BRUCE NELSON DAVIDSON V REGISTRAR OF COMPANIES HC WN CIV 2010-485-76

BRUCE NELSON DAVIDSON V REGISTRAR OF COMPANIES HC WN CIV 2010-485-76 27 August 2010IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 2010-485-76UNDER the Companies Act 1993 ("the Act") IN THE MATTER OF an appeal pursuant to s 370 of the Act against the decision of the Registrar of Companies under s 385 of the Act BETWEEN BRUCE NELSON DAVIDSON Appellant AND REGISTRAR OF COMPANIES Respondent Hearing: 12 July 2010 Counsel: C R Carruthers QC and D G Hurd for Appellant H Rennie QC and G Caro for Respondent Judgment: 27 August 2010JUDGMENT OF MILLER JTABLE OF CONTENTS The Bridgecorp group [ 5]The narrative [ 9]The National Enforcement Unit Report [ 34]Misleading prospectuses [ 37]Defaults in payments of principal and interest [ 41]Transactions about remuneration and benefit [ 44]Mr Davidson's representations [ 49]Misleading prospectuses [ 54]Defaults in payments of principal and interest [ 55]Transactions about remuneration and benefit [ 57]Other considerations [ 63]The Deputy Registrar's decision [ 64]Misleading information in prospectuses [ 72]Defaults in payments of principal and interest [ 73]Transactions relating to remuneration and benefits [ 75]Reliance on others [ 78]Just and equitable [ 80]Term of prohibition [ 81]The appeal [ 83]The legislation [ 85]Legislative history and policy [ 87]Analysis of s 385 [ 93]Natural justice [104]Eligibility for prohibition [108]Notice [109]Causation [111]Mr Davidson's conduct [119]Context [120]Mr Davidson's responsibility for identified mismanagement [122]To resign or to stay on? [128]Is prohibition warranted given Mr Davidson's personal qualities? [134]Mr Davidson's conduct: conclusion [138]Term of prohibition [139]Stay [144]Decision [152][1] The Bridgecorp group of companies collapsed in mid-2007 owing investors in its debt securities some $486m. I am told that about 10 cents in the dollar will be returned to them. [2] Bruce Davidson was a director of six companies in the group, including the parent, Bridgecorp Holdings Limited, which he chaired, and two subsidiaries,Bridgecorp Limited and Bridgecorp Investments Limited, which raised money from the New Zealand public. [3] In the fullness of time the Registrar of Companies invoked s 385(4)(b) of the Companies Act 1993, which applies to a person who was within the preceding five years a director or manager of two or more insolvent companies. The Registrar may prohibit such person from being a director or promoter or manager of a company for as long as five years, unless the person satisfies the Registrar that the manner in which the affairs of all, or all but one, of the companies were managed was not wholly or partly responsible for their insolvency or that the power's exercise would not be just or equitable. [4] The Registrar prohibited Mr Davidson for two and a half years from 1 December 2009. From that decision he brings this appeal.The Bridgecorp group[5] The Bridgecorp group was established by its managing director, Rod Petricevic. In 1993 it went into finance, funding property development projects in New Zealand, Australia and Fiji using money raised from the public in New Zealand and Australia. [6] Mr Petricevic controlled about 60 per cent of the shares in the parent, Bridgecorp Holdings Limited. When the group collapsed Bridgecorp Holdings was registered as an Australian company. For that reason, it is not one of the six group companies that the Registrar used for jurisdiction to prohibit Mr Davidson; it is however in liquidation. The group structure is depicted in the following chart, which identifies the six companies: Bridgecorp Investments Limited, Bridgecorp Limited, Bridgecorp Management Services Limited, BNL 2007 Limited, Monice Properties Limited and BFSL 2007 Limited. It also names the directors and records their dates of appointment. Mr Davidson, a senior commercial lawyer, became a director of Bridgecorp Holdings in 1987 or 1988, and chairman in 1988:[7] There were two other non-executive directors of Bridgecorp Holdings, Peter Steigrad and Gary Urwin. The remaining two directors were executives, Mr Petricevic and Cornelis Roest (the chief financial officer). Mr Roest became a director on 17 July 2006, replacing a Mr O'Sullivan, who left after Mr Petricevic and Mr Urwin purported to dismiss him in April 2006. [8] The record establishes that Bridgecorp Holdings had established an orthodox governance structure. The Board, which met monthly, had three relevant committees; audit, credit and remuneration. It appears that they met at appropriate intervals. The audit committee comprised Messrs Urwin, Davidson and Steigrad. An internal auditor, Mr Kumar, prepared monthly reports for the committee. His function is said to have included telling the chairman about any unauthorised transactions. The accounts were of course audited by an external auditor. Cashflow was reported to each Board meeting, and a credit analyst and a credit manager were employed. The credit committee's terms of reference are not in evidence, nor does it appear that Mr Davidson served on it, but in prospectuses Bridgecorp claimed that the committee oversaw credit approval and recovery practices. Mr Davidson was a member of the remuneration committee, which Mr Steigrad chaired. The Board took external advice and secured assurances from management before prospectuses were signed. Its meetings also served as meetings of the subsidiaries' Boards.The narrative[9] For my purposes the narrative can be confined to the sixteen months preceding Bridgecorp's collapse. (Except where necessary, I will refer to the group as 'Bridgecorp' without distinguishing among the companies.) I begin with a brief summary, prepared by the receivers, which illustrates how the group's financial position changed steadily for the worse over the final 12 months. It records declining term investment renewals, falling gross margins and growing loan impairment, together starving the group of cash:Bridgecorp Limited Charging Group (New Zealand) Performance Indicators covering Operations and Solvency – June 2006 to May 2007Month Term Investment Renewals Gross Margin* Impaired % Non Performing Assets/Total Assets Impaired & Past Due Loans/Total Loans Provision for Bad Debts Bank Balance Profit/(Loss) Before Taxation % % % % $'000 $'000 $'000 Jun 2006 61 62 16.2 10.2 5645 13,284 (190) Jul 2006 55 33 17.5 11.3 6004 15,805 840 Aug 2006 53 37 18.0 13.8 7422 11,355 1,639 Sept 2006 51 37 26.0 24.0 8483 4,553 19 Oct 2006 56 36 26.6 24.9 8415 2 1,105 Nov 2006 54 29 28.2 27.5 8609 3,387 883 Dec 2006 48 33 26.1 22.9 9086 6,507 692 Jan 2007 56 23 25.2 21.6 8677 3,308 (176) Feb 2007 54 27 22.4 19.6 8695 649 91 Mar 2007 50 23 22.3 18.2 9833 156 213 Apr 2007 45 21 28.0 23.0 12902 2,415 (8,192) May 2007 47 28 28.7 22.9 17428 16 (4,210)Source: Unaudited Management Information *Gross Margin = Interest and Fee Income/Interest and Commission Expense Percentage 21 September 2007[10] In February 2006 the Australian Securities and Investment Commission ("ASIC") issued a stop order preventing Bridgecorp Finance (Australia) Pty Limited, an Australian subsidiary, from raising money from the public until it had lodged a new or amended prospectus to replace one issued in December 2005. ASIC was concerned about solvency. Although there was no corresponding regulatory actionin New Zealand, ASIC's intervention caused investors to lose confidence; a measure of that is found in the declining rate of renewals. [11] Its then positive cash holdings notwithstanding, Bridgecorp was under financial stress by mid-2006. On 29 June the Board agreed to what became known as the Barcroft transactions. Loans totalling some $76M had earlier been made to interests closely associated with Mr Urwin. They were consolidated into a single loan and sold to Barcroft Holdings Limited, which paid for the loans by issuing notes supported by securities over the loans. The transaction documents were executed on 30 August by the Bridgecorp companies involved although the transactions actually took place on 30 June, Bridegecorp's balance date. The precise nature of the Barcroft transactions is controversial - the Registrar maintains that they were related party transactions under which risk in the loans remained with Bridgecorp - but Mr Carruthers accepted that they involved the sale of outstanding loans to Barcroft and it seems that the security and administration arrangements were designed to ensure that Bridgecorp recovered the same amount it would have recovered had the transactions not taken place. [12] Minutes of a meeting of the Bridgecorp Holdings Board on 27 July 2006 record that Mr Petricevic reported falling investments and difficulty meeting cashflow requirements of the Australian business. For Bridgecorp Limited and Bridgecorp Finance Limited the trustee had requested weekly cash flow reports, ASIC had sought a Court order to finalise monthly reporting requirements, and the accountancy firm Deloittes were to review the Australian loan book. It was suggested that the Board's credit committee should meet weekly. [13] On 17 August 2006 the Supreme Court of New South Wales issued a consent order restraining Bridgecorp Finance (Australia) from raising money from the public until it had lodged a new or amended prospectus. The trustee had prepared a report noting heavy reliance on intra-group transactions and a need for significant additional bad debt provisioning. In response to that report Bridgecorp Finance had taken action to improve its capital position and provisioning, which led to the consent order. It appears that the remedial action included transferring funds from the New Zealand entities.[14] At a Board meeting on 31 August 2006, Mr Petricevic reported that the focus (of management, presumably) was now on getting cash in on due dates, that the Australian consent order required weekly cash flow reports to the trustee and monthly reporting, and that the directors would need to approve new quarterly cash flows. The reinvestment rate in New Zealand had fallen to around fifty-five per cent and there was no new lending in New Zealand. [15] On 23 November the Board adopted a policy statement governing single borrower lending, related party lending, and conflicts of interest in lending. The group's lending manual already provided that loans to one borrower group could not exceed five per cent of the charging group's tangible assets without the unanimous approval of the Board; the policy statement added that if possible the maximum exposure should also not exceed $10m, although it might do so in some circumstances. In future the group should focus on financing transactions between $2m and $5m. The policy statement further recorded that Bridgecorp had made loans to related parties, but the Board recognised a "negative perception" associated with such lending and "the potential for conflicts of interest to be implied", so it had decided that related party lending should only be undertaken where it was in Bridgecorp's best interests. Conflicts of interest might arise where loans to related parties were being considered, so any person involved in the credit decision should excuse himself if he faced an actual or perceived conflict. [16] On 5 December 2006 Fiji experienced a military coup. [17] After the annual general meeting in the same month Mr Davidson tendered his resignation as a director. His reasons have not been clearly explained. It was not the first time that he had taken steps to resign; in April he had threatened to resign over Mr O'Sullivan's dismissal, about which he was not consulted. He was persuaded to stay in April because ASIC's intervention had caused problems, and he was again persuaded to stay in December. He has since explained that he recognised his resignation would alarm the market and felt that the honourable course was to stay to ensure Bridgecorp's survival and prosperity.[18] Two new prospectuses were registered on 21 December 2006. Bridgecorp Limited issued a prospectus seeking up to $500M in term investments secured by first ranking debenture stock. Bridgecorp Investments Limited offered capital notes, being unsecured subordinated debt securities, for a maximum sum of $60M. [19] The prospectuses assured investors that Bridgecorp maintained a high standard of corporate governance:We understand that the decision to invest is an extremely important one. For this reason, we treat the management of your investment very seriously. As part of this, Bridgecorp is committed to ensuring that best practice corporate governance structures and principles are maintained at all times and that the highest ethical standards are adhered to. We have adopted the principles developed by the New Zealand Securities Commission as the framework for corporate governance at Bridgecorp. These principles form the foundation for our Corporate Governance Charter which is available on our website at www.bridgecorp.co.nz.