Christchurch Lightweight – Fair Trading Act breaches pierce corporate veil

It seems that issues relating to building products that are not what they are claimed to be have become a regular news item. This trend is a matter of concern to the Commerce Commission – and its latest Fair Trading Act case has resulted in a company director being fined $151,875 for misrepresenting imported (generic) cladding as a premium brand.

Christchurch Lightweight

Darryl Campbell, a former director and owner of the now-defunct Christchurch Lightweight Concrete Limited (“Christchurch Lightweight”) pleaded guilty to 9 charges under the Fair Trading Act for his misrepresentations to Christchurch Lightweight staff and customers between 2007 and 2010 that Chinese-made autoclaved aerated concrete cladding panels (“AAC panels”) were the Australian-made ‘Hebel’ brand.

During this period Christchurch Lightweight supplied exterior AAC panels for at least 83 properties.

In sentencing Mr Campbell at the Auckland District Court, Judge Gibson accepted the Comcom’s submission that Mr Campbell’s conduct was deliberate:

“He clearly knew the panels were not Hebel panels and he also knew, I am satisfied, of their reputation in the market.”

The case is part of the Comcom’s prosecution of four individuals associated with the former Cavan Forde group of companies – alleging the four misrepresented their AAC products as Hebel products. One individual has pleaded guilty to the charges against him and is awaiting sentencing and the remaining two defendants have entered not guilty pleas. All four held ownership or management positions in the now-defunct companies that supplied AAC panels during the relevant period.

Piercing the corporate veil

One of the main reasons for choosing a company as the vehicle to carry on a business is the protection of limited liability. However, a combination of the approach of the Courts and the developing trend of the offence provisions of public good statutes being backstopped by personal liability for those in control of the company means that there is a growing list of circumstances in which directors can be held personally liable for the acts of omissions of the company. This “piercing” of the corporate veil is increasingly being used where the Courts consider that the offending took place with the knowledge or encouragement of the director.

The Court of Appeal has invoked personal liability where the misleading or deceptive claims made by a company brochure relied on a director’s personal expertise and experience and therefore contained an element of “personal endorsement”. As a result, it said that in these circumstances, the consumer was best served by a broad approach to the Fair Trading Act and that directors should face (strict) liability.

In an economy where many sectors are dominated by SMEs, it is likely that regulators such as Comcom will take the view that it is highly likely that the directors will have a high level of personal involvement in, and knowledge of, the company’s activities – and therefore should be personal liable for the misleading or deceptive conduct of the company.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.