LawNews- Issue 30

Sep 1, 2023

Issue 30

Inside

■ COMPANIES Directors’ duties under the microscope

P06-08, 16-19

■ REGULATION

NZLS sends panel recommendations to govt P10-12

Displaced flood victims face tax on sale of

adls.org.nz

HOMES

Contents

LawNews is an official publication of Auckland District Law Society Inc. (ADLS).

Editor: Jenni McManus

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Will your family home be subject to capital gains tax by stealth?

Bruce Bernacchi & Lucy Tustin

Over the past couple of weeks, the so-called “bright-line test” that taxes gains on the sale of residential property has been the subject of a lot of media attention.

That’s because a recent Inland Revenue draft interpretation statement on the application of the bright-line rules highlighted the potential for the family home to be taxed.

This is a risk for anyone who purchased a home on or after 27 March 2021 and spent a continuous period of 12 months or more not living in it, and then sold it within 10 years of purchase.

In such a circumstance, someone could be taxed on a portion of the gain on the sale of the property at their marginal income tax rate (ie, up to 39%).

This is irrespective of the reason for the absence from the property and whether or not this was within a person’s control, as we explain.

Rushed legislation

The bright-line test effectively acts as a capital gains tax on residential properties sold during the “bright-line period”. It was originally enacted by the National government, with application from 1 October 2015 and taxed gains made on the sale of residential properties within a two-year bright-line period.

The bright-line rule was never intended to tax the family home, so gains made on the sale of a person’s main home were excluded from taxation, provided the property was used as a main home for “most” of the time it was owned.

Inland Revenue interpreted “most” as requiring the property

to have been used as a main home for more than 50% of the period of ownership. It was an “all in or all out” test, meaning that once the property had not been lived in for more than 50% of the ownership period, the entire gain on sale was subject to tax, whereas absences of less than 50% of the ownership period meant no taxation on sale arose.

The main-home exclusion rule never proved controversial, with most people accepting that an absence of more than half of the period of ownership meant a property should not really benefit from an exclusion to the bright-line rules.

The bright-line rules have evolved over the years. In 2018, the Labour government extended the bright-line period to five years, but kept the exemption for main homes unchanged (ie, it was still interpreted as a 50% main-homeuse requirement).

With effect from 27 March 2021, the bright-line period was extended again to 10 years as part of the enactment of the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Act 2021. At the same time, the government fundamentally changed the main-home exemption to a 12-month change-of-use rule and an apportionment mechanism.

These two changes to the bright-line rules were a rushed piece of legislation. They were not included in the first version of the 2021 Amending Act released in June 2020, nor in the second-reading version released on 11 March 2021, meaning

Continued on page 04

The imposition of a 12-month test should be reconsidered, especially in cases where individuals cannot live in their homes due to circumstances beyond their control, such as natural disasters

It would be truly distressing for families already grappling with the aftermath of the Auckland flooding or Cyclone Gabrielle to be burdened with an unforeseen tax liability. But this is a very real possibility

Continued from page 03

they never went through a comprehensive select committee process.

The bright-line changes were released via a Supplementary Order Paper to the 2021 Amending Act on 23 March 2021. They were accompanied by a fact sheet and commentary, explaining how the new rules would operate with respect to residential properties acquired on or after 27 March 2021.

How the main-home exclusion now works

A person’s main home is excluded from taxation under the bright-line rules if it is used predominantly as a dwelling and as a person’s main home. Importantly, the exclusion does not apply if the property was not used as a main home for more than 365 consecutive days. If this 12-month period is breached, then any gain on sale is taxed on an apportioned basis, meaning the person is taxed based on the proportion of time spent not living in the property as their main home.

The issue with the new test is that the term “main home” has been very broadly defined. Inland Revenue’s statement takes a very strict interpretation of the term and essentially treats any absence from a property as failing the “main home” test.

This means those who are required to spend large periods out of the country for work may inadvertently be considered to no longer be living in their “main home”.

These New Zealanders may have pursued overseas job opportunities for better pay, only to discover that the financial penalties of being subject to capital gains tax outweigh the benefits of working abroad.

Startling and bizarre consequences

Of particular concern is the Inland Revenue statement’s hypothetical case of “Rebecca” who owns an apartment with her husband and lives there with their two children.

Rebecca leaves the country for a two-year work assignment and lives in temporary accommodation offshore provided by her employer. Her family continues to reside in the apartment while she is away, and she visits home twice a year.

Bizarrely, despite not owning a second property and her family living in the property she owns, the family home is not considered to be Rebecca’s main home in this example, with the consequence that she is subject to tax on a proportion of her half-share on the sale of the property after she returns to New Zealand.

This is a very harsh interpretation and one that is at odds with Inland Revenue’s stance on what constitutes being a tax resident in New Zealand.

Broadly speaking, a person is tax resident in New Zealand if he or she spends more than 183 days in any 12-month period

here or they have a “permanent place of abode” (PPOA) in New Zealand. If a person is tax resident in New Zealand, he or she is subject to New Zealand tax on their worldwide earnings.

Inland Revenue Interpretation Statement IS 16/03 on tax residence makes it clear that if a person owns a property in New Zealand and has previously lived here for a substantial period, it will be very difficult for them to establish that they don’t have a PPOA in New Zealand.

IS 16/03 states that a property does not have to be vacant or available for use by a person to be a PPOA. A property can be rented out and still be a PPOA. Further, IS 16/03 focuses on a person’s associations and connections with New Zealand, noting that the test is looking to establish the “place where the taxpayer habitually resides from time to time even if they spend periods of time overseas”.

There is no doubt that “Rebecca” in IR’s statement example would have a PPOA in New Zealand and therefore would be subject to New Zealand income tax on her offshore salary. It therefore seems inconsistent that while remaining a New Zealand taxpayer, Rebecca fails the main-home test and becomes subject to taxation on its eventual sale. Inland Revenue is quite simply trying to have its cake and eat it too.

Even more concerning is the potential for people who have been forced out of their homes, owing to circumstances entirely beyond their control, to end up facing a tax bill.

It would be truly distressing for families already grappling with the aftermath of the Auckland flooding or Cyclone Gabrielle to be burdened with an unforeseen tax liability. But this is a very real possibility.

There are people in Auckland who have already been out of their homes for seven months, waiting for central and local government funding issues to be resolved so they can pay for repairs on their properties.

They will likely be outside their homes for more than 12 months as a result. For anyone in this situation who bought after 27 March 2021, any future gain on the sale of their house within 10 years will trigger a tax liability. It is hard to justify how this interpretation and outcome of the law aligns with the bright-line test’s intended focus.

This unfairness hit the press recently, resulting in a statement from the Prime Minister’s office on 23 August that the bright-line rules would be clarified to ensure they would not tax the family home and a statement from the Minister of Revenue that where flood- and cyclone-damaged houses are voluntarily sold to local authorities, the bright-line rules will not be triggered.

This quick response to provide some assurance to flood and cyclone victims is to be applauded. However, the Revenue

Continued on page 05

Inland Revenue’s statement takes a very strict interpretation of the term and essentially treats any absence from a property as failing the ‘main-home’ test

Continued from page 04

Minister’s statement addresses only the sale of properties to local authorities.