[20] The prospectuses also mentioned Bridgecorp's policies governing related party and single borrower lending, stating that all loans must be made on normal commercial terms and follow credit approval policies, while exposure to a single borrower or group or related borrowers could not exceed five percent of the charging group's tangible assets without unanimous Board approval. [21] Investors' attention was drawn to a substantial list of risks, including the possibility of losses from Bridgecorp's heavy exposure to property markets in Australasia and Fiji. The business plan was premised on the economy remaining stable; any downturn could reduce earnings or the value of Bridgecorp's assets. Bridgecorp Holdings had resolved to support an Australian subsidiary, Bridgecorp Finance Limited (Australia), which had been raising funds in Australia until ASIC suspended its prospectus in February 2006. AUD $15M had been advanced to Bridgecorp Finance Limited (Australia) Limited to allow it to meet its obligations to depositors and borrowers for the period 1 March to 20 May 2006, and Bridgecorp reserved the right to provide further financial accommodation to that company or to Bridgecorp Holdings itself. Further, Bridgecorp had lent $47.7M to a company to partially fund a staged resort development at Momi Bay, Fiji, but the recent coup might adversely affect the value of the security or affect the borrower's ability to repay.[22] Before the prospectuses were issued the Board obtained management reports confirming that Mr Roest and other senior executives (excluding Mr Petricevic) knew of nothing misleading about the prospectuses. [23] On 13 April 2007 Mr Davidson wrote to the directors seeking written reports for a Board meeting the following week. He wanted a list of reports "IN WRITING": cash flows for New Zealand and Australia that were up-to-date and accompanied by up-to-date forecasts, with all key assumptions being made explicit; up to date reports on significant overdue loans in New Zealand and Australia; strategies to deal with a funding deficit of $5m per month in New Zealand; and progress on asset sales. He emphasised that it was now 12 months since problems had surfaced with ASIC in Australia and "triggered so much grief and pain." The year-end reporting cut-off was now 11 weeks away, and action was needed on a number of fronts; he and Mr Steigrad saw the next few weeks as "critical". It appears that he was by now concerned about the quality and transparency of management reporting and frustrated by management inaction. [24] The Board met on 19 April 2007. Mr Petricevic reported that the reinvestment rate had fallen to fifty per cent. Cash flow was being managed daily, and it was necessary to sell at least one of the large assets. Staff had had enough of the current situation. Mr Steigrad observed that with its current property holdings Bridgecorp was unable to produce the cash flows of a finance company. The minutes record that Mr Roest reported orally. He explained the financial position was tight but he did not refer to any problems repaying investors. [25] Mr Davidson took leave between 24 April and 3 June 2007. Mr Steigrad acted as chairman in his absence. [26] During May 2007 Mr Kumar reviewed payments to investors, finding that since 7 February some principal and interest payments had been late. He presented a written report to Mr Roest on 17 May. It disclosed that in February there had been shortfalls on five days, although the deficit was quickly made up and full payments for the month had been made by 28 February. By April, however, payments had been late on 10 days and the amounts involved were substantial, as much as$989,000 for a single day. (It appears that management were selective about repayments, favouring investors whose advisors recommended Bridgecorp.) [27] Mr Roest suggested that the report not be issued given its sensitivity. He also instructed Mr Kumar not to e-mail the report to Mr Davidson, who was overseas. Mr Kumar obeyed these instructions. [28] On 6 June Mr Kumar phoned Mr Davidson and arranged to meet on 14 June. At that meeting the report was presented to Mr Davidson, for whom it was the first notice that payments had not been made when due. Dismayed, he scheduled a special board meeting for 21 June. At that meeting Messrs Petricevic and Roest assured the Board that the companies were still meeting their obligations. The Board adjourned for two days to allow them to prepare reports and obtain information. At the adjourned meeting they threw in the towel, admitting that Bridgecorp had been in default since 20 June. Payments to investors effectively ceased on 25 June and by the end of the month they were $3.9M in arrears. [29] The trustee under the debenture trust deed, Covenant Trustee Company Limited, put some Bridgecorp companies into receivership on 2 July. It is not clear from what source Covenant learned of the defaults, but there is no suggestion that Mr Davidson sought to delay the inevitable; on the contrary, it seems that he was about to contact Covenant when that firm approached Bridgecorp. [30] On 12 December 2008 the National Enforcement Unit gave the Registrar a draft report recommending Mr Davidson's prohibition. The report was delivered to Mr Davidson on 26 June 2009 with a notice identifying the six companies, asserting that he had been a director within the previous five years, and advising that unless he made representations within 10 working days the Registrar intended to consider prohibiting him under s 385. The notice, curiously, was dated 31 March 2009. I discuss the report below. [31] On 30 September Mr Davidson delivered detailed representations to the Registrar, who had agreed to extend time for his response. Again, it will be necessary to discuss the details.[32] The decision was made by a specially appointed Deputy Registrar, Peter Barker, a Wellington barrister. His decision was dated 1 December 2009, but it was not served until 21 December. [33] Criminal charges resulted from the collapse. They are still pending. Messrs Petricevic and Roest face charges brought by the Serious Fraud Office under the Crimes Act 1961. They are said to have stolen money from Bridgecorp by authorising payments to purchase a vessel, the Medici, and for services purportedly provided to Bridgecorp by a woman, Janita Wright, with whom Mr Petricevic was in a relationship. All of the directors are facing charges brought by the Securities Commission under s 58 of the Securities Act 1978. Those charges relate to the two prospectuses, which are said to have been misleading. They were laid in 2008, and they are for trial in the High Court at Auckland on 4 July 2011.The National Enforcement Unit Report[34] The Report ran to 71 pages plus lengthy appendices and annexures, the latter including reports by liquidators and receivers, transaction documents, and minutes. It began by identifying Mr Davidson and the failed companies concerned, recording that each company was in receivership or liquidation for inability to pay its debts and asserting that mismanagement was at least partly responsible for that state of affairs. Under the heading "matters known to the Registrar relevant to s 385 action", it recited:This section sets out information currently known to the Registrar relating to the management of the "Bridgecorp" Group of Companies which fall within s 385(1), and to the extent to which Mr Davidson was involved with, concerned in, or took part in, (whether directly or indirectly) the management of those Companies. This information is set out to inform Mr Davidson of matters which the Registrar will require to be dealt with in any response by him under s 385(4), whether such response relates to all Companies, or any one company. The Registrar's consideration of action under s 385 will relate to all elements and aspects of management of each of the Companies, and is not limited to the information and issues raised in the section of the Report.[35] The Report stated that the directors were responsible for good governance, an integral part of which was the establishment of an independent system to detect,record and remedy governance breaches. As chairman, Mr Davidson must lead the Board in monitoring management, assessing the companies' financial position and performance, and detecting and assessing any material adverse events. He must set the agenda for the Board's performance of its responsibilities and see to it that the Board was properly informed and take a close and active interest in the adequacy of cash reserves, and he must ensure there was an active and functioning audit committee and ongoing internal audit review. Once matters "affecting the ongoing principles, objectives or goals" of the company came to his attention, he could not assume that he was kept fully informed by oral reports made at Board meetings; rather, he must make active inquiries and take all necessary action. In the circumstances that he found himself in, he could not rely on information volunteered by management and fellow directors. [36] Against that backdrop, the Report moved on to note that Bridgecorp raised money from the public, deploying it as working capital for its core business of finance lending. The Report highlighted Bridgecorp's prospectus claims about its excellent corporate governance and its disciplined lending practices before examining three matters which were said to require consideration under s 385: misleading statements in the December 2006 prospectuses, defaults in payment of principal and interest, and transactions involving remuneration and benefit.Misleading prospectuses[37] The Report concluded that the prospectuses were misleading in several respects. They failed to disclose all relevant information essential for an understanding of the Barcroft transactions and two other related party transactions involving Matapo Limited and Compass Capital Limited; all of these should have been treated as related party loans or accounted for as if the transactions had not happened. They failed to identify, assess and manage liquidity and solvency risks facing the Bridgecorp group, which had by then ceased to write new business and was in survival mode. And they failed to disclose that the company had missed interest or principal payments to investors. The misleading statements demonstratedthat the directors had failed, both to exercise reasonable care and to observe the standards of governance that they had promised investors. [38] The substance of the Barcroft transactions was that in June 2006 seven existing loans to entities associated with Mr Urwin had been combined into one loan. The original loans had been the subject of internal audit reports that treated them as related party transactions and identified failures to document and manage the loans. The Board had done nothing to scrutinise the loans, which together amounted to some $76m. After the loans were 'sold' to Barcroft they increased substantially and Mr Kumar reported to the audit committee monthly about them. On 30 November 2006, for example, he highlighted many features of the Barcroft transactions that were potentially prejudicial to Bridgecorp's security position, including loss of control over assets funded by the loans, undocumented drawdowns (it appears that some drawdowns were made on email requests by Mr Urwin or Mr Roest), and absence of feasibility studies, valuations, evidence of pre-sales and any exit strategy. Mr Kumar also complained that Bridgecorp's F40 form had not been completed. That form was a central part of the credit approval process. (When it finally was completed, on 30 April 2007, it contained a litany of serious concerns about the transactions.) Notwithstanding all of this, Mr Davidson signed prospectuses in which the Barcroft transactions were characterised as a sale to an unrelated company in the ordinary course of business. [39] The Report further suggested that the Barcroft transactions highlighted serious governance weaknesses. For example, Mr Urwin was a member of the credit committee, but he did not recuse himself from the committee or the Board at any time when they discussed the loans or the Barcroft transactions. He was allowed to make drawdown requests without supporting documents. Fees paid to him and Mr Petricevic were charged to the Barcroft loan account. [40] Compass bought mortgages having a face value of some $29m from Bridgecorp. The Report alleged that Compass was a subsidiary and should have been consolidated. Matapo had been advanced some $40m which was 'repaid' by Matapo assigning third party receivables (proceeds of sale of properties at Momi Bay, Fiji) to Bridgecorp. This ought not to have been treated as a repayment,because Bridgecorp retained substantially all the risks and rewards