Following on from the liability finding in February, at the end of last month delivered the penalty decision in the case brought by the FMA against the former CFO or NZX Listed insurer – CBL.
In headline terms, the former CFO has been ordered to pay a pecuniary penalty of $641k for breaches of the continuous disclosure obligations under the FMC Act. He has also been ordered to pay agreed costs of a further $606k.
To recap, CBL was listed in October 2015, and the continuous disclosure breaches occurred over a 5-month period prior to its collapse in February 2018.
The substantive hearing was the first time a New Zealand court has considered the question of accessory liability, by a director or officer as an accessory to a company’s breaches of the FMC Act.
The FMA’s case against the CFO centred on his role as CFO and as a member of CBL’s Disclosure Committee. He was also a director of CBL’s Irish-regulated subsidiary (CBLIE). In the substantive hearing, the CFO was found to have the required level of knowledge and participation in three of CBL’s continuous disclosure breaches – to make him personally liable as an accessory. These breaches related to:
- The existence and impact on regulatory solvency of approximately $35m of aged receivables (insurance premiums owed to CBLIE but unpaid). This issue was known to CBL by August 2017 – but not disclosed to the market for more than 5 months.
- The need for CBLIE to strengthen its reserves by approximately $100m. This was known to CBL by the last week of January 2018 – but not disclosed to the market for 2 weeks.
- A direction issued to CBLIE by its prudential regulator, the Central Bank of Ireland, requiring CBLIE to hold additional cash reserves of €31.5m. This was known to CBL by the end of January 2018 (at the latest) – but not disclosed to the market for more than a week.
After the liability finding, the FMA and the CFO reached agreement on the recommended level of penalty – which was approved by the Court. In doing so, Gault J. said:
| “As the FMA submitted, the lack of disclosure by [CBL] meant investors were denied timely access to material information and continued to trade, uninformed, for an extended period of more than five months…I have addressed [the CFO’s] significant involvement in these contraventions. The impact on the market was serious and far reaching.” |
and that:
| “The penalty imposed against [the CFO] as a senior officer with specific responsibilities in relation to disclosure needs to reflect the importance of listed companies making prompt and accurate disclosures to the market as well as his specific involvement in the contraventions.” |
Accessory liability is a bit of a hot button topic overseas. The High Court’s findings on liability and the penalty decision provide a benchmark for holding an accessory liable for a listed issuer’s continuous disclosure breaches.
What is apparent from the [substantive] liability finding in February is that the question of accessory liability is often very fact specific and will require careful consideration of the particular facts and circumstances in every case.
From the judgment, accessory liability for directors and officers will only be arise if the party primarily liable (typically the company) commits a breach – and the person [accessory] is involved in the contravention.
Being involved in the contravention means that the accessory has actual knowledge (including wilful blindness) of the essential facts giving rise to the contravention. Constructive knowledge is not enough.
The question of the what are the “essential facts” will be very case-specific. In relation to CBL’s continuous disclosure obligations, the [accessory] must know that:
- the relevant information was not available to the market; and
- it was sufficiently material that a reasonable person would have expected the information, if it were generally available to the market, to have had a material effect on the price of the securities – in other words that the [accessory] must know that the information was ‘material’.
Therefore, accessories (directors and officers) will not be exposed to accessory liability if they did not know that the information was material (or genuinely did not appreciate its materiality). Because there is a lifeline where a director of officer [accessory] made a judgement call about materiality, but got it wrong (and thereby did not have the requisite level of knowledge) evidence on this point is likely to be put closely under the microscope.
Because accessory liability hinges on knowledge of the essential facts, rather than the law, ignorance of the law (in this case the NZX Listing Rules) rules, or a mistaken belief about the application of the law, may not be a defence. Consequently, directors and officers need to be aware of the company’s continuous disclosure obligations – including the latest guidance on continuous disclosure. This includes the various carve-outs from continuous disclosure (e.g. for incomplete negotiations).
Accessory liability also requires intentional participation in the contravention. This requires acts or omissions that had a “practical connection” with the contravention.
In this case, the CFO was (in three specific instances) found to have acted in a way that had a “practical connection” with the contravention – because he had known that that the Board had not properly considered whether the information should be disclosed.
Although no general duty to urge consideration was found – this underlines the risk for officers [senior managers] by staying silent if there is at least a real risk that the Board has not considered, or not correctly considered, their continuous disclosure obligations. It is possible that such a risk may arise even where officers are not part of the Board’s decision-making process about the decision to make a disclosure, and/or the content of that disclosure.
Because of the Court’s findings about the CFO’s knowledge, the substantive decision also found that the CFO could not rely on the ‘all reasonable steps’ defence – because he had not proved that he had taken all reasonable steps to ensure that CBL complied with its continuous disclosure obligations.
More to come
This is not the end of the cluster of proceedings brought by the FMA arising from the collapse of CBL. Having succeeded against the CFO, and reached in-court settlements with CBL, its Managing, and its four former independent non-executive directors in 2023 and 2024, – the FMA’s proceedings, alleging breaches of the FMC Act in relation to CBL’s 2015 IPO are timetabled to be heard in April 2026.
For more information, please do not hesitate to contact me.