It does not address the situation of flood and cyclone victims forced out of their properties for more than 12 months while they are being repaired and who later sell the property to a private purchaser a few years down the track.

Re-think needed

Our view is that something needs to change and we hope the Prime Minister’s broader promise in this regard will be made good.

It is unfair and very poor tax policy to burden family homeowners with a capital gains tax, particularly when these individuals are driven out of their properties through no fault of their own.

The imposition of a 12-month test should be reconsidered, especially in cases where individuals cannot live in their homes due to circumstances beyond their control, such as natural disasters.

A fairer solution should also be available for those who spend time abroad, whether for work or for embarking on “the Big OE” after enduring years of travel restrictions during the pandemic. The main-home test could, for example, be aligned with the PPOA test for tax-residence purposes. Another alternative would be to lengthen the 12-month period significantly, noting that in Australia the main-home exemption from capital gains tax allows individuals to reside outside of Australia for up to six years while still benefitting from the exemption.

Imposing capital gains tax on the family home is something that almost no country in the world entertains. The recent changes to the bright-line test have brought in too many situations for properties acquired after 27 March 2021 where this may occur.

It is a consequence of rushed legislation and an ad hoc approach to the taxation of residential investment property, rather than taking a more measured and principled approach to the broader issue of the taxation of capital gains. ■

Bruce Bernacchi is a partner and Lucy Tustin is a law graduate at Dentons Kensington Swan ■

The bright-line rule was never intended to tax the family home

Mainzeal directors breached Companies Act, liable for nearly $40m

The Supreme Court endorsed the Court of Appeal’s view that a review of ss 135, 136 and 301 of the Companies Act would be appropriate

Reweti Kohere Companies Act 1993 – ss 135, 136 and 301 – directors’ duties – protection of creditors’ interests – trading while insolvent – reckless trading – substantial risk of serious loss to creditors – duty in relation to obligations – breach of directors’ duties – approaches to quantify loss – proper relief – orders for compensation

Yan & Ors v Mainzeal Property and Construction Limited (In Liq) [2023] NZSC 113

The collapse of one of New Zealand’s largest construction companies more than a decade ago and the ensuing legal wrangling has culminated in the Supreme Court’s long-awaited decision on directors’ duties

Mainzeal Property and Construction, known for constructing

several landmark buildings throughout New Zealand, including the Supreme Court building in Wellington, was placed in receivership and liquidation in February 2013.

Mainzeal at best generated limited operating profits in the five preceding years. More usually, it ran at a loss. Significantly, the company’s liabilities exceeded its assets from 2005, preventing it from paying its debts as they fell due. This balancesheet insolvency occurred largely because Mainzeal made substantial yet irrecoverable advances to members of a group of companies associated with Richard Yan, one of its directors and the controlling shareholder of the parent company.

From 2009 to 2012, Yan and directors Peter Gomm, Clive Tilby and former Prime Minister Dame Jenny Shipley, allowed

Continued on page 07

Photo: Jung Getty / Getty Images

The company’s liabilities exceeded its assets from 2005, preventing it from paying its debts as they fell due

Continued from page 06

Mainzeal to keep trading despite its insolvency because they relied on assurances of support from Yan’s associated companies. While not legally binding, the assurances often came orally from him.

On 29 January 2013, financial support dried up. Yan advised that his associated group of companies would not support Mainzeal. Eight days later, the Bank of New Zealand (BNZ), a secured creditor, appointed receivers. By the end of February that year, Mainzeal was in liquidation. BNZ and preferential creditors were paid fully from the receivership. Unsecured creditors, however, were owed a shortfall of about $110 million.

The liquidators, Andrew Bethell and Brian Mayo-Smith, sued the directors, alleging from January 2011 they had agreed: ■ to keep operating in a manner likely to create a substantial risk of serious loss of creditors, in breach of s 135 of the Companies Act 1993 (reckless trading); and ■ to the company incurring obligations to creditors when they did not believe on reasonable grounds that Mainzeal could meet those obligations when they fell due, in breach of s 136.

Procedural history

Cooke J dismissed the liquidators’ s 136 claim but found the directors traded recklessly by no later than 31 January 2011 (breach date). Compensation of $36m, representing about onethird of the amount owed to unsecured creditors, was awarded.

The directors appealed to the Court of Appeal, as did the liquidators who sought a larger award of compensation for the reckless trading breach and a finding that the directors did breach s 136.

The court agreed with Cooke J. The directors breached s 135 as they had exposed creditors to a substantial risk of serious loss by no later than the end of January 2011. However, that risk did not materialise as there was no “net deterioration” in the company’s position between the breach date and the liquidation date. As the liquidators had failed to establish any loss, compensation could not be awarded.

On the s 136 claim, the court differed from Cooke J: the directors did breach their duty not to incur obligations which they could not reasonably believe Mainzeal would meet. The breach occurred in respect of two sets of obligations and the relevant loss suffered was the amount of the new debts incurred that remained unpaid at liquidation. The Court of Appeal sent the case back to the High Court to determine quantum.

The directors appealed to the Supreme Court, seeking to reverse the findings of liability under both sections or succeed in arguing that the liquidators had failed to establish loss for which the court could award compensation.

The liquidators sought to uphold the findings of liability, cross-appealed the Court of Appeal’s finding on the approach to

assessing s 135 losses and asked for compensation to be fixed rather than having this aspect remitted to the High Court.

Supreme Court

The judges were unanimous: the directors breached the Act and were liable for nearly $40m, plus interest.

The court upheld the lower courts’ findings that the directors had, by no later than 31 January 2011, breached s 135 in adopting “a trading policy that was ‘likely to create a substantial risk of serious loss to the company’s creditors’”.

This was because:

■ Mainzeal had been trading for many years while balancesheet insolvent;

■ external advice was given that additional capital was required, yet such capital was not provided;

■ Mainzeal generated little, if any, operating profit from 2008;

■ the directors were aware of the company’s precarious financial position; and

■ they could not have reasonably relied on assurances of support as sufficiently mitigating the risk to creditors to ensure compliance with s 135.

The court also upheld the Court of Appeal’s finding that the directors were in breach of s 136 in relation to both sets of obligations. While the directors had argued the breaches in respect of the first lot had not been specifically argued or pleaded, the Supreme Court considered they were squarely on the table at trial.

Liability principles

Conscious of the impact of its decision on directors and good governance practice, the Supreme Court outlined the implications of its judgment.

Where a company is insolvent or bordering on insolvency, ss 135, 136 are geared at protecting creditors who have an economic interest in the company, which the directors must consider.

Directors have a continuing obligation to monitor their company’s performance and prospects, for failure will breach their duty to exercise the care, diligence and skill of a reasonable director. They should “squarely address” the future of the company if monitoring reveals the potential for substantial risk of serious loss to creditors or doubt as to whether there is a continuing reasonable basis for believing the company can honour obligations it has incurred.

If the potential of either risk is revealed, the directors must decide how best to avoid breaching their obligations. Professional or expert advice from independent sources will help, and directors will be afforded a reasonable amount of time to decide the course of action they should take, whether that is

Continued on page 08

Mainzeal had been trading for many years while balancesheet insolvent

Continued from page 07

eliminating the risks or managing and mitigating them.