of the loan to Matapo.Defaults in payments of principal and interest[41] Turning to liquidity and solvency, the Report contended that the solvency position of Bridgecorp's charging group deteriorated progressively from September 2006. Investor renewals were well below the budgeted rate of 66 per cent. From October Bridgecorp commonly obtained same-day clearances on investors' cheques, and from 7 February 2007 investors' funds were redeemed on a selective basis. Inadequate provision had been made for bad debts, which increased substantially. Bridgecorp was vulnerable to them because it relied on collections from guarantors and recognised potential profits arising from security sharing and profit sharing arrangements and sale proceeds arising from lapsed conditional sale and purchase agreements. Although most loans were secured the security was often poor. Many better quality loans had been sold to other financiers to generate cashflow to pay Bridgecorp's investors. Bridgecorp also had to borrow short-term from other finance companies, causing its gross margins to fall dramatically from 62 per cent in June 2006 to 21 per cent in April 2007. From March 2007 the business was in survival mode, but the Board neither acknowledged that urgent action was needed nor implemented any emergency strategy. [42] The Report recorded that between 7 February 2007 and 2 July 2007, Bridgecorp Limited and Bridgecorp Investments Limited were late in paying more than $17M to debenture stockholders. Those payments were one or two business days late, but until 20 June 2007 all were eventually paid. The late payments were default events under the Secured Debenture Stock Trust Deed between Bridgecorp and the trustee. The prospectuses claimed that Bridgecorp had never missed an interest payment or principal payment, but that had ceased to be true from 7 February. The prospectuses were also amended on 21 March 2007, without correcting this false claim. Further, on 30 April 2007 Messrs Petricevic and Roest supplied the trustee with a directors' certificate confirming that interest and principalhad been paid on due date. The Report accepted that Messrs Petricevic and Roest did not tell the other directors about the late payments. [43] The Report concluded that Mr Davidson's fault lay in the latitude accorded the executive directors in their reporting to the Board. That contributed to the late payments. Knowing of a liquidity crisis and the urgent need to realise assets, Mr Davidson should have initiated a review by April 2007 of both cash resources and the Group's ability to pay its debts when they fell due. By March 2007 the prospectus claim that Bridgecorp prudently managed its exposure to the property sector was clearly misleading, but Mr Davidson failed to do anything, increasing the likelihood and extent of stakeholder losses.Transactions about remuneration and benefit[44] Remuneration was paid to executives via Bridgecorp Management Services Limited, of which company Mr Davidson was the chairman. He and Mr Steigrad were members of the Bridgecorp Holdings remuneration committee and his roles included reviewing the remuneration of directors and senior management. The Report stated that there was no evidence that the remuneration committee ever met or considered the remuneration of Messrs Petricevic or Mr Roest or other related parties, or engaged external consultants to advise on appropriate remuneration levels and structure. [45] The Report recited that between 1 July 2004 and 30 June 2007 Mr Petricevic was paid very large sums comprising base salary of $1,337,012, bonuses of $2,397,442, vehicle expenses of $241,560, back pay of $73,333 and a management fee of $200,000. The receivers had obtained judgment against Mr Petricevic for excess remuneration of $3,192,612. There was no formal signed employment agreement and no resolution stating that Mr Petricevic's remuneration was fair. Mr Davidson should have ensured that there was such an agreement, that any benefits that Mr Petricevic received were disclosed in the interests register, that the remuneration committee had independently reviewed the remuneration, and finally that the Board had authorised and confirmed the terms and conditions of payment.He breached his duty to the company by failing to ensure that Mr Petricevic's remuneration was fair. [46] With respect to other benefits, the Report complained that in September 2006 a personal advance had been made to Mr Petricevic to pay outstanding personal income tax of $576,100. This advance was undocumented. In 2002 Mr Petricevic had also acquired the Medici using Bridgecorp funds of $1.65M. The title to the vessel was taken by Poseidon Limited, of which he was the sole director and shareholder, and Dominion Finance Group lent $1.65M for the purchase. However, that advance was made because Bridgecorp Finance Limited in turn advanced Dominion Finance $1.65M and undertook not to withdraw that advance. Mr Petricevic signed all the agreements and resolutions. He also created a boat sponsorship agreement under which Bridgecorp paid Poseidon $350,000, apparently so that Bridgecorp's clients could use the vessel to watch the America's Cup. The Report acknowledged that Mr Petricevic did all of this without the Board's approval. But all Bridgecorp directors visited the vessel for business purposes, and the Report claimed that Mr Davidson should have ensured that the acquisition was appropriately considered by the remuneration committee and the Board and that the Board had authorised any payment for the benefit of the company. [47] Lastly, between 1 February 2004 and 30 June 2007 Bridgecorp made 41 payments totalling $1,083,434 to an entity called A Bb, allegedly for consultancy, database creation, call centre services and wages. A Bb was Ms Wright. The Report acknowledged that Mr Petricevic had failed to disclose the relationship. [48] In relation to remuneration and other benefits, the Report concluded that the latitude Mr Davidson accorded Mr Petricevic in his reporting to the Board contributed to "ongoing breaches". Mr Davidson relied on information that management volunteered. He could not assume that oral reports at Board meetings kept him fully informed. Although he knew nothing of the financial advantages that Mr Petricevic received, his ongoing lack of leadership permitted the abuses.Mr Davidson's representations[49] Mr Davidson responded through counsel on 30 September 2009. He acknowledged that each of the six companies met one or more of the criteria under s 385(1) of the Act and that he was at relevant times a director of each of them and chairman of the group. He accepted that it was for him to satisfy the Registrar of the matters set out in s 385(4)(b) and noted:As we read it, s 385(4)(b)(i) relates to the management of the companies in the broad sense and without reference to the particular role undertaken by each director. If our understanding is correct, then, while not conceding the issue, it is probably difficult to establish this particular limb.He maintained, however, that it would be neither just nor equitable if he were prohibited. [50] Counsel prefaced the representations by stating that they were made under protest, because the allegation that the prospectuses were misleading was the very same allegation on which Mr Davidson was to stand trial. It was fundamentally unfair and inappropriate for the Registrar to rely on the same matters for prohibition, which is in the nature of a penalty. A director should not be forced to disclose matters relevant to his intended defence of the criminal prosecutions. Counsel repeated an earlier request that the Registrar await the Court's decision in the criminal proceeding. [51] Mr Davidson maintained that the collapse of the companies resulted from a combination of factors including market anxiety about finance companies following the failures of several, political problems in Fiji and liquidity conditions in Australasia, and the dishonest and unauthorised actions of the two executive directors. There was no suggestion of dishonesty or similarly culpable conduct by Mr Davidson. Further, the Registrar's treatment of directors' duties, and especially those of the chairman, was quite wrong. The duties of a director are not co-extensive with best corporate governance principles. The Report assumed that non-executive directors could transact all the affairs of a company, but their position differed markedly from that of executive directors. No New Zealand authority imposed any additional duty upon a chairman, and in suggesting otherwise the NationalEnforcement Unit had misunderstood the decision of Austin J in Australian Securities and Investment Commission v Rich.1[52] Mr Davidson further contended that he complied with his obligations qua director. The Report made basic errors, perhaps because neither the receivers nor the National Enforcement Unit had interviewed him. The Board engaged an independent auditor, appointed an internal auditor, and operated an audit committee. It established a code of conduct and required reports from senior executives. Regular financial reports were required. The Board met regularly, with a proper agenda and detailed papers, and directors were regularly reminded of their responsibilities. In 2004 Mr Davidson had gone to the trouble of producing a formal note for Board members on the subject. Before signing the prospectuses or other public documents, the Board obtained representations from the relevant executives. [53] Mr Davidson then turned to the specific complaints raised in the Report.Misleading prospectuses[54] With respect to the prospectuses, Mr Davidson pointed out that they specified that no director guaranteed the securities and risks were clearly identified, including that of insolvency. The Board properly considered the Barcroft transactions and those relating to Matapo and Compass. The description of the Barcroft transactions had been drafted by Bridgecorp's legal advisors and was accurate. Mr Davidson had relied on external advice that these were not related party transactions. Mr Kumar had expressed concerns, but he was mistaken about lack of security and lack of evidence of pre-sales and or an exit strategy, while other issues that he identified were being worked through. The transactions actually improved Bridgecorp's security position, which had been weak because, following an error by one of Bridgecorp's legal advisers, specific mortgage security had not been taken over land in stage II of the Momi development. Under the Barcroft transactions Bridgecorp obtained the ability to acquire such security. The transactions need not go through lending procedures because there was no new lending, and Mr Urwin's interest was1 Australian Securities and Investment Commission v Rich (2003) 44 ACSR 341.always known. Further advances were attributable to administration 'fees' that had been charged improperly to the loan account.Defaults in payments of principal and interest[55] With respect to liquidity, solvency and bad debt provisions, Mr Davidson observed that the Report's criticisms were based on hindsight. Regrettably, it was now clear that he and the other non-executive directors were repeatedly misled by the executive directors. Nonetheless, in his email of 13 April 2007 he had initiated the very sort of review that the Report suggested. Mr Davidson acknowledged that the level of impaired and non-performing assets and loans had been a real concern to him. He knew too that renewal rates had declined. He monitored what the executive directors were telling him about liquidity, believing that with planned repayments and asset realisations the situation could be managed as the overall size of the business reduced. He knew nothing of non-payments to investors that began in February 2007 or the practice of obtaining same-day clearance on investors' cheques or some of the transactions with other finance companies. [56] Mr Davidson maintained that while he had by April 2007 become frustrated and concerned about the lack of information and action on longstanding issues, including Fiji, he might properly rely on his co-directors, having no reason to doubt their probity and integrity until, at earliest, early June 2007. Counsel submitted that "it is now clear that Mr Davidson and the non-executive directors were lied to, mislead and deliberately starved of information critical to the carrying out of their roles." The Report's claim that he was wrong to rely on oral reports seemed to be beside the point, although he conceded that he had repeatedly asked for written reports.Transactions about remuneration and benefit[57] Mr Davidson stated that, contrary to the Report's claims, the remuneration committee did meet and considered the remuneration of senior executives, and it did take external advice. The Board reached an interim agreement