Companies Office prosecutions – thoughts about today’s Newsroom article

This morning’s edition of the Newsroom daily briefing includes an interesting article about the results of an Official Information Act release showing that there were “hundreds of non-compliant companies but few charges”. The point the article is seeking to sheet home is that this is yet another example of a public sector culture of “education over enforcement”.

Unfortunately, the article cites, as a comparison, the recent concerns with NZTA. From where I sit, the comparison stretches the bounds of credibility. This is not what I have come to expect from Newsroom – whose excellent research and thought-provoking articles have made it one of my ‘go to’ news sources in the last 12 months.

First, some data

Newsroom’s interrogation of the Official Information Act release is interesting, and notes that:

• the Companies Office received just over 1,000 matters for consideration in the 2017/18 financial year;
• these were whittled down to 750 – and the Companies Office worked with the affected companies to secure compliance in 250 cases;
• 170 companies were considered for director prohibitions;
• just over 100 complaints were not progressed due to the companies being placed into liquidation;
• a “full” investigation was carried out into 150 matters – to determine whether serious breaches of the Companies Act had occurred; and
• just under 50 charges were laid against 11 people (although a number of investigations remain ongoing) – and a further 9 people were convicted in relation to charges laid in previous years.

To give this some context, which the article did not, at 31 December 2018 there were 619,000 companies registered – and the companies register is searched approximately 500,000 times per month.

Enforcement criteria

Where the Newsroom article is enlightening is in its discussion of the Companies Office enforcement criteria.

Helpfully, it notes that the Companies Office has a range of measures at its disposal (rather than just prosecution) including formal warnings and cancelling registration.

The article continues by noting that Companies Office’s guidelines set quite a high bar for prosecution. The factors considered include the seriousness of offending, the extent to which it constitutes an abuse of corporate structure, and the history of offending.

At this point, the article diverts the reader to a discussion about the Japanese-owned Optimus Group, that failed to adequately disclose its ultimate ownership – as a result of late and/or incomplete filings with the Companies Office for more than a year. Newsroom ran an interesting article late last year, about Optimus Group in the context of the goings on at NZTA – highlighting allegations of inadequate management of conflicts of interest in the area of importing and testing/certifying of vehicles. But it continues to seek to criticise the Companies Office for concluding that there was no public interest in prosecution – seeking instead to correct the register information (albeit in a timeframe approx. 35 times longer than that specified by the Companies Office).

When to prosecute?

Companies Office filings must be truthful. Filing a false declaration is a serious offence, attracting maximum penalties of up to 5 years in jail or a maximum fine of $200,000.

However, the Companies Office enforcement policy aims to achieve compliance rather than penalising. This is consistent with the Solicitor-General’s guidelines and seeks to ensure that the taxpayers’ resources are applied only to the most serious breaches. This is also consistent with the aims of the regulator to maintain New Zealand’s status as an easy place in which to start and conduct a business.

This approach does require a certain number of trade-offs – aimed, amongst other things, at seeking to ensure meaning that business is conducted above the radar and visible to regulators (including the IRD) and the public. At nearly half a million searches of the Companies Office register a month – the reader could argue that such a high level of public scrutiny yielding just over 1,000 matters for consideration was a pointer to that public scrutiny resulting in a high level of compliance.

And the criteria applied to decisions about how best to apply the taxpayer’s resources (to prosecute) should sound familiar. By way of example, they are the same as those applied by the FMA when it announced, late last year, that despite some concerns – it would not pursue prosecutions in relation to announcements made by the failed Wynyard Group. Instead, both the FMA and NZX used this as a case study to highlight the need for systems and processes to ensure regulatory compliance.

Concluding comments

I do not, for a second, suggest that the Companies Office should be treated as a soft touch and that the Newsroom article is evidence that there is a culture of non-compliance because the market knows that the can get away with it. Instead, the benefit of three decades’ experience tells me that the approach of seeking to achieve compliance with statutory obligations rather than seeking to pinging companies and their directors for every footfault – is working.

This approach was exemplified by Companies Office solicitor Peter Weir – who retired at the end of last year. Peter would very patiently explain the rules and the reasons for them to any enquirer. At the same time, he was also very careful to explain the likely consequences of non-compliance – and underline the point that the clock was ticking and his team’s patience was not to be tried.

Also, there can be no argument that those who deliberately fudge important details or mislead the public to their cost, should experience the full rigour of the enforcement regime.

However, commentators should be very careful to draw comparisons with those public sector agencies who regulate activities which, if not adequately managed, put the safety of the public at risk.

Further information

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