The courts must assess directors’ decisions against a standard of reasonableness, and will recognise that such decisions will involve the exercise of business judgment often in complex, time-pressured situations, on incomplete information and where more than one reasonable course of action is open.

Loss

On the proper approach to quantifying loss under s 135, the court agreed with the directors: “net deterioration”, or how much a company’s financial position has deteriorated between breach and liquidation dates, should be used. The measure fell in line with the language of the provision, the court said – the substantial risk of serious loss is directed at creditors generally, not individual creditors. On the facts of Mainzeal, however, the liquidators were not entitled to compensation because no net deterioration, as a result of reckless trading, had been proved.

For s 136 losses, the liquidators’ “new debt” approach was preferred. The provision focused on categories of obligations and losses to particular creditors, the court said. The most logical basis for quantification was the loss those creditors suffered. The court concluded it had adequate information to quantify the s 136 losses, assessing them at nearly $40m.

Relief and culpability

On the issue of relief, the liquidators had applied under s 301 of the Act, which empowers the court to require certain persons repay money or return property as it “thinks just”. The court said the language of the provision meant it was free to tailor relief in ways that responded to particular breaches or wrongs, to the harm that flowed as a result and to the culpability of the directors as between them.

An order imposing on the directors joint and several liability for $39.8m was the “obvious” starting point, the court said. However, said such an award would not be “just”, given the differing levels of culpability between the directors. The court exercised its discretion under s 301 by reference to Cooke J’s

How to L ead a Team

assessment of their respective culpabilities.

While the court accepted that Yan had acted honestly, he was “far more culpable” than the other directors. That Mainzeal kept trading while insolvent, which caused the losses to the creditors upon its collapse, was “fundamentally his fault. We see no reason why his liability should be for less than the assessed loss.”

While the former prime minister lent her reputation to Mainzeal, which could form the basis for treating her as more blameworthy than Tilby and Gomm, the court was not prepared to depart from Cooke J’s informed conclusion that the trio were “equally culpable but far less so than Mr Yan”.

The Supreme Court endorsed the Court of Appeal’s view that a review of ss 135, 136 and 301 would be appropriate. The purpose and text of s 301, for instance, were at odds with one another.

While the court had resolved the tension, it said “there remains a more general incoherence in relation to ss 135, 136 and 301 as to distribution of the proceeds of a successful claim… The problems just highlighted are not the only ones that have emerged from our consideration of the present case.”

Applicable principles: likelihood of a substantial risk of serious loss to creditors – whether it was reasonable for directors to continue trading while balance-sheet insolvent – whether relying on assurances of support from sister companies was reasonable – whether the directors squarely addressed the company’s financial position – whether directors incurred obligations on reasonable grounds that the company could honour them – quantifying loss – net deterioration or new debt – scope of s 301 discretion – culpability. Held: The directors’ appeal failed; the liquidators’ cross-appeal is allowed to the extent the directors must contribute $39.8m, plus interest, to Mainzeal’s assets.

Yan must pay the full amount and Dame Jenny, Tilby and Gomm are each directed to pay one-sixth of the total, rounded down to $6.6m. More than 10 years’ interest was added and $65,000 in costs was awarded. ■

ADLS is holding a webinar about the Supreme Court decision and its implications on 5 October, details here ■

The courts must assess directors’ decisions against a standard of reasonableness

Heads of bench update lawyers on digitisation, legal aid, courtroom security and Te Ao Mārama

It’s change that’s long overdue, change that’s happened in courts overseas, with our court system playing catch-up after more than two decades, really, of treading water

Reweti Kohere

Heads of bench and the Ministry of Justice this week updated the profession on efforts to mitigate some of the “generational damage” that structural issues are inflicting on New Zealand’s justice system.

There are some reasons for “cautious optimism”, participants heard on a webinar on Tuesday hosted by the New Zealand Law Society.

Chief Justice Dame Helen Winkelmann was joined by Chief High Court Judge Susan Thomas, Justice David Goddard, Acting Chief District Court Judge Ida Malosi and Secretary for Justice Andrew Kibblewhite.

Lawyers were told the judiciary’s flagship digitisation project, Te Au Reka, had passed an important milestone: the ministry and the judiciary have this week signed up to the first phase of the design and build using Microsoft-based systems.

The initial rollout of the digital case management system should be live in the Family Court within three years, Justice Goddard said, with the second and third phases, covering the District Court, senior courts and some specialist courts taking five years.

“I’m an impatient person, I’d like to see it happen a lot faster. But the most important thing is it’s a generational opportunity to get it right and that’s what we need to do, with lots of consultation with the profession and other users,” he said.

Described by the Court of Appeal judge as one of four highpriority initiatives identified in the courts’ digital strategy, Te Au Reka would sit alongside improvements to remote hearing technology, fit-for-purpose physical infrastructure for digital working, and high-quality training and support. The judiciary expects progress will be made on all four during the next five

years. Te Au Reka will be the most significant, however, as it will facilitate more meaningful participation and interaction, make the courts more effective and efficient, and could improve access to justice if done well, Justice Goddard said.

“It’s change that’s long overdue, change that’s happened in courts overseas, with our court system playing catch-up after more than two decades, really, of treading water.”

Generational damage

The digital strategy was just one of several system-wide initiatives being progressed to address what Chief Justice Winkelmann described as “structural” issues.

The past three years had been an “extraordinarily challenging time” for the profession, the judiciary and the ministry, she said. The pressures that were coming to bear on lawyers are unprecedented. “Wherever you look in the justice system, there’s stress.”

The covid catchup was one explanation, as were the chronic underfunding of, and administration issues with, legal aid.

“I have no doubt this generational issue has caused generational damage to the structure of the profession,” Chief Justice Winkelmann said. As the stream of legal aid practitioners is drying up, fewer have been left to carry the burden. This was a “vicious cycle”, Chief Justice Winkelmann said, resulting in burnout and increased barriers to accessing justice.

Some reasons for cautious optimism existed though, she said. A judicial working group, made up of Justice Sally Fitzgerald and Judges Russell Collins and Peter Callinicos, was developing a framework of principles to guide the use of remote

Continued on page 23

Wherever you look in the justice system, there’s stress

Chief Justice Dame Helen Winkelmann

Justice Susan Thomas

NZLS endorses independent regulator proposal and treaty clause

group members.

Excluding the board members, most of the councillors support the headline recommendation with three of the 20 respondents accepting it fully and eight in principle. Six believe further consideration is needed while three reject the proposal.

Reweti Kohere

The New Zealand Law Society has thrown its support behind establishing a new, independent watchdog after accepting in principle the review panel’s recommendation.

The remainder of the panel’s proposals have also been backed by NZLS, which rejected none. But while most have been accepted in principle, some will require further consideration before the membership and regulatory body settles on a view.

The creation of a new, independent regulator headlines the Law Society’s response, which includes accepting in principle a Treaty of Waitangi clause in any new regulatory framework and overhauling how complaints about lawyers are handled.

Progress on the recommendations now sits with the Minister of Justice as any substantive reforms will require amending the Lawyers and Conveyancers Act 2006. NZLS says it is looking to government to indicate whether reform will be a legislative priority.