with Mr Petricevicunder which he was to be entitled to an annual salary of $500,000 and an annual performance and profit related payment of up to a further $500,000, paid in arrears, but that was never concluded because Mr Petricevic would not agree. He wanted larger bonuses, paid in advance. So the Board never authorised bonuses for Messrs Petricevic and Roest. The actual remuneration received by Mr Petricevic was neither known to Mr Davidson nor authorised by the remuneration committee or the Board. From time to time Mr Petricevic did bring to the Board recommendations for bonuses for various executives, but none concerned himself or Mr Roest. [58] Mr Davidson criticised the Report's claim that he was responsible for the absence of a signed employment agreement. Agreement could not be reached. It was not realistic to dismiss Mr Petricevic, who controlled more than 50 per cent of the shares in the company. Remuneration was fixed, however, under the interim agreement. A formal agreement would not have altered Mr Petricevic's behaviour, and it was not the directors' task to verify every transaction through the accounts of Bridgecorp Management Services. [59] Nor did the Board know anything about the wholly unauthorised personal advance for tax or Ms Wright and the payments made to her. Not until June 2007 were these things revealed. [60] The facts about the Medici were that Mr Petricevic, without authority, entered an agreement to purchase the vessel for Bridgecorp. He had tried to enlist directors' support and was told that he would have to put a proposal to the Board. He did so, and it was rejected on 21 May 2002. Mr Petricevic then announced that he would buy the vessel himself, but he requested a bridging loan to complete the purchase. He withdrew that request after directors expressed their unwillingness to support it at a Board meeting on 2 August 2002. Mr Petricevic then entered into the funding arrangements described in the Report without the knowledge or approval of the Board. There can be no question but that he acted dishonestly, for he knew that the Board had refused either to buy or to finance the vessel. Bridgecorp did agree subsequently to pay appropriate sums for its use.[61] Mr Davidson acknowledged that in September 2004 the Board learned of Bridgecorp's unauthorised involvement in the Medici purchase. The Board made known its "grave concern at what had apparently occurred", but had to deal with the situation. It decided to acquire the vessel "with a view to its early resale". Mr O'Sullivan was left to manage the sale (which does not seem to have occurred before the group collapsed nearly three years later). [62] In conclusion, Mr Davidson emphasised that since he knew nothing of Mr Petricevic's dishonest actions, nothing he could have done would have brought those actions to light earlier.Other considerations[63] Mr Davidson noted that while he had responded to the many matters raised in the Report, and had shown that there was no relevant breach of duty, the Registrar must also consider whether prohibition was reasonably justified and necessary. Section 385 was directed to the protection of the public, and nothing in the Report required that the public be protected from him. No one regretted the collapse more than he. Acting as Bridgecorp's chairman was no easy task. He had stayed on from a deep sense of duty and loyalty, because it would be "gravely prejudicial" to Bridgecorp had he resigned at that time. He is a person of integrity, possessed of wisdom and judgement. He has given a lifetime of service to the community, including longstanding associations with the Anglican Church and numerous good works. (In submissions before me, counsel expanded on this, referring to several charitable trusts on which Mr Davidson has served as trustee but from which the Registrar's decision now prohibits him.2 )The Deputy Registrar's decision[64] The Deputy Registrar began by refusing to await the criminal proceeding, reasoning that the legal provisions before him were separate and distinct from the2 Charitable Trusts Act 2005, s 16(d).prosecutions, asserting that his decision did not affect other proceedings, and concluding that he saw no need to deviate from the process in s 385. [65] He recorded that it was common ground that s 385(4)(b) applied and the onus was on Mr Davidson. With respect to the statutory test, he stated:Paragraph 4 of [Mr Davidson's] Submissions correctly notes that s 385(4)(b)(i) does not differentiate between individual directors but also correctly notes in paragraph 5 that if Mr Davidson was not able to satisfy me under s 385(4)(b)(i) his individual actions are highly relevant when considering section 385(4)(b)(ii).[66] The Deputy Registrar noted that Mr Davidson had pointed to extrinsic causes outside his influence or control, but Mr Davidson must show that none of the reasons advanced by the National Enforcement Unit were at least partly responsible for the failure of the companies. [67] Mr Davidson had made extensive submissions about the Report's claims concerning the law governing his duties as chairman and a non-executive director. He had not directly raised s 138 of the Act, but the Deputy Registrar had considered it. The Deputy Registrar accepted some of Mr Davidson's submissions about his duties as a director and the extent to which he owed further duties as chairman. Rather than analyse the Report and the submissions on that topic, the Deputy Registrar recorded what he considered were the correct duties and standard of care, testing the allegations in the Report against those duties and standards rather than the higher standards that the National Enforcement Unit had employed. He noted that under s 137 of the Companies Act all directors must exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances taking into account the nature of the company, the nature of the decision, and the position of the director and the nature of the responsibilities that he or she undertook. [68] Turning to Bridgecorp's circumstances, the Deputy Registrar concluded:7.4 I consider that the directors, of an unlisted company that borrows money from the public through a prospectus, should put in place adequate systems of control and reporting. That will mean that directors should be receiving financial information upon which they can rely. To enable directors to rely on the information provided to them it should generally be in writing. Where a CEO or a CFO of a company is also on the board, thedirectors should ensure the system of reporting and receipt of information is not dependent upon those individuals. Also there should be checks and balances such as an audit committee of the directors. The setting up of such structures can and is usually recognised as being part of corporate governance. ... 7.11 I also consider that in considering the nature of the company one must take into account the main activities of that company. In this case the Companies borrowed money to lend to the types of borrowers referred to in the prospectus. That necessarily means that all directors should have some knowledge of how a finance company operates, and financial matters. There is an objective standard against which all directors will be measured when considering the allegations in the Report. 7.12 In the present case I consider that the directors chose to place a higher standard of governance on themselves by stating in the prospectus certain standards and principles ... they had adopted. Because the directors chose to adopt those standards then I consider the NEU is entitled to review whether the directors in fact did what they promised in the prospectus. I have reviewed the relevant NEU allegations taking this factor into account. Having said that I have, as a separate exercise, considered those NEU allegations disregarding this factor and come to the same conclusions.[69] The Deputy Registrar rejected the Report's conclusion that the chairman owed extra duties by reason of his office. Although s 137 contemplated that a different standard might apply, the duties relevantly owed by Mr Davidson in this case were those of all directors. [70] The Deputy Registrar addressed Mr Davidson's submission that appropriate systems and procedures had been put in place, stating:7.13 For completeness I also record here that Mr Davidson has satisfied me that certain of the matters alleged by the NEU that should have been in place for the Companies (the existence of an Audit Committee as just one example) were in fact in place. I have taken those matters into account when considering the NEU allegations and also when considering the [just and equitable ground and the term of the prohibition].[71] He emphasised that prohibition was available although other factors, some of which may have been outside the directors' control, may have contributed to the collapse. Mr Davidson had to satisfy him that none of the reasons advanced in the Report was partly responsible for the companies' failure.Misleading information in prospectuses[72] Mr Davidson failed to discharge that burden with respect to the alleged misleading statements. The Deputy Registrar observed that statements in the prospectuses that the investments involved risk did not necessarily absolve the directors from responsibility for misleading statements. He did not explain how the misleading statements may have been responsible for the group's failure.Defaults in payments of principal and interest[73] The Deputy Registrar summarised the Report and Mr Davidson's submissions, focusing on whether it was reasonable for Mr Davidson to rely on what executives told him. For the period 14 June 2007 until the companies were placed in receivership Mr Davidson did not breach his duty of care, but for the preceding period he had failed to show that each of the matters alleged in the Report was not at least partly responsible for the failure. That was especially so, the Deputy Registrar reasoned, because s 385(4)(b)(i) does not differentiate among individual directors. [74] Mr Davidson also failed to show that he was entitled to rely on the integrity of Messrs Petricevic and Roest. In the particular circumstances of this case and having regard to New Zealand caselaw, "the reporting and monitoring structures that were in place should have been more robust than what they were." The Deputy Registrar did not catalogue the reporting and monitoring structures or specify in what respects they were insufficiently robust. Nor did he explain why defaults in payments to investors might have caused the companies to fail.Transactions relating to remuneration and benefits[75] Again the Deputy Registrar summarised the Report and Mr Davidson's submissions. He accepted that the remuneration committee did meet and did consider remuneration for Messrs Petricevic and Roest. It also took external advice.[76] However, the Deputy Registrar rejected Mr Davidson's claim that it was not within the power of any one director to ensure Mr Petricevic had a formal employment contract. If the directors and the "chief executive" could not agree on this matter then "someone should have gone", either the directors or the chief executive. At the very least, the issue should have led Mr Davidson to question what reliance he could place on Mr Petricevic. [77] With respect to the tax payment, the vessel Medici, and the payments to Ms Wright, the Deputy Registrar appeared to accept that Mr Davidson was unaware of the payments. He concluded that Mr Davidson had been unable to satisfy him that each of the matters alleged by the Report was at least not partly responsible for the failure of the companies.Reliance on others[78] The Deputy Registrar then turned to consider Mr Davidson's reliance on others, noting that under s 138 of the Companies Act a director may rely on reports, statements, financial data and other information prepared or supplied, so long as the director acts in good faith and makes proper inquiry where a need for inquiry is indicated by the circumstances and has no knowledge that such reliance is unwarranted. Mr Davidson had not explicitly referred to s 138, but he was not persuaded that Mr Davidson could successfully invoke it. [79] In particular, Mr Davidson could not rely on anything Mr Petricevic might have said about the companies from at least 2002 onwards, for there were many instances of Mr Petricevic behaving in ways which should have put Mr Davidson on inquiry. He noted as one example Mr Davidson's own conclusion that Mr Petricevic's actions involving the Medici were "dishonest and unauthorised". Further, Mr Davidson had explained that he and the Board had repeatedly requested written reports which did not eventuate. Directors "should not place reliance on persons who do not immediately comply with requests or directions from the Board."Just and equitable[80] The Deputy Registrar stated that he had considered Mr Davidson's submissions and his personal circumstances. There were no allegations of dishonesty against Mr Davidson, he had as chairman established "some processes and procedures" for the Board, and he was devastated by the Group's collapse. But he had been trusting to the point of naivety, which had likely contributed to investors' losses. The Deputy Registrar was not persuaded that it would not be just or equitable for the power to be exercised.Term of prohibition[81] The Deputy Registrar held that prohibition was not intended as a punishment for the companies' failure; the "major focus" was possible risk to the public should Mr Davidson be a manager or director. Mr Davidson possesses high integrity, but he was too trusting of the employees and executive directors. That characteristic warranted prohibition for a period. There were instances earlier in his directorship where any reasonable director would have recognised that Mr Petricevic was untrustworthy. Had Mr Davidson acted then, it is likely that creditors would have suffered less. Mr Davidson had also downplayed problems within Bridgecorp, which the Deputy Registrar appeared to see as the main reason for its collapse. The Deputy Registrar appears to have considered that Mr Davidson should have resigned. [82] On balance, the Deputy Registrar reasoned that a prohibition of two and a half years sufficed. He was satisfied that Mr Davidson would use the period to reflect and take corrective action.The appeal[83] The appeal is brought under s 370 of the Companies Act, which provides:(1) A person who is aggrieved by an act or decision of the Registrar under this Act may appeal to the Court within 15 working days after the date of notification of the act or decision, or within such further time as the Court may allow.