18.05.2020

Lifting the roof on director’s duties

First prosecution for serious breaches of director’s duties under the Companies Act.

A roofing contractor has been sentenced to five years and six months imprisonment the District Court in Auckland this month for breach of director’s duties.  Sam Oliver Spence faced 11 charges under the Companies Act 1993 and the Insolvency Act 2006.  These charges included serious breaches of director’s duties, as well as being a director of and taking part in the management of a phoenix company under the Companies Act.  Charges under the Insolvency Act included misleading the Official Assignee, failing to file a statement of affairs and taking part in the management of a company whilst bankrupt.

The facts

Mr Spence’s roofing business, trading under the name “Compass Roofing” operated through several companies including Compass Roofing Ltd, Compass Group Ltd and Caspian Engineering Ltd.  From 2011 until 2018 Mr Spence was either a director of, or involved in the management of these companies.  Throughout this period, Mr Spence operated the business in a manner which caused significant losses to creditors, of over $1M.  Customers of Compass Roofing were also affected by work that was never completed or was carried out in a defective manner.  Mr Spence also managed to cause his company losses totalling over $1M.

Mr Spence’s response to the financial issues with his companies was also troubling.  Companies in the Compass Roofing group incurred debts until they became insolvent and then Mr Spence would place them in liquidation.  However, before liquidators could take control of the company, Mr Spence transferred that company’s assets to a new company, at a significant undervalue, using the money received by the company in liquidation to continue trading using the Compass Roofing brand.  This activity is prohibited under s 386A of the Companies Act, commonly known as the phoenix company trading provision.

Mr Spence’s offending continued, even after he was adjudicated bankrupt in February 2018.  Once adjudicated bankrupt, Mr Spence was prohibited from being a director or taking part of the management of a company, unless permission was granted by the Official Assignee.  However, Mr Spence’s de facto partner Jessica Brechelt was named director of the various remaining Compass Roofing entities.  Mr Spence was permitted by Ms Brechelt to continue managing the businesses under the guise of being employed as a quantity surveyor.

When the extent of Mr Spence’s behaviour was discovered he refused to engage with the Official Assignee and liquidators tasked with managing his former companies.  Mr Spence refused to hand over key records of the liquidated companies, particularly the statement of affairs setting out the financial positon of those companies.

Directors’ obligations

Section 138A Companies Act creates an offence for a serious breach of a director’s duty to act in good faith and in the best interest of the company.  To establish this offence, the director must have exercised powers or performed duties as a director:

  • In bad faith towards the company and believing that such conduct is not in the best interests of the company; and
  • Knowing that the conduct will cause serious loss to the company.

The section creates a criminal offence for flagrant breaches of director’s duties, beyond existing duties on directors including the duty to act in good faith in the best interests of the parties under s 131 of the Companies Act.  The maximum sentence for an individual breach of s 138A is five years imprisonment or a fine not exceeding $200,000.

Mr Spence was sentenced on a number of charges under the Companies Act including two serious breaches of director’s duties (s 138A), taking part in the management of a phoenix company (s 386A) and failure to comply with requests from the liquidator for company documents (s 262).  Under the Insolvency Act, charges spanned a variety of provisions including failing to file a statement of affairs on liquidation of his companies (ss 67 and 433), misleading the Official Assignee (s 440) and taking part in the management of a company while bankrupt. 

Ms Brechelt was sentenced in January on charges of being a director of a phoenix company (s 386A), as well as aiding and abetting Mr Spence to take part in the management of a phoenix company and the management of a company while bankrupt. 

Sentence

Although the sentencing decision for Mr Spence has not yet been made available, the offending has been described as containing a calculated criminal aspect that was prolonged and systemic.  Accordingly, a sentence below the five year maximum under any one of the charges in the judge’s opinion would not reflect the seriousness of the offending.  A sentence of five years and six months imprisonment was handed down to Mr Spence.

Ms Brechelt was sentenced in January to 6 months community detention, 150 hours community work and 12 months supervision on charges of being a director of a phoenix company.  Ms Brechelt was also sentenced for aiding or abetting Mr Spence to take part in the management of a phoenix company, and aiding or abetting Mr Spence to take part in the management of a business whilst bankrupt.

Our comment

Mr Spence is the first person to be prosecuted under s 138A Companies Act for serious breaches of director’s duties.  Directors’ duties are coming under increasing scrutiny, which is likely to continue in the current environment.  Although the nature and extent of Mr Spence’s offending is extreme, the proceeding reinforces the ability for significant sentences to be handed down in cases of clear breaches.  The sentence handed down provides an example of the significant penalties available under the Companies Act and will serve as a benchmark in future cases. 

The government has recently proposed changes to director’s duties under the Companies Act to assist businesses responding to the challenges of COVID-19.  This proposed change would provide directors a “safe harbour” from adverse claims under the reckless trading provision and the duty in relation to obligations. The Bill is currently before Parliament and expected to be passed under urgency.  Further information on these changes can be found here and here.  However, such a safe harbour will not enable a director to circumvent the prohibitions on serious breaches of directors’ duties, or the fundamental duty to act in good faith.  As shown in the Compass Roofing matter, where behaviour flouts the serious breach of director’s duties provision and risk serious loss to creditors, it will and should continue to be prosecuted.

If you have any questions about director’s duties, please get in touch with our Insolvency Team, Business Advice Team or your usual contact at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

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