decision makes clear that what matters for the purposes of accessory liability is knowledge of (and participation in) the contravention, and not who within an organisation has responsibility for particular matters. Senior managers with the relevant knowledge (not just directors) can be liable therefore as accessories for contravention of the FMCA, including in relation to continuous disclosure obligations.
A key part of the CFO's defence concerned the delineation between corporate governance and management. In particular, he argued that CBL's disclosure decisions were made by the board of directors and that, as a non-director in company management, he was not responsible for disclosure.
The Court confirmed that a senior manager in possession of the essential facts can be liable as an accessory if they intentionally participate in the contravention. This requires acts or omissions that have a "practical connection" with the contravention.
In this case, the Court was satisfied that, in relation to certain of the contraventions, there was a practical connection because the CFO had known that the board had not adequately considered whether information ought to be disclosed.
By way of comparison, in relation to the alleged breach of the fair dealing provisions, the Court considered that the CFO did not intentionally participate in the contravention because he had tried to remove some of the misleading wording.
Availability of defences
The FMCA contains a general affirmative defence for individuals involved in a contravention of "reasonable reliance" or "taking all reasonable steps".[3]
In relation to the continuous disclosure contraventions, the Court found, based on the findings outlined above (including the CFO's knowledge and his roles within CBL), that there was no evidence that the CFO took reasonable steps to ensure that CBL complied with its continuous disclosure obligations. There was equally no evidence that he had relied on advice or information from others.
The Court did not address in what circumstances (if any) a reasonable reliance defence could succeed where the criteria for liability include knowledge of the essential facts of the contravention, including non-disclosure of material information. As a result, it is yet to be determined whether, for example, an alleged accessory could succeed in a defence based on reasonable reliance on advice that disclosure was not required in circumstances where the accused accessory knew that the information was material and did not fall within a safe harbour under the Listing Rules.
Comment
Directors and executives may take comfort from the Court's confirmation that actual knowledge is required for accessory liability to arise, and that a lower threshold, such as constructive knowledge, is insufficient (albeit the FMA has indicated that it may seek to challenge this if the matter goes to appeal).
The case also confirms, however, that what matters for the purposes of accessory liability is not the position of an individual within an organisation but whether or not they had knowledge of (and participated in) the contravention. There is a real risk therefore for senior managers in "staying silent" if they are aware, or have reasonable grounds to consider, that the board has not properly considered whether information ought to be disclosed. This places an onus on those managers to ensure, when they are aware of relevant information, that it is provided to the board, and that the board properly considers whether disclosure is required.