(2) On hearing the appeal, the Court may approve the Registrar's act or decision or may give such directions or make such determination in the matter as the Court thinks fit.[84] Counsel agreed that under s 370 the Court must come to its own view of the merits, giving such weight to the Deputy Registrar's decision as the Court thinks fit. Mr Carruthers observed that there was no hearing before the Deputy Registrar, who cannot properly be regarded as having any special knowledge or expertise to which the Court might defer. 3 Mr Rennie urged me, should the appeal succeed, to remit the matter to the Deputy Registrar for further consideration, particularly since the appeal, without objection, addressed issues that were undisputed before the Deputy Registrar.The legislation[85] It is necessary to set out s 385 in full:385 Registrar may prohibit persons from managing companies(1) This section applies in relation to a company— (a) That has been put into liquidation because of its inability to pay its debts as and when they became due: (b) That has ceased to carry on business because of its inability to pay its debts as and when they became due: (c) In respect of which execution is returned unsatisfied in whole or in part: (d) In respect of the property of which a receiver, or a receiver and manager, has been appointed by a court or pursuant to the powers contained in an instrument, whether or not the appointment has been terminated: (e) In respect of which, or the property of which, a person has been appointed as a receiver and manager, or a judicial manager, or a statutory manager, or as a manager, or to exercise control, under or pursuant to any enactment, whether or not the appointment has been terminated: (f) That has entered into a compromise or arrangement with its creditors. (g) that is in voluntary administration under Part 15A.3 Austin Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141.(2) This section also applies in relation to a company the liquidation of which has been completed whether or not the company has been removed from the New Zealand register. (3) The Registrar may, by notice in writing given to a person, prohibit that person from being a director or promoter of a company, or being concerned in, or taking part, whether directly or indirectly, in the management of, a company during such period not exceeding 5 years after the date of the notice as is specified in the notice. Every notice shall be published in the Gazette. (4) The power conferred by subsection (3) of this section may be exercised in relation to— (a) Any person who the Registrar is satisfied was, within a period of 5 years before a notice was given to that person under subsection (5) of this section (whether that period commenced before or after the commencement of this section), a director of, or concerned in, or a person who took part in, the management of, a company in relation to which this section applies if the Registrar is also satisfied that the manner in which the affairs of it were managed was wholly or partly responsible for the company being a company in relation to which this section applies; or (b) Any person who the Registrar is satisfied was, within a period of 5 years before a notice was given to that person under subsection (5) of this section (whether that period commenced before or after the commencement of this section), a director of, or concerned in, or a person who took part in, the management of, 2 or more companies to which this section applies, unless that person satisfies the Registrar— (i) That the manner in which the affairs of all, or all but one, of those companies were managed was not wholly or partly responsible for them being companies in relation to which this section applies; or (ii) That it would not be just or equitable for the power to be exercised. (5) The Registrar must not exercise the power conferred by subsection (3) unless— (a) not less than 10 working days' notice of the fact that the Registrar intends to consider the exercise of it is given to the person; and (b) the Registrar considers any representations made by the person. (6) No person to whom a notice under subsection (3) of this section applies shall be a director or promoter of a company, or beconcerned or take part (whether directly or indirectly) in the management of a company. (7) Where a person to whom the Registrar has issued a notice under subsection (3) of this section appeals against the issue of the notice under this Act or otherwise seeks judicial review of the notice, the notice remains in full force and effect pending the determination of the appeal or review, as the case may be. (8) The Registrar may, by notice in writing to a person to whom a notice under subsection (3) of this section has been given,— (a) Revoke that notice; or (b) Exempt that person from the notice in relation to a specified company or companies. Every such notice shall be published in the Gazette. (9) Every person to whom a notice under subsection (3) of this section is s to comply with the notice commits an offence and is liable on conviction to the penalties set out in section 373(4) of this Act. (10) In this section, company includes an overseas company that carries on business in New Zealand.[86] The section appears in Part 21, dealing with offences and penalties. That Part also includes s 383, which allows the Court to disqualify a director who has persistently failed to comply with companies or securities legislation or acted in a reckless or incompetent manner.Legislative history and policy[87] Section 385 was first introduced in 1988, as s 189A of the Companies Act 1955. Introducing the Bill, the Minister of Justice, The Rt Hon Geoffrey Palmer, as he then was, highlighted public concern about persons using the benefits of limited liability companies to speculate at the expense of creditors and companies. The power was to be exercisable where a company was in financial difficulties attributable to mismanagement, and it would be for the respondent company officer to show that he or she was not responsible for the mismanagement that caused the company's financial difficulties:It has become more apparent, particularly since the sharemarket crash of last year, that there are persons who have been directors who have demonstrated that they are not fit and proper persons to be involved in the management ofcompanies. There is growing public concern about persons who use the benefits of limited-liability companies to wheel and deal for their own benefit, leaving behind unpaid creditors and companies in financial difficulties. The Companies Act already contains the power for the court to prohibit persons from being involved in the management of companies on the ground, amongst other grounds, of reckless management. There is a need for a speedier and more efficient means of dealing with the problem. ... The scheme of the new section 189A is that the Registrar of Companies can issue a notice to a person prohibiting that person from managing companies for a specified period not exceeding 5 years. The registrar's decision to issue a notice must first be confirmed by the Securities Commission after it has considered the information in the registrar's possession and any representation made to the registrar by the person concerned. The circumstances in which the notice can be issued are, in effect, that a company is in financial difficulties, that those financial difficulties are attributable to mismanagement, and that the person concerned is an officer of the company. The person concerned bears the onus of satisfying the registrar and the Securities Commission that he or she was not responsible for the mismanagement that caused the company's financial difficulties.[88] It is of course shareholders rather than directors who benefit from limited liability status. Irresponsible risk-taking by directors and managers is accurately characterised as an agency problem vis-a-vis shareholders and perhaps creditors.4Limited liability gives shareholders an incentive to behave opportunistically with respect to creditors, while directors and managers may experience incentive and opportunity to act in their own interests rather than those of either shareholders or creditors. Prohibition raises the costs of such behaviour, not by recovering monies lost by creditors or shareholders but by barring directors and managers from office. [89] There are no cases under s 385 (or its predecessor), but Gault J discussed the predecessor to s 383 in First City Corporation Limited v Downsview Nominees Limited, characterising it as providing for "denial of the privilege of participating in the conduct of business under the shelter of limited liability. It is penal in nature although the disqualification should be approached with protection of the public in mind rather than punitively." 54 Peter Watts "Company Law Commentary" [1992] NZRLR 219; Richard Williams "Disqualifying directors: A Remedy worse than the Disease?" (2007) 7 Journal of Corporate Law Studies 213.5 First City Corporation Limited v Downsview Nominees Limited [1989] 3 NZLR 710 at 766.[90] Counsel debated whether prohibition is indeed penal in nature, referring toRich v ASIC, an Australian prohibition case. 6 In issue was the non-discovery of documents on the ground that they might expose the appellant to a penalty. The majority in the Court of Appeal of New South Wales held that the nature of a sanction depends not only on its effect but also on its purpose in its legislative context, concluding that prohibition of directors is protective rather than punitive in character. [91] I need not categorise prohibition under s 385 as one thing or the other. As Gault J observed, it is both. As I explain below, the legislation initially examines mismanagement contributing to insolvency, without focusing on the conduct of any given director. Causation having been established, the Registrar may prohibit anyone falling into the class of directors and managers. Prohibition is aimed not at remedying wrongs done to shareholders and creditors of the insolvent company but at protecting the public from unscrupulous or incompetent directors in future, deterring others, and setting appropriate standards of behaviour. 