“Our vision is that all people in Aotearoa benefit from a strong, progressive and trusted legal profession,” says NZLS President Frazer Barton. “To achieve this, we need to be a best practice modern regulator and a strong voice for [the] profession through our representative function.”

Significant consideration

Barton says many in the profession believe the Law Society’s dual role as watchdog and representative doesn’t serve the interests of the public or the profession well.

“The independent review report stated that there is a strong case for a new independent regulator and I think there is a compelling logic to that.”

The NZLS council is comprised of the president and four vice-presidents (the five of whom make up the board), together with 13 regional branch representatives and seven interest-

NZLS surveys of the legal profession after the panel released its final report indicate more support for a new regulator: 61% of respondents agree or agree in principle, with 23% rejecting the recommendation. However, the profession’s overall response has been poor: only 5.7% of lawyers responded to the surveys.

“Some [council] respondents queried whether all regulatory functions should be undertaken by an independent regulator or whether there should be a separation of only the complaints and disciplinary functions,” says the Law Society in its response document. “There will be significant consideration of the scope and role of an independent legal regulator.”

Free from influence

On the institutional features of a new regulator, the council is evenly split on the establishment of an independent statutory body, which is not a Crown entity and not subject to ministerial direction.

NZLS says it has received clear feedback that any new regulator should not be a Crown entity, “and it must be completely free from government and ministerial influence, both through funding and the appointment of board members”.

The panel had recommended an eight-person board, equally split between lawyers and members of the public, chaired by a public member and containing at least two members with strong insights of te ao Māori. However, further consideration is needed on the board’s composition and the appointment process.

Feedback indicates that the necessity for a diverse board with relevant skills and experience is generally accepted, although the specifics are not yet clear. Strong concerns have been expressed about the actual or perceived risk of political bias with ministerial appointments.

‘All persons’

NZLS accepts in principle the panel’s recommendation that a standalone, overarching te Tiriti o Waitangi clause should be

Continued on page 11

Strong concerns have been expressed about the actual or perceived risk of political bias with ministerial appointments

As currently drafted, the clause states that “all persons exercising powers and performing functions and duties under this Act” will have to “give effect” to the principles of the treaty

Continued from page 10

inserted in the new legislation.

As currently drafted, the clause states that “all persons exercising powers and performing functions and duties under this Act” will have to “give effect” to the principles of the treaty.

Twelve of the 20 council responses accept or accept in principle the recommendation, with six requesting further consideration and two rejecting it. Some respondents are concerned about the practical implications for the regulator and that care will be needed to ensure the profession and users of legal services understand the clause’s scope and application.

Broader consultation has indicated mixed views on including the clause, mainly due to a lack of clarity about its implications on the regulated profession. To assuage concerns, Barton has repeatedly said the proposed recommendation “applies to a new regulator and not to lawyers or the duties they have”.

However, NZLS accepts the draft clause’s current wording will apply more broadly than simply to the independent regulator as “the language requires ‘all persons’ exercising functions and powers under the legislation to give effect to the principles of te Tiriti”. And the panel’s report states a treaty clause, while signalling the importance of te Tiriti to New Zealand’s constitution and legal system, will “guide how the regulator engages with the profession and the public and fulfils its functions”.

As the Law Society’s response document states, “the wording of any proposed te Tiriti clause would need to be considered in detail to ensure it is fit for purpose for a professional regulator.”

Too long

Further consideration is needed on the panel’s recommendation that complaints about lawyers should be assessed and determined by in-house specialist staff, instead of the current standards committee volunteers.

Council members are evenly split, with half either accepting it fully or in principle. However, nine members consider the recommendation needs further thought.

NZLS accepts in principle the recommendation to reserve formal and disciplinary processes for matters requiring a disciplinary response from the regulator. As all complaints – regardless of their seriousness or nature – must be processed by a standards committee, just one complaint takes on average 304 calendar days to be processed. The Law Society agrees this delay is too long.

Under the panel’s proposed framework, complaints about fees, delay, poor communication and other “consumer matters” will go through a process focused on resolution and restoration, while more serious responses will warrant investigation. NZLS says this multi-track approach will make the complaints process significantly more efficient and responsive.

That lawyers will be subject to a new duty to ensure they deal with complaints “promptly, fairly, and free of charge” has been accepted in principle, as has the recommendation that the identity of a lawyer whose conduct is deemed “unsatisfactory” will not be publicly disclosed other than in exceptional circumstances.

The recommendation received majority support from council members and the wider profession, with 77% either accepting it fully or in principle. ■ See also page 12 ■

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NZLS jumps the gun in taking panel recommendations to government

The council was unable to respond to the next recommendation concerning the composition of the regulator’s board, without further consideration. Nor to the next recommendation about who appoints the members of the board.

Gary Judd KC

On 24 August, the New Zealand Law Society released the response of the NZLS council to the recommendations made in the independent review report. NZLS advised that it had “provided its response to the Minister of Justice, so that it can be considered for the government’s legislative agenda”.

The body of the response indicates the council considers there are many matters requiring further consideration. It is disappointing that NZLS has rushed to engage with the government to get something on the “legislative agenda” before engaging with the profession on the issues where there is significant disagreement, even within the council.

Individual council members, excluding the board, voted electronically on each of the panel’s recommendations. The votes were used to compile the response which was adopted at the last of three council meetings.

Readers of LawNews will know that I criticised the report in two principal respects: the threat to lawyers’ independence and the recommendation that the new regulator be required to give effect to the principles of the treaty.

The response states only three of the 20 council member respondents accepted the fundamental proposition to establish a new regulator. Eight accepted it in principle; three did not accept. Six felt further consideration was needed. So, 11 accepted or accepted in principle, nine did not – a bare majority in favour of acceptance in principle.

If an independent regulator were to be established, a majority of the council respondents were of the opinion that it had to be independent and effective.

The response states: “The Law Society has nonetheless received clear feedback that if a regulator is established, it should not be a Crown entity and it must be completely free from government and ministerial influence, both through funding and the appointment of board members.”

These survey answers and explanations in the response seem to indicate the council was of the view that an independent regulator is a good idea, but it must be completely independent of the government. How to achieve that has not been worked out.

This is a major advance in support of lawyers’ independence, but why trot off to the government, opening the way for the government to do it the government’s way, before either coming up with an acceptable mechanism to address the problem or dropping the independent regulator idea altogether?

Treaty principles

The council also had difficulties with the recommendation that the regulator be required to give effect to the principles of the treaty. The response reports that the recommendation was accepted in principle on the basis that two accepted it and 10 accepted it in principle, with two not accepting it and eight saying further consideration was needed.

Problems for council members reported in the response concerned how such a clause might be worded and how it might be applied to a professional regulator.

The response reports a wise observation: “Te Arawhiti [the office for Maori Crown Relations] has commented on the use of te Tiriti clauses, noting that: “A recent proliferation of treaty clauses, however, has raised questions about the extent to which they are the product of well-considered policy and careful analysis of their legal and practical effect. If Parliament’s intended effects of a treaty clause are not clear, there is a risk they will not be implemented, potentially leading to unintended or adverse consequences both in the portfolio area and for the Māori/Crown relationship.”

