The Court of Appeal decision yesterday in relation to Bridgecorp confirms that directors face potential criminal liability should an issuer continue to use a registered prospectus or advertisement containing statements which have since become untrue.
Directors must take reasonable steps to monitor the ongoing accuracy of prospectuses and advertisements, ensuring that they are no longer used if they contain a statement which was once accurate but has been rendered inaccurate by an intervening event.
The Crown charged five of Bridgecorp’s directors with 18 offences relating to Bridgecorp’s prospectuses, dated 21 December 2006, and accompanying investment statements. Those documents claimed that Bridgecorp had never missed an interest payment or, when due, a repayment of principal.
At registration this claim was true. But Bridgecorp defaulted on a payment on 7 February 2007. As a result, the Crown has alleged that the directors breached s 58 of the Securities Act 1978 and are criminally liable for this and other alleged untrue statements.
The key issue – “distribute”
Section 58 provides for criminal liability on a strict liability basis where a registered prospectus or advertisement containing an untrue statement “is distributed” - even if no investor was actually misled by the untrue statement or suffered loss.
Mr Steigrad, one of Bridgecorp’s non-executive directors, applied to be discharged on a point of law. The key issue in the discharge application was whether directors are criminally liable for statements which were accurate when the prospectus was registered or investment statement was issued but have subsequently become untrue due to a change of circumstances.
The High Court decision
The High Court accepted that a director could only be criminally liable if the statement was untrue at the time the relevant document was “first distributed” or if it had subsequently been re-issued or extended or otherwise put before the public.
There needed to be a “positive act” to satisfy the strict liability nature of the offence.
The Court of Appeal reverses the decision
The Court of Appeal upheld the Crown’s appeal. The key points of its decision were:
- section 58 must be read in line with the Act’s purpose of ensuring that investment statements, prospectuses, and other advertisements do not mislead or deceive. Further, the section must be read in line with the Act’s other sections that do not distinguish between acts before or after distribution (for example, s34(1)(b))
- the definition of the term “distribute” in the Act contemplates communication to individual investors, and not just communication to investors as a group
- whether a particular statement is untrue will be judged at the time the document is distributed, i.e. at the time of the individual communication
- if the statement’s truth was only assessed at “first distribution”, a person could continue to distribute the document, for up to 18 months without criminal liability, even if the person had found out the day after registration that the statement was untrue, and
- the test for liability should be the same for prospectuses (which are registered and so have a clear point of “first distribution”) and advertisements (which lack that clarity).
Protecting innocent directors and promoters
Mr Steigrad’s counsel raised concerns for three classes of people affected by the Crown’s interpretation of the law:
- directors who had resigned before the statements became untrue
- promoters who might not have an ongoing role in a company after the prospectuses’ registration, and
- persons who try to prevent continued distribution but are unable to stop the company from distributing the offending document.
The Court considered that these people would be protected because:
- under the Act, a person is not liable if he or she can prove that the statement was immaterial or had reasonable grounds to believe and did believe, up to the time of the distribution of the prospectus or advertisement, that the statement was true. The person’s reasonable belief will be judged at the time of resignation or cessation of involvement in the company, and
- the common law “no fault” defence applies if, for example, a person takes every possible step to prevent distribution, including notifying the Financial Markets Authority (FMA).
The Appeal Court judgment reinforces that directors must take reasonable steps to monitor the ongoing accuracy of statements throughout the life of a prospectus or duration of an advertising campaign. The Act’s consumer protection purpose will be upheld despite increased compliance costs on directors and promoters of finance companies.
If the High Court’s decision had been upheld then the FMA’s existing actions against a number of finance company directors could have been curtailed. This will now not be the case.
The Crown’s prosecution of the Bridgecorp directors will now continue to the substantive issues of liability.