7 At the same time, any given director or manager inevitably experiences prohibition as a punishment; it is an adverse consequence of an inquiry into his or her involvement in an insolvent company. [92] As first enacted, the legislation envisaged that the Registrar of Companies could not act without the approval of the Securities Commission. In its Report preceding the Companies Act 1993 the Law Commission would have excluded the power, reasoning that it was too sweeping for core companies legislation.8 However, the power was reinstated in the 1993 Act, without the requirement for Securities Commission approval.6 Rich v Australian Securities and Investments Commission [2004] HCA 42, 220 CLR 129.7 Re Blackspur Group plc [1998] 1 WLR 422 at 426 per Lord Woolfe MR; Rich v Australian Securities and Investments Commission [2004] HCA 42, [2004] 220 CLR 129 at 145.8 Law Commission Company Law: Reform and Restatement (NZLC R9, 1989) at [731].Analysis of s 385[93] Counsel agreed that s 385(4)(b) applies in this case, but to set it in context I must examine the section as a whole. [94] Section 385 applies to a company that is unable to pay its debts as they fall due, or on which execution has been returned unsatisfied, or which has been put into receivership, or which has entered into a compromise with its creditors, or which is in voluntary administration. The theme is business failure, evidenced by insolvency. [95] Prohibition may follow where the qualifying company's plight resulted wholly or in part from the manner in which its affairs were managed. (I put the onus to one side for the moment.) So the legislation requires a causal relationship between management of the company's affairs and its qualifying circumstances. [96] There is a sense in which failure always results from management, for a company must act through human agency. However, Mr Rennie accepted that the section's purpose is that of disqualifying directors and managers who are not fit and proper persons to act in those capacities; it is aimed at mismanagement. Both counsel assumed that, for a director, some departure from the standard of care, diligence and skill set by ss 137 and 138 of the Act will be required. [97] I take a somewhat different view. I accept that the section is aimed at those who through some want of integrity, skill, judgement or industry are not suitable directors or managers. They may well have behaved in ways that breach a director's duties and standard of care under ss 131 - 137, and the Registrar must recognise that under s 138 a director is entitled to rely on others. But ss 131 - 137 address an individual director's accountability to shareholders and creditors of a company which the director has already served, while s 385 is protective and forward-looking. The Registrar's inquiry is addressed initially to mismanagement of the company's affairs and its causal connection to insolvency, not the behaviour of individual directors. Such mismanagement having been identified, all of the company's directors and managers are eligible for prohibition. The power to prohibit them is broad and discretionary in nature. When exercising it the Registrar is not confined toconduct that caused the company's insolvency; all of the individual director's attributes and conduct in office may be taken into account. [98] In particular, s 385 does not specify that the individual director or manager whose prohibition is in issue must be responsible for the mismanagement. I am unable to accept Mr Carruthers' submission that subsection 4(a) should be read as if it stated "a director ... of a company ... was wholly or partly responsible for the company being a company to which this section applies." That is not the ordinary and natural meaning of the statutory language. Rather, if the company was mismanaged any director or manager within the period of 5 years preceding the Registrar's notice is eligible for prohibition provided the mismanagement caused its insolvency in whole or in part. [99] The statutory language being plain, I need not resort to purpose, but four considerations support the literal meaning that the mismanagement need not be that of the individual respondent: a) Any director or manager who held his or her office or position when the mismanagement that caused the company to fail occurred had the opportunity to prevent it or, if it could not be prevented, to resign; b) There are substantial information asymmetries between the company's officers and the Registrar, such that it might be impossible for the Registrar, without exhaustive investigation, to determine which of them was responsible; c) The section establishes a simple and swift process, with no provision for hearing. That suggests the power has a protective, even precautionary, purpose; d) For reasons outlined below, the Registrar is nonetheless able to take the individual's conduct and qualities, including his or her contribution to the company's failure, into account when deciding whether to prohibit, and for how long.[100] Of course the Registrar does not wield the power against a Board and management team collectively; rather, each respondent must be examined individually in all the circumstances of the case. The power is discretionary; s 385(3) and s 385(4) both provide that the Registrar "may" exercise it. Like any other discretionary power, it must be exercised for the statutory purpose, that of excluding from company management those who are unsuited to it. 9[101] I record that while Mr Rennie accepted that the Registrar must consider the position of the individual director or manager, he suggested that the ability to do so is found in subsection (4)(b)(ii) (prohibition not just and equitable). While that is true so far as it goes, in my opinion the Registrar's duty to focus on the individual must be located in the discretion. If that were not so, a director would find it easier to escape prohibition under (b), which is aimed at the serial or large-scale transgressor, than under (a). [102] Under subsection (a) there is no onus, indeed no prosecutor on whom the onus might fall. The subsection simply requires that the Registrar be satisfied, having given the respondent notice and considered any representations that he or she may make, that prohibition is appropriate. An onus is imposed on the respondent under subsection 4(b), which applies when the respondent was a director or manager of two or more qualifying companies. He or she need not be a serial transgressor; it is enough that a single collapse may have resulted in two or more related companies failing. The respondent may show that the manner in which the affairs of the companies, or all but one of them, were managed was not wholly or partially responsible for their status. Alternatively, the respondent may show that it would not be just and equitable for the power to be exercised. [103] By way of summary, the Registrar's inquiry should follow the following steps: a) Does the company, or do the companies where there were more than one, qualify under subsection (1);9 McEvoy v Dallison [1997] 3 NZLR 11.b) Was the respondent a director or manager of the company or companies within the 5 years preceding the Registrar's notice; c) Where there is one qualifying company: i) was the manner in which the company's affairs were managed a contributing cause of its qualifying status; and if so ii) ought the Registrar exercise the discretion to prohibit the respondent in all the circumstances; d) Where there are two or more qualifying companies: i) has the respondent shown that: (i) the manner in which the affairs of the companies, or all but one of them, were managed was not a contributing cause of their qualifying status; alternatively (ii) it would not be just and equitable to prohibit the respondent in all the circumstances; and ii) if the respondent has not satisfied the Registrar of either of those things, ought the Registrar exercise the discretion to prohibit the respondent in all the circumstances. e) Where prohibition is appropriate, what is the appropriate term.Natural justice[104] The legislation says very little about process, requiring only that the Registrar must not prohibit a person unless he or she receives not less than 10 working days' notice of the Registrar's intention to consider prohibition and the Registrar considers any representations that the respondent may make. No hearing is required.[105] However, the Registrar acknowledges an obligation to afford the respondent natural justice, and the following practice has been adopted: the National Enforcement Unit of the Companies Office prepares a report and recommendations; that report is given to the respondent with the notice required under s 385; communications may ensue between the respondent and the Unit; if the Unit maintains that prohibition is warranted, the Report and the respondent's representations are submitted to a specially appointed Deputy Registrar of Companies for decision. [106] The content of the right to natural justice depends on the power being exercised and the circumstances. The limited process in s 385 does not preclude additional requirements. 10 Counsel did not discuss whether the Registrar is subject to s 27(1) of the New Zealand Bill of Rights Act 1990 when acting under s 385. In my opinion the Registrar is a public authority under that subsection, and decisions under s 385 affect the rights, obligations or interests of respondent directors and managers. 11[107] Accordingly, the Registrar must give the respondent reasonable notice of the case he or she is to meet. 12 In circumstances where the respondent normally knows much more about the company's management than does the Registrar, that requirement is unlikely to be onerous; it may suffice that the respondent knows the general nature of the allegations. 13 But as a practical matter, some investigation must normally precede the Registrar's notice; except in the simplest of cases, the Registrar could scarcely act without first inquiring into the company's circumstances. That investigation is likely to isolate instances of company mismanagement or features of the director's conduct or qualifications which should be identified when notice is given if they are to inform the Registrar's decision.10 Daganayasi v Minister of Immigration [1980] 2 NZLR 130 at 141-142.11 Combined Beneficiaries Union Inc v Auckland City COGS Committee [2008] NZCA 423.12 Ali v Deportation Review Tribunal [1997] NZAR 208 at 220.13 Russell v Duke of Norfolk [1949] 1 All ER 109 at 117-118.Eligibility for prohibition[108] It is common ground that each of the six companies qualifies through its inability to pay its debts and that Mr Davidson was a director of all of them within the five years preceding the Registrar's notice. It is of some moment that he was a director for most or all of that time in each case.Notice[109] Mr Carruthers did not argue that the Report failed to give notice of the complaints, but he did contend that the Deputy Registrar departed from the Report's approach and standards and allegations. Notice of these changes ought to have been given notwithstanding that some of them arose from Mr Davidson's submissions. In particular, the Deputy Registrar abandoned the claim that a chairman owed larger duties, abandoned any reliance on best practice governance, invoked ss 131-137 although they had not been mentioned in the Report, and treated Mr Davidson as relying on s 138. Counsel acknowledged that the standards applied were less onerous than those in the report. But the Deputy Registrar failed to consider the position of non-executive directors, who are not expected to be involved in the company's affairs. Factual errors included reliance on the Medici transaction as confirmation that Mr Davidson could not rely on Mr Petricevic although Mr Davidson knew nothing of the transaction in 2002, when it was entered. Nor was the Registrar right to attach significance to Mr Petricevic's preference for oral reports to the Board. [110] I reject these submissions. Mr Davidson was put on notice of the aspects of the group's affairs that concerned the Registrar, and the Deputy Registrar relied on the same general allegations. Mr Davidson had ample opportunity to comment. He introduced new information, but he need not be given a further opportunity to comment on the Deputy Registrar's analysis of his representations. Mr Rennie accurately observed that Mr Davidson implicitly argued for the standards that the Deputy Registrar adopted, albeit without referring expressly to s 138. I discuss the Medici transaction below.Causation[111] The Deputy Registrar examined the three instances of mismanagement identified by the National Enforcement Unit, stating that he was not persuaded that the mismanagement had not caused the companies to fail. Mr Carruthers argued, however, that neither the National Enforcement Unit nor the Deputy Registrar took the correct approach to causation. [112] There is force in that submission. It was not enough simply to rely, as Mr Rennie did in response, on the onus. Mr Davidson having put causation in issue, the Deputy Registrar must consider whether insolvency resulted in part from mismanagement. He made little reference to causation in his reasoning. Analysis was needed, for it is not self-evident that some of the identified instances of mismanagement contributed to the failure of the companies. For instance, failure to pay debenture holders on due date is certainly a symptom of insolvency, but it is not in itself a cause. Similarly, misleading statements in the prospectuses may have led to the group raising more money than it would otherwise have done, but this may be described