This has been the problem with treaty clauses right from the start. Bung it into the legislation and let the parties fight over what it means. What are these principles of the treaty? They seem to be whatever idea someone comes up with and can persuade a court or the tribunal to accept.

Continued on page 22

This has been the problem with treaty clauses right from the start. Bung it into the legislation and let the parties fight over what it means

The people who speak for the profession and are required to serve our interests have gone to the government prior to the formulation of coherent and complete propositions

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How Winston Peters might play his hand

altogether.

This threat of voter “punishment” has been hung, like the Sword of Damocles, over the heads of New Zealand’s political parties – especially its minor parties. Although it has never been tested, New Zealanders’ alleged aversion to tails wagging dogs has served its disciplinary purpose admirably. No small party has ever been bold enough to call National or Labour’s bluff and force a new election.

Chris Trotter

Seven seats. That’s the least NZ First will claim if it crests the 5% MMP threshold.

In a close election, seven seats could spell the difference between political stability and a nerve-racking period of political uncertainty. With Prime Minister Chris Hipkins ruling out any kind of coalition or confidence-and-supply deal with NZ First, and ACT leader David Seymour refusing to join any Cabinet of which NZ First is a part, the smart money would appear to be moving towards uncertainty.

If NZ First re-enters Parliament, its leader Winston Peters will have to come up with a plan that puts an end to that uncertainty while, somehow, preventing his own party’s eviction from the House.

For more than a century, New Zealand has avoided follow-on elections – ie, the calling of an election within three to six months of an inconclusive electoral contest. New Zealand’s first-past-thepost voting system more-or-less guaranteed decisive electoral victories.

Not even the introduction of mixed-member-proportional voting in 1996 could upset the tradition of New Zealanders voting for – and getting – a good government.

The country’s two most famous “snap” elections – 1951 and 1984 – both occurred well into the governing party’s three-year term and do not meet the follow-on election test.

Voters’ revenge

That New Zealand has not experienced a follow-on election in more than 100 years has not prevented political scientists and commentators from pronouncing upon its likely outcome. Conventional wisdom insists that whichever politician and/ or party is held responsible for sending the nation back to the ballot-box prematurely risks being voted out of Parliament

That may be about to change. Before examining what that change might entail, it is necessary to acknowledge that the looming election’s most likely outcome continues to be a solid and stable coalition government.

The most recent polls indicate that voters will elect a NationalACT coalition with a small, but workable, parliamentary majority. The next most likely outcome is a Labour-Green-Te Pāti Māori combination, with Labour and the Greens forming a minority government, and Te Pāti Māori guaranteeing it confidence and supply from the cross-benches.

It is only in the event that NZ First crosses the 5% threshold, with enough seats to place either the centre-right or the centreleft in office, that consideration will need to be given to the decidedly unlikely.

Many voters have forgotten that in 1999 Helen Clark became the Prime Minister of a minority, Labour-Alliance, government. She was able to govern the country only because the Green Party, then co-led by the saintly Jeanette Fitzsimons and the cuddly Rod Donald, happily assured them of its support on all matters of confidence and supply.

To discover that David Seymour has made a close study of the Clark-Anderton relationship would be entirely consistent with the ACT leader’s acknowledged political acuity.

Certainly, the fate of the radical Alliance offers a cautionary tale about the fate of little parties with big ideas. Duly cautioned, it is easy to understand why Seymour has become so agitated about NZ First’s steady rise in the polls.

The ACT leader is only too aware that Peters and his party are a very different proposition to the blithely accommodating Greens. Only occasionally was Helen Clark required to look over her shoulder to see what the Greens were up to.

In the case of NZ First, Seymour will soon be wishing he has eyes in the back of his head, because Winston and NZ First would

To discover that David Seymour has made a close study of the ClarkAnderton relationship would be entirely consistent with the ACT leader’s acknowledged political acuity

It is only as the need for NZ First votes to secure the passage of the new government’s first budget grows urgent that National and ACT will begin to grasp the precariousness of their position

Helen Clark

Continued from page 14

always be up to something.

Even assuming that Peters, having read the election results and true to his belief that what New Zealanders most want and deserve from an election is a good government, was willing to lead his party onto the cross-benches – thereby allowing National and ACT to form a minority coalition government – that would not be the end of it. Peters has never offered something for nothing.

The trap

What would that “something” be – apart, of course, from supplying the votes needed to confirm that the National-ACT coalition enjoyed the confidence of the House of Representatives?

At least initially, Peters’ “something” would include NZ First support for every piece of legislation that in whole or in part fulfilled those policies which National, ACT and NZ First have in common: the abolition of the Māori Health Authority, the repeal of the three waters legislation, curtailing co-governance, protecting free speech, getting rid of fair pay agreements. After six years, the Centre-Right’s to-do list is long.

The apprehension of National and ACT at Peters’ benevolent co-operation is easily imagined. “Why is he being so helpful!”

It is only as the need for NZ First votes to secure the passage of the new government’s first budget grows urgent that National and ACT will begin to grasp the precariousness of their position. While NZ First’s support for measures giving effect to what was also NZ First policy was a given, the same cannot be said for the hard-line neoliberal measures at the heart of the National-ACT minority government’s economic program.

“NZ First neither campaigned on, nor will it now support, policies that cast the reforms of Roger Douglas and Ruth Richardson into their shade. While the government’s Budget contains such vicious and damaging policies, this party cannot, and will not, vote for it.”

That may be the trap that Peters springs upon Christopher Luxon and David Seymour. Without NZ First’s votes, the Budget, as written, cannot be passed – but neither can it be defeated.

Either National and ACT will have to draft a compromise Budget or they will be obliged to inform the Governor-General that they cannot secure supply.

At this point, Chris Hipkins (assuming he is still Labour’s leader) may regret ruling out Peters so contemptuously as any sort of partner in, or supporter of, a Labour-Green-Te Pāti Māori government. Not that Peters would risk the voters’ wrath by accepting such an offer so soon after telling them that Labour cannot be trusted.

The moment would thus have arrived for Peters and NZ First to determine whether that Sword of Damocles hanging over their heads was made of steel or plastic. An electorate fearful and resentful of the (now delayed) austerity Budget which National and ACT had been ready to impose upon them might not be so punishing of a party which had contrived to give them another crack at getting it right. Especially a party inviting the voters to give the National Party a more responsible and compassionate coalition partner than ACT – now revealed in all the dismal economic finery of its true neoliberal colours.

Wise old political scientists used to tell their first-year classes that “three years is too short for a good government and too long for a bad one”.

New Zealand’s political history has yet to throw up a government bad enough to be tossed out after just three months. But that doesn’t mean it’s impossible.

These past six years have been strange and perilous for an unprecedented number of New Zealanders and they have exacted a terrible toll in terms of the public’s loss of trust and confidence in the nation’s key institutions.

Winston Peters is almost certainly correct when he says the object of a general election is to leave the voters with a good government.

