The Bridgecorp convictions should not disturb the prudent director’s peace of mind.
Petricevic and Roest were outliers in their offending, and were convicted under the Crimes Act and the Companies Act as well as the Securities Act.
But there are still some take-outs from the judgment which are of general relevance.
The charges related to two prospectuses and investment statements dated 21 December 2006 and to two extension certificates dated 30 March (the “offer documents”). All six documents referenced Bridgecorp’s financial statements at 30 June 2006. All maintained that there had been no material adverse effect to Bridgecorp’s financial position since 30 June 2006 and that Bridgecorp had never missed an interest payment or a repayment of principal.
Yet cash flow was a major issue for Bridgecorp from the middle of 2006 and, from 7 February 2007, it was regularly missing interest payments. The extension certificates were signed despite this, and the earlier 21 December documents continued to be distributed until July 2007.
Rod Petricevic as managing director and Robert Roest as finance director sat on the board as did three non-executive directors: Bruce Davidson, Gary Unwin and Peter Steigrad. Only Petricevic and Roest were charged under the Crimes Act and the Companies Act.
Davidson and Unwin pleaded guilty to the Securities Act charges in advance of the hearing. Davidson was found not to have acted dishonestly and was sentenced to home detention, community work and reparations of $500,000. Unwin got two years in prison.
Crimes Act and Companies Act convictions
Petricevic and Roest were found to have known of the missed payments, and were accordingly convicted on six charges under section 242 of the Crimes Act for making (or concurring in the making of) a false statement with the intent to induce people to invest.
They were also both convicted on two counts under section 377 of the Companies Act for making statements to the trustee that they knew to be false or misleading (being the statement in the extension certificates that no interest payments had been missed).
The maximum penalty (under the Crimes Act charges) is ten years’ imprisonment.
These convictions required proof that the directors knew that the statements were false (or were reckless as to whether or not they were false). In that respect Petricevic and Roest are outliers, qualitatively different to (and more culpable than) the directors convicted in the Nathans and Lombard cases.
“Recklessness” does not mean simply getting it wrong. It means not really caring whether or not you’ve got it right. That is not something which will apply to many directors – and is very different to the Nathans and Lombard cases.
The Court in those cases found the directors did care and honestly believed that their documents were true. They were not convicted under the Crimes Act or the Companies Act, only under the strict liability provisions of the Securities Act. Under these provisions, a director is liable for a misleading statement unless s/he can show either that it was not material or that s/he had an honest belief on reasonable grounds that it was accurate.
Steigrad and the honest belief defence
Steigrad was not charged under the Crimes Act or Companies Act. But, with Petricevic and Roest, he was found guilty under the strict liability provisions of the Securities Act.
The offer documents were found to have been materially misleading in a number of respects:
- incorrect statements that no payments had been missed
- non-disclosure of the fact that a $76 million transaction (described as a sale but treated as a loan) was with a related party
- statements that there was a policy of managing liquidity by maintaining a minimum cash reserve when there was no such policy
- failure to disclose a significant deterioration in the liquidity position since 30 June 2006
- statements that there had been no material deterioration in Bridgecorp’s financial position since 30 June 2006.
It is a defence to such charges if the director can show an honest belief on reasonable grounds that the relevant statements were true. All three directors sought to rely on this defence. Petricevic and Roest were unsuccessful.
Steigrad, however, met with partial success and was acquitted on the charges which related to the pre-7 February period. He was able to satisfy the Court that before the first missed payment (7 February) he had “an honestly held reasonable belief” that the information Bridgecorp had out in the market was correct.
Important to this defence was that he only got the audit and board packs rather than the much more detailed reports received by the executive committee (which included Petricevic and Roest); and that senior management and the other directors had withheld certain facts from him, particularly in relation to two matters at the heart of the disclosure allegations – the missed payments and the failure to reveal that one of the transactions was to a related party.
The “tipping point”
However, the Court took the view that there had been a “tipping point” sometime between 7 February and 30 March which should have put a reasonable director on inquiry. Among the factors cited by the Court to produce this important change in affairs were:
- papers in the board pack for the meeting of 22 March which reported that the company was unable to pay its suppliers
- a negative cash position when the budgeted forecast was for a surplus of $33.5 million, and
- an e-mail from Roest to all directors on 29 March predicting a negative balance for the next day.
These developments led the Court to conclude: “By 22 March he (Steigrad) should have been on inquiry and by 29 and 30 March at the latest, Mr Steigard should have realised he needed to find out what Bridgecorp’s exact financial position was. He did not do so”.
The Court also noted that “by then some months had passed since the line by line and management sign-offs of 21 December. His reliance on that, without more, was no longer reasonable at that point”.
Two points are worth noting here.
Non-continuous issuers (such as for IPOs and rights issues) typically conduct a “bring down” due diligence at the close of the offer period just to make sure that there have been no changes which mean allotment should not proceed. Steigrad’s fate is a reminder to continuous issuers (i.e. those who have “live” offering documents in the market and raise money under them over a long period) that they also have a duty of continuing vigilance.
Although the Court found that the “tipping point” might not have been reached until 22 March, the charges Steigrad was convicted of related to the period ending 30 March – a relatively small timeframe. Which raises the question of what he should have done.
In the Court’s view, he should have made inquiries and, having established that there was a serious problem, taken steps to involve the trustee.
He could also have insisted that the prospectus was pulled or rectified immediately and threatened to go to the Financial Markets Authority if this was not done. And/or, he could have resigned (as the Court in a related case indicated his fellow director Mr Davidson should have done).
While the Securities Act does not automatically absolve directors who take such action, so long as they act quickly it is to be hoped that a prosecution would not be brought against them. The key, though, is the need to act quickly. Once put on inquiry, a director is flirting with danger if s/he does not insist on the issue being dealt with immediately.
Obligations and liabilities around extension certificates
Steigrad sought to argue that he had not authorised the signing of the extension certificates and that the onus was on the Crown to prove that he had given express authorisation.
But the Court disagreed, saying that, while section 37A of the Securities Act provided that extension certificates could be signed by two directors on behalf of the board, the Act also imposed an obligation on each director to first make due inquiry into the financial circumstances of the company so that the Registrar was entitled to assume that the opinion presented was the opinion of all directors of the issuer.
This judgment does not add much to the jurisprudence around directors’ duties as the issues were fairly clear cut. But it does reinforce the importance of some key obligations.
- Continuous issuers must ensure that all information in all offer documentation remains correct, and must withdraw the document/s immediately they can no longer be confident that this is true.
- All directors are liable for all information in an extension certificate unless they can prove that the certificate was signed not only without their approval but without their knowledge.
- If they are put on notice of possible problems, directors need to move quickly and do everything possible – including, potentially, resign – to minimise their chances of conviction.