as a cause of insolvency only in the indirect sense that had the prospectuses been accurate the group would have ceased to trade earlier, with less extensive losses. One of the transactions involving remuneration and benefits, the Medici purchase, preceded the collapse by some years and resulted in Bridgecorp owning the vessel, with (at that time) no apparent loss suffered. I suspect that the Report and the Deputy Registrar focused on these examples because they combined two inquiries, one into the causes of the group's insolvency and the other into Mr Davidson's conduct and qualities. In the result, they focused on bad governance or misleading statements for which Mr Davidson might be responsible, without closely analysing their contribution to insolvency. Responsibility for this approach appears to lie with the National Enforcement Unit, whose report formed the basis of the Deputy Registrar's decision. [113] The bare facts of Bridgecorp's collapse suggest that the group's insolvency resulted in substantial part from a serious and sustained failure of management. The trustee's report in ASIC's action pointed to inadequate bad debt provisioning and undue reliance on intra-group transactions. The record before me contains ampleevidence of poor risk management practices, including low quality lending against weak security, allowing interest to be paid only on repayment of principal, and lending substantial sums to single borrowers or to related parties of Bridgecorp itself. Bridgecorp had put substantial sums into what were in substance its own property developments, leading to Mr Steigrad's belated but accurate observation of 19 April 2007 that it was unable to produce the cashflows of a finance company. When coupled with the group's heavy reliance on continued investor confidence, this was a vulnerable business model. The Board itself recognised this late in the day, adopting the 23 November 2006 policy statement about single-borrower and related party lending partly because of "negative perception" of related party lending. New lending having stopped, however, that was too little, too late to prevent insolvency and forestall the massive losses that creditors are now realising. [114] The Report did not approach causation in this way (although the matters I have just summarised were all mentioned). In the circumstances, I will address causation by inquiring whether the Report sufficiently establishes it, when considered with Mr Davidson's representations. I focus on those aspects of the Report that might be said to reflect bad management for which the Board generally was responsible. I recognise that care must be taken to avoid hindsight bias. If the group's insolvency was partly caused by mismanagement, it is also necessary to consider Mr Davidson's conduct. I address that in the next section of this judgment. [115] I find that that the Deputy Registrar was right to conclude that Mr Davidson failed to show absence of causation. Several features of the evidence lead me to that conclusion. [116] The first concerns the Medici purchase. It happened in 2002, long before the collapse, and by September 2004 Bridgecorp itself owned the vessel, an asset which might have been sold to repay the advance used to purchase it. So its significance is not that the funds invested in the vessel contributed to the 2006-2007 cashflow crisis. Rather it is - and was in 2004 - unmistakeable evidence of Mr Petricevic's dishonesty, his sense of entitlement to group funds, and his unwillingness to accept the Board's authority. The Deputy Registrar rightly attached significance to the transaction, for it established that by September 2004 the Board knew that relianceon Mr Petricevic was wholly unwarranted. Had it thereafter insisted on closer accountability and systems that reported any unauthorised use of money, Mr Petricevic would have been unable to plunder the treasury and the group may not have entered other imprudent and unauthorised transactions. There were numerous such transactions, small and large, and I do not understand it to be in dispute that they collectively contributed to the group's insolvency. [117] The second concerns the Barcroft transactions, which exceeded the five percent threshold for single-borrower lending. I am prepared to assume (without deciding) that Barcroft was not a related party. Nonetheless, the transaction involved in substance the aggregation of seven loans into one very large one, all committed to a single property development in Fiji. Bridgecorp created a new loan account for Barcroft, which had 'paid' for the seven loans by issuing notes. Between 30 June and and 30 November 2006 the Barcroft loan grew to $90m, and by 30 April 2007 it was $122m. Some of the increase is explained by accrued interest (it appears that about $865,000 per month was capitalised to the loan account) and some by fees the legitimacy of which is in doubt, but the interest contributed to the eventual loss and there were substantial further advances including Mr Urwin's salary (presumably in his capacity as a borrower) and that of Mr Petricevic's son. Most of these advances appear to have ceased after the coup on 5 December 2006. [118] The third concerns the Board's delay in addressing the group's worsening financial situation, a matter which the Report emphasised when addressing liquidity and solvency. The Barcroft transactions were agreed orally and consummated within two days, settlement occurring on 30 June 2006 and documentation some time later. Such extraordinary haste on the eve of balance date compels the inference that Bridgecorp needed to remove existing Fijian (and related party) loans from its statement of financial position. That is clear evidence of concern about the group's financial state, which the Board was otherwise remarkably slow to address. I have mentioned the monthly reports from the internal auditor about Barcroft. Of course Barcroft was only one dimension of the group's troubles, as Mr Davidson's 13 April 2007 memo confirms; he mentioned falling investment renewals, bad loans and slow asset sales. That memo shows how belated was the Board's reaction to a financial crisis that had loomed since ASIC intervened a year earlier. Inaction was all themore inexcusable when during the same period Bridgecorp issued the December prospectuses, the reliability of which should have been of vital concern both at the time of issue, only weeks after the coup, and subsequently.Mr Davidson's conduct[119] I turn to consider Mr Davidson's conduct. It is convenient to address the just and equitable limb of s 385(4)(b) and the discretion to prohibit together, since the same considerations arise. As noted above, this phase of the analysis is not confined to conduct that contributed to insolvency (although I focus on that because the Registrar did so). It includes, in particular, his decision to remain in office and his personal qualities.Context[120] Mr Davidson emphasised in his representations that he is not an accountant but rather a commercial lawyer. Although experienced in business, in financial matters he relied on management and on other directors who were better qualified. For example, he stated that other directors, with relevant expertise, were more closely involved in the Barcroft accounting issues. In relation to the group's worsening financial position, he stated that the Board were repeatedly assured that performance was in line with budgets, suggesting either that the Board did not receive orthodox monthly management accounts or that he did not read them. With respect to the sharp decline in margins, he did not recall discussions and may not have been as closely attuned to the issue as other directors. He maintains that in relation to financial matters he was entitled to rely on managers and fellow directors under s 138. [121] These observations lead me to the conclusion that Mr Davidson was not fully qualified for the office that he held. I accept that the standard of care required of a director depends on his or her position and responsibilities, but it also depends on the nature of the company and any given decision being made. 14 A director must14 Section 137.understand the fundamentals of the business, monitor performance and review financial statements regularly. 15 It follows that a degree of financial literacy is required of any director of a finance company. Without it, Mr Davidson could scarcely understand the business, let alone contribute to policy decisions affecting risk management and monitor the company's performance, yet his presence and reputation might encourage investors to believe that the group was well managed. Nor could he delegate performance monitoring to other directors, especially when he was one of only two who were independent. (Because of his status as a major borrower I do not characterise Mr Urwin as independent, although he was designated non-executive.)Mr Davidson's responsibility for identified mismanagement[122] I begin by examining Mr Davidson's conduct in the Medici transaction. It is common ground that he knew nothing about it initially, the Board having refused either to buy or to finance the vessel. But when the truth was revealed in September 2004 no disciplinary action was taken; the Board merely "made known its grave concern". [123] I accept Mr Carruthers' submission that Bridgecorp had established an orthodox governance structure in which, among other things, an internal auditor reported directly to the audit committee, so allowing the non-executive directors to monitor management's compliance with the group's policies and procedures. But form is not conclusive evidence of substance and the evidence demonstrates abundantly that substance was wanting. Unauthorised lending to an executive should have been reported to the audit committee immediately it happened. It was not, showing that internal controls were incomplete or ineffective, yet when it came to light the Board apparently did nothing to ensure that it could not happen again. It is not the misconduct but the Board's failure to respond to it that evidences bad governance. The predictable sequel was that the Medici financing was merely the first of many occasions on which Mr Petricevic took money without authority and without the Board being told about it.15 Australian Securities and Investment Commission v Adler [2002] NSWSC 171 at [372].[124] Mr Davidson criticised as naive the Registrar's complaint that the Board was content to receive oral reports from Mr Petricevic, saying that the form of reports is beside the point. I think not. There is a large difference between a written report, usually provided some days before a meeting, and an oral report at the meeting. Without the opportunity to prepare, directors are in a poor position to examine critically what they are being told. Without a record of what was reported, they are in a poor position to demand accountability if it turns out that what they were told was wrong. No doubt for these reasons, the Board did ask for written reports; Mr Davidson stated in his representations that they were "repeatedly requested". He was still requesting them in April 2007. His failure to insist is compelling evidence that the Board was not in charge at Bridgecorp. [125] I have identified the Barcroft transactions as a contributing cause of insolvency. They were preceded by critical internal audit reports about the underlying loans, and after they were consummated Mr Kumar repeatedly raised serious concerns about them with the audit committee. I have referred to these at [38] and [118] above. Mr Davidson observes that Mr Kumar had been appointed at the Board's direction. He contends that the internal audit reports were not always correct; in particular, the transactions improved Bridgecorp's security and there was evidence of an exit strategy (complete the development and sell the residential sections and hotel), valuations and pre-sales. He knew further advances were being made to the Momi project and that there were delays in completing the F40 form, but he says that the issues were being worked through methodically. He does not now dispute that the F40 form was required. In my opinion this was manifestly lending to a new borrower and lending processes ought to have been followed. It is indisputable that there were serious failings in documenting a loan proposal and, in consequence, evaluating the risks of the transactions. That should have been done before the transactions were settled in June 2006. The internal auditor clearly drew those concerns to Mr Davidson's attention, but little was done and lending continued. [126] Mr Davidson must also accept responsibility for not insisting that Mr Urwin play no part in the Board's decisionmaking. It is not sufficient that everyone knew of Mr Urwin's interest. Some procedure such as that adopted in the November 2006policy statement should have been established long before. On the evidence before me, it does not seem that the option of cutting Bridgecorp's losses in Fiji received serious consideration at any time. [127] Lastly, Mr Davidson cannot escape a significant share of responsibility for the delay in addressing the cashflow crisis. He must have understood why the Barcroft transactions were being executed on balance date, and the minutes of the 27 July and 31 August 2006 meetings confirm that the Board knew of the crisis. He knew by then that new lending in New Zealand was at a standstill. His memo of 13 April 2007 testifies to the Board's inaction; it is clear that the Board did not have up to date financials, and the memo is fairly summarised as a belated call for information and a documented recovery plan. He concedes that he was frustrated by management's delays, but until April he clearly thought it was enough to monitor what management were telling him about liquidity and asset realisations. He failed to insist either that the Board was fully informed of its financial position or that a timely recovery plan was formulated and followed.To resign or to stay on?