Certainly, it will take a more-than-usually-artful politician to convince them that, in these dangerous times, getting a good government may take two goes at the ballot box. But, if anyone can convince them to do exactly that, it’s Winston Peters. ■

Chris Trotter is a political writer and commentator of more than 30 years’ experience and author of the Bowalley Rd blog ■

The fate of the radical Alliance offers a cautionary tale about the fate of little parties with big ideas

Jim Anderton

Photo: Robert Patterson / Stringer / Getty Images

Applying the directors’ due diligence defence to climate change reporting and disclosures

Compliance with the new climate-related disclosures regime clearly starts at the top, with directors being required to sign off on climate statements that comply with the External Reporting Board climate standards

Lloyd Kavanagh & Hannah Cross

Directors of climate reporting entities (CREs) are grappling with the new climate-related disclosures (CRD) regime and the steps they should take to ensure the CRE’s climate statements comply with the Part 7A climate-related disclosure provisions under the Financial Markets Conduct Act 2013 (FMCA).

They have a comparable level of responsibility as directors have for financial statements, but the subject-matter of CRD is inherently more forward-looking and uncertain, making the task more demanding.

While there are various sanctions and potential defences available to directors under the FMCA, this article focuses on the standard required by the core defence in s 501(2) for directors if they prove they took “all reasonable steps” to ensure the CRE complied.

The defence applies to civil liability in relation to disclosure of initial offer documents, ongoing and simplified disclosures, financial reporting obligations and now climate-related disclosures.

The ‘all reasonable steps’ defence

The “all reasonable and proper steps” defence in s 501(2) was introduced with the FMCA in 2013, after the global financial crisis and the associated finance company collapses in New Zealand. The previous Securities Act 1978 did not have this defence, only one of honest and reasonable belief.

When the FMCA was being enacted, the Ministry of Business, Innovation and Employment (MBIE) advice made clear to the select committee that it was intended to allow reasonable delegation (when appropriate) of due diligence processes, such as through a due diligence committee, to

increase efficiency and flexibility.

The wording of the s 501(2) defence as enacted was similar to that contained in s 40 of the Financial Reporting Act 1993 (FRA 1993) for offences related to financial statements.

Its application to offer documents was a conscious reaction to some of the cases under the Securities Act, suggesting directors were expected to personally verify prospectuses and investment statements in all cases.

In 2019, s 501(2) of the FMCA was amended to remove “and proper”, leaving the standard as solely “all reasonable steps”.

Given the lack of available commentary by MBIE or Parliament on the removal of “and proper”, our view is that the change to the FMCA defence was simply intended to achieve alignment with the comparable provisions in the Financial Reporting Act 2013, which replaced the FRA 1993.

During the Financial Markets Conduct Bill discussions, MBIE officials noted that although governance is a “collective responsibility”, individual directors will best protect themselves by actively engaging in this collective due diligence process –the extent of which will depend on the type of product and the nature of the business.

Compliance with the new CRD regime clearly starts at the top, with directors being required to sign off on climate statements that comply with the External Reporting Board (XRB) climate standards (NZ CS).

However, that leaves open the question as to the level of inquiry directors should personally engage in to ensure the accuracy of the contents. Do they each need to become climate experts and personally verify the contents of the disclosure? Or if they do decide to delegate preparation, what level of oversight will they be expected to exercise?

The first point is that the CRD regime has a different and more formal status than the voluntary climate disclosures that many companies have engaged in to date, often by reference to the TCFD recommendations.

Voluntary climate-related disclosure falls under the general conduct obligations in Part 1 of the Fair Trading Act 1986 (FTA),

Continued on page 17

The ‘all reasonable and proper steps’ defence in s 501(2) was introduced with the Financial Markets Conduct Act in 2013

Continued from page 16

which prevent voluntary climate reports from reflecting any misleading and deceptive conduct, or contain any false or misleading representations or unsubstantiated representations.

Where financial products and services are concerned, voluntary climate reports are subject to the fair dealing provisions under Part 2 of the FMCA which mirror the Part 1 FTA provisions.

A voluntary climate report may also be an “advertisement” for the purposes of Part 3 of the FMCA, bringing it under the advertising requirements but only if the entity is issuing a specified product.

However, there are no formal requirements as to the content and, importantly, liability falls primarily on the legal entity issuing the disclosure, rather than personally on directors or others, assuming they are not knowingly involved in the contravention.

By contrast, mandatory CRD disclosure, in addition to the relevant fair-dealing regimes as discussed above, must also comply with the prescribed requirements of the Part 7A FMCA provisions. Those include making disclosures in compliance with the requirements of the NZCS. In broad terms, the requirements and legal responsibilities parallel those under Part 7 of the FMCA (for financial reporting).

Climate statements and financial statements are intended to be released in tandem, with the climate reporting period being the same as the financial reporting period, but directors should consider whether the same due diligence approach makes sense for both reporting regimes.

Although financial statements are in part forward-looking, unique requirements in the NZCS-like scenario analysis are a particular pressure point for directors, given their hypothetical and scientific nature.

New Zealand case law

Case law has also informed what an entity’s due diligence process should look like for the s 501(2) defence to apply. The most recent case to consider “all reasonable steps”, in the context of financial reporting under the FRA, is Prain v Financial Markets Authority [2016] NZCA 298.

In Prain, Apple Fields Limited (AFL) had failed to deliver audited financial statements to the Registrar of Companies under the FRA 1993.

AFL’s directors raised the “all reasonable and proper steps” defence in the FRA 1993, arguing that AFL’s failure was due to the accountant’s advice that generally accepted accounting practice required consolidation of AFL’s financial statements and those of Noble Investments Limited (NIL). NIL was an in-substance subsidiary, but it refused to provide the necessary financial information to AFL to allow preparation of the consolidated financial statements. AFL’s directors acted on the accountant’s advice and did not register the unconsolidated financial statements.

Penalties for directors

The FMA has a range of enforcement tools, one of which is seeking pecuniary penalty orders against a director.

The maximum civil penalty for a contravention, or involvement in a contravention of disclosure, financial and climate reporting provisions will be the greatest of (s 490):

(a) if ascertainable, three times the amount of the gain, or the loss avoided, by the person who contravened the civil liability provision; and

(b) $1 million in the case of an individual or $5m in any other case.

For climate reporting contraventions, a range of criminal sanctions is possible for directors:

■ Directors who are knowingly or recklessly contravening provisions related to defective disclosures on a register entry (where climate statements will be filed) will be liable on conviction to imprisonment for a term not exceeding 10 years, or an individual fines of up to $1m.

■ Directors of CREs who knowingly fail to comply with climate standards will be liable on conviction to imprisonment for a term not exceeding five years, or an individual fine of up to $500,000.

There was no question that AFL’s directors failed to meet the obligation to register the financial statements. Rather, the question was whether the financial statements had to be consolidated to be compliant with the relevant standards. The Court of Appeal was not prepared to infer that the accountant’s advice was wrong because the unconsolidated financial statements would still have been compliant for reasons which are not relevant for the purposes of this article, and the court decided the directors were reasonable to follow the consolidation approach in reliance on the accountant’s opinion.

Accordingly, the court held that the directors of AFL were not required to have sought a second accountant’s opinion or legal advice to meet the “all reasonable steps” defence.

The Prain decision also indicated that the substance of the directors’ steps would be the primary focus for the purposes of the defence.