[128] The Board's weakness probably stemmed from Mr Petricevic's majority shareholding. In his representations Mr Davidson argued that dismissal was unrealistic both for that reason and because Mr Petricevic's was the public face of Bridgecorp. Mr Carruthers submitted that the Deputy Registrar was wrong to suggest that Mr Davidson ought to have resigned; indeed, the Registrar still has not explained how Mr Davidson's resignation would help Bridgecorp or its creditors. Rather, Mr Davidson acted honourably by remaining in difficult circumstances. [129] I accept that Mr Davidson acted from honourable motives. He believed both that the group could work through its financial difficulties and that had he resigned at any time after ASIC first intervened a crisis of market confidence would have followed, with results gravely prejudicial to Bridgecorp. [130] However, that is merely to illustrate the Registrar's point. Faced with large information asymmetries and without much expertise, lay investors may elect to relyon the personal reputations of directors and managers. Implicit in Mr Davidson's no doubt well-founded belief that resignation would harm Bridgecorp is an acknowledgement that his presence, as a chairman of good reputation, reassured investors that Bridgecorp was well governed and managed notwithstanding that the managing director controlled the group. To the extent that he took it upon himself to comfort investors about the quality of Bridgecorp's management, however, the metaphor of the canary in the mineshaft is not entirely misplaced. Because he could not practically dismiss Mr Petricevic, he could warn investors of serious internal management difficulties only by resigning. [131] In hindsight there can be no doubt that Mr Davidson ought to have resigned, probably when Mr Petricevic's character and attitude towards the Board stood so unmistakeably revealed in September 2004. He maintains, however, that in late 2006 he had every reason to believe that it was in Bridgecorp's best interests that he remain while the group worked through its problems. I do not agree. He had every reason to believe that Bridgecorp was in worsening financial difficulty. He knew of clear warning signs that a cashflow crisis confronted the group – ASIC's intervention many months earlier, the motivation for the Barcroft transactions, multiple indicators of declining financial performance, the internal auditor's reports, and the belated adoption of tighter controls on single-borrower and related party lending. [132] I also observe that Mr Davidson spoke in his representations mostly of Bridgecorp's interests. Under s 385 the interests of creditors also matter. Directors ought to have scrutinised Bridgecorp's performance and prospects critically before going to the market for more money in December 2006. Those who entrusted money to them under the new prospectuses could be forgiven for asking in what sense Mr Davidson acted in their interests by remaining in office. [133] In short, I do not accept Mr Davidson's view that his resignation would have harmed Bridgecorp; on the contrary, by December 2006 he could have done the group and its creditors no greater service. Further, he had before him at that time the evidence needed to reach that conclusion. I acknowledge his regret that, having decided to resign at that time, he allowed others to persuade him to stay in what he mistakenly but genuinely saw as Bridgecorp's interests.Is prohibition warranted given Mr Davidson's personal qualities?[134] It is common ground that Mr Davidson is a man of integrity with an admirable record of community service, much of it apparently unheralded. He is also a highly regarded lawyer. Bridgecorp's collapse has caused him much distress. In these circumstances, Mr Carruthers submitted, the public needs no protection from Mr Davidson. On the contrary, prohibition prevents him from continuing to serve as trustee on several charitable trusts. [135] Mr Rennie responded that Mr Davidson has shown himself to be too trusting and such a person may endanger investors no less than an active wrongdoer. In his own representations, Mr Davidson had stated that he is a man of faith and integrity and he had trusted, sometimes to the point of naivety, that others shared similar values. If community organisations wish to have Mr Davidson act as trustee, exemptions can be sought under s 385(8). [136] I accept that the public has nothing to fear from Mr Davidson. He has learned a painful lesson and I expect that his trusting nature will not again betray him in a commercial setting, nor will he accept an office for which he is not fully qualified. Specific deterrence is not required. I accept too that there is no reason for concern about Mr Davidson serving charitable trusts of the sort that he has identified, although that can be addressed through exemption applications. [137] However, prohibition serves several purposes. Protection of the public from an individual director is one of them. The others are standard-setting and general deterrence. They assume importance in this case, for Mr Davidson's lapses point to a failure to appreciate the nature and extent of his responsibilities and his excuses point to a need to set standards that require rather more of a director than mere honesty. For the reasons given in [121] he was unwise, in my opinion, to rely on more financially literate directors. He was unwise too to rely, when the warning signs of insolvency confronted him, on a managing director whose unreliability and unwillingness to accept the Board's authority had long been established. For these reasons prohibition is both warranted and necessary.Mr Davidson's conduct: conclusion[138] The Deputy Registrar did not err by deciding to prohibit Mr Davidson.Term of prohibition[139] Mr Carruthers argued that the Deputy Registrar wrongly decided, when considering the term, that prohibition is not a punishment. He repeated that the Deputy Registrar was wrong to conclude that Mr Davidson ought to have resigned, that it was unfair and insulting to treat Mr Davidson as a gullible fool from whom the business community need protecting, and that the Registrar was wrong to criticise Mr Davidson for invoking external contributing causes of the collapse, such as the Fijian coup. [140] It will be apparent from what I have already said that I agree with the Deputy Registrar that Mr Davidson downplayed the role that poor governance played in Bridgecorp's collapse and failed to acknowledge that Mr Petricevic demonstrated his untrustworthiness early on. Although there was no dishonesty, indeed no impropriety of any sort, on Mr Davidson's part, the case is nonetheless a serious one, in which sustained mismanagement of the Bridgecorp group has led to massive investor losses. For the reasons I have given Mr Davidson cannot escape his share of responsibility by pointing to external problems and Mr Petricevic's behaviour. [141] Equally, I accept Mr Carruthers' submission that specific deterrence is not needed. To that extent I differ from the Deputy Registrar's view that prohibition is needed to allow Mr Davidson to reflect on how he will perform as a director in future. [142] But for the reasons I have just given, standard-setting and general deterrence do matter in this case. They call for a substantial period of prohibition if the sanction is to be meaningful. I agree with the Deputy Registrar that the maximum period of five years is not reserved for the worst possible cases; on the contrary, there may be many cases in which a substantial period is needed.[143] I am not persuaded that the period of two and half years chosen in this case was wrong. I recognise that Mr Davidson's community service was not drawn to the Deputy Registrar's attention, but that does not alter my assessment since exemptions may be granted in appropriate cases.Stay[144] Mr Carruthers submitted that the Registrar was wrong to persist with his inquiry while criminal proceedings are pending against Mr Davidson. By persisting, the Registrar effectively forced Mr Davidson to disclose his hand on the allegations that the prospectuses were misleading, which is the crux of the criminal prosecutions. The prosecutor will be armed with Mr Davidson's account and may use it against him should he elect to give evidence. [145] Prohibition is civil rather than criminal in nature. Section 405 of the Crimes Act 1961 provides that:No civil remedy for any act or omission shall be suspended by reason that such act or omission amounts to an offence.[146] Mr Rennie accepted that a Court might nonetheless stay the Registrar's process where it risked causing injustice in criminal proceedings. 16 For his part, Mr Carruthers accepted that a stay cannot follow automatically where the Registrar is considering mismanagement that also attracts a criminal prosecution. Section 385 contemplates a summary process, and a stay may result in a director remaining in office for a considerable time. [147] A decision whether to stay litigation while criminal proceedings run their course requires: 17... a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case,16 General Distributors Limited v Hilliard HC Auckland CIV 2008-404-1057, 16 July 2008; Wilson v Registrar of Companies HC Wellington CP305/97, 28 November 1997; ADT Securitas Limited v Geange (1992) 6 PRNZ 100.17 Johnson v Gore Wood & Co [2002] 2 AC 1 at 31 per Lord Bingham. Adopted in Z v Dental Complaints Assessment Committee [2008] NZSC 55, [2009] 1 NZLR 1 at [127].focussing attention on the crucial question whether in all the circumstances a party is misusing or abusing the process of the court.[148] The two proceedings do traverse some of the same ground. The Securities Act prosecution will focus on two questions; whether the prospectuses were in fact misleading, assessed objectively, and if so whether the defendants can demonstrate absence of fault. The Registrar's process has also examined whether the prospectuses were misleading. Both examine questions of individual justification or excuse. [149] But no abuse of process arises. The two proceedings serve different and lawful purposes, the one being concerned with criminal liability, the other with protection of the public from unfit directors and managers. Such people having identified themselves through their conduct, the Registrar should not delay in prohibiting them. Consistent with that, I observe that s 386(7) provides that an appeal from the Registrar does not operate as a stay. [150] Mr Carruthers could not point to anything Mr Davidson disclosed to the Registrar that prejudiced his defence. Mr Davidson's assertions that there was nothing misleading about the prospectuses depend substantially on their language, and his representations were generally exculpatory. Mr Carruthers pointed only to the common subject matter, the absence of any imminent risk to the public from Mr Davidson in the absence of prohibition, and the Registrar's long delay in making the prohibition decision. The question, however, is whether Mr Davidson faces any real risk of injustice in the criminal proceeding from the disclosures made to date. I cannot see that he does. 18[151] For these reasons the Registrar did not err by refusing to stay the prohibition process.18 I assume without deciding that it is not too late; that is, that the trial Court would refuse to allow the prosecutor to use Mr Davidson's representations if I held that a stay ought to have been granted.Decision[152] The appeal is dismissed. [153] Counsel may file memoranda if any issue arises as to costs. Miller JSolicitors:Holmden Horrock, Auckland for Appellant Ministry of Economic Development, Auckland for Respondent