Accordingly, the Court of Appeal considered two questions in addressing the FRA 1993 defence:

■ was it reasonable for the directors to not seek a second accountant’s opinion about the consolidation requirement?

■ was it reasonable for the directors to not seek legal advice about requiring NIL to provide the necessary information?

First, the Court of Appeal raised the District Court’s finding that AFL’s directors had honestly relied on the accountant’s advice and made diligent efforts to consolidate the financial statements. On that basis, the court went on to find that they must be taken to have acted reasonably unless a second opinion should have been sought and there was a reason to suspect that the second opinion may have been different (that

Continued on page 18

Do directors each need to become climate experts and personally verify the contents of the disclosure?

Continued from page 17

consolidation was not required).

The court’s conclusion was that the directors were reasonable to rely on the accountant’s advice, as there was no evidence suggesting the directors had reason to suspect that the advice was incorrect.

To require a second opinion would be “to prefer process to substance”, but the court acknowledged that a second opinion may be necessary in different circumstances, such as where the directors have (or should have) doubts about the accuracy of the first opinion.

On the second question, the directors were found to have acted reasonably in not seeking legal advice. Even though the evidence suggested that legal advice would have made no difference, because AFL “did not control [NIL] in any orthodox sense”, the court concluded regardless that the FRA 1993 defence did not require the directors to take legal advice.

Substantive reasonableness therefore may look like obtaining expert advice, and whether directors can rely on that advice without going further, will depend on whether the circumstances give rise to any doubt as to the merits of the advice.

Exhausting every single avenue in an attempt to comply may not be reasonable in situations like getting a second opinion when directors reasonably believe the first one is correct, or seeking legal advice knowing it will not solve the noncompliance.

Ministry of Economic Development v Feeney (2010)10 NZCLC 264, 715 (DC)

An earlier District Court decision that was referenced in the Prain proceedings, Feeney, also considered the due diligence defence under the FRA 1993 and came to a similar conclusion.

The court found that the directors of Feltex Carpets Ltd reasonably relied on the company’s financial management team and on Ernst & Young which reviewed and produced a report on the company’s financial accounts.

The directors had engaged in a variety of prudent due

diligence steps, and Doogue J concluded that the directors would have had to undertake extensive analysis of the new NZIFRS standards to pick up on the breach – an unrealistic and unreasonable expectation.

Although the Feeney decision was only at the District Court level, its circumstances have parallels with the CRD regime, in that it involved a new regime and the directors were relying on a substantial due diligence process which involved external experts.

Directors of CREs may have to lean on external experts and sources to produce NZCS-compliant climate reports, such as in relation to the strategy disclosures, such as scenario analysis and reporting greenhouse gas (GHG) emissions. If not now, CREs will be required to obtain assurance engagements over their GHG emissions for reporting periods ending on or after 27 October 2024.

The Australian approach

It is important to be aware that the Australian courts have taken a somewhat different approach.

The Federal Court of Australia’s most recent consideration of a similar defence in s 601FD(1)(f) of the Corporations Act 2001 (Cth), in Trilogy Funds Management Ltd v Sullivan (No 2) [2015] FCA 1452, can be argued to be broadly consistent with Prain and Feeney, even though the defence was unsuccessful.

In that case, the court accepted that there were circumstances in which directors would be entitled to delegate compliance steps. However, this would likely not be reasonable if it became apparent to the directors that the delegation would result in non-compliance or if they failed to monitor the person they had delegated to.

However, the New Zealand approach in Prain and Feeney contrasts with the earlier Federal Court of Australia’s decision in Australian Securities and Investments Commission v Healey [2011] FCA 717 (Centro).

In Centro, the court held that the directors must have read

Continued on page 19

The CRD regime has a different and more formal status than the voluntary climate disclosures that many companies have engaged in to date

Continued from page 18

and understood the financial statements to have taken “all reasonable steps”, and because they had failed to do so they were found liable.

The court considered that the directors would have identified the error in the statements had they properly considered them, behaviour that sets them apart from the more prudent and actively engaged directors in Prain and Feeney. Interestingly, the Federal Court in Trilogy referenced the Centro statement that directors must monitor and familiarise themselves with the company’s financial position, a reference that may seem counter-intuitive to its acceptance of delegation and reliance. Perhaps the reconciliation is that the meaning of “all reasonable steps” is very context-dependent.

The Supreme Court of Victoria in Clarke (as trustee of the Clarke Family Trust) v Great Southern Finance Pty Ltd (Receivers and Managers Appointed) (in liq) [2014] VSC 516 (Great Southern), took a similar approach to Trilogy and Feeney by concluding the directors were reasonable to rely on the due diligence committee, alongside an effective review and monitoring process of that committee, and therefore had the benefit of a defence in s 1022B(7) of the Corporations Act.

The proceedings related to defective offer documents for a managed investment scheme. Although they ended in a settlement, Croft J attached an annexure to the court’s judgment approving the settlement with a discussion of the establishment of the reasonable steps defence.

Final takeaways

Although due diligence processes will differ across different types of products and business types, generally the approach should involve:

■ delegating the verification of disclosure documents, financial statements and climate statements to a due diligence committee;

■ ensuring the members of the due diligence committee and its processes are adequately monitored and reviewed regularly;

■ obtaining expert advice – externally or internally – provided the directors are assured the advice is given by someone with the requisite skills and competence. Whether the directors can rely on that advice depends on whether the directors have reason to doubt its accuracy; and ■ directors signing off on a compliance report from the due diligence committee and undertaking a post-process review. In a practical sense, a crucial part of a due diligence process is to establish and document a plan for how the process is actually conducted for each relevant disclosure document, including climate statements, and then ensure that plan is followed.

The Financial Markets Authority (FMA) has released draft record-keeping guidance for CRD records which has relevance

Considerations for a due diligence process

Due diligence processes should be documented in a written plan. Directors should actively assess whether it is appropriate to have individual plans for each document to be verified or whether a single plan can provide for multiple documents.

In each case, the objective of the process should be to ensure all representations and factual statements are substantiated, will not be false, misleading or confusing and will comply with the specific legal requirements for content, in this case in Part 7A of the FMCA (and regulations) and the NZCS.

When creating and monitoring these documented plans, directors should consider:

■ who has the various roles and responsibilities and how and why those people have been selected;

■ what exactly those people will do and to what standard;

■ how verification is done and by whom;

■ how other stakeholder comments are obtained and incorporated;

■ how facts are substantiated and how evidence is stored;

■ what written evidence and sign-offs will be produced during the process (and to whom the sign-offs are addressed);

■ how and where that written evidence will be retained so it can be accessed in the event of challenge to the content of the relevant document; and

■ what the post-process review and improvement process will be, to allow for continuous improvement.

for a documented due diligence process.

The guidance is about supporting evidence rather than evidence of a good due diligence and verification process, but the FMA states, “Without proper supporting documentation, it can be unclear whether an entity and its directors have sufficiently considered, understood and reviewed their disclosures and whether these are based on reasonable and well-considered inputs and assumptions”.

Having good record-keeping policies in place ensures that the content of climate statements can be substantiated. Efficient record-keeping may look like using one central digital platform to store all evidence related to the climate report and the accompanying due diligence process which would be readily and easily accessible and able to be updated by all parties involved.

Echoing the level of involvement in due diligence processes for financial reporting in relation to climate reporting, the XRB said in its guidance that “directors play a critical role in providing high-level strategic oversight of an entity’s climate-related disclosures”.

CREs must disclose how the governance body is addressing climate-related risks and opportunities and how management is structured to share this responsibility. These requirements are in relation to a CRE’s approach to climate change itself rather than the process for disclosing and lodging climate statements.

Even so, the same ideas should be applied to ensuring a workable and effective due diligence process for compliance with the CRD regime. ■

Lloyd Kavanagh is a partner and Hannah Cross is a law clerk at MinterEllisonRuddWatts ■

A crucial part of a due diligence process is to establish and document a plan for how the process is actually conducted for each relevant disclosure document

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Continued from page 12

NZLS has created its own problem for itself through the actions of previous board members and presumably council members setting up the reform structure with incorporation of treaty principles as part of the agenda.

As Chris Finlayson KC has pointed out, individual New Zealanders and nonCrown institutions like NZLS are not parties to the treaty. Had there been clear thinking and the eschewing of ideological considerations, such ideas would have been rebuffed from the outset. The response to whoever was advocating for these ideas should have been, “We are not the Crown, there is no need for us to get involved in that issue.”

Unfortunate assumptions

NZLS council members may be well advised to ask whether there is something about the way the society is governed and managed which has led to this unfortunate situation, where the process was put in train with assumptions about the desirability of a new regulator and giving effect to the principles of the treaty. These assumptions were made before existence of well-considered policy and before careful analysis of the legal and practical effect of the assumptions. Now it is in the hands of government bureaucrats who will make recommendations to ministers according to their views. The people who speak for the profession and are required to serve our interests have gone to the government prior to the formulation of coherent and complete propositions.

The reason the response gives is “so that it can be considered for the government’s legislative agenda”. Why does NZLS want it on the agenda when it does not know what it wants? ■

Te Hapori fundraising event

To celebrate the 10-year anniversary of the Alcohol and Other Drug Treatment Court (Te Whare Whakapiki Wairua), Te Hapori, the community advisory group to the AODT Court, is holding a special fundraiser.

Time 6pm – 10pm

Date 21 September

Place The Pah Homestead, 72 Hillsborough Rd, Auckland

Tickets $100

While participants are in the AODT Court, Te Hapori provides funding to assist with opportunities such as attendance at 12-step recovery camps, tattoo removal, providing recovery milestone tags, recovery literature, dental treatment and educational and work-related opportunities.

Click here to view more details and to purchase a ticket. For those who cannot attend but would like to support the work of Te Hapori, donations can be made here

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participation in proceedings.

The group would then consider, alongside the Department of Corrections and New Zealand Police, how best to operationalise it because the upsides of remote participation couldn’t “obscure” the imperative for just outcomes and procedural fairness, the chief justice said. Judges’ bench books, an electronic resource that compiled current case law and statute, legal commentary and practice directions, were another initiative.

While work was continuing toward publishing some of the specialist books, Chief Justice Winkelmann intended the full criminal jury trial book would be made publicly available in 2024, representing a step forward in making the judiciary’s processes more transparent, she said.

Wellbeing concerns

In response to leaders of the profession recently alerting the bench of wellbeing concerns among lawyers, Justice Thomas and Chief District Court Judge Heemi Taumaunu shared concerns with their judges. Practitioners have reported that they are operating under immense workload pressures, as well as feeling increasingly stressed and overwhelmed – all of which are jeopardising their ability to serve their clients.

Justice Thomas, who attended a series of meetings with counsel throughout the country, said it was crucial the line of communication between judges and the profession remained open as “understanding one another’s perspectives is really essential”.

Criminal jury trial numbers have returned to pre-covid levels, participants heard, although cases are taking much longer to resolve. The mix of work has changed with homicides and large, multi-defendant drug cases increasing in number. Trial dates are typically being set 14 months after first appearances.

The recently-released criminal disclosure practice note, designed to avoid the stress that late disclosures cause, was an important initiative, as was a new civil case management system in which a greater number of cases will be assigned to High Court judges for more intensive case management. Justice Thomas said: “The court cannot control the volume of its work, but what it can and must do is manage its work as effectively as possible to reduce unproductive time and effort for everybody.”

Te Ao Mārama

Judge Malosi said Chief Judge Taumaunu had asked his executive and liaison judges to arrange meetings with the profession to better understand their concerns and work through local solutions.

While not all their responses have yet been received, the discussions were reportedly “very constructive”. Judge Malosi encouraged the profession to keep raising issues with the judiciary. “The District Court sees this as an ongoing

conversation and is very committed to remaining engaged in it.”

Practitioners are concerned about what skills they will need to work within Te Ao Mārama, the District Court’s landmark initiative to incorporate the hallmarks of specialist and therapeutic courts into its mainstream criminal and family work.

Te Ao Mārama is fundamentally about “timely justice”, Judge Malosi said, which would require change “and new skills for everyone”. The court aimed to share more resources with the profession; a best practice framework would be developed over the next three years.

The judge acknowledged the court’s backlog has progressively worsened since at least 2015. While 2023 felt “as though, maybe, the backlogs would get the better of us”, Judge Malosi said recent reviews of rostering and scheduling had created more cautious optimism that the court could start to reduce the build-up. Early results from a new priority-based approach implemented in the Auckland region have been promising: between 1 May and 20 August, the criminal backlog has been reduced by 550 cases, the judge said. “All our efforts to address that backlog need to take into account and address the fact that there is a human toll on both sides of this complex equation.”

Courtroom safety

On safety and security in court, Kibblewhite acknowledged that lawyers were feeling “a more pervasive anxiety” in light of Isaac Aydon’s brutal assault on family lawyer Brintyn Smith in the Whangārei District Court earlier this year. Aydon was sentenced to two years, seven months’ imprisonment.

Safety was “an absolute priority”, he said. The ministry now employed more than 340 court security officers, up from 50 in 2009, with more material increases having been made in the last four years.

The ministry had also invested in a training facility in the Hutt Valley. More emphasis could be placed on courthouse inductions for counsel “so that everyone is fully aware of where the jury alarms are, how to engage them, how to engage with security”.

The state of New Zealand’s courthouses, some of which were in a “sorry state”, was another concern. Kibblewhite said nearly a third of the ministry’s building portfolio had been assessed in 2019 as in a poor or very poor condition.

“At the risk of starting to be repetitive”, underinvestment had also been made in this space over several decades. However, more investment had flown into buildings in the past three years than had been seen in a generation.

New builds were underway in Tauranga and Whanganui, land has been purchased for new courthouses in Waitakere, Papakura and Rotorua, capacity upgrades were set to start at the Manukau District Court and Cabinet had recently agreed to spend $150m on seismic strengthening a raft of courts, including the High Court at Wellington.

Kibblewhite said: “There’s a long list of projects – I won’t name any more of them – but I would just hopefully leave participants on this call with a more optimistic frame.” ■

The court cannot control the volume of its work, but what it can and must do is manage its work as effectively as possible to reduce unproductive time and effort for everybody

Justice David Goddard

Judge Ida Malosi